Self-Regulatory Organizations; New York Stock Exchange, Inc.; Order Granting Approval to Proposed Rule Change Relating to Its Allocation Policy and Procedures

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34906; File No. SR-NYSE-94-30]

Self-Regulatory Organizations; New York Stock Exchange, Inc.;

Order Granting Approval to Proposed Rule Change Relating to Its

Allocation Policy and Procedures

October 27, 1994.

I. Introduction

On August 12, 1994, the New York Stock Exchange, Inc. (``NYSE'' 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 requesting permanent approval of

revisions to its Allocation Policy and Procedures that were implemented

on a one year pilot basis.\3\

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

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

\3\See Securities Exchange Act Release No. 33121 (October 29,

1993) (approving such changes on a one-year pilot basis to expire

October 28, 1994) (``Pilot Release'').

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The proposed rule change was published for comment in Securities

Exchange Act Release No. 34644 (September 7, 1994), 59 FR 47192

(September 14, 1994). No comments were received on the proposal.

II. Description of the Proposal

The NYSE Allocation Policy and Procedures (``Policy'') governs the

allocation of equity securities to NYSE specialist units.\4\ The intent

of the Policy is to ensure that each equity security listed on the

Exchange is allocated in the fairest manner possible to the best

specialist unit for that security. In its continuing efforts to enhance

allocation decisions, the Exchange conducts periodic reviews of the

allocation process.\5\ In October of 1993 the NYSE amended its Policy

on a one-year pilot basis to revise, among other things, the allocation

criteria, the composition of the Allocation Committee

(``Committee'')\6\ and Allocation Panel (``Panel''),\7\ and the

Committee's disclosure policy.

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\4\The NYSE Allocation Policy applies to the allocation of

equity securities under the following circumstances: (1) when an

equity security is to be initially listed on the NYSE; (2) when an

equity security is to be reallocated as a result of disciplinary or

other proceedings under NYSE Rules 103A, 475 and 476; or (3) when a

specialist unit voluntarily surrenders its registration in a

security as a result of possible disciplinary or performance

improvement action. See NYSE Allocation Policy and Procedures.

\5\Subsequent to the implementation of the pilot program

pursuant to the Pilot Release, the Exchange conducted another

comprehensive review of the allocation process and further revised

the Policy (see SR-NYSE-94-18). These revisions include, among other

things, the composition of the Allocation Committee and the

Allocation Panel, the quorum requirement for the Committee, and

allocation of merging companies.

\6\Under the Policy, the NYSE Allocation Committee has sole

responsibility for the allocation of securities to specialist units

pursuant to Board-delegated authority, and is overseen by the

Quality of Markets Committee of the Board of Directors (``Board'').

The Allocation Committee renders decisions based on the allocation

criteria specified in the Allocation Policy.

\7\The composition of the Panel reflects the Committee structure

and includes floor brokers, allied members, and floor broker

Governors. The Panel comprises the pool of individuals from which

the Committee is formed. The Panel members are selected through an

annual appointment process that utilizes input from the membership.

Panel members are appointed to serve a one-year term; Governors,

however, remain on the Panel for as long as they are Governors.

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The Exchange fully implemented the changes to the Policy, detailed

in the Pilot Release, in February of 1994. The Exchange states that it

has reviewed the changes to the Policy as they have impacted on the

allocation process and it believes that there has been a beneficial

effect in terms of the way in which stocks are allocated. The Exchange

further maintains that it continues to subject this vital function to

rigorous scrutiny, looking to refine the process, as is evidenced by

the filing of further changes to the Policy cited earlier.

III. Discussion

The Commission finds that the proposed rule change is consistent

with the requirements of the Act and the rules and regulations

thereunder applicable to a national securities exchange and, in

particular, with the requirements of Section 6(b)(5) of the Act.\8\

Section 6(b)(5) requires that the rules of an exchange be designed to

promote just and equitable principles of trade, to prevent fraudulent

and manipulative acts and practices, to remove impediments to and

perfect the mechanism of a free and open market, and, in general, to

protect investors and the public interest. Further, the Commission

finds that the proposal is consistent with Section 11(b) of the Act\9\

and Rule 11b-1 thereunder,\10\ which allow exchanges to promulgate

rules relating to specialists in order to maintain fair and orderly

markets. For the reasons set forth below, the Commission believes that

the amended Policy should enhance the Exchange's allocation process,

encourage improved specialist performance and, thereby, protect

investors and the public interest.

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\8\15 U.S.C. 78f(b)(5) (1988).

\9\15 U.S.C. 78k(b) (1988).

\10\17 CFR 240.11b-1 (1994).

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Specialists play a crucial role in providing stability, liquidity

and continuity to the trading of securities. Among the obligations

imposed upon specialists by the Exchange, and by the Act and the rules

thereunder, is the maintenance of fair and orderly markets in their

designated securities.\11\ To ensure that specialists fulfill these

obligations, it is important that the Exchange develop and maintain

stock allocation procedures and policies that provide specialists with

an incentive to strive for optimal performance. The Commission fully

supports and encourages the NYSE's continuing effort to develop

meaningful and effective allocation policies that encourage improved

specialist performance and market quality.

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\11\See e.g., Rule 11b-1, 17 CFR 240.11b-1 (1994); NYSE Rule

104.

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The Commission believes that the proposed revisions to the NYSE's

Policy should refine the Exchange's allocation process and, thereby,

encourage improved specialist performance. As discussed in more detail

in the Pilot Release, the NYSE's Policy emphasizes that the most

significant allocation criterion is specialist performance. In the

Commission's view, performance-based stock allocations not only help to

ensure that stocks are allocated to specialists who will make the best

markets, but will provide an incentive for specialists to improve their

performance or maintain superior performance.

The Commission believes that the use of Specialist Performance

Evaluation Questionnaire (``SPEQ'')\12\ ratings, objective performance

measures, and the Committee's professional judgment under the revised

Policy should enable the Committee to review specialist performance in

a more precise and comprehensive fashion. Specifically, the Commission

believes that it is appropriate to limit the weight that the SPEQ may

be given in allocation decisions to one-third and to increase the

emphasis given to objective measures of performance. Although the SPEQ

remains a useful tool to measure performance, the Commission has long

believed that objective indications of performance should play an

important role in allocation decisions. In particular, the Commission

believes that objective performance measures can identify poor market

making performance that otherwise may not be reflected in a unit's SPEQ

survey results.\13\

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\12\The SPEQ is a quarterly survey on specialist performance

completed by eligible floor brokers (i.e., any floor broker with at

least one year of experience). The SPEQ consists of 21 questions and

requires floor brokers to rate, and provide written comments on, the

performance of specialist units with whom they deal frequently.

\13\The Commission believes that it is appropriate to delete the

objective performance measure pertaining to the Opening Automated

Report Service (``OARS'') contained in the Policy. Because this

performance measure was deleted from NYSE Rule 103A in 1990,

deleting the reference to the OARS would update and remove an

obsolete performance measure from the Policy.

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The Commission believes that the NYSE's proposal to require that

SPEQ performance data be presented to the Committee in four tiers, with

units listed alphabetically in each comparable group, is a reasonable

means of ranking units for comparison. In this regard, the Commission

recognizes that a unit might not have SPEQ scores which, from a

statistical perspective, are significantly different from the next

higher or lower unit. The presentation of the SPEQ results in four

tiers that differ significantly should provide the Committee with

appropriate groupings of specialist units for its use in allocation

decisions. This should help the Committee in its evaluation of

applicants for a new listing.

The Commission believes that the Exchange's proposal to amend its

Policy to state that in the case of spin-offs, listings of related

companies and relistings of securities, the NYSE will honor a listing

company's request that it not be allocated automatically to its former

specialist unit or the specialist in the parent or related company,

should provide an opportunity for the listed company to provide input

into the allocation of an affiliated listing. However, a listing

company's preference should not be allowed to take significance over or

negate specialist performance. A listing company's preference is a

minor, supplemental factor and only should be used to distinguish

between the best qualified units based on performance related

criteria.\14\ In this regard, the listing company's request would serve

only to open the allocation to all units.

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\14\See Securities Exchange Act Release No. 27803 (March 14,

1990), 55 FR 10740 (March 22, 1990) (order approving File No. SR-

NYSE-88-32).

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The Commission believes that the Exchange's proposal to delete the

reference to specific aspects of trading foreign issues on the Exchange

floor should provide the NYSE with additional flexibility in allocating

foreign issues. Again, the foreign listing considerations in the Policy

are supplemental in that specialist performance remains the key factor

in allocation decisions.

The Commission believes that the NYSE's proposal to eliminate

specialist representation on the Committee will solve the appearance of

a conflict of interest on the Committee and, thereby, enhance

confidence in the allocation process. The Commission concurs with the

NYSE's conclusion that floor brokers and allied members are in a better

position to judge the relative strengths and weaknesses of specialist

units. The Commission also agrees that an effort should be made to

appoint individuals that have not yet served on the Committee before

reappointing past Committee members. This should ensure that a broader

segment of the trading floor community will have an opportunity to

serve on the Committee. In this regard, the Commission also agrees with

the NYSE in that the Panel should consist of a core group of

experienced, senior professionals and supports its proposal to select a

significant number of floor members on the Panel from among the

Exchange's senior floor officials, floor governors and former

allocation committee chairmen. Accordingly, the Commission believes

that the revised mix of both Committee and Panel members is appropriate

and consistent with the Act.

The Commission believes that the NYSE's proposal to require that

the list of Committee members be kept confidential and prohibit members

and investment bankers from initiating contact with Committee members

regarding pending allocations should minimize potential conflicts in

allocation decisions. Under the revised Policy, Committee members still

would be permitted to initiate contact with any specialist if they

believe it would be beneficial when making an allocation decision. The

Commission believes that this revision to the Policy should help to

ensure that specialist performance, rather than subjective

recommendation, is the most significant criterion in allocation

decisions.

The Commission believes that the NYSE's proposal to amend the

Policy to discontinue the practice of distributing a summary of reasons

for each allocation decision to Exchange floor members provides for

more efficient resource allocation and reduces unnecessary paperwork.

At the same time, the Commission emphasizes, however, that the Exchange

will make such information available to those who are interested by

continuing to publish\15\ allocation decisions for its membership and

listing companies.

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\15\The term ``publish'' in this context refers to: (1) a

posting on a bulletin board on the floor of the Exchange giving

notice to all floor members of each allocation; and (2) a

notification to the issuer whose security was allocated.

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The Commission believes that the Exchange's proposal to permit all

current Committee members, including outgoing members, to vote for an

incoming Committee Chairman is reasonable in that outgoing Committee

members have gained valuable experience with candidates with whom they

have been serving. Therefore, the Commission believes that outgoing

members' input should broaden the scope of the election of the NYSE's

Committee Chairman, and help to ensure the selection of the best

qualified Chairman of the Committee.\16\

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\16\The Commission believes that the NYSE's proposal to

standardize the agenda used to educate Committee Chairmen and

members should encourage Committee Chairmen and members to maintain

quality performance in their allocation responsibilities.

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The Commission believes that the proposed amendments to the

allocation application procedure to require information about a

specialist unit's contacts with listed companies and NYSE member

organizations should help to facilitate compliance with NYSE Rule 106.

NYSE Rule 106(c) requires each specialist to report to the Exchange

semi-annually, a record of their contacts with senior officials of

their listed companies, their off-floor contacts with representatives

of each of the 15 largest Exchange member organizations, their off-

floor contacts with each other member organization that is a

significant customer of the specialist unit, and their off-floor

contacts with any other member organization that requests such contact.

Because the revised application would specify the Exchange's current

specialist contact requirement, the proposal should assist specialists

in their responsibilities under the rules of the Exchange.

Finally, the Commission believes that it is appropriate for the

NYSE to implement the revised Policy on a permanent basis. The

Commission believes that the pilot period has provided the Exchange and

the Commission with an opportunity to study the effects of the revised

Policy on the NYSE's allocation process. During the pilot period, the

Exchange has monitored carefully the effects of the revised Policy and

has reported its findings to the Commission. The Commission has

reviewed and analyzed the reports submitted by the Exchange and on that

basis, and for the reasons discussed above, believes that the revised

Policy is consistent with the Act and furthers the objectives of the

Exchange to develop an efficient and reliable allocation procedure.

It Is Therefore Ordered, pursuant to Section 19(b)(2) of the

Act,\17\ that the proposed rule change (SR-NYSE-94-30) is approved.

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

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) (1991).

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Jonathan G. Katz,

Secretary.

[FR Doc. 94-27229 Filed 11-2-94; 8:45 am]

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