[Federal Register Volume 61, Number 183 (Thursday, September 19, 1996)]
[Notices]
[Pages 49371-49373]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23976]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37668; File No. SR-NYSE-96-17]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the New York
Stock Exchange, Inc. Relating to Extension of Pilot Programs for
Capital Utilization and Near Neighbor Measures of Specialist
Performance
September 11, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on July 1,
1996, the New York Stock Exchange, Inc. (``NYSE'' or ``Exchange'')
filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the self-regulatory
organization.\1\ The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ See Letter from James E. Buck, Senior Vice President and
Secretary, NYSE, to Sharon Lawson, Senior Special Counsel, SEC,
dated September 10, 1996 (``Amendment No. 1''). The Exchange
originally requested that the capital utilization and near neighbor
measure pilots be approved for an additional year, until September
10, 1997. In Amendment No. 1, the Exchange amended the filing to
request that the pilots only be extended for an additional four
months, until January 10, 1997 and requested that the four-month
extension be approved on an accelerated basis. The Exchange stated
that during this time, it expected to seek permanent approval of the
programs from its Board of Directors, and to subsequently file such
requests with the Commission.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change consists of extending for an additional
four months, through January 10, 1997, the pilot programs to use
specialist capital utilization and the ``near neighbor'' approach to
measure specialist performance.\2\
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\2\ The SEC notes that these measures currently are only used by
the Allocation Committee in making specialist allocation decisions.
See infra note 4. The SEC initially approved the capital utilization
program on a one-year pilot basis in Securities Exchange Act Release
No. 33369 (December 22, 1993), 58 FR 69431 (December 30, 1993). The
SEC approved a six-month extension of the pilot program in
Securities Exchange Act Release No. 35175 (December 29, 1994), 60 FR
2167 (January 6, 1995) (extending pilot through June 30, 1995). The
SEC approved a subsequent extension of the pilot so that the
Exchange and the SEC could evaluate the capital utilization and near
neighbor programs concurrently. See Securities Exchange Act Release
No. 35926 (June 30, 1995), 60 FR 35760 (July 11, 1995) (extending
pilot through September 10, 1996). The SEC approved the near
neighbor program on a pilot basis in Securities Exchange Act Release
No. 35927 (June 30, 1995), 60 FR 35927 (July 11, 1995) (pilot
approved through September 10, 1996).
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in Sections A, B, and C below, of the
most significant aspects of such statements.
The Exchange requests the Commission to find good cause, pursuant
to Section 19(b)(2) of the Act, for approving the proposed rule change,
and Amendment No. 1 thereto, prior to the thirtieth day after
publication in the Federal Register.\3\
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\3\ See Amendment No. 1, supra note 1.
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A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange currently uses several programs to measure specialist
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performance including specialist capital utilization and the near
neighbor approach, which compares a stock's performance with stocks
with similar characteristics. These measures are currently utilized on
a pilot program basis in Allocation Committee deliberations.\4\ The
pilot programs are scheduled to expire on September 10, 1996.
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\4\ The Exchange's Allocation Policy and Procedures
(``Allocation Policy'') governs 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. The Allocation Policy
emphasizes that the most significant allocation criterion is
specialist performance. In this regard, the Allocation Policy states
that the Allocation Committee will base its allocation decisions on
the Specialist Performance Evaluation Questionnaire (``SPEQ''),
objective performance measures, and the Committee's expert
professional judgment. See Securities Exchange Act Release No. 34906
(October 27, 1994), 59 FR 55142 (November 3, 1994) (order approving
revisions to the NYSE's Allocation Policy).
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The capital utilization measure of performance focuses on a
specialist unit's use of its own capital in relation to the total
dollar value of trading activity in the unit's stocks.\5\ The near
neighbor approach compares certain performance measures of a given
stock (price continuity, depth, quotation spread and capital
utilization) to those of its ``near neighbors'', i.e., stocks that have
certain similar characteristics. The stock is then categorized as
either ``below mean'', ``mean'', or ``above mean'' as compared to its
near neighbors for a given performance measure.\6\ These measures are
presented to the Allocation Committee in summary form for each unit
applying for a new listing and are a factor in allocating newly-listed
stocks.
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\5\ For a comprehensive description of the capital utilization
measure of specialist performance, see Securities Exchange Act
Release No. 35927, supra note 2.
\6\ For a comprehensive description of the near neighbor
measure, see Securities Exchange Act Release No. 35927, supra note
2.
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The Exchange believes the capital utilization and near neighbor
programs provide useful objective measures of specialist performance,
and is therefore proposing that the pilot programs be extended for an
additional four months, through January 10, 1997. During this time, the
Exchange expects to seek permanent approval of these programs from its
Board of Directors, and to subsequently file such requests with the
Commission.\7\
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\7\ See Amendment No. 1, supra note 1.
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2. Statutory Basis
The basis under the Act for the proposed rule change is the
requirement under Section 6(b)(5) \8\ that an Exchange have rules that
are 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 Exchange believes that the proposed rule change is consistent with
these requirements in that continuing to develop objective measures of
specialist performance would help perfect the mechanism of a free and
open market.
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\8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying at the
Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filing will also be available
for inspection and copying at the principal office of the Exchange. All
submissions should refer to File No. SR-NYSE-96-17 and should be
submitted by [insert date 21 days from date of publication].
IV. 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)(5) of the Act.
Section 6(b)(5) requires 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 is
consistent with Section 11(b) of the Act \9\ and Rule 11b-1
thereunder,\10\ which allow exchanges to promulgate rules relating to
specialists to ensure fair and orderly markets. For the reasons set
forth below, the Commission continues to believe that the consideration
of specialist capital utilization and near neighbor analysis by the
Allocation Committee should enhance the Exchange's allocation process
and encourage improved specialist performance, consistent with the
protection of investors and the public interest.
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\9\ 15 U.S.C. 78k(b).
\10\ 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 specialists by the Exchange, and by the Act and rules
thereunder, is the maintenance of fair and orderly markets in
designated securities.\11\ To ensure that specialists fulfill these
obligations, it is important that the Exchange develop objective
measures of specialist performance and prescribe stock allocation
procedures and policies that encourage specialists to strive for
optimal performance. The Commission supports the NYSE's effort to
develop objective measures of specialist capital utilization and near
neighbor analysis for use in the allocation process to encourage
improved specialist performance and market quality.
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\11\ See, e.g., 17 CFR 240.11b-1, NYSE Rule 104.
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The Commission believes that extending the pilot period for these
two measures is appropriate because the Exchange indicates that it has
found these measures useful in providing the NYSE Allocation Committee
with objective measures of specialist performance. The NYSE's
Allocation Policy emphasizes that the most significant allocation
criterion is
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specialist performance.\12\ In the Commission's view, performance based
stock allocations not only help to ensure that stocks are allocated to
specialists who will make the best markets, but will provide an
incentive for specialists to improve their performance or maintain
superior performance.
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\12\ See, e.g., Securities Exchange Act Release No. 34906, supra
note 4.
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For these reasons and for the other reasons discussed in Securities
Exchange Act Release Nos. 33369 and 35927, the Commission has
determined to extend the pilot program for these measures through
January 10, 1997. The Commission believes that extending the pilot
period is appropriate because it will provide the Exchange and the
Commission with an opportunity to study further the effects of the use
of these measures on the NYSE's allocation process prior to the
Exchange's submission of a request for permanent approval of these
measures during the four month extension of the pilots. In addition,
extending the pilots will permit the measures to run concurrently with
the Rule 103A pilot.\13\ During the pilot period, the Commission
continues to expect the NYSE to monitor carefully the effects of the
near neighbor and capital utilization programs and report its findings
to the Commission in order to assist the Commission in considering
approval of the pilots on a permanent basis. Specifically, the
Commission requests that the Exchange should, for the three month
period between April 1, 1996 to June 30, 1996, submit a report that
identifies the specialist units, the securities for which they applied,
the stocks that were allocated to them, and the specialist units' SPEQ
rating as presented to the Allocation Committee.\14\ In the report, the
Exchange should identify allocations that were made to specialists
units with relatively poor tier ratings in the objective measures and
discuss the reasons the Allocation Committee made such allocations.\15\
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\13\ In Securities Exchange Act Release No. 37667 (September 11,
1996) (File No. SR-NYSE-96-22), the Commission approved an extension
of the NYSE Rule 103A pilot program until January 10, 1997.
\14\ The Commission believes that this information will allow it
to evaluate the extent to which the Allocation Committee's decisions
appear consistent with the relative performance of specialist units
according to the objective measures. In this regard, however, the
Commission recognizes that the Allocation Committee also considers
the SPEQ results and may use its professional judgment in making
allocation decisions. See supra note 4.
\15\ The Exchange may submit one report for both the near
neighbor and capital utilization pilots. This report should be
submitted to the Commission no later than November 15, 1996, along
with any Exchange request for permanent approval of the pilot
programs.
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The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
notice of filing thereof in the Federal Register. The Commission
believes that accelerated approval of the proposal is appropriate
because it will enable the Exchange to continue to make use of the
capital utilization and near neighbor measures of specialist
performance on an uninterrupted basis and will ensure continuity and
consistency in the stock allocation deliberation process prior to the
Exchange's submission to the Commission of a request for permanent
approval of these programs. Further, the initial proposals to adopt
both the capital utilization pilot and near neighbor pilot were noticed
previously in the Federal Register for the full statutory period and
the Commission did not receive any comments on these proposals.\16\
Accordingly, the Commission believes good cause exists pursuant to
Section 19(b) of the Act to grant accelerated approval of the pilots'
extensions.
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\16\ See Securities Exchange Act Release Nos. 33369 and 35927,
supra note 2.
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) \17\ that the
proposed rule change (File No. SR-NYSE-96-17), and Amendment No. 1
thereto, is hereby approved on an accelerated basis, through January
10, 1997.
\17\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-23976 Filed 9-18-96; 8:45 am]
BILLING CODE 8010-01-M
