[Federal Register Volume 60, Number 151 (Monday, August 7, 1995)]
[Notices]
[Pages 40217-40219]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-19386]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36043; File No. SR-NYSE-95-21]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Order Granting Accelerated Approval of Proposed Rule Change and Notice
of Filing and Order Granting Accelerated Approval to Amendment No. 1 to
Proposed Rule Change Relating to Amendments to 460.20
August 1, 1995.
I. Introduction
On May 26, 1995, 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 Exchange Rule 460.20 to
require an associated specialist of an approved person acting as an
underwriter in a distribution of a security in which the associated
specialist is registered to ``give up the book'' if the associated
specialist and approved person do not have an exemption from Rule 10b-6
or Rule 10b-13.
\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4 (1994).
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 35929 (June 30, 1995), 60 FR 35759 (July 11,
1995). No comments were received on the proposal. On July 27, 1995, the
Exchange submitted Amendment No. 1 to the proposed rule change.\3\ This
order approves the proposed rule change, including Amendment No. 1, on
an accelerated basis.
\3\ See letter from James E. Buck, Senior Vice President and
Secretary, NYSE, to Glen Barrentine, Senior Counsel, SEC, dated July
26, 1995. In Amendment No. 1, the Exchange amended the NYSE rule to
reflect more accurately the requirements under Rules 10b-6 and 10b-
13 for specialists to give up the book if the specialists and their
approved persons do not have an exemption from such rules. See infra
note 10 and accompanying text.
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II. Description of Proposal
Rule 10b-6 under the Act requires a specialist organization to
withdraw from the market when an affiliated entity is participating in
a distribution of a security in which the specialist organization is
registered commencing with the applicable cooling off period specified
in Rule 10b-6 until the affiliate has completed its participation in
the distribution.\4\ Currently, to ensure compliance with Rule 10b-6,
NYSE Rule 460.20 requires a specialist organization to ``give up the
book'' (i.e. suspend its specialist activities) to a specialist
organization unaffiliated with any distribution participant, which then
assumes all specialist responsibilities under NYSE rules until the
approved person (affiliate) has completed its participating in the
distribution.\5\ At the conclusion of the approved person's
participation, the regular specialist organization regains the ``book''
and resumes its specialist activities.
\4\ Rule 10b-6 is an anti-manipulation rule that, subject to
certain exceptions, prohibits persons engaged in a distribution of
securities from bidding for or purchasing, or inducing others to
purchase, such securities, any security of the same class and series
as those securities, or any right to purchase any such security
(``related securities'') until they have completed their
participation in a distribution. The provisions of Rule 10b-6 apply
to issuers, selling shareholders, underwriters, prospective
underwriters, dealers, brokers, and other persons who have agreed to
participate or are participating in the distribution, as defined in
Rule 10b-6(c)(5), and their ``affiliated purchasers,'' as defined in
Rule 10b-6(c)(6), including broker-dealer affiliates. The applicable
cooling off period is described in (xi) and (xii) of Rule 10b-
6(a)(4). See 17 CFR 240.10b-6.
\5\ Exchange Rule 460.10 prohibits an approved person of a
specialist organization from engaging in any business transaction
with any company whose stock the specialist is registered or accept
a finder's fee from such company. See NYSE Rule 460. NYSE Rule 98,
however, affords exemptive relief for approved persons of a
specialist organization from restrictions found in various NYSE
rules, including certain provisions of rule 460, that would
otherwise be applicable to such approved persons' transactions in
NYSE securities in which the specialist organization is registered
or to business transactions with the issuers of such securities. See
NYSE Rule 98, infra note 9. Therefore, an approved person of a
specialist organization must be entitled to an exemption from Rule
460.10 pursuant to Rule 98 to act as an underwriter in any capacity
for a distribution of securities in which an associated specialist
is registered.
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The Exchange has filed a request with the Division of Market
Regulation (``Division''), separately from this proposed rule change,
for exemptive relief from certain provisions of Rules 10b-6 and 10b-13
\6\ (``Petition for Exemptive Relief'').\7\ This request was based on
competitive concerns in light of the amendments to Rule 10b-6 and new
Rule 10b-6A that permit NASD market makers to continue to make markets
in a stock while participating in an underwriting of that stock,
subject to several restrictions on their level of market making
activity (``passive market making'').\8\ In this regard, the Exchange
believed that the failure to provide some type of exemptive relief from
Rule 10b-6 for NYSE specialist units affiliated with underwriting firms
may have a detrimental effect on the Exchange's ability to compete for
issuer listings and on the willingness of large firms to invest capital
in the specialist business. The Exchange further believed that the
Commissions's passive market making restrictions could not be extended
appropriately to Exchange specialists, who are subject to an
affirmative obligation to deal when necessary to maintain a fair and
orderly market. The Exchange believed, however, that exemptive relief
was appropriate in light of the restrictions on the flow of information
between the affiliated specialists and its approved person contained in
Exchange Rule 98 \9\ along with the additional safeguards specified in
its Petition for Exemptive Relief.
\6\ Rule 10b-13 under the Act, among other things, prohibits a
person making a tender offer or exchange offer for any equity
security from, directly or indirectly, purchasing or making any
arrangement to purchase any such security (or any security that is
immediately convertible or exchangeable for such security),
otherwise than pursuant to the offer, from the time the offer is
publicly announced until its expiration, including any extension
thereof. Rule 10b-13 also applies to the dealer-manager of a tender
offer because the dealer-manager acts as the agent of the bidder to
facilitate the bidder's objectives. See 17 CFR 240.10b-13.
The Exchange is seeking relief from Rule 10b-13 to allow
affiliated specialists to continue their market making functions in
their respective specialty securities in connection with certain
mergers or tender or exchange offers in which an affiliated broker-
dealer is participating.
\7\ See letter from James E. Buck, Senior Vice President and
Secretary, NYSE, to Jonathan G. Katz, Secretary, SEC, dated April
28, 1995.
\8\ See Securities Exchange Act Release No. 32117 (Apr. 8,
1993), 58 FR 19528. In general, Rule 10b-6A permits ``passive market
making'' in connection with the distributions of certain securities
quoted on the Nasdaq Stock Market during the Rule 10b-6 cooling-off
period, the period when the rule's provisions otherwise would
prohibit such transactions. A passive market maker's bids and
purchases, however, are limited to the highest current independent
bid i.e., a bid of a market maker who is not participating in the
distribution and is not an affiliated purchaser of a participating
market maker. Furthermore, Rule 10b-6A contains certain eligibility
criteria, volume limitations on purchases, and notification and
disclosure requirements. See Rule 10b-6A(c)(2) (Level of Bid),
(c)(3) (Requirements to Lower the Bid), (c)(4) (Purchase
Limitation), (c)(5) (Limitation on Displayed Size), (c)(6)
(Identification of a Passive Market Making Bid), (c)(7)
(Notification and Reporting to the NASD). See 17 CFR 240.10b-
6A(c)(2) through (c)(6).
\9\ Pursuant to Rule 98 and the guidelines promulgated
thereunder, the specialist organization and affiliated entities must
be operated as separate and distinct organizations, and
``information barriers'' must be established that place substantial
limits on access to, and communications of, trading information,
including positions and strategies, between the two organizations.
Rule 98 exemptive relief is conditioned on the organizations
receiving prior written approval from the NYSE, which conducts an
annual review of each firm to ensure that all conditions for the
exemption are being met.
Under this proposal, the Exchange proposes to replace the current
``give up the book'' provision with one that would make NYSE Rule
460.20 compatible with the Exchange's Petition for Exemptive Relief.
The proposed rule change would allow an affiliated specialist to
continue to make a market in the securities in which the affiliated
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specialist was registered during distribution, provided that it has
obtained an Exchange exemption from Rule 460.10 pursuant to Rule 98 and
a Commission exemption from Rule 10b-6 or Rule 10b-13.\10\ Under the
new provision, an associated specialist would still be required to
``give up the book'' in the subject security to another specialist
member organization satisfactory to the Exchange, in situations where
the associated specialist and approved person do not have an exemption
from Rule 10b-6 or Rule 10b-13, until the book may be reacquired by the
associated specialist in accordance with Rule 10b-6 or Rule 10b-13.
\10\ Absent an exemption from or exception to Rule 10b-6,
Exchange specialists that are affiliated with a person participating
in a distribution of securities would be precluded from bidding for
or purchasing such securities or any related securities.
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III. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
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).\11\ 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.
\11\ 15 U.S.C. 78f(b) (1988 & Supp. V 1993).
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The Commission believes that the rule change is consistent with the
requirements of the Act in that the proposal will allow the NYSE rules
to reflect accurately the current state of the law. In response to the
NYSE's Petition for Relief, the Division has granted exemptions from
Rules 10b-6 and 10b-13 to permit NYSE specialists (``Affiliated
Specialists'') affiliated with a NYSE member firm (``Affiliated Broker-
Dealer'') to remain in the market and to continue their normal
specialist activities during the period when the Affiliated Broker-
Dealer is engaged in a distribution of a specialty security or is
acting as a dealer manager in a tender or exchange offer for a
specialty security.\12\
\12\ See Letter regarding Application of Rules 10b-6 and 10b-13
to New York Stock Exchange Specialists (File No. TP94-293) (July 31,
1995). The exemptions provided in this letter will expire in two
years from the effective date of the exemptions unless otherwise
extended. This sunset provision is consistent with the NYSE's
proposed rule change, which would require an associated specialist
of an approved person acting as an underwriter in a distribution to
``give up the book'' if the associated specialist and approved
person do not have an exemption from Rule 10b-6 or Rule 10b-13.
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In providing the requested relief to the NYSE specialists, the
Division has placed certain terms and conditions on the exemptions as
well as limitations on their scope. As conditions to the exemptions,
the Affiliated Specialist and the Affiliated Broker-Dealer must comply
with the terms of, and the enumerated obligations imposed by, the
exemptive letter. Moreover, the NYSE also has certain responsibilities
to conduct surveillance of Affiliated Specialists and Affiliated
Broker-Dealers for compliance with the conditions of the exemptions, to
guard against manipulative conduct, and to provide an analysis of the
operation of the exemptions to the Division.
The amendment to Rule 460.20 would require the NYSE specialists to
``give up the book'' during a distribution in which an approved person
participates if the associated specialist and approved person do not
have an exemption from Rule 10b-6 or Rule 10b-13. The Commission,
therefore, believes that Exchange Rule 460.20 is consistent with Rules
10b-6 and 10b-13 and any exemption as granted by the Division. The
proposed rule change would also reaffirm, through an exchange rule, the
obligations under Rules 10b-6 and 10b-13 of an associated specialist to
``give up the book'' where such specialist does not have an exemption
from such rules.
The Commission notes that the exemptions as provided by the
Division are subject to modification or revocation at any time the
Commission or the Division determines that such action is necessary or
appropriate in furtherance of the purposes of the Act. Therefore, it is
the responsibility of the associated specialist and the approved person
to become aware of any changes in the exemptions and to determine
whether an exemption continues to apply to their activities. Moreover,
the Exchange should notify its members of any modifications or
revocation of the exemptions granted by the Division.
Moreover, the Commission finds good cause for approving the
proposed rule change, including Amendment No. 1, prior to the thirtieth
day after the date of publication of notice of filing thereof. The
Exchange's original proposal was published in the Federal Register for
comment and no comments were received.\13\ Amendment No. 1 merely
codifies the intention of, and what necessarily must be implied from,
the proposed rule change: that associated specialists do not have to
give up the book if the associated specialists and approved persons
have an exemption from Rule 10b-6 or Rule 10b-13. Amendment No. 1 does
not alter the substance of the NYSE's original proposal as previously
published. Moreover, the proposed rule change, as amended, merely makes
Exchange Rule 460.20 compatible with the exemptions granted by the
Division; the rule change does not independently create any rights or
obligations for NYSE specialists. Based on the above, the Commission
finds that there is good cause, consistent with Section 6(b)(5) of the
Act, to accelerate approval of the amended proposed rule change.
\13\ See Securities Exchange Act Release No. 35929 (June 30,
1995), 60 FR 35759 (July 11, 1995).
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 1. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street NW., Washington,
DC 20549. Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed 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. Sec. 552, will be available for inspection and
copying at the Commission's Public Reference Section, 450 Fifth Street
NW., Washington, DC 20549. Copies of such filing will also be available
for inspection and copying at the principal office of the Exchange. All
submissions should refer to File No. SR-NYSE-95-21 and should be
submitted by August 28, 1995.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\14\ that the proposed rule change (SR-NYSE-95-21), as amended, is
approved.
\14\ 15 U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
\15\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-19386 Filed 8-4-95; 8:45 am]
BILLING CODE 8010-01-M
