[Federal Register Volume 60, Number 70 (Wednesday, April 12, 1995)]
[Notices]
[Pages 18649-18653]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-8996]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35571; File No. SR-NYSE-95-01]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Order Approving Proposed Rule Change Relating to Domestic Listing
Standards
April 5, 1995.
I. Introduction
On January 18, 1995, the New York Stock Exchange, Inc. (``NYSE'' or
``Exchange'') submitted to the Securities and Exchange Commission
(SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend its domestic listing
standards.
\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1994).
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 35301 (January 31, 1995), 60 FR 7245 (February
7, 1995). On February 2, and April 5, 1995, the Exchange submitted to
the Commission Amendment Nos. 1 and 2 to the proposed rule change. Each
of these amendments made a single, non-substantive change to clarify
the language of the original filing and are incorporated into the
discussion below.\3\
\3\Letter from Robert G. Britz, Senior Vice President, New
Listings & Client Service, NYSE, to Sharon Lawson, Assistant
Director, Division of Market Regulation, SEC, dated January 27, 1995
(``Amendment No. 1''). Amendment No. 1 is further described at note
11, infra. Letter from J. Paul Wyciskala, Managing Director,
Financial Compliance, to Sharon Lawson, Assistant Director, Division
of Market Regulation, SEC, dated April 5, 1995 (``Amendment No.
2''). Amendment No. 2 is further described at note 10,
infra. [[Page 18650]]
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The Commission received one comment letter from the National
Association of Securities Dealers, Inc. (``NASD'')\4\ and one letter
from the NYSE responding to the NASD's comments.\5\ This order approves
the proposed rule change, including Amendment Nos. 1 and 2.
\4\Letter from Joseph R. Hardiman, President, NASD, to Jonathan
G. Katz, Secretary, SEC, dated March 3, 1995 (``NASD Letter'').
\5\Letter from James E. Buck, Senior Vice President and
Secretary, NASD, to Jonathan G. Katz, Secretary, SEC, dated March
17, 1995 (``NYSE Letter'').
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II. Overview of Proposal
A. Background
Paragraph 102.01 of the NYSE's Listed Company Manual sets forth
the standards for domestic companies that want to list their equity
securities on the Exchange. These standards require applicants to
satisfy the following minimum numerical criteria.\6\ First, the company
must have at least 2,200 total stockholders, together with an average
monthly trading volume of 100,000 shares for the most recent six
months, or 2,000 round-lot holders.\7\ Second, at least 1.1 million
shares of the company's stock must be publicly held.\8\ Third, the
aggregate market value of the publicly held shares must be at least $18
million. In this regard, Paragraph 102.01 of the Exchange's Listed
Company Manual states that, while the NYSE places greater emphasis on
market value, an additional measure of size is $18 million in net
tangible assets. Fourth, the company must have demonstrated earning
power such that its income before federal income taxes and under
competitive conditions must equal or exceed (a) $2.5 million in the
latest fiscal year and $2 million in each of the preceding two fiscal
years or (b) $4.5 million in the most recent fiscal year and an
aggregate of $6.5 million for the last three fiscal years, with all
three years being profitable.
\6\In deciding whether to approve the listing of an equity
security, the NYSE also takes qualitative factors into
consideration. These factors include whether the company is a going
concern or a successor thereto, the degree of national interest in
the company, the character of the market for its products, its
relative stability and position in its industry.
\7\In determining the number of holders for the above
distribution standards, the NYSE considers both beneficial and
record owners.
\8\Shares held by directors, officers or their immediate
families and other concentrated holdings of 10% or more are excluded
from the public float. Additionally, if the unit of trading is less
than 100 shares, the requirement relating to the number of publicly-
held shares will be reduced proportionately.
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b. Proposed Amendments
The Exchange proposes to amend Paragraph 102.01 to make four
changes to its existing numerical criteria. The first two amendments
would increase the existing numerical criteria for the aggregate market
value of both publicly held shares and net tangible assets from $18
million to $40 million.\9\ The third amendment would adopt an alternate
shareholder distribution standard for companies whose shares are very
actively traded. Specifically, a company with an average monthly
trading volume of one million shares for the most recent 12 months
could qualify for listing with 500 total stockholders.\10\
\9\Paragraph 102.01 of the Listed Company Manual provides for an
adjustment to the aggregate market value standard whenever the
NYSE's Composite Index is below 55.06. Because the value of the
Composite Index has remained substantially higher than 55.06 in
recent years, no adjustment has been necessary. The Exchange
proposal would make a conforming change in Paragraph 102.01 to
provide that any such adjustment would be made to the new $40
million aggregate market value standard.
\10\Amendment No. 2 amended Exhibit A to the NYSE's original
filing, which set forth the text of the proposed rule change, to
make it clear that the NYSE would consider both beneficial and
record owners for purposes of determining whether the alternative
shareholder distribution standard has been satisfied.
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Finally, the proposed amendments would adopt an alternate
demonstrated earnings power standard for companies that have a market
capitalization of at least $500 million and revenues of at least $200
million in their most recent fiscal year.\11\ Under this alternative,
such companies could qualify for listing if their adjusted net income,
as defined below, is positive for each of the last three fiscal years
and not less than $25 million in the aggregate for such period.
\11\Amendment No. 1 corrected Exhibit A to the NYSE's original
filing, which set forth the text of the proposed rule change, by
deleting the word ``net'' in the phrase ``net revenues'' as used in
the alternate demonstrated earnings power standard. This inaccuracy
did not appear, however, in the text of Securities Exchange Act
release No. 35301 (January 31, 1995), 60 FR 7245 (February 7, 1995),
which published the proposal for comment.
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For purposes of the proposed amendment to Paragraph 102.01,
``adjusted net income'' would be calculated by removing from reported
net income (before preferred dividends) the effects of all items whose
cash effects are investing or financing cash flows as determined
pursuant to Paragraph 28(b) of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 95, ``Statement
of Cash Flows'' (``FASB Statement No. 95''), subject to the limitations
noted below. Examples of such items include depreciation, amortization
of goodwill and gains or losses on sales of property, plant and
equipment. In contrast to FASB Statement No. 95, however, the proposed
rule change would limit the adjustment for the following items to
reversing the amount charged or credited in determining net income for
that period: (a) Discontinued operations; (b) the cumulative effect of
an accounting change; (c) an extraordinary item; and (d) the gain or
loss on extinguishment of debt.
III. Comments Received by the Commission
The Commission received one comment letter from NASD\12\ and one
letter from the NYSE supporting its proposal and addressing the NASD's
comments.\13\
\12\See NASD letter, supra, note 4.
\13\See NYSE letter, supra, note 5.
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The NASD stated that it had no comment on the substance of the
NYSE's listing amendments, but that the proposed rule change would pose
``substantial anti-competitive concerns for The Nasdaq Stock Market''
(``Nasdaq'') if NYSE Rule 500 were left in place. NYSE Rule 500
contains the shareholder approval requirements that an issuer needs to
satisfy before it can voluntarily withdraw its securities from listing
on the NYSE.\14\ In this context, the NASD noted that approval of the
NYSE's proposed rule change would allow the NYSE to solicit a broader
range of companies listed on Nasdaq notwithstanding that Rule 500 would
``make it difficult, if not impossible, for Nasdaq to seek listings
from among a potentially enlarged universe of NYSE-listed companies.''
Finally, the NASD stated its belief that ``expanding the NYSE listing
standards without eliminating the anti-competitive effect of NYSE Rule
500 is contrary to a free and open market and the national market
system, and imposes a burden on competition that is not otherwise
justified or in furtherance of the purposes of the Exchange Act'' in
violation of Sections 6(b)(5) and (8) and 11A(a)(1)(C)(ii) of the
Act.\15\ Accordingly, the NASD requested that the Commission require
the elimination of the NYSE shareholder approval requirements under
Rule 500 before approving the NYSE's alternative listing standards.
\14\NYSE Rule 500 generally requires that an issuers's proposed
withdrawal from listing on the NYSE be approved by the holders of
66\2/3\% of the outstanding security without the objection of more
than 10% of the individual holders thereof.
\15\15 U.S.C. 78f(b) (5) and (8) and 78k-1(a)(1)(C)(ii) (1988).
[[Page 18651]]
In its comment letter, the NYSE asserted that Rule 500 is not
related to its pending proposal and that Rule 500 would not affect
issuers that list under the proposal any differently from issuers
listing under existing requirements. The NYSE also claimed that, if the
proposal were adopted, the proposal were adopted, the NYSE would
continue to have the highest listing requirements among all domestic
equities markets.
IV. Discussion
A. Introduction
After careful consideration of the comments received, the
Commission finds that the proposed rule change is consistent with the
requirements of Section 6(b).\16\ In particular, the Commission
believes the proposal is consistent with the Section 6(b)(5)
requirements that the rules of an exchange be designed to promote just
and equitable principles of trade, to prevent fraudulent and
manipulative acts, and, in general, to protect investors and the public
interest; and are not designed to permit unfair discrimination between
issuers. The Commission also finds that the proposal is consistent with
the requirements of Section 6(b)(8) that the rules of an exchange not
impose any burden on competition not necessary or appropriate in
furtherance of the purpose of the Act.
\16\15 U.S.C. 78f(b) (1988 and Supp. V 1993).
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B. Background
The development and enforcement of adequate standards governing the
initial and continued listing of securities on an exchange is an
activity of critical importance to financial markets and the investing
public. Listing standards serve as a means for an exchange to screen
issuers and to provide listed status only to bona fide companies with
sufficient public float, investor base, and trading interest to ensure
that the market for a company's stock has the depth and liquidity
necessary to maintain fair and orderly markets. Adequate standards are
especially important given the expectations of investors regarding
exchange trading and the imprimatur of listing on a particular market.
Once a security has been approved for initial listing, maintenance
criteria allow an exchange to monitor the status and trading
characteristics of that issue to ensure that it continues to meet the
exchange's standards for market depth and liquidity so that fair and
orderly markets can be maintained.
For the reasons set forth below, the Commission believes that the
proposed rule change will provide the NYSE with greater flexibility in
determining which equity securities warrant inclusion in its market,
without compromising the effectiveness of the Exchange's listing
standards, and that the standards do not pose a burden on competition
among markets.
C. The Proposed Alternative Listing Standards
As discussed above, the NYSE currently requires a company to meet
rigorous standards regarding, among other things, its investor base and
its public float before qualifying for listing. The Commission agrees
with the NYSE, however, that there are bona fide companies that do not
meet these measures but that nonetheless have sufficient investor
interest to ensure that the market for the company's stock has the
depth and liquidity appropriate for auction market trading.
In particular, the Commission believes that it is reasonable for
the NYSE to list companies with 500 stockholders given that such
companies must have an average monthly trading volume of one million
shares, which amount is ten times the normal monthly trading volume
currently required by the Exchange under one of its stockholder
distribution listing standards for domestic equities. This higher
trading volume standard will ensure that listed companies with a
smaller shareholder base should nevertheless have sufficient interest
to support a liquid market.
Additionally, the Commission believes that the proposed alternative
to the existing demonstrated earnings power standard, which is based on
net income adjusted for the cash effects of investing or financing cash
flows, is adequate to ensure that the NYSE lists only bona fide
issuers. First, only companies that have a market capitalization of at
least $500 million and revenues of at least $200 million in their most
recent fiscal year are eligible to use the alternative net income
standard to satisfy demonstrated earnings power. These threshold
requirements, taken together with the actual alternative standard
requiring adjusted net income to be positive for the last three fiscal
years and not less than $25 million in the aggregate for such period,
should ensure that such companies are of sufficient size and substance
so as not to compromise the reasonable expectations of investors
regarding the companies that are eligible to trade on the NYSE. Second,
the other listing requirements including number of stockholders and
publicly held shares as well as the increased aggregate market value
and tangible net assets standard will apply to all listed companies
including those utilizing the alternative demonstrated earning power
criteria. As a result of these requirements, the Exchange's domestic
listing standards will continue to provide only for the listing of
securities with a sufficient investor base to maintain fair and orderly
markets and the listing of companies that are viable, going concerns
with substantial aggregate market value or tangible net assets.
Third, the alternative standard to demonstrated earning power using
net income adjusted for the cash effects of investing or financing cash
flows is based, with certain exceptions, on FAST Statement No. 95,
which sets forth a uniform accounting standard for calculation of cash
flows. Although the proposal limits certain adjustments to net income
that are not included in FASB Statement No. 95, the specific
limitations are set forth in the NYSE's listing criteria. Accordingly,
the NYSE can apply the standard uniformly and companies will be able to
know with certainly whether or not they can meet the alternative
demonstrated earnings power test based on net income (as adjusted for
the cash effects of investing or financing cash flows).
Finally, the Commission agrees with the NYSE's proposal to increase
the aggregate market value and net tangible assets requirements from
$18 million to $40 million. These requirements have not been updated
since 1984.\17\ This substantial increase significantly upgrades the
NYSE's listing criteria and should offer further assurances that the
current amendments do not weaken the high standards that a listing on
the NYSE has traditionally represented.
\17\See Securities Exchange Act Release No. 20649 (February 13,
1984), 49 FR 6587 (February 22, 1984).
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D. Maintenance Criteria
The NYSE's proposal does not contain separate continued listing
standards for the newly proposed initial listing standards. Instead,
the NYSE has indicated that, in reviewing companies for continued
listing under such standards, it would rely on its broad authority to
duelist companies set forth in Exchange Rule 499, which states that
securities admitted to the list may be suspended from dealings or
removed from the list at any time.\18\ Further, the [[Page 18652]] NYSE
has stated that, in monitoring companies listed under the proposed
alternative standards, companies that subsequently fall substantially
below those standards would be considered for relisting. In addition
the NYSE also would consider factors for continued listing such as:
trading volume; the number of publicly held shares; the aggregate
market value of publicly-held shares; the inability to meet current
debt obligations or adequately Finance operations; or an abnormally low
selling price or volume of trading. The Commission believes that the
authority in Rule 499, in addition to the NYSE's clarifications on
continued listing under the new standards, gives the NYSE sufficient
flexibility to adequately monitor companies listed under the
alternative standards being adopted herein and delist such companies
where appropriate.
\18\The Supplementary Material to Rule 499 states that although
the Exchange has adopted certain guidelines, ``. . .The Exchange is
not limited by what is set forth under the heading `Numerical and
Other Criteria.' Rather, it may make an appraisal of, and determine
on an individual basis, the suitability for continued listing of an
issue in light of all pertinent facts whenever it deems such action
appropriate, even though a security meets or fails to meet any
enumerated criteria.''
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Nevertheless, the NYSE has indicated its intention to develop
specific continued listing criteria that correlate to the alternative
initial listing standards.\19\ The Commission believes this will be
useful to the NYSE in monitoring such companies to ensure continued
depth and liquidity. In addition, in light of the increase in the
initial listing criteria for aggregate market value of shares
outstanding and tangible net assets from $18 million to $40 million,
the Commission believes that the Exchange should consider updating its
continued listing standards for these criteria, which are currently set
at $8 million.
\19\Letter from Robert G. Britz, Senior Vice President, New
Listings & Client Service, to Sharon Lawson, Assistant Director,
Division of Market Regulation, SEC, dated February 28, 1995 and
letter from J. Paul Wyciskala, Managing Director, Financial
Compliance, to Sharon Lawson, Assistant Director, Division of Market
Regulation, SEC, dated March 21, 1995.
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E. Burden on Competition
The NASD believes the Commission should disapprove the NYSE's
alternate listing standards unless the NYSE first rescinds its Rule 500
because, in the NASD's view, the proposal, when coupled with Rule 500,
limits competition for listings. The direct effect of the NYSE's
proposal, however, will be to increase the number of companies eligible
for NYSE listing. Accordingly, the proposal actually will increase
competition for new listings between the NYSE and other self-regulatory
organizations. The Commission believes that such an increase in
competition, on balance, would benefit the securities markets.\20\
\20\In this regard, the Commission believes it is significant
that, pursuant to Rule 19c-3 under the Act, 17 CFR 240.19c-3 (1994),
NASD market makers still will be able to trade the NYSE's newly
listed securities.
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In addition, the NYSE's changes are relatively modest in scope. The
NASD has not presented any evidence to indicate that the new
requirements will broaden significantly the pool of Nasdaq companies
that will become eligible for an NYSE listing under the new standards.
Indeed, the NASD comment letter states that already ``most of Nasdaq's
largest companies choose to freely remain on Nasdaq rather than switch
to the NYSE.'' The NASD has not indicated how the NYSE proposal would
change this situation.
The NASD, in effect, is asking the Commission to disapprove a pro-
competitive proposal because it believes that another rule of the NYSE
creates an anticompetitive barrier to delisting from the NYSE.\21\
While the Commission is mindful of the competitive consequences of NYSE
Rule 500 and believes those issues should be explored further,\22\ the
Commission does not believe that the current NYSE listing standards
should be frozen in place pending such examination. As a practical
matter, the immediate effect of this proposal will be to increase
competition for listing, which the Commission believes is in the best
interest of the securities markets and consistent with the Act.\23\ The
broader question of whether delisting standards should be revised is a
separate matter that should be considered independently. Moreover, such
separate consideration is consistent with the Commission's commitment
to expedite the processing of rule filings whenever possible.\24\
\21\In its comments, the NASD stated its belief ``that expanding
the NYSE listing standards without eliminating the anticompetitive
effect of Rule 500 is contrary to a free and open market and
national market system, and imposes a burden on competition that is
not otherwise justified or in furtherance of the purposes of the
Exchange Act.'' As support for such statement, the NASD cited, among
other sections of the Act, Section 11A(1)(C)(ii), which sets forth
the finding by Congress that it is in the public interest and
appropriate for the protection of investors and the maintenance of
fair and orderly markets to assure fair competition between exchange
markets and markets other than exchange markets. To the extent the
alternate listing standards allow the NYSE to compete for listings
of other market centers, it will assure fair competition between
exchange markets and other markets consistent with Section 11A of
the Act.
\22\See Division of Market Regulation, SEC, ``Market 2000, An
Examination of Current Equity Market Developments'' (January 1994)
at 30 and 31 (``The standards embodied in Rule 500 * * * represent a
barrier to delisting that is too onerous, * * * Accordingly, the
Division recommends that the NYSE submit a proposed rule change to
modify the requirements of NYSE Rule 500. * * * The new standards
should rely on a determination by an issuer's board of directors
rather than shareholder approval. For example, the new standards
could require approval by the board of directors and a majority of
the independent directors, or it could require a review of the
delisting decision by the board's audit committee.'').
\23\The Commission notes that the alternative listing standards
increase the classes of companies that are eligible for listing on
the NYSE based upon objective, numerical criteria that are
reasonably related to the purposes underlying the NYSE's listing
standards. As such, the Commission finds, in accordance with Section
6(b)(5) of the Act, that these standards do not discriminate
unfairly between issuers.
\24\See Securities Exchange Act Release No. 35123 (December 20,
1994), 59 FR 66692 (December 28, 1994) (amending Rule 19b-4 to
expedite the process by which proposed rule changes of self-
regulatory organizations are filed and become effective).
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V. Conclusion
In summary, based upon the analysis set forth above, the Commission
believes this rule change will not weaken the high standards for
listing on the NYSE. Further, following this change, the Exchange's
domestic listing standards will continue to provide only for the
listing of securities with a sufficient investor base to maintain fair
and orderly markets. Accordingly, the Commission believes that this
rule change adequately protects investors and the public interest.
The Commission further believes that these new standards will
provide the NYSE with greater flexibility in determining which equity
securities warrant inclusion in its market. Such flexibility will
increase competition for new listings between the NYSE and other self-
regulatory organizations. The Commission believes that this increase in
competition will benefit the securities markets. Accordingly, the
Commission does not believe that the rule change will result in any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended.
Finally, the Commission declines to condition its approval on the
NYSE's elimination of its Rule 500. While the Commission recognizes the
potentially anti-competitive effect of Rule 500 and urges the NYSE to
consider modifications thereto, the Commission believes that approval
of the NYSE's proposal is in the best interest of, and will actually
foster competition among, the securities markets. The Commission
believes that the benefits of such competition should not be delayed
pending the resolution of the Rule 500 issues. [[Page 18653]]
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\25\ that the proposed rule change (SR-NYSE-95-01), including
Amendments Nos. 1 and 2, is approved.
\25\15 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\26\
\26\17 CFR 200.30-3(a)(12) (1994).
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[FR Doc. 95-8996 Filed 4-11-95; 8:45 am]
BILLING CODE 8010-01-M
