[Federal Register Volume 62, Number 103 (Thursday, May 29, 1997)]
[Notices]
[Pages 29170-29177]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-14018]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38669; File No. SR-NYSE-97-12]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the New York Stock Exchange, Inc., Relating to Amendments to
the Exchange's Allocation Policy and Procedures
May 22, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on April 16, 1997, the New
York Stock Exchange, Inc. (``NYSE'' or ``Exchange'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared by the self-regulatory organization. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange, pursuant to Rule 19b-4 of the Act, submits a proposed
rule change amending the NYSE's Allocation Policy and Procedures. The
text of the proposed rule change is as follows [new text is italicized;
deleted text is bracketed]
New York Stock Exchange, Inc., Allocation Policy and Procedures
I. Purpose
The current allocation process was established in 1976. [In
September 1987] T[t]he Quality of Markets Committee of the NYSE Board
of Directors has periodically appointed [a] special Allocation System
Review Committees (ARCs) to conduct [a] comprehensive reviews of the
allocation process. [The ARC's recommendations were implemented once
approved by the SEC in May 1990. A second and third committee were
appointed to review the policy and to make revisions where
appropriate.] The objective of each review was to preserve the
integrity of the original system and build upon its strengths, in order
to ensure that the allocation process:
(1) Is based on fairness and consistency;
(2) Maximizes the professionalism, expertise and objectivity of
committee members;
(3) Minimizes potential conflicts of interest;
(4) Rewards performance and provides an incentive for performance
improvement;
(5) Spreads reward and risk throughout the specialist system, in
order to contribute to its strength and continued viability;
(6) Provides the best possible match between specialist unit and
stock, and provides an opportunity for input from the listing company
for that purpose;
(7) Provides for education of all participants in the allocation
process; and
(8) Ensures the strength and autonomy of the Allocation Committee
in applying policy.
[Both committees concluded that, since its inception in 1976, the
allocation process has worked very well.] Because specialists can
expand their business only by increasing the number of their specialty
stocks, allocation criteria and procedures and the performance
evaluations on which they rely focus critical attention on customer
service and ongoing improvement in the level of specialists'
performance. The result is higher quality markets, benefiting the
investing public, listed companies and member organizations.
[The committee recognizes that one key to continued success is
ongoing education to ensure understanding of and commitment to the
allocation process. The effectiveness of the allocation system, and the
full confidence of the broad range of Exchange constituents in that
process, also depend on specialist performance data and can be
sustained only to the extent that the performance evaluation process
provides the highest quality data to the deliberative process. The
Allocation System Review Committee reviewed and developed
recommendations regarding the SPEQ
[[Page 29171]]
process in 1991. It is essential that the Exchange continue to
periodically review and seek to improve the specialist performance
evaluation process as well as the allocation system.]
This document presents the policy of the Exchange with respect to
the allocation of equity securities: (1) When a common stock is to be
initially listed on the Exchange: (2) when a security is to be
reallocated as a result of disciplinary or other proceedings under
Exchange Rules 103A, 475 and 476; or (3) when a specialist unit
voluntarily surrenders its registration in a security as a result of
possible disciplinary or performance improvement action. The purpose of
the allocation system is: (1) To ensure that securities are allocated
in an equitable and fair manner and that all specialist units have a
fair opportunity for allocations based on established criteria and
procedures; (2) to provide an incentive for ongoing enhancement of
performance by specialist units; (3) to provide the best possible match
between specialist unit and security and (4) to contribute to the
strength of the specialist system.
II. Allocation Committee
Responsibility
The Allocation Committee has sole responsibility for the allocation
of securities to specialist units under this policy pursuant to
authority delegated by the Board of Directors, and is overseen by the
Quality of Markets Committee of the Board (``QOMC''). The Allocation
Committee renders decisions based on the allocation criteria specified
in this policy (see Section IV). Allocation decisions are published for
Exchange Floor members and are communicated to listing companies by
Exchange staff. The Allocation Committee gives periodic reports to the
QOMC.
Composition
The composition of the Allocation Committee is intended to maximize
expertise and objectivity in the allocation process.
To this end, the committee is comprised of 7 Floor brokers,
including 3 broker Governors (1 of whom may be an independent/two
dollar broker), 4 other Floor brokers from the Allocation Panel (1 of
whom must be an independent/two dollar broker) and 2 allied members
from the Market Performance Committee or the panel. For options
allocations, only 1 Governor shall sit on the committee. Commission
brokers contribute their experience in conducting business with
specialists, as well as broad-based knowledge of units on the Floor.
Therefore, they have the largest representation on the committee.
Allied members often provide a perspective on the trading
characteristics of new listings and experience as an off-Floor customer
of the specialists. Including Governors on the committee adds
comprehensive knowledge of specialist performance as well as a broad
perspective and expertise relating to the Exchange.
The 9-member committee is chosen from an Allocation Panel (See
Section III), which includes Floor brokers, allied members, Governors,
and Senior Floor Officials. Selection of committee members within the
appropriate member categories is random as to individuals, but an
effort is made to appoint individuals who have not yet served on the
committee before reappointing past committee members. The Exchange also
tries to provide a balanced Floor geographical mix--3 Main Room, 2
Garage, 1 Blue Room, 1 Expanded Blue Room. Efforts are also made to
include no more than one broker or allied member whose firm is
affiliated with a specialist unit.
Term of Service
Committee members serve 4-month terms, and every two months four or
five members are rotated, thereby fostering continuity and objectivity
in the decision-making process.
A committee member whose term has expired is ineligible for
consecutive reappointment, but after two months is eligible for further
service if again randomly selected.
Quorum Requirement
A full Allocation Committee affords optimal participation, and
every effort is made to have 9 members for each allocation decision.
Whenever standing committee members are unable to serve for a
particular meeting or must abstain from deliberations regarding
particular stocks, randomly selected panel members may substitute to
complete a 9-member committee. A quorum requirement is established so
that allocation decisions can otherwise be made, provided there are 7
members including 6 Floor brokers, at least two of whom are Governors,
and 1 allied member. For options allocations, a quorum shall include
one Governor. In the event that any of the broker Governors on the
standing committee are not able to attend an Allocation Committee
meeting, or are unable to participate in the allocation of a particular
stock, the Exchange first seeks to substitute for such Governor(s) with
another broker Governor on the panel. If no such Governor is available,
a Senior Floor Official broker on the panel who is not currently a
standing member of the Allocation Committee may serve as a substitute
for a Governor for the purpose of meeting the Governor quorum
requirement. If no Senior Floor Official broker on the panel is
available, any Senior Floor Official broker on the standing committee
may substitute for the absent Governor(s) for the purpose of meeting
the Governor quorum requirement. The Exchange seeks as a substitute a
Senior Floor Official who is not currently a standing member of the
Allocation Committee in order to maximize the level of seniority of the
standing committee. In the event no current Floor broker or allied
panel member is available, a former Allocation Committee chairman may
substitute, but may not substitute for a Governor for the purpose of
meeting the Governor quorum requirement, unless such former Allocation
Committee chairman is a Senior Floor Official on the panel. A former
chairman brings unique experience and expertise to the process.
Chairman
The Allocation Committee chairman is selected from among the Floor
brokers on the standing committee whose firms conduct business with the
public, as well as Governors. (Governors and brokers whose firms are
affiliated with a specialist unit are ineligible to serve as chairman.)
All candidates for chairman must have experience on the Allocation
Committee to qualify. The chairman is elected by current Allocation
Committee members, including outgoing members, and members of the
committee who will be serving at the time of the chairman's
appointment.
While allocation decisions are made by the committee as a whole,
the chairman's role calls for leadership in conducting meetings in
accordance with policy and procedure, emphasizing the importance of
preserving the integrity of the allocation process, the committee's
responsibility to serve the best interests of the public and the
Exchange, and the need to suspend individual interest and avoid
possible conflicts of interest.
In order to foster a complete understanding of and ensure
consistency of the allocation process, each new chairman is elected two
months prior to the commencement of his or her term as chairman. The
eligible members will thus include the brokers with 4 to 6 months
remaining in their committee terms, plus the brokers selected for
rotation onto the committee two months hence. The chairman will
[[Page 29172]]
serve until the end of his or her committee term (i.e., two to six
months).
If elected prior to the commencement of his or her committee term
the chairman-elect will attend meetings as an observer and discuss the
allocations with the current chairman. If already serving on the
committee, the chairman-elect will likewise discuss the meetings with
the current chairman. Orientation of each new chairman will also be
provided by former chairmen of the Allocation Committee and by the
Quality of Markets Committee. A standardized agenda for education of
new chairmen will be made available.
Committee Member Abstentions
In making allocation decisions pursuant to this policy, it is the
responsibility of each Allocation Committee member to adhere strictly
to the approved allocation criteria. A committee member who feels he or
she cannot abide by the criteria due to potential conflict of interest
(e.g., allocation involving a relative, a financial interest, relief
specialists, etc.) should disqualify himself or herself from the
deliberations.
If an Allocation Committee member has an investment banking
relationship (defined as manager or co-manager of an underwriting
group) or is in an advisory fee relationship with an about-to-be listed
company, that committee member must abstain from allocation
deliberations with respect to that particular stock. A broker or allied
member whose firm is affiliated with a specialist unit must abstain
from deliberations regarding allocation of a stock for which that unit
has applied.
Committee Disclosure
The names of the standing committee members will be kept
confidential. Allocation Committee books will not be delivered to
committee members on the trading Floor. Committee members will pick up
their books at the Committee Support Services area.
Committee Information
Allocation policy provides the application form and related written
correspondence as the means by which interested parties transmit to the
Allocation Committee information pertinent to allocations. Exchange
members and investment bankers may not initiate contact with Allocation
Committee members pertaining to an upcoming allocation. Allocation
Committee members will enforce this prohibition. Allocation decisions
are made by the committee as a whole, based on the published allocation
criteria. Under all circumstances the confidentiality of the Allocation
Committee's deliberations is paramount.
Observation of Committee Meetings
All incoming committee members are expected to observe as many
committee meetings as possible prior to the commencement of their
committee terms.
III. Allocation Panel
Composition
The composition of the Allocation Panel reflects the committee
structure and includes 28 Floor brokers, [8] 12 allied members
(including the 4 allied members serving on the Market Performance
Committee), the 8 Floor broker Governors who are part of the panel by
virtue of their appointment as Governors, [the 4 allied members serving
on the Market Performance Committee,] and a minimum of 5 Senior Floor
Official brokers that have been appointed to the panel.
Selection
Panel members are nominated by the membership. A selection
committee, appointed by the Floor Directors, reviews the nominations
and recommends panel appointments to the Floor Directors, who finalize
recommendations for presentation to the QOMC. The selection committee
operates in accordance with such guidelines as are established and made
known to the membership from time to time. The selection committee and,
in turn, the Floor Directors seek to develop a representative panel
that maximizes professional expertise and broad exposure on the Floor
by including members from various types of firms and from diverse
locations on the Floor. To the maximum extent possible, the Floor
members on the panel are expected to be a core group of experienced,
senior professionals, such as former Allocation Committee chairmen,
Senior Floor Officials, and current and former Floor Governors.
In the case of allied members, the member organization is appointed
to the panel. The individual representative is then selected by the
organization. A Floor Director gives guidance to the organization in
selecting an appropriate representative.
Eligibility
Professional expertise and experience are essential to the
excellence of the allocation system. Therefore, a Floor member must
have a minimum of 5 years experience as a member on the Floor in order
to be eligible for appointment to the Allocation Panel. In the case of
allied members, the member organization shall select a representative
with at least 51 years of trading experience in listed equities and a
senior position on the trading desk. Each allied member may designate
one alternate who meets the Panel qualifications, subject to approval
by the Floor Directors.
Term of Service
Panel members are appointed to serve a one-year term. They may
serve a maximum of 6 consecutive one year terms. Once a panel member
has served a total of two 4-month committee terms, the member is
rotated off the panel at the next annual meeting of the Exchange. The
panel members serve staggered terms so that every 2 months 4 or 5
members rotate from the committee. Once rotated off, the member is
ineligible for appointment to the panel for one year. Governors are not
subject to the two committee term restriction, but remain on the panel
for as long as they are Governors. Senior Floor Officials are subject
to annual reappointment, but are not subject to the two committee term
restriction and are not limited to a maximum of six consecutive one
year terms.
IV. Allocation Criteria
Allocation decisions under this policy are based on the
professional judgment of the Allocation Committee in applying specified
criteria.
In order to ensure that a single criterion is not afforded too
great a weight in any allocation decision, and in order to ensure
consistency in the allocation process, the Allocation Committee will
base its decisions on the following:
(i) Results of the Specialist Performance Evaluation Questionnaire
(``SPEQ'') (to be given [no more than] 25% weight);
(ii) Objective performance measures; and
(iii) The committee's expert professional judgment in considering
the SPEQ, objective measures of performance, and other criteria as
enumerated below. Set forth below are the criteria, followed by an
explanation of each:
--SPEQ
--Objective performance measures
--Professional judgment
--Listing company input
--Allocations received
--Capital deficiency, disciplinary actions, justifiable complaints
--Foreign listing considerations
[[Page 29173]]
Specialist Performance Evaluation Questionnaire
The SPEQ includes several facets. Professional judgment determines
the relative weight of the various aspects listed below:
(a) Ratings in the current quarter, particularly relative to other
applicants;
(b) Improved ratings;
(c) Ratings over time (e.g., 4 quarters), to consider possible
aberrations in ratings;
(d) The strengths of the individual specialist designated by the
unit to handle the stock, relative to the strengths of the specialists
designated by other applicants, as indicated by SPEQ comments that
frequently refer to performance of individuals;
(e) Ratings and written comments on specific specialist functions
in relation to particular characteristics of the new listing; and
(f) Written SPEQ comments as to the performance of the entire unit.
Objective Measures of Performance
The objective performance measures include TTV, stabilization,
capital utilization, near neighbor analysis and such other measures as
may be adopted. Objective measures in Rule 103A include:
(a) Timeliness of regular openings;
(b) Promptness in seeking Floor official approval of a non-
regulatory delayed opening;
(c) Timeliness of DOT turnaround; and
(d) Response to administrative messages.
The objective measures are reported to the Allocation Committee as
a ``pass'' or ``fail'' as specified in Rule 103A.
Specialist dealer performance is measured in terms of participation
(TTV); [and] stabilization; capital utilization, which is the degree to
which the specialist unit uses its own capital in relation to the total
dollar value of training in the unit's stocks; and near neighbor
analysis, which is a measure of specialist performance and market
quality comparing performance in a stock to performance of stocks hat
have similar market characteristics. The Allocation Committee receives
the most recent data available and historical data with respect to each
applicant's performance in relation to other units evaluated during the
same time period.
The Allocation Committee is informed if an applicant has been
subject to a performance improvement action in the most recent four
quarters.
Although stocks are allocated to units, as noted above, the
committee may give consideration to the person who will serve as the
specialist. Therefore, it is important that the application accurately
represent the unit's plans as to the individual who will handle the
stock.
Professional Judgment
The expert, professional judgment of the members of the Allocation
Committee is crucial to the allocation decision-making process.
Decisions are based on professional judgment, rather than mathematical
calculation. Each committee member evaluates the data and determines
how the specified criteria should be applied in each allocation, based
on his or her expertise and experience from the viewpoint of his or her
role in the Exchange community. In addition to the SPEQ and the
objective performance measures described above, the committee also
considers listing company input, allocations received, capital and
disciplinary and cautionary data, as detailed below.
Listing Company Input
Listing on the New York Stock Exchange is a significant development
for a company, and the assignment of a specialist through the
allocation process is an important step. The Exchange's Allocation
Policy is intended to provide listing companies with a choice of
alternatives as to how their specialist unit may be selected. The
listing company may choose to have its specialist unit selected by the
Allocation Committee, in accordance with the criteria specified in the
Allocation Policy, and the exercise of the Committee's expert
professional judgment. Alternatively, the listing company may choose to
become more directly involved in the selection process. In that case,
the company may request that the Allocation Committee select specialist
units that would be appropriate to trade the company's stock, with the
company then making the final selection from among the group of units
as chosen by the Allocation Committee. Such a group shall consist of
three, four, or five units, selected by the Committee as demonstrably
deemed to be the most qualified to receive such allocation from among
the units that apply, based upon the criteria set forth in this policy.
These procedures shall apply to the allocation of a newly-listing
company, as well as the reallocation of an already listed company.
Specialist Unit Selected by Allocation Committee
If the listing company so chooses, the Allocation Committee shall
select the specialist unit to be allocated the company's stock based on
the Committee's expert assessment of the type of specialist unit that
would be most appropriate for the company, and the Committee's
professional evaluation of performance data and other relevant
information as specified in the Allocation Policy. The listing company
may submit a letter to the Allocation Committee describing the
characteristics (e.g., trading philosophy, policies on maintaining
communications with its listed companies, etc.) it believes would be
appropriate for the unit that would be selected to trade its stock. The
listing company may not, however, identify any particular specialist
unit in its letter, or specify characteristics so unique as to be
applicable only to a readily identifiable specialist unit.
Specialist Unit Selected by Listing Company
If the listing company so chooses, it may request that the
Allocation Committee select specialist units that would be appropriate
to trade the company's stock, with the company then making the final
selection. If the listing company chooses this alternative, the company
may either make no communication to the Allocation Committee, or it may
submit a letter (as noted in the preceding paragraph) to the Committee
describing the characteristics the company believes would be
appropriate for the units to be selected by the Committee. The listing
company may not, however, identify any particular specialist unit in
its letter, or specify characteristics so unique as to be applicable
only to a readily identifiable specialist unit.
Meetings Between Listing Company and Specialist Units
Within two business days after the selection of a group of
specialist units as described above (unless the Exchange has determined
to permit a longer time period in a particular case), the listing
company shall meet, either in person or by teleconference, with
representatives of each of the specialist units. Meetings to be held in
person shall normally be held at the Exchange, unless the Exchange has
agreed that they may be held elsewhere. At least one representative of
the listing company must be a senior official of the rank of Corporate
Secretary of above of that company. No more than three representatives
of each specialist unit may participate in the meeting, each of whom
must be employees of the specialist unit, and one of whom must be the
individual who is proposed to trade the company's stock.
[[Page 29174]]
Listing Company's Selection of Specialist Unit
Within one business day following its meeting with representatives
of the specialist units (or such longer time period as the Exchange may
permit in a particular case), the listing company shall select its
specialist unit in writing, signed by a senior official of the rank of
Corporate Secretary or higher duly authorized to so act on behalf of
the company. The Allocation Committee shall then confirm the allocation
of the stock to that unit, at which time the stock shall be deemed to
have been so allocated.
Allocation Applications
In their applications for the allocation of a listing company's
stock, specialist units must describe all pertinent factors as to why
they believe they should be allocated the stock. At a minimum, such
factors should include how the unit will allocate resources (staff and/
or capital) to accommodate this new issue and what new resources, if
any, will the unit need to acquire to service this stock [a description
of the unit's capital base]; identify and experience of the individual
proposed to trade the stock, with a description of other securities
traded by that individual; and a discussion of why that individual is
appropriate to trade the listing company's stock. If the listing
company has submitted a letter to the Allocation Committee as permitted
herein, a copy of such letter shall be made available to all specialist
units. In their applications to be allocated the stock of such company,
specialist units shall be expected to indicate how they meet the
characteristics described in the company's letter. If, within six
months of the date a newly-listed company begins trading on the
Exchange (or a company which has been reallocated begins trading with
its new unit), the specialist unit determines that the individual
specialist who trades the company's stock should be an individual other
than the one named in the allocation application, the specialist unit
shall so inform the Allocation Committee, in writing, and disclose its
reasons therefor. These letters shall be maintained in the permanent
records of the Committee.
In addition, specialist units must describe in their applications
to be allocated the stock of a listing company any contacts they, or
any individual acting on their behalf, have had with any employee of
that company, or any individual acting on behalf of that company with
regard to its prospective listing on the Exchange, within six months
prior to the date that allocation applications are solicited with
respect to that company.
Allocations Received
The committee is provided information on allocations received by
each unit in the preceding year and the current year, the number of
applicants for those stocks allocated in the past and the number of
stocks lost through corporate mergers, delistings or other such events
over which the specialist has no control. While a recent allocation
does not preclude a unit from being awarded a subsequent new listing,
the committee considers such factors in comparing similarly qualified
applicants.
Capital Deficiency Information
The committee is informed of any applicant that is in capital
violation, or is potentially in violation, based on a current check of
estimated capital data (conducted between the application deadline and
the date of the allocation meeting). A unit with a capital deficiency
will be informed in advance of the meeting and may provide information
for the committee explaining the circumstances of the unit's capital
situation. The unit's capital history will also be provided (frequency
of past violations and borderline situations).
Disciplinary and Cautionary Data
The committee is informed of disciplinary and cautionary actions,
as described below.
Cautionary letters and summary fines regarding market maintenance
are reported for 12 months beginning at the time of issuance.
All other cautionary letters and summary fines are reported for 6
months beginning at the time of issuance.
The preceding parameters apply equally to disciplinary or
cautionary actions that result from a justifiable complaint (public or
institutional complaint received via correspondence).
The committee is informed of significant pending enforcement
matters. The investigations are included in an allocation file when
[(a) a stipulation is signed or (b) when charges are issued] the
commencement of an enforcement action is authorized. If formal
disciplinary action is ultimately taken, the item would remain in the
file for [6] 12 months after a Hearing Panel decision is final.
Foreign Listing Considerations
The special characteristics of foreign issues often require the
specialist to commit extra resources in order to be a presence in the
foreign market. Therefore, in allocating a foreign issue, the committee
also considers a specialist applicant's commitment to establish and
maintain relationships with arbitrage houses and foreign brokerage
firms, and to gain familiarity with various aspects of trading
securities of foreign issuers.
V. Policy Notes
Spin-offs, Listing of Related Companies and Relistings
Spin-offs and related companies of listed companies and relistings
are treated as new listings, with allocation open to all units.
Information about the relationship to a listed company or prior listing
and the name of the specialist involved, is included on the stock data
sheet inviting specialist applications. The same information is
provided to the committee for consideration in their deliberations
regarding the allocation of the new listing. While committee members
use their own judgment to determine what consideration, if any, should
be given to that information, a listing company's request not to be
allocated to its former specialist unit (or the specialist in the
parent or related company) will be honored.
Listed Company Mergers
When two NYSE listed companies merge, the merged entity is assigned
to the specialist in the company that is determined to be the survivor-
in-fact (dominant company). Where no surviving/dominant entity can be
identified, the matter is referred to the Allocation Committee and all
specialist units are invited to apply.
In situations involving the merger of a listed company and an
unlisted company, where the unlisted company is determined to be the
survivor-in-fact, such company may choose to remain registered with the
specialist unit that had traded the listed company entity in the
merger, or it may request that the matter be referred to the Allocation
Committee. In such a case, applications will be invited from all
specialist units, and the Allocation Committee shall honor the
company's request not to be allocated to the specialist unit that had
traded the listed company.
``Target'' Stock. The specialist unit registered in such stock
prior to a separate listing shall remain registered in such stock after
its separate listing, unless the listing company requests that the
matter be referred to the Allocation Committee. In such a case,
applications will be invited from all specialist units, and the
Allocation Committee shall
[[Page 29175]]
honor the company's request not to be allocated to the specialist unit
that had traded the ``target'' stock.
Allocation Freeze Policy
In the event that a specialist unit: (i) loses its registration in
a specialty stock as a result of proceedings under Exchange Rules 103A,
475 or 476; or (ii) voluntarily withdraws its registration in a
specialty stock as a result of possible proceedings under those rules,
the unit will be ineligible to apply for future allocations for the six
month period immediately following the reassignment of the security
(Allocation Prohibition).
Following the Allocation Prohibition, a second six month period
will begin during which a specialist unit may apply for new listings,
provided that the unit demonstrates to the Exchange relevant efforts
taken to resolve the circumstances that triggered the Allocation
Prohibition. The determination as to whether a unit may apply for new
listings will be made by Exchange staff, in consultation with the Floor
Directors. The factors the Exchange will consider will vary depending
on the unit's particular situation, but may include one or more steps
such as:
--Supplying additional manpower/experience;
--Changes in professional staff;
--Attaining appropriate dealer participation;
--Enhancing back-office staff; and
--Implementing more stringent supervision/new procedures.
Allocation Sunset Policy
Allocation decisions shall remain effective with respect to any
initial public offering listing company which lists on the Exchange
within three months of such decision. If a listing company does not
list within three months, the matter shall be referred again to the
Allocation Committee, with applications invited from all units.
Support of the Allocation System
The Allocation Committee views positively a specialist unit's
applying for a broad range of issues.
Criteria for Applicants That Are Not Currently Specialists
Since an entity seeking to enter the specialist business does not
have a history directly comparable to that of existing units, the
Allocation Committee considers the following criteria with respect to
applicants that are not currently specialists.
1. Individuals proposed as specialists must have successfully
completed the Exchange's specialist examination.
2. The proposed unit must demonstrate that it understands the
specialist business, including the needs of brokers, their
organizations, and their customers.
3. The proposed unit must demonstrate an ability and willingness to
trade as necessary to maintain fair and orderly markets with depth and
liquidity, and facilitate the execution of orders.
(a) The proposed unit should indicate the extent of its capital
commitment to specializing over and above the minimum capital
requirements.
(b) The proposed unit must have sufficient specialist and clerical
support dedicated to maintaining and servicing the market in a
specialty stock.
(c) If the proposed specialist unit or any of its participants is
presently a specialist or market maker on any exchange, performance
during the prior 12 months, as evidenced by available data maintained
by such exchange which evaluates the quality of performance of the unit
or its participants as a specialist or market maker on such exchange,
will be considered by the Allocation Committee.
4. Other factors that will be considered by the Allocation
Committee include any action taken or warning issued within the past 12
months by any regulatory or self-regulatory organization against the
unit or any of its participants [relating to:] with respect to any
capital or operational problem, or any regulatory or disciplinary
matter.
(a) Any capital or operational problem; or
(b) Any Floor-related activity.
VI. Procedures
Applications
Whenever a security is to be allocated to a specialist, unit, all
specialist units are invited to submit applications to the Exchange
prior to the published deadline for the allocation of such security.
The application of any specialist unit shall be in such form as shall
be approved from time to time by the Exchange, but each applicant shall
be free to submit in writing such additional information in support of
its application as it may wish to bring to the attention of the
Allocation Committee.
Blanket Applications
All specialist units shall be deemed to have filed with the
Exchange a blanket application pursuant to which the applicant agrees
to accept the allocation of any security. Any security allocated to a
specialist unit on the basis of its blanket application shall not be
reflected in the records of the Exchange as a ``security gained'' nor
shall it prejudice that unit's eligibility for future allocations.
Decision Making
An allocation decision pursuant to this policy is made on the basis
of the specified criteria, by a majority vote of the committee members
present at the meeting and eligible to vote on such matter.
Announcement
Written notice of the name and post location of the successful
applicant are make known to the members of the Exchange and to the
issuer of the security allocated.
Registration of Specialists
Each member associated with the specialist unit to which any
security is allocated who acts as a regular specialist in such security
shall be registered as a specialist in such security pursuant to Rule
103.
VII. Education
Education of all participants is a key to ensuring continued
quality and consistency in the allocation process. A summary of the
education process follows:
New panel members receive an orientation conducted by former
Allocation Committee chairmen and staff, and serve as observers at
meetings before their terms begin. A standardized agenda for educating
allocation Committee members will be made available. The new Allocation
Committee chairman is elected two months in advance of his or her
appointment to provide time to observe and learn from the existing
chairman. The newly elected chairman also receives an orientation by
former committee chairmen and the Quality of Markets Committee. A
standardized agenda for educating new chairmen will be made available.
Education efforts regarding the allocation process are offered
periodically for specialists as well as the general membership.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
[[Page 29176]]
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in Sections A, B, and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The intent of the Exchange's Allocation Policy and Procedures is:
(1) To ensure that securities are allocated in an equitable and fair
manner and that all specialist units have a fair opportunity for
allocations based on established criteria and procedures; (2) to
provide an incentive for ongoing enhancement of performance by
specialist units; (3) to provide the best possible match between a
specialist unit and a security; and (4) to contribute to the strength
of the specialist system. In September 1987, the Quality of Markets
Committee (``QOMC'') appointed the first Allocation Review Committee
(``ARC'') to undertake a comprehensive review of the Exchange's then-
existing allocation procedures which had been in effect since 1976.
ARC's recommendations were filed with the SEC in 1988 and approved in
1990.\2\ In April 1991, the QOMC determined that the Allocation Policy
and Procedures should be re-examined and appointed a new committee, ARC
II, to do so. The Committee's recommendations were subsequently filed
with the Commission, and approved in 1993 as a one-year pilot.\3\ In
August 1994, the Exchange filed for and subsequently received permanent
approval of that pilot.\4\ In accordance with the Exchange's commitment
to preserve the integrity of the existing allocation system while
refining the allocation policy as necessary, ARC III convened in
November 1993. The Committee's recommendations were filed with the
Commission, and approved in September 1994.\5\ In December 1995, the
QOMC appointed ARC IV to continue to review the allocation process. The
Committee made several recommendations with respect to the Allocation
Policy and Procedures. Several of these recommendations were submitted
by the Exchange for immediate effectiveness in March 1997 for a seven-
month pilot period.\6\ Additional recommendations of ARC IV are being
submitted in this filing.
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\2\ Securities Exchange Act Release No. 27803 (Mar. 14, 1990),
55 FR 10740 (Mar. 22, 1990) (order approving File No. SR-NYSE-88-
32).
\3\ Securities Exchange Act Release No. 33121 (Oct. 29, 1993),
58 FR 59085 (Nov. 5, 1993) (order approving File No. SR-NYSE-92-15).
\4\ Securities Exchange Act Release No. 34906 (Oct. 27, 1994),
59 FR 55142 (Nov. 3, 1994) (order approving File No. SR-NYSE-94-30).
\5\ Securities Exchange Act Release No. 34626 (Sept. 1, 1994),
59 FR 46457 (Sept. 8, 1994) (order approving File No. SR-NYSE-94-
18).
\6\ Securities Exchange Act Release No. 38373 (Mar. 7, 1997), 62
FR 13421 (Mar. 20, 1997) (notice of filing and immediate
effectiveness for a seven-month period of File No. SR-NYSE-97-04).
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The principle changes to the Exchange's Allocation Policy and
Procedures are described below.
Mergers of listed and unlisted companies. Currently, companies
resulting from mergers of listed and unlisted companies are registered
by staff with the specialist in the listed company, regardless of size
or survivorship considerations. Under the proposal, a company resulting
from the merger of a listed company with an unlisted company would
remain with the specialist in the listed company unless the unlisted
company is determined to be the survivor-in-fact and the unlisted
company requests allocation, in which case, all units would be invited
to apply.
Targeted stock. Currently, there is no policy for targeted stock.
Under the proposal, these securities (also known as ``letter stock'')
typically are ``targeted'' to a specific aspect of an issuer's overall
business. When such a security is ``uncoupled'' and becomes an
independent entity, it would remain with the current specialist in the
target stock unless the issuer requests that the new stock be allocated
by the Allocation Committee.
Reporting of disciplinary actions. Currently, enforcement actions
are reported to the Allocation Committee when the stipulation is signed
or charges are issued. Such items remain in the file for 6 months after
a Hearing Panel decision is made final. Under the proposal, enforcement
actions would be reported to the Allocation Committee when an
enforcement case is authorized. Moreover, if formal disciplinary action
is ultimately taken, the item would remain in the file for 12 months
after a Hearing Panel decision is final. In addition, the current
policy interpretation that summary fines, not just cautionary letters,
for market maintenance are reported for 12 months, has been codified.
Allocation applications. Currently, a specialist's application for
an allocation of a particular issue must contain a description of the
unit's capital base. Under the proposal, the specialist is required to
describe how it will allocate resources (staff and/or capital) to
accommodate the new issue being applied for, and what new resources, if
any, will the unit need to service the stock being applied for.
Allocation ``Sunset'' Policy. Currently, a one year sunset policy
has been followed. Under the proposal, initial public offering
companies that list within three months after allocation would be
traded by the specialist unit that originally received the allocation.
Thereafter, the matter would be referred again to the Allocation
Committee, with applications invited from all units.
Allocation ``Freeze'' Policy. The Allocation Freeze Policy, which
provides that a specialist firm may not apply to be allocated a stock
following reallocation of a stock or voluntary withdrawal of
registration in a stock as a result of an Exchange disciplinary
proceeding would be incorporated into the Allocation Policy. The
Allocation Freeze Policy was approved in a prior filing, but was not
incorporated directly into the Allocation Policy.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b)(5) of the
Act in that it is designed to prevent fraudulent and manipulative acts
and practices and to perfect the mechanism of a free and open market.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the publication of this notice in the Federal
Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
[[Page 29177]]
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, 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 at the
Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filing will also be available
for inspection and copying at the principal office of the Exchange. All
submissions should refer to File No. SR-NYSE-97-12 and should be
submitted by June 19, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-14018 Filed 5-28-97; 8:45 am]
BILLING CODE 8010-01-M
