[Federal Register Volume 60, Number 70 (Wednesday, April 12, 1995)]
[Notices]
[Pages 18649-18653]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-8996]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35571; File No. SR-NYSE-95-01]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Approving Proposed Rule Change Relating to Domestic Listing 
Standards

April 5, 1995.

I. Introduction

    On January 18, 1995, 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 amend its domestic listing 
standards.

    \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. 35301 (January 31, 1995), 60 FR 7245 (February 
7, 1995). On February 2, and April 5, 1995, the Exchange submitted to 
the Commission Amendment Nos. 1 and 2 to the proposed rule change. Each 
of these amendments made a single, non-substantive change to clarify 
the language of the original filing and are incorporated into the 
discussion below.\3\

    \3\Letter from Robert G. Britz, Senior Vice President, New 
Listings & Client Service, NYSE, to Sharon Lawson, Assistant 
Director, Division of Market Regulation, SEC, dated January 27, 1995 
(``Amendment No. 1''). Amendment No. 1 is further described at note 
11, infra. Letter from J. Paul Wyciskala, Managing Director, 
Financial Compliance, to Sharon Lawson, Assistant Director, Division 
of Market Regulation, SEC, dated April 5, 1995 (``Amendment No. 
2''). Amendment No. 2 is further described at note 10, 
infra. [[Page 18650]] 
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    The Commission received one comment letter from the National 
Association of Securities Dealers, Inc. (``NASD'')\4\ and one letter 
from the NYSE responding to the NASD's comments.\5\ This order approves 
the proposed rule change, including Amendment Nos. 1 and 2.

    \4\Letter from Joseph R. Hardiman, President, NASD, to Jonathan 
G. Katz, Secretary, SEC, dated March 3, 1995 (``NASD Letter'').
    \5\Letter from James E. Buck, Senior Vice President and 
Secretary, NASD, to Jonathan G. Katz, Secretary, SEC, dated March 
17, 1995 (``NYSE Letter'').
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II. Overview of Proposal

A. Background

    Paragraph 102.01 of the NYSE's Listed Company Manual  sets forth 
the standards for domestic companies that want to list their equity 
securities on the Exchange. These standards require applicants to 
satisfy the following minimum numerical criteria.\6\ First, the company 
must have at least 2,200 total stockholders, together with an average 
monthly trading volume of 100,000 shares for the most recent six 
months, or 2,000 round-lot holders.\7\ Second, at least 1.1 million 
shares of the company's stock must be publicly held.\8\ Third, the 
aggregate market value of the publicly held shares must be at least $18 
million. In this regard, Paragraph 102.01 of the Exchange's Listed 
Company Manual states that, while the NYSE places greater emphasis on 
market value, an additional measure of size is $18 million in net 
tangible assets. Fourth, the company must have demonstrated earning 
power such that its income before federal income taxes and under 
competitive conditions must equal or exceed (a) $2.5 million in the 
latest fiscal year and $2 million in each of the preceding two fiscal 
years or (b) $4.5 million in the most recent fiscal year and an 
aggregate of $6.5 million for the last three fiscal years, with all 
three years being profitable.

    \6\In deciding whether to approve the listing of an equity 
security, the NYSE also takes qualitative factors into 
consideration. These factors include whether the company is a going 
concern or a successor thereto, the degree of national interest in 
the company, the character of the market for its products, its 
relative stability and position in its industry.
    \7\In determining the number of holders for the above 
distribution standards, the NYSE considers both beneficial and 
record owners.
    \8\Shares held by directors, officers or their immediate 
families and other concentrated holdings of 10% or more are excluded 
from the public float. Additionally, if the unit of trading is less 
than 100 shares, the requirement relating to the number of publicly-
held shares will be reduced proportionately.
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b. Proposed Amendments

    The Exchange proposes to amend Paragraph 102.01 to make four 
changes to its existing numerical criteria. The first two amendments 
would increase the existing numerical criteria for the aggregate market 
value of both publicly held shares and net tangible assets from $18 
million to $40 million.\9\ The third amendment would adopt an alternate 
shareholder distribution standard for companies whose shares are very 
actively traded. Specifically, a company with an average monthly 
trading volume of one million shares for the most recent 12 months 
could qualify for listing with 500 total stockholders.\10\

    \9\Paragraph 102.01 of the Listed Company Manual provides for an 
adjustment to the aggregate market value standard whenever the 
NYSE's Composite Index is below 55.06. Because the value of the 
Composite Index has remained substantially higher than 55.06 in 
recent years, no adjustment has been necessary. The Exchange 
proposal would make a conforming change in Paragraph 102.01 to 
provide that any such adjustment would be made to the new $40 
million aggregate market value standard.
    \10\Amendment No. 2 amended Exhibit A to the NYSE's original 
filing, which set forth the text of the proposed rule change, to 
make it clear that the NYSE would consider both beneficial and 
record owners for purposes of determining whether the alternative 
shareholder distribution standard has been satisfied.
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    Finally, the proposed amendments would adopt an alternate 
demonstrated earnings power standard for companies that have a market 
capitalization of at least $500 million and revenues of at least $200 
million in their most recent fiscal year.\11\ Under this alternative, 
such companies could qualify for listing if their adjusted net income, 
as defined below, is positive for each of the last three fiscal years 
and not less than $25 million in the aggregate for such period.

    \11\Amendment No. 1 corrected Exhibit A to the NYSE's original 
filing, which set forth the text of the proposed rule change, by 
deleting the word ``net'' in the phrase ``net revenues'' as used in 
the alternate demonstrated earnings power standard. This inaccuracy 
did not appear, however, in the text of Securities Exchange Act 
release No. 35301 (January 31, 1995), 60 FR 7245 (February 7, 1995), 
which published the proposal for comment.
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    For purposes of the proposed amendment to Paragraph 102.01, 
``adjusted net income'' would be calculated by removing from reported 
net income (before preferred dividends) the effects of all items whose 
cash effects are investing or financing cash flows as determined 
pursuant to Paragraph 28(b) of the Financial Accounting Standards 
Board's Statement of Financial Accounting Standards No. 95, ``Statement 
of Cash Flows'' (``FASB Statement No. 95''), subject to the limitations 
noted below. Examples of such items include depreciation, amortization 
of goodwill and gains or losses on sales of property, plant and 
equipment. In contrast to FASB Statement No. 95, however, the proposed 
rule change would limit the adjustment for the following items to 
reversing the amount charged or credited in determining net income for 
that period: (a) Discontinued operations; (b) the cumulative effect of 
an accounting change; (c) an extraordinary item; and (d) the gain or 
loss on extinguishment of debt.

III. Comments Received by the Commission

    The Commission received one comment letter from NASD\12\ and one 
letter from the NYSE supporting its proposal and addressing the NASD's 
comments.\13\

    \12\See NASD letter, supra, note 4.
    \13\See NYSE letter, supra, note 5.
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    The NASD stated that it had no comment on the substance of the 
NYSE's listing amendments, but that the proposed rule change would pose 
``substantial anti-competitive concerns for The Nasdaq Stock Market'' 
(``Nasdaq'') if NYSE Rule 500 were left in place. NYSE Rule 500 
contains the shareholder approval requirements that an issuer needs to 
satisfy before it can voluntarily withdraw its securities from listing 
on the NYSE.\14\ In this context, the NASD noted that approval of the 
NYSE's proposed rule change would allow the NYSE to solicit a broader 
range of companies listed on Nasdaq notwithstanding that Rule 500 would 
``make it difficult, if not impossible, for Nasdaq to seek listings 
from among a potentially enlarged universe of NYSE-listed companies.'' 
Finally, the NASD stated its belief that ``expanding the NYSE listing 
standards without eliminating the anti-competitive effect of NYSE Rule 
500 is contrary to a free and open market and the national market 
system, and imposes a burden on competition that is not otherwise 
justified or in furtherance of the purposes of the Exchange Act'' in 
violation of Sections 6(b)(5) and (8) and 11A(a)(1)(C)(ii) of the 
Act.\15\ Accordingly, the NASD requested that the Commission require 
the elimination of the NYSE shareholder approval requirements under 
Rule 500 before approving the NYSE's alternative listing standards.

    \14\NYSE Rule 500 generally requires that an issuers's proposed 
withdrawal from listing on the NYSE be approved by the holders of 
66\2/3\% of the outstanding security without the objection of more 
than 10% of the individual holders thereof.
    \15\15 U.S.C. 78f(b) (5) and (8) and 78k-1(a)(1)(C)(ii) (1988).
    [[Page 18651]]
    
    In its comment letter, the NYSE asserted that Rule 500 is not 
related to its pending proposal and that Rule 500 would not affect 
issuers that list under the proposal any differently from issuers 
listing under existing requirements. The NYSE also claimed that, if the 
proposal were adopted, the proposal were adopted, the NYSE would 
continue to have the highest listing requirements among all domestic 
equities markets.

IV. Discussion

A. Introduction

    After careful consideration of the comments received, the 
Commission finds that the proposed rule change is consistent with the 
requirements of Section 6(b).\16\ In particular, 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; and are not designed to permit unfair discrimination between 
issuers. The Commission also finds that the proposal is consistent with 
the requirements of Section 6(b)(8) that the rules of an exchange not 
impose any burden on competition not necessary or appropriate in 
furtherance of the purpose of the Act.

    \16\15 U.S.C. 78f(b) (1988 and Supp. V 1993).
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B. Background

    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 an exchange to screen 
issuers and to provide listed status only to bona fide companies with 
sufficient public float, investor base, and trading interest to ensure 
that the market for a company's stock has the depth and liquidity 
necessary to maintain fair and orderly markets. Adequate standards are 
especially important given the expectations of investors regarding 
exchange trading and the imprimatur of listing on a particular market. 
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 so that fair and 
orderly markets can be maintained.
    For the reasons set forth below, the Commission believes that the 
proposed rule change will provide the NYSE with greater flexibility in 
determining which equity securities warrant inclusion in its market, 
without compromising the effectiveness of the Exchange's listing 
standards, and that the standards do not pose a burden on competition 
among markets.

C. The Proposed Alternative Listing Standards

    As discussed above, the NYSE currently requires a company to meet 
rigorous standards regarding, among other things, its investor base and 
its public float before qualifying for listing. The Commission agrees 
with the NYSE, however, that there are bona fide companies that do not 
meet these measures but that nonetheless have sufficient investor 
interest to ensure that the market for the company's stock has the 
depth and liquidity appropriate for auction market trading.
    In particular, the Commission believes that it is reasonable for 
the NYSE to list companies with 500 stockholders given that such 
companies must have an average monthly trading volume of one million 
shares, which amount is ten times the normal monthly trading volume 
currently required by the Exchange under one of its stockholder 
distribution listing standards for domestic equities. This higher 
trading volume standard will ensure that listed companies with a 
smaller shareholder base should nevertheless have sufficient interest 
to support a liquid market.
    Additionally, the Commission believes that the proposed alternative 
to the existing demonstrated earnings power standard, which is based on 
net income adjusted for the cash effects of investing or financing cash 
flows, is adequate to ensure that the NYSE lists only bona fide 
issuers. First, only companies that have a market capitalization of at 
least $500 million and revenues of at least $200 million in their most 
recent fiscal year are eligible to use the alternative net income 
standard to satisfy demonstrated earnings power. These threshold 
requirements, taken together with the actual alternative standard 
requiring adjusted net income to be positive for the last three fiscal 
years and not less than $25 million in the aggregate for such period, 
should ensure that such companies are of sufficient size and substance 
so as not to compromise the reasonable expectations of investors 
regarding the companies that are eligible to trade on the NYSE. Second, 
the other listing requirements including number of stockholders and 
publicly held shares as well as the increased aggregate market value 
and tangible net assets standard will apply to all listed companies 
including those utilizing the alternative demonstrated earning power 
criteria. As a result of these requirements, the Exchange's domestic 
listing standards will continue to provide only for the listing of 
securities with a sufficient investor base to maintain fair and orderly 
markets and the listing of companies that are viable, going concerns 
with substantial aggregate market value or tangible net assets.
    Third, the alternative standard to demonstrated earning power using 
net income adjusted for the cash effects of investing or financing cash 
flows is based, with certain exceptions, on FAST Statement No. 95, 
which sets forth a uniform accounting standard for calculation of cash 
flows. Although the proposal limits certain adjustments to net income 
that are not included in FASB Statement No. 95, the specific 
limitations are set forth in the NYSE's listing criteria. Accordingly, 
the NYSE can apply the standard uniformly and companies will be able to 
know with certainly whether or not they can meet the alternative 
demonstrated earnings power test based on net income (as adjusted for 
the cash effects of investing or financing cash flows).
    Finally, the Commission agrees with the NYSE's proposal to increase 
the aggregate market value and net tangible assets requirements from 
$18 million to $40 million. These requirements have not been updated 
since 1984.\17\ This substantial increase significantly upgrades the 
NYSE's listing criteria and should offer further assurances that the 
current amendments do not weaken the high standards that a listing on 
the NYSE has traditionally represented.

    \17\See Securities Exchange Act Release No. 20649 (February 13, 
1984), 49 FR 6587 (February 22, 1984).
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D. Maintenance Criteria

    The NYSE's proposal does not contain separate continued listing 
standards for the newly proposed initial listing standards. Instead, 
the NYSE has indicated that, in reviewing companies for continued 
listing under such standards, it would rely on its broad authority to 
duelist companies set forth in Exchange Rule 499, which states that 
securities admitted to the list may be suspended from dealings or 
removed from the list at any time.\18\ Further, the [[Page 18652]] NYSE 
has stated that, in monitoring companies listed under the proposed 
alternative standards, companies that subsequently fall substantially 
below those standards would be considered for relisting. In addition 
the NYSE also would consider factors for continued listing such as: 
trading volume; the number of publicly held shares; the aggregate 
market value of publicly-held shares; the inability to meet current 
debt obligations or adequately Finance operations; or an abnormally low 
selling price or volume of trading. The Commission believes that the 
authority in Rule 499, in addition to the NYSE's clarifications on 
continued listing under the new standards, gives the NYSE sufficient 
flexibility to adequately monitor companies listed under the 
alternative standards being adopted herein and delist such companies 
where appropriate.

    \18\The Supplementary Material to Rule 499 states that although 
the Exchange has adopted certain guidelines, ``. . .The Exchange is 
not limited by what is set forth under the heading `Numerical and 
Other Criteria.' Rather, it may make an appraisal of, and determine 
on an individual basis, the suitability for continued listing of an 
issue in light of all pertinent facts whenever it deems such action 
appropriate, even though a security meets or fails to meet any 
enumerated criteria.''
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    Nevertheless, the NYSE has indicated its intention to develop 
specific continued listing criteria that correlate to the alternative 
initial listing standards.\19\ The Commission believes this will be 
useful to the NYSE in monitoring such companies to ensure continued 
depth and liquidity. In addition, in light of the increase in the 
initial listing criteria for aggregate market value of shares 
outstanding and tangible net assets from $18 million to $40 million, 
the Commission believes that the Exchange should consider updating its 
continued listing standards for these criteria, which are currently set 
at $8 million.

    \19\Letter from Robert G. Britz, Senior Vice President, New 
Listings & Client Service, to Sharon Lawson, Assistant Director, 
Division of Market Regulation, SEC, dated February 28, 1995 and 
letter from J. Paul Wyciskala, Managing Director, Financial 
Compliance, to Sharon Lawson, Assistant Director, Division of Market 
Regulation, SEC, dated March 21, 1995.
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E. Burden on Competition

    The NASD believes the Commission should disapprove the NYSE's 
alternate listing standards unless the NYSE first rescinds its Rule 500 
because, in the NASD's view, the proposal, when coupled with Rule 500, 
limits competition for listings. The direct effect of the NYSE's 
proposal, however, will be to increase the number of companies eligible 
for NYSE listing. Accordingly, the proposal actually will increase 
competition for new listings between the NYSE and other self-regulatory 
organizations. The Commission believes that such an increase in 
competition, on balance, would benefit the securities markets.\20\

    \20\In this regard, the Commission believes it is significant 
that, pursuant to Rule 19c-3 under the Act, 17 CFR 240.19c-3 (1994), 
NASD market makers still will be able to trade the NYSE's newly 
listed securities.
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    In addition, the NYSE's changes are relatively modest in scope. The 
NASD has not presented any evidence to indicate that the new 
requirements will broaden significantly the pool of Nasdaq companies 
that will become eligible for an NYSE listing under the new standards. 
Indeed, the NASD comment letter states that already ``most of Nasdaq's 
largest companies choose to freely remain on Nasdaq rather than switch 
to the NYSE.'' The NASD has not indicated how the NYSE proposal would 
change this situation.
    The NASD, in effect, is asking the Commission to disapprove a pro-
competitive proposal because it believes that another rule of the NYSE 
creates an anticompetitive barrier to delisting from the NYSE.\21\ 
While the Commission is mindful of the competitive consequences of NYSE 
Rule 500 and believes those issues should be explored further,\22\ the 
Commission does not believe that the current NYSE listing standards 
should be frozen in place pending such examination. As a practical 
matter, the immediate effect of this proposal will be to increase 
competition for listing, which the Commission believes is in the best 
interest of the securities markets and consistent with the Act.\23\ The 
broader question of whether delisting standards should be revised is a 
separate matter that should be considered independently. Moreover, such 
separate consideration is consistent with the Commission's commitment 
to expedite the processing of rule filings whenever possible.\24\

    \21\In its comments, the NASD stated its belief ``that expanding 
the NYSE listing standards without eliminating the anticompetitive 
effect of Rule 500 is contrary to a free and open market and 
national market system, and imposes a burden on competition that is 
not otherwise justified or in furtherance of the purposes of the 
Exchange Act.'' As support for such statement, the NASD cited, among 
other sections of the Act, Section 11A(1)(C)(ii), which sets forth 
the finding by Congress that it is in the public interest and 
appropriate for the protection of investors and the maintenance of 
fair and orderly markets to assure fair competition between exchange 
markets and markets other than exchange markets. To the extent the 
alternate listing standards allow the NYSE to compete for listings 
of other market centers, it will assure fair competition between 
exchange markets and other markets consistent with Section 11A of 
the Act.
    \22\See Division of Market Regulation, SEC, ``Market 2000, An 
Examination of Current Equity Market Developments'' (January 1994) 
at 30 and 31 (``The standards embodied in Rule 500 * * * represent a 
barrier to delisting that is too onerous, * * * Accordingly, the 
Division recommends that the NYSE submit a proposed rule change to 
modify the requirements of NYSE Rule 500. * * * The new standards 
should rely on a determination by an issuer's board of directors 
rather than shareholder approval. For example, the new standards 
could require approval by the board of directors and a majority of 
the independent directors, or it could require a review of the 
delisting decision by the board's audit committee.'').
    \23\The Commission notes that the alternative listing standards 
increase the classes of companies that are eligible for listing on 
the NYSE based upon objective, numerical criteria that are 
reasonably related to the purposes underlying the NYSE's listing 
standards. As such, the Commission finds, in accordance with Section 
6(b)(5) of the Act, that these standards do not discriminate 
unfairly between issuers.
    \24\See Securities Exchange Act Release No. 35123 (December 20, 
1994), 59 FR 66692 (December 28, 1994) (amending Rule 19b-4 to 
expedite the process by which proposed rule changes of self-
regulatory organizations are filed and become effective).
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V. Conclusion

    In summary, based upon the analysis set forth above, the Commission 
believes this rule change will not weaken the high standards for 
listing on the NYSE. Further, following this change, the Exchange's 
domestic listing standards will continue to provide only for the 
listing of securities with a sufficient investor base to maintain fair 
and orderly markets. Accordingly, the Commission believes that this 
rule change adequately protects investors and the public interest.
    The Commission further believes that these new standards will 
provide the NYSE with greater flexibility in determining which equity 
securities warrant inclusion in its market. Such flexibility will 
increase competition for new listings between the NYSE and other self-
regulatory organizations. The Commission believes that this increase in 
competition will benefit the securities markets. Accordingly, the 
Commission does not believe that the rule change will result in any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.
    Finally, the Commission declines to condition its approval on the 
NYSE's elimination of its Rule 500. While the Commission recognizes the 
potentially anti-competitive effect of Rule 500 and urges the NYSE to 
consider modifications thereto, the Commission believes that approval 
of the NYSE's proposal is in the best interest of, and will actually 
foster competition among, the securities markets. The Commission 
believes that the benefits of such competition should not be delayed 
pending the resolution of the Rule 500 issues. [[Page 18653]] 
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\25\ that the proposed rule change (SR-NYSE-95-01), including 
Amendments Nos. 1 and 2, is approved.

    \25\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.\26\

    \26\17 CFR 200.30-3(a)(12) (1994).
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[FR Doc. 95-8996 Filed 4-11-95; 8:45 am]
BILLING CODE 8010-01-M