[Federal Register Volume 60, Number 27 (Thursday, February 9, 1995)]
[Proposed Rules]
[Pages 7718-7723]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-3175]



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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249

[Release No. 34-35323; File No. S7-4-95]
RIN 3235-AG28


Unlisted Trading Privileges

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rulemaking.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
proposing new rules and amendments to existing rules concerning 
unlisted trading privileges (``UTP'') in listed initial public 
offerings (``IPOs''). The proposed rules would reduce the period that 
exchanges have to wait before extending UTP to any listed IPO security, 
from the third trading day, to the first trade reported by the listing 
exchange to the Consolidated Tape. The proposed 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 the securities.

DATES: Comments should be submitted on or before March 13, 1995.

ADDRESSES: Interested persons should submit three copies of their 
written data, views and opinions to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., D.C. 20549, 
and should refer to File No. S7-4-95. All submissions will be made 
available for public inspection and copying at the Commission's Public 
Reference Room, Room No. 1024, 450 Fifth Street, N.W., Washington, D.C. 
20549.

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

SUPPLEMENTARY INFORMATION:

I. Background

    On October 22, 1994, the Unlisted Trading Privileges Act of 1994 
(``UTP Act'') became effective. The UTP Act amends Section 12(f) of the 
Securities Exchange Act of 1934 (``Exchange Act''). Section 12(f) 
governs when a national securities exchange (``exchange'') may trade a 
security that is not listed and registered on that exchange, i.e. by 
extending unlisted trading privileges (``UTP'') to the security. 
Pursuant to the UTP Act, the Commission today is proposing rules under 
Section 12(f).

A. Section 12(f) Prior to the UTP Act

    Prior to the UTP Act, Section 12(f) required exchanges to apply to 
the Commission before extending UTP to a particular security.<SUP>1 An 
exchange application for the extension of UTP named the security (or 
frequently, securities) for which the applicant exchange sought 
Commission approval for UTP. The Commission was required to provide 
interested parties with at least ten days notice of the application, 
which the Commission accomplished by publishing each UTP application 
for comment in the Federal Register at least ten days prior to 
approving UTP for a security. In addition, prior to approving the UTP 
application, the Commission had to find that the extension of UTP to 
each security named, if listed and registered on another exchange 
(``listed security'' on a ``listing exchange''), would be consistent 
with the maintenance of fair and orderly markets and the protection of 
investors. If so, the [[Page 7719]] Commission published an approval 
order in the Federal Register.

    \1\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).
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    Section 12(f) gave interested parties an opportunity to comment and 
to participate in a hearing regarding the extension of UTP to any 
security. Pursuant to Section 12(f), the Commission processed hundreds 
of exchange applications for the extension of UTP each year, yet 
comments on the applications were extremely rare. Indeed, virtually no 
comments have been submitted to the Commission on a UTP application in 
over ten years.
    As a consequence of the application, publication, and approval 
process, applicant exchanges had to wait several weeks before competing 
with listing exchanges that already were trading the securities. 
Moreover, while exchanges were required to await Commission approval 
before competing with the listing exchange, dealers trading off an 
exchange could trade any security immediately upon its effective 
registration with the Commission.<SUP>2

    \2\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. Over-the-counter (``OTC'') 
dealers are not subject to the Section 12(a) listing requirement 
because they do not transact business on an exchange.
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    As noted above, Section 12(f) also 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 relate to UTP. Accordingly, the 
staff reviewed each application to ensure, among other things, 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 and over 99% of the applications were approved.
    In response to the Concept Release that initiated the Market 2000 
Study,<SUP>3 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>4 Shortly after 
publication of the Concept Release, the Telecommunications and Finance 
Subcommittee of the House Committee on Energy and Commerce 
(``Subcommittee'') began working on draft legislation to amend Section 
12(f).<SUP>5 These efforts, along with the efforts and support of the 
various self-regulatory organizations, ultimately led to the UTP Act.

    \3\See Securities Exchange Act Release No. 30920 (July 14, 
1992), 57 FR 32587 (``Concept Release'').
    \4\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).
    \5\The Subcommittee held a hearing on the UTP Act on June 22, 
1994, at which a Division representative and representatives of 
several self-regulatory organizations appeared and submitted written 
comments on the legislation. 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'').
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B. Statutory Changes Under Amended Section 12(f)

    The UTP Act, among other matters, removes 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 amendment generally allows an 
exchange to extend UTP to any security when it becomes listed and 
registered on another exchange or included in Nasdaq,<SUP>6 subject to 
certain limitations.

    \6\Section 12(f), as amended, also removes the application and 
approval requirements for exchange UTP in securities that are 
registered under 12(g) of the Exchange Act (generally, ``OTC 
securities''). Exchange extensions of UTP to OTC securities, and 
specifically to Nasdaq/National Market securities, are subject to 
limitations provided in Section 12(f) and provided in an on-going 
pilot program. See Securities Exchange Act Release No. 34371 (July 
13, 1994), 59 FR 37103. While the UTP Act removed the relevant 
application procedures for Nasdaq stocks, UTP in OTC securities 
continues to be subject to the on-going pilot program and the 
limitations it provides. For that reason, the Commission will 
consider issues involved in UTP extensions to OTC securities as the 
Commission continues its on-going review of the operation of the 
pilot program.
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    First, the UTP Act contains special provisions for the extension of 
UTP to any listed security that is the subject of an initial public 
offering (``listed IPO security'').<SUP>7 The amendment includes a 
temporary provision that requires exchanges to wait until the third day 
of trading in any listed IPO security on the listing exchange before 
they may allow their members to trade the security pursuant to UTP. 
This provision also requires the Commission to prescribe by rule or 
regulation, within 180 days of the enactment of the UTP Act (or before 
April 21, 1995), the mandatory delay (or, ``duration of the 
interval''), if any, that should apply to UTP extensions to listed IPO 
securities.<SUP>8

    \7\Section 12(f)(1)(B), read jointly with Section 
12(f)(1)(A)(ii), 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).
    \8\Specifically, amended Section 12(f)(1)(C) provides:
    Not later than 180 days after the date of enactment of the 
Unlisted Trading Privileges Act of 1994, the Commission shall 
prescribe, by rule or regulation, the duration of the interval 
referred to in this subparagraph (B), if any, as the Commission 
determines to be necessary or appropriate for the maintenance of 
fair and orderly markets, the protection of investors, or otherwise 
in furtherance of the purposes of this title. Until the earlier of 
the effective date of such rule or regulation, or 240 days after 
such date of enactment, such interval shall begin 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 
and end at the conclusion of the next trading day.
    In short, this provision requires exchanges (until the earlier 
of the effective date of a Commission rule, or 240 days after the 
enactment of the UTP Act) to wait until the third trading day in a 
listed IPO security before trading the security pursuant to UTP.
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    Second, Section 12(f)(1)(D) provides the Commission with rulemaking 
authority to prescribe, by rule or regulation, additional procedures or 
requirements for extending UTP to any security.
    Third, new Section 12(f)(2) 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 in the security. Pursuant 
to Section 12(f)(2)(A)(ii), an exchange seeking to reinstate its 
ability to extend UTP to the security, following a Commission 
suspension, must file an application with the Commission. The exchange 
must apply 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 [[Page 7720]] Exchange Act. New 
Section 12(f)(2) requires public notice and Commission review of 
applications to reinstate UTP that has been suspended summarily by the 
Commission. The procedures and Commission standard of review for 
approval of a reinstatement application are substantially similar to 
the application and review process that previously preceded an 
exchange's initial extension of UTP to a security under former Section 
12(f) and the rules thereunder.
    These amendments to Section 12(f) reduce the waiting period that 
previously delayed exchange extensions of UTP to securities listed on 
other exchanges, or to certain securities traded OTC. In addition, the 
amendments direct the Commission to prescribe rules for UTP in listed 
IPO securities, and otherwise empowers the Commission to establish 
rules for UTP generally as the Commission deems appropriate in 
furtherance of the purposes of the Exchange Act.

II. Proposed Rules and Amendments to Existing Rules Pursuant to Amended 
Section 12(f)

    As described in more detail below, the Commission is proposing two 
new rules and amendments to and rescissions of existing rules. 
Specifically, the Commission is proposing new Rule 12f-2 concerning UTP 
in listed IPO securities, and is soliciting comment on alternatives to 
the proposed rule that would be consistent with the UTP Act. The 
Commission also is proposing and soliciting comment on new Rule 12f-5 
regarding exchange rules to ensure the maintenance of fair and orderly 
markets and the protection of investors for all securities traded 
pursuant to UTP. To provide consistency between the amendments to 
Section 12(f) and the rules thereunder, the Commission also is 
proposing to amend existing Rules 12f-1 and 12f-3 and to rescind 
existing Rules 12f-2 and 12f-6. Finally, the Commission is soliciting 
comment on whether other Commission action concerning intermarket 
linkages, as they affect UTP in listed securities, is necessary to 
facilitate the operation of the UTP Act.

A. Listed Securities That Are the Subject of an Initial Public Offering 
(Proposed Rule 12f-2)

    As discussed above, the UTP Act generally allows exchanges to 
extend UTP to securities when they become listed and registered on 
another exchange or included in Nasdaq, except in the case of listed 
IPO securities. In this regard, the UTP Act establishes a temporary 
provision that requires exchanges to wait until the third day of 
trading in the security on the listing exchange before extending UTP to 
the security. Before April 21, 1995, the Commission must prescribe by 
rule or regulation the appropriate waiting period, if any, that would 
apply before an exchange may extend UTP to any listed IPO security 
following the commencement of its IPO.
    The Commission is proposing new Rule 12f-2 under the Exchange Act 
to establish the waiting period that would govern the extension of UTP 
to a security that is the subject of an IPO. Proposed Rule 12f-2 would 
provide that an exchange may extend UTP to a listed IPO security when 
at least one transaction in the subject security has been effected on 
the listing exchange and the transaction has been reported pursuant to 
an effective transaction reporting plan as defined in Rule 11Aa3-1 
under the Exchange Act.<SUP>9 The proposed rule, therefore, would 
shorten 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), to the 
time that it takes to effect and report the initial trade in the 
security on a listing exchange.

    \9\17 CFR 240.11Aa3-1 (1991).
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    Rule 12f-2 would define the term ``subject security'' to mean a 
security that is the subject of an initial public offering, as that 
term is defined in Section 12(f)(1)(G) of the Exchange Act. To ensure 
that the proposed rule would not provide any means to circumvent other 
Section 12(f) objectives and requirements, the proposed rule also would 
provide that the extension of UTP pursuant to the rule would be subject 
to all the provisions set forth in Section 12(f) of the Exchange Act, 
as amended, and any rule or regulation promulgated thereunder, or which 
may be promulgated thereunder while the extension is in effect.
    The Commission preliminarily believes that it is appropriate to 
minimize regulatory restraints on competition for trading listed IPO 
securities. Shortening the interval for UTP in listed IPO securities 
should enhance the ability of exchanges to compete for order flow in 
the subject securities, especially in light of the fact that OTC 
dealers may trade IPO securities immediately upon effective 
registration with the Commission. Accordingly, in the absence of a 
compelling reason to impose a restriction that would inhibit 
competition among exchanges, the Commission initially believes that 
competing exchanges should be able to extend UTP to a listed IPO 
security after the first trade in the security on the listing exchange 
has been effected and reported.
    The Commission is proposing a one-trade interval before exchanges 
may extend UTP to a listed IPO security because the Commission 
preliminarily believes that the first transaction in an IPO, as 
disseminated on the consolidated tape, conveys essential information to 
the public concerning the pre-evaluated offering price of the security. 
In addition, the timing of the initial trade and commencement of 
trading in a new issue entail significant coordination involving the 
issuer, the listing exchange, and the underwriters of the public 
offering of the security. If competing exchanges were to allow their 
members to trade a listed IPO security before it initially trades on 
the listing exchange, it may be difficult to ensure that all the 
preparation for the IPO had been completed before public trading in the 
security commenced.
    During the legislative process preceding the UTP Act, conflicting 
views arose among interested parties concerning the appropriate waiting 
period, if any, for UTP in listed IPO securities. At the UTP Hearing, 
testimony and evidence were presented to show the negative impact that 
a mandatory waiting period for UTP has on competition.<SUP>10 At the 
same time, however, one interested party asserted that listed IPO 
securities should trade in a central location for a ``short'' period of 
time to help ensure market efficiency immediately following an IPO, and 
that immediate UTP in listed IPO securities could increase the cost of 
raising capital for issuers.<SUP>11

    \10\See prepared testimony of Nicholas A. Giordano, President 
and Chief Executive Officer, Philadelphia Stock Exchange, UTP 
Hearing, supra note 5.
    \11\See prepared testimony of Edward A. Kwalwasser, Executive 
Vice President, Regulation, New York Stock Exchange, UTP Hearing, 
id.
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    In a report to Congress on the UTP Act, the House Committee on 
Energy and Commerce provided guidance concerning specific matters it 
considered relevant to the present Commission rulemaking and resolution 
of the above concerns:

    The Committee expects that, in undertaking the IPO rulemaking 
authorized under the bill, the Commission will seek comments on the 
benefits associated with streamlining the regulatory process and 
enhancing competitive opportunities among market centers with 
respect to UTP in IPOs, and the identification of the negative 
effects if any that granting immediate UTP might [[Page 7721]] have 
on the distribution of these securities. The Committee further 
expects the Commission to consider the experience of the third 
market trading in listed IPOs in the course of its examination of 
these questions. Finally, the Committee expects the markets to 
cooperate in providing the Commission with data regarding the nature 
and effect of trading activity (including, for example, any 
volatility effects on the security) in connection with IPO listings 
in order to enable the Commission to determine whether the benefits 
of confining early trading in IPOs to one marketplace are outweighed 
by the benefits of removing regulatory delays that inhibit 
competition among market.<SUP>12

    \12\H.R. Rep. No. 626, 103d Cong., 2d Sess. (1994).

    The Commission seeks comment on each of these matters. The 
Commission believes that 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, 
would be particularly useful in its review.
    The Commission also seeks comment on the one-trade waiting period 
as proposed. To the extent that commenters believe a waiting period is 
appropriate, the Commission requests that they provide data to 
illustrate the potential negative effects on the pricing of an IPO. 
Commenters also may wish to provide an analysis of the effects of the 
current two-day waiting period. Finally, the Commission would be 
interested in receiving alternative proposed rules from commenters who 
believe that either no waiting period or a longer waiting period is 
appropriate.

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

    Section 12(f)(1)(D), 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 is proposing 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.
    This rule is intended to preserve a benefit of Commission review of 
UTP applications 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. In general, applicant 
exchanges had listing rules in place that provided for transactions for 
most product classes of securities. Occasionally, however, an exchange 
would submit a UTP application to the Commission to trade a new or 
unusual product class of securities that had been approved for trading 
on the listing exchange, but had not been approved for trading on the 
applicant exchange.<SUP>13

    \13\Prior to the UTP Act, exchanges were not permitted to apply 
to the Commission for UTP in any security for which the applicant 
exchange had not adopted listing standards and proper trading rules, 
pursuant to Section 19(b) of the Exchange Act and Rule 19b-4 
thereunder. Proposed Rule 12f-5 would make explicit the obligation 
to have the necessary rules in place before extending UTP to a 
specific type of security.
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    For example, the Commission would approve a proposed rule change to 
the Commission, pursuant to Section 19(b) of the Exchange Act, by an 
exchange to list and trade a new type of security. The proposed rule 
change established exchange rules to ensure the maintenance of fair and 
orderly markets in the securities and sufficient mechanisms for 
regulatory oversight of the named securities to provide for the 
protection of investors. A regional stock exchange occasionally filed a 
UTP application for the security without submitting a similar proposed 
rule change pursuant to Section 19(b) of the Exchange Act. The 
Commission's review procedures for UTP applications identified those 
instances so that necessary rules would be in place on the applicant 
exchange in order to ensure the maintenance of fair and orderly markets 
and the protection of investors.
    The Commission is proposing Rule 12f-5 to require exchanges to 
ensure that these rules and oversight mechanisms exist on their 
exchanges for the relevant securities before extending UTP to the 
securities. The proposed rule reconfirms to exchanges their obligation 
to evaluate their extensions of UTP before allowing their members to 
trade the securities.
    In soliciting comment on the proposed rule, the Commission is 
particularly interested in the views of market participants and other 
commenters concerning the need for the rule and whether it would, in 
practice, help ensure that an exchange has all the necessary rules in 
place to provide for fair and orderly markets in all securities to 
which the exchange extends UTP.

C. Proposed Amendments to Existing Rules 12f-1 and 12f-3, and Proposed 
Rescission of Existing 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 
is proposing to amend or rescind these rules to reflect statutory 
changes, and is soliciting comment on whether these proposed changes 
are appropriate.
    First, the Commission is proposing to amend Rule 12f-1,<SUP>14 to 
limit its operation to an exchange's application to reinstate UTP after 
a Commission suspension. Section 12(f), as amended, requires an 
exchange to apply to the Commission for UTP if the Commission has 
suspended the exchange's extension of UTP to the security. The proposed 
amendment would 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.

    \14\17 CFR 240.12f-1 (1991).
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    Second, the Commission is proposing to rescind existing Rule 12f-2 
and remove Form 27 referred to in the rule.<SUP>15 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'' immaterially for those purposes. The rule and form provide 
an exemption from reapplication for UTP in these cases. The Commission 
is proposing to rescind the rule because the application procedures, 
from which the rule provided an exemption, no longer exist.

    \15\17 CFR 240.12f-2 (1991).
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    Third, the Commission is proposing to rescind the last sentence of 
paragraph (b) of Rule 12f-3.<SUP>16 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 includes 
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. Finally, the 
Rule requires the exchange, upon suspension or 
[[Page 7722]] termination, promptly to file Form 28 with the 
Commission.

    \16\17 CFR 240.12f-3 (1991).
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    The Commission believes this final requirement no longer is 
necessary because exchanges are no longer required to apply to the 
Commission to extend UTP to a security. Thus, notifying the Commission 
of termination or suspension of UTP serves no purpose. The Commission, 
therefore, is proposing to rescind that last requirement from the Rule 
concerning Form 28, and to remove Form 28, in order to conform further 
with efforts to streamline the regulatory process concerning UTP.
    Finally, the Commission is proposing to rescind Rule 12f-6.<SUP>17 
This rule exempts a merged exchange from the UTP application process in 
certain circumstances. The exemption no longer is necessary because the 
waiting period that restrained exchanges from extending UTP to most 
securities has been eliminated by the UTP Act.

    \17\17 CFR 240.12f-6 (1991).
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    The Commission is soliciting comment on each of these proposed 
Commission rule changes. The Commission is interested in comments on 
whether the proposed amendments and rescissions accomplish the 
Commission's goals with respect to the amendments or rescissions. The 
Commission also is interested in receiving comments concerning the 
continued necessity of other provisions of the rules, given the recent 
amendment to Section 12(f) of the Exchange Act.

D. Solicitation of Comment on Structural Implications of Immediate UTP

    The Commission is seeking comment on whether any Commission action 
is necessary under Section 12(f), in order to carry out the 
congressional objectives of linked markets as required by Section 
11A(a)(1)(D),<SUP>18 to make changes to the consolidated quotation, 
trade reporting, and routing of customer and principal interest in 
securities that are traded pursuant to UTP, now that exchanges and 
linking facilities will have less time to prepare for multiple exchange 
market trading in the securities. The Commission is particularly 
interested in comments concerning any existing procedural delays that 
should be corrected by Commission action in order to ensure that the 
operation of amended Section 12(f) is not impeded.

    \18\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.
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III. Initial Regulatory Flexibility Analysis

    The Commission has prepared an Initial Regulatory Flexibility 
Analysis (``IRFA'') in accordance with 5 U.S.C. Sec. 603 regarding the 
proposed rules. The following summarizes the conclusions of the IRFA.
    The IRFA uses certain definitions of ``small businesses'' adopted 
by the Commission for purposes of the Regulatory Flexibility Act 
(``RFA''). As described in Section II, above, the Commission is 
proposing rules and changes to existing rules under Section 12(f) to 
comply with the UTP Act directives and to further the objectives of 
this recent amendment. Proposed Rule 12f-2 would require exchanges to 
wait, before extending UTP to such a security, until the listing 
exchange effects and reports the first transaction in the security.
    Proposed Rule 12f-2 primarily has an impact on competitive 
initiatives of the self-regulatory organizations, which are not small 
businesses for the purposes of the RFA.<SUP>19 The proposed rules also 
may have some economic effect on some businesses that may be, from time 
to time, small businesses for the purposes of the RFA. Specifically, 
the proposed rule may affect the order-routing choices available to 
broker-dealer firms and would designate the moment at which regional 
exchange specialist firms may compete for order flow in any listed IPO 
security. Some broker-dealers and some regional specialist firms may be 
small businesses. The Commission believes, however, that the economic 
impact of the rule may not be ``significant'' and the number of ``small 
businesses'' that would be affected by the rule may not be 
``substantial,'' as contemplated by the RFA. In this regard, the 
Commission notes, among other things, that listed IPO securities 
comprise only a fraction of the overall number of securities available 
for order-routing by broker-dealers and for trading by regional 
specialist firms, and only a small number of those firms are ``small 
businesses.'' Furthermore, neither small nor large businesses would be 
subject to reporting, recordkeeping, or other compliance requirements 
under the proposal.

    \19\The relevant rule under the Act, 17 CFR 240.0-10, provides 
that, for the purposes of the RFA, ``small business'' (when 
referring to a broker or dealer) shall mean a broker or dealer that 
had total capital of less than $500,000 on the date in the prior 
fiscal year as of which its audited financial statements were 
prepared, or if not required to be prepared, on the last business 
day of the preceding fiscal year. Also, ``small business'' does not 
include any entity that is affiliated with another entity that is 
not a small business.
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    The other proposals would restate existing standards for exchange 
extensions of UTP, and would amend existing rules under Section 12(f) 
to conform to the UTP Act and, therefore, should have no economic 
impact for the purposes of the RFA.
    A copy of the Initial Regulatory Flexibility Analysis may be 
obtained by contacting Betsy Prout, Attorney, Office of Market 
Supervision, Division of Market Regulation, Securities and Exchange 
Commission, Washington, D.C. 20549, (202) 942-0170.

IV. Effects on Competition

    Section 23(a)(2) of the Exchange Act<SUP>20 requires the 
Commission, in adopting rules under the Exchange Act, to consider any 
anti-competitive effects of the rules and to balance these effects 
against the regulatory benefits gained in furthering the purposes of 
the Act. As discussed in more detail above, the extension of unlisted 
trading privileges allows exchanges to compete with the listing 
exchange, other exchanges, and with dealers for order flow in the 
relevant securities. The rules promulgated under Section 12(f), 
therefore, may directly affect competition among market centers and 
their members. In addition, firms sending orders to the market centers 
for execution may also be affected by limitations that the proposed 
rules may place on their order-routing practices. The Commission is 
soliciting comment on the effect the proposed rules, and the proposed 
changes to existing rules, may have on exchanges, associations, their 
members, and order-routing firms.

    \20\15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

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 proposes to 
amend Part 240 of Chapter II of Title 17 of the Code of Federal 
Regulations to read 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- 
[[Page 7723]] 23, 80a-29, 80a-37, 80b-3, 80b-4, and 80b-11, unless 
otherwise noted.
* * * * *
    2. By amending Sec. 240.12f-1 by revising the section heading and 
introductory text of paragraph (a), redesignating paragraphs (a)(5) and 
(a)(6) as (a)6) and (a)(7), adding paragraph (a)(5), and revising newly 
designated (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). 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. By revising Sec. 240.12f-2 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 when at least one 
transaction in the subject security has been effected on the national 
securities exchange upon which the security is listed and the 
transaction has been reported pursuant to an effective transaction 
reporting plan as defined in Sec. 240.11Aa3-1.
    (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) Definition. For purposes of this section, 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) of the Act (15 
U.S.C. 78l(f)(1)(G)).
    4. By amending Sec. 240.12f-3 by revising paragraph (b) to read as 
follows:


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

    (a) * * *
    (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. By adding Sec. 240.12f-5, 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.


Sec. 240.12f-6  [Removed]

    6. By removing and reserving Sec. 240.12f-6.

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.


Sec. 249.27 and 249.28  [Removed]

    8. By removing Sec. 249.27 and Sec. 249.28.

    By the Commission.

    Dated: February 2, 1995.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-3175 Filed 2-8-95; 8:45 am]
BILLING CODE 8010-01-P