[Federal Register Volume 60, Number 82 (Friday, April 28, 1995)]
[Rules and Regulations]
[Pages 20891-20897]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-10487]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 249
[Release No. 34-35637; File No. S7-4-95]
RIN 3235-AG28
Unlisted Trading Privileges
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Commission is adopting new rules and amendments to
existing rules concerning unlisted trading privileges (``UTP''). The
rules would reduce the period that exchanges have to wait before
extending UTP to any listed initial public offering, from the third
trading day in the security to the second trading day in the security.
The 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 any security.
EFFECTIVE DATE: April 21, 1995.
FOR FURTHER INFORMATION CONTACT: Betsy Prout, 202/942-0170, Attorney,
Office of Market Supervision, Division of Market Regulation, Securities
and Exchange Commission (Mail Stop 5-1), 450 5th Street, N.W.,
Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION:
I. Introduction
On February 2, 1995, the Securities and Exchange Commission
(``Commission'') proposed for comment rules1 under Section 12(f)
of the Securities Exchange Act of 1934 (``Exchange Act''),2 as
recently amended by the Unlisted Trading Privileges Act of 1994 (``UTP
Act''). The proposed rules would have: (1) Required national securities
exchanges (``exchanges''), for any security that is the subject of an
initial public offering (``IPO'') and is listed on another exchange
(``listed IPO''), to wait until the listing exchange reports the first
trade in the security to the Consolidated Tape before trading the
security pursuant to unlisted trading privileges (``UTP''); (2)
required each national securities exchange to have in effect a rule or
rules providing for transactions in the class or type of security to
which the exchange extends UTP; and (3) amended certain existing rules
under Section 12(f) of the Exchange Act to conform to the recent
statutory amendments effected by the UTP Act. The Commission also
requested comments on alternatives to the proposed rule concerning UTP
in listed IPOs from commenters who believe that either no waiting
period or a longer waiting period would be appropriate. In addition,
the Commission requested comment on whether any Commission action is
necessary to carry out the congressional objectives of linked markets
as required by Section 11A(a)(1)(D) of the Exchange Act.3
\1\See Securities Exchange Act Release No. 35323 (February 2,
1995), 60 FR 7718 (``Proposing Release'').
\2\15 U.S.C. 78l.
\3\15 U.S.C. 78k-1(a)(1)(D).
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The Commission received nine comment letters on the proposed
rules,4 eight of which discuss the proposed rule concerning UTP in
listed IPOs.5 The Commission also received, prior to publication
of the proposed rules in the Federal Register, a report presenting
certain volume and price parameter statistics of listed IPOs.6
\4\See letters from James F. Duffy, American Stock Exchange,
Inc., dated March 21, 1995 (``Amex letter''), George W. Mann, Boston
Stock Exchange, Inc., dated March 6, 1995 (``BSE letter''), Lisa W.
Barry, CS First Boston, dated March 14, 1995 (``CS First Boston
letter''), J. Craig Long, Foley & Lardner, dated March 20, 1995
(``Chx letter''), Richard T. Chase, Lehman Brothers, dated March 10,
1995 (``Lehman letter''), James E. Buck, New York Stock Exchange,
Inc., dated March 15, 1995 (``NYSE letter''), Leopold Korins,
Pacific Stock Exchange, Inc., dated March 14, 1995 (``PSE letter''),
John C. Katovich, Pacific Stock Exchange, Inc., dated March 29, 1995
(``PSE response''), and William Uchimoto, Philadelphia Stock
Exchange, Inc., dated March 29, 1995 (``Phlx response''), to
Jonathan G. Katz, Secretary, SEC.
\5\See BSE letter, Chx letter, CS First Boston letter, Lehman
letter, NYSE letter, PSE letter, Phlx response, and PSE response,
id.
\6\See letter and report from William Uchimoto, Philadelphia
Stock Exchange, Inc., dated February 6, 1995 (``Phlx Study''). The
Phlx Study was submitted to the Commission on behalf of the Boston
Stock Exchange, Inc., the Chicago Stock Exchange, Inc., the
Philadelphia Stock Exchange, Inc., and the Pacific Stock Exchange,
Inc.
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The Commission is adopting the rules as proposed, except for the
rule that would have required exchanges to wait, before extending UTP
to listed IPOs, until the first trade is reported by the listing
exchange. Instead, that proposed rule is being replaced with a
requirement that exchanges wait, before trading a listed IPO pursuant
to UTP, until the opening of business on the day following the initial
public offering of the security on the listing exchange.
II. Background
As stated above, the Commission is adopting rules pursuant to the
UTP Act, which recently amended Section 12(f) of the Exchange Act. The
UTP Act became effective on October 22, 1994. As discussed more fully
in the Proposing Release and below, the UTP Act amended Section 12(f)
of the Exchange Act to require the Commission to prescribe rules
concerning UTP in listed IPOs. Rule 12f-2, as adopted, meets this
requirement. The UTP Act also authorizes the Commission to prescribe
other rules pertaining to exchange extensions of UTP, and specifically
authorizes the Commission to prescribe, by rule or order, the
procedures that will apply to exchanges when they apply to reinstate
UTP in a security after the Commission has suspended UTP in the
security on the applicant exchange.
Section 12(f) governs when an exchange may trade a security that is
[[Page 20892]] not listed and registered on that exchange, i.e. by
extending UTP to the security.7 Prior to the UTP Act, Section
12(f) required exchanges to apply to the Commission before extending
UTP to a security, and required the Commission to provide notice of
each application for comment and opportunity for a hearing. The
Commission also was required to review each application, and if the
application met certain standards, the Commission issued an order
approving the exchange's request to trade the security pursuant to its
grant of UTP.8 These requirements caused significant delays before
exchanges could begin UTP trading in securities already traded on the
listing exchange, even though over-the-counter (``OTC'') dealers were
not subject to UTP limitations.9 The delay in trading, resulting
from the previous application procedures, was especially criticized by
competing exchanges because, while the Commission published for comment
hundreds of exchange applications for the extension of UTP each year,
comments on the applications were extremely rare. Indeed, virtually no
comments had been submitted to the Commission on a UTP application in
over ten years.
\7\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).
\8\Section 12(f) 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 related to UTP. Accordingly, these
areas included ensuring 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.
\9\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. OTC dealers are not subject
to the Section 12(a) listing requirement because they do not
transact business on an exchange.
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In response to the Concept Release that initiated the Market 2000
Study,10 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.11 After publication
of the Concept Release, on June 22, 1994, the Telecommunications and
Finance Subcommittee of the House Committee on Energy and Commerce
(``Subcommittee'') held a hearing on the UTP Act, ultimately adopted on
October 22, 1994.12
\10\See Securities Exchange Act Release No. 30920 (July 14,
1992), 57 FR 32587 (``Concept Release'').
\11\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).
\12\A representative of the Division and representatives of
several self-regulatory organizations testified at this hearing. 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'').
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The UTP Act, among other matters, removed 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 UTP Act generally allows an exchange
to extend UTP to any security when it becomes listed and registered on
another exchange or included in Nasdaq, subject to certain
limitations.13
\13\Section 12(f)(1)(E) prohibits extension of unlisted trading
privileges in securities that are registered under Section 12(g) of
the Exchange Act (generally, ``OTC securities''), except pursuant to
a rule, regulation or order of the Commission approving such
extension or extensions. The Commission's order approving the on-
going pilot program, including all limitations and conditions
therein, is deemed such an order. See Securities Exchange Act
Release No. 34371 (July 13, 1994), 59 FR 37103. Pursuant to Section
12(f)(1)(E), the Commission will consider issues involved in
extensions of UTP to OTC securities as the Commission continues it
on-going review of the operation of the pilot program.
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Specifically, the UTP Act grants exchanges the authority to trade
any security via UTP immediately upon listing on another exchange,
provided that the security is not a listed IPO security, as defined in
the UTP Act.14 For listed IPO securities, the UTP Act contains a
temporary provision that requires exchanges to wait, before trading any
listed IPO security, until the third day of trading in the security on
the listing exchange. This provision also requires the Commission to
prescribe by rule or regulation, within 180 days of the enactment of
the UTP Act, the mandatory delay (or, ``duration of the interval''), if
any, that should apply to UTP extensions to listed IPO
securities.15
\14\Section 12(f)(1)(B), read jointly with Section
12(f)(1)(A)(i), 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).
\15\15 U.S.C. 78l(f)(1)(C). The UTP Act temporary two-day delay
provision for UTP in listed IPOs expires on the earlier of the
effective date of a Commission rule prescribing the appropriate
interval of delay, if any, or 240 days following the enactment of
the UTP Act.
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The UTP Act also provides the Commission with rulemaking authority
to prescribe additional procedures or requirements for exchange
extensions of UTP to any security, and 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 pursuant to UTP in the
security. An exchange seeking to reinstate UTP in the security,
following a Commission suspension, must file an application with the
Commission 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 Exchange Act. Public notice by the
Commission of an exchange application to reinstate suspended UTP, and
Commission review of the application, are also required. The amended
Section 12(f) notice, review, and Commission approval provisions are
substantially similar to the requirements that previously applied to an
exchange's initial extension of UTP to a security under former Section
12(f).16
\16\See Section 12(f)(2), as amended, 15 U.S.C. 78l(f)(2).
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III. Extensions of UTP to Listed Securities That Are the Subject of an
Initial Public Offering
A. Proposed Rule 12f-2
Proposed Rule 12f-2 would have allowed exchanges to extend UTP to a
listed IPO security when at least one transaction in the security had
been effected on the listing exchange and the
[[Page 20893]] transaction had been reported pursuant to an effective
transaction reporting plan as defined in Rule 11Aa3-1 under the
Exchange Act.17 The proposed rule, therefore, would have shortened
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),18 to the time that
it takes to effect and report the initial trade in the security on a
listing exchange. The result of the proposed rule would have been to
permit the regional exchanges to trade listed IPOs at essentially the
same time as the primary listing exchange.
\17\17 CFR 240.11Aa3-1 (1991).
\18\See supra note 15.
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The Commission proposed a one-trade delay for UTP in listed IPOs
because the Commission preliminarily believed that it was appropriate
to minimize regulatory restraints on competition for trading listed IPO
securities. In soliciting comments on proposed Rule 12f-2, however, the
Commission noted a previous New York Stock Exchange (``NYSE'') position
that listed IPOs should be traded solely on the listing market for a
``short'' period of time to help ensure market efficiency immediately
following the IPO.19 The Commission also cited a report on the UTP
Act by the House Committee on Energy and Commerce (``Committee''), in
which the Committee directed the markets to provide the Commission with
trading activity data on the effects of UTP in IPOs (including, for
example, any volatility effects on the security), so that the
Commission could determine whether the benefits of confining early
trading in IPOs to one marketplace would be outweighed by the benefits
of removing regulatory delays that inhibit competition among
markets.20
\19\See Proposing Release, supra note 1, citing prepared
testimony of Edward A. Kwalwasser, Executive Vice President,
Regulation, New York Stock Exchange, UTP Hearing, supra note 12.
\20\See Proposing Release, supra note 1, citing H.R. Rep. No.
626, 103d Cong., 2d Sess. (1994). The Committee also identified the
experience of third market trading in listed IPOs as relevant to
this inquiry.
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The Commission solicited comments on these issues, specifically
seeking comments on certain items that would be particularly useful to
the Commission. These included 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. To the extent that commenters believed a waiting period
would be appropriate, the Commission requested that they provide data
to illustrate the potential negative effects on the pricing of an IPO.
The Commission also suggested that commenters might provide an analysis
of the effects of the two-day waiting period temporarily in effect
under the UTP Act. Finally, the Commission stated that it would be
interested in receiving alternative proposed rules from commenters who
believe that either no waiting period or a longer waiting period would
be appropriate.
In addition, the Commission sought comment on whether any
Commission action would be necessary under Section 12(f), as amended,
in order to carry out the congressional objectives of linked markets as
required by Section 11A(a)(1)(D).21 Specifically, the Commission
requested comment on whether changes should be made to the consolidated
quotation, trade reporting, and order routing systems, now that
exchanges and linking facilities will have less time to prepare for
multiple exchange trading in the securities. The Commission expressed
particular interest in receiving comments concerning any existing
procedural delays that should be corrected by Commission action to
ensure that the operation of amended Section 12(f) is not impeded.
\21\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.
15 U.S.C. 78k-1(a)(1)(D).
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B. Comments on Proposed Rule 12f-2
The Commission received a total of eight comment letters on
proposed Rule 12f-2, five of which supported the proposed rule,22
and three of which opposed the proposal.23 Shortly prior to the
publication of the proposed rules, the Commission also received a study
from the Philadelphia Stock Exchange (``Phlx''), submitted on behalf of
the Boston Stock Exchange, Inc., the Chicago Stock Exchange Inc., and
the Pacific Stock Exchange Inc., concerning certain volume and pricing
characteristics of listed IPOs.24
\22\See BSE letter, Chx letter, PSE letter, Phlx response, and
PSE response, supra note 4.
\23\See CS First Boston letter, Lehman letter, and NYSE letter,
supra note 4.
\24\See Phlx Study, supra note 6.
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The Phlx Study shows high volume in IPOs during the early days of
trading, particularly on the first and second day of trading. Based on
this data, the Phlx Study states that a restriction on UTP in IPOs
creates a substantial negative effect on competition, both in relation
to the listing exchange and OTC dealers.25 The Phlx Study
concludes that the Commission should adopt a rule for UTP in listed
IPOs that would allow the regional exchanges to trade the securities on
the first day of trading.
\25\See supra note 9.
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These competitive concerns were reiterated by the other comment
letters supporting the proposed rule.26 One regional exchange also
states that it has listed IPOs simultaneously with the NYSE and has
seen no adverse effect related to the dual listings.27 This
exchange argues that the NYSE has not been able to identify any adverse
effects from the dual listing of IPOs. Another regional exchange states
that, since the UTP Act reduced the waiting period to two days, there
have been no instances of pricing disparities, inordinate volatility,
or issuer complaints for securities traded by regional exchanges on the
third trading day of IPOs, and no offering has been adversely affected
by regional trading.28
\26\See BSE letter, Chx letter, and PSE letter, supra note 4.
\27\See Chx letter, supra note 4.
\28\See PSE letter, supra note 4.
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The Commission received three comment letters, one from the NYSE
and two from underwriters, expressing opposition to proposed Rule 12f-
2.29 These commenters believe that immediate regional exchange
trading of IPOs would increase price volatility in the trading of IPO
securities because the underwriters would not have sufficient time to
ensure an orderly distribution of the securities. Two of the commenters
argued that the temporary two-day delay should continue in
place,30 while the third commenter recommends at the very least a
one-day trading delay.31 Those proposing a two-day delay base
their recommendation on data compiled by Lehman Brothers (``Lehman
Study''), showing higher volatility in some Nasdaq IPOs than in
selected NYSE IPOs. The two letters assert that this data demonstrates
that dispersed initial trading of IPOs in the Nasdaq market is more
volatile than initial centralized trading of IPOs.
\29\See NYSE letter, CS First Boston letter, and Lehman letter,
supra note 4.
\30\See NYSE letter and Lehman letter, supra note 4.
\31\See CS First Boston letter, supra note 4.
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The Commission received two comment letters from two regional
exchanges in response to the comments opposing the proposed
rule.32 One of these commenters believes that National Market
System procedures and practices are capable of providing effective
[[Page 20894]] pricing for IPOs, contrary to the concerns voiced by the
opposing comment letters.33 The commenter also believes that only
upward price volatility risk exists for early IPO trading, particularly
because underwriters may place stabilizing bids in IPOs to limit
declines in the prices of the securities.
\32\PSE response and Phlx response, supra note 4.
\33\PSE response, supra note 4.
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The second response letter reiterates these points, and also notes
that regional exchange opening, high, low, and closing prices in IPOs
that were dually-listed among one regional exchange and the NYSE were
consistent with NYSE comparable prints.34 In addition to providing
its reasons for believing that price volatility in early trading of
IPOs is limited to upward movements in the price of the security, the
commenter also concludes that price volatility is generated by supply
and demand in securities and that, as a natural by-product of a free
and open market, price volatility should never be used as a reason to
exclude some equally-regulated competitors from the marketplace.35
\34\See Phlx response, supra note 4.
\35\As discussed in Section III.C., infra, the Phlx response and
the Chx letter suggest enhancements to certain Intermarket Trading
System (``ITS'') procedures in order to facilitate the extension of
unlisted trading privileges pursuant to the new streamlined
requirements for UTP under the UTP Act.
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C. Commission Response
The Commission is adopting a revised version of Rule 12f-2. Instead
of requiring exchanges to wait until the listing exchange of an IPO
reports the first trade in the security to the Consolidated Tape, as
originally proposed, exchanges will be required to wait, before trading
the security pursuant to a grant of UTP, until the opening of business
on the day following the IPO. For the reasons discussed below, the
Commission believes that this ``one-trading-day'' delay for UTP in
listed IPOs is appropriate for the maintenance of fair and orderly
markets, the protection of investors, and otherwise in furtherance of
the purposes of the Exchange Act, as required by the UTP Act.
As a general matter, the Commission agrees with the regional
exchanges that early UTP in IPO securities would enhance the ability of
multiple markets to compete with the listing exchange for the
substantial volume occurring on the initial trading days of IPOs. As
discussed below, however, several commenters raise the possibility that
virtually immediate UTP in IPO securities could complicate the pricing
and orderly distribution of IPO securities by increasing the risk of
price volatility as the securities are distributed immediately to the
public. In light of these concerns, and in particular those raised by
the underwriters who believe that IPO pricing may be at risk if there
were no opportunity for early centralized trading, the Commission is
adopting a rule to provide a one-trading-day delay for UTP in IPO
securities.
The Commission believes that a one-trading-day delay to precede UTP
in listed IPOs is appropriate at this time primarily because the
Commission is concerned that the first day of trading in an IPO on an
exchange presents special circumstances, including initial pricing, an
attempt to effectuate an orderly distribution of securities, high
trading volume, and the resulting potential for high price volatility
in the securities, that could have a significant effect on pricing and
distribution of IPOs. In light of the comments regarding the possible
impact of immediate UTP for the IPO process, the Commission believes,
therefore, that a one-trading-day delay is warranted in order to ensure
the protection of investors as required by the UTP Act, and by the
Exchange Act in general.
The Phlx Study and Phlx response discuss the five IPO securities
that were dually-listed on one regional exchange and the NYSE, and
state that regional trades virtually always occurred within the NYSE
daily trading range on the first and second trading days of the IPO.
The Commission considers this limited amount of data insufficient to
show that immediate UTP will not increase price volatility across the
markets. In addition to the limited number of occurrences reviewed,
this information only addresses listings on one exchange competing with
the listing exchange, rather than the effects of five markets trading
the IPO simultaneously with the listing exchange.
The Commission also believes that there is insufficient evidence on
the record to warrant a longer waiting period than the first trading
day to precede UTP in listed IPOs. It appears that the risk of high
price volatility for listed IPOs and the resultant impact on IPO
distributions decreases after the first day of trading.
In light of the concerns raised and the limited nature of the
trading data available, the Commission is adopting the one-trading-day
delay for UTP in listed IPOs. The Commission currently believes that
this one-day restriction is necessary and appropriate for the
maintenance of fair and orderly markets and the protection of investors
with respect to IPOs. This conclusion is premised on the importance of
the initial trading of IPOs for the offering process, the concerns
raised regarding orderly IPO distribution, and the limited data
responding to those concerns.
The Commission is sympathetic to concerns that a one-trading-day
delay for exchange extensions of UTP will restrict regional exchange
trading, while OTC dealers will continue to be free to trade the
securities upon effective registration. The evidence presented in the
Phlx study, however, shows that in virtually all IPOs studied, OTC
market makers trade the securities only in extremely small volume, if
at all, on the first day of the IPO. The Commission believes,
therefore, that any competitive advantage to OTC market makers is
minimal, and is outweighed by the benefit to investors and the capital
formation process that should be accrued by decreasing the risk of
price volatility in the IPO securities.
The Commission will continue, of course, to monitor the experience
with the trading of IPOs under the amended Rule. The Commission is
willing to consider revisiting the question of the appropriate waiting
period for UTP in listed IPOs after experience has been gained with the
amended rules.
Two commenters who urged adoption of the proposed rule also
responded to the Commission's solicitation of comments on any necessary
enhancements to National Market Systems to facilitate operation of the
UTP Act. One commenter suggested that all ITS Participants should be
permitted to participate in the opening on the first day of trading on
the listing exchange via the ITS.36 Another commenter stated that
the new UTP trading regimen necessitates more reactive procedures by
the ITS Participants and the Securities Industry Automation Corporation
(``SIAC''), the ITS facilities manager.37 The commenter urged SIAC
to make ITS automatically available for any UTP security on the day
following a regional exchange's request that the security be available
for ITS use.
\36\See Chx letter, supra note 4.
\37\See Phlx response, supra note 4.
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The Commission urges the ITS Participants to enhance their
procedures for ITS eligibility of securities. The Commission notes that
the ITS Pre-Opening Application and the ITS Trade-Through Rule are
designed, in part, to ensure orderly pricing of securities among the
various Participant market centers. Thus, the Commission believes that
the ITS Participants should move forward to ensure that the ITS is
available for use by all interested [[Page 20895]] participant markets
in time to participate in the opening trade of a listed IPO security on
the second day the security trades.
IV. Exchange Rules for Securities to Which Unlisted Trading Privileges
are Extended (Rule 12f-5)
Section 12(f)(1)(D) of the Exchange Act, 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 proposed 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.
The Commission solicited comment on whether proposed Rule 12f-5
would help ensure that an exchange has the necessary rules in place to
provide for fair and orderly markets in all securities to which the
exchange extends UTP. The Commission received one response to this
question.38 This commenter supported the rule, and requested that
the Commission, in this release, clarify that, prior to commencing UTP
trading, an exchange should be required to have entered into
appropriate information sharing agreements with foreign exchanges (or
the Commission with foreign regulators), comparable to that required of
the listing exchange for the particular product.39
\38\See Amex letter, supra note 4.
\39\The commenter also suggested that the Commission make clear
that OTC transactions in exchange-listed securities must be subject
to the same regulatory requirements as those imposed by the listing
exchange and by other exchanges trading the security pursuant to
UTP, which could be accomplished by a amendment to the rules of the
National Association of Securities Dealers. The Commission believes
that this recommendation is outside the scope of the present
rulemaking, which deals specifically with exchange extensions of
UTP.
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The Commission is adopting Rule 12f-5, as proposed, as a means to
ensure that exchanges meet their obligation under the Exchange Act to
have these rules and oversight mechanisms in place on their exchanges
for the relevant securities before extending UTP to the securities. As
discussed in the Proposing Release, the rule is intended to preserve a
benefit of Commission review of UTP applications that was required by
Section 12(f) 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. Now that the Commission will no longer
review UTP applications, the Commission believes that the requirements
set forth in Rule 12f-5 are appropriate because the rule confirms to
exchanges their obligation to evaluate their extensions of UTP to
determine that the exchanges are authorized to list the product class
of securities before allowing their members to trade the securities.
Finally, in regard to the comment that exchanges must enter into an
appropriate information sharing agreement for all securities traded
thereon, Rule 12f-5 will ensure that an exchange granting UTP in a
security has secured previous Commission approval to trade the product
class of security pursuant to Section 19(b) of the Exchange Act.40
The Commission, in such approval process, will have determined the
adequacy of information sharing arrangements for the particular
exchange.
\40\15 U.S.C. 78s(b).
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V. Amendments to Rules 12f-1 and 12f-3, and Rescission of Previous
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
proposed to amend or rescind these rules to reflect statutory changes,
and solicited comment on whether the proposed changes were appropriate.
No comments were received on these proposals. The Commission is
adopting the amendments to existing Rules 12f-1 and 12f-3, and is
rescinding existing Rules 12f-2 and 12f-6, as proposed.
First, Rule 12f-141 is amended to limit its operation to an
exchange's application to reinstate UTP after a Commission suspension.
The amended rule will 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. The Commission believes
the amendment is an appropriate means to carry out the intention of the
new Section 12(f)(2) requirement for exchange UTP applications in cases
where exchanges seek to reinstate UTP for a security that was
previously suspended by the Commission.
\41\17 CFR 240.12f-1 (1991).
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Second, Rule 12f-2 is rescinded and Form 27, referred to in
previous Rule 12f-2, is removed.42 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'' (as
described in the rule) immaterially for those purposes. The rule and
form provide an exemption from reapplication for UTP in these cases.
The Commission is rescinding these items because the application
procedures, from which the rule provided an exemption, no longer exist.
\42\17 CFR 240.12f-2 (1991).
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Third, the Commission is rescinding the last sentence of paragraph
(b) of Rule 12f-3.43 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 include 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. The Rule also required the
exchange, upon suspension or termination, promptly to file Form 28 with
the Commission.
\43\17 CFR 240.12f-3 (1991).
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This final requirement no longer is necessary because exchanges are
no longer required to apply to the Commission to extend UTP to a
security. The Commission, therefore, is rescinding that last
requirement from the Rule concerning Form 28 and is removing Form 28 to
conform further with efforts to streamline the regulatory process
concerning UTP.
Finally, the Commission is rescinding Rule 12f-6, which exempted a
merged exchange from the UTP application process in certain
circumstances.44 The exemption no longer is necessary because the
waiting period that restrained exchanges from extending UTP to most
securities no longer exists.
\44\17 CFR 240.12f-6 (1991).
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VI. Effects on Competition and Regulatory Flexibility Act
Considerations
Section 23(a)(2) of the Exchange Act45 requires that the
Commission, when adopting rules under the Exchange Act, consider the
anticompetitive effects of those rules, if any, and balance any
anticompetitive impact against the [[Page 20896]] regulatory benefits
gained in terms of furthering the purposes of the Exchange Act. The
Commission believes that adoption of Rules 12f-2 and 12f-5, and the
amendments to Rules 12f-1 and 12f-3, and the rescission of previous
Rules 12f-2 (to be replaced with new Rule 12f-2) and 12f-6 will not
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act. Specifically, as
discussed in more detail above, the Commission believes that the new
Rule 12f-2 one-trading-day delay for UTP in IPOs provides a minimal
restraint on competition among market centers which is outweighed by
the benefits associated with the resulting reduction of potential price
volatility risk in IPO securities. In addition, the one-trading-day
delay is shorter than the current temporary two-trading day delay.
\45\15 U.S.C. 78w(a)(2).
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The Commission has prepared a Final Regulatory Flexibility Analysis
(``FRFA'') regarding the amendments and rescissions to the rules under
Section 12(f), in accordance with 5 U.S.C. 604. The FRFA notes the
minimal economic effect on the minimal number of small businesses, if
any, that may be generated by these amendments to and rescissions of
these rules under Section 12(f) of the Exchange Act. In addition, the
FRFA notes that Rule 12f-2 should reduce the risk of high price
volatility, and possible associated risk of loss to investors, in
listed IPOs. The Commission believes that the benefits of reducing risk
to investors outweigh the potential costs, if any, that might be
incurred by, for example, small specialist firms on regional exchanges.
A copy of the FRFA will be available for inspection and copying in
the Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
VII. Effective Date
The new rules and amendments to the Commission's rules and forms
shall be effective immediately, in accordance with the Administrative
Procedure Act, which allows effectiveness in less than 30 days after
publication for, inter alia, ``a substantive rule which grants or
recognizes an exemption or relieves a restriction.'' 5 U.S.C.
553(d)(1). Moreover, the Administrative Procedures Act allows for
accelerated effectiveness ``as provided by the agency for good cause
and published with the Rule.'' 5 U.S.C. 553(d)(3). Accelerated
effectiveness of the rules and amendments is necessary in order to
ensure compliance with the UTP Act, which requires the Commission to
prescribe the duration of the waiting period, if any, for UTP in listed
IPOs ``[n]ot later than 180 days after the date of enactment of the
Unlisted Trading Privileges Act of 1994 * * *.''46
\46\Section 12(f)(1)(C), as amended, 15 U.S.C. 78l(f)(1)(C).
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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 hereby
amends title 17, chapter II of the Code of Federal Regulations 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-23, 80a-29, 80a-
37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
2. Section 240.12f-1 is amended by revising the section heading and
introductory text of paragraph (a), redesignating paragraphs (a)(5) and
(a)(6) as paragraphs (a)(6) and (a)(7), adding paragraph (a)(5), and
revising newly designated paragraph (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) of the Act (15 U.S.C. 78l(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. Section 240.12f-2 is revised 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 on or after such
national securities exchange opens for trading on the day that follows
the day on which the initial public offering of such subject security
commences.
(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) Definitions. For the purposes of this section:
(1) 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)(i) of the Act (15 U.S.C. 78l(f)(1)(G)(i)), and
(2) An initial public offering commences at such time as is
described in section 12(f)(1)(G)(ii) of the Act (15 U.S.C.
78l(f)(1)(G)(ii)).
4. Section 240.12f-3 is amended by revising paragraph (b) to read
as follows:
Sec. 240.12f-3. Termination or suspension of unlisted trading
privileges.
* * * * *
(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. Section 240.12f-5 is added 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.
6. Section 240.12f-6 is removed and reserved.
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;
* * * * *
Secs. 249.27 and 248.28 [Removed]
8. Sections 249.27 and 248.28 are removed.
[[Page 20897]] Dated: April 21, 1995.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-10487 Filed 4-27-95; 8:45 am]
BILLING CODE 8010-01-P
