[Federal Register Volume 60, Number 82 (Friday, April 28, 1995)]
[Rules and Regulations]
[Pages 20891-20897]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-10487]



=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249

[Release No. 34-35637; File No. S7-4-95]
RIN 3235-AG28


Unlisted Trading Privileges

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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

SUMMARY: The Commission is adopting new rules and amendments to 
existing rules concerning unlisted trading privileges (``UTP''). The 
rules would reduce the period that exchanges have to wait before 
extending UTP to any listed initial public offering, from the third 
trading day in the security to the second trading day in the security. 
The rules also would require exchanges to have rules and oversight 
mechanisms in place to ensure fair and orderly markets and the 
protection of investors with respect to UTP in any security.

EFFECTIVE DATE: April 21, 1995.

FOR FURTHER INFORMATION CONTACT: Betsy Prout, 202/942-0170, Attorney, 
Office of Market Supervision, Division of Market Regulation, Securities 
and Exchange Commission (Mail Stop 5-1), 450 5th Street, N.W., 
Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction

    On February 2, 1995, the Securities and Exchange Commission 
(``Commission'') proposed for comment rules<SUP>1 under Section 12(f) 
of the Securities Exchange Act of 1934 (``Exchange Act''),<SUP>2 as 
recently amended by the Unlisted Trading Privileges Act of 1994 (``UTP 
Act''). The proposed rules would have: (1) Required national securities 
exchanges (``exchanges''), for any security that is the subject of an 
initial public offering (``IPO'') and is listed on another exchange 
(``listed IPO''), to wait until the listing exchange reports the first 
trade in the security to the Consolidated Tape before trading the 
security pursuant to unlisted trading privileges (``UTP''); (2) 
required each national securities exchange to have in effect a rule or 
rules providing for transactions in the class or type of security to 
which the exchange extends UTP; and (3) amended certain existing rules 
under Section 12(f) of the Exchange Act to conform to the recent 
statutory amendments effected by the UTP Act. The Commission also 
requested comments on alternatives to the proposed rule concerning UTP 
in listed IPOs from commenters who believe that either no waiting 
period or a longer waiting period would be appropriate. In addition, 
the Commission requested comment on whether any Commission action is 
necessary to carry out the congressional objectives of linked markets 
as required by Section 11A(a)(1)(D) of the Exchange Act.<SUP>3

    \1\See Securities Exchange Act Release No. 35323 (February 2, 
1995), 60 FR 7718 (``Proposing Release'').
    \2\15 U.S.C. 78l.
    \3\15 U.S.C. 78k-1(a)(1)(D).
---------------------------------------------------------------------------

    The Commission received nine comment letters on the proposed 
rules,<SUP>4 eight of which discuss the proposed rule concerning UTP in 
listed IPOs.<SUP>5 The Commission also received, prior to publication 
of the proposed rules in the Federal Register, a report presenting 
certain volume and price parameter statistics of listed IPOs.<SUP>6

    \4\See letters from James F. Duffy, American Stock Exchange, 
Inc., dated March 21, 1995 (``Amex letter''), George W. Mann, Boston 
Stock Exchange, Inc., dated March 6, 1995 (``BSE letter''), Lisa W. 
Barry, CS First Boston, dated March 14, 1995 (``CS First Boston 
letter''), J. Craig Long, Foley & Lardner, dated March 20, 1995 
(``Chx letter''), Richard T. Chase, Lehman Brothers, dated March 10, 
1995 (``Lehman letter''), James E. Buck, New York Stock Exchange, 
Inc., dated March 15, 1995 (``NYSE letter''), Leopold Korins, 
Pacific Stock Exchange, Inc., dated March 14, 1995 (``PSE letter''), 
John C. Katovich, Pacific Stock Exchange, Inc., dated March 29, 1995 
(``PSE response''), and William Uchimoto, Philadelphia Stock 
Exchange, Inc., dated March 29, 1995 (``Phlx response''), to 
Jonathan G. Katz, Secretary, SEC.
    \5\See BSE letter, Chx letter, CS First Boston letter, Lehman 
letter, NYSE letter, PSE letter, Phlx response, and PSE response, 
id.
    \6\See letter and report from William Uchimoto, Philadelphia 
Stock Exchange, Inc., dated February 6, 1995 (``Phlx Study''). The 
Phlx Study was submitted to the Commission on behalf of the Boston 
Stock Exchange, Inc., the Chicago Stock Exchange, Inc., the 
Philadelphia Stock Exchange, Inc., and the Pacific Stock Exchange, 
Inc.
---------------------------------------------------------------------------

    The Commission is adopting the rules as proposed, except for the 
rule that would have required exchanges to wait, before extending UTP 
to listed IPOs, until the first trade is reported by the listing 
exchange. Instead, that proposed rule is being replaced with a 
requirement that exchanges wait, before trading a listed IPO pursuant 
to UTP, until the opening of business on the day following the initial 
public offering of the security on the listing exchange.

II. Background

    As stated above, the Commission is adopting rules pursuant to the 
UTP Act, which recently amended Section 12(f) of the Exchange Act. The 
UTP Act became effective on October 22, 1994. As discussed more fully 
in the Proposing Release and below, the UTP Act amended Section 12(f) 
of the Exchange Act to require the Commission to prescribe rules 
concerning UTP in listed IPOs. Rule 12f-2, as adopted, meets this 
requirement. The UTP Act also authorizes the Commission to prescribe 
other rules pertaining to exchange extensions of UTP, and specifically 
authorizes the Commission to prescribe, by rule or order, the 
procedures that will apply to exchanges when they apply to reinstate 
UTP in a security after the Commission has suspended UTP in the 
security on the applicant exchange.
    Section 12(f) governs when an exchange may trade a security that is 
[[Page 20892]] not listed and registered on that exchange, i.e. by 
extending UTP to the security.<SUP>7 Prior to the UTP Act, Section 
12(f) required exchanges to apply to the Commission before extending 
UTP to a security, and required the Commission to provide notice of 
each application for comment and opportunity for a hearing. The 
Commission also was required to review each application, and if the 
application met certain standards, the Commission issued an order 
approving the exchange's request to trade the security pursuant to its 
grant of UTP.<SUP>8 These requirements caused significant delays before 
exchanges could begin UTP trading in securities already traded on the 
listing exchange, even though over-the-counter (``OTC'') dealers were 
not subject to UTP limitations.<SUP>9 The delay in trading, resulting 
from the previous application procedures, was especially criticized by 
competing exchanges because, while the Commission published for comment 
hundreds of exchange applications for the extension of UTP each year, 
comments on the applications were extremely rare. Indeed, virtually no 
comments had been submitted to the Commission on a UTP application in 
over ten years.

    \7\When an exchange ``extends UTP'' to a security, the exchange 
allows its members to trade the security as if it were listed on the 
exchange. For discussions of the history of UTP in U.S. markets and 
Section 12(f) of the Exchange Act, see, e.g., Stephen L. Parker & 
Brandon Becker, Unlisted Trading Privileges, 14 Rev. Sec. Reg. 853 
(1981); and Walter Werner, Adventure in Social Control of Finance: 
The National Market System for Securities, 75 Colum. L. Rev. 1233 
(1975).
    \8\Section 12(f) required the Commission to review each UTP 
application to ensure the maintenance of fair and orderly markets 
and the protection of investors with respect to the extension of UTP 
to the securities named in the application. Pursuant to this 
standard of review, the staff identified, over time, certain areas 
of particular concern as they related to UTP. Accordingly, these 
areas included ensuring that the applicant exchange had proper 
trading rules in place to provide a fair and orderly market in each 
security named and had sufficient standards for regulatory oversight 
of each security to provide for the protection of investors. While 
Commission review of the applications led to occasional discoveries 
of material deficiencies and errors in the applications, the 
overwhelming majority of applications raised no substantive issues.
    \9\As a technical matter, Section 12(a) limits the trading of 
securities on an exchange to those securities that are listed and 
registered on that exchange. Section 12(f), both prior to and 
following this amendment, makes an exemption from this requirement 
for securities traded pursuant to UTP. OTC dealers are not subject 
to the Section 12(a) listing requirement because they do not 
transact business on an exchange.
---------------------------------------------------------------------------

    In response to the Concept Release that initiated the Market 2000 
Study,<SUP>10 resulting in the Division of Market Regulation's 
(``Division'') report, Market 2000: An Examination of Current Equity 
Market Developments, some commenters noted that the regulatory process 
for UTP could be a potential area for reform.<SUP>11 After publication 
of the Concept Release, on June 22, 1994, the Telecommunications and 
Finance Subcommittee of the House Committee on Energy and Commerce 
(``Subcommittee'') held a hearing on the UTP Act, ultimately adopted on 
October 22, 1994.<SUP>12

    \10\See Securities Exchange Act Release No. 30920 (July 14, 
1992), 57 FR 32587 (``Concept Release'').
    \11\See letter from William G. Morton, Jr., Boston Stock 
Exchange; John L. Fletcher, Midwest (currently Chicago) Stock 
Exchange; Leopold Korins, Pacific Stock Exchange; and Nicholas A. 
Giordano, Philadelphia Stock Exchange, to Jonathan G. Katz, 
Secretary, Commission, dated December 11, 1992. See also, Division 
of Market Regulation, Securities and Exchange Commission, Market 
2000: An Examination of Current Equity Market Developments (January 
1994).
    \12\A representative of the Division and representatives of 
several self-regulatory organizations testified at this hearing. The 
Unlisted Trading Privileges Act of 1994 and Review of the SEC's 
Market 2000 Study: Hearing Before the Subcomm. on Telecommunications 
and Finance of the House Comm. on Energy and Commerce, 103d Cong., 
2d Sess. (1994) (``UTP Hearing'').
---------------------------------------------------------------------------

    The UTP Act, among other matters, removed the application, notice, 
and Commission approval process from Section 12(f) of the Exchange Act, 
except in cases of Commission suspension of UTP in a particular 
security on an exchange. Thus, the UTP Act generally allows an exchange 
to extend UTP to any security when it becomes listed and registered on 
another exchange or included in Nasdaq, subject to certain 
limitations.<SUP>13

    \13\Section 12(f)(1)(E) prohibits extension of unlisted trading 
privileges in securities that are registered under Section 12(g) of 
the Exchange Act (generally, ``OTC securities''), except pursuant to 
a rule, regulation or order of the Commission approving such 
extension or extensions. The Commission's order approving the on-
going pilot program, including all limitations and conditions 
therein, is deemed such an order. See Securities Exchange Act 
Release No. 34371 (July 13, 1994), 59 FR 37103. Pursuant to Section 
12(f)(1)(E), the Commission will consider issues involved in 
extensions of UTP to OTC securities as the Commission continues it 
on-going review of the operation of the pilot program.
---------------------------------------------------------------------------

    Specifically, the UTP Act grants exchanges the authority to trade 
any security via UTP immediately upon listing on another exchange, 
provided that the security is not a listed IPO security, as defined in 
the UTP Act.<SUP>14 For listed IPO securities, the UTP Act contains a 
temporary provision that requires exchanges to wait, before trading any 
listed IPO security, until the third day of trading in the security on 
the listing exchange. This provision also requires the Commission to 
prescribe by rule or regulation, within 180 days of the enactment of 
the UTP Act, the mandatory delay (or, ``duration of the interval''), if 
any, that should apply to UTP extensions to listed IPO 
securities.<SUP>15

    \14\Section 12(f)(1)(B), read jointly with Section 
12(f)(1)(A)(i), as amended, provides this exception for listed IPO 
securities. In defining securities that fall within the exception, 
new subparagraphs 12(f)(1)(G)(i) and (ii) provide:
    (i) a security is the subject of an initial public offering if--
    (I) the offering of the subject security is registered under the 
Securities Act of 1933; and
    (II) the issuer of the security, immediately prior to filing the 
registration statement with respect to the offering, was not subject 
to the reporting requirements of section 13 or 15(d) of this title; 
and
    (ii) an initial public offering of such security commences at 
the opening of trading on the day on which such security commences 
trading on the national securities exchange with which such security 
is registered.
    15 U.S.C. 78l(f)(1)(G).
    \15\15 U.S.C. 78l(f)(1)(C). The UTP Act temporary two-day delay 
provision for UTP in listed IPOs expires on the earlier of the 
effective date of a Commission rule prescribing the appropriate 
interval of delay, if any, or 240 days following the enactment of 
the UTP Act.
---------------------------------------------------------------------------

    The UTP Act also provides the Commission with rulemaking authority 
to prescribe additional procedures or requirements for exchange 
extensions of UTP to any security, and allows the Commission summarily 
to suspend UTP in a security at any time within 60 days of the 
commencement of trading on the relevant exchange pursuant to UTP. Upon 
suspension, the exchange must cease trading pursuant to UTP in the 
security. An exchange seeking to reinstate UTP in the security, 
following a Commission suspension, must file an application with the 
Commission pursuant to procedures that the Commission may prescribe by 
rule or order for the maintenance of fair and orderly markets, the 
protection of investors and the public interest, or otherwise in 
furtherance of the purposes of the Exchange Act. Public notice by the 
Commission of an exchange application to reinstate suspended UTP, and 
Commission review of the application, are also required. The amended 
Section 12(f) notice, review, and Commission approval provisions are 
substantially similar to the requirements that previously applied to an 
exchange's initial extension of UTP to a security under former Section 
12(f).<SUP>16

    \16\See Section 12(f)(2), as amended, 15 U.S.C. 78l(f)(2).
---------------------------------------------------------------------------

III. Extensions of UTP to Listed Securities That Are the Subject of an 
Initial Public Offering

A. Proposed Rule 12f-2

    Proposed Rule 12f-2 would have allowed exchanges to extend UTP to a 
listed IPO security when at least one transaction in the security had 
been effected on the listing exchange and the 
[[Page 20893]] transaction had been reported pursuant to an effective 
transaction reporting plan as defined in Rule 11Aa3-1 under the 
Exchange Act.<SUP>17 The proposed rule, therefore, would have shortened 
the mandatory waiting period (or ``interval,'' as it is described in 
the UTP Act) for UTP in listed IPO securities from two trading days, as 
temporarily specified by amended Section 12(f),<SUP>18 to the time that 
it takes to effect and report the initial trade in the security on a 
listing exchange. The result of the proposed rule would have been to 
permit the regional exchanges to trade listed IPOs at essentially the 
same time as the primary listing exchange.

    \17\17 CFR 240.11Aa3-1 (1991).
    \18\See supra note 15.
---------------------------------------------------------------------------

    The Commission proposed a one-trade delay for UTP in listed IPOs 
because the Commission preliminarily believed that it was appropriate 
to minimize regulatory restraints on competition for trading listed IPO 
securities. In soliciting comments on proposed Rule 12f-2, however, the 
Commission noted a previous New York Stock Exchange (``NYSE'') position 
that listed IPOs should be traded solely on the listing market for a 
``short'' period of time to help ensure market efficiency immediately 
following the IPO.<SUP>19 The Commission also cited a report on the UTP 
Act by the House Committee on Energy and Commerce (``Committee''), in 
which the Committee directed the markets to provide the Commission with 
trading activity data on the effects of UTP in IPOs (including, for 
example, any volatility effects on the security), so that the 
Commission could determine whether the benefits of confining early 
trading in IPOs to one marketplace would be outweighed by the benefits 
of removing regulatory delays that inhibit competition among 
markets.<SUP>20

    \19\See Proposing Release, supra note 1, citing prepared 
testimony of Edward A. Kwalwasser, Executive Vice President, 
Regulation, New York Stock Exchange, UTP Hearing, supra note 12.
    \20\See Proposing Release, supra note 1, citing H.R. Rep. No. 
626, 103d Cong., 2d Sess. (1994). The Committee also identified the 
experience of third market trading in listed IPOs as relevant to 
this inquiry.
---------------------------------------------------------------------------

    The Commission solicited comments on these issues, specifically 
seeking comments on certain items that would be particularly useful to 
the Commission. These included identification and analysis of the 
potential harms and benefits that would result from either no waiting 
period, or from a longer waiting period than that proposed by the 
Commission. To the extent that commenters believed a waiting period 
would be appropriate, the Commission requested that they provide data 
to illustrate the potential negative effects on the pricing of an IPO. 
The Commission also suggested that commenters might provide an analysis 
of the effects of the two-day waiting period temporarily in effect 
under the UTP Act. Finally, the Commission stated that it would be 
interested in receiving alternative proposed rules from commenters who 
believe that either no waiting period or a longer waiting period would 
be appropriate.
    In addition, the Commission sought comment on whether any 
Commission action would be necessary under Section 12(f), as amended, 
in order to carry out the congressional objectives of linked markets as 
required by Section 11A(a)(1)(D).<SUP>21 Specifically, the Commission 
requested comment on whether changes should be made to the consolidated 
quotation, trade reporting, and order routing systems, now that 
exchanges and linking facilities will have less time to prepare for 
multiple exchange trading in the securities. The Commission expressed 
particular interest in receiving comments concerning any existing 
procedural delays that should be corrected by Commission action to 
ensure that the operation of amended Section 12(f) is not impeded.

    \21\Section 11A(a)(1)(D) of the Exchange Act provides:
    The linking of all markets for qualified securities through 
communication and data processing facilities will foster efficiency, 
enhance competition, increase the information available to brokers, 
dealers, and investors, facilitate the offsetting of investors' 
orders, and contribute to best execution of such orders.
    15 U.S.C. 78k-1(a)(1)(D).
---------------------------------------------------------------------------

B. Comments on Proposed Rule 12f-2

    The Commission received a total of eight comment letters on 
proposed Rule 12f-2, five of which supported the proposed rule,<SUP>22 
and three of which opposed the proposal.<SUP>23 Shortly prior to the 
publication of the proposed rules, the Commission also received a study 
from the Philadelphia Stock Exchange (``Phlx''), submitted on behalf of 
the Boston Stock Exchange, Inc., the Chicago Stock Exchange Inc., and 
the Pacific Stock Exchange Inc., concerning certain volume and pricing 
characteristics of listed IPOs.<SUP>24

    \22\See BSE letter, Chx letter, PSE letter, Phlx response, and 
PSE response, supra note 4.
    \23\See CS First Boston letter, Lehman letter, and NYSE letter, 
supra note 4.
    \24\See Phlx Study, supra note 6.
---------------------------------------------------------------------------

    The Phlx Study shows high volume in IPOs during the early days of 
trading, particularly on the first and second day of trading. Based on 
this data, the Phlx Study states that a restriction on UTP in IPOs 
creates a substantial negative effect on competition, both in relation 
to the listing exchange and OTC dealers.<SUP>25 The Phlx Study 
concludes that the Commission should adopt a rule for UTP in listed 
IPOs that would allow the regional exchanges to trade the securities on 
the first day of trading.

    \25\See supra note 9.
---------------------------------------------------------------------------

    These competitive concerns were reiterated by the other comment 
letters supporting the proposed rule.<SUP>26 One regional exchange also 
states that it has listed IPOs simultaneously with the NYSE and has 
seen no adverse effect related to the dual listings.<SUP>27 This 
exchange argues that the NYSE has not been able to identify any adverse 
effects from the dual listing of IPOs. Another regional exchange states 
that, since the UTP Act reduced the waiting period to two days, there 
have been no instances of pricing disparities, inordinate volatility, 
or issuer complaints for securities traded by regional exchanges on the 
third trading day of IPOs, and no offering has been adversely affected 
by regional trading.<SUP>28

    \26\See BSE letter, Chx letter, and PSE letter, supra note 4.
    \27\See Chx letter, supra note 4.
    \28\See PSE letter, supra note 4.
---------------------------------------------------------------------------

    The Commission received three comment letters, one from the NYSE 
and two from underwriters, expressing opposition to proposed Rule 12f-
2.<SUP>29 These commenters believe that immediate regional exchange 
trading of IPOs would increase price volatility in the trading of IPO 
securities because the underwriters would not have sufficient time to 
ensure an orderly distribution of the securities. Two of the commenters 
argued that the temporary two-day delay should continue in 
place,<SUP>30 while the third commenter recommends at the very least a 
one-day trading delay.<SUP>31 Those proposing a two-day delay base 
their recommendation on data compiled by Lehman Brothers (``Lehman 
Study''), showing higher volatility in some Nasdaq IPOs than in 
selected NYSE IPOs. The two letters assert that this data demonstrates 
that dispersed initial trading of IPOs in the Nasdaq market is more 
volatile than initial centralized trading of IPOs.

    \29\See NYSE letter, CS First Boston letter, and Lehman letter, 
supra note 4.
    \30\See NYSE letter and Lehman letter, supra note 4.
    \31\See CS First Boston letter, supra note 4.
---------------------------------------------------------------------------

    The Commission received two comment letters from two regional 
exchanges in response to the comments opposing the proposed 
rule.<SUP>32 One of these commenters believes that National Market 
System procedures and practices are capable of providing effective 
[[Page 20894]] pricing for IPOs, contrary to the concerns voiced by the 
opposing comment letters.<SUP>33 The commenter also believes that only 
upward price volatility risk exists for early IPO trading, particularly 
because underwriters may place stabilizing bids in IPOs to limit 
declines in the prices of the securities.

    \32\PSE response and Phlx response, supra note 4.
    \33\PSE response, supra note 4.
---------------------------------------------------------------------------

    The second response letter reiterates these points, and also notes 
that regional exchange opening, high, low, and closing prices in IPOs 
that were dually-listed among one regional exchange and the NYSE were 
consistent with NYSE comparable prints.<SUP>34 In addition to providing 
its reasons for believing that price volatility in early trading of 
IPOs is limited to upward movements in the price of the security, the 
commenter also concludes that price volatility is generated by supply 
and demand in securities and that, as a natural by-product of a free 
and open market, price volatility should never be used as a reason to 
exclude some equally-regulated competitors from the marketplace.<SUP>35

    \34\See Phlx response, supra note 4.
    \35\As discussed in Section III.C., infra, the Phlx response and 
the Chx letter suggest enhancements to certain Intermarket Trading 
System (``ITS'') procedures in order to facilitate the extension of 
unlisted trading privileges pursuant to the new streamlined 
requirements for UTP under the UTP Act.
---------------------------------------------------------------------------

C. Commission Response

    The Commission is adopting a revised version of Rule 12f-2. Instead 
of requiring exchanges to wait until the listing exchange of an IPO 
reports the first trade in the security to the Consolidated Tape, as 
originally proposed, exchanges will be required to wait, before trading 
the security pursuant to a grant of UTP, until the opening of business 
on the day following the IPO. For the reasons discussed below, the 
Commission believes that this ``one-trading-day'' delay for UTP in 
listed IPOs is appropriate for the maintenance of fair and orderly 
markets, the protection of investors, and otherwise in furtherance of 
the purposes of the Exchange Act, as required by the UTP Act.
    As a general matter, the Commission agrees with the regional 
exchanges that early UTP in IPO securities would enhance the ability of 
multiple markets to compete with the listing exchange for the 
substantial volume occurring on the initial trading days of IPOs. As 
discussed below, however, several commenters raise the possibility that 
virtually immediate UTP in IPO securities could complicate the pricing 
and orderly distribution of IPO securities by increasing the risk of 
price volatility as the securities are distributed immediately to the 
public. In light of these concerns, and in particular those raised by 
the underwriters who believe that IPO pricing may be at risk if there 
were no opportunity for early centralized trading, the Commission is 
adopting a rule to provide a one-trading-day delay for UTP in IPO 
securities.
    The Commission believes that a one-trading-day delay to precede UTP 
in listed IPOs is appropriate at this time primarily because the 
Commission is concerned that the first day of trading in an IPO on an 
exchange presents special circumstances, including initial pricing, an 
attempt to effectuate an orderly distribution of securities, high 
trading volume, and the resulting potential for high price volatility 
in the securities, that could have a significant effect on pricing and 
distribution of IPOs. In light of the comments regarding the possible 
impact of immediate UTP for the IPO process, the Commission believes, 
therefore, that a one-trading-day delay is warranted in order to ensure 
the protection of investors as required by the UTP Act, and by the 
Exchange Act in general.
    The Phlx Study and Phlx response discuss the five IPO securities 
that were dually-listed on one regional exchange and the NYSE, and 
state that regional trades virtually always occurred within the NYSE 
daily trading range on the first and second trading days of the IPO. 
The Commission considers this limited amount of data insufficient to 
show that immediate UTP will not increase price volatility across the 
markets. In addition to the limited number of occurrences reviewed, 
this information only addresses listings on one exchange competing with 
the listing exchange, rather than the effects of five markets trading 
the IPO simultaneously with the listing exchange.
    The Commission also believes that there is insufficient evidence on 
the record to warrant a longer waiting period than the first trading 
day to precede UTP in listed IPOs. It appears that the risk of high 
price volatility for listed IPOs and the resultant impact on IPO 
distributions decreases after the first day of trading.
    In light of the concerns raised and the limited nature of the 
trading data available, the Commission is adopting the one-trading-day 
delay for UTP in listed IPOs. The Commission currently believes that 
this one-day restriction is necessary and appropriate for the 
maintenance of fair and orderly markets and the protection of investors 
with respect to IPOs. This conclusion is premised on the importance of 
the initial trading of IPOs for the offering process, the concerns 
raised regarding orderly IPO distribution, and the limited data 
responding to those concerns.
    The Commission is sympathetic to concerns that a one-trading-day 
delay for exchange extensions of UTP will restrict regional exchange 
trading, while OTC dealers will continue to be free to trade the 
securities upon effective registration. The evidence presented in the 
Phlx study, however, shows that in virtually all IPOs studied, OTC 
market makers trade the securities only in extremely small volume, if 
at all, on the first day of the IPO. The Commission believes, 
therefore, that any competitive advantage to OTC market makers is 
minimal, and is outweighed by the benefit to investors and the capital 
formation process that should be accrued by decreasing the risk of 
price volatility in the IPO securities.
    The Commission will continue, of course, to monitor the experience 
with the trading of IPOs under the amended Rule. The Commission is 
willing to consider revisiting the question of the appropriate waiting 
period for UTP in listed IPOs after experience has been gained with the 
amended rules.
    Two commenters who urged adoption of the proposed rule also 
responded to the Commission's solicitation of comments on any necessary 
enhancements to National Market Systems to facilitate operation of the 
UTP Act. One commenter suggested that all ITS Participants should be 
permitted to participate in the opening on the first day of trading on 
the listing exchange via the ITS.<SUP>36 Another commenter stated that 
the new UTP trading regimen necessitates more reactive procedures by 
the ITS Participants and the Securities Industry Automation Corporation 
(``SIAC''), the ITS facilities manager.<SUP>37 The commenter urged SIAC 
to make ITS automatically available for any UTP security on the day 
following a regional exchange's request that the security be available 
for ITS use.

    \36\See Chx letter, supra note 4.
    \37\See Phlx response, supra note 4.
---------------------------------------------------------------------------

    The Commission urges the ITS Participants to enhance their 
procedures for ITS eligibility of securities. The Commission notes that 
the ITS Pre-Opening Application and the ITS Trade-Through Rule are 
designed, in part, to ensure orderly pricing of securities among the 
various Participant market centers. Thus, the Commission believes that 
the ITS Participants should move forward to ensure that the ITS is 
available for use by all interested [[Page 20895]] participant markets 
in time to participate in the opening trade of a listed IPO security on 
the second day the security trades.

IV. Exchange Rules for Securities to Which Unlisted Trading Privileges 
are Extended (Rule 12f-5)

    Section 12(f)(1)(D) of the Exchange Act, as amended, authorizes the 
Commission to prescribe, by rule or regulation, such additional 
procedures or requirements for extending UTP to any security as the 
Commission deems necessary or appropriate for the maintenance of fair 
and orderly markets, the protection of investors and the public 
interest, or otherwise in furtherance of the purposes of the Exchange 
Act. Pursuant to this authority, the Commission proposed Rule 12f-5, 
which would prohibit an exchange from extending UTP to any security 
unless the exchange has in effect a rule or rules providing for 
transactions in the class or type of security to which the exchange 
extends UTP.
    The Commission solicited comment on whether proposed Rule 12f-5 
would help ensure that an exchange has the necessary rules in place to 
provide for fair and orderly markets in all securities to which the 
exchange extends UTP. The Commission received one response to this 
question.<SUP>38 This commenter supported the rule, and requested that 
the Commission, in this release, clarify that, prior to commencing UTP 
trading, an exchange should be required to have entered into 
appropriate information sharing agreements with foreign exchanges (or 
the Commission with foreign regulators), comparable to that required of 
the listing exchange for the particular product.<SUP>39

    \38\See Amex letter, supra note 4.
    \39\The commenter also suggested that the Commission make clear 
that OTC transactions in exchange-listed securities must be subject 
to the same regulatory requirements as those imposed by the listing 
exchange and by other exchanges trading the security pursuant to 
UTP, which could be accomplished by a amendment to the rules of the 
National Association of Securities Dealers. The Commission believes 
that this recommendation is outside the scope of the present 
rulemaking, which deals specifically with exchange extensions of 
UTP.
---------------------------------------------------------------------------

    The Commission is adopting Rule 12f-5, as proposed, as a means to 
ensure that exchanges meet their obligation under the Exchange Act to 
have these rules and oversight mechanisms in place on their exchanges 
for the relevant securities before extending UTP to the securities. As 
discussed in the Proposing Release, the rule is intended to preserve a 
benefit of Commission review of UTP applications that was required by 
Section 12(f) prior to the UTP Act. Previously, the Commission reviewed 
each UTP application to ensure that the applicant exchange had rules in 
place to cover the trading of the product class of the security for 
which the exchange applied. Now that the Commission will no longer 
review UTP applications, the Commission believes that the requirements 
set forth in Rule 12f-5 are appropriate because the rule confirms to 
exchanges their obligation to evaluate their extensions of UTP to 
determine that the exchanges are authorized to list the product class 
of securities before allowing their members to trade the securities. 
Finally, in regard to the comment that exchanges must enter into an 
appropriate information sharing agreement for all securities traded 
thereon, Rule 12f-5 will ensure that an exchange granting UTP in a 
security has secured previous Commission approval to trade the product 
class of security pursuant to Section 19(b) of the Exchange Act.<SUP>40 
The Commission, in such approval process, will have determined the 
adequacy of information sharing arrangements for the particular 
exchange.

    \40\15 U.S.C. 78s(b).
---------------------------------------------------------------------------

V. Amendments to Rules 12f-1 and 12f-3, and Rescission of Previous 
Rules 12f-2 and 12f-6

    Several of the rules prescribed under former Section 12(f) 
concerned the application process for extensions of UTP. The Commission 
proposed to amend or rescind these rules to reflect statutory changes, 
and solicited comment on whether the proposed changes were appropriate. 
No comments were received on these proposals. The Commission is 
adopting the amendments to existing Rules 12f-1 and 12f-3, and is 
rescinding existing Rules 12f-2 and 12f-6, as proposed.
    First, Rule 12f-1<SUP>41 is amended to limit its operation to an 
exchange's application to reinstate UTP after a Commission suspension. 
The amended rule will require essentially the same format for 
applications to reinstate UTP as was required by the rule under former 
Section 12(f) for applications to extend UTP. The Commission believes 
the amendment is an appropriate means to carry out the intention of the 
new Section 12(f)(2) requirement for exchange UTP applications in cases 
where exchanges seek to reinstate UTP for a security that was 
previously suspended by the Commission.

    \41\17 CFR 240.12f-1 (1991).
---------------------------------------------------------------------------

    Second, Rule 12f-2 is rescinded and Form 27, referred to in 
previous Rule 12f-2, is removed.<SUP>42 This rule and form dealt with 
instances where an exchange might have been required to cease extending 
UTP, and to reapply for UTP, in a security that was ``changed'' (as 
described in the rule) immaterially for those purposes. The rule and 
form provide an exemption from reapplication for UTP in these cases. 
The Commission is rescinding these items because the application 
procedures, from which the rule provided an exemption, no longer exist.

    \42\17 CFR 240.12f-2 (1991).
---------------------------------------------------------------------------

    Third, the Commission is rescinding the last sentence of paragraph 
(b) of Rule 12f-3.<SUP>43 Rule 12f-3 allows the issuer of a security 
that is traded pursuant to UTP, or any broker or dealer who makes a 
market in the security, or any other person having a bona fide interest 
in the question of termination or suspension of UTP in the security, to 
apply to the Commission for the termination or suspension of UTP in the 
security. The Rule also identifies the categories of information that 
should be provided in the application, which include the applicant's 
statement that it has sent a copy of the application to the exchange 
from which the suspension or termination is sought. Thereafter, the 
Rule provides that the exchange may terminate or suspend UTP in the 
security in accordance with its rules. The Rule also required the 
exchange, upon suspension or termination, promptly to file Form 28 with 
the Commission.

    \43\17 CFR 240.12f-3 (1991).
---------------------------------------------------------------------------

    This final requirement no longer is necessary because exchanges are 
no longer required to apply to the Commission to extend UTP to a 
security. The Commission, therefore, is rescinding that last 
requirement from the Rule concerning Form 28 and is removing Form 28 to 
conform further with efforts to streamline the regulatory process 
concerning UTP.
    Finally, the Commission is rescinding Rule 12f-6, which exempted a 
merged exchange from the UTP application process in certain 
circumstances.<SUP>44 The exemption no longer is necessary because the 
waiting period that restrained exchanges from extending UTP to most 
securities no longer exists.

    \44\17 CFR 240.12f-6 (1991).
---------------------------------------------------------------------------

VI. Effects on Competition and Regulatory Flexibility Act 
Considerations

    Section 23(a)(2) of the Exchange Act<SUP>45 requires that the 
Commission, when adopting rules under the Exchange Act, consider the 
anticompetitive effects of those rules, if any, and balance any 
anticompetitive impact against the [[Page 20896]] regulatory benefits 
gained in terms of furthering the purposes of the Exchange Act. The 
Commission believes that adoption of Rules 12f-2 and 12f-5, and the 
amendments to Rules 12f-1 and 12f-3, and the rescission of previous 
Rules 12f-2 (to be replaced with new Rule 12f-2) and 12f-6 will not 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act. Specifically, as 
discussed in more detail above, the Commission believes that the new 
Rule 12f-2 one-trading-day delay for UTP in IPOs provides a minimal 
restraint on competition among market centers which is outweighed by 
the benefits associated with the resulting reduction of potential price 
volatility risk in IPO securities. In addition, the one-trading-day 
delay is shorter than the current temporary two-trading day delay.

    \45\15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The Commission has prepared a Final Regulatory Flexibility Analysis 
(``FRFA'') regarding the amendments and rescissions to the rules under 
Section 12(f), in accordance with 5 U.S.C. 604. The FRFA notes the 
minimal economic effect on the minimal number of small businesses, if 
any, that may be generated by these amendments to and rescissions of 
these rules under Section 12(f) of the Exchange Act. In addition, the 
FRFA notes that Rule 12f-2 should reduce the risk of high price 
volatility, and possible associated risk of loss to investors, in 
listed IPOs. The Commission believes that the benefits of reducing risk 
to investors outweigh the potential costs, if any, that might be 
incurred by, for example, small specialist firms on regional exchanges.
    A copy of the FRFA will be available for inspection and copying in 
the Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549.

VII. Effective Date

    The new rules and amendments to the Commission's rules and forms 
shall be effective immediately, in accordance with the Administrative 
Procedure Act, which allows effectiveness in less than 30 days after 
publication for, inter alia, ``a substantive rule which grants or 
recognizes an exemption or relieves a restriction.'' 5 U.S.C. 
553(d)(1). Moreover, the Administrative Procedures Act allows for 
accelerated effectiveness ``as provided by the agency for good cause 
and published with the Rule.'' 5 U.S.C. 553(d)(3). Accelerated 
effectiveness of the rules and amendments is necessary in order to 
ensure compliance with the UTP Act, which requires the Commission to 
prescribe the duration of the waiting period, if any, for UTP in listed 
IPOs ``[n]ot later than 180 days after the date of enactment of the 
Unlisted Trading Privileges Act of 1994 * * *.''<SUP>46

    \46\Section 12(f)(1)(C), as amended, 15 U.S.C. 78l(f)(1)(C).
---------------------------------------------------------------------------

List of Subjects in 17 CFR Parts 240 and 249

    Reporting and recordkeeping requirements, Securities.

    For the reasons set out in the preamble, the Commission hereby 
amends title 17, chapter II of the Code of Federal Regulations as 
follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for Part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg, 
77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p, 
78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-
37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
    2. Section 240.12f-1 is amended by revising the section heading and 
introductory text of paragraph (a), redesignating paragraphs (a)(5) and 
(a)(6) as paragraphs (a)(6) and (a)(7), adding paragraph (a)(5), and 
revising newly designated paragraph (a)(6) to read as follows:


Sec. 240.12f-1  Applications for permission to reinstate unlisted 
trading privileges.

    (a) An application to reinstate unlisted trading privileges may be 
made to the Commission by any national securities exchange for the 
extension of unlisted trading privileges to any security for which such 
unlisted trading privileges have been suspended by the Commission, 
pursuant to section 12(f)(2)(A) of the Act (15 U.S.C. 78l(2)(A)). One 
copy of such application, executed by a duly authorized officer of the 
exchange, shall be filed and shall set forth:
    (1) * * *
    (5) The date of the Commission's suspension of unlisted trading 
privileges in the security on the exchange;
    (6) Any other information which is deemed pertinent to the question 
of whether the reinstatement of unlisted trading privileges in such 
security is consistent with the maintenance of fair and orderly markets 
and the protection of investors; and
* * * * *
    3. Section 240.12f-2 is revised to read as follows:


Sec. 240.12f-2  Extending unlisted trading privileges to a security 
that is the subject of an initial public offering.

    (a) General Provision--A national securities exchange may extend 
unlisted trading privileges to a subject security on or after such 
national securities exchange opens for trading on the day that follows 
the day on which the initial public offering of such subject security 
commences.
    (b) The extension of unlisted trading privileges pursuant to this 
section shall be subject to all the provisions set forth in Section 
12(f) of the Act (15 U.S.C. 78l(f)), as amended, and any rule or 
regulation promulgated thereunder, or which may be promulgated 
thereunder while the extension is in effect.
    (c) Definitions. For the purposes of this section:
    (1) The term subject security shall mean a security that is the 
subject of an initial public offering, as that term is defined in 
section 12(f)(1)(G)(i) of the Act (15 U.S.C. 78l(f)(1)(G)(i)), and
    (2) An initial public offering commences at such time as is 
described in section 12(f)(1)(G)(ii) of the Act (15 U.S.C. 
78l(f)(1)(G)(ii)).
    4. Section 240.12f-3 is amended by revising paragraph (b) to read 
as follows:


Sec. 240.12f-3.  Termination or suspension of unlisted trading 
privileges.

* * * * *
    (b) Unlisted trading privileges in any security on any national 
securities exchange may be suspended or terminated by such exchange in 
accordance with its rules.
    5. Section 240.12f-5 is added to read as follows:


Sec. 240.12f-5  Exchange rules for securities to which unlisted trading 
privileges are extended.

    A national securities exchange shall not extend unlisted trading 
privileges to any security unless the national securities exchange has 
in effect a rule or rules providing for transactions in the class or 
type of security to which the exchange extends unlisted trading 
privileges.
    6. Section 240.12f-6 is removed and reserved.

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    7. The authority citation for Part 249 continues to read in part as 
follows:

    Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;
* * * * *


Secs. 249.27 and 248.28  [Removed]

    8. Sections 249.27 and 248.28 are removed.

    [[Page 20897]] Dated: April 21, 1995.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-10487 Filed 4-27-95; 8:45 am]
BILLING CODE 8010-01-P