Document ID: SEC-2007-1198-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange LLC
Posted Date: 2007-08-27T04:00Z

[Federal Register: August 27, 2007 (Volume 72, Number 165)]
[Notices]               
[Page 49033-49034]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27au07-92]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56290; File No. SR-NYSE-2007-75]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 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 on a Six 
Month Pilot Basis

 August 20, 2007.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Exchange Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is 
hereby given that on August 13, 2007, New York Stock Exchange LLC (the 
``NYSE'' or the ``Exchange'') filed with the Securities and Exchange 
Commission the proposed rule changes as described in Items I and II 
below, which items have been prepared by the Exchange. NYSE has 
designated the proposed rule change as constituting a ``non-
controversial'' rule change under paragraph (f)(6) of Rule 19b-4,\4\ 
which renders the proposal effective upon receipt of this filing by the 
Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend the earnings standard of Section 
102.01C(I) of the Exchange's Listed Company Manual (the ``Manual'') on 
a six-month pilot program basis. 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 on the Exchange's 
Web site (http://www.nyse.com), at the Exchange's Office of the 

Secretary, and at 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 Exchange 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 on a six-month pilot program basis (the 
``Pilot Program''). The amendment will enable the Exchange to adjust 
the earnings of companies listing in conjunction with an 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 converted into or exercised for common 
stock of the company at the time of listing.
    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

[[Page 49034]]

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.
2. Statutory Basis
    The basis under the Exchange Act for this proposed rule change is 
the requirement under Section 6(b)(5) \5\ that an exchange have rules 
that are designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market 
and, in general, to protect investors and the public interest.
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    \5\ 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

    Because the proposed rule change: (i) Does not significantly affect 
the protection of investors or the public interest; (ii) does not 
impose any significant burden on competition; and (iii) does not become 
operative for 30 days after the date of the filing, or such shorter 
time as the Commission may designate if consistent with the protection 
of investors and the public interest, the proposed rule change has 
become effective pursuant to Section 19(b)(3)(A) of the Exchange Act 
\6\ and Rule 19b-4(f)(6) thereunder.\7\
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    \6\ 15 U.S.C. 78s(b)(3)(A).
    \7\ 17 CFR 240.19b-4(f)(6). Pursuant to Rule 19b-4(f)(6)(iii) 
under the Exchange Act, the Exchange is required to give the 
Commission written notice of its intent to file the proposed rule 
change, along with a brief description and text of the proposed rule 
change, at least five business days prior to the date of filing of 
the proposed rule change, or such shorter time as designated by the 
Commission. The Exchange has satisfied the five-day pre-filing 
requirement.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Exchange Act \8\ normally does not become operative for 30 days after 
the date of its filing. However, Rule 19b-4(f)(6)(iii) \9\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has requested that the Commission waive the 30-day operative delay. The 
Commission hereby grants the request.\10\ The Commission believes that 
waiving the 30-day operative delay is consistent with the protection of 
investors and the public interest because the proposed rule change is 
consistent with other adjustments the Exchange makes when evaluating 
applicants on a forward-looking, post-IPO basis under the existing 
earnings standard in Section 102.01C(I) of the Listed Company Manual, 
and the proposal will take effect as a Pilot Program, allowing the 
Commission to evaluate the suitability of the proposal during the pilot 
period.\11\
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    \8\ 17 CFR 240.19b-4(f)(6).
    \9\ 17 CFR 240.19b-4(f)(6)(iii).
    \10\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
    \11\ Not later than 60 days prior to the expiration of the Pilot 
Program, the NYSE should provide the Commission with information 
regarding the nature of the adjustments that have been made to the 
financial statements of individual companies that have listed on the 
Exchange using the proposed rule change.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate the rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Exchange Act.

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 e-mail to rule-comments@sec.gov. Please include File 

Number SR-NYSE-2007-75 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSE-2007-75. 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, on official business 
days between the hours of 10 a.m. and 3 p.m. Copies of such filing will 
also be available for inspection and copying at the principal office of 
the NYSE. 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-2007-75 and should be submitted on or before September 17, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-16837 Filed 8-24-07; 8:45 am]

BILLING CODE 8010-01-P