[Federal Register Volume 59, Number 113 (Tuesday, June 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-14337]
[[Page Unknown]]
[Federal Register: June 14, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34167; File No. SR-NYSE-93-45]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change Relating to the
Specialist Combination Review Policy
June 6, 1994.
I. Introduction and Summary
On December 3, 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 adopt a new set of guidelines
for reviewing combinations among specialist units known as the
Exchange's Specialist Combination Review Policy (the ``Policy'').
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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. 33475 (January 13, 1994), 59 FR 3145 (January
20, 1994). No comments were received on the proposal.
The Exchange's current Policy was first approved by the Commission
on a six-month pilot basis in 1987.\3\ It was subsequently extended and
then granted interim effectiveness until such time as the Commission
makes a final determination on permanent approval.\4\
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\3\See Securities Exchange Act Release No. 24411 (April 29,
1987), 52 FR 17870 (May 12, 1987).
\4\See Securities Exchange Act Release No. 25481 (March 17,
1988), 53 FR 9554 (March 23, 1988).
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The proposed rule change will continue to authorize the Quality of
Markets Committee (``QOMC'') to review certain proposed combinations
that, in the Exchange's view, may lead to undue concentration within
the specialist community. The current combination review policy calls
for an Exchange review of a potential combination under a two tier
system where the combined unit exceeds any one of the four specified
concentration measures.\5\ A tier I QOMC review occurs whenever a
proposed combination would result in a specialist organization
specializing in securities which exceed 5% of any one of four
concentration measures. A tier II review occurs whenever a proposed
combination would result in a specialist organization exceeding 10% of
any concentration measure. The tier II review differs from the tier I
review in that the presumption is against approval of the proposed
combination.\6\ The proposed new Policy establishes a three tier system
of review for combinations. The four concentration measures that
trigger a combination review under the various tiers, however, will
remain unchanged.
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\5\The concentration measures include specialist share of:
allocation (i.e. designation as registered specialist)
for all listed common stocks
allocation (i.e. designation as registered specialist)
for the 250 most active listed common stocks
total share volume of stock trading on the Exchange
total dollar value of stock trading on the Exchange.
\6\The burden of proof is on the proponents of the combination
to show, by clear and convincing evidence, that the proposed
combination would not result in undue concentration and would
promote competition among the specialist units.
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The proposed rule change does not affect the role of the Exchange's
Market Performance Committee (``MPC''), acting under delegated
authority from the QOMC, of conducting a preliminary review of all
proposed combinations to determine the effects of the proposed
combination on market quality. If the MPC concludes that the proposed
combination will erode significantly market quality, it informs the
constituent units of its concern. If the constituent units persist in
their plans, the MPC can inform them that some or all of the affected
stocks may be put up for reallocation.\7\
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\7\If the proposed combination is under 5%, then the MPC is in
effect the governing body and its decision is appealable through the
Exchange's rules relating to hearings and appeals. If, however, the
proposed combination would exceed one of the thresholds, then the
MPC's determination would be taken under advisement by the QOMC in
conducting its review pursuant to the Policy; in this case it would
be the QOMC's decision that would be appealable. See NYSE
Constitution, Article IV, Section 14.
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II. Description of the Proposal
The proposed rule change modifies the NYSE's mechanism of
monitoring the level of concentration within the Exchange specialist
community. The proposal establishes a three tier system of review
whereby the QOMC will be authorized to review proposed specialist
combinations that raise concentration-related issues.
A tier I QOMC review is triggered, both currently and under the
proposal, whenever a proposed combination involves or would result in a
specialist organization exceeding 5% of any concentration measure.\8\
In a tier I review, the QOMC reviews the proposed combination with the
following considerations in mind: (a) Specialist performance and market
quality in the stocks subject to the proposed combination;
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\8\See, note 6, supra.
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(b) The effects of the proposed combination in terms of the
following criteria: (i) Strengthening the capital base of the resulting
specialist organization;
(ii) Minimizing both the potential for financial failure of the new
unit and the negative consequences of any such failure on the
specialist system as a whole; and
(iii) Maintaining or increasing operational efficiencies within the
resulting specialist organization;
(c) The commitment to the Exchange market, focusing on whether the
constituent specialist organizations have worked to support, strengthen
and advance the Exchange, its agency/auction market and its
competitiveness in relation to other markets; and
(d) The effect of the proposed combination on overall concentration
of specialist organizations.
When a combination involves an entity that is not an existing
specialist unit (e.g., if a third party's contemporaneous purchase of
two or more units creates a combination exceeding the five percent
threshold), the application of the ``commitment to the Exchange
market'' criterion to the non-specialist organization will be based
upon an assessment of whether the organization will work to support,
strengthen and advance the Exchange, its agency/auction market and its
competitiveness in relation to other markets.
Moreover, the criterion relating to the ``commitment to the
Exchange market'' under a tier I review is designed to require the QOMC
to look to a variety of factors that extend beyond compliance with the
Exchange's requirements for providing sufficient capital, talent and
order handling services. Specifically, the Committee will review and
assess each constituent unit's past conduct on the Exchange relating to
such items as:
(a) Participation upon request in the Exchange's FACTS program,\9\
in its marketing seminars, in sales calls and in other of its marketing
initiatives seeking to attract order flow and new listings.
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\9\The FACTS program is used to introduce member firms and other
interested persons to the operations of the Exchange.
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(b) Acceptance of innovations in order-routing and other trade-
support systems and willingness to make optimal use of the systems once
they become fully operational.
(c) Willingness to apply for allocations of stocks that are less
lucrative from the standpoint of profitability to the specialist.
(d) Assistance to other units by providing capital and personnel in
unusual market situations, such as ``breakouts'' and difficult
openings.
(e) Efforts at customers' relations with both listed companies and
order providers, as evidenced by personal contact, return of telephone
calls, prompt resolution of complaints, assessment of customer needs
and anticipation of customer problems.
(f) Efforts to streamline the efficiency of its own operations and
its competitive posture.
The QOMC will continue to approve or disapprove a particular
proposed specialist unit combination based on its assessment of the
concentration and other considerations described above. In addition,
the QOMC will retain the ability to condition its approval, under any
level of review, upon compliance by the resulting specialist
organization with any steps specified by the QOMC to address particular
concerns in regard to the considerations above.
Once the proposed combination potentially exceeds 10% of any
concentration measure, the QOMC will give primary weight to the effect
of the proposed combination on the overall concentration of specialist
organizations. Moreover, the Policy places an affirmative obligation
upon the proponents of the combination to make certain representations
regarding the proposed combination in order to obtain QOMC approval.
The breadth of the evidentiary showing required depends upon whether
the proponents are subject to a tier II or tier III QOMC review.
A tier II QOMC review will be triggered whenever a proposed
combination involves or would result in a specialist organization
exceeding 10%, up to and including 15%, of any of the four
concentration measures. In a tier II review, the burden of proof will
then be on the constituent specialist organizations to prove, by a
preponderance of the evidence, that the proposed combination:
(1) Would not create or foster concentration in the specialist
business detrimental to the Exchange and its markets; and
(2) Would foster competition among specialist organizations; and
(3) Would enhance the performance of the constituent specialist
organization and the quality of the markets in the stocks; and
(4) Would otherwise be in the public interest.
Absent such a showing, the QOMC will disapprove the proposed
combination.
A tier III QOMC review will be triggered whenever a proposed
combination involves or would result in a specialist organization
exceeding 15% of any of the four concentration measures. In a tier III
review, the proponents must present clear and convincing evidence
demonstrating that, if approved, the proposed combination would satisfy
requirements 1-4 enumerated above.
The proposed rule change defines a ``proposed combination''
subjected to the Policy to include:
(a) A merger of specialist organizations or an acquisition of one
organization by another;
(b) The formation of a joint account involving two or more existing
organizations;
(c) The ``split-up'' of an existing organization (including an
organization operating under a joint account) and recombination with
another organization;
(d) An individual specialist leaving an existing organization and
proposing to take stocks with him to join another existing
organization; and
(e) Any other arrangement that would result in previously separate
organizations operating under common control.
The NYSE also has informed the Commission of how it intends to
address three specific situations involving the purchase of specialist
units by an entity other than a specialist firm. First, when a non-
specialist entity purchases a single specialist unit, the acquisition
will not be reviewable under the Policy regardless of whether or not
the specialist unit has a concentration level of 5% or more at the time
of purchase. The Policy only applies to combinations of specialist
units that involve or would result in a unit exceeding 5%, 10%, or 15%
of a concentration measure. Second, if a non-specialist entity proposes
to purchase two or more specialist units that, combined into one unit,
account for more than 5%, 10%, or 15% of a concentration measure, the
acquisition will be reviewable under the Policy. Finally, a non-
specialist entity's purchase of two or more specialist units which are
kept operationally separate, but when viewed together would cross a 5%,
10%, or 15% concentration measure, will be reviewable under the
Policy.\10\ In this latter example, the QMOC will seek information as
to what the acquiror's intentions are with respect to the specialist
units and whether or not a combination is anticipated. In sum, any time
a threshold may be exceeded as a direct result of a potential
combination made possible by an acquisition, it will be subject to
review.\11\
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\10\The NYSE states that such a review is initiated because of
the introduction of the element of common ownership even if the
units are to be kept separate.
\11\For example, if a full service broker-dealer bought two
specialist units, one with 4% of all allocations and the other with
3%, this would constitute a combination subject to review. Likewise,
if a full service broker-dealer that already owned one specialist
unit with 7% of all allocations bought another unit having 2% of all
allocations, this would be reviewable under the Policy because it is
a combination of specialist units crossing the 5% threshold. In
contrast, if a full service broker-dealer that had no affiliated
specialist unit bought a unit having 11% of all allocations, this
purchase would not be reviewable under the Policy.
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The Exchange has previously stated, with respect to the Policy,\12\
that the Policy is designed to provide the Exchange with a mechanism
for reviewing proposed mergers, acquisitions and other combinations
between or among specialist units that may lead to a level of
concentration within the specialist community that is detrimental to
the Exchange and the quality of its markets. The Exchange expressed its
belief that undue concentration may undermine its agency/auction
process, accentuate specialist complacency, and damage the public's
perception of the Exchange as a free market environment. Specifically,
the Exchange's principal concern from a concentration standpoint was
that the transformation of the specialist community into fewer and
larger units might vitiate the competition among existing specialist
units and present a significant barrier to new entrants to the
specialist business, all to the detriment of the competition for the
allocation of new listings. In implementing a policy to address these
concerns, the Exchange sought to strike an appropriate balance between
the perceived harm from undue concentration and the need for some
specialist organizations to grow and attract capital through
combinations. The instant modification strengthens this balance by
adding a middle level of review at which the proponents of the
combination are held to a less burdensome standard.
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\12\See Securities Exchange Act Release No. 24411 (April 29,
1987) 52 FR 17870 (May 12, 1987).
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III. Discussion
The Commission recognizes the NYSE's concerns that undue
concentration can result in various negative effects on market quality.
The Commission also believes that in many situations consolidations
among specialist units can be beneficial for the units themselves,
particularly for those units with limited capital and resources, as
well as for the quality of the market.
The Commission has previously indicated its belief that it is
appropriate for the NYSE to adopt a policy that authorizes it to
monitor specialist combinations to determine their impact upon the
competitive environment necessary to maintain an orderly market.\13\
Further, the Commission continues to believe the concentration factors
identified by the NYSE are adequately designed to result in approval of
proposed combinations which will not have an adverse impact on market
quality or result in undue concentration, and at the same time will
enable the NYSE to identify those combinations that can be potentially
harmful to market quality and actually decrease competition.
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\13\See Securities Exchange Act Release No. 24411 (April 29,
1987), 52 FR 17870 (May 12, 1987).
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The Commission has carefully reviewed the NYSE's Policy, placing
particular emphasis on its differences with respect to the existing
pilot procedure. The Commission previously expressed concern, due to
the ability of the NYSE to disapprove proposed combinations based upon
their potential concentration effects, as to whether the thresholds
identified by the NYSE are appropriate measures of potentially harmful
concentration. In particular, the Commission was concerned with the 10%
threshold, where the constituent firms would have to overcome the
presumption that the proposed combination would result in a level of
business harmful to the specialist community.\14\ Although the instant
Policy retains this presumption, the burden of proof placed upon the
proponents under a tier II review is being decreased from a clear and
convincing to a preponderance standard. The clear and convincing
standard will now only apply to a tier III review. The Commission
believes that this intermediary level of review, along with the lower
evidentiary standard, will make it less likely that potentially
beneficial mergers will be erroneously blocked, consistent with the Act
and the goals of the Exchange.
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\14\The Commission notes that to date the NYSE QOMC has only
conducted two tier II reviews, both of which have been approved,
despite the current high level of burden of proof.
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Accordingly, in light of the legitimate concentration concerns the
NYSE has identified, the Commission believes that it is consistent with
the Act for the NYSE to have a permanent review mechanism for proposed
specialist combinations. Further, the Commission believes that the
threshold levels identified by the NYSE in the Policy are reasonable in
relation to the current distribution of the four concentration measures
among specialist units on the NYSE.
Finally, the Commission notes that the QOMC acts on behalf of the
Board of Directors and consists of at least three Directors that are
representatives of the public. Currently only one member of the eight-
member committee represents a specialist unit. The Commission would be
concerned if specialist representation of the QOMC were substantially
increased to more than a minor representation by specialists when
determining the outcome of a proposed specialist combination, as this
could appear to cause a conflict of interest. In such circumstance, the
Commission will review this Policy for continued consistency with the
Act.
IV. Conclusion
For the reasons discussed above, 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
Sections 6(b).\15\ In this regard, the Commission believes that the
proposal is consistent with the Section 6(b)(5) requirements that the
rules of an exchange be designed to promote just and equitable
principles of trade, to prevent fraudulent and manipulative acts, and,
in general, to protect investors and the public, in that it identifies
specific levels of review for combinations that could potentially
impair market quality and hinder competition to the detriment of
investors and the public interest while ensuring that combinations that
are beneficial to the market place will not be prohibited. The
Commission also believes that the proposal does not impose any
unnecessary or inappropriate burden on competition under Section
6(b)(8) of the Act in that it establishes review procedures to prevent
undue concentration of specialist units that could potentially hinder
market quality. Although the Commission recognizes that the Policy can
result in prohibiting certain combinations from occurring, the
Commission believes the considerations outlined in the Policy in
conducting a combination review under the various tiers will help to
ensure that combinations that are beneficial to the market will be
permitted, while prohibiting those combinations that may have a
negative impact on market quality. Accordingly, any potential burden on
competition resulting from the Policy is, in the Commission's view,
justified as necessary and appropriate under the Act.
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\15\15 U.S.C. 78f(b) (1988).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\16\ that the proposed rule change (SR-NYSE-93-45) is approved.
\16\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.\17\
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\17\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-14337 Filed 6-13-94; 8:45 am]
BILLING CODE 8010-01-M
