[Federal Register Volume 76, Number 155 (Thursday, August 11, 2011)]
[Proposed Rules]
[Pages 49698-49706]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-20445]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 76 , No. 155 / Thursday, August 11, 2011 / 
Proposed Rules

[[Page 49698]]



SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 230

[Release No. 33-9251; File No. S7-31-11]
RIN 3235-AL20


Covered Securities Pursuant to Section 18 of the Securities Act 
of 1933

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or 
``Commission'') proposes for comment an amendment to Rule 146 under 
Section 18 of the Securities Act of 1933 (``Securities Act''), as 
amended, to designate certain securities on BATS Exchange, Inc. 
(``BATS'' or ``Exchange'') as covered securities for purposes of 
Section 18 of the Securities Act. Covered securities under Section 18 
of the Securities Act are exempt from state law registration 
requirements.

DATES: Comments should be received on or before September 12, 2011.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
    <bullet> Send an e-mail to <a href="/cdn-cgi/l/email-protection#245651484109474b4949414a5057645741470a434b52"><span class="__cf_email__" data-cfemail="0b797e676e26686466666e657f784b786e68256c647d">[email protected]</span></a>. Please include 
File Number S7-31-11 on the subject line.
    <bullet> Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

    <bullet> Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-31-11. This file number 
should be included on the subject line if e-mail is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's Internet Web site (http://www.sec.gov/rules/proposed.shtml). 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 website 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street, NE., Washington, DC 20549, on official business days between 
the hours of 10 a.m. and 3 p.m. Copies of the filing also will be 
available for inspection and copying at the principal office of the 
Exchange. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly.

FOR FURTHER INFORMATION CONTACT: David R. Dimitrious, Senior Special 
Counsel, (202) 551-5131, Ronesha Butler, Special Counsel, (202) 551-
5629 or Carl Tugberk, Special Counsel, (202) 551-6049, Division of 
Trading and Markets (``Division''), Commission, 100 F Street, NE., 
Washington, DC 20549-6628.

SUPPLEMENTARY INFORMATION:

I. Introduction

    In 1996, Congress amended Section 18 of the Securities Act to 
exempt from state registration requirements securities listed, or 
authorized for listing, on the New York Stock Exchange LLC (``NYSE''), 
the American Stock Exchange LLC (``Amex'') (now known as NYSE Amex 
LLC),\1\ or the National Market System of The NASDAQ Stock Market LLC 
(``Nasdaq/NGM'') \2\ (collectively, the ``Named Markets''), or any 
national securities exchange designated by the Commission to have 
substantially similar listing standards to those of the Named 
Markets.\3\ More specifically, Section 18(a) of the Securities Act 
provides that ``no law, rule, regulation, or order, or other 
administrative action of any State * * * requiring, or with respect to, 
registration or qualification of securities * * * shall directly or 
indirectly apply to a security that--(A) is a covered security.'' \4\ 
Covered securities are defined in Section 18(b)(1) of the Securities 
Act to include those securities listed, or authorized for listing, on 
the Named Markets, or securities listed, or authorized for listing, on 
a national securities exchange (or tier or segment thereof) that has 
listing standards that the Commission determines by rule are 
``substantially similar'' to those of the Named Markets (``Covered 
Securities'').\5\
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    \1\ On October 1, 2008, NYSE Euronext acquired The Amex 
Membership Corporation (``AMC'') pursuant to an Agreement and Plan 
of Merger, dated January 17, 2008 (the ``Merger''). In connection 
with the Merger, NYSE Amex's predecessor, the Amex, a subsidiary of 
AMC, became a subsidiary of NYSE Euronext called NYSE Alternext US 
LLC (``NYSE Alternext''). See Securities Exchange Act Release No. 
58673 (September 29, 2008), 73 FR 57707 (October 3, 2008) (SR-NYSE-
2008-60 and SR-Amex-2008-62) (approving the Merger). In 2009, the 
Exchange changed its name from NYSE Alternext to NYSE Amex LLC 
(``NYSE Amex''). See Securities Exchange Act Release No. 59575 
(March 13, 2009), 74 FR 11803 (March 19, 2009) (SR-NYSEALTR-2009-24) 
(approving the name change).
    \2\ As of July 1, 2006, the National Market System of The NASDAQ 
Stock Market LLC is known as the Nasdaq Global Market (``NGM''). See 
Securities Exchange Act Release Nos. 53799 (May 12, 2006), 71 FR 
29195 (May 19, 2006) and 54071 (June 29, 2006), 71 FR 38922 (July 
10, 2006).
    \3\ See National Securities Markets Improvement Act of 1996, 
Pub. L. 104-290, 110 Stat. 3416 (October 11, 1996).
    \4\ 15 U.S.C. 77r(a).
    \5\ 15 U.S.C. 77r(b)(1)(A) and (B). In addition, securities of 
the same issuer that are equal in seniority or senior to a security 
listed on a Named Market or national securities exchange designated 
by the Commission as having substantially similar listing standards 
to a Named Market are covered securities for purposes of Section 18 
of the Securities Act. 15 U.S.C. 77r(b)(1)(C).
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    Pursuant to Section 18(b)(1)(B) of the Securities Act, the 
Commission adopted Rule 146.\6\ Rule 146(b) lists those

[[Page 49699]]

national securities exchanges, or segments or tiers thereof, that the 
Commission has determined to have listing standards substantially 
similar to those of the Named Markets and thus securities listed on 
such exchanges are deemed Covered Securities.\7\ BATS has filed a 
proposed rule change for the listing of securities on BATS \8\ and has 
petitioned the Commission to amend Rule 146(b) to designate such 
securities as Covered Securities for the purpose of Section 18 of the 
Securities Act.\9\ If the Commission were to approve the proposed 
listing standards and make this determination, then securities listed 
on BATS would be exempt from state law registration requirements.\10\ 
Additionally, should the Commission approve BATS' proposed listing 
standards and the securities listed, or authorized for listing, on BATS 
were designated as Covered Securities under Rule 146(b)(1), then BATS' 
listing standards would be subject to Rule 146(b)(2) under the 
Securities Act. Rule 146(b)(2) conditions the designation of securities 
as Covered Securities under Rule 146(b)(1) on the identified exchange's 
listing standards continuing to be substantially similar to those of 
the Named Markets. Thus, under Rule 146(b)(2), the designation of 
certain securities as Covered Securities would be conditioned on BATS 
maintaining listing standards for its equity securities that are 
substantially similar to those of the Named Markets.
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    \6\ Securities Exchange Act Release No. 39542 (January 13, 
1998), 63 FR 3032 (January 21, 1998) (determining that the listing 
standards of the Chicago Board Options Exchange, Incorporated 
(``CBOE''), Tier 1 of the Pacific Exchange, Inc. (``PCX'') (now 
known as NYSE Arca, Inc.), and Tier 1 of the Philadelphia Stock 
Exchange, Inc. (``Phlx'') (now known as NASDAQ OMX PHLX LLC) were 
substantially similar to those of the Named Markets and that 
securities listed pursuant to those standards would be deemed 
Covered Securities for purposes of Section 18 of the Securities 
Act). In 2004, the Commission amended Rule 146(b) to designate 
options listed on the International Securities Exchange, Inc. 
(``ISE'') (now known as the International Securities Exchange, LLC) 
as Covered Securities for purposes of Section 18(b) of the 
Securities Act. See Securities Act Release No. 8442 (July 14, 2004), 
69 FR 43295 (July 20, 2004). In 2007, the Commission amended Rule 
146(b) to designate securities listed on the Nasdaq Capital Market 
(``NCM'') as Covered Securities for purposes of Section 18(b) of the 
Securities Act. See Securities Act Release No. 8791 (April 18, 
2007), 72 FR 20410 (April 24, 2007).
    \7\ 17 CFR 230.146(b).
    \8\ See Securities Exchange Act Release No. 64546 (May 25, 
2011), 76 FR 31660 (June 1, 2011) (proposing qualitative and 
quantitative listing requirements and standards for securities).
    \9\ See letter from Eric Swanson, Senior Vice President and 
General Counsel, BATS, to Elizabeth M. Murphy, Secretary, 
Commission, dated May 26, 2011 (File No. 4-632) (``BATS Petition'').
    \10\ 15 U.S.C. 77r.
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II. Background

    In 1998, the CBOE, PCX (now known as NYSE Arca, Inc.), Phlx,\11\ 
and the Chicago Stock Exchange, Inc. (``CHX'') petitioned the 
Commission to adopt a rule determining that specified portions of the 
exchanges' listing standards were substantially similar to the listing 
standards of the Named Markets.\12\ In response to the petitions, and 
after extensive review of the petitioners' listing standards, the 
Commission adopted Rule 146(b), determining that the listing standards 
of the CBOE, Tier 1 of the PCX, and Tier 1 of the Phlx were 
substantially similar to those of the Named Markets and that securities 
listed pursuant to those standards would be deemed Covered 
Securities.\13\ In 2004, ISE petitioned the Commission to amend Rule 
146(b) to determine that its listing standards for securities listed on 
ISE are substantially similar to those of the Named Markets and, 
accordingly, that securities listed pursuant to such listing standards 
are Covered Securities for purposes of Section 18(b) of the Securities 
Act.\14\ The Commission subsequently amended Rule 146(b) to designate 
options listed on ISE as Covered Securities.\15\ In 2007, Nasdaq 
petitioned the Commission to amend Rule 146(b) to determine that 
listing standards for securities listed on the NCM are substantially 
similar to those of the Named Markets and, accordingly, that securities 
listed pursuant to such listing standards are Covered Securities.\16\ 
The Commission subsequently amended Rule 146(b) to designate securities 
listed on the NCM as Covered Securities.\17\
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    \11\ On July 24, 2008, The NASDAQ OMX Group, Inc. acquired Phlx 
and renamed it ``NASDAQ OMX PHLX LLC.'' See Securities Exchange Act 
Release Nos. 58179 (July 17, 2008), 73 FR 42874 (July 23, 2008) (SR-
Phlx-2008-31); and 58183 (July 17, 2008), 73 FR 42850 (July 23, 
2008) (SR-NASDAQ-2008-035). See also Securities Exchange Act Release 
No. 62783 (August 27, 2010), 75 FR 54204 (September 3, 2010) (SR-
Phlx-2010-104).
    \12\ See letter from David P. Semak, Vice President, Regulation, 
PCX, to Arthur Levitt, Jr., Chairman, Commission, dated November 15, 
1996; letter from Alger B. Chapman, Chairman, CBOE, to Jonathan G. 
Katz, Secretary, Commission, dated November 18, 1996; letter from J. 
Craig Long, Esq., Foley & Lardner, Counsel to CHX, to Jonathan G. 
Katz, Secretary, Commission, dated February 4, 1997; and letter from 
Michele R. Weisbaum, Vice President and Associate General Counsel, 
Phlx, to Jonathan G. Katz, Secretary, Commission, dated March 31, 
1997.
    \13\ Securities Exchange Act Release No. 39542, supra note 6. 
The Commission did not include Tier 1 of the CHX in Rule 146 because 
of ``concerns regarding the CHX's listing and maintenance 
procedures.'' Id. at 3032.
    \14\ See letter from Michael Simon, Senior Vice President and 
General Counsel, ISE, to Jonathan G. Katz, Secretary, Commission, 
dated October 9, 2003.
    \15\ Securities Act Release No. 8442 (July 14, 2004), 69 FR 
43295 (July 20, 2004).
    \16\ See letter from Edward S. Knight, Executive Vice President 
and General Counsel, Nasdaq, to Nancy M. Morris, Secretary, 
Commission, dated March 1, 2006 (File No. 4-513).
    \17\ See Securities Act Release No. 8791, supra note 6.
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    BATS has petitioned the Commission to amend Rule 146(b) and 
determine that its proposed listing standards for securities listed on 
BATS are substantially similar to those of the Named Markets, and that 
such securities are Covered Securities under Section 18(b) of the 
Securities Act.\18\
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    \18\ See BATS Petition, supra note 9.
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III. Discussion

    Under Section 18(b)(1)(B) of the Securities Act,\19\ the Commission 
has the authority to determine that the listing standards of an 
exchange, or tier or segment thereof, are substantially similar with 
those of the NYSE, NYSE Amex, or Nasdaq/NGM. The Commission initially 
has compared BATS' proposed listing standards for all securities with 
one of the Named Markets. If the proposed listing standards in a 
particular category were not substantially similar to the standards of 
that market, the Commission compared BATS' proposed standards to one of 
the other two markets.\20\ In addition, as it has done previously, the 
Commission has interpreted the ``substantially similar'' standard to 
require listing standards at least as comprehensive as those of the 
Named Markets.\21\ If a petitioner's listing standards are higher than 
the Named Markets, then the Commission may still determine that the 
petitioner's listing standards are substantially similar to those of 
the Named Markets.\22\ Finally, the Commission notes that differences 
in language or approach would not necessarily lead to a determination 
that the listing standards of the petitioner are not substantially 
similar to those of any Named Market.\23\
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    \19\ 15 U.S.C. 77r(b)(1)(B).
    \20\ This approach is consistent with the approach that the 
Commission has previously taken. See Securities Act Release No. 7494 
(January 13, 1998), 63 FR 3032 (January 21, 1998).
    \21\ See id.
    \22\ See Securities Act Release No. 8791, supra note 6.
    \23\ Id.
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    The Commission has reviewed proposed listing standards for 
securities to be listed and traded on BATS and, for the reasons 
discussed below, preliminarily believes that the proposed standards 
overall are substantially similar to those of a Named Market.\24\
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    \24\ See generally proposed BATS Chapter XIV; Securities 
Exchange Act Release No. 64546, supra note 8, 76 FR 31660. In making 
its preliminary determination of substantial similarity, as 
discussed in detail below, the Commission generally compared BATS' 
proposed qualitative listing standards for both Tier I and Tier II 
securities with Nasdaq/NGM's qualitative listing standards, BATS' 
proposed quantitative listing standards for Tier I securities with 
Nasdaq/NGM's quantitative listing standards, and BATS' proposed 
quantitative listing standards for Tier II securities with NYSE 
Amex's quantitative listing standards.
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A. Qualitative Listing Standards

    BATS' proposed qualitative listing standards for both the Tier I 
and Tier II securities are substantively identical to

[[Page 49700]]

the qualitative listing standards for Nasdaq/NGM securities.\25\ 
Therefore, the Commission preliminarily believes that BATS' qualitative 
listing standards for Tier I and Tier II securities are substantially 
similar to a Named Market.
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    \25\ Such qualitative listing standards relate to, among other 
things, the number of independent directors required, conflicts of 
interest, composition of the audit committee, executive 
compensation, shareholder meeting requirements, voting rights, 
quorum, code of conduct, proxies, shareholder approval of certain 
corporate actions, and the annual and interim reports requirements. 
Compare proposed BATS Rules 14.6 and 14.10 with Nasdaq Rule 5250 and 
Rule 5600 Series.
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    The Commission requests comment on whether BATS' proposed 
qualitative listing standards for Tier I and Tier II are 
``substantially similar'' to Nasdaq/NGM's listing standards.

B. Tier I Securities Quantitative Listing Standards

    The Commission believes that BATS' proposed initial and continued 
listing standards for its Tier I Securities are substantively identical 
to the initial and continued listing standards for securities listed on 
Nasdaq/NGM.\26\ Therefore, the Commission preliminarily believes that 
BATS' quantitative listing standards for Tier I Securities are 
substantially similar to a Named Market.
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    \26\ Compare proposed BATS Rules 14.4(a) and 14.8 with Nasdaq 
Rule 5225(a) and Nasdaq Rule 5400 Series (providing for identical 
rules concerning initial listing and maintenance standards for 
units, primary equity securities, preferred stock and secondary 
classes of common stock, rights, warrants and convertible debt on 
BATS and the Nasdaq/NGM).
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    The Commission requests comment on whether BATS' proposed Tier I 
Securities quantitative listing rules are ``substantially similar'' to 
Nasdaq/NGM's listing rules.

C. Tier II Securities Quantitative Listing Standards

1. Primary Equity Securities
    The Commission compared BATS' proposed listing standards for 
primary equity securities listed on Tier II of the Exchange to the 
listing standards of NYSE Amex.\27\ The Commission preliminarily 
believes that BATS' proposed initial listing standards for primary 
equity securities listed on Tier II of the Exchange are substantially 
similar to those of NYSE Amex's common stock listing standards.\28\ 
Specifically, BATS' proposed requirements relating to bid price,\29\ 
round lot holders,\30\ shares held by the public,\31\ and required 
number of registered and active market makers \32\ are substantially 
similar to NYSE Amex requirements. Additionally, BATS' proposed 
equity,\33\ market value,\34\ and net income \35\ standards are also 
substantially similar to NYSE Amex standards.
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    \27\ See generally Sections 101 and 102 of the NYSE Amex Company 
Guide and proposed BATS Rule 14.9.
    \28\ BATS' proposed use of ``primary equity securities'' and 
NYSE Amex's use of ``common stock'' is simply a difference in 
nomenclature, as BATS' proposed listing standards define ``primary 
equity security'' as a company's first class of common stock. See 
proposed BATS Rule 14.1(a)(21).
    \29\ BATS' proposed listing standards would require a minimum 
bid price of $4 per share for initial listing and $1 per share for 
continued listing while NYSE Amex requires a minimum bid price of 
$2-$3 per share depending on the issuer for initial listing and will 
consider delisting if the price per share is ``low.'' Compare 
proposed BATS Rule 14.9(b)(1)(A) with Section 102 of the NYSE Amex 
Company Guide. The Commission has interpreted the substantially 
similar standard to require listing standards at least as 
comprehensive as those of the Named Markets; the Commission may 
determine that a petitioner's standards are substantially similar if 
they are higher, and differences in language or approach of the 
listing standards are not dispositive. See supra notes 21-23 and 
accompanying text.
    \30\ While BATS' proposed listing standards would require at 
least 300 round lot holders, NYSE Amex's listing standards require 
400 or 800 public shareholders (depending upon the number of shares 
held by the public), or 300 or 600 public shareholders for its 
alternate listing standards. The Commission preliminarily does not 
believe this difference would preclude a determination of 
substantial similarity between the standards. Additionally, BATS' 
proposed listing standards are identical to the listing standards of 
NCM, which the Commission previously found to be substantially 
similar to a Named Market. See Securities Act Release 8791, supra 
note 6 (determining that NCM listing standards, which are identical 
to BATS' proposed listing standards for primary equity securities on 
Tier II of the Exchange, are substantially similar to these same 
Amex standards). With respect to NCM having alternative listing 
standards for the number of round lot holders, the Commission noted 
that this difference did not preclude a determination of substantial 
similarity between the standards. See Securities Act Release 8791, 
supra note 6, 72 FR at 20412; Securities Act Release No. 8754 
(November 22, 2006), 71 FR 67762 (November 22, 2006) (proposing that 
the Commission amend Rule 146(b) to designate securities listed on 
the NCM as covered securities for purposes of Section 18(b) of the 
Securities Act).
    \31\ BATS' proposed listing standards would require a minimum of 
1,000,000 publicly held shares while NYSE Amex requires a minimum of 
500,000. Compare proposed BATS Rule 14.9(b)(1)(B) with Section 
102(a) of the NYSE Amex Company Guide. The Commission has 
interpreted the substantially similar standard to require listing 
standards at least as comprehensive as those of the Named Markets; 
the Commission may determine that a petitioner's standards are 
substantially similar if they are higher, and differences in 
language or approach of the listing standards are not dispositive. 
See supra notes 21-23 and accompanying text.
    \32\ BATS' proposed listing requirements would require at least 
three registered and active market makers while NYSE Amex requires 
one specialist to be assigned. Compare proposed BATS Rule 
14.9(b)(1)(D) with Section 202(e) of the NYSE Amex Company Guide. 
The Commission may still determine that the petitioner's listing 
standards are substantially similar to those of the Named Markets if 
a petitioner's listing standards are higher than the Named Markets. 
See Securities Act Release No. 8791, supra note 6.
    \33\ BATS' proposed listing standard would require a company to 
have stockholder equity of at least $5 million, a market value of 
publicly held shares of at least $15 million, and a two-year 
operating history. See proposed BATS Rule 14.9(b)(2)(A). NYSE Amex 
requires stockholder equity of at least $4 million, a market value 
of publicly held shares of at least $15 million, and a two-year 
operating history.
    \34\ BATS' proposed listing standards would require a market 
value of listed securities of at least $50 million and a market 
value of publicly held shares of at least $15 million, which is the 
same as required by NYSE Amex. Compare proposed BATS Rule 
14.9(b)(2)(B) with Section 101(c)(2)-(3) of the NYSE Amex Company 
Guide.
    \35\ BATS' proposed listing standards would require net income 
from continuing operations of at least $750,000, which is the same 
as required by NYSE Amex. Compare proposed BATS Rule 14.9(b)(2)(C) 
with Section 101(d)(1) of the NYSE Amex Company Guide.
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    In addition to the above initial listing requirements, BATS would 
require that American Depositary Receipts (``ADRs'') comply with an 
additional criterion. Specifically, BATS would require there be at 
least 400,000 ADRs issued for such securities to be initially listed on 
BATS.\36\ However, NYSE Amex does not have specific requirements for 
ADRs in addition to its initial listing standards for primary equity 
securities.\37\ As noted above, the Commission may still determine that 
the petitioner's listing standards are similar to those of the Named 
Markets if BATS' proposed listing standards are higher than the Named 
Markets.\38\ The Commission preliminarily believes that BATS' proposed 
listing requirements for ADRs are substantially similar to those of 
NYSE Amex.
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    \36\ See proposed BATS Rule 14.9(b)(1)(E). This proposed 
requirement is identical to NCM. See Nasdaq Rule 5505(a)(5); see 
generally Securities Act Release 8791, supra note 6 (determining 
that NCM listing standards, which are identical to BATS' proposed 
standards for primary equity securities on Tier II of the Exchange, 
are substantially similar to the Amex standards).
    \37\ See Section 102 of the NYSE Amex Company Guide. See also 
Section 110 of the NYSE Amex Company Guide.
    \38\ See Securities Act Release No. 8791, supra note 6.
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    The Commission also preliminarily believes that the proposed 
continued listing requirements for primary equity securities listed on 
Tier II of the Exchange, while not identical, are substantially similar 
to those of NYSE Amex.\39\ NYSE Amex's delisting criteria are triggered 
by poor financial conditions or operating results of the

[[Page 49701]]

issuer.\40\ Specifically, NYSE Amex will consider delisting an equity 
issue if: (i) Stockholders' equity is less than $2 million and such 
issuer has sustained losses from continuing operations and/or net 
losses in two of its three most recent fiscal years; (ii) stockholders' 
equity is less than $4 million and such issuer has sustained losses 
from continuing operations and/or net losses in three of its four most 
recent fiscal years; (iii) stockholders' equity is less than $6 million 
if such issuer has sustained losses from continuing operations and/or 
net losses in its five most recent fiscal years; or (iv) the issuer has 
sustained losses which are so substantial in relation to its overall 
operations or its existing financial resources, or its financial 
condition has become so impaired that it appears questionable, in the 
opinion of the exchange, as to whether such company will be able to 
continue operations and/or meet its obligations as they mature.\41\
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    \39\ See generally Securities Act Release 8791, supra note 6 
(determining that NCM continued listing standards, which are 
identical to BATS' proposed continued listing standards for primary 
equity securities on Tier II of the Exchange, are substantially 
similar to the Amex standards).
    \40\ See generally Sections 1001 through 1006 of the NYSE Amex 
Company Guide.
    \41\ See Section 1003(a) of the NYSE Amex Company Guide. While 
not identical to NYSE Amex, BATS, as noted below, also has a 
shareholder equity standard. See infra note 42 and accompanying 
text. NYSE Amex, however, will not normally consider suspending 
dealing in (i) through (iii) noted above if the issuer is in 
compliance with the following: (1) Total market value of market 
capitalization of at least $50,000,000; or total assets and revenue 
of $50,000,000 each in its last fiscal year, or in two of its last 
three fiscal years; and (2) the issuer has at least 1,100,000 shares 
publicly held, a value of publicly held shares of at least 
$15,000,000 and 400 round lot holders. Id.
    NYSE Amex also will consider delisting if: (i) An issuer has 
sold or otherwise disposed of its principal operating assets or has 
ceased to be an operating company or has discontinued a substantial 
portion of its operations or business; (ii) if substantial 
liquidation of the issuer has been made; or (iii) if advice has been 
received, deemed by the Exchange to be authoritative, that the 
security is without value, or in the case of a common stock, such 
stock has been selling for a substantial period of time at a low 
price. See Section 1003(c) and (f)(v) of the NYSE Amex Company 
Guide.
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    Although BATS would not have the same continued listing provisions 
for Tier II, BATS also would look at the financial condition and 
operating results of the issuer in order to determine whether to delist 
an issuer. BATS' continued listing standards for Tier II securities 
would require compliance with either a (1) Shareholder equity, (2) 
market value of listed securities or (3) net income standard. 
Specifically, for continued listing, BATS would require shareholder's 
equity of at least $2.5 million, market value of listed securities of 
at least $35 million, or net income of $500,000 from continuing 
operations in the past fiscal year or two out of three past fiscal 
years.\42\ Further, BATS would require an issuer to have (i) A minimum 
bid price for continued listing of $1 per share,\43\ (ii) at least two 
registered and active market makers, (iii) 300 public holders, and (iv) 
a minimum number of publicly held shares of at least 500,000 shares 
with a market value of at least $1 million.\44\ The Commission 
preliminarily believes that the differences in the maintenance criteria 
for common stock listed on NYSE Amex and as proposed on BATS for Tier 
II Securities are not significant and that, taken as a whole, the 
criteria are substantially similar.\45\
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    \42\ Proposed BATS Rule 14.9(e)(2)(A)-(C). NYSE Amex focuses on 
a shareholder equity standard for continued listing. BATS' proposed 
shareholder equity standard would require at least $2.5 million 
shareholders' equity compared to NYSE Amex's lowest shareholder 
equity standard of $2 million, if the NYSE Amex issuer has sustained 
losses from continuing operations and/or net losses in two of its 
three most recent fiscal years. Compare proposed BATS Rule 
14.9(e)(2)(A)-(C) with Section 1003(a) of the NYSE Amex Company 
Guide.
    \43\ See proposed BATS Rule 14.9(e)(1)(B). Amex will consider 
delisting if the price per share is ``low.'' See Section 1003(f)(v) 
of the Amex Company Guide. See also Securities Act Release 8791, 
supra note 6 (noting the same regarding the NCM and Amex bid price 
standards).
    \44\ Proposed BATS Rule 14.9(e)(1)(A)-(E). NYSE Amex will 
consider delisting the common stock of an issuer if the aggregate 
market value of such publicly held shares is less than $1 million 
for more than 90 consecutive days, the number of publicly held 
shares is less than 200,000 shares, or the number of its public 
stockholders is less than 300. See Section 1003(b) of the NYSE Amex 
Company Guide.
    \45\ The Commission has interpreted the substantially similar 
standard to require listing standards at least as comprehensive as 
those of the Named Markets, and differences in language or approach 
of the listing standards are not dispositive. See supra notes 21-23 
and accompanying text. See also Securities Act Release 8791, supra 
note 6 (determining that NCM continued listing standards, which are 
identical to BATS' proposed continued listing standards for primary 
equity securities on Tier II of the Exchange, are substantially 
similar to the Amex standards).
---------------------------------------------------------------------------

    The Commission requests comment on whether BATS' proposed listing 
standards for primary equity securities on Tier II are ``substantially 
similar'' to NYSE Amex standards.
2. Preferred Stock and Secondary Classes of Common Stock
    The Commission has compared the proposed listing standards of 
preferred stock and secondary classes of common stock on Tier II of the 
Exchange to the Nasdaq/NGM standards and preliminarily believes that 
BATS' standards are substantially similar to those of Nasdaq/NGM. A 
secondary class of common stock is a class of common stock of an issuer 
that has another class of common stock listed on an exchange.\46\ The 
Commission preliminarily believes that BATS' proposed initial and 
continued listing standards with respect to the number of round lot 
holders,\47\ bid price,\48\ number of publicly held shares,\49\ market 
value of publicly held shares,\50\ and number of market makers \51\ are 
substantially similar to the Nasdaq/NGM standards.\52\
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    \46\ See Securities Act Release No. 8791, supra note 6, at 
20411.
    \47\ BATS' proposed initial listing standard would require 100 
round lot holders, as Nasdaq/NGM requires. Compare proposed BATS 
Rule 14.9(c) with Nasdaq Rule 5510. Similarly, BATS' proposed 
continued listing standard would require 100 round lot holders. The 
Nasdaq/NGM continued listing standard requires 100 round lot 
holders. Compare proposed BATS Rule 14.9(f) with Nasdaq Rule 
5460(a)(4).
    \48\ While BATS' proposed bid price requirement for initial 
listing is $4 and the Nasdaq/NGM requirement is $5, the Commission 
preliminarily does not believe this difference is significant. 
Compare proposed BATS Rule 14.9(c)(1)(A) with Nasdaq Rule 
5510(a)(1). See also Securities Act Release No. 8791, supra note 6, 
at 20412 n. 28 (determining that an NCM bid requirement, which is 
identical to BATS' proposed bid requirement, was substantially 
similar to the Nasdaq/NGM requirement). Both BATS' proposed standard 
and Nasdaq/NGM's existing standard require a $1 bid price for 
continued listing. Compare proposed BATS Rule 14.9(f)(1) with Nasdaq 
Rule 5460(a)(3).
    \49\ BATS' proposed standard would require 200,000 publicly held 
shares for initial listing, and 100,000 publicly held shares for 
continued listing, which is the same as Nasdaq/NGM requires. Compare 
proposed BATS Rule 14.9(c)(1)(C) and 14.9(f)(1)(c) with Nasdaq Rules 
5415(a)(1) and 5460(a)(1).
    \50\ BATS' proposed standard for initial listing of preferred 
stock or a secondary class of common stock would require a market 
value of publicly held shares of at least $3.5 million. Nasdaq/NGM 
requires a market value of publicly held shares of at least $4 
million. Compare proposed BATS Rule 14.9(c)(1)(D) with Nasdaq Rule 
5415(a)(2). BATS proposed standard for continued listing would 
require a market value of publicly held shares of at least $1 
million. Nasdaq/NGM requires a market value of publicly held shares 
of at least $1 million for continued listing. Compare proposed BATS 
Rule 14.9(f)(1)(D) with Nasdaq Rule 5460(a)(1). The Commission 
preliminarily believes BATS' proposed initial and continued listing 
standards for preferred stock and secondary classes of common stock 
are substantially similar to Nasdaq/NGM. See also Securities Act 
Release No. 8791, supra note 6, at 20411-12. (determining that NCM 
listing standards, which are identical to BATS' proposed listing 
standards for preferred stock and secondary classes of common stock, 
are substantially similar to the Nasdaq/NGM standards).
    \51\ BATS proposed standard for initial listing would require at 
least three registered and active market makers, while its continued 
listing standard would require at least two registered and active 
market makers. Nasdaq/NGM requires the same. Compare proposed BATS 
Rule 14.9(c)(1)(E) with Nasdaq Rule 5415(a)(2).
    \52\ The Commission notes that these proposed requirements would 
apply to instances when the common stock or common stock equivalent 
security of the issuer were listed on BATS as a Tier II Security or 
otherwise were a Covered Security. If the common stock or common 
stock equivalent is not listed as a Tier II Security or is a Covered 
Security, then the security would be required to meet the initial 
primary equity listing requirements for Tier II noted above. Nasdaq/
NGM contains a similar requirement. Compare proposed BATS Rule 
14.9(f)(2) with Nasdaq Rule 5460(b).
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    The Commission requests comment on whether the BATS proposed

[[Page 49702]]

secondary classes of common stock and preferred stock rules are 
``substantially similar'' to Nasdaq/NGM's rules.
3. Warrants
    The Commission has compared BATS' proposed standards for warrants 
to Nasdaq/NGM's standards, and preliminarily believes that the BATS 
proposed standards are substantially similar to the Nasdaq/NGM 
standards. BATS' proposed initial listing standards would require that 
400,000 warrants be outstanding for initial listing, and that there be 
at least three registered and active market makers and 400 round lot 
holders.\53\ Nasdaq/NGM's standards are identical except that Nasdaq/
NGM requires 450,000 warrants to be outstanding.\54\ Though not 
identical with respect to the number of warrants outstanding standard, 
the Commission preliminarily believes these proposed initial listing 
standards are substantially similar to the Nasdaq/NGM standards.\55\ 
Further, the proposed BATS standards would require the issuer's 
underlying security to be listed on the Exchange or be a Covered 
Security.\56\ The Commission notes that Nasdaq/NGM has a similar 
standard that the underlying security be listed on Nasdaq/NGM or be a 
Covered Security and preliminarily believes that BATS' proposed 
standard is substantially similar to Nasdaq/NGM.\57\
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    \53\ See proposed BATS Rule 14.9(d)(1)(A), (C) and (D).
    \54\ See Nasdaq Rule 5410(a), (c) and (d).
    \55\ See also Securities Act Release 8791, supra note 6 
(determining that NCM initial listing standards, which are identical 
to BATS' proposed standards for warrants on Tier II of the Exchange, 
are substantially similar to the Amex standards).
    \56\ See BATS proposed Rule 14.9(d)(1)(B).
    \57\ See Nasdaq Rule 5410(b).
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    The Commission also preliminarily believes that BATS' proposed 
continuing listing requirements for warrants that there be two 
registered and active market makers (one of which may be a market maker 
entering a stabilizing bid) and that the underlying security remain 
listed on the Exchange or be a Covered Security are substantially 
similar to that of Nasdaq/NGM.\58\
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    \58\ Compare proposed BATS' Rule 14.9(g)(1) with Nasdaq Rule 
5455(1) and (2).
---------------------------------------------------------------------------

    The Commission requests comment on whether BATS' proposed listing 
standards for warrants are ``substantially similar'' to Nasdaq/NGM's 
listing standards.
4. Index Warrants
    For index warrants traded on BATS, BATS has proposed the same 
standards (both initial and continuing) that apply to index warrants 
traded on Nasdaq/NGM.\59\ Therefore, the Commission preliminarily 
believes that the proposed listing standards for index warrants traded 
on BATS are substantially similar to the standards applicable to index 
warrants traded on the Nasdaq/NGM market.
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    \59\ Compare proposed BATS' Rule 14.9(d)(3) with Nasdaq Rule 
5725.
---------------------------------------------------------------------------

    The Commission requests comment on whether BATS proposed listing 
standards for index warrants are ``substantially similar'' to Nasdaq/
NGM's listing standards.
5. Convertible Debt
    The Commission has compared BATS' proposed listing standards for 
convertible debt to NYSE Amex's listing standards for debt. The 
Commission preliminarily believes that BATS' proposed initial listing 
standards regarding the threshold principal amount outstanding,\60\ the 
availability of current last sale information,\61\ and number of market 
makers \62\ are substantially similar to NYSE Amex standards.\63\ In 
addition to the requirements noted above, BATS' proposed listing 
standards would require that one of four additional conditions be met 
for listing of convertible debt. Specifically, BATS proposes that it 
would not list a convertible debt security unless one of the following 
conditions were met: (i) The issuer of the debt security also has 
equity securities listed on the Exchange, NYSE Amex, the NYSE, or 
Nasdaq/NGM; (ii) an issuer of equity securities listed on the Exchange, 
NYSE Amex, the NYSE, or Nasdaq/NGM directly or indirectly owns a 
majority interest in, or is under common control with, the issuer of 
the debt security, or has guaranteed the debt security; (iii) a 
nationally recognized securities rating organization (an ``NRSRO'') has 
assigned a current rating to the debt security that is no lower than an 
S&P Corporation ``B'' rating or equivalent rating by another NRSRO; or 
(iv) if no NRSRO has assigned a rating to the issue, an NRSRO has 
currently assigned an investment grade rating to an immediately senior 
issue or a rating that is no lower than an S&P Corporation ``B'' 
rating, or an equivalent rating by another NRSRO, to a pari passu or 
junior issue.\64\ The Commission preliminarily believes that these 
other conditions proposed by BATS for listing of convertible debt are 
substantially similar to NYSE Amex standards.\65\
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    \60\ The BATS proposed rule would require a principal amount 
outstanding of at least $10 million for initial listing and $5 
million for continued listing. See proposed BATS Rule 14.9(d)(2)(A) 
and 14.9(g)(2)(A). NYSE Amex requires a principal amount outstanding 
of at least $5 million for initial listing and will consider 
delisting if the principal amount outstanding is less than $400,000 
or if the issuer is not able to meet its obligations on the listed 
debt security. See Sections 104 and 1003 of the NYSE Amex Company 
Guide. As the Commission noted in a prior release, while these 
requirements are not identical, the Commission believes that both 
standards are designed to ensure the continued liquidity of the debt 
security, and thus are substantially similar. See Securities Act 
Release 8791, supra note 6, at 20412 (finding that an identical NCM 
listing standard was substantially similar to the Amex standard).
    \61\ Both BATS' proposed standard and NYSE Amex include an 
initial listing requirement that there be current last sale 
information available in the United States with respect to the 
underlying security into which the bond or debenture is convertible. 
Compare proposed BATS Rule 14.9(d)(2)(B) with Section 104 of the 
NYSE Amex Company Guide. Additionally, Section 1003(e) of the NYSE 
Amex Company Guide states that convertible bonds will be reviewed 
when the underlying security is delisted and will be delisted when 
the underlying security is no longer the subject of real-time 
reporting in the United States. BATS' continued listing standards 
for a convertible debt security also require that current last sale 
information be available in the United States with respect to the 
underlying security, whereas NYSE Amex does not. Compare proposed 
BATS Rule 14.9(g)(2)(C) with Section 1003(e) of the NYSE Amex 
Company Guide.
    \62\ BATS' proposed standard would require at least three 
registered and active market makers for initial listing and two 
registered and active market makers for continued listing (one of 
which may be a market maker entering a stabilizing bid), whereas 
NYSE Amex requires one specialist to be assigned. Compare proposed 
BATS Rule 14.9(d)(1)(C) with NYSE Amex Rule 104.
    \63\ NYSE Amex will not list a convertible debt issue containing 
a provision which gives an issuer discretion to reduce the 
conversion price unless the issuer establishes a minimum 10-day 
period within which such price reduction will be in effect. See 
Section 104 of the NYSE Amex Company Guide. The Commission 
preliminarily believes that omission of such a provision does not 
impact its determination. See Securities Act Release Nos. 39542, 
supra note 6 (finding PCX listing standards to be substantially 
similar to Amex even with the absence of this provision); 8791, 
supra note 6, at 20412 (finding NCM's listing standard, which is 
identical to BATS' proposed listing standard for convertible debt, 
is substantially similar to Amex even with the absence of this 
provision).
    \64\ These standards are identical to the initial listing 
standard for convertible debt securities on NYSE Amex and NCM). 
Compare proposed BATS Rule 14.9(d)(2)(D)(iv) with Section 104(A)-(E) 
of the NYSE Amex Company Guide and Nasdaq Rule 5515(b)(4).
    \65\ Id.
---------------------------------------------------------------------------

    The Commission requests comment on whether the BATS proposed 
convertible debt listing rules are ``substantially similar'' to NYSE 
Amex's listing standards for debt securities.
6. Units
    The listing requirements for units on Tier II of the Exchange, NYSE 
Amex, and Nasdaq/NGM are all the same, as each evaluates the initial 
and continued listing of a unit by looking to its components.\66\ If 
all of the components

[[Page 49703]]

of a unit individually meet the standards for listing, then the unit 
would meet the standards for listing.\67\ Because the components for 
units proposed by BATS are substantially similar to those of a Named 
Market, as discussed above, the Commission preliminarily believes that 
BATS' proposed listing standards for units to be listed on Tier II of 
the Exchange are substantially similar to a Named Market.\68\
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    \66\ A unit is a type of security consisting of two or more 
different types of securities (e.g., a combination of common stocks 
and warrants). See, e.g., Securities Exchange Act Release No. 48464 
(September 9, 2003), 68 FR 54250 (September 16, 2003) (order 
approving NYSE Amex proposed rule change to amend Sections 101 and 
1003 of the NYSE Amex Company Guide to clarify the listing 
requirements applicable to units).
    \67\ See generally proposed BATS Rule 14.4, Section 101(f) of 
the NYSE Amex Company Guide, and Nasdaq Rule 5225.
    \68\ See Securities Exchange Act Release No. 64546, supra note 
8, 76 FR 31660 at 31664.
---------------------------------------------------------------------------

    The Commission requests comment on whether BATS' proposed listing 
standards for units on Tier II of the Exchange are ``substantially 
similar'' to NYSE Amex requirements.

D. Other Securities Including Exchange Traded Funds, Portfolio 
Depository Receipts and Index Fund Shares

    In addition to the proposed listing standards for Tier I and Tier 
II securities and the analyses of such standards to the Named Markets 
discussed above, the Commission notes that BATS has proposed listing 
standards for other securities, including exchange traded funds, 
portfolio depository receipts, and index fund shares. The Commission 
also notes that BATS' proposed standards for these securities are 
identical to those of Nasdaq/NGM.\69\
---------------------------------------------------------------------------

    \69\ Compare proposed BATS Rule 14.11 with Nasdaq Rule 5700 
Series.
---------------------------------------------------------------------------

E. Other Changes

    Sections (b)(1) and (b)(2) of Rule 146 use the term ``Amex'' to 
refer to the American Stock Exchange LLC. As noted above, on October 1, 
2008, NYSE Euronext acquired Amex and renamed it NYSE Alternext.\70\ 
Further, in 2009, NYSE Alternext was renamed NYSE Amex LLC.\71\ 
Additionally, Section (b)(1) of Rule 146 uses the term ``the 
Philadelphia Stock Exchange, Inc.'' As noted above, on July 24, 2008, 
The NASDAQ OMX Group, Inc. acquired Phlx and renamed it ``NASDAQ OMX 
PHLX LLC.'' \72\ The proposed rule change includes changes to Rule 
146(b) to account for these name changes.
---------------------------------------------------------------------------

    \70\ See Securities Exchange Act Release No. 58673, supra note 
1.
    \71\ See Securities Exchange Act Release No. 59575, supra note 
1.
    \72\ See Securities Exchange Act Release Nos. 58179, 58183, and 
62783, supra note 11.
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F. Comments

    To date, the Commission has not received any comment letters on the 
Petition.

IV. Solicitation of Comments

    The Commission seeks comment generally on the desirability of 
amending Rule 146(b) to include securities listed, or authorized for 
listing, of BATS. As discussed above, based on its review of BATS' 
proposed listing standards, the Commission preliminarily believes that 
the proposed initial and continued listing standards for BATS are 
substantially similar to those of the NYSE Amex or Nasdaq/NGM. The 
Commission seeks comments on its preliminary analysis.
    The Commission also invites commenters to provide views and data as 
to the costs, benefits, and effects associated with the proposed 
amendments. In addition to the questions posed above, commenters are 
welcome to offer their views on any other matter raised by the proposed 
amendment to Rule 146(b), including the application of rule 146(b)(2). 
Finally, the Commission requests comment on whether it could use a 
different methodology to determine whether BATS' proposed listing 
standards are ``substantially similar'' to those of the Named Markets.

V. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 does not apply because the 
proposed amendment to Rule 146(b) does not impose recordkeeping or 
information collection requirements or other collection of information, 
which require the approval of the Office of Management and Budget under 
44 U.S.C. 3501 et seq.

VI. Economic Analysis

A. Introduction

    Section 2(b) of the Securities Act \73\ requires us, when engaging 
in rulemaking where we are required to consider or determine whether an 
action is necessary or appropriate in the public interest, to consider, 
in addition to the protection of investors, whether the action will 
promote efficiency, competition and capital formation. We have 
considered, and discuss below, the effects of the proposed amendment to 
Securities Act Rule 146, with regard to BATS' proposed listing 
standards to designate certain securities that would be listed on BATS 
as Covered Securities, on efficiency, competition, and capital 
formation, as well as the benefits and costs associated with the 
proposed rulemaking.
---------------------------------------------------------------------------

    \73\ 15 U.S.C. 77b(b).
---------------------------------------------------------------------------

    Congress amended Section 18 of the Securities Act to exempt covered 
securities from state registration requirements. These securities are 
listed on the Named Markets or any other national securities exchange 
determined by the Commission to have ``substantially similar'' listing 
standards to those of the Named Markets (``Designated Markets'').\74\ 
The Commission proposes to determine (if the Commission were to approve 
the proposed listing standards filed by BATS) that the listing 
standards for securities listed on BATS are substantially similar to 
those of a Named Market, specifically Nasdaq/NGM or NYSE Amex. 
Securities listed, or authorized for listing, on BATS therefore would 
be exempt from state law registration requirements.
---------------------------------------------------------------------------

    \74\ See 15 U.S.C. 77r(b)(1)(B).
---------------------------------------------------------------------------

    There are three Named Markets (NYSE, NYSE Amex, and Nasdaq/NGM) and 
currently five Designated Markets (Tier I of NYSE Arca, Tier I of the 
Philadelphia Stock Exchange, CBOE, ISE, and Nasdaq/NCM). NYSE and 
Nasdaq/NGM are currently the largest exchanges in terms of number of 
securities listed. As of April 19, 2011, in terms of securities listed, 
NYSE lists 3,255, Nasdaq/NGM lists 2,854, NYSE Arca lists 1,213, and 
NYSE Amex lists 544.\75\
---------------------------------------------------------------------------

    \75\ These listed securities include exchange traded funds and 
multiple securities from the same issuer.
---------------------------------------------------------------------------

    The direct economic effect of the proposed rule would be to exempt 
issuers that list, or are authorized to list, on BATS from the 
requirements of state registration. Instead, these issuers would be 
required to comply with BATS' proposed listing standards and the 
federal securities laws, rules and regulations with respect to the 
registration and sale of securities. The requirements of state 
registration typically include: (i) Paperwork and labor hours necessary 
to comply with state registration requirements, (ii) meeting the 
disclosure standards, and (iii) in some states, meeting certain minimum 
merit requirements to make public offerings.\76\
---------------------------------------------------------------------------

    \76\ A commentator noted that the purpose of such review is ``to 
prevent `unfair' and `oppressive' offerings of securities,'' and, as 
of 2011, merit review is employed in about 30 states. See Jeffrey B. 
Bartell & A.A. Sommer, Jr., Blue Sky Registration, in Securities Law 
Techniques (Matthew Bender ed., 2011). Typical elements of merit 
review include: offering expenses, including underwriter's 
compensation, rights of security holders, historical ability to 
service debt or pay dividends, financial condition of the issuer, 
cheap stock held by insiders, the quantity of securities subject to 
options and warrants, self-dealing and other conflicts of interest, 
and the price at which the securities will be offered. See id. Some 
merit regulation would be imposed on these issuers through 
application of exchange listing standards.

---------------------------------------------------------------------------

[[Page 49704]]

    An indirect effect of the proposed rule would be that, by removing 
the requirements of state registration for issuers that list, or are 
authorized to list, on BATS--the same privilege granted to other 
Covered Securities--the rule could improve BATS' ability to compete 
effectively with other exchanges. Therefore, an important economic 
effect of the rule could be to engender greater competition in the 
market for listing services.
    Exchanges generally compete in multiple areas, which include the 
market for listing, the market for trading, and the market for order-
flow. This proposed rule and BATS' proposed listing standards \77\ 
relate primarily to the market for listing, although the proposed rule 
(should it be adopted) and the entry of a new participant in the 
listings market could impact other markets as well.\78\ In the market 
for listing, exchanges compete for issuers to list on their exchanges, 
so that the exchange may collect listing fees. Domestic exchanges face 
listing competition from other domestic exchanges and from foreign 
exchanges.\79\ The benefit of listing for issuers generally is to gain 
greater access to capital through measures designed to help promote 
quality certification and visibility to public investors, which will 
generally result in a reduction in the cost of raising capital for 
these issuers. This access to capital may be further enhanced through 
listing on particular exchanges, which could affect the level of 
investors' trust in a listed company's governance structure and the 
fairness of trading in the company's securities (through the perceived 
effectiveness of exchanges' conduct rules and surveillance of trading 
as well as other services and regulatory functions).
---------------------------------------------------------------------------

    \77\ See Securities Exchange Act Release No. 64546, supra note 
8.
    \78\ See, e.g., Thierry Foucault and Christine A. Parlour, 
Competition for Listing, 35 Rand J. Econ. 329 (2004) (describing how 
listing fees and trading costs both affect firms' incentives to list 
with one exchange versus another).
    \79\ It has been noted that NYSE and the London Stock Exchange, 
for example, compete for listings of firms in third countries, in 
particular from emerging economies. See Thomas J. Chemmanur & Paolo 
Fulghieri, Competition and Cooperation Among Exchanges: A Theory of 
Cross-Listing and Endogenous Listing Standards, 82 J. Fin. Econ. 
455, 456 (2006). See generally Craig Doidge, Andrew Karolyi, and 
Ren[eacute] Stulz, Has New York Become Less Competitive than London 
in Global Markets? Evaluating Foreign Listing Choices Over Time, 
Journal of Financial Economics 91, 253-277 (2009); Craig Doidge, 
Andrew Karolyi, and Ren[eacute] Stulz, Why Do Foreign Firms Leave 
U.S. Equity Markets?, Journal of Finance 65, 1507-1553 (2010); 
Caglio, Cecilia, Hanley, Kathleen Weiss and Marietta-Westberg, 
Jennifer, Going Public Abroad: The Role of International Markets for 
IPOs (March 16, 2010), available at SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1572949. Additionally, differences in 
regulatory regimes may impact listing decisions.
---------------------------------------------------------------------------

    Exchanges may try to compete for issuers by reducing listing fees 
or by improving the quality of services they offer, or both. The cost 
of listing for an issuer includes listing fees and the cost of 
complying with listing standards. In principle, this means exchanges 
can compete by reducing listing fees, by relaxing the listing standards 
issuers must meet, or by offering several trading segments with 
different listing standards on each, though such standards must be 
determined to be substantially similar to a Named Market in order to 
get the benefit of the Securities Act Section 18(b)(1)(B) exemption 
from state registration requirements. Any concern that exchanges may 
try to compete by lowering the listing standards to attract issuers 
(and hence enter in a ``race-to-the-bottom'') is mitigated by the fact 
that (1) Listing standards affect exchanges' reputations among 
investors, which, in turn, impacts their attractiveness to issuers, (2) 
any proposed listing standards or proposed changes to existing listing 
standards must be filed with the Commission pursuant to Section 19(b) 
of the Securities Exchange Act of 1934, as amended (``Exchange Act'') 
and must meet its requirements to become effective,\80\ and (3) lower 
listing standards that are not substantially similar to those of a 
Named Market will not have the benefit of the exemption from state 
registration requirements.\81\
---------------------------------------------------------------------------

    \80\ Any revision to exchange listing standards must be done in 
accordance with Section 19(b) of the Exchange Act and Rule 19b-4 
thereunder. Any Commission approval of a listing standard revision 
is conditioned upon a finding by the Commission that the revision is 
consistent with the requirements of the Exchange Act and rules 
thereunder. See 15 U.S.C. 78s.
    \81\ See Chemmanur & Fulghieri, supra note 79, at 458.
---------------------------------------------------------------------------

    The competition among exchanges for listings is only partially 
based on price. Exchanges also compete in various other areas, which 
contribute to the quality of the service listed issuers receive, 
including, but not limited to, provision of trade statistics, 
regulatory and surveillance services, access to new technology, 
attractive trading mechanisms, and marketing services.
    One important dimension of competition is brand name.\82\ Issuers 
place high value on being listed on certain exchanges because investors 
may more readily trust those exchanges, which may, in turn, reduce the 
cost of raising capital for those issuers. As a result, NYSE and 
Nasdaq/NGM, which are already the two largest exchanges in terms of 
securities listed, may be able to charge listing fees that are above 
marginal cost--that is, what it would cost them to list additional 
issuers--and higher than other competing exchanges; therefore, certain 
exchanges may earn economic rent from these higher listing premiums 
(the amount of fee difference certain exchanges can charge, above a 
competitor's price, because of its brand name). In addition to brand 
name recognition, the market for listing exhibits positive network 
externalities: issuers may prefer to be listed on exchanges where many 
other issuers are listed and where there are more intermediaries 
trading because of increased liquidity and visibility.\83\ This 
indicates that, all else being equal, large exchanges (in terms of 
listings) will tend to be favored over smaller ones. In theory, this 
preference may persist to some extent even if large exchanges were to 
offer slightly inferior services than their smaller counterparts 
because the advantages of being listed on a large exchange, where there 
are many issuers and intermediaries, might outweigh the cost of being 
offered slightly inferior services. Because of these brand name effects 
and positive externalities, the market for listings to some extent 
exhibits certain barriers to entry for new entrants to the listing 
markets, such as BATS.\84\
---------------------------------------------------------------------------

    \82\ See generally Clement G. Krouse, Brand Name as a Barrier to 
Entry: The Rea Lemon Case, 51 Southern Econ. J. 495 (1984) 
(describing the effect of brand name on competition in markets with 
incomplete information); see also Tibor Scitovsky, Ignorance as a 
Source of Oligopoly Power, 40 Amer. Econ. Rev. 48, 49 (1950) (``An 
ignorant buyer * * * is unable to judge the quality of the products 
he buys by their intrinsic merit. Unable to appraise products by 
objective standards, he is forced to base his judgment on indices of 
quality, such as * * * general reputation of the producing 
firms.'').
    \83\ See, e.g., Carmine Di Nola, Competition and Integration 
Among Stock Exchanges in Europe: Network Effects, Implicit Mergers 
and Remote Access, 7 European Fin. Man. 39 (2001)(``Firms may derive 
more utility in being listed on exchanges where there are more 
intermediaries as they give more liquidity to the market.'').
    \84\ Brand name recognition is frequently recognized as a 
barrier to entry mainly because consumers do not have all the 
information regarding product quality and thus tend to rely on brand 
names as a proxy for quality. See, e.g., Brand Name as a Barrier to 
Entry: The Rea Lemon Case, 51 S. Econ. J. 495 (1984); Tibor 
Scitovsky, Ignorance as a Source of Oligopoly Power, 40 Amer. Econ. 
Rev. 48 (1950). Network externalities are also recognized as a 
barrier to entry. See, e.g., Gregory J. Weden, Network Effects and 
Conditions of Entry: Lessons from the Microsoft Case, 69 Antitrust 
L.J. 87 (2001); Douglas A. Melamed, Network Industries and 
Antitrust, 23 Harv. J. L. & Pub. Pol'y 147 (1999).

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[[Page 49705]]

B. Benefits, Including the Impact on Efficiency, Competition, and 
Capital Formation

    By proposing to exempt securities listed, or authorized for 
listing, on BATS from state law registration requirements, the 
Commission expects that issuers seeking to list securities on BATS 
could have the benefit of reduced regulatory compliance burdens, as 
compliance with state blue sky law requirements would not be required. 
One benefit of this proposal would be to eliminate these compliance 
burdens with respect to securities listed, or authorized for listing, 
on BATS. The Commission expects that the proposed rule could also 
improve efficiency by eliminating duplicative registration costs for 
issuers and improving liquidity by allowing for greater market access 
to issuers who have not been listed previously.
    To the extent that state merit reviews may have inhibited certain 
smaller businesses from making public offerings,\85\ an exemption from 
state registration requirements could facilitate capital formation.
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    \85\ A number of scholarly articles have expressed concerns over 
the possibility for blue sky merit regulation to hinder capital 
formation. See, e.g., Martin Fojas, Ay Dios NSMIA!: Proof of a 
Private Offering Exemption Should Not Be a Precondition for 
Preempting Blue Sky Law Under the National Securities Markets 
Improvement Act, 74 Brooklyn L. Rev. 477 (2009); Rutheford B. 
Campbell, Jr., Blue Sky Laws and the Recent Congressional Preemption 
Failure, 22 J. Corp. L. 175 (1997); Brian J. Fahrney, State Blue Sky 
Laws: A Stronger Case for Federal Pre-Emption Due to Increasing 
Internationalization of Securities Markets, Comment, 86 Nw. U. L. 
Rev. 753 (1991-92); Roberta S. Karmel, Blue-Sky Merit Regulation: 
Benefit to Investors or Burden on Commerce, 53 Brook. L. Rev. 106 
(1987-88). While the concerns are numerous, other studies have shown 
some positive effect of merit regulation. See Jay T. Brandi, The 
Silverlining in Blue Sky Laws: The Effect of Merit Regulation on 
Common Stock Returns and Market Efficiency, 12 J. Corp. L. 713 
(1986-87) (reporting that merit regulation can have a positive 
effect on investor returns); Ashwini K. Agrawal, ``The Impact of 
Investor Protection Law on Corporate Policy: Evidence from the Blue 
Sky Laws,'' working paper (2009) (reporting that the passage of 
investor protection statutes causes firms to pay out greater 
dividends, issue more equity, and grow in size), available at http://ssrn.com/abstract=1442224. Some merit regulation would be imposed 
on these issuers through application of exchange listing standards.
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    The Commission preliminarily believes that the proposed amendment 
to Rule 146(b) should permit BATS to better compete for listings with 
other markets whose listed securities already are exempt from state law 
registration requirements. This result could enhance competition, thus 
benefiting market participants and the public.
    Specifically, BATS currently intends to enter the listing market 
with generally lower fees than incumbent exchanges in order to compete 
with them.\86\ In response to BATS' proposed entry, although 
recognizing the significant barriers to entry noted above, the 
incumbent exchanges might choose to reduce their listing fees to match 
or come closer to those proposed by BATS. Incumbent exchanges might 
also enhance the other services they provide to their currently listed 
issuers (e.g., regulatory and surveillance services, access to new 
technology, attractive trading mechanisms, marketing services) as a way 
to counteract BATS' proposed lower listing fees.
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    \86\ See Securities Exchange Act Release No. 64546, supra note 
8, 76 FR at 31666 & n. 27-28 (representing that BATS' proposed 
pricing, while not necessarily cheaper for all issuers at all other 
markets, is roughly equivalent to or less than the price issuers 
would pay at other exchanges, including NGM and NCM).
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    Additional competition in the market for listings could enable some 
issuers, both public and private, that have (1) either not listed on 
any exchange or (2) have listed on an exchange but have chosen not to 
list on certain exchanges because of the costs of listing there, to 
list on any Named or Designated Market due to the potential for lower 
listing fees across all exchanges. This potentially could result in a 
lower cost of capital for those issuers that previously had not listed 
on an exchange and could benefit the current investors in such issuers 
in the form of higher company value arising from the reduced cost of 
capital and increased liquidity. If currently unlisted firms were able 
to list because of lower listing fees, this could also improve 
efficiency and capital formation since future investors in these 
issuers would have easier access to invest in them and to further 
diversify their investment portfolios.
    Those issuers that are currently listed on any exchange, including 
the Named Markets, and that remain listed there, would potentially 
benefit from any reduced listing fees; however, because any such 
benefit would come at the expense of the exchange on which they are 
listed in the form of potentially reduced profit, this aggregate effect 
would be a transfer from one group of investors (exchange shareholders) 
to another group of investors (listed issuer shareholders).
    Additionally, some issuers currently listed on other Named or 
Designated Markets could potentially switch their listings to BATS, 
thus potentially lowering their listing costs (provided the Named or 
Designated Markets did not reduce their listing fees). The size of any 
such potential benefit would depend on how large any cost savings due 
to listing on BATS would be in comparison to the cost of giving up any 
valuable services that the other exchanges might provide that BATS 
might not. In addition, the behavior of these issuers would depend 
heavily on the extent to which these other exchanges respond to BATS' 
proposed entry by making themselves more competitive to the issuers.

C. Costs, Including the Impact on Efficiency, Competition, and Capital 
Formation

    The proposed amendment would eliminate state registration 
requirements for securities listed, or authorized for listing, on BATS. 
In principle, there could be certain economic costs to investors 
through the loss of benefits of state registration and oversight. For 
example, by listing on BATS, issuers would no longer be required to 
comply with certain states' blue sky laws, which could mandate more 
detailed disclosure than BATS' proposed listing standards and the 
requirements imposed pursuant to the federal securities laws, rules, 
and regulations. In such circumstances, investors could lose the 
benefit of the additional information. Additionally, to the extent blue 
sky laws result in additional enforcement protections in the form of 
another regulator policing issuer activity, then investors from these 
states could incur costs when issuers choose to list on BATS. Some 
commentators have also expressed a concern that the exemption from blue 
sky laws could prompt riskier public offerings.\87\
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    \87\ See, e.g., Brandi, supra note 85.
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    From the perspective of competition in the market for listing, the 
Commission notes that there could be a concern that, to the extent the 
market for exchange services exhibits network effects, as explained 
above, there could be a loss in efficiency as a result of having a 
greater number of networks, if one or more of the existing large 
exchanges (in terms of listings) shrinks in size. However, the 
Commission also notes that the overall efficiency effect would depend 
on the precise fragmentation of the exchanges. It is possible, for 
instance, that, through specialization of exchanges, there could be an 
efficiency gain from having more distinct exchanges, each of which 
specializes in listing issuers from certain types of industries.
    The Commission acknowledges that these costs are difficult to 
quantify. The Commission believes that Congress contemplated these 
costs in relation to the economic benefits of exempting Covered 
Securities from state regulation. The Commission, however, is 
considering the costs of the proposed

[[Page 49706]]

amendment to Rule 146(b) and requests commenters to provide views and 
supporting information as to the costs and benefits associated with 
this proposal. The proposed rule otherwise imposes no recordkeeping or 
compliance burdens, but would provide a limited purpose exemption under 
the federal securities laws.
    Overall, the Commission believes the proposed amendment to Rule 
146(b) should not impair efficiency, competition, and capital 
formation.

D. Request for Comment

    We request comment on the costs and benefits associated with this 
rule amendment, including identification and assessments of any costs 
and benefits not discussed in this analysis. We solicit comments on the 
usefulness of the rule amendment to investors, reporting persons, 
registrants, and the marketplace at large. We encourage commentators to 
identify, discuss, analyze, and supply relevant data, information, or 
statistics regarding any such costs or benefits, as well as any costs 
and benefits not already defined. We also request qualitative feedback 
on the nature of the benefits and costs described above. Additionally, 
we request comment on the extent of any costs that may be attributable 
to any loss of protections that currently are afforded by the state 
registration process, such as any merit-based requirements imposed by 
states on issuers.

VII. Regulatory Flexibility Act Certification

    Section 603(a) of the Regulatory Flexibility Act \88\ requires the 
Commission to undertake an initial regulatory flexibility analysis of 
the proposed amendment to Rule 146 on small entities, unless the 
Commission certifies that the proposed amendment, if adopted, would not 
have a significant economic impact on a substantial number of small 
entities.\89\ For purposes of Commission rulemaking in connection with 
the Regulatory Flexibility Act, an issuer is a small business if its 
``total assets on the last day of its most recent fiscal year were $5 
million or less.'' \90\
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    \88\ 5 U.S.C. 603(a).
    \89\ 5 U.S.C. 605(b).
    \90\ 17 CFR 230.157. See also 17 CFR 240.0-10(a).
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    The Commission believes that the proposal to amend Rule 146(b) 
would not affect a substantial number of small entities because, as 
proposed by BATS, to list its securities on BATS, an issuer's aggregate 
market value of publicly held shares would be required to be at least 
$5 million. If an entity's market value of publicly held shares were at 
least $5 million, it is reasonable to believe that its assets generally 
would be worth more than $5 million. Therefore, an entity seeking to 
list securities as proposed by BATS in its proposed listing standards 
generally would have assets with a market value of more than $5 million 
and thus would not be a small entity.
    Accordingly, the Commission hereby certifies, pursuant to Section 
605(b) of the Regulatory Flexibility Act,\91\ that amending Rule 146(b) 
as proposed would not have a significant economic impact on a 
substantial number of small entities. The Commission encourages written 
comments regarding this certification. The Commission solicits comment 
as to whether the proposed amendment to Rule 146(b) could have an 
effect that has not been considered. The Commission requests that 
commenters describe the nature of any impact on small entities and 
provide empirical data to support the extent of such impact.
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    \91\ 5 U.S.C. 605(b).
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VIII. Small Business Regulatory Enforcement Fairness Act of 1996

    For purposes of the Small Business Enforcement Fairness Act of 
1996, a rule is ``major'' if it results or is likely to result in:
    (i) An annual effect on the economy of $100 million or more;
    (ii) A major increase in costs or prices for consumers or 
individual industries; or
    (iii) Significant adverse effects on competition, investment, or 
innovation.\92\
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    \92\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C., and as a note 
to 5 U.S.C. 601).
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    The Commission requests comment regarding the potential impact of 
the proposed amendment on the economy on an annual basis. Commenters 
should provide empirical data to support their views to the extent 
possible.

IX. Statutory Authority and Text of the Proposed Rule

    The Commission is proposing an amendment to Rule 146 pursuant to 
the Securities Act of 1933,\93\ particularly Sections 18(b)(1)(B) and 
19(a).\94\
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    \93\ 15 U.S.C. 77a et seq.
    \94\ 15 U.S.C. 77r(b)(1)(B) and 77s(a).
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List of Subjects in 17 CFR Part 230

    Securities.

    For the reasons set forth in the preamble, the Commission proposes 
to amend Title 17, Chapter II of the Code of Federal Regulations as 
follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

    1. The authority citation for Part 230 continues to read, in part, 
as follows:

    Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r, 
77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78t, 78w, 
78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-37, 
unless otherwise noted.
* * * * *
    2. Revise Section 230.146(b)(1) and (b)(2) to read as follows:


Sec.  230.146  Rules under section 18 of the Act.

* * * * *
    (b) * * *
    (1) For purposes of Section 18(b) of the Act (15 U.S.C. 77r), the 
Commission finds that the following national securities exchanges, or 
segments or tiers thereof, have listing standards that are 
substantially similar to those of the New York Stock Exchange 
(``NYSE''), the NYSE Amex LLC (``NYSE Amex''), or the National Market 
System of the Nasdaq Stock Market (``Nasdaq/NGM''), and that securities 
listed, or authorized for listing, on such exchanges shall be deemed 
covered securities:
    (i) Tier I of the NYSE Arca, Inc.;
    (ii) Tier I of the NASDAQ OMX PHLX LLC;
    (iii) The Chicago Board Options Exchange, Incorporated;
    (iv) Options listed on the International Securities Exchange, LLC;
    (v) The Nasdaq Capital Market; and
    (vi) BATS Exchange, Inc.
    (2) The designation of securities in paragraphs (b)(1)(i) through 
(vi) of this section as covered securities is conditioned on such 
exchanges' listing standards (or segments or tiers thereof) continuing 
to be substantially similar to those of the NYSE, NYSE Amex, or Nasdaq/
NGM.
* * * * *

    By the Commission.

    Dated: August 8, 2011.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-20445 Filed 8-10-11; 8:45 am]
BILLING CODE 8011-01-P


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