[Federal Register Volume 65, Number 91 (Wednesday, May 10, 2000)]
[Notices]
[Pages 30171-30175]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-11609]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42746; File No. SR-NYSE-99-34]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change and Amendment No. 1 
Thereto Relating to the Exchange's Allocation Policy and Procedures

May 2, 2000.

I. Introduction

    On July 20, 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 amending the Exchange's 
Allocation Policy and Procedures (``Policy''). On February 7, 2000, the 
Exchange submitted Amendment No. 1 to the proposed rule change.\3\ The 
proposed rule change, as amended, was published for comment in the 
Federal Register on March 9, 2000.\4\ This order approves the NYSE 
proposal, as amended.
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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 Terri Evans, Attorney, Division of Market 
Regulation (``Division''), Commission, dated February 4, 2000 
(``Amendment No. 1'').
    \4\ Securities Exchange Act Release No. 42487 (March. 2, 2000), 
65 FR 12603.
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II. Description of the Proposal

    According to the Exchange, its Policy is intended to: (1) Ensure 
that the allocation process for securities is based on fairness and 
consistency and that all specialist units have a fair opportunity for 
allocations based on established criteria and procedures; (2) provide 
an incentive for ongoing enhancement of performance by specialist 
units; (3) provide the best possible match between a specialist unit 
and security; and (4) contribute to the strength of the specialist 
system.
    Since 1987, the Exchange's Quality of Markets Committee has 
appointed a number of Allocation Review Committees (``ARCs'') to review 
the

[[Page 30172]]

Policy and make recommendations with respect to changes.\5\ In February 
1999, the Quality of Markets Committee again appointed an ARC, ARC V, 
to review the Policy and make recommendations with respect to 
improvements in the allocation process. Those recommendations, which 
the Exchange is proposing as changes to the Policy, are discussed 
below.
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    \5\ See Securities Exchange Act Release No. 38372 (March 7, 
1997), 62 FR 13421 (March 20, 1997) (containing recommendations made 
by ARCs I through IV).
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A. Composition of Allocation Committee

    Currently, the Allocation Committee is composed of nine members, 
consisting of seven floor brokers (including (1) three broker Governors 
(one of whom may be an independent/two dollar broker) and (2) four 
other floor brokers from the Allocation Panel) (``Panel'') (one of whom 
must be an independent/two dollar broker)) and two allied members from 
the Market Performance Committee or the Panel. The Allocation Committee 
presently does not have representation from institutional investor 
organizations. The proposal would add one institutional investor 
representative member to the Allocation Committee, drawn from the Panel 
or from the institutional investor members of the Market Performance 
Committee. The Exchange does not believe that it is necessary to expand 
the size of the Allocation Committee. Therefore, the Exchange proposes 
to decrease the number of floor brokers on the Committee from seven to 
six by decreasing the number of other floor brokers from the Panel to 
three (one of whom must be an independent/two dollar broker).

B. Composition of Allocation Panel

    According to the NYSE, the Panel is the resource from which the 
Allocation Committee is assembled. A Panel is appointed by the 
Exchange's Quality of Markets Committee from individuals nominated by 
the Exchange's membership. The Panel consists of 28 floor brokers; 
twelve allied members (including the four allied members serving on the 
Market Performance Committee); eight floor broker Governors, who are 
part of the Panel by virtue of their appointment as Governors; and a 
minimum of five Senior Floor Official brokers.
    The Exchange proposes three changes to the composition of the 
Panel. First, the Exchange proposes to expand the Panel to add nine 
institutional investor organization representatives, including the five 
serving on the Market Performance Committee, to be consistent with the 
proposal to add institutional investor representatives to the 
Allocation Committee. Representatives from institutional investor 
organizations would be chosen in the same manner as other Panel 
members, (i.e., through nominations from the membership and appointment 
by the Quality Markets Committee). Second, the Exchange is proposing to 
increase the number of floor broker Governors on the Panel from eight 
to ten to reflect the increased number of floor Governors appointed 
under Exchange Rule 46.\6\ Finally, at the time the number of floor 
Governors was increased, the number of allied member representatives on 
the Market Performance Committee was increased from four to five. 
Therefore, the Exchange proposes to amend the composition of the Panel 
to reflect this increase.
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    \6\ The floor broker Governors are automatically members of the 
Market Performance Committee and the Panel.
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    Under these proposed revisions to the Policy, the new composition 
of the Panel would be 28 floor brokers; 13 allied members (including 
the five allied members serving on the Market Performance Committee); 
nine institutional members (including the five representatives of 
institutional investor organizations serving on the Market Performance 
Committee); then floor broker Governors, who are part of the Panel by 
virtue of their appointment as Governors; and a minimum of five Senior 
Floor Official brokers.

C. Allocation Committee Quorum Requirement

    The proposal would not alter the Allocation Committee's existing 
quorum requirement that there be at least six floor brokers, at least 
two of whom are Governors, and one allied member. According to the 
Exchange, the presence of the instutional representative would not be 
required for a quorum because, at times, it may be difficult to obtain 
the participation of a representative of an institutional investor 
organization.

D. Contact Between Listing Companies and Specialist Units

    Under the Policy, specialist units or any individual acting on 
their behalf are prohibited from having any contact with a company that 
has applied for listing from the date applications (known as ``green 
sheets'') are solicited from specialists for the purpose of allocating 
the stock to a specialist organization. The Exchange proposes to change 
this non-contact period to the earlier of the date written notice is 
given that the listing company filed its listing application with the 
Exchange or the date allocation applications are solicited, (i.e., the 
date the ``green sheet'' is posted). The Exchange presently publishes 
this notice of listing applications in its Weekly Bulletin. This 
proposal would move the start of the period as to when contact is 
prohibited to an earlier date in those cases where the ``green sheet'' 
is issued after the Weekly Bulletin notice of an application to list 
has been published.

E. Listing Company Request for Additional Specialist Information 
Following Interviews

    The Policy currently permits a listing company to pick its 
specialist unit after interviewing a pool of three, four, or five units 
selected by the Allocation Committee. Furthermore, any follow-up 
questions conveyed to the Exchange from a listing company regarding 
specialist unit(s) it interviewed are restricted to questions regarding 
publicly-available information. The Exchange must approve the request 
and all units in the group of units interviewed must be notified by the 
Exchange of the request.
    The NYSE proposes that if a listing company has a follow-up 
question for any specialist unit(s) it interviewed, it must be conveyed 
to the Exchange. The Exchange would contact the unit(s) to which the 
question pertains and would provide any information received from the 
unit(s) to the listing company. The NYSE further proposes to eliminate 
the requirement that only publicly-available information be provided 
and the language requiring Exchange approval, as well as the 
requirement that the Exchange notify the other units interviewed of the 
company's request.

F. Common Stock Listing After Preferred

    Currently, the Policy does not address the situation involving a 
common stock being listed after its preferred stock has been allocated. 
Accordingly, the Exchange is proposing that the allocation of the 
common stock of a company listing after its preferred stock has been 
listed would be open to all specialist units. Under the terms of the 
proposal, the company may select Option 1 (in which the Allocation 
Committee selects the specialist unit to be allocated the company's 
stock) or Option 2 (in which the company selects a specialist unit from 
among a group of units chosen by the Allcoation Committee). If Option 2 
is selected, the specialist unit that trades the preferred stock must 
be included in the group of units comprising the interview pool. The 
company would not be able to

[[Page 30173]]

select the specialist unit trading the preferred stock without going 
through the allocation process.

G. Listed Company Mergers

    Currently, when two listed companies merge, the merged entity is 
assigned to the specialist in the company that is determined to be the 
survivor-in-fact. Where no surviving entity can be identified, the 
matter is referred to the Allocation Committee and all specialists are 
invited to apply. The merged company may request either Option 1 or 
Option 2, with no provisions to include or exclude any unit from 
consideration by the Allocation Committee. The Exchange notes that 
there is no provision for the merged company to select a unit that 
trades one of the listed companies, which is merging, without going 
through the allocation interview process.
    The Exchange is proposing several changes to the Policy relating to 
listed company mergers. The Exchange is proposing that in cases where 
no surviving entity can be identified, the listing company would be 
permitted to select one of the units trading the merging companies 
without going through the allocation process. If the listing company 
determines to go to allocation, it may select Option 1 or Option 2. 
Under Option 1, the company would not be able to request that the 
Allocation Committee not allocate the stock to one of the units trading 
the merging companies. If the company chooses Option 2, the interview 
pool would consist of the specialist units of the merging companies and 
must include additional units. The number of additional units must be 
consistent with the Policy requirement that each pool consists of three 
to five units. Under Option 2, the company would not be permitted to 
request that any of the units trading the merging companies be excluded 
from the interview pool.

H. Listed/Unlisted Company Mergers

    Currently, if the unlisted company is the survivor-in-fact, the 
company may choose to remain registered with the unit that traded the 
listed company involved in the merger or may request that the matter be 
referred to allocation, with applications invited from all units. The 
company may request that the unit trading the listed company not be 
allocated the stock (and, as a result, not be included in the pool of 
units under Option 2) and the Allocation Committee must honor that 
request.
    The Exchange is proposing to conform this Policy to the proposed 
Policy involving listed company mergers with no survivor-in-fact. 
Therefore, the Policy would be amended to preclude the unlisted company 
from excluding from consideration by the Allocation Committee the 
specialist unit that trades the listed company. Further, the Policy 
would require that if the unlisted company chooses Option 2, the unit 
trading the listed company must be included in the allocation pool.

I. Issuance of Tracking (``Target'') Stock

    These securities (also known as ``letter stock'') typically are 
``targeted'' to a specific aspect of an issuer's overall business. 
There are two instances in which ``target'' stocks are being listed. 
The first involves situations in which the ``target'' stock is being 
``uncoupled'' from the listed company, and itself listing on the 
Exchange. Under the current Policy, when such a security is 
``uncoupled'' and becomes an independent listing, it remains with the 
specialist registered in the stock prior to its separate listing 
(``original stock''), unless the listing company requests that the new 
stock be referred to the Allocation Committee. The second type of 
``target'' stock involves a listed company issuing a ``target'' stock 
to track a separate business line. In these instances, the issue is 
assigned by Exchange staff to the specialist in the listed company 
issuing the ``target'' stock. As a result, the new listing company (the 
``target'' stock) has no input in the allocation decision. As a result, 
the Exchange proposes to amend the Policy to conform to the spin off/
related company policy.
    Target stocks, whether the target stock itself is joining the 
Exchange as a separate listing (e.g., Con Edison Inc. issuing distinct 
securities in Con Edison of New York) or where the target stock 
represents a tracking of a business line of the current listed company 
(e.g., GM and GMH), will be treated in the same manner as spin-offs and 
listing of related companies. According to the exchange, the Policy 
allows the listed/listing company to choose to stay with the specialist 
unit registered in the related listed company or be referred to the 
Allocation Committee. In the latter case, the company may request not 
to be allocated to the parent's specialist and the Allocation Committee 
will honor such request. Alternatively, the company may request the 
exclusion or inclusion of the parent's specialist in the allocation 
pool under Option 2.

J. Allocation Sunset Policy

    When the Exchange allocates a company that is listing its shares 
from its initial public offering, that allocation decision remains 
effective for three months. If the company does not list within that 
time, the matter is referred again to the Allocation Committee. 
However, the Exchange is proposing to amend the Policy to permit a 
listing company to choose whether to stay with the merged specialist 
unit, or be referred to allocation if the selected specialist unit 
mergers or is involved in a combination within the three-month period.

K. Listing Company Attendees at Specialist Interviews

    The current Policy requires that a senior official of the listing 
company of the rank of Corporate Secretary or above be present at the 
interviews with specialists under Option 2. In the case of structured 
products' listings,\7\ the corporate makeup contemplated by the 
existing requirement often does not exist. The Exchange proposes to 
amend the Policy to clarify that any senior officer \8\ of the issuer 
may be present at the interview to satisfy the requirement.
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    \7\ A structured product is a security, which is based on the 
value of another security.
    \8\ The structured product company would designate which of its 
officers is a senior officer.
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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\ 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. 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 t promulgate rules relating to specialists to ensure fair and 
orderly markets.
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    \9\ In approving this rule, the Commission has considered its 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ 15 U.S.C. 78k(b).
    \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

[[Page 30174]]

allocation procedures and policies that provide specialists 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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A. Composition of Allocation Committee

    The Exchange first proposes to add one institutional investor 
representative member to the Allocation Committee drawn from the Panel 
or from the institutional investor members of the Market Performance 
Committee. In conjunction with this proposed change, the Exchange 
proposes to decrease the number of floor brokers on the Allocation 
Committee from seven to six by decreasing the number of other floor 
brokers from the Panel to three. The Commission believes that 
institutional investors are significant participants in the securities 
markets, including the Exchange and, therefore, that such 
representation enhances the expertise and objectivity of the allocation 
process. The Commission further believes that it is reasonable for the 
Exchange to determine not to increase the size of the Allocation 
Committee with the addition of an institutional investor.

B. Composition of Allocation Panel

    The Exchange also proposes three changes to the composition of the 
Panel. First, in order to be consistent with the proposal to add 
institutional investor representatives to the Allocation Committee, the 
Exchange proposes to expand the Panel to add nine institutional 
investor organization representatives, including the five serving on 
the Market Performance Committee. Second, the Exchange proposes to 
increase the number of floor broker Governors on the Panel from eight 
to ten to reflect the increased number of floor Governors appointed 
under Exchange Rule 46. Third, the Exchange proposes to amend the 
composition of the Panel to reflect the increase in the number of 
allied member representatives on the Market Performance Committee from 
four to five. The Commission believes that these changes to the 
composition of the Panel are reasonable and consistent with the Act, 
and merely reflect the proposed inclusion of institutional investor 
representatives in the allocation process or incorporate prior changes 
made by the Exchange.

C. Quorum

    The Exchange believes that it may be difficult at times to obtain 
the participation of an institutional investor representative and 
therefore has decided not to change the Allocation Committee's existing 
quorum requirement. The Commission recognizes that while institutional 
investor participation may be preferred, it may be difficult to have 
such participation at all times without delaying the allocation 
process. Therefore, the Commission believes that it is reasonable not 
to change the quorum requirement to reflect the addition of 
institutional investor representatives on the Allocation Committee.

D. Contact Between Listing Companies and Specialist Units

    The proposal also changes the non-contact period between listing 
companies and specialist units to the earlier of the date written 
notice is given that the listing company filed its listing application 
with the Exchange or the date allocation applications are solicited. 
The Commission believes that once the listing process has begun, the 
Exchange may want to limit contacts between specialists and the listing 
company to avoid the appearance of impropriety and, therefore, it is 
appropriate to extend the limitation on contact to reflect the earliest 
notification to the specialist units of the company's intent to apply.

E. Requests for Additional Specialist Information

    The proposal further amends the Policy with respect to requests by 
a listing company for additional specialist information following 
interviews. Specifically, the proposal provides that if a listing 
company has a follow-up question for any specialist unit(s) it 
interviewed, it must be conveyed to the Exchange, which would then 
contact the unit(s) to which the question pertains and provide any 
information received from the unit(s) to the listing company. The 
proposal also eliminates the requirement that only publicly-available 
information be provided and the language requiring Exchange approval, 
as well as the requirement that the Exchange notify other units of the 
company's request.
    The Commission believes that these changes should allow listing 
companies greater latitude in obtaining information from specialist, as 
well as reduce the burden on both the listing company and prospective 
specialist units. For example, in some cases, the listing company may 
have received information during the interview from one specialist and 
desires to obtain similar information about the other specialists to 
better compare the specialists. In other cases, the listing company may 
only be interested in one or more of the specialists in the pool and 
consequently, only desire information on those specific specialists. 
Therefore, the proposed changes should reduce the burden on listing 
companies because the companies would only have to review responses 
from selected specialist. In addition, it should also reduce the burden 
on specialists to provide information that the listing company may not 
be interested in receiving from that particular specialist.

F. Common Stock Listing After Preferred

    With respect to situations where a common stock is to be listed 
after its preferred stock has been allocated, the proposal provides 
that the allocation of the common stock would be open to all units. As 
a result, a company would not be able to select the specialist unit 
trading the preferred stock without going through the allocation 
process. The Commission notes that because of the potential greater 
volume associated with trading a common stock listing, a listing 
company may have different criteria for selecting a specialist for its 
common stock. Therefore, the Commission believes that the proposed 
change would ensure that all special units would be allowed to compete 
for the common stock listing on an equal basis and is, accordingly, 
appropriate.

G. Listed Company Mergers

    With respect to listed company mergers, the proposal provides for 
several changes. First, where no surviving entity of a merger can be 
identified, the listing company would be allowed to select one of the 
units trading the merging companies without going through the 
allocation interview process. The Commission believes that this would 
make the allocation process more efficient and less time-consuming for 
the listing company in those instances in which the company ultimately 
may have decided that it would select one of the units trading the 
merging companies.
    Under the proposal, a listing company may also request that the 
listing go to the Allocation Committee under Option 1 or Option 2. 
Under Option 1, the company would not be able to request that the 
Allocation Committee not allocate the stock to one of the units trading 
the merging companies. If the company chooses Option 2, the interview 
pool would consist of the specialist units of the merging companies and 
must include additional units. Under Option 2, the company would not be 
permitted to request that any of the units trading the merging 
companies be excluded from the interview pool. The Commission believes 
that this approach strikes an appropriate balance between the

[[Page 30175]]

interests of specialist units, who have developed a relationship and a 
history of market-making performance with a listed company, and the 
interests of listed companies in choosing the most appropriate unit to 
be their specialist. The Commission also believes that this proposal 
provides the current specialist(s) with a reasonable opportunity to 
present their case to the merged company's new management without, of 
course, any guarantee of receiving the allocation. Accordingly, the 
Commission believes that the proposed changes would assist in providing 
the opportunity for input and choice on the part of the listing 
company, and as such, are appropriate and consistent with the Act.

H. Listed/Unlisted Company Mergers

    The Exchange's proposal under Options 1 and 2 to preclude a company 
resulting from a merger between a listed company and an unlisted 
company from excluding from consideration by the Allocation Committee 
the specialist unit that trades the listed company is appropriate 
because it ensures that all specialist units would be allowed to 
compete to the allocation on an equal basis.

I. Issuance of Tracking Stock

    The Commission notes that the Exchange is conforming its treatment 
of target stocks to its treatment of spin-offs and the listing of 
related companies. In this situation, the Commission believes that this 
is appropriate since target stocks may have a similar relationship with 
the parent's specialist. If the patent company is unsatisfied with the 
specialist's performance to date, the Commission believes it is 
unnecessary to include this unit in the pool if the company so 
requests. In the same vein, if the parent company is satisfied with the 
specialist's performance but wishes to avail itself of the opportunity 
to interview other units, the company should have the option of 
including such specialist in the interview pool along with other 
specialists selected by the Allocation Committee. Finally, it is 
important to bear in mind that senior management of the subject 
companies is often the same as that of the parent (or there is 
substantial overlap), and, therefore, the choice of a specialist would 
be influenced by an assessment of the current relationship and market-
making performance.

J. Allocation Sunset Policy

    With respect to the Exchange's three-month allocation sunset 
policy, the Commission believes that in a situation where the selected 
specialist unit merges or is involved in a combination within the 
three-month period, the proposal to permit the listing company to 
choose whether to stay with the merged specialist unit or be referred 
to allocation, is appropriate. In this regard, the Commission 
recognizes that the listing company should have an ability to 
reconsider its choice given the changed circumstances.

K. Listing Company Attendees at Specialist Interviews

    Finally, with respect to the current Policy, whereby a senior 
official of the listing company of the rank of Corporate Secretary or 
above must be present at interviews with specialist units under Option 
2, the Commission believes that the proposal to accommodate the listing 
of a structured product company by clarifying that any officer 
designated as senior by the company may be allowed to satisfy the 
requirement is appropriate, as the corporate makeup of such a company 
does not always exist in a manner contemplated by the current Policy.
    In summary, the Commission believes that the Exchange's Policy can 
serve as an effective incentive for specialist units to maintain high 
levels of performance and market quality to be considered for, and 
ultimately awarded, additional listings. This in turn may benefit the 
execution of public orders and promote competition among specialist 
units.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-NYSE-99-34), as amended, is 
approved.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-11609 Filed 5-9-00; 8:45 am]
BILLING CODE 8010-01-M