[Federal Register Volume 60, Number 245 (Thursday, December 21, 1995)]
[Notices]
[Pages 66329-66333]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-31087]



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[[Page 66330]]


SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36594; File No. SR-Amex-95-29]


Self-Regulatory Organizations; American Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Notice of Filing and Order 
Granting Accelerated Approval to Amendment No. 1 to Proposed Rule 
Change Relating to Bond Listing Standards

December 14, 1995.

I. Introduction

    On July 19, 1995, the American Stock Exchange, Inc. (``Amex'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder, \2\ a proposed rule change to revise its standards for the 
listing and delisting of debt securities. On December 12, 1995, the 
Amex submitted to the Commission Amendment No. 1 to the proposed rule 
change.\3\

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1994).
    \3\ See letter from Claudia Crowley, Amex, to Glen Barrentine, 
Senior Counsel, Division of Market regulation, SEC, dated December 
12, 1995. Amendment No. 1 supplemented the proposal by specifying 
that (1) the underlying equities of listed convertible debt must be 
subject to real-time last sale reporting in the United States, (2) 
specialists assigned to municipal debt must comply with MSRB Rule G-
3, (3) municipal securities will not be subject to off-board trading 
restrictions, and (4) unrated debt securities of unaffiliated 
issuers may be listed if an NRSRO has currently assigned an 
investment grade rating to an immediately senior issue by the same 
company.
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 36225 (September 13, 1995), 60 FR 48734 
(September 20, 1995). No comments were received on the proposal. This 
order approves the proposed rule change, including Amendment No. 1 on 
an accelerated basis.

II. Description of the Proposal

    Section 104 of the Amex's Company Guide sets forth the current 
standards for listing bonds and debentures. Presently, the Amex will 
consider listing a debt security if: (1) The company appears to be in a 
financial position sufficient to satisfactorily service the debt issue; 
(2) the issuer meets the size and earnings guidelines applicable to 
issuers listing common stock; \4\ and (3) the issue has an aggregate 
market value and principal amount of at least $5 million for issuers 
that have common stock listed on the Amex or the New York Stock 
Exchange (``NYSE''), or at least $20 million and 100 holders for 
issuers that do not have securities listed on the Amex or NYSE. The 
Amex presently gives consideration to delisting a bond issue if the 
aggregate market value or principal amount falls below $400,000. For 
convertible debt, continued listing is dependent upon the underlying 
security remaining in compliance with the Amex's numerical criteria for 
that security.

    \4\ The Amex guidelines provide for the issuer to have 
stockholders' equity of at least $4,000,000 and pre-tax income of at 
least $750,000 in its last fiscal year, or in two of its last three 
fiscal years.
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    The Amex proposes to amend its standards for the listing of debt 
securities with a view towards making the Exchange more accessible to 
debt issuers and facilitating the listing of such securities.\5\ 
Specifically, the proposal eliminates the requirements that the issuer 
demonstrate that it will be able to satisfactorily service the debt 
issue, and that the issuer meet the size and earnings guidelines 
applicable to companies listing common stock. The proposal also removes 
the requirement that issuers that do not have securities listed on the 
Amex or NYSE have at least 100 holders and an aggregate market value 
and principal amount of $20 million. Finally, the proposal modifies the 
current aggregate market value and principal amount requirement by 
stating that the issuer must have at least $5 million in aggregate 
market value or principal amount.

    \5\ The Commission notes that the new guidelines for listing 
debt securities are substantially similar to the NYSE's debt listing 
standards, which the Commission approved in Securities Exchange Act 
Release No. 34019 (May 5, 1994), 59 FR 24765 (May 12, 1994).
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    In place of the current guidelines, the proposal provides that the 
Amex may list an issuer's debt securities if an issuer of an equity 
security listed on the Amex or NYSE is in ``good standing'' with the 
respective exchange,\6\ and has an aggregate market value or principal 
amount of at least $5 million. This standard also will apply to an 
issuer that is owned by, or under common control with, an issuer of 
equity securities listed on the Exchange or the NYSE (``listed 
issuer''); and to an issuer whose debt securities are guaranteed by a 
listed issuer.

    \6\ A company is in ``good standing'' if it is above the 
relevant continued listing guidelines.
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    In contrast, debt securities of an ``unaffiliated'' issuer \7\ will 
not be eligible for initial listing on the Amex unless a nationally 
recognized securities rating organization (``NRSRO'') has assigned a 
certain minimum rating to the bonds (or to other bonds issued by the 
same company). Specifically, debt securities of an unaffiliated issuer 
will not be eligible for initial listing on the Amex unless:

    \7\ An unaffiliated issuer is one that has no equity securities 
listed on the Amex or NYSE; is not, directly or indirectly, 
majority-owned by, nor under common control with, an issuer of Amex 
or NYSE-listed equity securities; and is not issuing a debt security 
guaranteed by an issuer of equity securities listed on the Amex or 
NYSE.
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    <bullet>  An NRSRO has assigned a current rating to the debt 
security that is no lower than a Standard and Poor's (``S&P'') 
Corporation ``B'' rating or an equivalent rating by another NRSRO; 
or
    <bullet>  If no NRSRO has assigned a rating to the issue, an 
NRSRO has currently assigned an investment grade rating to an 
immediately senior issue,\8\ or a rating that is no lower than an 
S&P Corporation ``B'' rating (or an equivalent rating by another 
NRSRO) to a pari passu\9\ or junior issue.

    \8\ To be investment grade, an issue must be assigned a rating 
no lower than an S&P Corporation rating of ``BBB-'' (or another 
NRSRO's equivalent thereof). The Amex amended the proposal to 
specify that it will apply this standard only to unrated bonds that 
are immediately junior to another rated class of securities issued 
by the same company. See Amendment No. 1, supra note 3.
    \9\ A pari passu issue has equal standing with the debt issue 
proposed to be listed.
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    As under its current rules, the Amex will give consideration to 
delisting a bond issue if the issuer is unable to meet its obligations 
on the listed debt, or if the debt's aggregate market value or 
principal amount falls below $400,000. The Amex proposal amends the 
delisting standards to clarify that any debt issuer that is unable to 
meet its obligation on the listed debt securities may be delisted. In 
applying this standard, the Exchange states that it normally will not 
delist the debt if there is value in the security and continued 
Exchange trading is in the best interests of investors.\10\ However, if 
an issuer is unable to meet its financial obligations and there is 
minimal or no value in the security, the Exchange will give serious 
consideration to delisting the debt issue.\11\ The Exchange states that 
it also will consider delisting debt that was listed based on the 
issuer being either majority-owned or guaranteed by an Amex or NYSE 
issuer when the equity securities of such owner or guarantor are 
delisted.\12\

    \10\ See Securities Exchange Act Release No. 36225 (September 
13, 1995), 60 FR 46734 (September 20, 1995) (notice of this proposed 
rule change).
    \11\ Id.
    \12\ Id.
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    Convertible bonds will be reviewed for continued listing when the 
underlying equity security is delisted, and will be delisted when the 
related security is no longer subject to real-time last sale reporting 
in the United States.\13\ Further, if the underlying equity 

[[Page 66331]]
security is delisted due to a violation of the Amex ``corporate 
responsibility'' criteria (including, but not limited to, the outside 
director, audit committee and shareholder voting requirements),\14\ the 
Exchange will delist all debt securities convertible into that equity 
security.

    \13\ See Amendment No. 1 supra note 3 (specifying that last 
trade reporting must be available in the United States).
    \14\ See Sections 121-123 of the Amex's Company Guide.
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    The Amex also proposes to simplify the listing process for debt 
issuers by reducing the number of documents that an applicant must file 
in support of its debt listing application. Specifically, the Exchange 
will eliminate the schedule of distribution and the listing resolution. 
In addition, the Exchange will no longer require that trustees certify 
certain issuer-specific information.
    Finally, the Amex is adopting a new rule to permit the listing of 
municipal and sovereign debts (i.e., debt issued by foreign 
governments, and by American states, localities, or government 
agencies).\15\ The Exchange will evaluate whether to list there issuers 
on a case-by-case basis and will treat the issuer as an 
``unaffiliated'' corporate issuer for purposes of the initial listing 
guidelines described above. Municipal debt will be subject to the same 
delisting standards as corporate debt. The Amex will assign municipal 
securities accepted for listing on the Exchange to specialists that 
will trade the securities in accordance with all Amex regulations 
otherwise applicable to the trading of securities on the trading 
floor.\16\ All Exchange contracts in municipal securities will be 
compared, settled and cleared in accordance with the applicable 
regulations of the Municipal Securities Rulemaking Board (``MSRB'').

    \15\ This does not include debt issued or guaranteed by the 
United States Government or agencies thereof that presently may be 
admitted to dealings on the Exchange pursuant to Amex Rule 140.
    \16\ The Amex intends to require specialist units applying for 
appointment and registration in municipal securities to be in 
compliance with MSRB Rule G-3 regulations regarding municipal 
securities principals and representatives. See Amendment No. 1 supra 
note 3. The National Association of Securities Dealers, Inc. 
(``NASD'') has authority to enforce MSRB rules for listed municipal 
securities. The Amex enforcement in this regard will not preempt or 
limit in any manner the NASD's authority to act in this area.
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III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with the requirements of Section 6(b).\17\ Specifically, 
the Commission believes the proposal is consistent with the Section 
6(b)(5) requirements that the rules of an exchange be designed to 
promote just and equitable principles of trade, to prevent fraudulent 
and manipulative acts, and, in general, to protect investors and the 
public interest.

    \17\ 15 U.S.C. 78f(b) (1988).
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    The development and enforcement of adequate standards governing the 
initial and continued listing of securities on an exchange is an 
activity of critical importance to financial markets and the investing 
public. Listing standards serve as a means for a self-regulatory 
organization to screen issuers and to provide listed status only to 
bona fide companies with sufficient float, investor base and trading 
interest to maintain fair and orderly markets. Once a security has been 
approved for initial listing, maintenance criteria allow an exchange to 
monitor the status and trading characteristics of that issue to ensure 
that it continues to meet the exchange's standards for market depth and 
liquidity. For the reasons set forth below, the Commission believes 
that the proposed rule change will provide the Amex with greater 
flexibility in determining which debt securities warrant inclusion in 
its bond trading and disclosure systems, while continuing the 
protections that the Exchange's listing standards provide investors.
    After careful review, the Commission has concluded that the 
proposed initial listing standards should help the Amex to ensure that 
only substantial companies capable of meeting their financial 
obligations are eligible to have their debt listed on the Exchange. As 
before, the proposed rule change will require that the Amex evaluate an 
issuer's ability to cover the interest charges on its debt securities. 
Although the Exchange currently makes this interest coverage 
determination itself,\18\ the amended standards will rely instead on 
either the issuer's relationship with the Amex of NYSE, or the debt's 
NRSRO rating.

    \18\ As noted above, the current listing standards require that 
a company appear to be in a financial position sufficient to 
satisfactorily service in the debt issue to be listed.
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    The Commission agrees that, to the extent that the Amex and the 
NYSE have adequate listing standards for common stock, the Amex 
reasonably may assume that listed companies (and certain affiliates 
thereof) should not pose a significant risk of defaulting on their 
obligations so long as the companies remain in ``good standing'' on the 
exchanges. Moreover, debt securities enjoy seniority over equity 
securities. Because the Amex (or NYSE) presumably would not have listed 
the junior equity issue unless it was satisfied with the quality of the 
company, the Commission believes it is reasonable for the Amex to 
assume that the senior debt issue also warrants listed status.
    For ``unaffiliated'' issuers, the Commission finds that it is not 
unreasonable for the Exchange to defer to the expertise of an NRSRO, 
rather than conducting its own analysis of the company's financial 
condition, as is presently the case. Although the Commission would be 
concerned by any potential misuse of NRSRO ratings, the Commission 
notes that the NRSROs routinely evaluate interest coverage, among other 
things, when they rate bonds. In addition, their methodology 
incorporates extrinsic factors, such as characteristics of the issuer's 
industry group. The Commission therefore agrees with the Exchange that, 
under these circumstances, NRSRO ratings can be relied upon for 
determinations about the creditworthiness of issuers.
    Moreover, the Commission is satisfied that the distinctions in 
NRSRO ratings drawn by the Amex are valid.\19\ According to the S&P 
Corporation's debt rating definitions,\20\ bonds rated ``B'' (or 
higher) currently have the capacity to meet interest payments and 
principal repayments, whereas bonds rated ``CCC'' (or lower) are 
dependent upon favorable business, financial or economic conditions to 
meet timely payments of interest and repayment of principal. The 
Commission also believes that it is logical for the Amex to assume that 
an unrated debt issue which is pari passu with (or senior to) an issue 
with at least a ``B'' rating would, if rated, receive an equal (or 
higher) rating. Finally, to permit the Amex to list unrated bonds that 
are immediately junior to an investment grade issue is appropriate 
because those bonds generally would be rated no more than one rating 
category lower (i.e., a S&P Corporation ``BB'' rating).\21\

    \19\ The Commission notes that the NRSRO ratings being adopted 
by the Amex are the same standards as the Commission approved for 
the NYSE in Securities Exchange Act Release No. 34019, supra note 5.
    \20\ See Standard & Poor's High Yield Directions, January 1994.
    \21\ Id.
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    As for the other provisions in the proposal, the Commission finds 
that they strike an appropriate balance between protecting investors 
and enhancing the flexibility of the debt listing process. For 
instance, the proposed rule change provides that, to be eligible for 
listing, a bond issue must have an aggregate market value or 

[[Page 66332]]
principal amount of at least $5 million. This should enable the Amex to 
deny listed status to companies whose securities do not have sufficient 
liquidity for a fair and orderly market, without infringing upon bona 
fide issuers' access to the Exchange's bond trading and disclosure 
systems.
    Conversely, the Commission does not believe that eliminating the 
distribution requirement for unaffiliated issuers will have a 
significant adverse effect on investors in the bond market. In the 
past, the Commission has recognized that such information may be 
difficult to estimate accurately and may be relatively less pertinent 
than other factors.\22\ Additionally, the Commission believes that the 
proposed elimination of certain documents that the Exchange currently 
requires from applicants is reasonable. Specifically, the Exchange is 
eliminating the schedule of distribution because distribution is no 
longer a listing guideline, and the listing resolution because it is 
essentially ceremonial in nature and does not serve any significant 
purpose.\23\ The Amex also will cease to require that trustees certify 
issuer-specific information. Accordingly, the Exchange only will 
require that the certificate show the trustee's acceptance of the 
trust.\24\

    \22\ See Securities Exchange Act Release No. 32909 (September 
15, 1993), 58 FR 49537 (September 23, 1993) (File No. SR-NYSE-93-21) 
(approving amendments to Paragraph 703.06 of the NYSE's Listed 
Company Manual to eliminate requirement that distribution 
information be submitted as supporting document to debt listing 
application).
    \23\ The Exchange will continue to require an opinion of counsel 
that the issuance of the debt has been approved by the company's 
board of directors. See Section 213.6(c) of the Amex's Company 
Guide. Not requiring a listing resolution is consistent with NYSE 
procedures. See Paragraph 703.06 of the NYSE's Listed Company 
Manual.
    \24\ This is consistent with NYSE requirements. See Paragraph 
703.06 of the NYSE's Listed Company Manual.
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    In terms of the delisting criteria, the Commission has concluded 
that the revised standards should enable the Amex to identify listed 
companies that may have insufficient resources to meet their financial 
obligations or whose debt securities may lack adequate trading depth 
and liquidity. This, in turn, will allow the Exchange to take 
appropriate action to protect bondholders. The Amex delisting 
standards, however, do not include a minimum market value for debt 
securities. The Exchange states that if an issuer is unable to meet its 
financial obligations and there is minimal or no value in the security, 
the Exchange will give serious consideration to delisting the debt 
issue.\25\ As the Commission discussed in its approval of similar debt 
standards for the NYSE,\26\ the Commission expects the Amex to consider 
carefully the propriety of continued exchange trading of the securities 
of bankrupt or distressed companies,\27\ and expects debt securities 
with minimal value to be delisted.

    \25\ See Securities Exchange Act release No. 36225, supra note 
10.
    \26\ See Securities Exchange Act Release No. 34019, supra note 
5.
    \27\ For example, the Commission believes that the Amex should 
delist the debt of companies in bankruptcy that file a plan of 
reorganization providing no recovery for debt holders.
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    In addition, the Amex will delist convertible bonds whenever the 
underlying equity security is no longer subject to real-time last sale 
reporting in the United States.\28\ If the related equity merely moves 
from the Amex to another market, it is not inconsistent with the Act 
for the Exchange to have discretion to continue listing the convertible 
debt. This would not be the case, however, if the underlying security 
is delisted because the issuer violated one of the Amex's corporate 
responsibility criteria. As a general matter, the Commission would have 
serious concerns about any proposal that does not provide for the 
delisting of convertible bonds where a company acts to disadvantage its 
shareholders. The Amex proposal addresses this concern by including in 
its guidelines that the Exchange will delist convertible bonds when the 
issuer's equity security is delisted due to a violation of the 
Exchange's corporate governance listing standards.\29\

    \28\ See Amendment No. 1, supra note 3 (specifying that last 
trade reporting must be available in the United States).
    \29\ See supra note 14 and accompanying text.
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    Finally, the Commission believes that the Amex's initial listing 
and delisting criteria are appropriate for determining whether 
municipal debt should be trading on the Exchange. Because municipal 
securities will trade under the Amex's existing regulatory regime for 
trading securities (which includes specialist obligations, margin 
requirements, and surveillance programs), the Commission believes that 
adequate safeguards are in place to ensure the protection of investors 
in municipal securities.\30\

    \30\ The Amex confirmed in Amendment No. 1, supra note 3, that 
municipal securities will not be subject to off-board trading 
restrictions.
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    The Commission notes that the MSRB's regulatory scheme for the 
comparison, settlement, and clearing of municipal securities will 
continue to apply to municipal securities listed on the Amex. 
Additionally, the Amex will require specialist units applying for 
appointment and registration in municipal securities to be in 
compliance with MSRB Rule G-3 regarding municipal securities principals 
and representatives.\31\ The Commission believes that it is important 
that any specialist selected by the Amex for a listed municipal 
security be familiar with the characteristics of such security.

    \31\ See Amendment No. 1, supra note 3.
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    The Commission finds good cause for approving Amendment No. 1 prior 
to the thirtieth day after the date of publication of notice of filing 
thereof. Amendment No. 1 clarifies and codifies the intent of certain 
language used in the original filing. Finally, the Commission did not 
receive any comments on the original proposal,\32\ which was noted for 
the full statutory period, nor did it receive comments on a similar 
NYSE proposal that was also noticed for the full statutory period.\33\

    \32\ See Securities Exchange Act Release No. 36225, supra note 
10.
    \33\ See Securities Exchange Act Release No. 34019, supra note 
5.
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    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1 to the proposed rule change. 
Persons making written submissions should file six copies thereof with 
the Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW, Washington, DC 20549. Copies of the submission, all subsequent 
amendments, all written statements with respect to the proposed rules 
change that are filed with the Commission, and all written 
communications relating to Amendment No. 1 between the Commission and 
any persons, other than those that may be withheld from the public in 
accordance with the provisions of 5 U.S.C. 552, will be available for 
inspection and copying in the Commission's Public Reference Section, 
450 Fifth Street, NW, Washington, DC 20549. Copies of such filing will 
also be available at the principal office of the Amex. All submissions 
should refer to File No. SR-Amex-95-29 and should be submitted by 
January 11, 1996.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\34\ that the proposed rule change (SR-Amex-95-29), including 
Amendment No. 1 on an accelerated basis, is approved.

    \34\ 15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\35\

    \35\ 17 CFR 200.30-3(a)(12) (1994).
    
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-31087 Filed 12-20-95; 8:45 am]
BILLING CODE 8010-01-M