Document ID: SEC-2012-0118-0001
Agency: sec
Document Type: Rule
Title: Covered Securities of BATS Exchange, Inc.
Posted Date: 2012-01-25T05:00Z

[Federal Register Volume 77, Number 16 (Wednesday, January 25, 2012)]
[Rules and Regulations]
[Pages 3590-3598]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-1521]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 230

[Release No. 33-9295; File No. S7-31-11]
RIN 3235-AL20

Covered Securities of Bats Exchange, Inc.

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or 
``Commission'') is adopting an amendment to Rule 146 under Section 18 
of the Securities Act of 1933, as amended, (``Securities Act'') to 
designate certain securities listed, or authorized for listing, on BATS 
Exchange, Inc. (``BATS'' or ``Exchange'') as covered securities for 
purposes of Section 18 of the Securities Act. Covered securities under 
Section 18 of the Securities Act are exempt from state law registration 
requirements. The Commission also is making corrections to the rule 
text to reflect name changes.

DATES: Effective Date: February 24, 2012.

FOR FURTHER INFORMATION CONTACT: David R. Dimitrious, Senior Special 
Counsel, (202) 551-5131, Ronesha Butler, Special Counsel, (202) 551-
5629, or Carl Tugberk, Special Counsel, (202) 551-6049, or Tyler Raimo, 
Special Counsel, (202) 551-6227, Division of Trading and Markets 
(``Division''), Commission, 100 F Street NE., Washington, DC 20549-
6628.

SUPPLEMENTARY INFORMATION: 

I. Introduction

    In 1996, Congress amended Section 18 of the Securities Act to 
exempt from state registration requirements securities listed, or 
authorized for listing, on the New York Stock Exchange LLC (``NYSE''), 
the American Stock Exchange LLC (``Amex'') (now known as NYSE Amex 
LLC),\1\ or the National Market System of The NASDAQ Stock

[[Page 3591]]

Market LLC (``Nasdaq/NGM'') \2\ (collectively, the ``Named Markets''), 
or any national securities exchange designated by the Commission to 
have substantially similar listing standards to those of the Named 
Markets.\3\ More specifically, Section 18(a) of the Securities Act 
provides that ``no law, rule, regulation, or order, or other 
administrative action of any State * * * requiring, or with respect to, 
registration or qualification of securities * * * shall directly or 
indirectly apply to a security that--(A) is a covered security.'' \4\ 
Covered securities are defined in Section 18(b)(1) of the Securities 
Act to include those securities listed, or authorized for listing, on 
the Named Markets, or securities listed, or authorized for listing, on 
a national securities exchange (or tier or segment thereof) that has 
listing standards that the Commission determines by rule are 
``substantially similar'' to those of the Named Markets (``Covered 
Securities'').\5\
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    \1\ On October 1, 2008, NYSE Euronext acquired The Amex 
Membership Corporation (``AMC'') pursuant to an Agreement and Plan 
of Merger, dated January 17, 2008 (the ``Merger''). In connection 
with the Merger, NYSE Amex's predecessor, the Amex, a subsidiary of 
AMC, became a subsidiary of NYSE Euronext called NYSE Alternext US 
LLC (``NYSE Alternext''). See Securities Exchange Act Release No. 
58673 (September 29, 2008), 73 FR 57707 (October 3, 2008) (SR-NYSE-
2008-60 and SR-Amex 2008-62) (approving the Merger). In 2009, the 
Exchange changed its name from NYSE Alternext to NYSE Amex LLC 
(``NYSE Amex''). See Securities Exchange Act Release No. 59575 
(March 13, 2009), 74 FR 11803 (March 19, 2009) (SR-NYSEALTR-2009-24) 
(approving the name change).
    \2\ As of July 1, 2006, the National Market System of The NASDAQ 
Stock Market LLC is known as the Nasdaq Global Market (``NGM''). See 
Securities Exchange Act Release Nos. 53799 (May 12, 2006), 71 FR 
29195 (May 19, 2006) and 54071 (June 29, 2006), 71 FR 38922 (July 
10, 2006).
    \3\ See National Securities Markets Improvement Act of 1996, 
Pub. L. 104-290, 110 Stat. 3416 (October 11, 1996).
    \4\ 15 U.S.C. 77r(a).
    \5\ 15 U.S.C. 77r(b)(1)(A) and (B). In addition, securities of 
the same issuer that are equal in seniority or senior to a security 
listed on a Named Market or national securities exchange designated 
by the Commission as having substantially similar listing standards 
to a Named Market are covered securities for purposes of Section 18 
of the Securities Act. 15 U.S.C. 77r(b)(1)(C).
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    Pursuant to Section 18(b)(1)(B) of the Securities Act, the 
Commission adopted Rule 146.\6\ Rule 146(b) lists those national 
securities exchanges, or segments or tiers thereof, that the Commission 
has determined to have listing standards substantially similar to those 
of the Named Markets and thus securities listed on such exchanges are 
deemed Covered Securities.\7\ BATS has petitioned the Commission to 
amend Rule 146(b) to designate certain securities listed on BATS \8\ as 
Covered Securities for the purpose of Section 18 of the Securities 
Act.\9\
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    \6\ Securities Exchange Act Release No. 39542 (January 13, 
1998), 63 FR 3032 (January 21, 1998) (determining that the listing 
standards of the Chicago Board Options Exchange, Incorporated 
(``CBOE''), Tier 1 of the Pacific Exchange, Inc. (``PCX'') (now 
known as NYSE Arca, Inc.), and Tier 1 of the Philadelphia Stock 
Exchange, Inc. (``Phlx'') (now known as NASDAQ OMX PHLX LLC) were 
substantially similar to those of the Named Markets and that 
securities listed pursuant to those standards would be deemed 
Covered Securities for purposes of Section 18 of the Securities 
Act). In 2004, the Commission amended Rule 146(b) to designate 
options listed on the International Securities Exchange, Inc. 
(``ISE'') (now known as the International Securities Exchange, LLC) 
as Covered Securities for purposes of Section 18(b) of the 
Securities Act. See Securities Act Release No. 8442 (July 14, 2004), 
69 FR 43295 (July 20, 2004). In 2007, the Commission amended Rule 
146(b) to designate securities listed on the Nasdaq Capital Market 
(``NCM'') as Covered Securities for purposes of Section 18(b) of the 
Securities Act. See Securities Act Release No. 8791 (April 18, 
2007), 72 FR 20410 (April 24, 2007).
    \7\ 17 CFR 230.146(b).
    \8\ BATS recently filed an immediately effective rule change to 
amend Rule 14.1 of its listing standards to include all securities 
listed on the Exchange pursuant to Rule 14.11 as Tier I securities. 
Exchange Rule 14.11 sets forth the criteria for listing certain 
exchange traded products, including exchange traded funds, portfolio 
depository receipts, index fund shares and various other types of 
securities (collectively, ``ETPs''). ETPs were not designated as 
either Tier I or Tier II securities prior to this amendment. The 
Exchange's recent filing modifies the definitions of ``Tier I'' in 
Rule 14.1(a)(29), and ``Tier I security'' in Rule 14.1(a)(30), to 
make clear that ETPs are considered Tier I securities for purposes 
of the Exchange's rules. See Exchange Act Release No. 65809 
(November 23, 2011), 76 FR 74079 (November 30, 2011). The Commission 
notes that this is only a definitional change. It does not result in 
any substantive changes to the Exchange's existing listing standards 
that are the subject of this rule amendment.
    \9\ See letter from Eric Swanson, Senior Vice President and 
General Counsel, BATS, to Elizabeth M. Murphy, Secretary, 
Commission, dated May 26, 2011 (File No. 4-632) (``BATS Petition'').
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    On August 8, 2011, the Commission issued a release proposing to 
amend Rule 146(b) to designate certain securities listed, or authorized 
for listing, on BATS as covered securities for purposes of Section 
18(a) of the Securities Act.\10\ The Commission also proposed to update 
certain references in the rule. The Commission received one comment 
letter,\11\ which favored amending Rule 146(b) to reflect the name 
change of Phlx, as proposed by the Commission. In connection with its 
petition, BATS filed a proposed rule change to establish standards for 
the listing of securities on BATS.\12\ On August 30, 2011, the 
Commission approved this proposed rule change.\13\
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    \10\ Securities Act Release No. 9251 (August 8, 2011), 76 FR 
46698 (August 11, 2011) (``Proposing Release'').
    \11\ See letter to Elizabeth M. Murphy, Secretary, Commission, 
from Keith Paul Bishop, former California Commissioner of 
Corporations, dated August 23, 2011 (``Bishop Letter''). The 
commenter concurred with the Commission that Rule 146(b)(1)(iv) 
should be updated to reflect the term ``NASDAQ OMX PHLX LLC'' 
instead of ``the Philadelphia Stock Exchange, Inc.'' The commenter 
also requested that the Commission review the current standards of 
the PHLX with respect to the listing and trading of securities to 
determine whether the current listing standards of PHLX are 
substantially similar to standards of Named Market. The Commission 
has carefully considered the comment letter, and believes that the 
request of the commenter with regard to the listing standards of 
Phlx is beyond the scope of the Commission's proposed rule. However, 
the Commission notes that, via its oversight, inspection and 
enforcement functions, it regularly monitors the operations of 
registered exchanges and their compliance with the securities laws 
and rules applicable to them.
    \12\ See Securities Exchange Act Release No. 64546 (May 25, 
2011), 76 FR 31660 (June 1, 2011) (proposing qualitative and 
quantitative listing requirements and standards for securities).
    \13\ Securities Exchange Act Release No. 65225 (August 30, 
2011), 76 FR 55148 (September 6, 2011).
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    Based on the approved BATS listing standards and after careful 
comparison, the Commission has determined that BATS' listing standards 
for Tier I and Tier II securities are substantially similar to the 
listing standards of the Named Markets. Accordingly, the Commission 
today is amending Rule 146(b) to designate securities listed, or 
authorized for listing, on Tier I and Tier II of BATS as Covered 
Securities under Section 18(b)(1) of the Securities Act.\14\ Amending 
Rule 146(b) to include these securities as Covered Securities will 
exempt those securities from state registration requirements as set 
forth under Section 18(a) of the Securities Act.\15\ The Commission 
also is adopting, as proposed, updated references in the rule.
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    \14\ 15 U.S.C. 77r(b)(1).
    \15\ 15 U.S.C. 77r(a).
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    The Commission notes that the proposed rule text would have 
designated any security listed, or authorized for listing, on BATS as a 
Covered Security. In light of BATS recent rule amendment defining 
``Tier I'' and ``Tier I securities'' to include ETPs,\16\ the 
Commission is refining the rule text adopted today to designate those 
securities listed on Tier I and Tier II of the Exchange as Covered 
Securities. This designation is substantively identical to the proposed 
rule text, as the same securities that the Commission proposed to be 
designated as Covered Securities in the Proposing Release will be so 
designated.
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    \16\ See supra note 8.
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II. Amendment to Rule 146(b) To Include BATS Securities

    Under Section 18(b)(1)(B) of the Securities Act,\17\ the Commission 
has the authority to determine that the listing standards of an 
exchange, or tier or segment thereof, are substantially similar with 
those of the NYSE, NYSE Amex, or Nasdaq/NGM. The Commission initially 
compared BATS' listing standards for Tier I and Tier II securities with 
those of one of the Named Markets. If the listing standards in a 
particular category were not substantially similar to the standards of 
that market, the Commission compared BATS' standards to one of the 
other two markets.\18\ In addition, as it has done

[[Page 3592]]

previously, the Commission interpreted the ``substantially similar'' 
standard to require listing standards at least as comprehensive as 
those of the Named Markets.\19\ If BATS' listing standards were higher 
than those of the Named Markets, then the Commission still determined 
that BATS' listing standards are substantially similar to those of the 
Named Markets.\20\ Finally, the Commission notes that differences in 
language or approach would not necessarily lead to a determination that 
BATS' listing standards are not substantially similar to those of any 
Named Market.\21\
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    \17\ 15 U.S.C. 77r(b)(1)(B).
    \18\ This approach is consistent with the approach that the 
Commission has previously taken. See, e.g., Securities Act Release 
No. 7494 (January 13, 1998), 63 FR 3032 (January 21, 1998).
    \19\ See id.
    \20\ See Securities Act Release No. 8791, supra note 6.
    \21\ Id.
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    The Commission has reviewed BATS' listing standards for securities 
to be listed and traded on BATS and, for the reasons discussed below, 
has determined that the standards are substantially similar to those of 
a Named Market.\22\ Accordingly, the Commission is amending Rule 146(b) 
to include securities listed, or authorized for listing, on Tier I and 
Tier II of BATS. Because the Commission has determined BATS' 
qualitative listing standards for BATS' Tier I and Tier II securities, 
Tier I quantitative listing standards are substantively identical to 
the listing standards for Nasdaq/NGM securities (and, therefore, are 
``substantially similar'' to a Named Market as required by Section 
18(b)(1)(B)),\23\ the discussion below focuses on BATS' Tier II 
quantitative listing standards. The Commission included in the 
Proposing Release its preliminary view that the Tier I and Tier II 
qualitative listing standards and Tier I quantitative listing standards 
were substantively identical to the listing standards for Nasdaq/NGM 
securities and received no comments on that view.\24\
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    \22\ See generally BATS Chapter XIV; Securities Exchange Act 
Release No. 64546, supra note 8, 76 FR 31660. In making its 
determination of substantial similarity, as discussed in detail 
below, the Commission generally compared BATS' proposed qualitative 
listing standards for both Tier I and Tier II securities with 
Nasdaq/NGM's qualitative listing standards, BATS' proposed 
quantitative listing standards for Tier I securities with Nasdaq/
NGM's quantitative listing standards, and BATS' proposed 
quantitative listing standards for Tier II securities with NYSE 
Amex's quantitative listing standards.
    \23\ See infra notes 42-49.
    \24\ See Proposing Release at 49699 to 49700 and n. 25 to n. 26. 
See id. at 49703 (discussing ETPs).
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A. Primary Equity Securities

    As discussed in the Proposing Release, the Commission preliminarily 
believed that BATS' initial listing standards for primary equity 
securities listed on Tier II of the Exchange were substantially similar 
to those of NYSE Amex's common stock listing standards.\25\ The 
Commission has determined that BATS' initial listing standards for 
primary equity securities are substantially similar to those of NYSE 
Amex. BATS' requirements relating to bid price,\26\ round lot 
holders,\27\ shares held by the public,\28\ and required number of 
registered and active market makers \29\ are substantially similar to 
NYSE Amex requirements. Additionally, BATS' proposed equity,\30\ market 
value,\31\ and net income \32\ standards are substantially similar to 
NYSE Amex standards.
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    \25\ See Proposing Release at 49700. BATS' use of ``primary 
equity securities'' and NYSE Amex's use of ``common stock'' is 
simply a difference in nomenclature, as BATS' listing standards 
define ``primary equity security'' as a company's first class of 
common stock. See BATS Rule 14.1(a)(21).
    \26\ BATS' listing standards require a minimum bid price of $4 
per share for initial listing and $1 per share for continued listing 
while NYSE Amex requires a minimum bid price of $2-3 per share 
depending on the issuer for initial listing and will consider 
delisting if the price per share is ``low.'' Compare BATS Rule 
14.9(b)(1)(A) with Section 102 of the NYSE Amex Company Guide. The 
Commission has interpreted the substantially similar standard to 
require listing standards at least as comprehensive as those of the 
Named Markets; the Commission may determine that a petitioner's 
standards are substantially similar if they are higher, and 
differences in language or approach of the listing standards are not 
dispositive. See supra notes 19-21 and accompanying text.
    \27\ While BATS' listing standards require at least 300 round 
lot holders, NYSE Amex's listing standards require 400 or 800 public 
shareholders (depending upon the number of shares held by the 
public), or 300 or 600 public shareholders for its alternate listing 
standards. The Commission does not believe this difference precludes 
a determination of substantial similarity between the standards. 
Additionally, BATS' listing standards are identical to the listing 
standards of NCM, which the Commission previously found to be 
substantially similar to a Named Market. See Securities Act Release 
8791, supra note 6 (determining that NCM listing standards, which 
are identical to BATS' listing standards for primary equity 
securities on Tier II of the Exchange, are substantially similar to 
these same Amex standards). With respect to NCM having alternative 
listing standards for the number of round lot holders, the 
Commission noted that this difference did not preclude a 
determination of substantial similarity between the standards. See 
Securities Act Release 8791, supra note 6, 72 FR at 20412; 
Securities Act Release No. 8754 (November 22, 2006), 71 FR 67762 
(November 22, 2006) (proposing that the Commission amend Rule 146(b) 
to designate securities listed on the NCM as covered securities for 
purposes of Section 18(b) of the Securities Act).
    \28\ BATS' listing standards require a minimum of 1,000,000 
publicly held shares while NYSE Amex requires a minimum of 500,000. 
Compare BATS Rule 14.9(b)(1)(B) with Section 102(a) of the NYSE Amex 
Company Guide. The Commission has interpreted the substantially 
similar standard to require listing standards at least as 
comprehensive as those of the Named Markets; the Commission may 
determine that a petitioner's standards are substantially similar if 
they are higher, and differences in language or approach of the 
listing standards are not dispositive. See supra notes 17-19 and 
accompanying text.
    \29\ BATS' listing requirements require at least three 
registered and active market makers while NYSE Amex requires one 
specialist to be assigned. Compare BATS Rule 14.9(b)(1)(D) with 
Section 202(e) of the NYSE Amex Company Guide. The Commission may 
still determine that the petitioner's listing standards are 
substantially similar to those of the Named Markets if a 
petitioner's listing standards are higher than the Named Markets. 
See Securities Act Release No. 8791, supra note 6.
    \30\ BATS' listing standards require a company to have 
stockholder equity of at least $5 million, a market value of 
publicly held shares of at least $15 million, and a two-year 
operating history. See BATS Rule 14.9(b)(2)(A). NYSE Amex requires 
stockholder equity of at least $4 million, a market value of 
publicly held shares of at least $15 million, and a two-year 
operating history.
    \31\ BATS' listing standards require a market value of listed 
securities of at least $50 million and a market value of publicly 
held shares of at least $15 million, which is the same as required 
by NYSE Amex. Compare BATS Rule 14.9(b)(2)(B) with Section 
101(c)(2)-(3) of the NYSE Amex Company Guide.
    \32\ BATS' listing standards require net income from continuing 
operations of at least $750,000, which is the same as required by 
NYSE Amex. Compare BATS Rule 14.9(b)(2)(C) with Section 101(d)(1) of 
the NYSE Amex Company Guide.
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    In addition to the above initial listing requirements, BATS 
requires that American Depositary Receipts (``ADRs'') comply with an 
additional criterion. Specifically, BATS requires there be at least 
400,000 ADRs issued for such securities to be initially listed on 
BATS.\33\ However, NYSE Amex does not have specific requirements for 
ADRs in addition to its initial listing standards for primary equity 
securities.\34\ As noted above, the Commission may still determine that 
the petitioner's listing standards are substantially similar to those 
of the Named Markets if BATS' listing standards are higher than the 
Named Markets.\35\ Further, as noted above, differences in language or 
approach of listing standards are not dispositive.\36\ The Commission 
has determined that the quantitative initial listing standards for 
primary equity securities on Tier II of the Exchange are substantially 
similar to those of NYSE Amex.
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    \33\ See BATS Rule 14.9(b)(1)(E). This requirement is identical 
to NCM. See Nasdaq Rule 5505(a)(5); see generally Securities Act 
Release 8791, supra note 6 (determining that NCM listing standards, 
which are identical to BATS' standards for primary equity securities 
on Tier II of the Exchange, are substantially similar to the Amex 
standards).
    \34\ See Section 102 of the NYSE Amex Company Guide. See also 
Section 110 of the NYSE Amex Company Guide.
    \35\ See Securities Act Release No. 8791, supra note 6.
    \36\ See id.
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    The Commission has determined that the continued listing 
requirements for primary equity securities listed on Tier II of the 
Exchange, while not identical, are substantially similar to those of

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NYSE Amex.\37\ NYSE Amex's delisting criteria are triggered by poor 
financial conditions or operating results of the issuer.\38\ 
Specifically, NYSE Amex will consider delisting an equity issue if: (i) 
Stockholders' equity is less than $2 million and such issuer has 
sustained losses from continuing operations and/or net losses in two of 
its three most recent fiscal years; (ii) stockholders' equity is less 
than $4 million and such issuer has sustained losses from continuing 
operations and/or net losses in three of its four most recent fiscal 
years; (iii) stockholders' equity is less than $6 million if such 
issuer has sustained losses from continuing operations and/or net 
losses in its five most recent fiscal years; or (iv) the issuer has 
sustained losses which are so substantial in relation to its overall 
operations or its existing financial resources, or its financial 
condition has become so impaired that it appears questionable, in the 
opinion of the exchange, as to whether such company will be able to 
continue operations and/or meet its obligations as they mature.\39\
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    \37\ See generally Securities Act Release 8791, supra note 6 
(determining that NCM continued listing standards, which are 
identical to BATS' continued listing standards for primary equity 
securities on Tier II of the Exchange, were substantially similar to 
the Amex standards).
    \38\ See generally Sections 1001 through 1006 of the NYSE Amex 
Company Guide.
    \39\ See Section 1003(a) of the NYSE Amex Company Guide. While 
not identical to NYSE Amex, BATS, as noted below, also has a 
shareholder equity standard. See infra note 37 and accompanying 
text. NYSE Amex, however, will not normally consider suspending 
dealing in (i) through (iii) noted above if the issuer is in 
compliance with the following: (1) Total market value of market 
capitalization of at least $50,000,000; or total assets and revenue 
of $50,000,000 each in its last fiscal year, or in tow of its last 
three fiscal years; and (2) the issuer has at least 1,100,000 shares 
publicly held, a value of publicly held shares of at least 
$15,000,000 and 400 round lot holders. Id.
    NYSE Amex also will consider delisting if: (i) an issuer has 
sold or otherwise disposed of its principal operating assets or has 
ceased to be an operating company or has discontinued a substantial 
portion of its operations or business; (ii) if substantial 
liquidation of the issuer has been made; or (iii) if advice has been 
received, deemed by the Exchange to be authoritative, that the 
security is without value, or in the case of a common stock, such 
stock has been selling for a substantial period of time at a low 
price. See Section 1003(c) and (f)(v) of the NYSE Amex Company 
Guide.
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    Although BATS does not have the same continued listing provisions 
for Tier II, BATS also looks at the financial condition and operating 
results of the issuer in order to determine whether to delist an 
issuer. BATS' continued listing standards for Tier II securities 
require compliance with either a (1) shareholder equity, (2) market 
value of listed securities or (3) net income standard. Specifically, 
for continued listing, BATS requires shareholder's equity of at least 
$2.5 million, market value of listed securities of at least $35 
million, or net income of $500,000 from continuing operations in the 
past fiscal year or two out of three past fiscal years.\40\ Further, 
BATS requires an issuer to have (i) a minimum bid price for continued 
listing of $1 per share,\41\ (ii) at least two registered and active 
market makers, (iii) 300 public holders, and (iv) a minimum number of 
publicly held shares of at least 500,000 shares with a market value of 
at least $1 million.\42\ The Commission has determined that the 
differences in the maintenance criteria for primary equity securities 
on BATS for Tier II Securities and common stock listed on NYSE Amex are 
not significant and that, taken as a whole, the criteria are 
substantially similar.\43\
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    \40\ BATS Rule 14.9(e)(2)(A)-(C). NYSE Amex focuses on a 
shareholder equity standard for continued listing. BATS' shareholder 
equity standard requires at least $2.5 million shareholders' equity 
compared to NYSE Amex's lowest shareholder equity standard of $2 
million, if the NYSE Amex issuer has sustained losses from 
continuing operations and/or net losses in two of its three most 
recent fiscal years. Compare BATS Rule 14.9(e)(2)(A)-(C) with 
Section 1003(a) of the NYSE Amex Company Guide.
    \41\ See BATS Rule 14.9(e)(1)(B). Amex will consider delisting 
if the price per share is ``low.'' See Section 1003(f)(v) of the 
Amex Company Guide. See also Securities Act Release 8791, supra note 
6 (noting the same regarding the NCM and Amex bid price standards).
    \42\ BATS Rule 14.9(e)(1)(A)-(E). NYSE Amex will consider 
delisting the common stock of an issuer if the aggregate market 
value of such publicly held shares is less than $1 million for more 
than 90 consecutive days, the number of publicly held shares is less 
than 200,000 shares, or the number of its public stockholders is 
less than 300. See Section 1003(b) of the NYSE Amex Company Guide.
    \43\ The Commission has interpreted the substantially similar 
standard to require listing standards at least as comprehensive as 
those of the Named Markets, and differences in language or approach 
of the listing standards are not dispositive. See supra notes 17-19 
and accompanying text. See also Securities Act Release 8791, supra 
note 6 (determining that NCM continued listing standards, which are 
identical to BATS' continued listing standards for primary equity 
securities on Tier II of the Exchange, are substantially similar to 
the Amex standards).
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B. Preferred Stock and Secondary Classes of Common Stock

    The Commission compared the listing standards of preferred stock 
and secondary classes \44\ of common stock on Tier II of the Exchange 
to the Nasdaq/NGM standards. As discussed in the Proposing Release,\45\ 
the Commission preliminarily believed that BATS' standards were 
substantially similar to those of Nasdaq/NGM. BATS' initial and 
continued listing standards with respect to the number of round lot 
holders,\46\ bid price,\47\ number of publicly held shares,\48\ market 
value of publicly held shares,\49\ and number of market makers \50\ are 
substantially similar to the Nasdaq/NGM standards.\51\ As such, the 
Commission has determined that BATS' quantitative listing standards for 
preferred stock and secondary classes of common stock are substantially 
similar to those of Nasdaq/NGM.
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    \44\ A secondary class of common stock is a class of common 
stock of an issuer that has another class of common stock listed on 
an exchange. See Securities Act Release No. 8791, supra note 6, at 
20411.
    \45\ See Proposing Release at 49701 to 49702.
    \46\ BATS' initial and continued listing standards require 100 
round lot holders, as Nasdaq/NGM requires. Compare BATS Rule 14.9(c) 
with Nasdaq Rule 5510; compare BATS Rule 14.9(f) with Nasdaq Rule 
5460(a)(4).
    \47\ While BATS' bid price requirement for initial listing is $4 
and the Nasdaq/NGM requirement is $5, the Commission does not 
believe this difference is significant. Compare BATS Rule 
14.9(c)(1)(A) with Nasdaq Rule 5510(a)(1). See also Securities Act 
Release No. 8791, supra note 6, at 20412 n. 28 (determining that an 
NCM bid requirement, which is identical to BATS' bid requirement, 
was substantially similar to the Nasdaq/NGM requirement). Both BATS' 
standard and Nasdaq/NGM's existing standard require a $1 bid price 
for continued listing. Compare BATS Rule 14.9(f)(1) with Nasdaq Rule 
5460(a)(3).
    \48\ BATS' standard requires 200,000 publicly held shares for 
initial listing, and 100,000 publicly held shares for continued 
listing, which is the same as Nasdaq/NGM requires. Compare BATS Rule 
14.9(c)(1)(C) and 14.9(f)(1)(c) with Nasdaq Rules 5415(a)(1) and 
5460(a)(1).
    \49\ BATS' standard for initial listing of preferred stock or a 
secondary class of common stock requires a market value of publicly 
held shares of at least $3.5 million. Nasdaq/NGM requires a market 
value of publicly held shares of at least $4 million. Compare BATS 
Rule 14.9(c)(1)(D) with Nasdaq Rule 5415(a)(2). BATS standard for 
continued listing requires a market value of publicly held shares of 
at least $1 million. Nasdaq/NGM requires a market value of publicly 
held shares of at least $1 million for continued listing. Compare 
BATS Rule 14.9(f)(1)(D) with Nasdaq Rule 5460(a)(1). The Commission 
believes BATS' initial and continued listing standards for preferred 
stock and secondary classes of common stock are substantially 
similar to Nasdaq/NGM. See also Securities Act Release No. 8791, 
supra note 6, at 20411-12 (determining that NCM listing standards, 
which are identical to BATS' listing standards for preferred stock 
and secondary classes of common stock, are substantially similar to 
the Nasdaq/NGM standards).
    \50\ BATS' standards for initial listing require at least three 
registered and active market makers, while its continued listing 
standards require at least two registered and active market makers. 
Nasdaq/NGM requires the same. Compare BATS Rule 14.9(c)(1)(E) with 
Nasdaq Rule 5415(a)(2).
    \51\ The Commission notes that these requirements apply to 
instances when the common stock or common stock equivalent security 
of the issuer is listed on BATS as a Tier II Security or otherwise 
is a Covered Security. If the common stock or common stock 
equivalent is not listed as a Tier II Security or is a Covered 
Security, then the security would be required to meet the initial 
primary equity listing requirements for Tier II noted above. Nasdaq/
NGM contains a similar requirement. Compare BATS Rule 14.9(f)(2) 
with Nasdaq Rule 5460(b).

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[[Page 3594]]

C. Warrants

    The Commission compared BATS' listing standards for warrants to 
Nasdaq/NGM's standards. In the Proposing Release, the Commission stated 
that it preliminarily believed that the BATS' standards were 
substantially similar to the Nasdaq/NGM standards.\52\ BATS' initial 
listing standards require that 400,000 warrants be outstanding for 
initial listing, and that there be at least three registered and active 
market makers and 400 round lot holders.\53\ Nasdaq/NGM's standards are 
identical except that Nasdaq/NGM requires 450,000 warrants to be 
outstanding.\54\ Though not identical with respect to the number of 
warrants outstanding standard, the Commission believes that the Nasdaq/
NGM higher listing standards do not preclude a finding of substantial 
similarity. BATS' initial listing standards also require the issuer's 
underlying security to be listed on the Exchange or be a Covered 
Security.\55\ The Commission notes that Nasdaq/NGM has a similar 
standard that the underlying security be listed on Nasdaq/NGM or be a 
Covered Security and believes BATS' standard is substantially similar 
to Nasdaq/NGM.\56\ Therefore, the Commission has determined that BATS' 
initial listing standards for warrants are substantially similar to 
those of Nasdaq/NGM.\57\
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    \52\ See Proposing Release at 49702.
    \53\ See BATS Rule 14.9(d)(1)(A), (C) and (D).
    \54\ See Nasdaq Rule 5410(a), (c) and (d).
    \55\ See BATS Rule 14.9(d)(1)(B).
    \56\ See Nasdaq Rule 5410(b).
    \57\ See also Securities Act Release 8791, supra note 6 
(determining that NCM initial listing standards, which are identical 
to BATS' standards for warrants on Tier II of the Exchange, are 
substantially similar to the Amex standards).
---------------------------------------------------------------------------

    As discussed in the Proposing Release, the Commission also 
preliminarily believed that BATS' continued listing requirements for 
warrants that there be two registered and active market makers (one of 
which may be a market maker entering a stabilizing bid) and that the 
underlying security remain listed on the Exchange or be a Covered 
Security were substantially similar to that of Nasdaq/NGM.\58\ The 
Commission has determined that BATS' continued listing standards for 
warrants are substantially similar to those of Nasdaq/NGM.
---------------------------------------------------------------------------

    \58\ See Proposing Release at 49702. Compare proposed BATS' Rule 
14.9(g)(1) with Nasdaq Rule 5455(1) and (2).
---------------------------------------------------------------------------

D. Index Warrants

    For index warrants traded on BATS, BATS has the same standards 
(both initial and continuing) that apply to index warrants traded on 
Nasdaq/NGM.\59\ Therefore, the Commission has determined that the 
listing standards for index warrants traded on BATS are substantially 
similar to the standards applicable to index warrants traded on the 
Nasdaq/NGM market.
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    \59\ Compare BATS Rule 14.9(d)(3) with Nasdaq Rule 5725.
---------------------------------------------------------------------------

E. Convertible Debt

    The Commission has compared BATS' listing standards for convertible 
debt to NYSE Amex's listing standards for debt, and preliminarily 
believed that BATS' initial listing standards for convertible debt were 
substantially similar to those of NYSE Amex. BATS' listing standards 
for convertible debt, regarding the threshold principal amount 
outstanding,\60\ the availability of current last sale information,\61\ 
and number of market makers \62\ are substantially similar to NYSE Amex 
standards.\63\ In addition to the requirements noted above, BATS' 
listing standards require that one of four additional conditions be met 
for listing of convertible debt. Specifically, BATS will not list a 
convertible debt security unless one of the following conditions is 
met: (i) The issuer of the debt security also has equity securities 
listed on the Exchange, NYSE Amex, the NYSE, or Nasdaq/NGM; (ii) an 
issuer of equity securities listed on the Exchange, NYSE Amex, the 
NYSE, or Nasdaq/NGM directly or indirectly owns a majority interest in, 
or is under common control with, the issuer of the debt security, or 
has guaranteed the debt security; (iii) a nationally recognized 
securities rating organization (an ``NRSRO'') has assigned a current 
rating to the debt security that is no lower than an S&P Corporation 
``B'' rating or equivalent rating by another NRSRO; or (iv) if no NRSRO 
has assigned a rating to the issue, an NRSRO has currently assigned an 
investment grade rating to an immediately senior issue or a rating that 
is no lower than an S&P Corporation ``B'' rating, or an equivalent 
rating by another NRSRO, to a pari passu or junior issue.\64\ 
Therefore, the Commission has determined that BATS' listing standards 
for convertible debt are substantially similar to those of NYSE Amex.
---------------------------------------------------------------------------

    \60\ BATS' rule requires a principal amount outstanding of at 
least $10 million for initial listing and $5 million for continued 
listing. See BATS Rule 14.9(d)(2)(A) and 14.9(g)(2)(A). NYSE Amex 
requires a principal amount outstanding of at least $5 million for 
initial listing and will consider delisting if the principal amount 
outstanding is less than $400,000 or if the issuer is not able to 
meet its obligations on the listed debt security. See Sections 104 
and 1003 of the NYSE Amex Company Guide. As the Commission noted in 
a prior release, while these requirements are not identical, the 
Commission believes that both standards are designed to ensure the 
continued liquidity of the debt security, and, thus, are 
substantially similar. See Securities Act Release 8791, supra note 
6, at 20412 (finding that an identical NCM listing standard was 
substantially similar to the Amex standard).
    \61\ Both BATS and NYSE Amex include an initial listing 
requirement that there be current last sale information available in 
the United States with respect to the underlying security into which 
the bond or debenture is convertible. Compare BATS Rule 
14.9(d)(2)(B) with Section 104 of the NYSE Amex Company Guide. 
Additionally, Section 1003(e) of the NYSE Amex Company Guide states 
that convertible bonds will be reviewed when the underlying security 
is delisted and will be delisted when the underlying security is no 
longer the subject of real-time reporting in the United States. 
BATS' continued listing standards for a convertible debt security 
also require that current last sale information be available in the 
United States with respect to the underlying security, whereas NYSE 
Amex does not. Compare BATS Rule 14.9(g)(2)(C) with Section 1003(e) 
of the NYSE Amex Company Guide.
    \62\ BATS' standard requires at least three registered and 
active market makers for initial listing and two registered and 
active market makers for continued listing (one of which may be a 
market maker entering a stabilizing bid), whereas NYSE Amex requires 
one specialist to be assigned. Compare BATS Rule 14.9(d)(1)(C) with 
NYSE Amex Rule 104.
    \63\ NYSE Amex will not list a convertible debt issue containing 
a provision which gives an issuer discretion to reduce the 
conversion price unless the issuer establishes a minimum 10-day 
period within which such price reduction will be in effect. See 
Section 104 of the NYSE Amex Company Guide. The Commission believes 
that omission of such a provision does not impact its determination. 
See Securities Act Release Nos. 39542, supra note 6 (finding PCX 
listing standards to be substantially similar to Amex even with the 
absence of this provision); 8791, supra note 6, at 20412 (finding 
NCM's listing standard, which is identical to BATS' listing standard 
for convertible debt, was substantially similar to Amex even with 
the absence of this provision).
    \64\ These standards are identical to the initial listing 
standards for convertible debt securities on NYSE Amex and NCM). 
Compare BATS Rule 14.9(d)(2)(D)(iv) with Section 104(A)-(E) of the 
NYSE Amex Company Guide and Nasdaq Rule 5515(b)(4).
---------------------------------------------------------------------------

F. Units

    The listing requirements for units on Tier II of the Exchange, NYSE 
Amex, and Nasdaq/NGM are all the same, as each evaluates the initial 
and continued listing of a unit by looking to its components.\65\ If 
all of the components of a unit individually meet the standards for 
listing, then the unit would meet the standards for listing.\66\ 
Because the components for units

[[Page 3595]]

proposed by BATS are substantially similar to those of a Named Market, 
as discussed above, the Commission has determined that BATS' listing 
standards for units to be listed on Tier II of the Exchange are 
substantially similar to a Named Market.\67\
---------------------------------------------------------------------------

    \65\ A unit is a type of security consisting of two or more 
different types of securities (e.g., a combination of common stocks 
and warrants). See, e.g., Securities Exchange Act Release No. 48464 
(September 9, 2003), 68 FR 54250 (September 16, 2003) (order 
approving NYSE Amex proposed rule change to amend Sections 101 and 
1003 of the NYSE Amex Company Guide to clarify the listing 
requirements applicable to units).
    \66\ See generally BATS Rule 14.4, Section 101(f) of the NYSE 
Amex Company Guide, and Nasdaq Rule 5225.
    \67\ See Securities Exchange Act Release No. 64546, supra note 
11, 76 FR 31660 at 31664.
---------------------------------------------------------------------------

    The Commission is amending Rule 146(b) as proposed to reflect the 
following name changes:
     Sections (b)(1) and (b)(2) of Rule 146 use the term 
``Amex'' to refer to the American Stock Exchange LLC. As noted above, 
on October 1, 2008, NYSE Euronext acquired Amex and renamed it NYSE 
Alternext.\68\ Further, in 2009, NYSE Alternext was renamed NYSE Amex 
LLC.\69\ The Commission is making a conforming change to Rule 146(b).
---------------------------------------------------------------------------

    \68\ See Securities Exchange Act Release No. 58673, supra note 
1.
    \69\ See Securities Exchange Act Release No. 59575, supra note 
1.
---------------------------------------------------------------------------

     Section (b)(1) of Rule 146 refers to ``the Philadelphia 
Stock Exchange, Inc.'' \70\ On July 24, 2008, The NASDAQ OMX Group, 
Inc. acquired Phlx and renamed it ``NASDAQ OMX PHLX LLC.'' \71\ The 
Commission is making a conforming change to Rule 146(b).
---------------------------------------------------------------------------

    \70\ See supra note 10.
    \71\ On July 24, 2008, The NASDAQ OMX Group, Inc. acquired Phlx 
and renamed it ``NASDAQ OMX PHLX LLC.'' See Securities Exchange Act 
Release Nos. 58179 (July 17, 2008), 73 FR 42874 (July 23, 2008) (SR-
Phlx-2008-31); and 58183 (July 17, 2008), 73 FR 42850 (July 23, 
2008) (SR-NASDAQ-2008-035).
---------------------------------------------------------------------------

III. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 does not apply because the 
amendment to Rule 146(b) does not impose recordkeeping or information 
collection requirements or other collection of information, which 
require the approval of the Office of Management and Budget under 44 
U.S.C. 3501 et seq.

IV. Economic Analysis

A. Introduction

    Section 2(b) of the Securities Act \72\ requires us, when engaging 
in rulemaking that requires the Commission to consider or determine 
whether an action is necessary or appropriate in the public interest, 
to consider, in addition to the protection of investors, whether the 
action will promote efficiency, competition and capital formation. We 
have considered, and discuss below, the effects of the amendment to 
Securities Act Rule 146, with regard to BATS' listing standards to 
designate certain securities that will be listed, or authorized for 
listing, on BATS as Covered Securities, on efficiency, competition, and 
capital formation, as well as the benefits and costs associated with 
the rulemaking.
---------------------------------------------------------------------------

    \72\ 15 U.S.C. 77b(b).
---------------------------------------------------------------------------

    Congress amended Section 18 of the Securities Act to exempt covered 
securities from state registration requirements. These securities are 
listed on the Named Markets or any other national securities exchange 
determined by the Commission to have ``substantially similar'' listing 
standards to those of the Named Markets (``Designated Markets'').\73\ 
Consistent with statutory authority, the Commission has determined that 
the listing standards for securities listed, or authorized for listing, 
on BATS are substantially similar to those of a Named Market, 
specifically Nasdaq/NGM or NYSE Amex. Securities listed, or authorized 
for listing, on BATS, therefore, will be exempt from state law 
registration requirements.
---------------------------------------------------------------------------

    \73\ See 15 U.S.C. 77r(b)(1)(B).
---------------------------------------------------------------------------

    There are three Named Markets (NYSE, NYSE Amex, and Nasdaq/NGM) and 
currently five Designated Markets (Tier I of NYSE Arca, Tier I of the 
Philadelphia Stock Exchange, CBOE, ISE, and Nasdaq/NCM). NYSE and 
Nasdaq/NGM are currently the largest exchanges in terms of number of 
securities listed. As of April 19, 2011, in terms of securities listed, 
NYSE lists 3,255, Nasdaq/NGM lists 2,854, NYSE Arca lists 1,213, and 
NYSE Amex lists 544.\74\
---------------------------------------------------------------------------

    \74\ These listed securities include exchange traded funds and 
multiple securities from the same issuer.
---------------------------------------------------------------------------

    The direct economic effect of the rule amendment will be to exempt 
issuers that list, or are authorized to list, on BATS from the 
requirements of state registration. Instead, these issuers will be 
required to comply with BATS' listing standards and the federal 
securities laws, rules and regulations with respect to the registration 
and sale of securities. The requirements of state registration 
typically include: (i) Paperwork and labor hours necessary to comply 
with state registration requirements, (ii) meeting the disclosure 
standards, and (iii) in some states, meeting certain minimum merit 
requirements to make public offerings.\75\ The Commission solicited 
comments concerning the costs and benefits associated with the 
proposal, but received none.
---------------------------------------------------------------------------

    \75\ It has been noted that the purpose of such review is ``to 
prevent `unfair' and `oppressive' offerings of securities,'' and, as 
of 2011, merit review is employed in about 30 states. See Jeffrey B. 
Bartell & A.A. Sommer, Jr., Blue Sky Registration, Securities Law 
Techniques (Matthew Bender ed., 2011). Typical elements of merit 
review include: offering expenses, including underwriter's 
compensation, rights of security holders, historical ability to 
service debt or pay dividends, financial condition of the issuer, 
cheap stock held by insiders, the quantity of securities subject to 
options and warrants, self-dealing and other conflicts of interest, 
and the price at which the securities will be offered. See id. Some 
merit regulation would be imposed on these issuers through 
application of exchange listing standards.
---------------------------------------------------------------------------

    The Commission believes that an indirect effect of the rule 
amendment will be that, by removing the requirements of state 
registration for issuers that list, or are authorized to list, on 
BATS--the same privilege granted to other Covered Securities--the rule 
can improve BATS' ability to compete effectively with other exchanges. 
Therefore, the Commission believes an important economic effect of the 
rule amendment can be to engender greater competition in the market for 
listing services.
    Exchanges generally compete in multiple areas, which include the 
market for listing, the market for trading, and the market for order-
flow. This rule amendment and BATS' listing standards \76\ relate 
primarily to the market for listing, although the rule amendment and 
the entry of a new participant in the listings market could impact 
other markets as well.\77\ In the market for listing, exchanges compete 
for issuers to list on their exchanges, so that the exchange may 
collect listing fees. Domestic exchanges face listing competition from 
other domestic exchanges and from foreign exchanges.\78\ The benefit of 
listing for issuers generally is to gain greater access to capital 
through measures designed to help promote quality certification and 
visibility to public investors, which will generally result in a 
reduction in the cost of raising capital for these issuers. This access 
to capital may be further

[[Page 3596]]

enhanced through listing on particular exchanges, which could affect 
the level of investors' trust in a listed company's governance 
structure and the fairness of trading in the company's securities 
(through the perceived effectiveness of exchanges' conduct rules and 
surveillance of trading as well as other services and regulatory 
functions).
---------------------------------------------------------------------------

    \76\ See Securities Exchange Act Release No. 64546, supra note 
11.
    \77\ See, e.g., Thierry Foucault and Christine A. Parlour, 
Competition for Listing, 35 R and J. Econ. 329 (2004) (describing 
how listing fees and trading costs both affect firms' incentives to 
list with one exchange versus another).
    \78\ It has been noted that NYSE and the London Stock Exchange, 
for example, compete for listings of firms in third countries, in 
particular from emerging economies. See Thomas J. Chemmanur & Paolo 
Fulghieri, Competition and Cooperation Among Exchanges: A Theory of 
Cross-Listing and Endogenous Listing Standards, 82 J. Fin. Econ. 
455, 456 (2006). See generally Craig Doidge, Andrew Karolyi, and 
Ren[eacute] Stulz, Has New York Become Less Competitive than London 
in Global Markets? Evaluating Foreign Listing Choices Over Time, 
Journal of Financial Economics 91, 253-277 (2009); Craig Doidge, 
Andrew Karolyi, and Ren[eacute] Stulz, Why Do Foreign Firms Leave 
U.S. Equity Markets?, Journal of Finance 65, 1507-1553 (2010); 
Caglio, Cecilia, Hanley, Kathleen Weiss and Marietta-Westberg, 
Jennifer, Going Public Abroad: The Role of International Markets for 
IPOs (March 16, 2010), available at SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1572949. Additionally, differences in 
regulatory regimes may impact listing decisions.
---------------------------------------------------------------------------

    Exchanges may try to compete for issuers by reducing listing fees 
or by improving the quality of services they offer, or both. The cost 
of listing for an issuer includes listing fees and the cost of 
complying with listing standards. In principle, this means exchanges 
can compete by reducing listing fees, by relaxing the listing standards 
issuers must meet, or by offering several trading segments with 
different listing standards on each, though such standards must be 
determined to be substantially similar to a Named Market in order to 
get the benefit of the Securities Act Section 18(b)(1)(B) exemption 
from state registration requirements. The Commission believes that any 
concern that exchanges may try to compete by lowering the listing 
standards to attract issuers (and hence enter in a ``race-to-the-
bottom'') is mitigated by the fact that (1) listing standards affect 
exchanges' reputations among investors, which, in turn, impacts their 
attractiveness to issuers, (2) any proposed listing standards or 
proposed changes to existing listing standards must be filed with the 
Commission pursuant to Section 19(b) of the Exchange Act and must meet 
its requirements to become effective,\79\ and (3) lower listing 
standards that are not substantially similar to those of a Named Market 
will not have the benefit of the exemption from state registration 
requirements.\80\
---------------------------------------------------------------------------

    \79\ Any revision to exchange listing standards must be done in 
accordance with Section 19(b) of the Exchange Act and Rule 19b-4 
thereunder. Any Commission approval of a listing standard revision 
is conditioned upon a finding by the Commission that the revision is 
consistent with the requirements of the Exchange Act and rules 
thereunder. See 15 U.S.C. 78s.
    \80\ See Chemmanur & Fulghieri, supra note 74, at 458.
---------------------------------------------------------------------------

    The competition among exchanges for listings is only partially 
based on price. Exchanges also compete in various other areas, which 
contribute to the quality of the services listed issuers receive, 
including, but not limited to, provision of trade statistics, 
regulatory and surveillance services, access to new technology, 
attractive trading mechanisms, and marketing services.
    One important dimension of competition is brand name.\81\ Issuers 
place high value on being listed on certain exchanges because investors 
may more readily trust those exchanges, which may, in turn, reduce the 
cost of raising capital for those issuers. As a result, NYSE and 
Nasdaq/NGM, which are already the two largest exchanges in terms of 
securities listed, may be able to charge listing fees that are above 
marginal cost--that is, what it would cost them to list additional 
issuers--and higher than other competing exchanges; therefore, certain 
exchanges may earn economic rent from these higher listing premiums 
(the amount of fee difference certain exchanges can charge, above a 
competitor's price, because of its brand name). In addition to brand 
name recognition, the market for listing exhibits positive network 
externalities: issuers may prefer to be listed on exchanges where many 
other issuers are listed and where there are more intermediaries 
trading because of increased liquidity and visibility.\82\ This 
indicates that, all else being equal, large exchanges (in terms of 
listings) will tend to be favored over smaller ones. In theory, this 
preference may persist to some extent even if large exchanges were to 
offer slightly inferior services than their smaller counterparts 
because the advantages of being listed on a large exchange, where there 
are many issuers and intermediaries, might outweigh the cost of being 
offered slightly inferior services. Because of these brand name effects 
and positive externalities, the Commission believes that the market for 
listings, to some extent, exhibits certain barriers to entry for new 
entrants to the listing markets, such as BATS.\83\
---------------------------------------------------------------------------

    \81\ See generally Clement G. Krouse, Brand Name as a Barrier to 
Entry: The Rea Lemon Case, 51 Southern Econ. J. 495 (1984) 
(describing the effect of brand name on competition in markets with 
incomplete information); see also Tibor Scitovsky, Ignorance as a 
Source of Oligopoly Power, 40 Amer. Econ. Rev. 48, 49 (1950) (``An 
ignorant buyer * * * is unable to judge the quality of the products 
he buys by their intrinsic merit. Unable to appraise products by 
objective standards, he is forced to base his judgment on indices of 
quality, such as * * * general reputation of the producing 
firms.'').
    \82\ See, e.g., Carmine Di Nola, Competition and Integration 
Among Stock Exchanges in Europe: Network Effects, Implicit Mergers 
and Remote Access, 7 European Fin. Man. 39 (2001) (``Firms may 
derive more utility in being listed on exchanges where there are 
more intermediaries as they give more liquidity to the market.'').
    \83\ Brand name recognition is frequently recognized as a 
barrier to entry mainly because consumers do not have all the 
information regarding product quality and thus tend to rely on brand 
names as a proxy for quality. See, e.g., Brand Name as a Barrier to 
Entry: The Rea Lemon Case, 51 S. Econ. J. 495 (1984); Tibor 
Scitovsky, Ignorance as a Source of Oligopoly Power, 40 Amer. Econ. 
Rev. 48 (1950). Network externalities are also recognized as a 
barrier to entry. See, e.g., Gregory J. Weden, Network Effects and 
Conditions of Entry: Lessons from the Microsoft Case, 69 Antitrust 
L.J. 87 (2001); Douglas A. Melamed, Network Industries and 
Antitrust, 23 Harv. J. L. & Pub. Pol'y 147 (1999).
---------------------------------------------------------------------------

B. Benefits, Including the Impact on Efficiency, Competition, and 
Capital Formation

    By exempting securities listed, or authorized for listing, on BATS 
from state law registration requirements, the Commission believes that 
issuers seeking to list securities on BATS could have the benefit of 
reduced regulatory compliance burdens, as compliance with state blue 
sky law requirements will not be required. One benefit of this 
amendment will be to eliminate these compliance burdens with respect to 
securities listed, or authorized for listing, on BATS. The Commission 
expects that the rule amendment can improve efficiency by eliminating 
duplicative registration costs for issuers and improving liquidity by 
allowing for greater market access to issuers who have not been listed 
previously.
    To the extent that state merit reviews may have inhibited certain 
smaller businesses from making public offerings,\84\ the Commission 
believes an exemption from state registration requirements will 
facilitate capital formation.
---------------------------------------------------------------------------

    \84\ A number of scholarly articles have expressed concerns over 
the possibility for blue sky merit regulation to hinder capital 
formation. See, e.g., Martin Fojas, Ay Dios NSMIA!: Proof of a 
Private Offering Exemption Should Not Be a Precondition for 
Preempting Blue Sky Law Under the National Securities Markets 
Improvement Act, 74 Brooklyn L. Rev. 477 (2009); Rutheford B. 
Campbell, Jr., Blue Sky Laws and the Recent Congressional Preemption 
Failure, 22 J. Corp. L. 175 (1997); Brian J. Fahrney, State Blue Sky 
Laws: A Stronger Case for Federal Pre-Emption Due to Increasing 
Internationalization of Securities Markets, Comment, 86 Nw. U. L. 
Rev. 753 (1991-92); Roberta S. Karmel, Blue-Sky Merit Regulation: 
Benefit to Investors or Burden on Commerce, 53 Brook. L. Rev. 106 
(1987-88). While the concerns are numerous, other studies have shown 
some positive effect of merit regulation. See Jay T. Brandi, The 
Silverlining in Blue Sky Laws: The Effect of Merit Regulation on 
Common Stock Returns and Market Efficiency, 12 J. Corp. L. 713 
(1986-87) (reporting that merit regulation can have a positive 
effect on investor returns); Ashwini K. Agrawal, ``The Impact of 
Investor Protection Law on Corporate Policy: Evidence from the Blue 
Sky Laws,'' working paper (2009) (reporting that the passage of 
investor protection statutes causes firms to pay out greater 
dividends, issue more equity, and grow in size), available at http://ssrn.com/abstract=1442224. Some merit regulation would be imposed 
on these issuers through application of exchange listing standards.
---------------------------------------------------------------------------

    The Commission believes that the amendment to Rule 146(b) should 
permit BATS to better compete for listings with other markets whose 
listed securities already are exempt from state law registration 
requirements, and the Commission believes that this result can enhance 
competition, thus benefiting market participants and the public. 
Specifically, BATS currently intends to enter the listing market with 
generally lower fees than incumbent exchanges in

[[Page 3597]]

order to compete with them.\85\ In response to BATS' entry, although 
recognizing the significant barriers to entry noted above, the 
incumbent exchanges might choose to reduce their listing fees to match 
or come closer to those proposed by BATS. Incumbent exchanges might 
also enhance the other services they provide to their currently listed 
issuers (e.g., regulatory and surveillance services, access to new 
technology, attractive trading mechanisms, marketing services) as a way 
to counteract BATS' lower listing fees.
---------------------------------------------------------------------------

    \85\ See Securities Exchange Act Release No. 64546, supra note 
11, 76 FR at 31666 & n. 27-28 (representing that BATS' pricing, 
while not necessarily cheaper for all issuers at all other markets, 
is roughly equivalent to or less than the price issuers would pay at 
other exchanges, including NGM and NCM).
---------------------------------------------------------------------------

    The Commission believes that additional competition in the market 
for listings can enable some issuers, both public and private, that 
have (1) either not listed on any exchange or (2) have listed on an 
exchange but have chosen not to list on certain exchanges because of 
the costs of listing there, to list on any Named or Designated Market 
due to the potential for lower listing fees across all exchanges. The 
Commission further believes that this will result in a lower cost of 
capital for those issuers that previously had not listed on an exchange 
and could benefit the current investors in such issuers in the form of 
higher company value arising from the reduced cost of capital and 
increased liquidity. Since currently unlisted firms may be able to list 
because of lower listing fees, the Commission believes this may improve 
efficiency and capital formation since future investors in these 
issuers would have easier access to invest in them and to further 
diversify their investment portfolios.
    The Commission believes that those issuers that are currently 
listed on an exchange, including the Named Markets, and that remain 
listed there, can potentially benefit from any reduced listing fees; 
however, because any such benefit will come at the expense of the 
exchange on which they are listed in the form of potentially reduced 
profit, this aggregate effect would be a transfer from one group of 
investors (exchange shareholders) to another group of investors (listed 
issuer shareholders).
    Additionally, the Commission believes that some issuers currently 
listed on other Named or Designated Markets could potentially switch 
their listings to BATS, thus potentially lowering their listing costs 
(provided the Named or Designated Markets do not reduce their listing 
fees). The size of any such potential benefit will depend on how large 
any cost savings due to listing on BATS would be in comparison to the 
cost of giving up any valuable services that the other exchanges might 
provide that BATS might not. In addition, the behavior of these issuers 
will depend heavily on the extent to which these other exchanges 
respond to BATS' entry by making themselves more competitive to the 
issuers.

C. Costs, Including the Impact on Efficiency, Competition, and Capital 
Formation

    The rule amendment will eliminate state registration requirements 
for securities listed, or authorized for listing, on BATS. The 
Commission notes that there may be certain economic costs to investors 
through the loss of benefits of state registration and oversight. For 
example, by listing on BATS, issuers will no longer be required to 
comply with certain states' blue sky laws, which could mandate more 
detailed disclosure than BATS' listing standards and the requirements 
imposed pursuant to the federal securities laws, rules, and 
regulations. In such circumstances, investors could lose the benefit of 
the additional information. Additionally, to the extent blue sky laws 
result in additional enforcement protections in the form of another 
regulator policing issuer activity, then investors from these states 
could incur costs when issuers choose to list on BATS. Some researchers 
have also expressed a concern that the exemption from blue sky laws 
could prompt riskier public offerings.\86\
---------------------------------------------------------------------------

    \86\ See, e.g., Brandi, supra note 84.
---------------------------------------------------------------------------

    From the perspective of competition in the market for listing, the 
Commission notes that there could be a concern that, to the extent the 
market for exchange services exhibits network effects, as explained 
above, there could be a loss in efficiency as a result of having a 
greater number of networks, if one or more of the existing large 
exchanges (in terms of listings) shrinks in size. However, the 
Commission also notes that the overall efficiency effect will depend on 
the precise fragmentation of the exchanges. It is possible, for 
instance, that, through specialization of exchanges, there could be an 
efficiency gain from having more distinct exchanges, each of which 
specializes in listing issuers from certain types of industries.
    The Commission acknowledges that these costs are difficult to 
quantify. The Commission believes that Congress contemplated these 
costs in relation to the economic benefits of exempting Covered 
Securities from state regulation. The rule amendment otherwise imposes 
no recordkeeping or compliance burdens, but will provide a limited 
purpose exemption under the federal securities laws. The Commission 
solicited comments on the rule amendment's effect on competition, 
efficiency, and capital formation, but received none. Thus, the 
Commission believes that the amendment to Rule 146(b) should not impair 
efficiency, competition, and capital formation.

V. Regulatory Flexibility Act Certification

    The Commission certified, pursuant to Section 605(b) of the 
Regulatory Flexibility Act,\87\ that the amendment to Rule 146 will not 
have a significant economic impact on a substantial number of small 
entities. This certification was included in the Proposing Release.\88\ 
The Commission solicited comments as to the nature of any impact on 
small entities, and generally on whether the amendment to Rule 146(b) 
could have an effect that has not been considered. No comments on these 
issues were received.
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    \87\ 5 U.S.C. 605(b).
    \88\ See Proposing Release at 49706.
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VI. Statutory Authority and Text of the Rule

    The Commission is adopting an amendment to Rule 146 pursuant to the 
authority of Section 19(a) of the Securities Act of 1933 \89\ 
particularly Sections 18(b)(1)(B) and 19(a).\90\
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    \89\ 15 U.S.C. 77a et seq.
    \90\ 15 U.S.C. 77r(b)(1)(B) and 77s(a).
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List of Subjects in 17 CFR Part 230

    Securities.

    For the reasons set forth in the preamble, Title 17, Chapter II of 
the Code of Federal Regulations is amended as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

0
1. The authority citation for Part 230 continues to read, in part, as 
follows:

    Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r, 
77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78t, 78w, 
78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-37, 
and Pub. L. 111-203, Sec.  939A, 124 Stat. 1376, (2010) unless 
otherwise noted.
* * * * *
0
2. Section 230.146 is amended by revising paragraphs (b)(1) and (b)(2) 
to read as follows:

[[Page 3598]]

Sec.  230.146  Rules under section 18 of the Act.

* * * * *
    (b) * * *
    (1) For purposes of Section 18(b) of the Act (15 U.S.C. 77r), the 
Commission finds that the following national securities exchanges, or 
segments or tiers thereof, have listing standards that are 
substantially similar to those of the New York Stock Exchange 
(``NYSE''), the NYSE Amex LLC (``NYSE Amex''), or the National Market 
System of the Nasdaq Stock Market (``Nasdaq/NGM''), and that securities 
listed, or authorized for listing, on such exchanges shall be deemed 
covered securities:
    (i) Tier I of the NYSE Arca, Inc.;
    (ii) Tier I of the NASDAQ OMX PHLX LLC;
    (iii) The Chicago Board Options Exchange, Incorporated;
    (iv) Options listed on the International Securities Exchange, LLC;
    (v) The Nasdaq Capital Market; and
    (vi) Tier I and Tier II of BATS Exchange, Inc.
    (2) The designation of securities in paragraphs (b)(1)(i) through 
(vi) of this section as covered securities is conditioned on such 
exchanges' listing standards (or segments or tiers thereof) continuing 
to be substantially similar to those of the NYSE, NYSE Amex, or Nasdaq/
NGM.
* * * * *

    By the Commission.

    Dated: January 20, 2012.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-1521 Filed 1-24-12; 8:45 am]
BILLING CODE 8011-01-P