00-24129. Self-Regulatory Organizations; New York Stock Exchange, Inc.; Order Approving Proposed Rule Change Relating to Continued Listing Standards

September 13, 2000.

I. Introduction

On December 21, 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 to revise the Exchange's continued listing standards. On March 27, 2000, the Exchange submitted Amendment Nos. 1 and 2 to the proposed rule change.^[3] The proposed rule change was published for comment in the Federal Register on April 7, 2000.^[4] No comments were received on the proposal. This order approves the NYSE's proposal, as amended.

II. Description of The Proposal

The proposal would modify several of the Exchange's existing continued listing criteria.^[5] First, the Exchange proposes to define the term “market capitalization” in so far as it applies to the continued listing standards. Second, the Exchange proposes to clarify what is meant by “shareholders equity” in the context of partnerships. Third, the Exchange proposes to specify a set of circumstances in which it will exercise some discretion in determining the listing status of a company that has filed or has announced an intent to file for bankruptcy, and that is below the financial continued listing standards specified in Para. 802.01B of the Listed Company Manual.

(A) Market Capitalization Definition

The proposal specifies that for purposes of its continued listing standards, the term “market capitalization” will encompass all common stock outstanding, whether publicly traded or not, so long as the Exchange is able to accurately attribute a value to it ^[6] on the day the market capitalization is calculated. Thus, if such a security is publicly traded common stock, the closing price from the previous trading day will be the price used for purposes of the calculation.

In addition, the proposal would permit the Exchange to provide its staff with the discretion to evaluate the capital structure of the issuer and include common stock that would be issued upon conversion of an instrument that constitutes the issuer's capital. Traditional debt, related to financing activities, will be excluded. Similar to the procedure discussed above, but for convertible publicly-traded securities other than common stock, the applicable price will be the closing price of the common stock into which it is convertible from the previous trading day.^[7]

Finally, if the issuer has outstanding privately-held securities, the calculation would be made as described above for convertible securities based upon the previous day's closing price of the publicly-traded security. Thus, a privately held Class B common stock convertible into the publicly-traded Class A would be valued at the price of the Class A. Likewise, a privately-held preferred Series A convertible into the publicly-traded Class A would be valued at the price of the Class A on an as-converted basis.

The proposal would also permit the Exchange to review any applicable conversion restrictions when conducting its market capitalization analysis and factor any such restrictions into the computations as appropriate.

(B) “Shareholders' Equity” and “Market Capitalization” of Partnerships

The proposal would enable the Exchange to evaluate the formation of the current capital structure of a partnership and, where appropriate, to include other publicly-traded securities in the calculation as a substantial equivalent to common stock. Furthermore, the proposal would amend the stockholders' equity test to clarify that both general and limited partners' capital is the measure for the applicable calculation. The Exchange believes that this clarification is necessary because the concept of “shareholders' equity” is not applicable to partnerships. Instead, the notion of capital captures the appropriate analogous concept with respect to partnerships.

The Exchange's intent in codifying the concept of analyzing the creation of the current capital structure stems primarily from the recent expiration of an IRS grandfather provision that resulted in numerous recapitalizations of partnerships. The Exchange believes it is not equitable to penalize these partnerships for restructuring in order to prevent, among other things, double taxation. Thus, for instance, if a holder of $50 of partnership units prior to the conversion were to receive $25 in partnership units and $25 in debt, the “market value” of the holdings has not changed and should be calculated at $50 for purposes of determining the continued listing status of the company. Consistent with the principles articulated above, the proposal would require that the non-equity instrument be publicly traded so as to assure the ability to value the instrument.

(C) Companies That Have Filed for Bankruptcy and That Are Below the Financial Continued Listing Criteria

The proposal would give the Exchange the authority to analyze the financial status of companies that have filed or that have announced an intent to file for bankruptcy, and that are also below the Exchange's financial continued listing criteria, on a case-by-case basis.^[8] However, if a company has previously filed an Exchange approved plan to meet the Exchange's continued listing standards within 18 months, application of this provision to the company does not restart the 18-month clock. Thus, for instance, a company that declares bankruptcy mid-stream through an Exchange-approved plan would still only have the remainder of the plan to come into compliance. It would not be afforded an additional 18 months, but would incorporate the projected effect of the bankruptcy into its Plan and resubmit it for consideration.

III. Discussion

The Commission finds that the proposal is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.^[9] Specifically, the Commission believes that the proposal is consistent with the requirements of Section 6(b)(5) of the Act ^[10] in that it clarifies certain maintenance criteria for listing on the NYSE. Listing standards serve as a means for a marketplace to screen issuers and to provide listed status only to bona fide companies with sufficient float, investor based, and trading interest to maintain fair and orderly markets. Once an issuer has been approved for initial listing, the maintenance criteria allow a marketplace to monitor the status of that issuer. Accordingly, the Commission believes that by clarifying the NYSE's continued listing standards, the proposal should prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, remove impediments to, and perfect the mechanism of a free and open market and, in general, to protect investors and the public interest.^[11]

First, the proposal would elucidate the term “market capitalization” as used in the Listed Company Manual. The proposal would explain that market capitalization encompasses all common stock outstanding, whether publicly traded or not, so long as the exchange is able to accurately attribute a value to it on the day the market capitalization is calculated. In addition, the proposal would give Exchange staff the discretion to evaluate the capital structure of an issuer and include common stock that would be issued upon conversion of an instrument that constitutes the issuer's capital, excluding traditional debt related to financing activities. Outstanding privately-held securities also would be considered in the market capitalization computation. Finally, the proposal would allow the Exchange to review any applicable conversion restrictions when conducting its market capitalization analysis and factor any such restrictions into the computations as appropriate. The Commission finds that the proposed clarifications and the additional discretion given to the Exchange's staff to evaluate a company's financial status are reasonable. Specifically, the Commission believes that such changes to the Exchange's existing rules are not inappropriate measures for determining a company's market capitalization and should aid the Exchange by producing a more accurate determination of a company's market capitalization.

Second, the proposal would enable the Exchange to evaluate the formation of the current capital structure of a partnership and, where appropriate, include other publicly-traded securities in the calculation as a substantial equivalent to common stock. The proposal would also amend the stockholders' equity test to clarify that both general and limited partners' capital is the measure for the applicable calculation. Given the unique nature of a partnership, the Commission finds that the proposed clarifications explaining which measures should be used to evaluate a partnership's financial status are reasonable.

Finally, the proposal would give the Exchange the authority to analyze the financial status of companies that have filed or that have announced an intent to file for bankruptcy, and that are also below the Exchange's financial continued listing citeria, on a case-by-case basis. However, if a company has previously filed an Exchange-approved plan to meet the Exchange's continued listing standards within 18 months, application of this provision to the company does not restart the 18-month clock. The Commission believes that certain flexibility in applying continued listing standards may occasionally be necessary when establishing procedures to uphold the quality of the market. Accordingly, the Commission believes it is reasonable to provide the Exchange with the discretion to evaluate a company's status to prevent premature, automatic delisting of a company otherwise qualified for continued listing. The Commission also believes that it is appropriate that a company that has previously submitted a plan to come into compliance with the Exchange's continued listing criteria not be extended additional time to come into compliance by filing or declaring an intent to file for bankruptcy. The Commission believes that this strikes a reasonable balance between providing companies an opportunity to cure any deficiencies and continue to list on the Exchange and protecting investors and the public interest by not continuing to list companies that cannot meet the Exchange's continued listing criteria during the initial 18 month period.

IV. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the Act,^[12] that the proposed rule change (SR-NYSE-99-50), as amended, is approved.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[13]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  In Amendment No. 1, the NYSE made several clarifications to the intent and proposed interpretation of the proposed rule change. The Exchange expanded its discussion regarding the use of convertible securities in calculating the market capitalization of an issuer, and provided several examples of the proposed rule's application. The Exchange also explained the IRS-related basis for the proposed changes to the calculation of market capitalization for partnerships. Finally, the Exchange clarified that the proposed change to the bankruptcy provision would not restart the eighteen-month clock for an Exchange-approved plan. See Letter to Belinda Blaine, Associate Director, Division of Market Regulation (“Division”), SEC, from James E. Buck, Senior Vice President and Secretary, NYSE, dated March 21, 2000 (“Amendment No. 1”). In Amendment No. 2, the Exchange made several technical changes to the rule text which were reflected in the notice. See Letter to Belinda Blaine, Associate Director, Division, SEC, from James E. Buck, Senior Vice President and Secretary, NYSE, dated March 24, 2000 (“Amendment No. 2”).

4.  Securities Exchange Act Release No. 42579 (March 27, 2000), 65 FR 18412.

5.  The Exchange recently revised its continued listing standards, and to this point several issues have come to light that necessitate clarification. See Securities Exchange Act Release No. 42194 (December 1, 1999), 64 FR 69311 (December 10, 1999).

6.  For example, a privately-held Class B common stock convertible into the listed Class A common stock would be included and valued on an as-converted basis.

7.  For example, if a convertible preferred security trades at $15 and the common stock into which it is convertible trades at $10, the price utilized would be the closing price of the common stock on the previous day (not the higher price of the preferred security) and the market capitalization would be computed on an as-converted basis.

8.  The Exchange represents that there are instances where companies meeting these criteria should be afforded the opportunity to submit a financial plan for evaluation. For instance, a company that is profitable (or that has a positive cash flow), or is demonstrably in sound financial health despite the bankruptcy proceedings, should not be delisted if it can demonstrate that, within 18 months, it will be in compliance with the Exchange's financial criteria.

9.  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).

10.  15 U.S.C. 78f(b)(5).

11.  Id.

12.  15 U.S.C. 78s(b)(2).

13.  17 CFR 200.30-3(a)(12).