Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change by the Boston Stock Exchange, Inc. Relating to Specialist Concentration

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34716; File No. SR-BSE-94-10]

Self-Regulatory Organizations; Notice of Filing and Order

Granting Accelerated Approval of Proposed Rule Change by the Boston

Stock Exchange, Inc. Relating to Specialist Concentration

September 26, 1994.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that

on August 30, 1994, the Boston Stock Exchange, Inc. (``BSE'' or

``Exchange'`) filed with the Securities and Exchange Commission

(``Commission'') the proposed rule change as described in Items I and

II below, which Items have been prepared by the self-regulatory

organization. The Commission is granting accelerated approval and is

publishing this notice to solicit comments on the proposed rule change

from interested persons.

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

\2\17 CFR 240.19b-4 (1991).

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I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The Exchange seeks to obtain accelerated effectiveness as to a one-

year extension of the Specialist Concentration Policy pilot program.\3\

This will continue to permit the Exchange's Executive Committee to

review proposed combinations that, in the Exchange's view, may lead to

undue concentration within the specialist community. The Exchange

therefore requests the Commission to find good cause, pursuant to

Section 19(b)(2) of the Act, for approving the proposed rule change

prior to the thirtieth day after publication in the Federal Register.

Accelerated approval is hereby granted for the reasons stated below.

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\3\On February 7, 1990, the Commission approved, on a six-month

pilot basis ending August 7, 1990, a proposed rule change by the BSE

to establish procedures for reviewing proposed combinations among

specialist units on the Exchange. See Securities Exchange Act

Release No. 27684 (February 7, 1990), 55 FR 5527 (approving File No.

SR-BSE-89-05). The Commission later approved the renewal of the

pilot program for additional one-year periods ending August 1, 1991,

August 13, 1992, August 13, 1993, and August 13, 1994. See

Securities Exchange Act Release Nos. 28327 (August 10, 1990), 55 FR

33794 (File No. SR-BSE-90-11); 29551 (August 13, 1991), 56 FR 41380

(File No. SR-BSE-91-06); 31037 (August 13, 1992), 57 FR 37854 (File

No. SR-BSE-92-08); and 32753 (August 16, 1993), 58 FR 44707 (File

No.SR-BSE-93-15).

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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 III below. The self-regulatory

organization 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 purpose of the proposed rule change is to extend the

concentration policy pilot program, which establishes certain standards

based on Consolidated Tape Association (``CTA'') ranking\4\ of

specialist stocks for reviewing certain proposed mergers, acquisitions

and other combinations between or among specialist units. The proposed

policy would authorize the Executive Committee of the Board of

Governors to review proposed combinations that, in the Exchange's view,

may lead to undue concentration within the specialist community.

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\4\In March 1973, the CTA was formed and the consolidated tape

was established to disseminate last sale transaction information for

trades executed on any of the participant exchanges or through the

National Association of Securities Dealers Automated Quotation

(``NASDAQ'') system. The current CTA participants include the New

York Stock Exchange (``NYSE''), American Stock Exchange (``Amex''),

Chicago Stock Exchange (``CHX''), Philadelphia Stock Exchange

(``Phlx''), Pacific Stock Exchange (``PSE''), BSE, Chicago Board

Options Exchange (``CBOE''), Cincinnati Stock Exchange (``CSE''),

and the National Association of Securities Dealers (``NASD''). Each

specialist stock is ranked according to the number of CTA trades in

such stock. The ranking is based upon an average for the past four

quarters.

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The Executive Committee will review any arrangement where

previously separate specialist organizations would be operating under

common control and would comprise:

(a) 15% or more of the 100 most actively traded CTA stocks; or,

(b) 15% or more of the second 100 most actively traded CTA stocks;

or,

(c) 20% or more of the third 100 most actively traded CTA stocks;

or,

(d) 15% or more of all the CTA stocks eligible for trading on the

BSE where the Free List contains fewer than 100 issues.\5\

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\5\The Free List is made up of securities which are not

registered to certain specialists and can be traded by any

specialist.

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The Executive Committee shall approve or disapprove the proposed

combination based on its assessment of the following considerations:

(a) Specialist performance and market quality in the stocks

subjects to the proposed combination;

(b) The effects of proposed combination in terms of the following

criteria:

(i) Strengthening the capital base of the resulting specialist

organization;

(ii) Minimizing both the potential for financial failure and the

negative consequences of any such failure on the specialist system

as a whole; and

(iii) Maintaining or increasing operational efficiencies;

(c) Commitment to the Exchange market, focusing on whether the

constituent specialist organizations engage in business activities that

might detract from the resulting specialist organization's willingness

or ability to act to strengthen the Exchange agency/auction market and

its competitiveness in relation to other markets; and

(d) The effect of the proposed combination on overall concentration

of specific organizations.

With respect to the criteria relating to the ``commitment to the

Exchange market'', the Executive Committee would look to a variety of

factors that extend beyond compliance with the Exchange's requirements

for providing sufficient capital, talent and order handling services.

For example, the Committee would review and assess each constituent

unit's past performance on the Exchange relating to such matters as:

Acceptance and cooperation in the development,

implementation and enhancement to the Boston Exchange Automated

Communications and Order-routing Network (``BEACON'');

Efforts at resolving problems concerning customer orders;

Willingness to facilitate early openings in order to

compete effectively with other exchanges; and

Willingness to voluntarily provide Execution Guarantees

beyond the minimum required under Rule 2039A.\6\

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\6\See BSE Rule 2039A. The Rule states that the BSE Execution

Guarantee shall be available to each member firm in all issues

traded through the Intermarket Trading System (ITS) registered to a

member specialist of the Exchange. For example, the rule imposes an

obligation upon specialists to guarantee executions on all agency

orders from 100 up to and including 1,299 shares.

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2. Statutory Basis

The Exchange believes that the basis under the Act for the proposed

policy is Section 6(b)(5) in that the policy enables the Exchange to

monitor the tendencies toward concentration in the specialist community

and to intervene to prevent undue concentration. As such, it is

designed to protect investors and the public interest, and is not

designed to permit unfair discrimination between customers, issuers,

brokers, or dealers, or to regulate by virtue of any authority

conferred by this title matters not related to the purpose of this

title or the administration of the Exchange.

B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed policy will impose

any burden on competition that is not necessary or appropriate in

furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed

Rule Change Received from Members, Participants or Others

Comments have neither been solicited nor received.

III. Solicitation of Comments

Interested persons are invited to submit written data, views and

arguments concerning the foregoing. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, NW., Washington, DC 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. 552, will be available for inspection and copying at the

Commission's Public Reference Section, 450 Fifth Street, NW.,

Washington, DC 20549. Copies of such filing will also be available for

inspection and copying at the principal office of the BSE. All

submissions should refer to File No. SR-BSE-94-10 and should be

submitted by October 21, 1994.

IV. Commission's Findings and Order Granting Accelerated Approval of

Proposed Rule Change

The Commission finds that the BSE's proposal to extend its pilot

program regarding specialist concentration for an additional one-year

period is consistent with the requirements of the Act and the rules and

regulations thereunder applicable to a national securities exchange,

and, in particular, the requirements of Section 6 of the Act.\7\ For

the reasons set forth below, the Commission believes that the BSE

proposal to extend its specialist concentration pilot furthers the

objectives of Section 6 of the Act.

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\7\15 U.S.C. Sec. 78f(b)(5) (1988).

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The Commission believes it is necessary to extend the pilot

program's operation in order to afford both the Exchange and the

Commission a further opportunity to evaluate the pilot's operation

during the Commission's consideration of permanent approval of the

concentration rules. Although the pilot has been in effect since

February, 1990, only two proposed combinations have triggered an

extensive Committee review by exceeding the concentration limits set

forth in the policy. Consequently, the Commission believes that the

Exchange, in conjunction with the SEC, needs additional time to fully

evaluate the operation of the concentration policy and to determine

whether the concentration rules are enhancing the quality of the

markets that specialist units make and thus improve the standards of

specialist performance. The Commission believes that allowing the

Exchange an additional one-year period in which to implement the pilot

will enable the Exchange and the Commission to adequately address the

effectiveness of the pilot.

In its prior orders renewing and extending the pilot program,\8\

the Commission requested that the BSE develop criteria to evaluate the

effects of its concentration rules on the activities of specialists and

to determine, for example, whether implementation of these rules is

increasing the performance and effectiveness of specialists and aiding

in the prevention of undue concentration. Specifically, the Commission

requested that the BSE submit a report to the Commission addressing,

among other things, the following issues: the number of proposed

specialist combinations that have triggered an Executive Committee

review since the inception of the pilot program and the circumstances

surrounding these reviews; whether the existence of more firms has

increased competition among specialists for new stock allocations;

whether the concentration rules have increased incentives for quality

markets and higher standards for performance; and the impact that the

specialist combination rules have had upon the competitive environment

necessary to maintain an orderly market.

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\8\See supra, note 3.

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In response to the Commission's request, the BSE submitted a

letter\9\ which addressed many of the issues the Commission outlined in

previous orders. The BSE stated that, during the last pilot period,

there have been no proposed specialist combinations that exceeded the

concentration limits set forth in the policy.\10\ The BSE reported that

the last combination reviewed under the concentration policy was in

February of 1993. The acquisition was discussed in the previous pilot

extension approval order.

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\9\See letter from George Mann, Senior Vice President and

General Counsel, Boston Stock Exchange, to Amy Bilbija, Commission,

dated September 1, 1994.

\10\The BSE has had a total of two proposed combinations that

exceeded the concentration limits since the inception of the pilot

program. The first such proposed combination was discussed in

Securities Exchange Act Release No. 29551 (August 13, 1991), 56 FR

41380 (File No. SR-BSE-91-06). The second such proposed combination

was discussed in Securities Exchange Act Release No. 32753 (August

16, 1993), 58 FR 44707 (File No. SR-BSE-93-15).

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The Commission also asked the BSE to discuss various other issues,

identical to the requests made during the previous one-year pilot

periods. The BSE's responses were identical to those submitted pursuant

to the previous pilot extension due to the absence of relevant data

during the last year.

During the extended pilot period, as was requested during the

previous one-year pilot periods, the Commission expects the Exchange to

continue to develop criteria to evaluate the effects of its

concentration rules on the activities of specialists. In this regard,

the Commission expects the BSE to report to the Commission by May 1,

1995, the number of proposed specialist combinations that have

triggered an Executive Committee review since the extension of the

pilot program and the circumstances surrounding these reviews; whether

competition among specialists for new stock allocations as well as

specialists and specialist firms applying for those allocations since

the inception of the pilot program;\11\ and whether any of the

specialist firms that have undergone Executive Committee review have

demonstrated an improvement in specialist evaluation results or

displayed a higher quality of markets. In addition, the Commission

remains interested in whether the BSE finds that the concentration

rules have assisted the Exchange in increasing order flow and if so,

the reasons for this conclusion, as well as the impact that the

specialist combination rules have had upon the competitive environment

necessary to maintain an orderly market.\12\

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\11\The Commission believes the BSE needs to more fully address

and justify why the proposed concentration levels are set

appropriately. In particular, the Commission expects the BSE to

demonstrate that the Policy does not result in a decrease in

competition for allocation and adversely affect the quality of the

BSE's markets.

\12\In evaluating the effects of the pilot, the Commission

expects the BSE to provide specific data to support its conclusions.

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The Commission finds good cause for approving the proposed rule

change prior to the thirtieth day after the date of publication of

notice of filing thereof in the Federal Register. The Commission

believes that accelerated approval of the extension of the pilot

program furthers the protection of investors and the public interest

because it allows the Exchange additional time to evaluate the

effectiveness of the pilot program on an uninterrupted basis during the

Commission's consideration of the Exchange's request for permanent

approval of its rules for reviewing proposed specialist combinations

and because the BSE's concentration policy may result in higher quality

markets and improved standards of specialist performance. Further, the

substance of the proposal has been noticed previously in the Federal

Register for the full statutory period and the Commission did not

receive any comments on it.\13\

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\13\See supra note 3.

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It Is Therefore Ordered, Pursuant to section 19(b)(2)\14\ that SR-

BSE-94-10 is hereby approved on a pilot basis through August 13, 1995.

\14\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.\15\

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\15\17 CFR 200.30-3(a)(12) (1991).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-24271 Filed 9-29-94; 8:45 am]

BILLING CODE 8010-01-M