[Federal Register Volume 60, Number 30 (Tuesday, February 14, 1995)]
[Notices]
[Pages 8437-8438]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-3619]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35343; File No. SR-NYSE-94-46]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change Amending Specialist 
Combination Review Policy to Require Proponents of Certain Specialist 
Unit Combinations to Address Issues Related to the Capitalization, Risk 
Management, and Operational Efficiency of Large Sized Specialized Units

February 8, 1995.

I. Introduction

    On December 9, 1994 the New York Stock Exchange, Inc. (``NYSE'' 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 adopt amendments to the NYSE's 
Specialist Combination Review Policy (``Policy''). Specifically, the 
proposal would require proponents of certain specialist unit 
combinations to address issues related to the capitalization, risk 
management, and operational efficiency of large sized specialist units.

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1994).
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 35171 (December 28, 1994), 60 FR 1818 (January 
5, 1995). No comments were received on the proposal.

II. Background

    The Exchange's Policy was first approved by the Commission on a 
six-month pilot basis in 1987.\3\ The Commission subsequently granted 
permanent approval following an interim extension.\4\

    \3\See Securities Exchange Act Release No. 24411 (April 29, 
1987), 52 FR 17870 (May 12, 1987).
    \4\See Securities Exchange Act Release Nos. 25481 (March 17, 
1988), 53 FR 9554 (March 23, 1988) (interim extension); 34167 (June 
6, 1994), 59 FR 30625 (June 14, 1994) (permanent approval).
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    The Policy is a three-tier system of review, primarily conducted by 
the Quality of Markets Committee (``QOMC''), to review proposed 
specialist combinations that raise concentration-related issues. The 
Policy calls for review of a potential combination where the 
combination will result in a specialist unit accounting for more than 
5% of any one of four specified concentration measures: Allocation for 
all listed common stocks; allocation for the 250 most active listed 
common stocks; total share volume of stock trading on the Exchange; and 
total dollar value of stock trading on the Exchange. Once a review is 
triggered under the Policy, the primary factors taken into 
consideration by the QOMC depend upon whether the proposed combination 
warrants a Tier I review (exceeding a concentration measure by more 
than 5%), Tier II review (exceeding a concentration measure by more 
than 10%, up to and including 15%), or a Tier III review (exceeding a 
concentration measure by 15%). The level of the burden of proof placed 
upon the proposed combining units also may vary depending on the Tier 
of review.

III. Description

    The proposal will add several requirements that address issues 
related to the capitalization, risk management, and operational 
efficiency of large-sized specialist units.\5\ The proposal requires 
proponents of a combination that would exceed 10% of a concentration 
measure to:

    \5\Once the proponents agree that they will abide by the 
requirements listed below, the Exchange will verify the ability of 
the units to make such commitments by reviewing their individual 
capitalization information. If such a review shows that the units do 
not have the requisite capacity, then the combination will not be 
approved. Once the combination has been approved, the Exchange will 
monitor the combined unit to ensure that it continues to meet the 
additional requirements. In the event the combined unit fails to 
meet the additional requirements, the Exchange will address the 
issue as it would any other capital requirements violation. In such 
circumstances, the Exchange, through its Rule 476, has several 
courses of action available to it including stock reallocation. 
Conversations between Don Seimer, NYSE, and Amy Bilbija, Attorney, 
SEC, on January 27, 1995 and February 6, 1995.
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    <bullet> Submit an acceptable risk management plan with respect 
to any line of business in which they engage;
    <bullet> Submit an operational certification prepared by an 
independent, nationally recognized management consulting 
organization with respect to all aspects of the firm's management 
and operations;
    <bullet> Agree to maintain a minimum of 1.5 times (2 times, in 
the case of a 15% combination) the total capital requirement 
specified in Rule 104.20\6\ with respect to the combined entity's 
stocks;

    \6\Pursuant to NYSE Rule 104.20, a specialist unit at an active 
post is required to be able to assume a position of 150 trading 
units in each common stock in which he is registered and must be 
able to establish that he can meet, with his own net liquid assets, 
the greater of, a minimum capital requirement of $1,000,000 or 25% 
of the foregoing position requirement. [[Page 8438]] 
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    <bullet> Agree to maintain 2 times (2.5 times, in the case of a 
15% combination) the capital requirement specified in Rule 104.20 
with respect to each of the combined entity's stocks that are 
component stocks of the Standard and Poor's 500 Stock Price Index; 
and
    <bullet> Agree that all capital required to be dedicated to 
specialist operations be accounted for separate and apart from any 
other capital of the combined entity, and that such specialist 
capital may not be used for any other aspect of the combined 
entity's operations.

    The proposal also requires that proponents of a proposed 
combination that would result in a specialist unit accounting for more 
than 5%, but less than or equal to 10%, of a concentration measure, 
maintain 1.5 times the capital requirement specified in Rule 104.20 
with respect to each of the combined entity's stocks that are 
components stocks of the Standard and Poor's 500 Stock Price Index.

IV. Discussion and Conclusion

    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 Sections 6(b).\7\ In particular, 
the Commission believes the proposal is consistent with the Section 
6(b)(5) requirements that the rules of an exchange be designated to 
promote just and equitable principles of trade, to prevent fraudulent 
and manipulative acts, and, in general, to protect investors and the 
public, in that it addresses concerns about capitalization, operational 
efficiency, and risk management where proposed combinations would 
result in large sized specialist units.

    \7\15 U.S.C. 78f(b) (1988).
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    The Commission agrees with the NYSE that these new requirements are 
appropriate in that they should minimize the risk of financial and/or 
operational failure of larger-sized units, and ensure that such units 
have sufficient, separately dedicated capital with which to meet their 
market making responsibilities. The Commission believes that it is 
appropriate to modify the Policy to place additional capitalization 
requirements when specialist units are combining. The combined entity 
will be larger than either of the two (or more) original entities, 
responsible for more securities, and financially exposed to a larger 
degree. The potential impact of the financial failure of a large-sized 
specialist unit upon the NYSE would be proportionately greater in 
comparison to either original unit. Thus, imposing more stringent 
capitalization requirements upon the new unit should decrease the 
probability of any such failure, and minimize any subsequent 
detrimental impact upon the market place.
    The Commission also believes that the proposal does not impose any 
unnecessary or inappropriate burden on competition under Section 
6(b)(8) of the Act in that it establishes review procedures to prevent 
potential under-capitalization of specialist units that could hinder 
market quality. The Commission recognizes that the revised Policy can 
prevent certain combinations from occurring by placing additional 
requirements for such combinations to take place. Nonetheless, the 
Commission believes that the additional requirements will help to 
ensure that combinations potentially detrimental to the market place 
will not be permitted. Accordingly, any potential burden on competition 
resulting from the proposal is, in the Commission's view, justified as 
necessary and appropriate under the Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-NYSE-94-46) is approved.

    \8\15 U.S.C. 78s(b)(2) (1988).

    For the Commission, by the Division of Market Regulations, 
pursuant to delegated authority.\9\

    \9\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-3619 Filed 2-13-95; 8:45 am]
BILLING CODE 8010-01-M