Document ID: SEC-2008-1075-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange LLC; Notice of Filing of Proposed Rule Change; Reversing the Income Statement Effects of Changes in Fair Value of Financial Instrume
Posted Date: 2008-08-05T04:00Z

[Federal Register: August 5, 2008 (Volume 73, Number 151)]
[Notices]               
[Page 45509-45511]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05au08-99]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58253; File No. SR-NYSE-2008-57]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change To Adopt on a Permanent Basis 
a Pilot Program Which Allows the Exchange To Adjust the Earnings of 
Companies for Purposes of Its Earnings Standard by Reversing the Income 
Statement Effects of Changes in Fair Value of Financial Instruments 
Extinguished at the Time of Listing

July 30, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is 
hereby given that on July 23, 2008, New York Stock Exchange LLC (the 
``NYSE'' or the ``Exchange'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule changes as described 
in Items I, II, and III below, which items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule changes from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to adopt on a permanent basis an amendment to 
the earnings standard of Section 102.01C(I) of the Exchange's Listed 
Company Manual (the ``Manual'') which is currently in force pursuant to 
a pilot program (the ``Pilot Program''). The amendment will enable the 
Exchange to adjust the earnings of companies by reversing the income 
statement effects for all periods of any changes in fair value of 
financial instruments classified as a liability recorded by the company 
in earnings, provided such financial instrument is either being 
redeemed with the proceeds of an offering occurring in conjunction with 
the listing or converted into or exercised for common stock of the 
company at the time of listing.
    The text of the proposed rule change is available at http://
www.nyse.com, the NYSE, and the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The NYSE has prepared summaries, 
set forth in Sections A, B and C below, of the most significant aspects 
of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend the earnings standard of Section 
102.01C(I) of the Manual. The amendment will enable the Exchange to 
adjust the earnings of companies listing in conjunction with an initial 
public offering (``IPO'') by reversing the income statement effects for 
all periods of changes in fair value of financial instruments 
classified as a liability recorded by the company in earnings, provided 
such financial instrument is either being redeemed with the proceeds of 
an offering occurring in conjunction with the listing or

[[Page 45510]]

converted into or exercised for common stock of the company at the time 
of listing. The proposed amendment was originally implemented for a 
six-month period as a Pilot Program.\3\ The Pilot Program expired and 
was subsequently renewed for an additional three months, expiring on 
September 2, 2008.\4\
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    \3\ See Securities Exchange Act Release No. 55974 (July 6, 
2007), 72 FR 37067 (June 28, 2007) (SR-NYSE-2007-52). [sic]
    \4\ See Securities Exchange Act Release No. 57905 (June 2, 
2008), 73 FR 32613 (June 9, 2008) (SR-NYSE-2008-43).
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    Nonpublic companies engaging in pre-IPO financings often raise 
capital through the sale of preferred stock and warrants to purchase 
preferred stock. Preferred stock and preferred stock warrants are also 
sometimes issued by pre-IPO companies to service providers in lieu of 
cash compensation. Typically, at the time of the company's IPO, the 
preferred stock is converted into common stock and the preferred stock 
warrants are automatically exercised and the underlying preferred stock 
is converted into common stock of the company. In some cases, companies 
may also redeem some or all of the outstanding preferred stock with a 
portion of the proceeds from the IPO.
    Some pre-IPO companies have determined that they must record in 
earnings changes in the fair value of certain financial instruments 
classified as liabilities. As the fair value of a pre-IPO company's 
equity often increases as the company gets closer to its IPO, many 
companies have had to record significant reductions in earnings 
associated with increases in the fair value of the preferred stock 
warrant liability. In certain cases, the impact on the company's 
earnings as reported under generally accepted accounting principles 
(``GAAP'') of the preferred stock liability causes otherwise qualified 
companies to fail to qualify under the Exchange's earnings standard. 
Under the Exchange's current rules, the Exchange cannot list these 
companies even though the preferred stock warrant liability will be 
extinguished at the time of the IPO by conversion into common stock or 
redemption out of the proceeds of the IPO.
    The Exchange believes that it is appropriate to exclude the effects 
of changes in fair value of a financial instrument classified as a 
liability from a company's earnings where the financial instrument is 
being retired at the time of a company's listing either out of the 
proceeds of a concurrent offering or by conversion into common stock at 
the time of listing. The Exchange believes that adjusting company 
earnings for charges arising out of the changes in fair value of 
financial instruments that are retired with the proceeds of an offering 
occurring in conjunction with the listing or converted into common 
stock at the time of listing is consistent with the adjustments that 
are currently permitted under Section 102.01C for a number of other 
nonrecurring charges to earnings that are included in net income as 
recorded under GAAP, such as the exclusion of impairment charges on 
long-lived assets, the exclusion of gains and losses on sales of a 
subsidiary's or investee's stock and the exclusion of in-process 
purchased research and development charges. The Exchange also believes 
that this adjustment is reasonable given the purpose of the earnings 
standard, which is to determine the suitability for listing of 
companies on a forward-looking basis.
    As with all companies listed on the Exchange, the Financial 
Compliance staff of NYSE Regulation will monitor on an ongoing basis 
the compliance with the Exchange's continued listing standards of any 
companies listed in reliance upon the proposed amendment. Such 
companies will be subject to delisting if they are found at any time to 
be below the Exchange's continued listing standards.
    As the Exchange gains experience in listing companies in reliance 
upon the proposed amendment, we will continue to carefully reevaluate 
its appropriateness. If we become aware that companies listed pursuant 
to the proposed amendment have difficulty complying with our continued 
listing standards, we will inform the Commission and discuss with the 
Commission the desirability of the continued use of the provision.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) \5\ of the Exchange Act, in general, and furthers the 
objectives of Section 6(b)(5) of the Exchange Act,\6\ in particular in 
that it is designed to promote just and equitable principles of trade, 
to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities, to remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest. The Exchange believes that the proposed amendment is 
consistent with the investor protection objectives of the Exchange Act 
in that it provides for an adjustment to listing applicants' historical 
financial results that is consistent with other adjustments already 
permitted under the Exchange's earnings standard and is reasonable 
given the purpose of the earnings standard, which is to determine the 
suitability for listing of companies on a forward-looking basis.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Exchange Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Exchange Act. Comments may be submitted 
by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NYSE-2008-57 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

[[Page 45511]]

All submissions should refer to File Number SR-NYSE-2008-57. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSE-2008-57 and should be 
submitted on or before August 26, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-17891 Filed 8-4-08; 8:45 am]

BILLING CODE 8010-01-P