Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Order Approving Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval of Amendment Nos. 1 and 2 to Proposed Rule Change Relating to Listing Requirements for Common Stock.

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34367; File No. SR-BSE-94-4]

Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Order

Approving Proposed Rule Change and Notice of Filing and Order Granting

Accelerated Approval of Amendment Nos. 1 and 2 to Proposed Rule Change

Relating to Listing Requirements for Common Stock.

July 13, 1994.

On February 25, 1994, the Boston Stock Exchange, Inc. (``BSE'' or

``Exchange'') submitted to the Securities and Exchange Commission

(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4

thereunder,\2\ a proposed rule change to amend its listing requirements

for securities listed on the Exchange. On June 7, 1994, the BSE

submitted to the Commission Amendment No. 1 to the proposed rule

change.\3\ On June 9, 1994, the BSE submitted to the Commission

Amendment No. 2 to the proposed rule change.\4\

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\1\15 U.S.C. Sec. 78s(b)(1) (1988).

\2\17 CFR 240.19b-4 (1994).

\3\See letter from Neal E. Sullivan, Vice President, Listings

and Government Relations, BSE, to Louis A. Randazzo, Attorney,

Office of Derivative and Exchange Oversight, SEC, dated June 2,

1994. Amendment No. 1 proposed that the number of required

beneficial holders be changed from 500 to 600, instead of to 750 as

originally requested.

\4\See letter from Neal E. Sullivan, Vice President, Listings

and Government Relations, BSE, to Louis A. Randazzo, Attorney,

Office of Derivative and Exchange Oversight, SEC, dated June 8,

1994. Amendment No. 2 changed the proposal to state that the

Exchange shall file and application for delisting should the company

fail to meet certain requirements within 30 days of suspension,

rather than 90 days as originally proposed.

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The proposed rule change was published for comment in Securities

Exchange Act Release No. 33827 (March 28, 1994), 59 FR 15754 (April 4,

1994). No comments were received on the proposal. This order approves

the proposed rule change, and grants accelerated approval to Amendment

Nos. 1 and 2.

I. Description of the Proposal

The Exchange is amending Chapter XXVII, Section 1 of the BSE Rules

to revise the listing requirements for initial listing of securities on

the Exchange. The Exchange will impose more stringent listing criteria

by increasing mandatory minimum requirements, modernizing the language

of the rule, and responding to the Commission's concerns regarding

certain issuers and promoters seeking listing on regional exchanges

solely as a means to avoid the requirements of Rule 15c2-6 under the

Act.\5\

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\5\Rule 15c2-6 provides, in part, that as a means reasonably

designed to prevent fraudulent, deceptive, or manipulative acts or

practices, it is unlawful for a broker or dealer to sell a

designated security to, or to effect the purchase of a designated

security unless certain conditions are fulfilled, such as, approving

a person's account for transactions in designated securities by,

among other things, obtaining information concerning the person's

financial situation, investment experience, and investment

objectives. See 17 CFR 240.15c2-6 (1994). The Commission enacted

this rule to address the concern with regard to the widespread

incidence of misconduct by some broker-dealers in connection with

transactions in low-priced stocks, commonly referred to as ``penny

stocks,'' that are traded predominantly in the over-the-counter

market. Because exchange-listed securities are exempt from the rule,

stringent quantitative listing and maintenance standards for

exchange-listed securities should help ensure that certain issuers

do not circumvent the rule's requirements by seeking to list their

securities on regional exchanges.

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Specifically, the BSE is amending the listing requirements for

common stock relating to tangible assets, public float, beneficial

stockholders, and minimum bid prices.

The Exchange is increasing the portion of the required total assets

($3,000,000) that must constitute tangible assets. The amount of

required tangible assets has been increased from $1,500,000 to

$2,000,000. The Exchange defines tangible assets as assets less any

intangible assets. Intangible assets currently include, but are not

limited to, goodwill, patents, licenses, and trademarks. This

definition is being amended to include other assets as the Exchange

shall deem intangible.\6\ Additionally, the BSE is increasing the

amount of required public float from 500,000 shares to 750,000 shares,

exclusive of shares held by directors, officers or other concentrated

holdings of five percent or more (currently 10% or more).

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\6\See BSE Chapter XXVII, Paragraph 2260, Section 1.

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The BSE is also amending the requirement relating to the minimum

number of beneficial stockholders.\7\ Specifically, the Exchange is

increasing the number of required beneficial stockholders from 500 to

600, exclusive of the holdings of directors, officers or other

concentrated holdings of five percent or more (currently 10% or more).

In addition, the BSE is adding a delisting provision to the minimum

stockholder requirement. Currently, with respect to a company which

seeks to list a common stock issue following an initial public

offering, the Exchange must receive assurances from the company or its

representatives that the minimum beneficial stockholder requirement

will be met following the distribution of the shares. If not met within

six months of listing, the Exchange will take action to suspend

dealings in the specific issue until the stockholder requirement is

met. The BSE is adopting a provision that limits the period in which a

company, listed following an initial public offering, can remain below

the beneficial stockholder requirement once dealings in the issue have

been suspended. Specifically, if a company fails to meet the beneficial

stockholder requirement within 30 days of the suspension of dealings in

the issue, the Exchange shall file an application for delisting with

the Commission.\8\

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\7\The Exchange defines a ``beneficial holder'' as the ultimate

owner of the stock even though the stock may be kept in street name.

See BSE Chapter XXVII, Section 1(C).

\8\A security registered with a national securities exchange may

be stricken from listing and registration pursuant to Section 12(d)

of the Act, and rule 12d2-2 thereunder. SEC Rule 12d2-2 contains the

Commission's procedures for delisting a security from an exchange,

including, but not limited to, a requirement to file an application

for delisting with the Commission. See 15 U.S.C. Sec. 781(d) (1988);

17 CFR 240.12d2-2 (1994).

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Furthermore, the BSE is amending the minimum bid price required for

listing. For a company involved in an initial public offering, the BSE

is increasing the minimum bid price from $1.00 per share to $2.00 per

share at the time of listing. The new standards require a company not

involved in an initial public offering to maintain a bid price of $2.00

per share for 45 days prior to listing up from $1.00 per share for 30

days prior to listing.

Finally, the BSE is amending the listing requirement relating to

net tangible assets and net income. The common stock listing criteria

relating to net tangible assets and net income currently requires that

the company have either net income of $100,000 in two of the past three

years, or net tangible assets in the amount of $500,000. The BSE is

increasing this criteria to require either net income of $100,000 in

two of the past three years, or in the alternative, $2,000,000 in net

tangible assets.\9\

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\9\The Exchange defines ``net tangible assets'' as stockholders'

equity less any intangible assets as described in Paragraph A of

Section 1, Chapter XXVII of the BSE Rules. See also, supra note 6

and accompanying text.

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The Exchange believes that the proposed rule change is consistent

with Section 6(b)(5) under the Act in that it is designed to prevent

fraudulent and manipulative acts and practices, to promote just and

equitable principles of trade, to perfect the mechanism of a free and

open market system, and, in general, to protect investors and the

public interest.

II. Discussion

The development and enforcement of adequate standards governing the

listing of securities on an exchange is an activity of critical

importance to exchange markets and to the investing public. Listing

standards serve as a means for the self-regulatory organizations to

screen issuers and to provide listed status only to bona fide companies

with substantial float, investor base, and adequate financial stability

to ensure sufficient liquidity for fair and orderly markets.

The Commission believes that the Exchange's rule change is

consistent with the requirements of the Act and the rules and

regulations thereunder and, in particular, the requirements of Section

6(b)(5) of the Act.\10\ Section 6(b)(5) of the requires, among other

things, that an exchange have rules that are designed to prevent

fraudulent and manipulative acts and practices, to promote just and

equitable principles of trade, and to protect investors and the public

interest.

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\10\15 U.S.C. Sec. 78f(b)(5) (1988).

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The Commission believes that the amendments to Chapter XXVII,

Section 1, which increase certain BSE requirements for listing common

stock, should benefit investors trading these securities at the

Exchange. The Commission believes that the revised listing requirements

should help to ensure that only legitimate companies with substantial

public float, investor base, and demonstrated financial stability would

be listed on the BSE. The new requirements also should enable the

Exchange to assure that a fair and orderly market can be maintained in

BSE listed securities. In particular, increasing the required minimum

number of beneficial stockholders to 600 and the number of outstanding

public float to 750,000 shares should help to ensure a wide public

distribution of an issuer's stock, and a minimum initial level of

liquidity in BSE listed securities. A wider public distribution of

shares resulting from a larger number of holders will decrease the

opportunities for manipulation, and will help create a more liquid

market for trading.

Moreover, the Commission believes that the more stringent

requirements to be met will prevent the continuous listing of a company

that fails to meet the minimum listing standards. Because the BSE will

file a delisting application upon a company's failure to meet the

minimum beneficial shareholder (600) requirement within 30 days of

suspension of dealings in the issue,\11\ the liquidity of the

marketplace will be preserved and investors will be protected.

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\11\As stated above, currently, with respect to a company which

seeks to list on the BSE following an initial public offering, the

Exchange must receive assurances from the company or its

representatives that the minimum beneficial stockholder requirement

will be met following the distribution of the shares. If not met

within six months of listing, the Exchange shall take action to

suspend dealings until the stockholder requirement is met.

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In addition, the increased requirements would enable the BSE to

verify the financial health of the company by requiring upon listing a

higher minimum bid price per share, and a higher amount of tangible

assets. For example, the amendment increases the proportion of total

assets required ($3 million) to qualify as tangible assets from

$1,500,000 to $2,000,000.\12\ It also requires that a listed company

have either net income of $100,000 in two of the past three years, or

net tangible assets in the amount of $2,000,000. Additionally, with

respect to an initial public offering, the amendment increases the

minimum bid price at the time of listing from $1 to $2 per share. With

respect to a company not involved in an initial public offering, a

minimum bid price of $2 per share must be maintained for 45 days prior

to listing. The Commission believes that these increased listing

standards should help ensure that only companies with sufficient

financial resources to meet their financial obligations continue to be

listed on the Exchange.

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\12\The Exchange is not changing the listing standard relating

to the amount of total assets. Current listing standards require a

company to have at least $3,000,000 in total assets.

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Finally, the Commission believes that the proposed rule change will

increase the effectiveness of Rule 15c2-6 under the Act.\13\ The

Commission adopted Rule 15c2-6 to address a growing concern with the

widespread incidence of misconduct by some broker-dealers in connection

with transactions in low-priced stocks, commonly referred to as ``penny

stocks.'' These stocks are traded predominantly in the over-the-counter

market and quoted in the ``pink sheets.'' Rule 15c2-6, which became

effective on January 1, 1990, imposes various sales practice

requirements on broker-dealers who recommend purchases of certain low-

priced securities to persons who are not established customers. Because

exchange-listed securities or securities authorized for quotation on

the National Association of Securities Dealers, Inc.'s Automated

Quotation (``NASDAQ'') system are exempt from Rule 15c6-6,\14\

stringent quantitative listing and maintenance standards for exchange-

listed securities should help ensure that certain issuers do not

circumvent the requirements of this rule by seeking to list their

securities on regional exchanges. As the Commission noted in the

release adopting Rule 15c2-6, it expects the exchanges to join it in

closely monitoring for fraudulent sales practices in exchange-listed

securities in order to prevent the transfer of such activities from the

pink sheet market to the exchange market.\15\ The new, more stringent

listing requirements of the BSE will help prevent low-priced securities

of companies without substantial float, assets, and shareholders from

evading the application of Rule 15c2-6 by listing on the BSE.

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\13\17 CFR 240.15c2-6 (1994).

\14\Rule 15c2-6 exempts from its requirements securities that

are registered on a national securities exchange that makes

transaction reports available pursuant to Rule 11Aa3-1 under the Act

or approved for quotation in the NASDAQ system. 17 CFR 240.15c2-6(c)

(1994). See surpa note 5.

\15\See Securities Exchange Act Release No. 27160 (August 22,

1989), 54 FR 35468 (August 28, 1989).

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The Commission finds good cause for accelerated approval of

Amendment Nos. 1 and 2 to the rule change prior to the thirtieth day

after publication of notice of filing thereof. The BSE's proposed

listing requirements were published in the Federal Register for the

full statutory period and no comments were received.\16\ Amendment Nos.

1 and 2 modify the rule filing to make certain adjustments to the rule

change that are not substantially more burdensome and that leave its

overall structure unchanged. The Commission finds that accelerated

approval of Amendment Nos. 1 and 2 is necessary in order for the BSE to

be able to effectuate its new listing standards in a timely manner upon

approval.

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\16\See Securities Exchange Act Release No. 33827 (March 28,

1994), 59 FR 15754 (April 4, 1994).

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III. Solicitation of Comments

Interested persons are invited to submit written data, views and

arguments concerning Amendment Nos. 1 and 2. Persons making written

submissions should file six copies thereof with the Secretary,

Securities and Exchange Commission, 450 Fifth Street, N.W., Washington,

D.C. 20549. 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. Sec. 552, will be available for inspection and

copying at the Commission's Public Reference Room. Copies of Amendment

Nos. 1 and 2 will also be available for inspection and copying at the

principal office of the BSE. All submissions should refer to File No.

SR-BSE-94-4 and should be submitted by August 9, 1994.

It is therefore ordered, pursuant to Section 19(b)(2) of the

Act,\17\ that the proposed rule change (SR-BSE-94-4), including

Amendment Nos. 1 and 2 on an accelerated basis, is approved.

\17\15 U.S.C. Sec. 78s(b)(2) (1988).

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For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\18\

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\18\17 CFR 200.30-3(a)(12) (1994).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-17523 Filed 7-18-94; 8:45 am]

BILLING CODE 8010-01-M