[Federal Register Volume 62, Number 139 (Monday, July 21, 1997)]
[Notices]
[Pages 39043-39045]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-19072]
[[Page 39043]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38828; File No. SR-NYSE-97-12]
Self-Regulatory Organizations; the New York Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change Relating to Amendments
to the Exchange's Allocation Policy and Procedures
July 9, 1997.
I. Introduction
On April 16, 1997, 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 amend the Exchange's
Allocation Policy and Procedures.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 38669 (May 22, 1997), 62 FR 29170 (May 29,
1997). No comments were received on the proposal.
II. Background
The Exchange's Allocation Policy and Procedures govern the
allocation of equity securities to NYSE specialist units. The
Allocation Committee has sole responsibility for the allocation of
securities to specialist units pursuant to Board-delegated authority,
and is overseen by the Quality of Markets Committee of the Board of
Directors. The Allocation Committee renders decisions based upon the
allocation criteria specified in the Allocation Policy.
In its proposal, the NYSE states that 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.\3\ 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.\4\ In August 1994, the Exchange filed for and subsequently
received permanent approval of that pilot.\5\ 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.\6\ 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.\7\
Additional recommendations of ARC IV are contained in this filing.
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\3\ Securities Exchange Act Release No. 27803 (Mar. 14, 1990),
55 FR 10740 (Mar. 22, 1990) (order approving File No. SR-NYSE-88-
32).
\4\ Securities Exchange Act Release No. 33121 (Oct. 29, 1993),
58 FR 59085, (Nov. 5, 1993) (order approving File No. SR-NYSE-92-
15).
\5\ Securities Exchange Act Release No. 34906 (Oct. 27, 1994),
59 FR 55142 (Nov. 3, 1994) (order approving File No. SR-NYSE-94-30).
\6\ Securities Exchange Act Release No. 34626 (Sept. 1, 1994),
59 FR 46457 (Sept. 8, 1994) (order approving File No. SR-NYSE-94-18)
\7\ Securities Exchange Act Release No. 38373 (Mar. 7, 1997), 62
FR 13421 (Mar 20, 1997) (notice of filing and immediate
effectiveness of File No. SR-NYSE-97-04).
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III. Description of Proposal
The NYSE proposes to amend Part IV, Allocation Criteria, of its
Allocation Policy and Procedures with respect to the Specialist
Performance Evaluation Questionnaire (``SPEQ), objective measures of
performance, allocation applications, and disciplinary and cautionary
data.
With respect to the Exchange's SPEQ,\8\ the NYSE proposes that in
considering whether a stock will be assigned to a particular specialist
unit, the Allocation Committee shall give 25% weight to the results of
the SPEQ. Currently, the policy only requires the Allocation Committee
to consider no more than 25% of the SPEQ results.
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\8\ The SPEQ is a quarterly survey on specialist performance
completed by eligible floor brokers (i.e., any floor broker with at
least one year of experience). The SPEQ consists of 21 questions and
requires floor brokers to rate, and provide written comments on, the
performance of specialist units with whom they deal frequently.
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With respect to the objective measures of performance used by the
Allocation committee in considering whether to assign a stock to a
particular unit, the NYSE proposes to add two criteria, capital
utilization and near neighbor analysis. Capital utilization measures
the degree to which the specialist unit uses its own capital in
relation to the total dollar value of trading in the unit's stocks,
while the near neighbor analysis measures specialist performance and
market quality by comparing performance in a stock to performance of
stocks that have similar market characteristics. The Commission had
previously approved the use of these criteria in allocation decisions,
but these criteria had never been codified into the actual language of
the allocation policy and procedures.\9\
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\9\ Securities Exchange Act Release No. 38158 (Jan. 10, 1997),
62 FR 2704 (Jan. 17, 1997).
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With respect to allocation applications, the NYSE proposes that in
their applications for the allocation of a listing company's stock,
specialist units describe all pertinent factors as to why they believe
they should be allocated the stock, which shall include how the unit
will allocate resources (staff and/or capital) to accommodate this new
issue and what new resources, if any, the specialist unit will meet to
acquire to service this stock. The NYSE proposes to delete the language
requiring a description of the specialist unit's capital base.
With respect to the reporting of disciplinary actions, the NYSE
proposes to amend its allocation policy and procedures such that
enforcement actions would be reported to the Allocation Committee when
an enforcement case is authorized, rather than when the stipulation is
signed or charges are issued, as is currently required. 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,
rather than six months, as is currently required. In addition, the
current policy interpretation that summary fines, not just cautionary
letters, for market maintenance are reported for 12 months, would be
codified.
The NYSE also proposes to amend Part V, Policy Notes, of its
Allocation Policy and Procedures with respect to mergers of listed and
unlisted companies, targeted stock, allocation ``freeze'' policy,
allocation ``sunset''
[[Page 39044]]
policy, and criteria for applicants that are not currently specialists.
With respect to mergers of listed and unlisted companies, the NYSE
proposes to amend its allocation policy and procedures to allow a
company that results from the merger between a listed company and an
unlisted company to remain registered with the specialist unit that had
traded the listed company. Under the proposal, however, if the unlisted
company is determined to be the survivor-in-fact, the unlisted company
may request that the Allocation Committee reallocate the stock of the
unlisted company. In this case, all specialist units would be invited
to apply, except that the Allocation Committee shall honor the unlisted
company's request not to be allocated to the specialist unit that had
traded the listed company's stock. Currently, companies resulting from
mergers of listed and unlisted companies must remain registered with
the specialist for the listed company regardless of whether the
unlisted company is the survivor-in-fact.
With respect to targeted stock, the NYSE proposes that when such a
security is ``uncoupled'' and becomes an independently entity, the
targeted stock would remain registered with the current specialist in
the listed company. Under the proposal, however, the listed company may
request that the Allocation Committee reallocate the targeted stock of
the listed company. In this case, all specialist units would be invited
to apply, except that the Allocation Committee shall honor the listed
company's request that the targeted stock not be allocated to the
specialist unit that had traded the target stock. In its filing, the
NYSE notes that there is no current policy for allocating targeted
stock.
The NYSE proposes to codify into its Allocation Policy and
Procedures its 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. Specifically,
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 specialist unit would be ineligible to apply for future allocations
for the six month period immediately following the reassignment of the
security. Following this initial six month period, a second six month
period will begin during which a specialist until may apply for new
listings, provided that the unit demonstrates to the Exchange relevant
efforts taken to resolve the circumstances that triggered the
prohibition. Under the allocation freeze policy, 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 specialist unit's
particular situation, but may include whether the specialist unit has:
Implemented more stringent supervision and new procedures; enhanced
back-office staff; attained appropriate dealer participation; changed
professional staff; and supplied additional manpower and experience.
With respect to the allocation ``sunset'' policy, the NYSE proposes
that allocation decisions remain effective with respect to any initial
public offering companies that list within three months. Under the
proposal, if a listing company does not list within three months, the
matter shall be referred again to the Allocation Committee and
applications invited from all specialist units. The NYSE notes that
previously it had followed a one-year sunset policy.
With respect to the criteria for applicants that are not currently
specialists, the NYSE proposes to add a provision requiring that the
Allocation Committee consider, in addition to capital or operational
problems, 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 with respect to any regulatory or disciplinary
matter. Currently, the policy only requires consideration of those
disciplinary matters or warnings related to any Floor-related activity.
IV. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, with the requirements of Section 6(b).\10\ In particular,
the Commission believes 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 interest. Further, the Commission finds that the proposal also
is consistent with Section 11(b) of the Act \11\ and Rule 11b-1 \12\
thereunder, which allow exchanges to promulgate rules relating to
specialists to ensure fair and orderly rules relating to specialists to
ensure fair and orderly markets.
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\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
\12\ 17 CFR 240.11b-1.
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Specialists play a crucial role in providing stability, liquidity
and continuity to the trading of securities. Among the obligations
imposed upon the specialists by the Exchange, and by the Act and the
rules thereunder, is the maintenance of fair and orderly markets in
their designated securities.\13\ To ensure that specialists fulfill
these obligations, it is important that the Exchange develop and
maintain stock allocation procedures and policies that provide
specialists with an initiative to strive for optimal performance.
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\13\ See 17 CFR 240.11b-1; NYSE Rule 104.
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The Commission believes that the Exchange's proposal to amend Part
IV, Allocation Criteria, of its Allocation Policy and Procedures is
consistent with the Act for the reasons set forth below.
As described above, the proposal will require the Allocation
Committee to give 25% weight to the results of the SPEQ in determining
whether to allocate a stock to a particular specialist unit. Under the
current Allocation Policy, the SPEQ is to be given no more than 25%
weight in allocation decisions. The Commission believes that this
change will provide certainty to the Allocation Committee on what
portion of its decision should be based on the SPEQ and will ensure
that allocation decisions are based in sufficient part on specialist
performance. In this regard, the Commission continues to believe that
performance, as measured by the objective criteria, should be the
primary consideration of the Allocation Committee.
Although the SPEQ remains a useful tool to measure performance, as
noted above, the Commission believes that objective measures of
performance should play an important role in allocation decisions. In
particular, the Commission has previously stated its belief that
objective performance measures can identify poor market making
performance that otherwise may not be reflected in a specialist unit's
SPEQ survey results.\14\ In this regard, the Commission believes it is
appropriate to codify into NYSE's Allocation Policy and Procedures
capital utilization and near neighbor analysis as objective measures of
performance to be considered by the
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Allocation Committee in making their allocation decisions.\15\
Specifically, the Commission has previously stated its belief that
these quality market measures identify aspects of market making that
are directly relevant to the specialist's maintenance of fair and
orderly markets. The Commission continues to believe that the near
neighbor analysis and capitalization measures could assist the
Allocation Committee in allocating stocks to specialists who commit
their own capital to maintain stable and liquid markets and, thus,
believes codification of such measures into the NYSE's Allocation
Policy and Procedures is appropriate.
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\14\ Securities Exchange Act Release No. 33369 (Dec. 22, 1993),
58 FR 69431 (Dec. 30, 1993).
\15\ The Commission previously approved the consideration of
specialist near neighbor analysis and capital utilization by the
Allocation Committee. Release No. 38158, supra note 9. Today, the
Commission is merely approving the codification of such measures
into the NYSE's Allocation Policy and Procedures.
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By requiring specialist units to include in their applications for
the allocation of a listing company's stock a description of how the
specialist unit will allocate resources (staff and/or capital) to
accommodate this new issue and what new resources, if any, the
specialist unit will need to acquire to service this stock, the
Commission believes that the proposal will provide the Allocation
Committee with the necessary information to better determine which
specialist unit is best equipped to handle trading of a particular
stock. Moreover, by requiring that enforcement actions against
specialists be reported to the Allocation Committee when an enforcement
case is authorized, rather than later when the stipulation is signed or
charges are issued, the proposal should ensure that relevant
information about enforcement matters considered on a timely basis by
the Allocation Committee. Similarly, by requiring that records of
formal disciplinary action be retained for 12 months, rather than the
current six months, after a Hearing Panel decision is final, the
proposal should enhance the allocation process by providing the
Allocation Committee with relevant information over a longer period of
time.
The Commission believes that the Exchange's proposal to amend Part
V, Policy Notes, of its Allocation Policy and Procedures also is
consistent with the Act for the reasons set forth below.
The Commission believes that the NYSE's proposal to allow a
company, resulting from a merger between a listed company and an
unlisted company, to request that the Allocation Committee reallocate
the stock of the unlisted company so long as the unlisted company is
determined to be the survivor-in-fact is appropriate because the merged
company is more analogous to a new company that has never been listed.
The proposal also requires the Allocation Committee to honor the
unlisted company's request the Allocation Committee to honor the
unlisted company's request not to be allocated to the specialist unit
that had traded the listed company's stock. This is also currently
permitted in situations involving spin-offs, listings of related
companies, and relistings. Although barring the original specialist
unit from receiving the listing does raises some concerns about
ensuring that all specialist units will be allowed to compete for the
allocation on an equal basis, the Commission believes that there may be
legitimate reasons why an unlisted company may believe it is more
appropriate to be allocated to a new specialist unit rather than one
that had dealings with the former listed company. Accordingly, the
Commission finds this provision is reasonable under the Act. For the
same reasons, the Commission believes that the NYSE's proposal to allow
a listing company, whose targeted stock becomes listed separately, the
request that the Allocation Committee reallocate the targeted stock and
refrain from allocating the targeted stock to the specialist unit that
had traded the targeted stock is reasonable.
The Commission also believes that by codifying its allocation
freeze policy, which provides that a specialist unit 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, the proposal provides an incentive to
specialists to improve their performance or maintain superior
performance while also ensuring that only those units performing well
and likely to make good markets in a particular stock will receive
allocations.
The Commission also believes that the NYSE's allocation sunset
policy, requiring allocation decisions to remain effective for three
months with respect to any initial public offering (``IPO'') listing
and, in the event a listing company does not list within three months,
requiring that the matter be referred again to the Allocation
Committee, with applications invited from all specialist units, is
appropriate. The Commission recognizes that, after three months, the
specialist unit assigned to make a market in the initial public
offering listing company may no longer have the resources to make the
best market and it would be prudent for the Allocation Committee to
reevaluate its allocation decision. The prior policy of waiting one
full year before an IPO was reallocated to another unit was, in the
Commission's view, too long and did not allow the Allocation Committee
to take into account changes in the unit that may have occurred during
the one year.
The Commission also believes that in considering the allocation
application of an applicant that is not currently a specialist, the
NYSE's proposal to add a provision requiring that the Allocation
Committee consider, in addition to capital or operational problems, 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 will help to strengthen the allocation policy and
ensure that only the best units are allocated stocks. Currently, the
policy only requires consideration of those disciplinary matters or
warnings related to any Floor-related activity. The Commission believes
that this expansion to include any regulatory or disciplinary matters
will ensure the quality of specialists assigned to make markets in
NYSE-listed stocks.
In summary, the Commission believes that the Exchange's Allocation
Policy and Procedures can serve as an effective incentive for
specialist units to maintain high levels of performance and market
quality in order to be considered for, and ultimately awarded,
additional listings. This in turn can benefit the execution of public
orders and promote competition among the exchanges. In this regard, the
Commission believes that the NYSE's proposals related to its Allocation
Policy and Procedures help to further these purposes. The Commission
will continue to support the NYSE's efforts to develop a meaningful and
effective allocation policy and procedures that encourage improved
specialist performance and market quality.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\16\ that the proposed rule change (SR-NYSE-97-12) is approved.
\16\ 15 U.S.C. 78s(b)(2).
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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-(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-19072 Filed 7-18-97; 8:45 am]
BILLING CODE 8010-01-M
