[Federal Register Volume 59, Number 91 (Thursday, May 12, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-11558]
[[Page Unknown]]
[Federal Register: May 12, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34019; File No. SR-NYSE-93-49]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Order Approving Proposed Rule Change and Notice of Filing and Order
Granting Accelerated Approval to Amendment No. 1 to Proposed Rule
Change Relating to Bond Listing Standards
May 5, 1994.
I. Introduction
On December 22, 1993, 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 revise its standards for the
listing and delisting of debt securities. On April 1, 1994, the NYSE
submitted to the Commission Amendment No. 1 to the proposed rule change
in order to clarify its interpretation of certain provisions of the
original filing.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1991).
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 33531 (January 27, 1994), 59 FR 4960 (February
2, 1994). No comments were received on the proposal. This order
approves the proposed rule change, including Amendment No. 1 on an
accelerated basis.
II. Description of the Proposal
Paragraphs 102.03 and 103.05 of the NYSE's Listed Company Manual
set forth the current standards for listing debt securities of domestic
and foreign issuers, respectively, on that Exchange. Under either
paragraph, the NYSE uses the following minimum criteria to determine
whether a debt security is eligible to be listed: The bond issue must
have an aggregate market value or principal amount of $5 million; the
anticipated distribution must be ``sufficient for trading on the
Exchange''; and the company must be in a position to cover interest
charges on all debts issued by it for a subsidiary. In this regard, the
NYSE deems interest coverage to be inadequate if the interest charges
on all debt issued by the company, its parent or a subsidiary exceed
earnings, before or after taxes, as reported in a filing to the
Commission.\3\ Finally, Paragraphs 102.03 and 103.05 allow the Exchange
to list convertible debt only if the underlying common stock also is
listed on the NYSE.
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\3\See Paragraph 802.00 of the Listed Company Manual.
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The delisting standards for debt securities are set forth in
paragraphs 801.00 and 802.00 of the Listed Company Manual. The NYSE
normally gives consideration to delisting a bond issue if the aggregate
market value or principal amount falls below $1 million, or if the
company's interest coverage is deemed to be inadequate.\4\ The NYSE
also can review the continued listing of a debt security pursuant to
certain other criteria in paragraph 802.00 (e.g., ``authoritative
advice received that security is without value,'' ``inability to meet
current debt obligations or to adequately finance operations''). In
terms of convertible bonds, paragraph 801.00 states that it is the
NYSE's customary policy to delist a convertible security if the related
common stock is delisted.
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\4\See supra, note 4 and accompanying text.
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The NYSE proposes to simplify and relax its standards for the
listing and delisting of debt securities, in order to make the
Exchange's trading and disclosure systems more accessible to bond
issuers. Specifically, the proposed amendments to paragraphs 102.03 and
103.05 will eliminate the requirement that the Exchange evaluate the
anticipated distribution of a bond issue,\5\ and will replace the
current definition of adequate interest coverage with a new standard
based on issuer or bond rating status.\6\ In addition, the NYSE
proposal will permit the Exchange to list convertible debt whenever the
underlying equity security is subject to real-time sale reporting in
the United States.\7\ Only the requirement that the bond issues have an
aggregate market value or principal amount of no less than $5 million
will remain unchanged.
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\5\The proposed rule change also will delete a reference to the
distribution requirement from paragraph 703.06 of the Listed Company
Manual, which governs the procedures an issuer must follow to list
its debt securities on the NYSE.
\6\See infra, notes 9-13 and accompanying text.
\7\Amendment No. 1, supra note 3, clarifies that, for both
domestic and foreign issuers, the underlying equity security must be
subject to real-time reporting in the United States.
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As noted above, the NYSE proposal contains a new standard for
evaluating whether a debt issuer has the ability to meet its interest
obligations. Rather than using an earnings deficit, or the lack
thereof, as the basis for making that determination,\8\ the Exchange
will rely instead on either (1) its own initial and continued listing
standards for equity securities or (2) the analysis of a nationally
recognized securities rating organization (``NRSRO'').
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\8\See supra, note 4 and accompanying text.
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Specifically, if an issuer of NYSE listed equity is in ``good
standing'' with the Exchange,\9\ the NYSE normally will list that
company's debt securities so long as they have an aggregate market
value or principal amount of at least $5 million. This standard also
will apply to an issuer owned by, or under common control with, an
issuer of NYSE listed equity; and to an issuer whose debt securities
are guaranteed by an issuer of NYSE listed equity. According to the
NYSE, because debt enjoys seniority over equity, the ``good standing''
test warrants listing an ``affiliated'' issuer's bonds.
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\9\See infra, note 24.
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In contrast, debt securities of an ``unaffiliated'' issuer\10\ will
not be eligible for initial listing on the NYSE unless an NRSRO has
assigned a certain minimum rating to the bonds (or to other bonds
issued by the same company). Thus, the NYSE will be able to list such a
debt issue only if it has received a rating no lower than a Standard
and Poor's (``S&P'') Corporation ``B'' rating (or another NRSRO's
equivalent thereof). If the issue proposed to be listed has not been
rated, those bonds must be either senior to, or pari passu with,\11\ an
issue that has received at least an S&P Corporation ``B'' rating (or
another NRSRO's equivalent thereof). Alternatively, the proposed rule
change will allow the NYSE to list unrated bonds that are junior to an
investment grade issue.\12\
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\10\As defined in the NYSE proposal, ``an `unaffiliated' issuer
is one that has no equity securities listed on the Exchange; is not,
directly or indirectly, majority-owned by, nor under common control
with, an issuer of Exchange-listed equity securities; and is not
issuing a debt security that an issuer of Exchange-listed equity
securities is guaranteeing.''
\11\A pari passu issue has equal standing with the debt issue
proposed to be listed.
\12\To be investment grade, an issue must be assigned a rating
no lower than an S&P Corporation rating of ``BBB'' (or another
NRSRO's equivalent thereof). The NYSE has indicated that it will
apply this standard only to unrated bonds which are immediately
junior to another rated class of securities issued by the same
company. Telephone conversation between Michael J. Simon, Milbank,
Tweed, Hadley & McCloy; Fred Siesel, Director, Fixed Income Markets,
NYSE; Sharon Lawson, Assistant Director, Division of Market
Regulation, SEC; and Beth Stekler, Attorney, Division of Market
Regulation, SEC, on February 4, 1994.
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As under current Paragraph 802.00, the NYSE will give consideration
to delisting a bond issue if its aggregate market value or principal
amount falls below $1 million, or if the issuer is unable to meet its
obligations on the listed debt securities.\13\ The NYSE also will
retain the discretion to remove a bond from listing if, among other
things, ``authoritative advice [is] received that [the] security is
without value.'' As a practical matter, the NYSE has indicated that it
normally will not delist debt where there is value in the security and
continued exchange trading is in the best interests of investors.\14\
The Exchange, however, has committed to give serious consideration to
delisting a bond issue if the debt security has minimal or no value and
the issuer is unable to meet its financial obligations.\15\
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\13\See Amendment No. 1, supra, note 3. The standard will
replace the current definition of inadequate interest coverage. See
supra, note 4 and accompanying text.
\14\See Amendment No. 1, supra, note 3.
\15\Id. Amendment No. 1 provides the following example of a
situation where the continued exchange trading of a debt security
normally would not be considered to be in the best interests of
investors: the issuer is in bankruptcy and files a plan of
reorganization with no recovery for bond holders.
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In addition, the NYSE will amend Paragraph 801.00 to specify that
convertible bonds will be reviewed for continued listing when the
underlying equity security is delisted,\16\ and will be delisted when
the related security is no longer subject to real-time last sale
reporting in the United States. Further, if the common stock is
delisted due to a violation of the NYSE's ``corporate responsibility''
criteria (including, but not limited to, the outside director, audit
committee and shareholder voting requirements),\17\ then the Exchange
will delist all debt securities convertible into that common stock.
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\16\Under Paragraph 801.00, other convertible securities will
continue to be delisted when the related common stock is delisted.
\17\See Section 3 of the Listed Company Manual.
On a related matter, Amendment No. 1, see supra note 3,
clarifies that, if the NYSE delists the equity securities of a
company which is the majority owner of an issuer of NYSE listed debt
or the guarantor thereof, the Exchange will review the listing of
the formerly ``affiliated'' issuer's bonds, convertible or
otherwise.
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Finally, the NYSE has indicated that the listing and delisting
standards for ``unaffiliated'' corporate issuers\18\ also will apply to
certain non-corporate issuers. In particular, the proposed rule change
specifies that sovereign issues will be evaluated on a case-by-case
basis. The NYSE proposal also will codify the Exchange's current policy
that only term/dollar municipal bonds may be listed.\19\
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\18\See supra, notes 11-13 and accompanying text.
\19\A term/dollar municipal bond is issued with a single
maturity date (as opposed to a serial bond), and is quoted in
dollars or as a percentage of its par value (rather than by yield).
As such, it resembles a corporate bond. Telephone conversation
between Fred Siesel, Director, Fixed Income Markets, NYSE, and Beth
Stekler, Attorney, Division of Marketing Regulation, SEC, on January
7, 1994.
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The Exchange states that the basis under the Act for the proposed
rule change is the requirement under section 6(b)(5) that an exchange
have rules that are designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
to remove impediments to and perfect the mechanisms of a free and open
market and a national market system, and, in general, to protect
investors and the public interest.
III. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, with the requirements of section 6(b).\20\ Specifically,
the Commission believes the proposal is consistent with 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.
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\20\15 U.S.C. 78f(b) (1988).
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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 a self-regulatory
organization to screen issuers and to provide listed status only to
bona fide companies with sufficient float, investor base and trading
interest to maintain fair and orderly markets. 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. For the reasons set forth below, the Commission believes
that the proposed rule change will provide the NYSE with greater
flexibility in determining which debt securities warrant inclusion in
its bond trading and disclosure systems, without compromising the
benefits that the Exchange's listing standards offer to investors.
After careful review, the Commission has concluded that the initial
listing standards in paragraphs 102.03 (for domestic issuers) and
103.05 (for foreign issuers), as amended, should ensure that only
substantial companies capable of meeting their financial obligations
are eligible to have their bonds listed on the NYSE. As before, the
proposed rule change will require that the NYSE evaluate an issuer's
ability to cover the interest charges on its debt securities. Although
the Exchange currently makes this interest coverage determination
itself,\21\ the amended standards will rely instead on either the
issuer's relationship with the NYSE or the bonds' NRSRO rating.
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\21\See supra, note 4 and accompanying text.
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The Commission agrees that, to the extent the NYSE has adequate
listing standards for common stock, the Exchange reasonably may assume
that NYSE listed companies (and certain affiliates thereof)\22\ in
``good standing'' with the Exchange\23\ are in solid financial
condition and do not pose a significant risk of defaulting on their
obligations. Moreover, as the NYSE correctly notes, debt securities
enjoy seniority over equity securities. Because the NYSE presumably
would not have listed the junior equity issue unless it was satisfied
with the quality of the company, the Commission is unable to conclude
that the NYSE has no basis for its assumption that the senior debt
issue also warrants listed status.
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\22\See supra, text accompanying note 10.
\23\According to the NYSE, a company is in ``good standing'' if
it is above the relevant continued listing criteria. See, e.g.,
Paragraph 703.19 of the Listed Company Manual. Telephone
conversation between Michael J. Simon, Milbank, Tweed, Hadley &
McCloy; Fred Siesel, Director, Fixed Income Markets, NYSE; and Beth
Stekler, Attorney, Division of Market Regulation, SEC, on April 11,
1994.
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For ``unaffiliated'' issuers, the Commission finds that it is not
unreasonable for the Exchange to defer to the expertise of an NRSRO,
rather than conducting its own analysis of the company's financial
condition, as is presently the case.\24\ Although the Commission would
be concerned by any potential misuse of NRSRO ratings, the Commission
notes that the NRSROs routinely evaluate interest coverage, among other
things, when they rate bonds. In addition, their methodology, unlike
the NYSE's, incorporates even more extrinsic factors, such as
characteristics of the issuer's industry group.\25\ The Commission
therefore agrees with the Exchange that, under these circumstances,
NRSRO ratings can be relied upon for determinations about the
creditworthiness of the issuer.
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\24\See supra, note 4 and accompanying text. The NYSE's
definition of the term ``unaffiliated issuer'' is set forth above,
see supra note 11.
\25\Telephone conversation between Fred Siesel, Director, Fixed
Income Markets, NYSE, and Beth Stekler, Attorney, Division of Market
Regulation, SEC.
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Moreover, the Commission is satisfied that the distinctions in
NRSRO ratings drawn by the NYSE are valid. According to the S&P
Corporation's debt rating definitions,\26\ bonds rated ``B'' (or
higher) currently have the capacity to meet interest payments and
principal repayments, whereas bonds rated ``CCC'' (or lower) are
dependent upon favorable business, financial or economic conditions to
meet timely payments of interest and repayment of principal. The
Commission also believes that it is logical for the NYSE to assume that
an unrated debt issue which is pari passu with (or senior to) an issue
with at least a ``B'' rating would, if rated, receive an equal (or
higher) rating. Finally, to permit the NYSE to list unrated bonds that
are immediately junior to an investment grade issue is appropriate
because those bonds generally would be rated no more than one rating
category lower (i.e., a S&P Corporation ``BB'' rating).\27\
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\26\See Standard & Poor's High Yield Directions, January 1994.
\27\Id.
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As for the other provisions in Paragraphs 102.03 and 103.05, the
Commission finds that they strike an appropriate balance between
protecting investors and enhancing the flexibility of the debt listing
process. For instance, the proposed rule change retains the current
requirement that, to be eligible for listing, a bond issue must have an
aggregate market value or principal amount of at least $5 million. This
should enable the NYSE to deny listed status to companies whose
securities do not have sufficient liquidity for a fair and orderly
market, without infringing upon bona fide issuers' access to the
Exchange's bond trading and disclosure systems.
Conversely, the Commission does not believe that eliminating the
distribution requirement will have a significant adverse effect on
investors in the bond market. The NYSE currently evaluates distribution
of debt securities in an ad hoc fashion. The NYSE does not specify a
mandatory minimum threshold for the number of bonds outstanding and/or
the number of holders thereof but only requires a distribution
``sufficient for trading on the Exchange.'' In the past, the Commission
has recognized that such information may be difficult to estimate
accurately and may be relatively less pertinent than other factors.\28\
From the Commission's perspective, the benefits of streamlining the
Exchange's substantive review is appropriate, especially since the NYSE
has discretion not to list an otherwise eligible debt issue if such
status would be unwarranted.
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\28\See Securities Exchange Act Release No. 32909 (September 15,
1993), 58 FR 49537 (September 23, 1993) (File No. SR-NYSE-93-21)
(approving amendments to Paragraph 703.06 of the Listed Company
Manual to eliminate requirement that distribution information be
submitted as supporting document to debt listing application).
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In terms of the delisting criteria in Paragraph 802.00, the
Commission has concluded that the revised standards should enable the
NYSE to identify listed companies that may have insufficient resources
to meet their financial obligations or whose debt securities may lack
adequate trading depth and liquidity. This, in turn, will allow the
Exchange to take appropriate action to protect bondholders. In this
regard, the NYSE has indicated that it normally will not delist a debt
security if it has value and if continued exchange trading is in the
best interests of investors; however, the NYSE has pledged to give
serious consideration to delisting bonds which, based on their market
price,\29\ have minimal or no value. In applying this standard, the
Commission expects the NYSE to consider carefully the propriety of
continued exchange trading of the securities of bankrupt or distressed
companies,\30\ and expects bonds with minimal value to be delisted.
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\29\Telephone conversation between Michael J. Simon, Milbank,
Tweed, Hadley & McCloy; Fred Siesel, Director, Fixed Income Markets,
NYSE; Sharon Lawson, Assistant Director, Division of Market
Regulation, SEC; and Beth Stekler, Attorney, Division of Market
Regulation, SEC.
\30\For example, debt of companies in bankruptcy that file a
plan of reorganization that provides no recovery for debt holders
should be delisted.
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The Commission also is satisfied with the NYSE's framework for the
listing and delisting of convertible debt securities. By authorizing
the Exchange to list and trade bonds that are convertible into any
equity security subject to real-time last sale reporting in the United
States (rather than merely NYSE listed common stock), the proposed rule
change should help the NYSE adapt to today's rapidly changing market
environment.\31\ The Commission notes that, like the NYSE, the other
national securities exchanges and the National Association of
Securities Dealers, Inc. (``NASD'') make quote and trade information
publicly available on a ``real-time'' basis. As a result, the
Commission believes that the NYSE proposal should ensure that investors
have information necessary to price convertible bonds.
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\31\In addition, the proposed rule change will conform the
NYSE's listing standards with the framework used by other markets,
including the American Stock Exchange.
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In the Commission's opinion, the above goals also will be furthered
by the requirement that convertible bonds be delisted whenever the
underlying equity security is no longer subject to a reporting
obligation. If the related equity merely moves from the NYSE to another
market, it is not inconsistent with the Act for the Exchange to have
discretion to continue listing the convertible debt, unless the
underlying security is delisted because the issuer has violated one of
the NYSE's corporate responsibility criteria. As a general matter, the
Commission would have serious concerns about any proposal that does not
provide for the delisting of convertible bonds where a company acts to
disadvantage its shareholders. The NYSE addresses this concern by
committing to delist convertible bonds when the issuer has violated
corporate governance listing standards.
Finally, at this time, the Commission believes that it is
reasonable for the NYSE to treat the debt of certain noncorporate
issuers (i.e., foreign governments, American states and localities,
government agencies) like the debt of ``unaffiliated'' corporate
issuers. As such, non-corporate debt would have to meet certain rating
requirements before listing.\32\ Nevertheless, as the NYSE gains
experience with listing and trading sovereign and municipal bonds, the
Commission expects the Exchange to monitor the adequacy of its existing
standards and to develop more narrowly tailored ones where appropriate.
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\32\See supra, notes 11-13 and accompanying text. In addition,
such debt would have to comply with the applicable registration
requirements of Section 12 of the Act.
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The Commission finds good cause for approving Amendment No. 1 prior
to the thirtieth day after the date of publication of notice of filing
thereof. Amendment No. 1 clarifies and codifies the intent of certain
language used in the original filing. Finally, the Commission did not
receive any comments on the original proposal, which was noticed for
the full statutory period.
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 1 to the proposed rule change.
Persons making written submissions should file six copies thereof with
the Secretary, Securities and Exchange Commission, 450 Fifth Street
NW., Washington, DC 20549. Copies of the submission, all subsequent
amendments, all written statements with respect to the proposed rules
change that are filed with the Commission, and all written
communications relating to Amendment No. 1 between the Commission and
any persons, other than those that may be withheld from the public in
accordance with the provisions of 5 U.S.C. 552, will be available for
inspection and copying in the Commission's Public Reference Section,
450 Fifth Street NW., Washington, DC 20549. Copies of such filing will
also be available at the principal office of the NYSE. All submissions
should refer to File No. SR-NYSE-93-49 and should be submitted by June
2, 1994.
IV. Conclusion
It is therefore ordered, Pursuant to section 19(b)(2) of the
Act,\33\ that the proposed rule change (SR-NYSE-93-49), including
Amendment No. 1 on an accelerated basis, is approved.
\33\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.\34\
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\34\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-11558 Filed 5-11-94; 8:45 am]
BILLING CODE 8010-01-M
