[Federal Register Volume 61, Number 63 (Monday, April 1, 1996)]
[Notices]
[Pages 14360-14363]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7842]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37023; File No. SR-NYSE-96-01]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Order Granting Accelerated Approval of Proposed Rule Change Amending
Exchange Rule 460.10
March 25, 1996.
I. Introduction
On January 5, 1996, the New York Stock Exchange, Inc. (``NYSE'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ the
proposed rule change, and on February 26, 1996, submitted Amendment No.
1 to the proposed rule change,\3\ to amend Exchange Rule 460.10 to
modify certain prohibitions on the ownership by specialists of their
specialty securities and to amend provisions that limit the business
transactions specialists may engage in with the issuers of specialty
securities.
\1\ 15 U.S.C. Sec. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Donald Siemer, Director, Market
Surveillance, NYSE to Glen Barrentine, Team Leader, Division of
Market Regulation, SEC, dated February 23, 1996.
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 36904 (Feb. 28, 1996), 61 FR 8998 (Mar. 6,
1996). No comments were received on the proposal.
II. Background
NYSE Rule 460.10 prohibits a specialist, his or her member
organization or any other member, allied member or approved person in
such member organization or officer or employee thereof, individually
or in the aggregate, from acquiring more than 10% of the outstanding
shares of any equity security in which the specialist is registered. In
the event the beneficial ownership of such persons, individually or in
the aggregate, in any such security exceeds 5% of the outstanding
shares of such security, Rule 460.10 also requires the specialist or
his or her member organization to report such fact promptly to Market
Surveillance. In such event, Market Surveillance may require any of the
persons covered by Rule 460.10 to take appropriate action to either
dispose of such beneficial ownership or reduce or eliminate his or her
interest in the specialist organization, as may be acceptable to the
Exchange. Rule 460.10 also prohibits a specialist, his or her member
organization or any other member,
[[Page 14361]]
allied member, approved person in such member organization or officer
or employee from engaging in any business transaction with any company
in whose stock the specialist is registered.
III. Description of Proposal
A. Ownership Restrictions
The restrictions on beneficial ownership codified in Rule 460.10
are intended to ensure that a specialist, and persons affiliated
therewith, do not enter into a control relationship with an issuer in
whose security the specialist is registered, such that the specialist's
status as a significant shareholder may create conflicts of interest
with respect to his or her affirmative and negative obligations to
maintain a fair and orderly market in the security. The Exchange
believes that the 10% ownership prohibition of Rule 460.10 as currently
in effect is unnecessarily restrictive and applies to certain types of
securities that do not give rise to the potential conflict of interest
noted above.\4\ To remedy this problem, the Exchange is proposing to
exempt three types of securities from the 10% ownership prohibition of
Rule 460.10.\5\
\4\ For example, in its filing the Exchange noted that Rule
460.10 would prohibit a specialist registered in both a warrant and
the underlying common stock from holding more than a 10% position in
a warrant that is convertible into a much smaller percentage of the
common stock.
\5\ The proposed rule does not change the requirement that the
specialist inform Market Surveillance upon the acquisition of 5% or
more of a equity issue in which he or she is registered.
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The first type of securities covered by the proposed amendment are
convertible or derivative securities, American or Global Depositary
Receipts, or similar instruments, but only to the extent that
conversion of any such securities would not result in a position in the
common stock exceeding the 10% threshold.
The proposed amendment also would remove the 10% threshold for
certain investment companies units (``units''), but again only to the
extent redemption of any such security would not result in a position,
directly or indirectly, in any equity security in which the specialist
is registered exceeding the 10% threshold. To come within the above
exemption, the investment company units must be listed pursuant to
Section 703.16 of the Exchange's Listed Company Manual.\6\ This section
sets forth listing standards for units of trading that represent an
interest in a registered investment company that is organized either as
an open-end management investment company or as a unit investment
trust. Under Section 703.16, the investment company would hold directly
securities comprising or otherwise based on or representing an interest
in an index or portfolio of securities.
\6\ The Exchange recently added Section 703.16 to its Listed
Company Manual. See Securities Exchange Act Release No. 36923, (Mar.
5, 1996), 61 FR 10410 (Mar. 13, 1996) (order approving File No. SR-
NYSE-95-23).
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Pursuant to Section 703.16, the Commission recently approved the
NYSE's proposal to list up to nine series of units in the form of
``CountryBaskets,'' which are based on the open-end management
investment company structure and invest directly in a portfolio of
securities included in the corresponding Financial Times/Standard &
Poor's Actuaries World Index.\7\ In that approval order, the Commission
also approved the NYSE's request to amend Rule 460.10 to allow a
specialist registered in a security issued by an investment company to
purchase and redeem the listed security, or securities that can be
subdivided or converted into the listed security, from the issuer, as
appropriate to facilitate the maintenance of a fair and orderly market
in the subject security.\8\ In addition to permitting the purchase and
redemption of units from the issuer only as appropriate to facilitate
the maintenance of a fair and orderly market in the subject security,
any purchases or redemptions must be made at the net asset value and on
the same terms and conditions as are available to any other
investor.\9\
\7\ Each CountryBasket is designed to provide investment results
that substantially correspond to the price and yield performance of
the specific index to which it relates. Accordingly, the weighing of
the portfolio securities of each series substantially corresponds to
their proportional representation in the relevant index. Id. Before
the Exchange may list any additional securities pursuant to Section
703.16, it must make an appropriate filing pursuant to Section 19(b)
of the Act with the Commission to provide the authorization to
effect such listings. Id.
\8\ Id.
\9\ Additionally, so-called Creation Transactions, must occur
through the principal underwriter or distributor and not directly
with the issuer. Id.
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The Exchange believes that specialists may be required to enter
into transactions to effect creation or redemption of the units, and
that these transactions may result in an ownership of greater than 10%
of an issue of units. Given the open-end nature of these entities, in
that securities will be issued on a continuous basis, the Exchange
believes that the issue of control by a specialist would not be
relevant.\10\ Finally, as noted above, under the proposal, a specialist
would not be able to hold units which, if redeemed, would result in the
specialist holding 10% or more of any individual equity security in
which he is registered.
\10\ See note 6, infra.
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The proposed amendment would also exempt from the 10% threshold,
but only with Exchange permission, a currency warrant that trades in
relationship to the value of an underlying currency or an index warrant
that trades in relationship to the value of an underlying index. With
respect to these securities, however, the specialist would not be
permitted to acquire a position of more than 25% of the issue.
B. Business Transactions
Rule 460.10 also prohibits a specialist, his or her member
organization or any other member, allied member, approved person in
such member organization or officer or employee from engaging in any
business transaction with any company in whose stock the specialist is
registered.\11\ This prohibition is designed to prevent a potential
conflict of interest by helping to ensure that the issuer does not
improperly influence the specialist in the performance of his or her
market making duties by the provision of goods or services upon
advantageous terms. The Exchange proposes to amend this provision to
provide that the prohibition shall not apply to the receipt of routine
business services, goods, materials, or insurance on generally
available terms. Accordingly, the amended rule would permit business
dealings between a specialist and an issuer so long as the service or
good is routinely available to the public, confers no special status to
the recipient beyond that of a consumer, and is generally available on
the same terms and conditions.
\11\ Under certain circumstances, NYSE Rule 98 affords exemptive
relief to approved persons of a specialist organization from
restrictions found in various NYSE rules, including certain
provisions of NYSE Rule 460. See Securities Exchange Act Release No.
36043 (Aug. 1, 1995), 60 FR 35759 (Aug. 7, 1995) (order approving
File No. NYSE-95-21).
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IV. Discussion
After careful consideration, the Commission finds that the proposed
rule change, as amended, is consistent with the requirements of the Act
and the rules and regulations thereunder applicable to a national
securities exchange, and, specifically, with the requirements of
Section 6(b).\12\ In particular, and for the reasons set forth below,
the Commission believes that the proposal, as amended, is consistent
with Section 6(b)(5) of the Act in that it is designed to prevent
fraudulent and manipulative acts and practices and is
[[Page 14362]]
consistent with the protection of investors and the public and with the
maintenance of fair and orderly markets.\13\
\12\ 15 U.S.C. Sec. 78f(b).
\13\ 15 U.S.C. Sec. 78f(b)(5).
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A. Ownership Restrictions
The established restrictions on ownership of equity securities
codified in the NYSE's Rule 460.10 prohibit a specialist, and persons
affiliated therewith, from owning more than 10% of the outstanding
shares of any equity security in which the specialist is registered.
This prohibition is based upon a concern that such a large ownership
interest may give rise to a control relationship between the specialist
and the issuer that may detract from the specialist's willingness or
ability to carry out his or her affirmative and negative obligations to
maintain a fair and orderly market in the security. The Commission
supports this established restriction and believes that it helps to
ensure the specialist's integrity in carrying out his or her
obligations. Nevertheless, the Commission acknowledges that, with
regard to certain securities, a specialist's position in excess of 10%
of the outstanding shares of an equity security may not result in a
relationship between the specialist and the issuer that warrants the
application of the 10% ownership restriction of Rule 460.10.
The proposal would allow a specialist to hold a position in excess
of the 10% threshold in three different types of securities. First, the
proposal would exempt from the 10% threshold, a specialist's interests
in convertible or derivative securities, including American Depositary
Receipts and Global Depositary Receipts, provided that, upon
conversion, the position in the underlying common stock does not exceed
10% of an issue in which the specialist is registered. As to such
securities, the Commission believes that this change is appropriate
because the rule will still ensure that specialists cannot control more
than 10% of the underlying issue in which the specialist is registered.
Second, the proposal would allow a specialist to hold a position in
excess of the 10% threshold for certain investment company units,
provided that the redemption of such units would not result in a
position, directly or indirectly, in any security in which the
specialist is registered exceeding the 10% threshold. To come within
the above exemption, the investment company units must be list pursuant
to Section 703.16 of the Exchange's Listed Company Manual. This section
sets forth listing standards for units of trading that represent an
interest in a registered investment company that is organized either as
an open-end management investment company or as a unit investment
trust. Under Section 703.16, the investment company would hold directly
securities comprising or otherwise based on or representing an interest
in an index or portfolio of securities.
As noted earlier, in the case of such securities the specialist
would be allowed to purchase or redeem any such security from the
issuer only as appropriate to facilitate the maintenance of a fair and
orderly market in the subject security.\14\ In addition, any such
purchase or redemption would have to be made at the net asset value and
on the same terms and conditions as are available to any other
investor.
\14\ The Commission believes that the Exchange's existing
surveillance procedures should be adequate to ensure that such
purchases are made only for the purpose of maintaining fair and
orderly markets. See Securities Exchange Act Release No. 36923,
supra note 6.
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Based upon the foregoing restrictions, the fact that the securities
will be issued on a continuous basis, and the continued restriction on
the specialist holding such units which, upon redemption, would result
in a position in any security in which the specialist is registered
exceeding the 10% threshold, the Commission believes that the amendment
of Rule 460.10 to exempt such securities from the 10% ownership
threshold is appropriate.\15\
\15\ The Commission notes that its approval of the Exchange's
proposal to allow specialists to hold a position in excess of 10% in
certain investment company units does not address any other
applicable requirements or obligations under the federal securities
laws. See Securities Exchange Act Release No. 36923, supra note 6,
at note 42 and accompanying text.
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Lastly, the proposal would allow a specialist, with Exchange
permission, to exceed the 10% threshold in a security such as a foreign
currency warrant, which trades in relationship to the value of an
underlying currency, or an index warrant, which trades in relationship
to the value of an underlying index. As to these securities, however,
the proposal, as amended, still would prohibit a specialist from
acquiring a position of more than 25% of the issue.
Based upon the fact that the specialist must receive the permission
of the Exchange in order to exceed the 10% threshold and that in any
event the specialist cannot exceed a 25% threshold, the Commission
believes that the exemption of the above described securities from the
10% ownership threshold of Rule 460.10 is appropriate. The Commission
believes that this exemption is appropriate for foreign currency
warrants, because, with the limitations noted, no control relationship
is likely to arise with regard to the underlying foreign currency. The
Commission also believes that such a relationship is unlikely to arise
with regard to an index warrant, at least where the index is
sufficiently broad based so that one or a few securities do not
dominate the index.\16\ The Commission believes that narrow based index
warrants, however, could potentially give rise to the conflict of
interest that the 10% ownership threshold is designed to address,
especially in those situations where the specialist is registered in an
equity security that represents a significant weight of the index
value. Accordingly, the Commission would expect the Exchange to
carefully scrutinize requests to exceed the 10% threshold in such index
warrants and to grant permission to exceed the 10% threshold only where
such permission is clearly necessary to the Specialist's market making
duties and such interest does not present the type of concern addressed
by Rule 460.10.
\16\ As noted below, to the extent a specialist can control up
to 25% of a particular warrant issue, with Exchange approval, the
Commission notes that such approval should only be given where it is
clearly necessary for a specialist to meet his market making
obligations under Rule 104.
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Finally, in approving these exceptions to the 10% ownership
threshold, the Commission is also relying upon the continuing provision
of Rule 460.10 that requires the specialist to report promptly to
Market Surveillance any beneficial ownership by the specialist, and
persons affiliated therewith, in any specialty security that,
individually or in the aggregate, exceeds 5% of the outstanding shares
of such security. The Commission expects the Exchange to pay particular
attention to such reports and, as appropriate, to use its authority
under Rule 460.10 to require that appropriate action be promptly taken
to dispose of such beneficial ownership or to reduce or eliminate the
beneficial owner's interest in the specialist organization.\17\
Moreover, the Commission notes that, notwithstanding the easing of the
prohibition of Rule 460.10 on owning more than 10% of a speciality
security, all transactions by specialists remain subject to NYSE Rule
104 and the requirement that specialists effect on the Exchange only
such transactions in their specialty securities as are reasonably
necessary to permit
[[Page 14363]]
such specialists to maintain fair and orderly markets.
\17\ NYSE Rule 460.10 specifically gives Market Surveillance the
authority to require a reduction in specialist positions that equal
or exceed 5% of the total outstanding shares of the equity security
in which the specialist is registered.
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B. Business Transactions
The Commission believes that the general restrictions of Rule
460.10 on business transactions entered into by specialists with
companies in whose stock the specialist is registered help ensure that
the issuer does not improperly influence the specialist in the
performance of his or her market making duties by the provision of
goods or services upon advantageous terms. The proposal would exempt
specialists from this prohibition as to the receipt of routine business
services, goods, materials, or insurance, on terms that would be
generally available.
The Commission believes that the NYSE's proposed rule, as amended,
is appropriate as it will continue to proscribe business transactions
that may give rise to a conflict of interest, while permitting
specialists to engage in routine business transactions that do not
raise the concerns that the rule is intended to prevent. The proposal
limits the type of business transactions in which a specialist may
engage with the issuer of a security in which the specialist is
registered to those that are available to all other business entities
and consumers on the same terms and conditions and that confer no
special status to the recipient beyond that of a consumer. The
Commission expects the NYSE to interpret this provision narrowly so as
to permit business dealings between a specialist and the issuer of a
specialty security only where the service or good is routinely
available to the public, confers no special status to the recipient
beyond that of a consumer, and is on terms and conditions that are
generally available.
The Commission finds good cause for approving the proposed rule
change and Amendment No. 1 prior to the thirtieth day after the date of
publication of notice of such filing thereof in the Federal Register.
The Commission notes that accelerated approval of the proposal is
appropriate in order to allow the NYSE to trade CountryBasket
securities as set forth in File No. SR-NYSE-95-23 on the anticipated
initial trading date of March 25, 1996. Moreover, the Commission notes
that the proposal, as amended, was noticed for a period of 16 days, and
that no comments were received on the proposal during that period.
V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\18\ that the proposed rule change (SR-NYSE-96-01), as amended, is
hereby approved.
\18\ 15 U.S.C. Sec. 78s(b)(2).
For the Commission, by the Division of Market Regulation, pursuant
to delegated authority.\19\
\19\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-7842 Filed 3-29-96; 8:45 am]
BILLING CODE 8010-01-M
