Federal Register / Vol. 61, No. 98 / Monday, May 20, 1996 / Notices 25253

11See Securities Exchange Act Release No. 31243

(September 28, 1992), 57 FR 45849.

12See, e.g., Securities Exchange Act Release No.

31243 (September 28, 1992), 57 FR 45849 (order

approving the listing of index options and index

LEAPS on the CBOE Biotech Index).

13See Securities Exchange Act Release No. 30944

(July 21, 1992), 57 FR 33376 (July 28, 1992).

14 15 U.S.C. § 78s(b)(2) (1988).

15 17 CFR § 200.30–3(a)(12).

1 15 U.S.C. 78(b)(1) (1988).

2Memo from Richard B. Nesson, Executive Vice

President and General Counsel, DTC, to Christine

Sibille, Commission (January 31, 1996).

3Securities Exchange Act Release No. 36897

(February 27, 1996), 61 FR 8992.

4Letter from Richard B. Nesson, Executive Vice

President and General Counsel, DTC, to Christine

Sibille, Senior Counsel, Division of Market

Regulation, Commission (March 4, 1996). The

amendment provides that DTC will provide thirty

days notice prior to implementing the IPO Tracking

System. Because the amendment did not change the

substance of the filing, the Commission did not

republish the proposed rule change for comment.

5Letter from Carl H. Hewitt, Managing Director

and General Counsel, Spear, Leeds & Kellogg, to

Commission (May 3, 1996).

6Syndicate members are a group of broker-dealers

that agree to purchase a new issue of securities from

an issuer under an underwriting agreement. The

selling group is a group of broker-dealers that

market the new issue to the public. Selling group

broker-dealers may purchase from a syndicate

member or may be a syndicate member.

7Flipping occurs when a syndicate’s lead

manager is supporting the IPO with a stabilization

bid (i.e., the lead manager is purchasing shares in

the secondary market in order to keep the price of

the issue from dropping below its initial offering

price), and securities of the IPO that had been

distributed to investors are sold by those investors

in the secondary market and are purchased by a

syndicate member. The lead manager may wish to

identify flipped transactions so that underwriting

concessions (i.e., the discount from the offering

price received by syndicate members) can be

recovered from the appropriate syndicate members.

8Under the rules of most national securities

exchanges and the National Association of

Securities Dealers (‘‘NASD’’), in order to be listed

for trading on a national securities exchange or to

Continued

exchange. The Commission notes that

the trading of standardized exchangetraded options occurs in an

environment that is designed to ensure,

among other things, that: (1) the special

risks of options are disclosed to public

customers; (2) only investors capable of

evaluating and bearing the risks of

options trading are engaged in such

trading; and (3) special compliance

procedures are applicable to options

accounts. Accordingly, because the

Index options and Index long-term fullvalue and reduced-value options will be

subject to the same regulatory regime as

the other standardized index options

currently traded on CBOE, the

Commission believes that adequate

safeguards are in place to ensure the

protection of investors in Index options

and full-value or reduced-value Index

long-term options.

C. Surveillance. The Commission

believes that a surveillance sharing

agreement between an exchange

proposing to list a stock index

derivative product and the exchange(s)

trading the stocks underlying the

derivative product is an important

measure for surveillance of the

derivative and underlying securities

markets. Such agreements ensure the

availability of information necessary to

detect and deter potential

manipulations and other trading abuses,

thereby making the stock index product

less readily susceptible to

manipulation.11 In this regard, the

Commission notes that the CBOE,

NYSE, and NASD are all members of the

ISG. The Commission believes that this

arrangement ensures the availability of

information necessary to detect and

deter potential manipulations and other

trading abuses, thereby making the

Index options and full-value and

reduced-value long-term Index options

less readily susceptible to

manipulations.12

D. Market Impact. The Commission

believes that the listing and trading of

Index options, including full-value and

reduced-value Index LEAPS on the

CBOE, will not adversely affect the

underlying securities markets. First,

because of the equal-weighting method

that will be used, no one security or

group of securities represented in the

Index will dominate the weight of the

Index immediately following a quarterly

rebalancing. Second, the Index

maintenance criteria ensure that the

Index will be comprised solely of

securities that satisfy the Exchange’s

listing standards for standardized

options trading, and that one or a few

stocks do not dominate the Index.

Third, the currently applicable 9,000

contract position and exercise limits

will serve to minimize potential

manipulation and market impact

concerns. Fourth, the risk to investors of

contra-party non-performance will be

minimized because the Index options

and Index long-term options will be

issued and guaranteed by the Options

Clearing Corporation just like any other

standardized option traded in the

United States.

Lastly, the Commission believes that

settling expiring Index options

(including full-value and reduced-value

long-term Index options) based on the

opening prices of component securities

is reasonable and consistent with the

Act. As has been noted previously,

valuing index options for exercise

settlement on expiration based on

opening rather than closing prices of

Index component securities may help to

reduce adverse effects on markets for

such securities.13

It therefore is ordered, pursuant to

Section 19(b)(2) of the Act,14 that the

proposed rule change (SR–CBOE–96–

11) is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.15

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–12594 Filed 5–17–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37208; File No. SR–DTC–

95–27]

Self-Regulatory Organizations; The

Depository Trust Company; Order

Approving a Proposed Rule Change

Implementing the Initial Public Offering

Tracking System

May 13, 1996.

On January 2, 1996, The Depository

Trust Company (‘‘DTC’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’) a proposed rule change

(File No. SR–DTC–95–27) under Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Act’’) 1 seeking to implement

the Initial Public Offering (‘‘IPO’’)

Tracking System. On January 31, 1996,

DTC amended the proposed rule

change.2 Notice of the proposal was

published in the Federal Register on

March 6, 1996.3 On march 7, 1996, DTC

filed a second amendment to the

proposed rule change.4 The Commission

received one comment letter in response

to the filing.5 For the reasons discussed

below, the Commission is approving the

proposed rule change.

I. Description

DTC is implementing its IPO Tracking

System to allow lead managers (also

referred to as managing underwriters)

and syndicate members6 of equity

underwritings to monitor ‘‘flipping’’ 7 of

new issues. Currently, many IPOs are

distributed entirely in physical,

certificated form outside the

depositories so that tracking may be

accomplished by using certificate

numbers to monitor the movements of

the securities. DTC’s IPO Tracking

System provides a means for lead

managers to track IPOs in a book-entry

environment and thus eliminates the

need to distribute newly underwritten

equity securities through the use of

physical certificates.

Currently, securities to be listed on an

exchange or quoted through the Nasdaq

Stock Market (‘‘Nasdaq’’) must be made

depository eligible.8 Furthermore, the
25254 Federal Register / Vol. 61, No. 98 / Monday, May 20, 1996 / Notices

be eligible for inclusion in the Nasdaq and issuer

must represent that the CUSIP number identifying

the security to be listed of such exchange or to be

eligible for inclusion in Nasdaq is included in the

file of eligible issues maintained by a securities

depository registered as a clearing agency under

Section 17A of the Act. E.q., New York Stock

Exchange (‘‘NYSE’’) Rule 227 and NASD Uniform

Practice Code Section 11. Securities Exchange Act

Release No. 35798 (June 1, 1995), 60 FR 30909.

9Securities Exchange Act Release No. 32455

(June 11, 1993), 58 FR 33679. E.g., NYSE Rule 226,

NASD By-laws, Schedule D, Part II, Section 1(c)(23)

and Uniform Practice Code Section 11.

10Supra note 3.

11 IPO control accounts are restricted accounts

established for DTC participant broker-dealers in

which their IPO shares are kept separate from other

shares held by the participants and from which

limited account movements may be made without

a ‘‘flip’’ being reported. These unreported

movements include: (i) the movement of shares

from the lead manager (or comanager when there

are shares to be distributed to foreign brokers) to a

DTC participant and (ii) the movement of shares

from a DTC participant to a custodian for an

institution.

12Share movements out of the selling group

broker-dealer’s IPO control account will be reported

as a flip.

13A prime broker is a broker-dealer that acts as

custodian for institutional customers and uses

DTC’s ID system (i.e., the prime broker acts as an

agent bank).

14Alternatively, the lead manager may deliver

directly to the custodian of the selling group

member’s institutional client. This process is

referred to as directed concessions.

15The AIA number is the internal number used

by the custodian to identify the institutional client.

The BIA number is the internal account number

that the selling group broker-dealer uses to identify

the institutional client.

16As a result, the transaction is marked as a fail.

NASD and most exchanges have rules

which require transactions in depository

eligible securities between financial

intermediaries and between a financial

intermediary and a customer with

delivery versus payment privileges to be

settled by book entry.9 Due to the need

to distribute new issues in physical

form (i.e., without using book entry

movements) for tracking purposes, these

rules provide that prior to the

availability of a flipping tracking system

a managing underwriter can delay the

date a security is deemed depository

eligible for up to three months after

trading has commended in the security.

Once a flipping tracking system

becomes available, managing

underwriters will no longer have the

option to delay an issue’s depository

eligible date and will be unable to

distribute Nasdaq quoted or exchange

listed new issues in physical certificate

form outside the depositories. DTC will

provide notice of the IPO Tracking

system’s availability date at least thirty

calendar days prior to its availability.10

Under DTC’s proposed rule change,

the lead manager will be required to

notify DTC of its decision to use the IPO

Tracking System to track an issue by

4:00 p.m. two days prior to the date of

the initial distribution of securities

(‘‘closing date’’). On the closing date,

DTC’s underwriting department will

place the IPO shares in the IPO control

account of the lead manager.11

Allocation of these shares by the lead

manager depends upon the nature of the

ultimate buyer (i.e., retail or

institutional).

Retail Trade

For a retail distribution, the lead

manager moves the securities from its

IPO control account directly to the IPO

control account of the selling group

broker-dealer for the retail customer.12

While broker-dealers are not required to

provide customer level detail, selling

group broker-dealers may populate the

IPO database with information for retail

accounts (e.g., internal customer

identification numbers) either directly

into the IPO Tracking System by using

the ‘‘Add Customer-Level Detail’’

function or into the IPO Tracking

System through submissions of daily

formatted trade files. Broker-dealers also

may change such information using the

IPO Customer Level Adjustment

function.

Upon the subsequent sale of a

position that was established in the

initial distribution, the selling group

broker-dealer releases the shares from

its IPO control account to its free

account by using the IPO release

capability through DTC’s participant

terminal system (‘‘PTS’’), computer-tocomputer facilities (‘‘CCF’’), or main

frame dual host (‘‘MDH’’). The release

instructions must include number of

shares, trade date, and price. If the

broker-dealer has previously assigned a

customer internal account number to

the IPO shares, the release instructions

must include such number which must

match a previously established IPO

database entry or the transaction will be

rejected. Upon DTC’s acceptance of the

release instructions, the shares are

moved from the broker-dealer’s IPO

control account to its free account. It is

this movement that marks the activity as

a flip. All deliveries and Continuous Net

Settlement (‘‘CNS’’) short positions are

satisfied from the participant’s free

account.

Institutional Trade

For an institutional customer, the lead

manager moves the shares from its IPO

control account directly into the selling

group broker-dealer’s IPO account at

DTC by using an initial distribution

deliver order (‘‘DO’’). The selling group

broker-dealer then distributes the

institutional portion of the initial

distribution to the institution’s

custodian, which is either an agent bank

or prime broker,13 through DTC’s

Institutional Delivery (‘‘ID’’) system or

by submitting a DO with an ID agent

bank identifier.14 The DO or ID confirm

will contain the Agent Internal Account

(‘‘AIA’’) number and the Broker Internal

Account (‘‘BIA’’) number,15 which will

be stored in the IPO database.

Agents banks do not have IPO control

accounts; therefore, all activity into and

out of the agent banks’ free accounts is

monitored to keep track of customer

purchases and sales. When an ID

confirm is generated for a sale in a

tracked issue, DTC matches the AIA

number on the confirm against the AIA

number in the IPO database. A warning

message is produced on the

confirmation and on the affirmed

confirmation when an AIA number does

not match any AIA number contained in

the IPO database. Similarly, settlement

authorization or DO processing is

prohibited if a match to an AIA number

in the IPO database is not found.16 In

order to settle the transaction, the agent

bank must either change the AIA

number in the IPO database using the

IPO Customer-Level Adjustment

function or submit a DO with an AIA

number that matches the IPO database.

Unlike agent banks, prime brokers

will have IPO control accounts at DTC.

Shares from an initial distribution are

moved into the prime broker’s IPO

control account, and the IPO database is

updated with AIA and BIA numbers

from the ID trade confirmation. The IPO

Tracking System automatically releases

IPO positions to the prime broker’s free

account for affirmed ID trades of

secondary market transactions when the

AIA number on the confirmation

matches an AIA number contained in

the IPO database. It is the release of the

IPO position that results in a report of

a flip.

When an institutional customer has

positions in the same security

purchased both in an IPO and in the

secondary market, the system uses the

secondary market position to complete

a delivery before using shares received

during the initial distribution. Also,

when a customer has received shares

from multiple broker-dealers and

subsequently sells such shares, the

system assigns the ‘‘flipped’’ shares on

a prorated basis among the selling group

members servicing that customer.

Correspondent Relationships

When an introducing broker (ie., not

a DTC participant) is acting as a selling

group member, its shares are held by its

designated clearing agent, which may be

a broker-dealer or agent bank. When
Federal Register / Vol. 61, No. 98 / Monday, May 20, 1996 / Notices 25255

17The CA number is the clearing firm’s internal

number for the introducing broker.

18When the ultimate purchaser is a retail

customer, clearing agents may enter customer-level

details into the IPO database on behalf of

correspondents. When the ultimate purchaser is an

institution, clearing agents are able to use the ID

system or a properly identified DO to deliver shares

as part of the initial distribution to a custodian.

19A WT is used when participants need to

withdraw physical stock or registered bond

certificates from DTC registered in a name other

than DTC’s nominee name, Cede & Co. DTC permits

participants to withdraw securities in round lots,

odd lots, or mixed lots registered in a name

designated by the participant.

20For a complete description of customer account

transfers of IPOs in the ACAT system, refer to

Securities Exchange Act Release No. 36931 (March

6, 1996), 61 FR 10050 [File No. SR–NSCC–96–05]

(notice of filing of proposed rule change modifying

the ACAT service to facilitate the transfer of shares

being tracked in the IPO Tracking System).

21The memo segregation function creates a memo

position within the participant’s account enabling

participants to protect customer securities.

22The lead manager’s report combined with

market conditions will assist the lead manager in

determining when to instruct DTC to discontinue

IPO tracking.

23 DTC will automatically release the shares from

the IPO control account to the participant’s memo

segregation account at the close of the tracking

period when requested in writing as a standing

instruction by individual participants that use the

memo segregation service. Without this standing

Continued

distribution these shares, the lead

manager identifies the transaction as a

correspondent delivery by entering the

Correspondent Account (‘‘CA’’) number

on the DO.17 The IPO Tracking System

captures the CA number from the

delivery to the clearing agent. The CA

number is stored in the IPO database

with the clearing agent’s participant

number to fully identify a

correspondent (i.e., the introducing

broker) as a selling group member.18

Subsequent share movements for

correspondents, either sales or account

transfers, require use of the CA number

and are subject to the same release rules

that apply to direct DTC participants.

Physical Certificates

DTC does not accept deposits of

physical certificates in tracked issues.

Participants may request a physical

certificate through a withdrawal-bytransfer (‘‘WT’’) request, which will be

processed beginning on the first

settlement day of the issue.19 For shares

held by agent banks, the bank must

input into the automated WT system the

AIA, CA, and ID agent bank numbers. If

the numbers entered do not match those

in the IPO database, the WT request will

be rejected. If a WT request exceeds the

position in the agent bank’s account, the

request will be rejected, and an error

message will be generated. The IPO

Tracking System will process WT

requests first using shares which were

not part of the initial distribution and

then using shares which were part of the

initial distribution provided there is

sufficient position.

For shares held by broker-dealers, the

WT request must include the customer

identification number. DTC will process

WT requests using shares in the IPO

control account with a matching

customer number. When there is a

customer number match in the IPO

database, DTC generates a release from

the IPO account and reports it on the

lead manager’s and selling group

member’s reports as a WT even if the

WT is not processed. The released IPO

shares are combined with free account

shares, and the WT is processed from

the free account. If the broker-dealer’s

IPO control account does not contain

shares with a matching customer

number, the WT is processed using

shares from the free account provided

there is sufficient position.

Stock Loan

Participants may process stock loan

DOs using stock loan reason codes.

Participants do not have to enter

individual account numbers (e.g., AIA

numbers) to match the IPO database. For

brokers, IPO tracked shares do not have

to be released by participants to execute

stock loans because the IPO system

automatically releases these shares.

Stock loans will be reported to the lead

manager as separate items from flipped

shares.

Customer Account Transfer

When a customer account includes

shares in a tracked issue, the transfer of

such shares cannot occur through the

National Securities Clearing

Corporation’s (‘‘NSCC’’) normal

Automated Customer Account Transfer

(‘‘ACAT’’) system processing. While the

initial processing at NSCC will remain

the same, at the end of the settlement

process NSCC will issue a trade-fortrade ticket for shares in a tracked issue,

and the shares will not be delivered

through NSCC’s Continuous Net

Settlement System.20 Instead, customer

shares in a tracked issue must be

processed by DTC’s new IPO customer

account transfer function. The function

allows the deliverer (i.e., the brokerdealer or agent bank) to enter the

customer internal account number

associated with the shares to be

delivered, its participant number, and

customer internal account number of

the broker-dealer to which the shares

are to be delivered. The shares are then

moved from the IPO control account of

the delivering broker-dealer to the IPO

control account of the receiving brokerdealer.

Reclamation

Initial distribution deliveries (i.e.,

deliveries from the lead manager to a

selling group member) that are

reclaimed and matched will return to

the account from which they originated

(i.e., the lead manager’s IPO control

account). Reclamations done for shares

which were released from a selling

group broker-dealer’s IPO control

account or a prime broker’s IPO control

account to a free account to satisfy an

obligation on the secondary market will

be returned to the delivering

participant’s free account, and such

shares will still be registered as flipped.

When a reclamation occurs for an agent

bank, the reclaimed DO will be matched

to the original delivery, and the

information in the IPO database will be

reversed (i.e., no flip will be registered).

Oversubscription

Generally, when an issue is

oversubscribed the lead manager will

purchase securities in the secondary

market. These shares will reside in the

lead manager’s free account. The lead

manager will have the option of

delivering oversubscribed shares from

its free account to selling group

members’ IPO control accounts or to its

IPO control account for its own

customers’ shares.

Memo Segregation

Participants may enter memo

segregation instructions with share

quantities that represent the combined

total of their free and IPO shares.21 As

DTC processes DOs, the share quantity

of the memo segregation instruction will

be subtracted from the combined share

total of the free account and the IPO

account and then compared against the

quantity on the DO to determine if the

delivery can take place. The shares to be

delivered will be removed from the

participant’s free account.

Termination of Tracking

During the tracking period, the lead

manager and selling group members are

able to obtain information on the

flipping of shares through hard copy or

machine readable daily reports or

through a new PTS inquiry function.22

DTC discontinues tracking an IPO on

the earlier of the business day following

DTC’s receipt of a termination request

from the managing underwriting or 120

calendar days from the date trading

commenced. Once IPO tracking is

discontinued, any shares remaining in a

broker-dealer’s IPO control account are

moved to its free account.23
25256 Federal Register / Vol. 61, No. 98 / Monday, May 20, 1996 / Notices

instruction, DTC will release shares residing in the

IPO control account directly into the participant’s

free account at the end of the tracking period.

24Syndicate members will not see information

regarding customers of their selling group brokerdealers.

25Supra note 5.

26 15 U.S.C. 78q–1 (1988).

27 15 U.S.C. 78q–1(b)(3) (A) and (F) (1988).

28Pub. L. No. 94–29, 89 Stat. 97 (1975) (codified

at 15 U.S.C. 77–80h [1988]).

29 15 U.S.C. 78q–1(e) (1988).

30E.g., Securities Exchange Act Release Nos.

22021 (September 23, 1983), 48 FR 45167 (order

granting full registration to nine clearing agencies);

19698 (April 15, 1983), 48 FR 17604 (order

implementing DTC;’s Fast Automated Securities

Transfer program); 30283 (January 23, 1992), 57 FR

3658 (order implementing DTC’s Deposit/

Withdrawal at Custodian program); 30505 (March

20, 1992), 57 FR 10683 (order eliminating DTC’s

Certificate on Demand service for most corporate

issues); 31645 (December 23, 1992), 57 FR 62407

(order approving rule change requiring that most

interdealer transactions in municipal securities be

settled by book-entry through a depository); 32455

(June 11, 1993), 58 FR 33679 (order approving

uniform book-entry settlement rules); and 35798

(June 1, 1995), 60 FR 30909 (order approving

depository eligibility requirements).

31Securities Exchange Act Release No. 37094

(April 11, 1996), 61 FR 17108.

32The system will report the withdrawal of a

certificate to the lead manager which may request

further clarification from the selling group brokerdealer as to the nature of the transaction.

At the close of the tracking period the

lead manager receives a final report

detailing the selling group members

(including the clearing agents) whose

customers have flipped. The report

includes sale price, trade date, and

number of shares as well as the clearing

agent’s participant number and the CA

number. The report also shows: (1)

Outstanding CNS short positions for

selling group members long in the IPO

control account, (2) a total aggregate of

all open CNS commitments, (3) WT

transfers, and (4) outstanding stock

loans by agent banks or broker-dealers.

The lead manager’s report does not

include customer level detail

information (i.e., BIA numbers, AIA

numbers, or customers internal account

numbers).

Selling group members and lead

managers, as part of the syndicate,

receive a report of their institutional or

retail customers’ sale transactions.24

Such report includes the original BIA

number, the identity of any prime

brokers or agent banks, and the AIA

numbers or the customer internal

account numbers. This provides

sufficient information for selling group

members to identify the clients that

have potentially flipped shares during

the tracking period.

II. Comment Letter

The Commission received one

comment letter in response to the

proposed rule change.25 The commenter

believes that the proposal is too broad

because the IPO Tracking System will

allow tracking of all new issues

regardless of whether the issues are

subject to a stabilization bid. The

commenter is concerned that DTC’s IPO

Tracking System will encourage

syndicates to monitor secondary market

sales of all IPOs. The commenter

believes such use of the IPO Tracking

System will place a burden on the

marketplace by restricting trading in the

secondary market and will infringe

upon the anonymous nature of trading.

III. Discussion

The Commission believes that DTC’s

proposal is consistent with Section 17A

of the Act 26 and specifically with

Sections 17A(b)(3) (A) and (F)

thereunder.27 Sections 17A(b)(3) (A)

and (F) require that a clearing agency be

organized and its rules be designed to

facilitate and to promote the prompt and

accurate clearance and settlement of

securities transactions and to assure the

safeguarding of securities and funds

which are in the custody or control of

DTC or for which it is responsible. By

facilitating a lead manger’s ability to

track flipping of IPOs in a book-entry

environment, DTC’s IPO Tracking

System should further efficiencies and

safety in the clearance and settlement of

securities transactions by reducing the

number of transactions that are settled

outside the national clearance and

settlement system.

Book-entry settlement of securities

transactions has been a goal since

Congress enacted the Securities Acts

Amendments of 1975.28 In Section

17A(e),29 Congress directed the

Commission to use its authority to end

the physical movement of securities

certificates in connection with the

settlement among brokers and dealers of

transactions in securities. Since 1975,

substantial progress has been made in

reducing the flow of physical

certificates for settlement of interdealer

and institutional securities

transactions.30 Approval of the present

rule change should further aid in the

efficiencies of the clearance and

settlement system because the IPO

Tracking System should reduce costs,

risks, and delays associated with the

physical delivery of certificates.

The one commenter has suggested

that the IPO Tracking System is overly

broad. It is true that the IPO Tracking

System may facilitate the tracking of

more issues than the method currently

used. However, the increase in the

amount of information available to the

lead manager does not, in itself, create

the problems cited by the commenter.

Any use of the IPO Tracking System

would need to be consistent with

federal securities laws in effect at that

time, including, if adopted, recent

proposals designed to address concerns

about post-offering activities by

underwriters.31 Therefore, the

Commission does not believe that the

gathering of information by the IPO

Tracking System will be detrimental to

public policy.

The commenter also stated that the

IPO Tracking System prevents

anonymity in the securities market. The

Commission believes that the IPO

Tracking System generally does not

provide any more information than is

obtained through the current method of

tracking with physical certificates. In a

retail trade, the selling group brokerdealer is not required to populate the

IPO datebase with retail customer

information. In instances where

customer information is provided either

in a retail or institutional trade, only the

selling group broker-dealer, and not the

lead manager, will receive reports

identifying the customer. This process

mirrors the flow of information in

physicial tracking where a lead manager

can identify the selling group brokerdealer by the certificate number, and the

selling group broker-dealer can identify

its customer by the certificate number.

Further, the Commission disagrees that

the proposal will restrict secondary

market sales. The system may in

practice actually make it easier for retail

customers to resell through any brokerdealer because an investor can

immediately request issuance of

physical certificates in her name or

request a transfer to another brokerdealer through the ACAT service, which

generally provides a more expedient

method to transfer an account because

the transfer is conducted through book

entry movements. Finally, the

Commission believes the efficiencies of

the IPO Tracking System outweigh the

potential for misuse of the system and

finds the system to be an effective

alternative to the present method of

tracking IPO shares in certificate form.

Furthermore, the IPO Tracking

System will not impede an investor’s

ability to obtain physical certificates

through a WT transaction. The

modifications to the automated WT

system allow participants to withdraw

physical certificates of tracked issues

without causing the withdrawals to

show as flipped transactions.32

Similarly, investors will be able to loan

or to pledge stock or to transfer their

accounts between broker-dealers during

the tracking period.
Federal Register / Vol. 61, No. 98 / Monday, May 20, 1996 / Notices 25257

33Because all movements out of an agent bank’s

account are monitored, DTC is able to determine

exactly which shares are reclaimed. In contrast,

shares are removed from a broker-dealer’s free

account without regard to their origin.

34Supra note 3.

35 17 CFR 200.30–3(a)(12) (1995).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3For purposes of this rule, a company is

‘‘domiciled’’ in the country under the laws of which

it is organized.

4 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.

5 In determining the number of holders for the

above distribution standards, the NYSE considers

both beneficial and record owners.

6According to the NYSE, the NYSE would

consider an ‘‘exchange’’ to be a trading market that

is regulated as a stock exchange by home-country

regulators. The NYSE believes that the Bolsa

Mexicana de valores is the only market in Mexico

that would be considered an ‘‘exchange’’ for this

purpose. In Canada, the NYSE believes that there

currently are five stock exchanges that satisfy this

test: The Montreal Exchange and the Toronto,

Vancouver, Winnipeg, and Alberta Stock

Exchanges. See letter from Michael J. Simons,

Milbank, Tweed, Hadley & McCloy, to Glen

Barrentine, Senior Counsel, Division of Market

Regulation, SEC, dated April 1, 1996.

7For example, assume that a Mexican company

has ADRs trading in the United States and ordinary

shares trading in Mexico, with each ADR

representing 10 ordinary shares. If the company

were to apply to list its U.S.-traded ADRs on the

NYSE, the Exchange would divide the Mexican

share volume by 10 in determining whether the

combined ADR/share volume meets the

requirements of the listing criteria. For Companies

that have multiple series of shares or ADR’s the

Exchange will include the volume only in the

specific ordinary shares and overlying ADRs that

would be listed on the exchange.

However, the Commission notes that

while a delivery reclaimed by an agent

bank on behalf of an institution will be

matched to the original delivery and the

reclamation will not be recorded as a

flip, a reclamation done for shares

delivered from a selling group brokerdealer’s IPO control account will be

registered as flipped. This distinction

could possibly result in discrimination

between retail customers, who typically

hold through broker-dealers, and

institutional customers. The

Commission understands that this

distinction is a result of systems

limitations.33 The Commission urges

DTC to monitor this situation once the

system is operational to determine

whether the limitation has a

discriminatory effect. If so, DTC should

consider systems modifications to

address this concern.

IV. Conclusion

The Commission finds that DTC’s

proposal is consistent with the

requirements of the Act and particularly

with Section 17A and the rules and

regulations thereunder.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act, that the

proposed rule change (File No. SR–

DTC–95–27) be and hereby is approved.

As stated, DTC has agreed to notify selfregulatory organizations and managing

underwriters at least thirty calendar

days prior to the general availability of

the IPO Tracking System.34

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.35

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–12540 Filed 5–17–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37211; International Series

Release No. 978; File No. SR–NYSE–96–05]

Self-Regulatory Organizations; New

York Stock Exchange, Inc.; Order

Granting Approval to Proposed Rule

Change Relating to Listing Standards

May 14, 1996.

On March 18, 1996, 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

that would permit companies domiciled

in Canada, Mexico, and the United

States (‘‘North America’’) 3 to include

holders and trading volume in North

America toward meeting the

stockholder and trading volume

requirements for listing on the Exchange

pursuant to the domestic listing criteria.

The proposed rule change was

published for comment in Securities

Exchange Act Release No. 37055 (Apr.

1, 1996), 61 FR 15546 (Apr. 8, 1996). No

comments were received on the

proposal.

Under the current NYSE rules,

companies applying to list on the

Exchange must meet the applicable

listing criteria. For equity listings, there

are two different standards: domestic

criteria, which are available to all

companies, (‘‘domestic standards’’) and

criteria available solely to non-U.S.

companies (‘‘worldwide standards’’).

Non-U.S. companies may elect to

qualify for listing under the Exchange’s

domestic numerical standards or

worldwide numerical standards. NonU.S. companies, however, must meet all

of the criteria within the standard under

which they seek to qualify for listing.

Paragraph 102.01 of the NYSE’s Listed

Company Manual (‘‘Manual’’) sets forth

the standards for domestic companies

that want to list their equity securities

on the Exchange. These standards

require applicants to satisfy certain

minimum numerical criteria.4 Under

these requirements for listing, the

company must have, among things, (a)

2,000 round-lot holders; (b) 2,200 total

stockholders, together with an average

monthly trading volume of 100,000

shares for the most recent six months;

or (c) 500 total stockholders, together

with an average monthly trading volume

of 1,000,000 shares for the most recent

12 months.5 The domestic criteria

require that these standards be met only

through holders and trading volume

occurring in the U.S.

The Exchange proposes to amend

these initial listing standards to provide

that for listing applications from North

American companies the Exchange will

include all North American holders and

North American trading volume in

applying the minimum stockholder and

trading volume requirements in

Paragraph 102.01 of the Manual. The

Exchange believes that with continuing

integration of the North American

market, this market should be viewed as

a whole in reviewing a company’s

eligibility for listing. Moreover, the

Exchange believes that this will foster

internationalization of the securities

markets by enhancing the access of U.S.

investors to the trading of Canadian and

Mexican securities.

Pursuant to the proposed rule change,

the Exchange would look at the number

of beneficial holders resident in North

America in applying the initial listing

criteria of Paragraph 102.01 to North

American companies. In computing

trading volume, the Exchange will look

to the reported volume (i) on U.S. stock

exchanges, (ii) in the U.S. over-thecounter market, and (iii) on Canadian or

Mexican stock exchanges.6 The total

volume reported from these sources

must satisfy the NYSE’s initial listing

standards. For American Depositary

Receipts (‘‘ADRs’’) to be listed on the

NYSE, volume in the ordinary shares

would be adjusted to be on an ADRequivalent basis.7 Finally, the proposed

rule change would make conforming

changes to Paragraph 103.00 of the

Manual, which establishes alternate

initial listing criteria for non-U.S.

companies.

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