[Federal Register Volume 64, Number 116 (Thursday, June 17, 1999)]
[Notices]
[Pages 32588-32594]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-15351]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41502; File No. SR-NYSE-99-13]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Order Approving Proposed Rule Change and Amendment No. 1 and Notice of
Filing and Order Granting Accelerated Approval of Amendment Nos. 2 and
3 Relating to Original Continued Listing Criteria
June 9, 1999.
I. Introduction
On March 31, 1999, the New York Stock Exchange, Inc. (``NYSE'' or
``Exchange'') filed with 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 relating to amendments to the
NYSE's Listed Company Manual (``Manual'') regarding the original and
continued listing criteria and procedures of the Exchange. On April 21,
1999, the Exchange submitted Amendment No. 1 to the proposed rule
change.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from James E. Buck, Senior Vice President and
Secretary, NYSE, to Richard Strasser, Assistant Director, Division
of Market Regulation (``Division''), SEC, dated April 21, 1999. In
Amendment No. 1, the NYSE resubmitted the entire filing to clarify
several aspects of the proposal.
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Notice of the proposal was published in the Federal Register on May
3, 1999.\4\ The Commission did not receive any comment letters on the
proposal. On May 27, 1999, the NYSE submitted Amendment No. 2 to the
proposed rule change.\5\ On June 8, 1999, the NYSE submitted Amendment
No. 3 to the proposed rule change.\6\ In this notice
[[Page 32589]]
and order, the Commission is seeking comment from interested persons on
Amendment Nos. 2 and 3 and is approving the proposed rule change and
Amendment No. 1 as well as Amendment Nos. 2 and 3 on an accelerated
basis.
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\4\ See Securities Exchange Act Release No. 41324 (April 22,
1999), 64 FR 23710.
\5\ See Letter from James E. Buck, Senior Vice President and
Secretary, NYSE, to Richard Strasser, Assistant Director, Division,
SEC, dated May 27, 1999. In Amendment No. 2, the NYSE proposes to
amend the international ``cash flow standard'' in the original
proposal to require $100 million in aggregate earnings for the last
three fiscal years instead of $25 million as is currently the case.
Companies would also be required to report a minimum of $25 million
in earnings for each of the two most recent years, instead of simply
reporting a positive amount of earnings for the last three fiscal
years.
\6\ See Letter from James E. Buck, Senior Vice President and
Secretary, NYSE, to Richard Strasser, Assistant Director, Division,
SEC, dated June 8, 1999. In Amendment No. 3, the NYSE proposes to
codify the Exchange's policy regarding the use of financial data to
grant eligibility clearance to an issuer that has less than three
years of operating history and to clarify that real estate
investment trusts and closed-end management investment companies
listing with a three-year operating history must satisfy the
original listing standards, set forth in paragraph 102.01 of the
Manual.
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II. Description of the Proposal
The proposal clarifies and codifies the Exchange's criteria and
procedures for evaluating a company's original and continued listing
eligibility.
A. Original Listing Criteria and Procedures
The NYSE proposes to revise the size component of the Exchange's
issuer financial eligibility criteria and the general eligibility
listing criteria. The proposal also would codify the Exchange staff's
authority to analyze the suitability of an applicant company for
listing on the Exchange even if the applicant meets the Exchange's
quantitative criteria. Currently, this authority is codified only in
the suspension and delisting section of the Manual.
The proposal also would raise the minimum requirement for aggregate
market value of publicly-held shares from $40 million to $100 million
for all listings other than spin-offs and initial public offerings
(``IPOs'') \7\ (including carve-outs \8\). The NYSE proposes to raise
the standard for spin-offs and IPOs to $60 million.
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\7\ The Exchange proposes to define an IPO as a company that,
prior to its original listing, did not have a class of common stock
registered under the Act. The Exchange notes that this definition
differs from the definition of an IPO in Section 12(f)(1)(G)(i) of
the Act, which turns on whether a company has a reporting obligation
under the Act prior to a stock offering. Because the Exchange is
applying its definition of IPO in the context of the original
listing of common stock, the Exchange believes it is more
appropriate to focus on the existence of U.S. publicly-traded stock
rather than on prior reporting requirements. For example, while a
company may have a reporting requirement under the Act if it
conducted a public sale of debt securities, that would not be
relevant in considering the appropriateness of listing a company's
first public class of common stock.
\8\ The Exchange proposes to define a carve-out as the initial
offering of an equity security to the public by a publicly-traded
company for an underlying interest in its existing business (which
may be a subsidiary, division, or business unit). In the case of a
``target stock,'' the security is treated in the same way as any
other second class of stock of the issuer.
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In addition, the proposal replaces the existing net tangible assets
(``NTAs'') test, which is currently the additional measure of a
company's size, with a stockholders' equity test ($460 million for IPOs
or spin-offs and $100 million for all other domestic listings).\9\ The
Exchange in determining whether a company satisfies the stockholders'
equity test would look to the composition of the stockholders' equity
to determine the origination of such equity. The proposal also would
clarify that the test is an alternate measure of size to be relied upon
where circumstances warrant an alternate measure and where the
applicant's public market capitalization is no more than 10 percent
below the public market value listing standard. Such circumstances may
include situations in which large private holdings drive down the
public market capitalization or changing market forces drive down the
price of the stock.
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\9\ For non-U.S. companies, the $100 million requirement applies
to all issuers and will be measured under this proposal in
stockholders' equity instead of the current NTA valuation.
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Finally, the proposal codifies the NYSE's practice of accepting a
written commitment from the underwriter for IPOs (for spin-offs, from
the parent company's investment banker or other financial advisor) to
demonstrate whether the company satisfies the public market value
requirement of $60 million ($100 million worldwide for non-U.S.
issuers).
B. Original Financial Listing Criteria and Procedures
The proposal codifies and amends the Exchange's current policies
and practices with respect to the financial criteria and policies for
domestic companies seeking to list with the Exchange. Currently, a
company that seeks to qualify for listing on the Exchange under its
domestic standards must meet one of three financial tests. Two of these
tests call for an analysis of the company's ``demonstrated earning
power under competitive conditions.'' The third test, which only
applies to companies with at least $500,000,000 in market
capitalization and $200,000,000 in revenues during the most recent
fiscal year, analyzes the company's ``demonstrated earning power--
adjusted net income,'' as such term is currently defined in the
footnotes accompanying the rules.
According to the NYSE, in conducting its review of the financial
condition of an applicant company, the Exchange historically has relied
upon financial statements presented to it by the company as obtained
from SEC filings. If the Exchange relied on the adjustments presented
in SEC filings in granting financial clearance to the company, the
company would be required to include these adjustments in its original
listing application as a condition of eligibility clearance. The
proposal codifies the Exchange's financial listing standards and
current practices, as well as clarifies and modifies the relevant
interpretations.
1. ``Pre-Tax Adjusted Earnings'' Standard
The proposal replaces the current requirement that applicants
``demonstrate * * * earning power under competitive conditions'' with a
standard intended to provide more specificity.The proposed standard is
``pre-tax earnings from continuing operations and after minority
interest and equity in the earnings or losses of investees as
adjusted.'' The term, ``pre-tax earnings'' incorporates the current
standard of ``income before federal income taxes.'' The phrase, ``from
continuing operations,'' focuses the analysis on ongoing operations and
excludes any discontinued operations included in the company's
historical financial statements.\10\
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\10\ The Exchange notes that accounting rules specify that, upon
management's commitment to discontinue an operation, financial
statements for all relevant periods presented must be restated. If a
commitment is made after the period under Exchange review and the
historical financial statements have not yet been restated, the
Exchange will rely on the company to prepare a presentation of the
adjusted data and provide an agreed upon procedures letter provided
by the company's outside audit firm. The auditor's letter will state
the procedures performed with respect to calculating the pre-tax
earnings from continuing operations and after minority interest and
equity in the earnings or losses of investees as adjusted giving
effect to the discontinuance for each period under review.
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The clause, ``after minority interest'' removes the interest of an
affiliate of the applicant company accrued to owners other than the
applicant company due to its less than 10 percent ownership.\11\ The
phrase, ``after equity in the earnings or losses of investees,'' arises
when an applicant company has an ownership interest in another
corporation, the results of which are not consolidated into the
applicant company's financial statements due to the application of the
governing accounting principles. The results of investments that accrue
to the company will be accounted for in the Exchange's analysis to
determine
[[Page 32590]]
whether or not the company is eligible for listing.\12\
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\11\ For example, where a subsidiary that has a 20 percent
privately held (minority) interest, only 80 percent of the interest
in the subsidiary is reflected in the public stock. In this
scenario, although 100 percent of the subsidiary is consolidated
into the applicant parent's operations, the Exchange would make the
appropriate adjustment in its analysis to include 80 percent of the
earnings in the subsidiary by adjusting the pre-tax income for the
reported minority interest provided such minority interest is not
included as part of the company's pre-tax income on the face of the
financial statement.
\12\ This will be effected by including these results from the
company's income statement provided such results are not included as
part of the company's pre-tax income on the face of the financial
statement.
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Finally, the proposal enumerates certain adjustments that
applicants will make to the amount computed pursuant to pre-tax
earnings. These adjustments would be part of the proposed standard and,
as such, would apply to every listing applicant. Applicant companies
may only apply those adjustments arising from events specifically
identified in the company's SEC filing(s) as to both categorization and
amount. Thus, in order for an adjustment to be appropriately applied,
it must be specifically identified and the amount applied must be
specifically disclosed in the SEC filing, or subject to an agreed upon
procedures letter in certain cases.\13\
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\13\ The above-referenced adjustments are measured and
recognized in accordance with the relevant accounting literature,
such as that published by the Financial Accounting Standards Board
(``FASB''), the Accounting Principles Board (``APB''), the Emerging
Issues Task Force (``EITF''), the American Institute of Certified
Public Accountants (``AICPA''), and the SEC.
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a. Use of Proceeds for Retiring Debt or Making Acquisitions
The Exchange currently relies on the use of proceeds anticipated
from an equity offering in determining the financial eligibility of a
company seeking to list its securities on the Exchange. The Exchange
evaluates companies under a three-year eligibility review. In reviewing
a company's historical results, the Exchange will continue to consider
the effect of the offering on that three-year review period where the
proceeds are used to pay existing indebtedness or to fund an
acquisition. For deleveragings (i.e., using the proceeds of an offering
to pay off debt), the Exchange will conduct its review as if the
recapitalization occurred on the first day of the first year of its
three-year analysis. In applying the standard, the actual historic
interest paid each year on the debt to be retired by the application of
the proceeds will be removed, and the principal amount of the debt will
be retired. The pro forma effects (i.e., the effects ``as if'' the debt
had been retired in an earlier period) of the deleveraging for the
latest fiscal year and the interim period will be reflected in the
company's SEC filing. If that specific debt was incurred prior to that
period, the company would need to prepare adjusted financial statements
to account for the relevant preceding periods.\14\
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\14\ Adjustments will not be made on any interest or principal
payment(s) made on indebtedness other than that specifically being
retired. The proposal requires that this adjustment be accompanied
by an agreed upon procedures letter provided by the company's
outside audit firm. The auditor's letter will state the procedures
performed with respect to the existence of the debt and the accuracy
of the adjustments applied to the company's historical pre-tax
earnings reflecting the retirement of the principal amount of the
debt and the actual historic interest payments made.
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Similarly, with regard to the use of proceeds for acquisitions, the
Exchange conducts its review as if the acquisition occurred on the
first day of the first year of its analysis, provided the historical
financial statements of the acquiree for such period are included in
the company's SEC filings. The starting point for this analysis is the
company's SEC filing, which will include a pro forma presentation for
the latest fiscal year and the subsequent interim period.\15\ The
Exchange then reviews the historical financials of the company included
in the registration statement and treats the acquisition for listing
eligibility purposes as if it were consummated on the first day of the
earliest fiscal year included in the acquiree's financial statements
presented in the filing. The Exchange combines the historical results
of the company with the historical results of the acquiree and reflects
the purchase accounting of the acquisition for the periods presented.
Specifically, the adjustments would be limited to the combination, as
well as the allocation of the purchase price including adjusting assets
and liabilities of the acquiree to fair value recognizing any
intangibles (and associated amortization and depreciation) and the
effects of any additional financing to complete the acquisition.\16\
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\15\ This pro forma presentation will give effect to those
acquisitions that meet the significance test of SEC Rule 3-05 of
Regulation S-X (``Rule 3-05''). Generally, the historical financial
statements of the acquiree included in the filing also will be
limited to the requisite periods disclosed pursuant the Rule 3-05
significance test.
\16\ The Exchange proposes to require that these adjustments, if
not set forth in the SEC filing, be accompanied by an agreed upon
procedures letter provided by the company's outside audit firm at
the request of the company. The auditor's letter would state the
procedures performed with respect to showing the effect of the
relevant acquisition on the applicant company.
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b. Acquisitions and Dispositions
In instances other than those associated with the use of proceeds,
the proposal limits the Exchange's analysis to those acquisitions and
dispositions that are disclosed as such in a company's financial
statements in accordance with Rule 3-05 and Article 11-01(b)(2) of
Regulation S-X. Unlike the use of proceeds to fund an acquisition, in
this instance, the adjustment for the acquisition or disposition will
be limited to those periods for which pro forma financial data are
presented in the SEC filing.\17\ If no detailed disclosure is provided
for a particular acquisition or disposition, and the acquisition or
disposition is only a factual, non-material, un-qualified reference,
then the acquisition or disposition will not be given effect because it
cannot be substantiated within the four corners of the company's SEC
filing.
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\17\ If there is a pro forma presentation included in the
company's SEC filing that does not specify pre-tax earnings from
continuing operations, minority interest, and equity in the earnings
or losses of investees, the company must prepare the relevant data.
The presentation of the adjusted data will need to be accompanied by
an agreed upon procedures letter provided by the company's outside
audit firm. The auditor's letter will state the procedures performed
with respect to showing the effect of the expansion of the pro forma
presentation from the SEC filing into a more comprehensive income
statements.
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If the event that the applicant company has less than three years
of operating history and is acquiring (either completed or committed)
an entity with the requisite operating history, the Exchange will
consider the combined operating history of the acquiror and acquiree
for the preceding period(s) in conducting its financial eligibility
review. If it is necessary to combine historical financial statements
of the acquiree and acquiror to enable the Exchange to conduct its
analysis (e.g., overlapping fiscal years), then the combined data would
need to be accompanied by an agreed upon procedures letter provided by
the company's outside audit firm at the request of the company.
The NYSE proposes not to require the agreed upon procedures letter
if the SEC filing under review makes it self-evident that the company
would qualify for listing on the Exchange irrespective of the
acquisition or disposition.
c. Merger or Acquisition Related Costs Recorded Under Pooling of
Interests
The proposal excludes legal and accounting fees and other costs
incurred by a company in effecting a merger or acquiring another entity
accounted for as a pooling of interests (whether or not the transaction
is consummated).
d. Certain Charges or Income Specifically Disclosed in the Filing
Consistent with the NYSE's past practice, the proposal excludes
several items in assessing the applicant company's earnings strength or
its cash
[[Page 32591]]
flow. These items have been excluded either because they are associated
with a company's adopted exit plan (as defined in the accounting
literature) or, based on the Exchange's experience in assessing ongoing
earnings strength, they are not necessarily recurring.
Charges or Income Related to an Adopted Exit Plan
When a company adopts a specified exit plan, the following charges
or income, if disclosed in the company's SEC filing, recorded in the
company's financial statements in accordance with generally accepted
accounting principles (``GAAP''), and associated with the
implementation of that plan, would be excluded by the Exchange in its
proposed financial analysis: (1) the costs of severance and termination
benefits that are incurred as part of an exit plan; (2) costs and
associated revenues and expenses associated with the elimination or
reduction of product lines for which an exit plan has been adopted; (3)
costs incurred to consolidate, close, or re-locate plant or office
facilities associated with an exit plan; and (4) loss or gain on
disposal of long-lived assets, which, by its definition, relates to
assets that will no longer be held by the company.
Environmental Clean-Up Costs
The NYSE proposes to remove environmental clean-up costs incurred
in the remediation of environmental problems from the company's
historical financial results. However, companies may not make
adjustments for annual maintenance or on-going costs of compliance with
environmental laws.
Litigation Settlements
Litigation settlement costs, including any settlement amounts,
interest payments and penalties so disclosed in a company's filings
would be removed from the company's historic financial results.
Companies may not make an adjustment for on-going, customary legal
fees.
e. Impairment Charges on Long-Lived Assets
Asset write downs that reflect the net realizable value of a long-
lived asset would be excluded from historic financial results.
f. Gains or Losses Associated with Sales of a Subsidiary's or
Investee's Stock
If a company has an ownership interest in another entity, or has a
wholly-owned subsidiary, any gain or loss associated with the sale of
all or part of the company's interest would be excluded from the
company's historic results.
g. Regulation S-X Article 11 Adjustments
Pro forma adjustments contained in a company's pro forma financial
presentation provided in a current filing with the SEC are required to
be made in accordance with SEC rules and regulations governing Article
11 ``Pro forma Financial Information.'' The Exchange will review the
company's financial statements in the context of any such adjustments,
which are subject to SEC review. These adjustments would be limited to
the current registration statement as to types of adjustments, amounts
and years disclosed (except for use of proceeds as discussed above).
2. ``Adjusted Cash Flow'' Standard
In addition to the Pre-Tax Adjusted Earnings standard discussed
above, a second standard is available to companies with at least $500
million of market capitalization and $200 million of revenues in the
most recent 12-month period. Companies that meet the size criteria may
currently use an ``adjusted net income'' test for the last three fiscal
years of at least $25 million in the aggregate, with all years being
positive.
The proposal codifies the standard applicable to the companies
meeting the above-stated $500 million/$200 million threshold by
incorporating the fundamental aspects of the footnote in the current
Manual into the rule. In addition, the standard will explicitly
indicate that the test includes adjustments for two purposes: the use
of proceeds and acquisitions, discussed above. The Exchange is
proposing to limit the adjustments incorporated into this standard
because the remaining adjustments may or may not have cash-flow
implications for a particular company. Those that do have a cash flow
effect will already have been accounted for in the operating activity
section of the company's cash flow statement.
C. Policy Clarifications
The proposal also adopts several policies clarifying the use of the
adjustments enumerated above, requiring the issuance of a press release
by companies whose adjusted financial data were relied upon by the
Exchange in granting eligibility clearance, and delineating the
consequences of restated financial statements.
First, all adjustments must be disclosed as such in the SEC filing
of the applicant company--the amount must be within the four corners of
the SEC filing or subject to an agreed upon procedures letter, as
discussed above. Second, except as noted above,\18\ as a general rule,
the Exchange will only accept the application of an adjustment in the
year in which the event giving rise to the adjustment occurred. Thus,
no event can give rise to an adjustment in the financial statements for
any prior year.
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\18\ The two exceptions are: (1) The use of proceeds for
deleveraging and acquisitions and dispositions (for companies
currently in registration for an equity offering) and (2)
acquisitions and dispositions.
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Third, any company for which the Exchange relies on adjustments to
historical financial data in granting financial eligibility clearance
must take steps to ensure full public disclosure of how it qualified.
The Exchange recognizes that, although listing applications are a
matter of public record, many investors may not be aware that they are
available and may believe that only the most recent publicly available
SEC document is relied upon in evaluating a company. Thus, the proposal
imposes two requirements on issuers. First, it codifies the Exchange's
requirement that any adjusted financial data relied upon by the
Exchange in granting financial clearance to the company must be
included in the company's listing application. Second, the proposal
requires these issuers to issue a press release stating that pro forma
financial adjustments were used to qualify the company and all relevant
additional information is available to the public upon request.
With respect to companies that restate financial statements due to
a change from unacceptable accounting principles and/or correction of
errors, the proposal codifies the Exchange's policy of reviewing the
company's status at the time of the restatement. Once a company issues
a restatement that affects one of the years used by the Exchange to
qualify the company for listing, the Exchange will determine whether or
not the company would have qualified at the time of its original
financial clearance with the restated numbers. If not, the company will
be subject to suspension and delisting procedures unless the company
meets the original listing standards at the time of the restatement
using the most recent three fiscal years of financial statements as
restated.
D. Standards for Non-U.S. Issues
The proposal makes several changes to Section 103 of the Manual
pertaining to non-U.S. companies to clarify the rules and to carry
forward relevant
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items from the revisions pertaining to domestic companies.
Specifically, the NYSE proposed to make adjustments for foreign
currency for non-U.S. companies because their operations are inherently
tied to the underlying fundamentals of their respective national
economies. For purposes of this adjustment, the Exchange deems a
currency devaluation of more than ten percent as against the U.S.
dollar to be significant. The proposal also increase the aggregate
amount from $25 million to $100 million for its adjusted cash flow
standard and narrows to two years the requisite itemized annual
financial analysis for non-U.S. companies to the two most recent fiscal
years, which would be required to be reported at a minimum of $25
million. Reconciliation to U.S. GAAP of the third year back would only
be required if the Exchange determines that it is necessary to
demonstrate that the aggregate $100 million threshold is satisfied. In
addition, for non-U.S. companies, the definition of IPOs is the same as
for domestic issues, but the representation of market value to be
received in connection with a spin-off may also come from the parent
company's transfer agent.
E. Real Estate Investment Trusts
The proposal also codified a policy the Exchange has applied
regarding the original listing criteria for real estate investment
trusts (``REITs''). The Exchange generally lists REITs either in
connection with IPO or shortly thereafter, when the REIT does not have
a three-day operating history, so long as the REIT has at least $60
million is stockholders' equity.\19\ REITs listing with a three-year
operating history must qualify under the standard equity original
listing standards.\20\
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\19\ For those REITs listing in conjunction with an offering,
this requirement would need to be evidenced by a written commitment
from the underwriter (or, in the case of a spin-off or carved-out,
from the parent company's investment banker or other financial
advisor). The Exchange, however, retains the discretion to deny
listing to a REIT if it determines that, based upon a comprehensive
financial analysis, it is unlikely to be able to maintain its
financial status.
\20\ See Amendment No. 3, supra note 6 (adding rule language to
clarify that both REITs and closed-end funds with a 3 year operating
history must meet original financial listing standards set forth in
paragraph 102.01 of the Manual).
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F. Continued Listing Procedures
The NYSE proposes to revise its continued listing criteria by
codifying existing practice with respect to companies that qualify for
listing based, at least in part, upon adjusted historical data.
Specifically, under the proposed continued listing criteria a company
would be subject to delisting if it had NTAs or an aggregate market
value of its common stock of less than $12 million and average net
income of less than $600,000 for the past three years. In calculating
average net income for a company during the initial three years
following its listing, the Exchange takes into consideration those
specific adjustments made to the company's historical financial data
for the relevant year in the original listing application. This
consideration is limited both as to the specific adjustment made during
the initial clearance as well as to the year in which the adjusted was
made.
The Exchange also proposes to revise and codify the procedures
instituted when a company is identified by Exchange staff as being
below the continued listing criteria. The proposal imposes specific
time frames with respect to the notification, monitoring, and
suspension and delisting, where appropriate, of these companies'
securities. In addition, the proposal modifies the Exchange's current
practice of requiring companies to return to original listing standards
within 36 months. Instead, the proposal requires these companies to
return to good standing within six quarters of being notified of this
status.
III. Discussion
The Commission finds that the proposal is consistent with the Act
and in particular with those provisions applicable to a national
securities exchange.\21\ Specifically, the Commission believes that the
proposal is consistent with the requirements of Section 6(b)(5) of the
Act \22\ because it is designed to promote just and equitable
principles of trade, to remove impediments to, and perfect the
mechanism of a free and open market and, in general, to protect
investors and the public interest. The Commission believes that the
proposal, by codifying, expanding, and clarifying existing listing
criteria and procedures, strikes a reasonable balance between the
Exchange's obligation to protect investors and investor confidence in
the market, and its parallel obligation to perfect the mechanism of a
free and open market. The proposal establishes reasonable procedures
for issuers, while giving the Exchange the ability to deny, limit, or
delist an issuer that has failed to meet the substantive standards
outlined in the NYSE's Manual.
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\21\ In approving this rule, the Commission has considered the
proposed rule change's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
\22\ 15 U.S.C. 78f(b)(5).
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Primarily, the proposal codifies the Exchange's present listing
practices and procedures. The general system of Exchange review of
applicant companies remains essentially unchanged. In the past, many of
these procedures were not codified. As a result, it was often unclear
to issuers and other market participants how the Exchange's listing
procedures were applied in particular cases. As the proposal sets forth
more clearly the listing criteria applicable to issuers, the Commission
believes that it should enhance transparency in listing decisions,
thereby promoting just and equitable principles of trade and removing
impediments to a free and open market.
Specifically, the Exchange clarifies and codifies the size
component of the financial eligibility and general eligibility listing
criteria and establishes the NYSE's authority to investigate the
suitability of an applicant company beyond the Exchange's quantitative
criteria. The requisite aggregate market value of publicly-held shares
would increase from $40 million to $60 million for spin-offs and IPOs
(including carve-outs) and $100 million for all other listings. To
demonstrate that the company will satisfy the public market value
requirement of $60 million, the proposal codifies the practice of
accepting a written commitment from the underwriter for IPOs. Lastly,
the proposal replaces the NTA test with a stockholders' equity test,
retaining the $60 million and $100 million thresholds and clarifying
that the stockholders' equity test is an alternative test for measuring
a company's size.
The Commission believes the proposed increases to the threshold
requirements should ensure that only companies of a certain minimum
size are included among those listed on the Exchange, thereby
protecting investors by raising the minimum standard for listed
companies. The Commission also believes that it is reasonable for the
Exchange to accept a written commitment from the underwriter for IPOs,
which, by definition, could not satisfy the requisite minimum aggregate
market value of publicly-held shares. Additionally, the Commission
believes that the proposed stockholders' equity test is simpler than
the existing NTA test and could better reflect a company's value in the
current economy because it accounts for intangibles and hard assets,
which are frequently found on companies' balance sheets.
The NYSE also proposes to codify and revise its financial
eligibility standards for original listing. First, the proposal
replaces the current requirement that
[[Page 32593]]
applicants ``demonstrate * * * earnings power under competitive
conditions'' with a new standard, the ``pre-tax earning from continuing
operations and after minority interest and equity in the earnings or
losses of investees as adjusted.'' The proposal then enumerates the
adjustments to be made to the amount computed under the new standard,
clarifying that applicant companies may only apply those adjustments
arising from events specifically identified in the company's SEC
filings as to both categorization and amount. The permissible
adjustments include: use of proceeds (for paying off existing debt or
funding an acquisition), acquisitions and dispositions, exclusion of
merger or acquisition related costs recorded under pooling of
interests, exclusion of charges of income specifically disclosed in the
applicant's SEC filing for certain enumerated costs, exclusion of
impairment charges on long-lived assets, exclusion of gains or losses
associated with sales of a subsidiary's or investee's stock, regulation
S-X Article 11 adjustments, and exclusion of the cumulative effect of
adoption of a New Accounting Standard. These adjustments are measured
and recognized in accordance with the relevant accounting literature.
The Commission believes that the new standard more explicitly
defines the analysis conducted by the Exchange in evaluating applicant
companies. The Commission also believes that by codifying its current
practice regarding adjustments, the Exchange increases the transparency
of the financial criteria applied to companies seeking to list on the
Exchange. The codification of the adjustments also ensures that the
financial criteria are applied consistently and are easily auditable,
thereby protecting investors and reducing the possibility of unfair
discrimination between companies seeking to list on the Exchange.
Second, the proposal clarifies and codifies a second listing
standard, available to companies with at least $500 million of market
capitalization and $200 million of revenues in the most recent 12-month
period. By incorporating the current footnote into the standard itself,
the NYSE transforms the ``adjusted net income'' test into the new
``adjusted cash flow'' standard. The new standard also specifies that
the adjustments included in this standard are limited to the use of
proceeds and acquisitions because the remaining adjustments may not
have cash-flow implications for a particular company. The Commission
believes that codifying these listing standards increases the
transparency of the listing criteria for companies seeking to list on
the Exchange. Providing an alternative standard for listing also
encourages a free and open market by giving companies that are of a
sufficient size an opportunity to list that do not meet the ``pretax
earnings'' standard but are otherwise qualified.
The NYSE also proposes several policy clarifications regarding the
use of adjustments in the listing process. First, all adjustments must
be disclosed as such in the SEC filing of the applicant company, either
within the four corners of the SEC filing or subject to an agreed upon
procedures letter. Second, adjustments will only be applied in the year
in which the event giving rise to the adjustment occurred, except for
the use of proceeds for deleveraging and acquisitions and dispositions,
and acquisitions and dispositions. Third, companies whose adjusted
financial data was relied on by the Exchange in granting eligibility
clearance must include all adjusted financial data in the company's
listing application and issue a press release to the same effect. The
proposal also delineates the Exchange's procedure for reviewing a
company's status at the time of a restatement of financial statements,
due to a change from unacceptable to acceptable accounting principles
and/or correction of efforts, including the consequences of restating
financial statements.
The Commission believes that the NYSE's proposal to codify and
modify the use of each of these adjustments in the evaluation of
applicant companies should provide greater transparency in the listing
process. This enhanced transparency should assist all market
participants, including prospective companies and investors, in better
understanding the significance of the NYSE's decision to list a given
issuer on the Exchange.
Specifically, the Commission believes that it is appropriate for
the Exchange to limit all adjustments to those disclosed as such in the
issuer's filings with the Commission or as subject to an agreed upon
procedures letter provided by the issuer's independent outside auditor.
Any other adjustments could lack sufficient reliability to be
considered by the Exchange in its listing decision. The Commission also
believes that it is reasonable to limit the use of adjustments to the
year in which the event giving rise to the adjustment occurred, with
the two delineated exceptions, because generally, applying such
adjustments to prior periods may, to some extent, distort a particular
company's financial picture. Finally, the Commission believes that the
NYSE's proposal to require companies that were evaluated using adjusted
financial data to include all adjusted financial data in their listing
applications and to issue press releases about the adjustments is
appropriate because such actions should enable potential investors to
better understand the companies' financial situation and the manner in
which such companies were granted clearance to list on the Exchange.
The NYSE also proposes to revise several aspects of the listing
criteria for non-U.S. companies which carry forward relevant items from
the revisions pertaining to domestic companies, including: (1)
Replacing the NTA test with the stockholder's equity test as an
alternative measure of size; (2) using the same definition of IPO's as
for domestic issuers, but also allowing the representation of market
value required in connection with a spin-off to come from the parent
company's transfer agent; and (3) allowing adjustments for foreign
currency for a currency devaluation of more than ten percent. With
respect to the ``adjusted cash flow'' standard, the proposal increases
the aggregate amount to $100 million in operating cash flow, and
narrows to two years the requisite itemized annual financial analysis
for non-U.S. companies whereby each of the two most recent fiscal years
would be required to be reported at a minimum of $25 million in
operating cash flow. Reconciliation to U.S. GAAP of the third year back
is required only if the Exchange determines that reconciliation is
necessary to demonstrate that the aggregate $100 million threshold is
satisfied.
The Commission believes that the proposed changes should provide a
better evaluation of a non-U.S. company's financial health, and also
simplify the non-U.S. company listing criteria because they parallel
the benchmark applied in the pre-tax adjusted earnings standard for
non-U.S. companies.\23\ The Commission does not believe it is
appropriate for the Exchange to impose different listing criteria on
non-U.S. issuers given that they may face different financial
challenges than those encountered by domestic issuers. The Commission
believes that codifying these changes increases transparency for
financial criteria applied to non-U.S. companies seeking to list on the
Exchange.
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\23\ See Securities Exchange Act Release No. 41459 (May 27,
1999), 64 FR 30088.
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The proposal also codifies the Exchange's policy regarding the
original listing criteria for REITs. Generally, the Exchange will
authorize the listing of a REIT if it has at least $60 million in
[[Page 32594]]
stockholders' equity, but will not consider those with less than $60
million in stockholders' equity. For those REITs listing in conjunction
with an offering, the requirement must be evidenced by a written
commitment from the underwriter. Furthermore, the Exchange may deny
listing to a REIT if the Exchange determines, based upon comprehensive
financial analysis, but the REIT is unlikely to maintain its financial
status. REITs with greater than a three-year operating history are
subject to the listing criteria described in this proposal.
The Commission recognizes that in many cases the applicant REIT is
not a traditional operating entity and therefore, it may not be
appropriate to apply the general earnings standards specified in the
Exchange's Manual at the time of listing. Thus, the Commission believes
that the Exchange's proposed minimum listing criteria of $60 million in
stockholders' equity is an acceptable means for screening out those
REITs that the Exchange believes are unsuitable for listing due to
insufficient assets. The Commission recognizes that the stockholders'
equity test is intended as a minimum standard and supports the
Exchange's direction to determine that, with respect to a given REIT,
notwithstanding sufficient sharholder's equity, the REIT may be
unsuitable for listing.
Finally, the NYSE proposes two amendments to its continued listing
criteria. First, in calculating average net income for a company during
the initial three years following its listing, the Exchange will
consider those specific adjustments made to the company's historical
financial data for the relevant year in the original listing
application. The consideration will be limited to the specific
adjustment made during the initial clearance and to the year in which
the adjustment was made.
Second, the proposal revises and codifies the procedures instituted
when a company is identified by Exchange staff as being below the
continued listing criteria by imposing specific time frames with
respect to the notification, monitoring, and suspension and delisting
of these companies' securities. The proposal also requires that the
companies return to good standing by satisfying the continued listing
standards within six quarters of being notified of this status.
The Commission believes that proposed revisions and codification of
the continued listing criteria should enhance investor protection by
ensuring that companies that fail to satisfy the continued listing
criteria are identified, reviewed, and then subjected to specified
delisting procedures. Moreover, those companies falling below the
NYSE's continued listing criteria are provided with transparent,
detailed procedures for addressing their status. The Commission notes
that proposed changes to NYSE Rule 499 are intended to confirm that
rule to the changes proposed to the continued listing criteria in NYSE
Rule 802.
The Commission finds good cause for approving proposed Amendment
Nos. 2 and 3 prior to the thirtieth day after the day after the date of
publication of notice of filing in the Federal Register. Amendment No.
2 addresses the ``adjusted cash flow'' standard with respect to non-
U.S. companies. The proposal increases the aggregate amount to $100
million, narrows to two years the requisite itemized annual financial
analysis for non-U.S. companies whereby each of the two most recent
fiscal years would be required to be reported at a minimum of $25
million, and requires reconciliation U.S. GAAP of the third year back
only if the Exchange determines that reconciliation is necessary to
demonstrate that the aggregate $100 million threshold is satisfied.\24\
The Commission believes Amendment No. 2 is a reasonable mechanism for
addressing the differences between non-U.S. and U.S. companies, helps
to ensure that the financial criteria applies to non-U.S. companies
seeking to list on the Exchange are fully transparent and applied
consistently, and encourages a free and open market by allowing non-
U.S. companies to list on the NYSE.
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\24\ See, not 11, supra.
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In Amendment No. 3, the NYSE proposes to codify the Exchange's
policy regarding the use of financial data to grant eligibility
clearance to an issuer that has less than three years of operating
history and clarifies that REITs and Funds listing with a three-year
operating history must qualify under the original listing standards for
equity securities. As noticed, the proposed rule change discussed the
Exchange's policy regarding the use of financial data to grant
clearance to an issuer with less than three years of operating history
but the proposal did not codify this policy. The Commission believes
that codifying the policy is consistent with the purpose of the Act
because it increases the transparency of the financial criteria applied
to companies seeking to list on the exchange and ensures that the
financial criteria are applied consistently across applicant companies.
For these same reasons, the Commission believes it is appropriate for
the Exchange to codify the applicable listing criteria for REITs and
Funds listing with a three-year operating history, instead of
addressing only those situations where a REIT or Fund has less than a
three-year operating history. Accordingly, the Commission believes that
it is consistent with Section 6 of the Act \25\ to accelerate approval
of Amendment Nos. 2 and 3.
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\25\ 15 U.S.C. 78f.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment Nos. 2 and 3, including whether those
amendments are consistent with the Act. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW, Washington,
DC 20549-0609. 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 Room. 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-99-13 and should be submitted by July 8, 1999.
V. Conclusion
It is therefore ordered, pursuant to Section 19((b)(2) of the
Act,\26\ that the proposed rule change (SR-NYSE-99-13), as amended,
codifying and revising the NYSE's original and continued listing
criteria and procedures, is approved.
\26\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-15351 Filed 6-16-99; 8:45 am]
BILLING CODE 8010-01-M
