Federal Register / Vol. 60, No. 82 / Friday, April 28, 1995 / Rules and Regulations 20891

1See 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).

4See 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.

5See BSE letter, Chx letter, CS First Boston letter,

Lehman letter, NYSE letter, PSE letter, Phlx

response, and PSE response, id.

6See 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.

200 of the Accomplishment Instructions of

that service bulletin.

(e) An alternative method of compliance or

adjustment of the compliance time that

provides an acceptable level of safety may be

used if approved by the Manager, New York

Aircraft Certification Office (ACO), ANE–170,

FAA, Engine and Propeller Directorate.

Operators shall submit their requests through

an appropriate FAA Principal Maintenance

Inspector, who may add comments and then

send it to the Manager, New York ACO.

Note 2: Information concerning the

existence of approved alternative methods of

compliance with this AD, if any, may be

obtained from the New York ACO.

(f) Special flight permits may be issued in

accordance with sections 21.197 and 21.199

of the Federal Aviation Regulations (14 CFR

21.197 and 21.199) to operate the airplane to

a location where the requirements of this AD

can be accomplished.

(g) The inspections, measurement, repair,

and restoration shall be done in accordance

with de Havilland Service Bulletin S.B. 8–

73–18 (for Model DHC–8–100 series

airplanes), or de Havilland S.B. 8–73–19 (for

Model DHC–8–300 series airplanes), both

dated April 29, 1994. This incorporation by

reference was approved by the Director of the

Federal Register in accordance with 5 U.S.C.

552(a) and 1 CFR part 51. Copies may be

obtained from Bombardier Inc., Bombardier

Regional Aircraft Division, Garratt Boulevard,

Downsview, Ontario, Canada M3K 1Y5.

Copies may be inspected at the FAA,

Transport Airplane Directorate, 1601 Lind

Avenue, SW., Renton, Washington; or at

FAA, Engine and Propeller Directorate, New

York Aircraft Certification Office, 10 Fifth

Street, Third Floor, Valley Stream, New York;

or at the Office of the Federal Register, 800

North Capitol Street, NW., suite 700,

Washington, DC.

(h) This amendment becomes effective on

May 30, 1995.

Issued in Renton, Washington, on April 20,

1995.

Darrell M. Pederson,

Acting Manager, Transport Airplane

Directorate, Aircraft Certification Service.

[FR Doc. 95–10203 Filed 4–27–95; 8:45 am]

BILLING CODE 4910–13–U

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 1 under Section 12(f) of the

Securities Exchange Act of 1934

(‘‘Exchange Act’’),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.3

The Commission received nine

comment letters on the proposed rules, 4

eight of which discuss the proposed rule

concerning UTP in listed IPOs.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.6

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
20892 Federal Register / Vol. 60, No. 82 / Friday, April 28, 1995 / Rules and Regulations

7When 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).

8Section 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.

9As 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.

10See Securities Exchange Act Release No. 30920

(July 14, 1992), 57 FR 32587 (‘‘Concept Release’’).

11See 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).

12A 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’’).

13Section 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.

14Section 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.

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

78l(f)(2).

not listed and registered on that

exchange, i.e. by extending UTP to the

security.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.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.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.

In response to the Concept Release

that initiated the Market 2000 Study,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.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, 1994.12

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.13

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.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.15

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).16

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
Federal Register / Vol. 60, No. 82 / Friday, April 28, 1995 / Rules and Regulations 20893

17 17 CFR 240.11Aa3–1 (1991).

18See supra note 15.

19See 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.

20See 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.

21Section 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).

22See BSE letter, Chx letter, PSE letter, Phlx

response, and PSE response, supra note 4.

23See CS First Boston letter, Lehman letter, and

NYSE letter, supra note 4.

24See Phlx Study, supra note 6.

25See supra note 9.

26See BSE letter, Chx letter, and PSE letter, supra

note 4.

27See Chx letter, supra note 4.

28See PSE letter, supra note 4.

29See NYSE letter, CS First Boston letter, and

Lehman letter, supra note 4.

30See NYSE letter and Lehman letter, supra note

4.

31See CS First Boston letter, supra note 4.

32PSE response and Phlx response, supra note 4.

transaction had been reported pursuant

to an effective transaction reporting plan

as defined in Rule 11Aa3–1 under the

Exchange Act.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),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.

The Commission proposed a onetrade 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.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.20

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).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.

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,22 and three of which

opposed the proposal.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.24

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.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.

These competitive concerns were

reiterated by the other comment letters

supporting the proposed rule.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.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.28

The Commission received three

comment letters, one from the NYSE

and two from underwriters, expressing

opposition to proposed Rule 12f–2.29

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,30 while the

third commenter recommends at the

very least a one-day trading delay.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.

The Commission received two

comment letters from two regional

exchanges in response to the comments

opposing the proposed rule.32 One of

these commenters believes that National

Market System procedures and practices

are capable of providing effective
20894 Federal Register / Vol. 60, No. 82 / Friday, April 28, 1995 / Rules and Regulations

33PSE response, supra note 4.

34See Phlx response, supra note 4.

35As 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.

36See Chx letter, supra note 4.

37See Phlx response, supra note 4.

pricing for IPOs, contrary to the

concerns voiced by the opposing

comment letters.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.

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.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.35

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 onetrading-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.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.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.

The Commission urges the ITS

Participants to enhance their procedures

for ITS eligibility of securities. The

Commission notes that the ITS PreOpening Application and the ITS TradeThrough 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
Federal Register / Vol. 60, No. 82 / Friday, April 28, 1995 / Rules and Regulations 20895

38See Amex letter, supra note 4.

39The 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.

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

41 17 CFR 240.12f–1 (1991).

42 17 CFR 240.12f–2 (1991).

43 17 CFR 240.12f–3 (1991).

44 17 CFR 240.12f–6 (1991).

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

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.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.39

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.40 The

Commission, in such approval process,

will have determined the adequacy of

information sharing arrangements for

the particular exchange.

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–141 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.

Second, Rule 12f–2 is rescinded and

Form 27, referred to in previous Rule

12f–2, is removed. 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.

Third, the Commission is rescinding

the last sentence of paragraph (b) of

Rule 12f–3.43 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.

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.44 The

exemption no longer is necessary

because the waiting period that

restrained exchanges from extending

UTP to most securities no longer exists.

VI. Effects on Competition and

Regulatory Flexibility Act

Considerations

Section 23(a)(2) of the Exchange Act 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
20896 Federal Register / Vol. 60, No. 82 / Friday, April 28, 1995 / Rules and Regulations

46Section 12(f)(1)(C), as amended, 15 U.S.C.

78l(f)(1)(C).

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.

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 * * *.’’46

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:

§ 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:

§ 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:

§ 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:

§ 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;

* * * * *

§§ 249.27 and 248.28 [Removed]

8. Sections 249.27 and 248.28 are

removed.
Federal Register / Vol. 60, No. 82 / Friday, April 28, 1995 / Rules and Regulations 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

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Food and Drug Administration

21 CFR Parts 210 and 211

[Docket No. 88N–0320]

Current Good Manufacturing Practice

in Manufacturing, Processing, Packing,

or Holding of Drugs; Revision of

Certain Labeling Controls; Partial

Extension of Compliance Date

AGENCY: Food and Drug Administration,

HHS.

ACTION: Final rule; partial extension of

compliance date.

SUMMARY: The Food and Drug

Administration (FDA) is announcing a

continuation of the partial extension of

the compliance date for a provision of

the final rule, which was published in

the Federal Register of August 3, 1993

(58 FR 41348). The document revised

the current good manufacturing practice

(CGMP) regulations for certain labeling

control provisions. In the Federal

Register of August 2, 1994 (59 FR

39255), FDA partially extended the

compliance date for a provision of the

regulation to August 3, 1995, and

requested comments on the scope of this

provision. The agency is further

extending the compliance date to

August 2, 1996. FDA is taking this

action in order to adequately assess

comments received on the scope of a

particular provision of that rule.

DATES: The final rule published at 58 FR

41348, August 3, 1993, is effective

August 3, 1994. The date for compliance

with § 211.122(g) for items of labeling

(other than immediate container labels)

is extended to August 2, 1996. The date

of compliance for all other provisions of

the final rule remains August 3, 1994.

FOR FURTHER INFORMATION CONTACT:

Thomas C. Kuchenberg, Center for

Drug Evaluation and Research

(HFD–362), Food and Drug

Administration, 7500 Standish Pl.,

Rockville, MD 20855, 301–594–

1046, or

Paul J. Motise, Center for Drug

Evaluation and Research (HFD–

323), Food and Drug

Administration, 7500 Standish Pl.,

Rockville, MD 20855, 301–594–

1089.

SUPPLEMENTARY INFORMATION:

In the Federal Register of August 3,

1993 (58 FR 41348), FDA published a

final rule that amended the CGMP

regulations to require that certain

special control procedures be instituted

if cut labeling is used. One of these

procedures requires the use of

‘‘appropriate electronic or

electromechanical equipment to

conduct a 100-percent examination for

correct labeling during or after

completion of finishing operations’’

(§ 211.122(g)(2)).

On May 4, 1994, FDA received a

citizen petition from five trade

associations requesting that the agency

take a number of actions including, but

not limited to, extending the August 3,

1994, effective date of this rule as it

applies to labeling (other than the

immediate container labels) as defined

in section 201(m) of the Federal Food,

Drug, and Cosmetic Act (the act) (21

U.S.C. 321(m)). The petition stated that

additional time was needed because of

the unavailability of bar code or

machine readers as well as other

equipment necessary to orient the

labeling codes properly, and requested

that FDA reopen its administrative

record to reassess the scope of a certain

provision of the regulation, as discussed

below in this document.

On May 6, 1994, the agency received

an additional petition from a trade

association that requested, among other

things, a 1-year stay of the effective date;

the petitioner stated that additional time

was needed to locate, install, and

validate scanning equipment and other

necessary equipment to orient items

properly for bar code scanning.

Appropriate electronic or

electromechanical equipment primarily

consists of systems that scan identity

codes printed on labeling. If an incorrect

code is detected, the defective labeling

is ejected from the labeling line. FDA

contacted vendors of this equipment

and determined that while there was not

a general shortage of system hardware,

there was a possible shortage of contract

engineering firms employed by some

drug manufacturers to evaluate, select,

purchase, install, qualify, and validate

labeling verification systems.

In response to this situation, FDA

extended the compliance date of

§ 211.122(g) as it applied to items of

labeling (other than the immediate

container label) to assess further the

availability of equipment necessary for

compliance with the final rule and to

evaluate adequately other issues raised

by petitioners.

The first petition also requested that

the agency reopen the administrative

record to receive additional comments

on the application of § 211.122(g) to

items of labeling (other than that of the

immediate container label) as defined in

section 201(m) of the act. Both citizen

petitions contended that § 211.122(g)

expanded the proposed scope of the

provision from immediate container

labels to all drug product labeling.

In response to the issues raised, FDA

agreed to receive comments on this

issue and to evaluate those comments in

light of the existing language of

§ 211.122(g). The comment period

ended on October 4, 1994, and since

that time FDA has had a number of

meetings with representatives of the

labeling industry and others to

determine control options available

through current technology and to

evaluate this information in light of

comments received during the extended

comment period.

In order to adequately assess this

information, determine whether any

possible revision of the regulation

should result, and provide industry

adequate time to fully comply with a

final regulation, FDA is extending the

compliance date of § 211.122(g) as its

applies to items of labeling other than

the immediate container label to August

2, 1996. Should FDA determine, after

completing its assessment of the

comments, that § 211.122(g) should be

retained in its current state or revised,

FDA will provide notice of that decision

in a future issue of the Federal Register.

The compliance date for the remainder

of § 211.122, including § 211.122(g) as it

applies to immediate container labels,

was August 3, 1994. The agency

emphasizes, however, that § 211.125

makes a waiver of labeling

reconciliation conditional on a 100-

percent examination for correct labeling

performed in accordance with

§ 211.122(g)(2).

Dated: April 24, 1995.

William B. Schultz,

Deputy Commissioner for Policy.

[FR Doc. 95–10461 Filed 4–27–95; 8:45 am]

BILLING CODE 4160–01–F

21 CFR Part 310

[Docket No. 77N–334S]

RIN 0905–AA06

Topical Drug Products for Over-theCounter Human Use; Products for the

Prevention of Swimmer’s Ear and for

the Drying of Water-Clogged Ears;

Final Rule; Correction

AGENCY: Food and Drug Administration,

HHS.