[Federal Register Volume 60, Number 27 (Thursday, February 9, 1995)]
[Proposed Rules]
[Pages 7718-7723]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-3175]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 249
[Release No. 34-35323; File No. S7-4-95]
RIN 3235-AG28
Unlisted Trading Privileges
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Securities and Exchange Commission (``Commission'') is
proposing new rules and amendments to existing rules concerning
unlisted trading privileges (``UTP'') in listed initial public
offerings (``IPOs''). The proposed rules would reduce the period that
exchanges have to wait before extending UTP to any listed IPO security,
from the third trading day, to the first trade reported by the listing
exchange to the Consolidated Tape. The proposed rules also would
require exchanges to have rules and oversight mechanisms in place to
ensure fair and orderly markets and the protection of investors with
respect to UTP in the securities.
DATES: Comments should be submitted on or before March 13, 1995.
ADDRESSES: Interested persons should submit three copies of their
written data, views and opinions to Jonathan G. Katz, Secretary,
Securities and Exchange Commission, 450 Fifth Street, N.W., D.C. 20549,
and should refer to File No. S7-4-95. All submissions will be made
available for public inspection and copying at the Commission's Public
Reference Room, Room No. 1024, 450 Fifth Street, N.W., Washington, D.C.
20549.
FOR FURTHER INFORMATION CONTACT: Betsy Prout, 202/942-0170, Attorney,
Office of Self-Regulatory Oversight and Market Structure, Division of
Market Regulation, Securities and Exchange Commission, (Mail Stop 5-1),
450 5th Street, N.W., Washington D.C. 20549.
SUPPLEMENTARY INFORMATION:
I. Background
On October 22, 1994, the Unlisted Trading Privileges Act of 1994
(``UTP Act'') became effective. The UTP Act amends Section 12(f) of the
Securities Exchange Act of 1934 (``Exchange Act''). Section 12(f)
governs when a national securities exchange (``exchange'') may trade a
security that is not listed and registered on that exchange, i.e. by
extending unlisted trading privileges (``UTP'') to the security.
Pursuant to the UTP Act, the Commission today is proposing rules under
Section 12(f).
A. Section 12(f) Prior to the UTP Act
Prior to the UTP Act, Section 12(f) required exchanges to apply to
the Commission before extending UTP to a particular security.1 An
exchange application for the extension of UTP named the security (or
frequently, securities) for which the applicant exchange sought
Commission approval for UTP. The Commission was required to provide
interested parties with at least ten days notice of the application,
which the Commission accomplished by publishing each UTP application
for comment in the Federal Register at least ten days prior to
approving UTP for a security. In addition, prior to approving the UTP
application, the Commission had to find that the extension of UTP to
each security named, if listed and registered on another exchange
(``listed security'' on a ``listing exchange''), would be consistent
with the maintenance of fair and orderly markets and the protection of
investors. If so, the [[Page 7719]] Commission published an approval
order in the Federal Register.
\1\When an exchange ``extends UTP'' to a security, the exchange
allows its members to trade the security as if it were listed on the
exchange. For discussions of the history of UTP in U.S. markets and
Section 12(f) of the Exchange Act, see, e.g., Stephen L. Parker &
Brandon Becker, Unlisted Trading Privileges, 14 Rev. Sec. Reg. 853
(1981); and Walter Werner, Adventure in Social Control of Finance:
The National Market System for Securities, 75 Colum. L. Rev. 1233
(1975).
---------------------------------------------------------------------------
Section 12(f) gave interested parties an opportunity to comment and
to participate in a hearing regarding the extension of UTP to any
security. Pursuant to Section 12(f), the Commission processed hundreds
of exchange applications for the extension of UTP each year, yet
comments on the applications were extremely rare. Indeed, virtually no
comments have been submitted to the Commission on a UTP application in
over ten years.
As a consequence of the application, publication, and approval
process, applicant exchanges had to wait several weeks before competing
with listing exchanges that already were trading the securities.
Moreover, while exchanges were required to await Commission approval
before competing with the listing exchange, dealers trading off an
exchange could trade any security immediately upon its effective
registration with the Commission.2
\2\As a technical matter, Section 12(a) limits the trading of
securities on an exchange to those securities that are listed and
registered on that exchange. Section 12(f), both prior to and
following this amendment, makes an exemption from this requirement
for securities traded pursuant to UTP. Over-the-counter (``OTC'')
dealers are not subject to the Section 12(a) listing requirement
because they do not transact business on an exchange.
---------------------------------------------------------------------------
As noted above, Section 12(f) also required the Commission to
review each UTP application to ensure the maintenance of fair and
orderly markets and the protection of investors with respect to the
extension of UTP to the securities named in the application. Pursuant
to this standard of review, the staff identified, over time, certain
areas of particular concern as they relate to UTP. Accordingly, the
staff reviewed each application to ensure, among other things, that the
applicant exchange had proper trading rules in place to provide a fair
and orderly market in each security named and had sufficient standards
for regulatory oversight of each security to provide for the protection
of investors. While Commission review of the applications led to
occasional discoveries of material deficiencies and errors in the
applications, the overwhelming majority of applications raised no
substantive issues and over 99% of the applications were approved.
In response to the Concept Release that initiated the Market 2000
Study,3 resulting in the Division of Market Regulation's
(``Division'') report, Market 2000: An Examination of Current Equity
Market Developments, some commenters noted that the regulatory process
for UTP could be a potential area for reform.4 Shortly after
publication of the Concept Release, the Telecommunications and Finance
Subcommittee of the House Committee on Energy and Commerce
(``Subcommittee'') began working on draft legislation to amend Section
12(f).5 These efforts, along with the efforts and support of the
various self-regulatory organizations, ultimately led to the UTP Act.
\3\See Securities Exchange Act Release No. 30920 (July 14,
1992), 57 FR 32587 (``Concept Release'').
\4\See letter from William G. Morton, Jr., Boston Stock
Exchange, John L. Fletcher, Midwest (currently Chicago) Stock
Exchange, Leopold Korins, Pacific Stock Exchange, and Nicholas A.
Giordano, Philadelphia Stock Exchange, to Jonathan G. Katz,
Secretary, Commission, dated December 11, 1992. See also, Division
of Market Regulation, Securities and Exchange Commission, Market
2000: An Examination of Current Equity Market Developments (January
1994).
\5\The Subcommittee held a hearing on the UTP Act on June 22,
1994, at which a Division representative and representatives of
several self-regulatory organizations appeared and submitted written
comments on the legislation. The Unlisted Trading Privileges Act of
1994 and Review of the SEC's Market 2000 Study: Hearing Before the
Subcomm. on Telecommunications and Finance of the House Comm. on
Energy and Commerce, 103d Cong., 2d Sess. (1994) (``UTP Hearing'').
---------------------------------------------------------------------------
B. Statutory Changes Under Amended Section 12(f)
The UTP Act, among other matters, removes the application, notice,
and Commission approval process from Section 12(f) of the Exchange Act,
except in cases of Commission suspension of UTP in a particular
security on an exchange. Thus, the amendment generally allows an
exchange to extend UTP to any security when it becomes listed and
registered on another exchange or included in Nasdaq,6 subject to
certain limitations.
\6\Section 12(f), as amended, also removes the application and
approval requirements for exchange UTP in securities that are
registered under 12(g) of the Exchange Act (generally, ``OTC
securities''). Exchange extensions of UTP to OTC securities, and
specifically to Nasdaq/National Market securities, are subject to
limitations provided in Section 12(f) and provided in an on-going
pilot program. See Securities Exchange Act Release No. 34371 (July
13, 1994), 59 FR 37103. While the UTP Act removed the relevant
application procedures for Nasdaq stocks, UTP in OTC securities
continues to be subject to the on-going pilot program and the
limitations it provides. For that reason, the Commission will
consider issues involved in UTP extensions to OTC securities as the
Commission continues its on-going review of the operation of the
pilot program.
---------------------------------------------------------------------------
First, the UTP Act contains special provisions for the extension of
UTP to any listed security that is the subject of an initial public
offering (``listed IPO security'').7 The amendment includes a
temporary provision that requires exchanges to wait until the third day
of trading in any listed IPO security on the listing exchange before
they may allow their members to trade the security pursuant to UTP.
This provision also requires the Commission to prescribe by rule or
regulation, within 180 days of the enactment of the UTP Act (or before
April 21, 1995), the mandatory delay (or, ``duration of the
interval''), if any, that should apply to UTP extensions to listed IPO
securities.8
\7\Section 12(f)(1)(B), read jointly with Section
12(f)(1)(A)(ii), as amended, provides this exception for listed IPO
securities. In defining securities that fall within the exception,
new subparagraphs 12(f)(1)(G)(i) and (ii) provide:
(i) a security is the subject of an initial public offering if--
(I) the offering of the subject security is registered under the
Securities Act of 1933; and
(II) the issuer of the security, immediately prior to filing the
registration statement with respect to the offering, was not subject
to the reporting requirements of section 13 or 15(d) of this title;
and
(ii) an initial public offering of such security commences at
the opening of trading on the day on which such security commences
trading on the national securities exchange with which such security
is registered.
15 U.S.C. 78l(f)(1)(G).
\8\Specifically, amended Section 12(f)(1)(C) provides:
Not later than 180 days after the date of enactment of the
Unlisted Trading Privileges Act of 1994, the Commission shall
prescribe, by rule or regulation, the duration of the interval
referred to in this subparagraph (B), if any, as the Commission
determines to be necessary or appropriate for the maintenance of
fair and orderly markets, the protection of investors, or otherwise
in furtherance of the purposes of this title. Until the earlier of
the effective date of such rule or regulation, or 240 days after
such date of enactment, such interval shall begin at the opening of
trading on the day on which such security commences trading on the
national securities exchange with which such security is registered
and end at the conclusion of the next trading day.
In short, this provision requires exchanges (until the earlier
of the effective date of a Commission rule, or 240 days after the
enactment of the UTP Act) to wait until the third trading day in a
listed IPO security before trading the security pursuant to UTP.
---------------------------------------------------------------------------
Second, Section 12(f)(1)(D) provides the Commission with rulemaking
authority to prescribe, by rule or regulation, additional procedures or
requirements for extending UTP to any security.
Third, new Section 12(f)(2) allows the Commission summarily to
suspend UTP in a security at any time within 60 days of the
commencement of trading on the relevant exchange pursuant to UTP. Upon
suspension, the exchange must cease trading in the security. Pursuant
to Section 12(f)(2)(A)(ii), an exchange seeking to reinstate its
ability to extend UTP to the security, following a Commission
suspension, must file an application with the Commission. The exchange
must apply pursuant to procedures that the Commission may prescribe by
rule or order for the maintenance of fair and orderly markets, the
protection of investors and the public interest, or otherwise in
furtherance of the purposes of the [[Page 7720]] Exchange Act. New
Section 12(f)(2) requires public notice and Commission review of
applications to reinstate UTP that has been suspended summarily by the
Commission. The procedures and Commission standard of review for
approval of a reinstatement application are substantially similar to
the application and review process that previously preceded an
exchange's initial extension of UTP to a security under former Section
12(f) and the rules thereunder.
These amendments to Section 12(f) reduce the waiting period that
previously delayed exchange extensions of UTP to securities listed on
other exchanges, or to certain securities traded OTC. In addition, the
amendments direct the Commission to prescribe rules for UTP in listed
IPO securities, and otherwise empowers the Commission to establish
rules for UTP generally as the Commission deems appropriate in
furtherance of the purposes of the Exchange Act.
II. Proposed Rules and Amendments to Existing Rules Pursuant to Amended
Section 12(f)
As described in more detail below, the Commission is proposing two
new rules and amendments to and rescissions of existing rules.
Specifically, the Commission is proposing new Rule 12f-2 concerning UTP
in listed IPO securities, and is soliciting comment on alternatives to
the proposed rule that would be consistent with the UTP Act. The
Commission also is proposing and soliciting comment on new Rule 12f-5
regarding exchange rules to ensure the maintenance of fair and orderly
markets and the protection of investors for all securities traded
pursuant to UTP. To provide consistency between the amendments to
Section 12(f) and the rules thereunder, the Commission also is
proposing to amend existing Rules 12f-1 and 12f-3 and to rescind
existing Rules 12f-2 and 12f-6. Finally, the Commission is soliciting
comment on whether other Commission action concerning intermarket
linkages, as they affect UTP in listed securities, is necessary to
facilitate the operation of the UTP Act.
A. Listed Securities That Are the Subject of an Initial Public Offering
(Proposed Rule 12f-2)
As discussed above, the UTP Act generally allows exchanges to
extend UTP to securities when they become listed and registered on
another exchange or included in Nasdaq, except in the case of listed
IPO securities. In this regard, the UTP Act establishes a temporary
provision that requires exchanges to wait until the third day of
trading in the security on the listing exchange before extending UTP to
the security. Before April 21, 1995, the Commission must prescribe by
rule or regulation the appropriate waiting period, if any, that would
apply before an exchange may extend UTP to any listed IPO security
following the commencement of its IPO.
The Commission is proposing new Rule 12f-2 under the Exchange Act
to establish the waiting period that would govern the extension of UTP
to a security that is the subject of an IPO. Proposed Rule 12f-2 would
provide that an exchange may extend UTP to a listed IPO security when
at least one transaction in the subject security has been effected on
the listing exchange and the transaction has been reported pursuant to
an effective transaction reporting plan as defined in Rule 11Aa3-1
under the Exchange Act.9 The proposed rule, therefore, would
shorten the mandatory waiting period (or ``interval,'' as it is
described in the UTP Act) for UTP in listed IPO securities from two
trading days, as temporarily specified by amended Section 12(f), to the
time that it takes to effect and report the initial trade in the
security on a listing exchange.
\9\17 CFR 240.11Aa3-1 (1991).
---------------------------------------------------------------------------
Rule 12f-2 would define the term ``subject security'' to mean a
security that is the subject of an initial public offering, as that
term is defined in Section 12(f)(1)(G) of the Exchange Act. To ensure
that the proposed rule would not provide any means to circumvent other
Section 12(f) objectives and requirements, the proposed rule also would
provide that the extension of UTP pursuant to the rule would be subject
to all the provisions set forth in Section 12(f) of the Exchange Act,
as amended, and any rule or regulation promulgated thereunder, or which
may be promulgated thereunder while the extension is in effect.
The Commission preliminarily believes that it is appropriate to
minimize regulatory restraints on competition for trading listed IPO
securities. Shortening the interval for UTP in listed IPO securities
should enhance the ability of exchanges to compete for order flow in
the subject securities, especially in light of the fact that OTC
dealers may trade IPO securities immediately upon effective
registration with the Commission. Accordingly, in the absence of a
compelling reason to impose a restriction that would inhibit
competition among exchanges, the Commission initially believes that
competing exchanges should be able to extend UTP to a listed IPO
security after the first trade in the security on the listing exchange
has been effected and reported.
The Commission is proposing a one-trade interval before exchanges
may extend UTP to a listed IPO security because the Commission
preliminarily believes that the first transaction in an IPO, as
disseminated on the consolidated tape, conveys essential information to
the public concerning the pre-evaluated offering price of the security.
In addition, the timing of the initial trade and commencement of
trading in a new issue entail significant coordination involving the
issuer, the listing exchange, and the underwriters of the public
offering of the security. If competing exchanges were to allow their
members to trade a listed IPO security before it initially trades on
the listing exchange, it may be difficult to ensure that all the
preparation for the IPO had been completed before public trading in the
security commenced.
During the legislative process preceding the UTP Act, conflicting
views arose among interested parties concerning the appropriate waiting
period, if any, for UTP in listed IPO securities. At the UTP Hearing,
testimony and evidence were presented to show the negative impact that
a mandatory waiting period for UTP has on competition.10 At the
same time, however, one interested party asserted that listed IPO
securities should trade in a central location for a ``short'' period of
time to help ensure market efficiency immediately following an IPO, and
that immediate UTP in listed IPO securities could increase the cost of
raising capital for issuers.11
\10\See prepared testimony of Nicholas A. Giordano, President
and Chief Executive Officer, Philadelphia Stock Exchange, UTP
Hearing, supra note 5.
\11\See prepared testimony of Edward A. Kwalwasser, Executive
Vice President, Regulation, New York Stock Exchange, UTP Hearing,
id.
---------------------------------------------------------------------------
In a report to Congress on the UTP Act, the House Committee on
Energy and Commerce provided guidance concerning specific matters it
considered relevant to the present Commission rulemaking and resolution
of the above concerns:
The Committee expects that, in undertaking the IPO rulemaking
authorized under the bill, the Commission will seek comments on the
benefits associated with streamlining the regulatory process and
enhancing competitive opportunities among market centers with
respect to UTP in IPOs, and the identification of the negative
effects if any that granting immediate UTP might [[Page 7721]] have
on the distribution of these securities. The Committee further
expects the Commission to consider the experience of the third
market trading in listed IPOs in the course of its examination of
these questions. Finally, the Committee expects the markets to
cooperate in providing the Commission with data regarding the nature
and effect of trading activity (including, for example, any
volatility effects on the security) in connection with IPO listings
in order to enable the Commission to determine whether the benefits
of confining early trading in IPOs to one marketplace are outweighed
by the benefits of removing regulatory delays that inhibit
competition among market.12
\12\H.R. Rep. No. 626, 103d Cong., 2d Sess. (1994).
The Commission seeks comment on each of these matters. The
Commission believes that identification and analysis of the potential
harms and benefits that would result from either no waiting period, or
from a longer waiting period than that proposed by the Commission,
would be particularly useful in its review.
The Commission also seeks comment on the one-trade waiting period
as proposed. To the extent that commenters believe a waiting period is
appropriate, the Commission requests that they provide data to
illustrate the potential negative effects on the pricing of an IPO.
Commenters also may wish to provide an analysis of the effects of the
current two-day waiting period. Finally, the Commission would be
interested in receiving alternative proposed rules from commenters who
believe that either no waiting period or a longer waiting period is
appropriate.
B. Exchange Rules for Securities to Which Unlisted Trading Privileges
are Extended (Proposed Rule 12f-5)
Section 12(f)(1)(D), as amended, authorizes the Commission to
prescribe, by rule or regulation, such additional procedures or
requirements for extending UTP to any security as the Commission deems
necessary or appropriate for the maintenance of fair and orderly
markets, the protection of investors and the public interest, or
otherwise in furtherance of the purposes of the Exchange Act. Pursuant
to this authority, the Commission is proposing Rule 12f-5, which would
prohibit an exchange from extending UTP to any security unless the
exchange has in effect a rule or rules providing for transactions in
the class or type of security to which the exchange extends UTP.
This rule is intended to preserve a benefit of Commission review of
UTP applications prior to the UTP Act. Previously, the Commission
reviewed each UTP application to ensure that the applicant exchange had
rules in place to cover the trading of the product class of the
security for which the exchange applied. In general, applicant
exchanges had listing rules in place that provided for transactions for
most product classes of securities. Occasionally, however, an exchange
would submit a UTP application to the Commission to trade a new or
unusual product class of securities that had been approved for trading
on the listing exchange, but had not been approved for trading on the
applicant exchange.13
\13\Prior to the UTP Act, exchanges were not permitted to apply
to the Commission for UTP in any security for which the applicant
exchange had not adopted listing standards and proper trading rules,
pursuant to Section 19(b) of the Exchange Act and Rule 19b-4
thereunder. Proposed Rule 12f-5 would make explicit the obligation
to have the necessary rules in place before extending UTP to a
specific type of security.
---------------------------------------------------------------------------
For example, the Commission would approve a proposed rule change to
the Commission, pursuant to Section 19(b) of the Exchange Act, by an
exchange to list and trade a new type of security. The proposed rule
change established exchange rules to ensure the maintenance of fair and
orderly markets in the securities and sufficient mechanisms for
regulatory oversight of the named securities to provide for the
protection of investors. A regional stock exchange occasionally filed a
UTP application for the security without submitting a similar proposed
rule change pursuant to Section 19(b) of the Exchange Act. The
Commission's review procedures for UTP applications identified those
instances so that necessary rules would be in place on the applicant
exchange in order to ensure the maintenance of fair and orderly markets
and the protection of investors.
The Commission is proposing Rule 12f-5 to require exchanges to
ensure that these rules and oversight mechanisms exist on their
exchanges for the relevant securities before extending UTP to the
securities. The proposed rule reconfirms to exchanges their obligation
to evaluate their extensions of UTP before allowing their members to
trade the securities.
In soliciting comment on the proposed rule, the Commission is
particularly interested in the views of market participants and other
commenters concerning the need for the rule and whether it would, in
practice, help ensure that an exchange has all the necessary rules in
place to provide for fair and orderly markets in all securities to
which the exchange extends UTP.
C. Proposed Amendments to Existing Rules 12f-1 and 12f-3, and Proposed
Rescission of Existing Rules 12f-2 and 12f-6
Several of the rules prescribed under former Section 12(f)
concerned the application process for extensions of UTP. The Commission
is proposing to amend or rescind these rules to reflect statutory
changes, and is soliciting comment on whether these proposed changes
are appropriate.
First, the Commission is proposing to amend Rule 12f-1,14 to
limit its operation to an exchange's application to reinstate UTP after
a Commission suspension. Section 12(f), as amended, requires an
exchange to apply to the Commission for UTP if the Commission has
suspended the exchange's extension of UTP to the security. The proposed
amendment would require essentially the same format for applications to
reinstate UTP as was required by the rule under former Section 12(f)
for applications to extend UTP.
\14\17 CFR 240.12f-1 (1991).
---------------------------------------------------------------------------
Second, the Commission is proposing to rescind existing Rule 12f-2
and remove Form 27 referred to in the rule.15 This rule and form
dealt with instances where an exchange might have been required to
cease extending UTP, and to reapply for UTP, in a security that was
``changed'' immaterially for those purposes. The rule and form provide
an exemption from reapplication for UTP in these cases. The Commission
is proposing to rescind the rule because the application procedures,
from which the rule provided an exemption, no longer exist.
\15\17 CFR 240.12f-2 (1991).
---------------------------------------------------------------------------
Third, the Commission is proposing to rescind the last sentence of
paragraph (b) of Rule 12f-3.16 Rule 12f-3 allows the issuer of a
security that is traded pursuant to UTP, or any broker or dealer who
makes a market in the security, or any other person having a bona fide
interest in the question of termination or suspension of UTP in the
security, to apply to the Commission for the termination or suspension
of UTP in the security. The Rule also identifies the categories of
information that should be provided in the application, which includes
the applicant's statement that it has sent a copy of the application to
the exchange from which the suspension or termination is sought.
Thereafter, the Rule provides that the exchange may terminate or
suspend UTP in the security in accordance with its rules. Finally, the
Rule requires the exchange, upon suspension or
[[Page 7722]] termination, promptly to file Form 28 with the
Commission.
\16\17 CFR 240.12f-3 (1991).
---------------------------------------------------------------------------
The Commission believes this final requirement no longer is
necessary because exchanges are no longer required to apply to the
Commission to extend UTP to a security. Thus, notifying the Commission
of termination or suspension of UTP serves no purpose. The Commission,
therefore, is proposing to rescind that last requirement from the Rule
concerning Form 28, and to remove Form 28, in order to conform further
with efforts to streamline the regulatory process concerning UTP.
Finally, the Commission is proposing to rescind Rule 12f-6.17
This rule exempts a merged exchange from the UTP application process in
certain circumstances. The exemption no longer is necessary because the
waiting period that restrained exchanges from extending UTP to most
securities has been eliminated by the UTP Act.
\17\17 CFR 240.12f-6 (1991).
---------------------------------------------------------------------------
The Commission is soliciting comment on each of these proposed
Commission rule changes. The Commission is interested in comments on
whether the proposed amendments and rescissions accomplish the
Commission's goals with respect to the amendments or rescissions. The
Commission also is interested in receiving comments concerning the
continued necessity of other provisions of the rules, given the recent
amendment to Section 12(f) of the Exchange Act.
D. Solicitation of Comment on Structural Implications of Immediate UTP
The Commission is seeking comment on whether any Commission action
is necessary under Section 12(f), in order to carry out the
congressional objectives of linked markets as required by Section
11A(a)(1)(D),18 to make changes to the consolidated quotation,
trade reporting, and routing of customer and principal interest in
securities that are traded pursuant to UTP, now that exchanges and
linking facilities will have less time to prepare for multiple exchange
market trading in the securities. The Commission is particularly
interested in comments concerning any existing procedural delays that
should be corrected by Commission action in order to ensure that the
operation of amended Section 12(f) is not impeded.
\18\Section 11A(a)(1)(D) of the Exchange Act provides:
The linking of all markets for qualified securities through
communication and data processing facilities will foster efficiency,
enhance competition, increase the information available to brokers,
dealers, and investors, facilitate the offsetting of investors'
orders, and contribute to best execution of such orders.
---------------------------------------------------------------------------
III. Initial Regulatory Flexibility Analysis
The Commission has prepared an Initial Regulatory Flexibility
Analysis (``IRFA'') in accordance with 5 U.S.C. Sec. 603 regarding the
proposed rules. The following summarizes the conclusions of the IRFA.
The IRFA uses certain definitions of ``small businesses'' adopted
by the Commission for purposes of the Regulatory Flexibility Act
(``RFA''). As described in Section II, above, the Commission is
proposing rules and changes to existing rules under Section 12(f) to
comply with the UTP Act directives and to further the objectives of
this recent amendment. Proposed Rule 12f-2 would require exchanges to
wait, before extending UTP to such a security, until the listing
exchange effects and reports the first transaction in the security.
Proposed Rule 12f-2 primarily has an impact on competitive
initiatives of the self-regulatory organizations, which are not small
businesses for the purposes of the RFA.19 The proposed rules also
may have some economic effect on some businesses that may be, from time
to time, small businesses for the purposes of the RFA. Specifically,
the proposed rule may affect the order-routing choices available to
broker-dealer firms and would designate the moment at which regional
exchange specialist firms may compete for order flow in any listed IPO
security. Some broker-dealers and some regional specialist firms may be
small businesses. The Commission believes, however, that the economic
impact of the rule may not be ``significant'' and the number of ``small
businesses'' that would be affected by the rule may not be
``substantial,'' as contemplated by the RFA. In this regard, the
Commission notes, among other things, that listed IPO securities
comprise only a fraction of the overall number of securities available
for order-routing by broker-dealers and for trading by regional
specialist firms, and only a small number of those firms are ``small
businesses.'' Furthermore, neither small nor large businesses would be
subject to reporting, recordkeeping, or other compliance requirements
under the proposal.
\19\The relevant rule under the Act, 17 CFR 240.0-10, provides
that, for the purposes of the RFA, ``small business'' (when
referring to a broker or dealer) shall mean a broker or dealer that
had total capital of less than $500,000 on the date in the prior
fiscal year as of which its audited financial statements were
prepared, or if not required to be prepared, on the last business
day of the preceding fiscal year. Also, ``small business'' does not
include any entity that is affiliated with another entity that is
not a small business.
---------------------------------------------------------------------------
The other proposals would restate existing standards for exchange
extensions of UTP, and would amend existing rules under Section 12(f)
to conform to the UTP Act and, therefore, should have no economic
impact for the purposes of the RFA.
A copy of the Initial Regulatory Flexibility Analysis may be
obtained by contacting Betsy Prout, Attorney, Office of Market
Supervision, Division of Market Regulation, Securities and Exchange
Commission, Washington, D.C. 20549, (202) 942-0170.
IV. Effects on Competition
Section 23(a)(2) of the Exchange Act20 requires the
Commission, in adopting rules under the Exchange Act, to consider any
anti-competitive effects of the rules and to balance these effects
against the regulatory benefits gained in furthering the purposes of
the Act. As discussed in more detail above, the extension of unlisted
trading privileges allows exchanges to compete with the listing
exchange, other exchanges, and with dealers for order flow in the
relevant securities. The rules promulgated under Section 12(f),
therefore, may directly affect competition among market centers and
their members. In addition, firms sending orders to the market centers
for execution may also be affected by limitations that the proposed
rules may place on their order-routing practices. The Commission is
soliciting comment on the effect the proposed rules, and the proposed
changes to existing rules, may have on exchanges, associations, their
members, and order-routing firms.
\20\15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------
List of Subjects in 17 CFR Parts 240 and 249
Reporting and recordkeeping requirements, Securities.
For the reasons set out in the preamble, the Commission proposes to
amend Part 240 of Chapter II of Title 17 of the Code of Federal
Regulations to read as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The authority citation for Part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg,
77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p,
78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-
[[Page 7723]] 23, 80a-29, 80a-37, 80b-3, 80b-4, and 80b-11, unless
otherwise noted.
* * * * *
2. By amending Sec. 240.12f-1 by revising the section heading and
introductory text of paragraph (a), redesignating paragraphs (a)(5) and
(a)(6) as (a)6) and (a)(7), adding paragraph (a)(5), and revising newly
designated (a)(6), to read as follows:
Sec. 240.12f-1 Applications for permission to reinstate unlisted
trading privileges.
(a) An application to reinstate unlisted trading privileges may be
made to the Commission by any national securities exchange for the
extension of unlisted trading privileges to any security for which such
unlisted trading privileges have been suspended by the Commission,
pursuant to section 12(f)(2)(A). One copy of such application, executed
by a duly authorized officer of the exchange, shall be filed and shall
set forth:
(1) * * *
(5) The date of the Commission's suspension of unlisted trading
privileges in the security on the exchange;
(6) Any other information which is deemed pertinent to the question
of whether the reinstatement of unlisted trading privileges in such
security is consistent with the maintenance of fair and orderly markets
and the protection of investors; and
* * * * *
3. By revising Sec. 240.12f-2 to read as follows:
Sec. 240.12f-2 Extending Unlisted Trading Privileges to a Security
that is the Subject of an Initial Public Offering.
(a) General provision--A national securities exchange may extend
unlisted trading privileges to a subject security when at least one
transaction in the subject security has been effected on the national
securities exchange upon which the security is listed and the
transaction has been reported pursuant to an effective transaction
reporting plan as defined in Sec. 240.11Aa3-1.
(b) The extension of unlisted trading privileges pursuant to this
section shall be subject to all the provisions set forth in Section
12(f) of the Act (15 U.S.C. 78l(f)), as amended, and any rule or
regulation promulgated thereunder, or which may be promulgated
thereunder while the extension is in effect.
(c) Definition. For purposes of this section, the term subject
security shall mean a security that is the subject of an initial public
offering, as that term is defined in section 12(f)(1)(G) of the Act (15
U.S.C. 78l(f)(1)(G)).
4. By amending Sec. 240.12f-3 by revising paragraph (b) to read as
follows:
Sec. 240.12f-3 Termination or suspension of unlisted trading
privileges.
(a) * * *
(b) Unlisted trading privileges in any security on any national
securities exchange may be suspended or terminated by such exchange in
accordance with its rules.
5. By adding Sec. 240.12f-5, to read as follows:
Sec. 240.12f-5 Exchange Rules for Securities to which Unlisted Trading
Privileges are Extended.
A national securities exchange shall not extend unlisted trading
privileges to any security unless the national securities exchange has
in effect a rule or rules providing for transactions in the class or
type of security to which the exchange extends unlisted trading
privileges.
Sec. 240.12f-6 [Removed]
6. By removing and reserving Sec. 240.12f-6.
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
7. The authority citation for Part 249 continues to read in part as
follows:
Authority: 15 U.S.C. 78a, et seq., unless otherwise noted.
Sec. 249.27 and 249.28 [Removed]
8. By removing Sec. 249.27 and Sec. 249.28.
By the Commission.
Dated: February 2, 1995.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-3175 Filed 2-8-95; 8:45 am]
BILLING CODE 8010-01-P
