regulatory organizations; proposed rule changes: New York Stock Exchange, Inc.,

[Federal Register: September 15, 1999 (Volume 64, Number 178)]

[Notices]

[Page 50129-50131]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr15se99-128]

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41834; File No. SR-NYSE-99-17]

Self-Regulatory Organizations; New York Stock Exchange, Inc.; Order Approving Proposed Rule Change and Amendment No. 1 Thereto and Notice of Filing and Order Granting Accelerated Approval of Amendment Nos. 2 and 3 to the Proposed Rule Change Permanently Approving the Pilot Program for the Listing Standards for Domestic and Non-U.S. Companies

September 3, 1999.

1. Introduction

   On April 22, 1999, the New York Stock Exchange, Inc. (``NYSE'' or ``Exchange'') filedwith the Securities and Exchange Commission (``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change relating to the Exchange's original listing standards. On May 19, 1999, the Exchange submitted Amendment No. 1 to its proposal.\3\

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

   \2\ 17 CFR 240.19b-4.

   \3\ See Letter from James Buck, Senior Vice President and Secretary, NYSE, to Richard Strasser, Assistant Director, Division of Market Regulation (``Division''), Commission, dated May 18, 1999 (``Amendment No. 1'').

   The proposed rule change and Amendment No. 1 were published for comment in the Federal Register on June 4, 1999,\4\ and the Commission granted accelerated approval to the pilot program relating to an alternative listing eligibility criteria for U.S. and non-U.S.

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   companies (``Pilot'') until September 3, 1999, or until the Commission approves the Exchange's request for permanent approval of the Pilot. On July 15, 1999, the Exchange filedAmendment No. 2 \5\ to the proposal and on August 30, 1999, the Exchange filedAmendment No. 3.\6\ The Commission received one comment letter regarding the proposal.\7\ This notice and order approves the proposed rule change, as amended, and solicits comments from interested person on Amendment Nos. 2 and 3.

   \4\ Securities Exchange Act Release No. 41459 (May 27, 1999), 64 FR 30088 (June 4, 1999).

   \5\ In Amendment No. 2, the Exchange made technical changes to conform its proposed rule language to reflect the Exchange's rule language, as amended by a previously submitted rule proposl. See Letter from Daniel Parker Odell, Assistant Secretary, NYSE, to Richard Strasser, Assistant Director, Division, Commission, dated July 14, 1999 (``Amendment No. 2).

   \6\ In Amendment No. 3, the Exchange made technical changes to conform its proposed rule language to reflect the Exchange's rule language, as amended by a previously submitted rule proposal. See Letter from James E. Buck, Senior Vice President and Secretary, NYSE, to Richard Strasser, Assistant Director, Division, Commission, dated August 26, 1999 (``Amendment No. 3).

   \7\ See Letter from Frank G. Zarb, Chairman and Chief Executive Officer, NASD, to Jonathan G. Katz, Secretary, Commission, dated July 19, 1999 (``NASD Letter'').

2. Description of the Proposal

   The purpose of the proposed rule change is to add a new original listing standard to the Exchange's domestic and non-U.S. numerical listing criteria and to modify its current original listing criteria applicable to non-U.S. issuers. The Exchange's numerical listing criteria currently include requirements regarding size, earnings and share distribution of a company. The Exchange is proposing to add a new alternative standards that focuses on global market capitalization and revenues for large, global companies.

   The specific proposed amendments to the Exchange's original listing criteria are:

   1. The Exchange is proposing a Capitalization Standard alternative to its other financial listing eligibility criteria. Under the proposed amendment to Paragraphs 102.01 and 103.01 of the NYSE's Manual, a company with a total global market capitalization of $1 billion and revenues of $250 million in its most recent fiscal year would be eligible for listing on the Exchange without satisfying any additional financial eligibility requirements. However, the company would have to meet the Exchange's other original listing criteria. The Exchange believes that companies of this magnitude would be appropriate for listing and trading on the NYSE even if they do not have earnings because the lack of earnings could be indicative of the company's stage of development, or the transitional nature of its home economy, or the fact that a company could be undergoing short-term variations in profitability. This listing standard is proposed for both domestic and non-U.S. companies.

      For companies listing in connection with an initial public offering (``IPO''), the valuation of the company's market capitalization would need to be demonstrated by a written representation from the underwriter (or, in the case of a spin-off, by the parent company's investment banker, other financial advisor, or transfer agent, if applicable) of the size of the offering as it pertains to the total market capitalization of the company upon completion of the offering (or distribution). For all other companies, the average market capitalization over the preceding six months would be used to determine the market capitalization of the company. In computing the six month average, the Exchange proposes to take advantage of the daily figures (i.e., share price and shares outstanding) over the preceding six- months.

   2. The Exchange currently has alternative numerical listing criteria for non-U.S. companies with limited U.S. distribution.\8\ The Exchange proposes to amend its pre-tax earnings standard for these companies by requiring $25 million in pre-tax income in each of the two most recent fiscal years. Currently, the company need only have pre-tax earnings of $25 million in any one of the three most recent years. Thus, to qualify under the proposed criteria, a non-U.S. issuer would need to demonstrate pre-tax income of $100 million in the aggregate for the last three fiscal years together with a minimum of $25 million of pre-tax income in each of the two most recent fiscal years.

      \8\ The Exchange applies the general financial listing standards in Paragraph 102.01 of its Manual both to domestic companies and to non-U.S. companies that have the required distribution and trading volume in the United States (or North America, for North American companies). However, the section and paragraph headings in the Manual suggest that those standards apply only to U.S. companies. The Exchange is proposing to change the non-U.S. heading to remove that implication by incorporating the word ``alternative.''

      The Exchange notes that its past experience indicates that non-U.S. companies tend to follow U.S. GAAP/SEC disclosure guidelines, which only require U.S. GAAP reconciliation for the most recent two years and any relevant interim period. Thus, the third year back is generally reported only in local GAAP and, therefore, is of little quantitative value to the Exchange without reconciliation to U.S. GAAP. As a result the proposed rule change would obviate the need to reconcile the third year back to U.S. GAAP except where the Exchange determines that that information is necessary to assure the Exchange that the aggregate $100 million threshold has been satisfied.

3. Summary of Comments

   The Commission received one comment letter from the National Association of Securities Dealers, Inc. (``NASD''), which opposed the proposal.\9\ The Exchange responded to this letter.\10\

   \9\ See NASD Letter, supra note 7.

   \10\ See Letter from James E. Buck, Senior Vice President and Secretary, NYSE, to Jonathan G. Katz, Secretary Commission, dated September 2, 1999.

   In its letter, the NASD opposed the adoption of new listing criteria that would increase the number of large Nasdaq issuers eligible for listing on the NYSE, while the NYSE retains rules restricting companies from voluntarily delisting from the NYSE \11\ and restricting off-board trading activity by NYSE members.\12\ The NASD contends that the proposal, in conjunction with NYSE Rules 500 and 390, provides the NYSE with an unfair competitive advantage. Therefore, the NASD contends that the NYSE should not be allowed to adopt any rule change that increases the Exchange's ability to obtain or retain issuer listings while NYSE Rules 500 and 390 remain in effect.

   \11\ NYSE Rule 500.

   \12\ NYSE Rule 390.

   In response, the Exchange argued that the NASD's argument is unrelated to the current proposal and further, that the proposed rule change is principally an additional listing standard to allow large companies to list on the Exchange. The Exchange noted that the decision whether to list on the Exchange is a decision made by the issuer.

4. Discussion

   The Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.\13\ Specifically, the Commission believes the proposal is consistent with the Section 6(b)(5) \14\ requirements that the rules of an exchange be designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanisms of a free and open market and a national market system, and in

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   general, to protect investors and the public. The Commission believes that the Exchange's alternative financial listing standard for companies with $1 billion in market capitalization and $250 million in revenues in the most recent fiscal year is an acceptable standard for listing very large companies that the Exchange believes will prove to be financially successful, although they may not have been profitable in recent years. The Commission believes that the proposed rule change is consistent with the Exchange's obligation to remove impediments to and perfect the mechanism of a free and open market by providing issuers another alternative for trading in the U.S. marketplace without undermining the NYSE's listing standards, which play an important role in protecting investors.

   \13\ In approving this rule change, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

   \14\ 15 U.S.C. 78f(b)(5).

   The Commission also believes that it is reasonable for the Exchange to accept a written representation from an underwriter (or, in the case of a spin-off, by a written representation from the parent company's investment banker or other financial advisor) for an IPO or spin-off, since by definition it could not satisfy the requisite market capitalization standard.

   With respect to the ``pre tax earnings'' standard, the proposal amends its standard by requiring $25 million in pre-tax income in each of the two most recent fiscal years. Thus, a non-U.S. issuer would need to demonstrate pre-tax income of $100 million in the aggregate for the last three fiscal years together with a minimum of $25 million of pre- tax income in each of the two most recent fiscal years. Reconciliation to U.S. GAAP of the third year back is required only if the Exchange determines that reconciliation is necessary to demonstrate that the aggregate $100 million threshold is satisfied. The Commission believes that the proposed change appropriately simplifies the non-U.S. company listing criteria because its parallels the benchmark applied in the ``adjusted cash flow'' standard for non-U.S. companies.\15\

   \15\ See Securities Exchange Act Release No. 41502 (June 9, 1999) 64 FR 32588 (June 17, 1999).

   The Commission carefully considered the concerns expressed by the NASD in its letter opposing the proposal. Without taking a position in this Order on the continued propriety of NYSE rules 390 and 500, the Commission was not persuaded by the NASD's contention that in light of those rules a proposal such as the current one that could reduce the burden for companies to list on the NYSE is by its nature inappropriately anti-competitive.

   The Commission finds that Amendment Nos. 2 and 3 are consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange. Specifically, the Commission believes Amendment Nos. 2 and 3 are consistent with the Section 6(b)(5) \16\ requirements that the rules of an exchange be designed to remove impediments to and perfect the mechanisms of a free and open market and a national market system by conforming the proposed rule language with the text of the NYSE rule language recently approved by the Commission.\17\

   \16\ 15 U.S.C. 78f(b)(5).

   \17\ See Securities Exchange Release No. 41502 (June 9, 1999) 64 FR 32588 (June 17, 1999). In approving this rule change, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

   The Commission finds good cause for approving Amendments Nos. 2 and 3 prior to the thirtieth day after the date of publication of notice thereof in the Federal Register. The Amendments merely conform the proposed rule language to the Exchange's actual rule language and do not make substantive changes to the text of the rule. In addition, accelerated approval will enable the Exchange to simultaneously make all relevant modifications to its Listed Company Manual and avoid any potential confusion due to recent rule revisions. Accordingly, the Commission finds that granting accelerated approval of Amendments No. 2 and 3 is appropriate and consistent with Sections 6(b)(5) and 19(b)(2) of the Act.\18\

   \18\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).

5. Solicitation of Comments

   Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether Amendments 2 and 3 are consistent with the Act. Persons making written statements should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filedwith 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 in Washington, DC. Copies of such filing will also be available for inspection and copying at the principal office of the Exchange. All submissions should refer to File No. SR-NYSE-99-17 and should be submitted by October 6, 1999.

6. Conclusion

   It is therefore ordered, pursuant to Section 19(b)(2) of the Act,\19\ that the proposed rule change (File No. SR-NYSE-99-17), as amended, relating to the listing criteria for U.S. and non-U.S. companies, is approved.

   \19\ 15 U.S.C. 78s(b)(2).

   For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\20\

   \20\ 17 CFR 200.30-3(a)(12).

   Margaret H. McFarland, Deputy Secretary.

   [FR Doc 99-23994Filed9-14-99; 8:45 am]

   BILLING CODE 8010-01-M