Unlisted Trading Privileges

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249

[Release No. 34-35637; File No. S7-4-95]

RIN 3235-AG28

Unlisted Trading Privileges

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Commission is adopting new rules and amendments to

existing rules concerning unlisted trading privileges (``UTP''). The

rules would reduce the period that exchanges have to wait before

extending UTP to any listed initial public offering, from the third

trading day in the security to the second trading day in the security.

The rules also would require exchanges to have rules and oversight

mechanisms in place to ensure fair and orderly markets and the

protection of investors with respect to UTP in any security.

EFFECTIVE DATE: April 21, 1995.

FOR FURTHER INFORMATION CONTACT: Betsy Prout, 202/942-0170, Attorney,

Office of Market Supervision, Division of Market Regulation, Securities

and Exchange Commission (Mail Stop 5-1), 450 5th Street, N.W.,

Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction

On February 2, 1995, the Securities and Exchange Commission

(``Commission'') proposed for comment rules1 under Section 12(f)

of the Securities Exchange Act of 1934 (``Exchange Act''),2 as

recently amended by the Unlisted Trading Privileges Act of 1994 (``UTP

Act''). The proposed rules would have: (1) Required national securities

exchanges (``exchanges''), for any security that is the subject of an

initial public offering (``IPO'') and is listed on another exchange

(``listed IPO''), to wait until the listing exchange reports the first

trade in the security to the Consolidated Tape before trading the

security pursuant to unlisted trading privileges (``UTP''); (2)

required each national securities exchange to have in effect a rule or

rules providing for transactions in the class or type of security to

which the exchange extends UTP; and (3) amended certain existing rules

under Section 12(f) of the Exchange Act to conform to the recent

statutory amendments effected by the UTP Act. The Commission also

requested comments on alternatives to the proposed rule concerning UTP

in listed IPOs from commenters who believe that either no waiting

period or a longer waiting period would be appropriate. In addition,

the Commission requested comment on whether any Commission action is

necessary to carry out the congressional objectives of linked markets

as required by Section 11A(a)(1)(D) of the Exchange Act.3

\1\See Securities Exchange Act Release No. 35323 (February 2,

1995), 60 FR 7718 (``Proposing Release'').

\2\15 U.S.C. 78l.

\3\15 U.S.C. 78k-1(a)(1)(D).

---------------------------------------------------------------------------

The Commission received nine comment letters on the proposed

rules,4 eight of which discuss the proposed rule concerning UTP in

listed IPOs.5 The Commission also received, prior to publication

of the proposed rules in the Federal Register, a report presenting

certain volume and price parameter statistics of listed IPOs.6

\4\See letters from James F. Duffy, American Stock Exchange,

Inc., dated March 21, 1995 (``Amex letter''), George W. Mann, Boston

Stock Exchange, Inc., dated March 6, 1995 (``BSE letter''), Lisa W.

Barry, CS First Boston, dated March 14, 1995 (``CS First Boston

letter''), J. Craig Long, Foley & Lardner, dated March 20, 1995

(``Chx letter''), Richard T. Chase, Lehman Brothers, dated March 10,

1995 (``Lehman letter''), James E. Buck, New York Stock Exchange,

Inc., dated March 15, 1995 (``NYSE letter''), Leopold Korins,

Pacific Stock Exchange, Inc., dated March 14, 1995 (``PSE letter''),

John C. Katovich, Pacific Stock Exchange, Inc., dated March 29, 1995

(``PSE response''), and William Uchimoto, Philadelphia Stock

Exchange, Inc., dated March 29, 1995 (``Phlx response''), to

Jonathan G. Katz, Secretary, SEC.

\5\See BSE letter, Chx letter, CS First Boston letter, Lehman

letter, NYSE letter, PSE letter, Phlx response, and PSE response,

id.

\6\See letter and report from William Uchimoto, Philadelphia

Stock Exchange, Inc., dated February 6, 1995 (``Phlx Study''). The

Phlx Study was submitted to the Commission on behalf of the Boston

Stock Exchange, Inc., the Chicago Stock Exchange, Inc., the

Philadelphia Stock Exchange, Inc., and the Pacific Stock Exchange,

Inc.

---------------------------------------------------------------------------

The Commission is adopting the rules as proposed, except for the

rule that would have required exchanges to wait, before extending UTP

to listed IPOs, until the first trade is reported by the listing

exchange. Instead, that proposed rule is being replaced with a

requirement that exchanges wait, before trading a listed IPO pursuant

to UTP, until the opening of business on the day following the initial

public offering of the security on the listing exchange.

II. Background

As stated above, the Commission is adopting rules pursuant to the

UTP Act, which recently amended Section 12(f) of the Exchange Act. The

UTP Act became effective on October 22, 1994. As discussed more fully

in the Proposing Release and below, the UTP Act amended Section 12(f)

of the Exchange Act to require the Commission to prescribe rules

concerning UTP in listed IPOs. Rule 12f-2, as adopted, meets this

requirement. The UTP Act also authorizes the Commission to prescribe

other rules pertaining to exchange extensions of UTP, and specifically

authorizes the Commission to prescribe, by rule or order, the

procedures that will apply to exchanges when they apply to reinstate

UTP in a security after the Commission has suspended UTP in the

security on the applicant exchange.

Section 12(f) governs when an exchange may trade a security that is

[[Page 20892]] not listed and registered on that exchange, i.e. by

extending UTP to the security.7 Prior to the UTP Act, Section

12(f) required exchanges to apply to the Commission before extending

UTP to a security, and required the Commission to provide notice of

each application for comment and opportunity for a hearing. The

Commission also was required to review each application, and if the

application met certain standards, the Commission issued an order

approving the exchange's request to trade the security pursuant to its

grant of UTP.8 These requirements caused significant delays before

exchanges could begin UTP trading in securities already traded on the

listing exchange, even though over-the-counter (``OTC'') dealers were

not subject to UTP limitations.9 The delay in trading, resulting

from the previous application procedures, was especially criticized by

competing exchanges because, while the Commission published for comment

hundreds of exchange applications for the extension of UTP each year,

comments on the applications were extremely rare. Indeed, virtually no

comments had been submitted to the Commission on a UTP application in

over ten years.

\7\When an exchange ``extends UTP'' to a security, the exchange

allows its members to trade the security as if it were listed on the

exchange. For discussions of the history of UTP in U.S. markets and

Section 12(f) of the Exchange Act, see, e.g., Stephen L. Parker &

Brandon Becker, Unlisted Trading Privileges, 14 Rev. Sec. Reg. 853

(1981); and Walter Werner, Adventure in Social Control of Finance:

The National Market System for Securities, 75 Colum. L. Rev. 1233

(1975).

\8\Section 12(f) required the Commission to review each UTP

application to ensure the maintenance of fair and orderly markets

and the protection of investors with respect to the extension of UTP

to the securities named in the application. Pursuant to this

standard of review, the staff identified, over time, certain areas

of particular concern as they related to UTP. Accordingly, these

areas included ensuring that the applicant exchange had proper

trading rules in place to provide a fair and orderly market in each

security named and had sufficient standards for regulatory oversight

of each security to provide for the protection of investors. While

Commission review of the applications led to occasional discoveries

of material deficiencies and errors in the applications, the

overwhelming majority of applications raised no substantive issues.

\9\As a technical matter, Section 12(a) limits the trading of

securities on an exchange to those securities that are listed and

registered on that exchange. Section 12(f), both prior to and

following this amendment, makes an exemption from this requirement

for securities traded pursuant to UTP. OTC dealers are not subject

to the Section 12(a) listing requirement because they do not

transact business on an exchange.

---------------------------------------------------------------------------

In response to the Concept Release that initiated the Market 2000

Study,10 resulting in the Division of Market Regulation's

(``Division'') report, Market 2000: An Examination of Current Equity

Market Developments, some commenters noted that the regulatory process

for UTP could be a potential area for reform.11 After publication

of the Concept Release, on June 22, 1994, the Telecommunications and

Finance Subcommittee of the House Committee on Energy and Commerce

(``Subcommittee'') held a hearing on the UTP Act, ultimately adopted on

October 22, 1994.12

\10\See Securities Exchange Act Release No. 30920 (July 14,

1992), 57 FR 32587 (``Concept Release'').

\11\See letter from William G. Morton, Jr., Boston Stock

Exchange; John L. Fletcher, Midwest (currently Chicago) Stock

Exchange; Leopold Korins, Pacific Stock Exchange; and Nicholas A.

Giordano, Philadelphia Stock Exchange, to Jonathan G. Katz,

Secretary, Commission, dated December 11, 1992. See also, Division

of Market Regulation, Securities and Exchange Commission, Market

2000: An Examination of Current Equity Market Developments (January

1994).

\12\A representative of the Division and representatives of

several self-regulatory organizations testified at this hearing. The

Unlisted Trading Privileges Act of 1994 and Review of the SEC's

Market 2000 Study: Hearing Before the Subcomm. on Telecommunications

and Finance of the House Comm. on Energy and Commerce, 103d Cong.,

2d Sess. (1994) (``UTP Hearing'').

---------------------------------------------------------------------------

The UTP Act, among other matters, removed the application, notice,

and Commission approval process from Section 12(f) of the Exchange Act,

except in cases of Commission suspension of UTP in a particular

security on an exchange. Thus, the UTP Act generally allows an exchange

to extend UTP to any security when it becomes listed and registered on

another exchange or included in Nasdaq, subject to certain

limitations.13

\13\Section 12(f)(1)(E) prohibits extension of unlisted trading

privileges in securities that are registered under Section 12(g) of

the Exchange Act (generally, ``OTC securities''), except pursuant to

a rule, regulation or order of the Commission approving such

extension or extensions. The Commission's order approving the on-

going pilot program, including all limitations and conditions

therein, is deemed such an order. See Securities Exchange Act

Release No. 34371 (July 13, 1994), 59 FR 37103. Pursuant to Section

12(f)(1)(E), the Commission will consider issues involved in

extensions of UTP to OTC securities as the Commission continues it

on-going review of the operation of the pilot program.

---------------------------------------------------------------------------

Specifically, the UTP Act grants exchanges the authority to trade

any security via UTP immediately upon listing on another exchange,

provided that the security is not a listed IPO security, as defined in

the UTP Act.14 For listed IPO securities, the UTP Act contains a

temporary provision that requires exchanges to wait, before trading any

listed IPO security, until the third day of trading in the security on

the listing exchange. This provision also requires the Commission to

prescribe by rule or regulation, within 180 days of the enactment of

the UTP Act, the mandatory delay (or, ``duration of the interval''), if

any, that should apply to UTP extensions to listed IPO

securities.15

\14\Section 12(f)(1)(B), read jointly with Section

12(f)(1)(A)(i), as amended, provides this exception for listed IPO

securities. In defining securities that fall within the exception,

new subparagraphs 12(f)(1)(G)(i) and (ii) provide:

(i) a security is the subject of an initial public offering if--

(I) the offering of the subject security is registered under the

Securities Act of 1933; and

(II) the issuer of the security, immediately prior to filing the

registration statement with respect to the offering, was not subject

to the reporting requirements of section 13 or 15(d) of this title;

and

(ii) an initial public offering of such security commences at

the opening of trading on the day on which such security commences

trading on the national securities exchange with which such security

is registered.

15 U.S.C. 78l(f)(1)(G).

\15\15 U.S.C. 78l(f)(1)(C). The UTP Act temporary two-day delay

provision for UTP in listed IPOs expires on the earlier of the

effective date of a Commission rule prescribing the appropriate

interval of delay, if any, or 240 days following the enactment of

the UTP Act.

---------------------------------------------------------------------------

The UTP Act also provides the Commission with rulemaking authority

to prescribe additional procedures or requirements for exchange

extensions of UTP to any security, and allows the Commission summarily

to suspend UTP in a security at any time within 60 days of the

commencement of trading on the relevant exchange pursuant to UTP. Upon

suspension, the exchange must cease trading pursuant to UTP in the

security. An exchange seeking to reinstate UTP in the security,

following a Commission suspension, must file an application with the

Commission pursuant to procedures that the Commission may prescribe by

rule or order for the maintenance of fair and orderly markets, the

protection of investors and the public interest, or otherwise in

furtherance of the purposes of the Exchange Act. Public notice by the

Commission of an exchange application to reinstate suspended UTP, and

Commission review of the application, are also required. The amended

Section 12(f) notice, review, and Commission approval provisions are

substantially similar to the requirements that previously applied to an

exchange's initial extension of UTP to a security under former Section

12(f).16

\16\See Section 12(f)(2), as amended, 15 U.S.C. 78l(f)(2).

---------------------------------------------------------------------------

III. Extensions of UTP to Listed Securities That Are the Subject of an

Initial Public Offering

A. Proposed Rule 12f-2

Proposed Rule 12f-2 would have allowed exchanges to extend UTP to a

listed IPO security when at least one transaction in the security had

been effected on the listing exchange and the

[[Page 20893]] transaction had been reported pursuant to an effective

transaction reporting plan as defined in Rule 11Aa3-1 under the

Exchange Act.17 The proposed rule, therefore, would have shortened

the mandatory waiting period (or ``interval,'' as it is described in

the UTP Act) for UTP in listed IPO securities from two trading days, as

temporarily specified by amended Section 12(f),18 to the time that

it takes to effect and report the initial trade in the security on a

listing exchange. The result of the proposed rule would have been to

permit the regional exchanges to trade listed IPOs at essentially the

same time as the primary listing exchange.

\17\17 CFR 240.11Aa3-1 (1991).

\18\See supra note 15.

---------------------------------------------------------------------------

The Commission proposed a one-trade delay for UTP in listed IPOs

because the Commission preliminarily believed that it was appropriate

to minimize regulatory restraints on competition for trading listed IPO

securities. In soliciting comments on proposed Rule 12f-2, however, the

Commission noted a previous New York Stock Exchange (``NYSE'') position

that listed IPOs should be traded solely on the listing market for a

``short'' period of time to help ensure market efficiency immediately

following the IPO.19 The Commission also cited a report on the UTP

Act by the House Committee on Energy and Commerce (``Committee''), in

which the Committee directed the markets to provide the Commission with

trading activity data on the effects of UTP in IPOs (including, for

example, any volatility effects on the security), so that the

Commission could determine whether the benefits of confining early

trading in IPOs to one marketplace would be outweighed by the benefits

of removing regulatory delays that inhibit competition among

markets.20

\19\See Proposing Release, supra note 1, citing prepared

testimony of Edward A. Kwalwasser, Executive Vice President,

Regulation, New York Stock Exchange, UTP Hearing, supra note 12.

\20\See Proposing Release, supra note 1, citing H.R. Rep. No.

626, 103d Cong., 2d Sess. (1994). The Committee also identified the

experience of third market trading in listed IPOs as relevant to

this inquiry.

---------------------------------------------------------------------------

The Commission solicited comments on these issues, specifically

seeking comments on certain items that would be particularly useful to

the Commission. These included identification and analysis of the

potential harms and benefits that would result from either no waiting

period, or from a longer waiting period than that proposed by the

Commission. To the extent that commenters believed a waiting period

would be appropriate, the Commission requested that they provide data

to illustrate the potential negative effects on the pricing of an IPO.

The Commission also suggested that commenters might provide an analysis

of the effects of the two-day waiting period temporarily in effect

under the UTP Act. Finally, the Commission stated that it would be

interested in receiving alternative proposed rules from commenters who

believe that either no waiting period or a longer waiting period would

be appropriate.

In addition, the Commission sought comment on whether any

Commission action would be necessary under Section 12(f), as amended,

in order to carry out the congressional objectives of linked markets as

required by Section 11A(a)(1)(D).21 Specifically, the Commission

requested comment on whether changes should be made to the consolidated

quotation, trade reporting, and order routing systems, now that

exchanges and linking facilities will have less time to prepare for

multiple exchange trading in the securities. The Commission expressed

particular interest in receiving comments concerning any existing

procedural delays that should be corrected by Commission action to

ensure that the operation of amended Section 12(f) is not impeded.

\21\Section 11A(a)(1)(D) of the Exchange Act provides:

The linking of all markets for qualified securities through

communication and data processing facilities will foster efficiency,

enhance competition, increase the information available to brokers,

dealers, and investors, facilitate the offsetting of investors'

orders, and contribute to best execution of such orders.

15 U.S.C. 78k-1(a)(1)(D).

---------------------------------------------------------------------------

B. Comments on Proposed Rule 12f-2

The Commission received a total of eight comment letters on

proposed Rule 12f-2, five of which supported the proposed rule,22

and three of which opposed the proposal.23 Shortly prior to the

publication of the proposed rules, the Commission also received a study

from the Philadelphia Stock Exchange (``Phlx''), submitted on behalf of

the Boston Stock Exchange, Inc., the Chicago Stock Exchange Inc., and

the Pacific Stock Exchange Inc., concerning certain volume and pricing

characteristics of listed IPOs.24

\22\See BSE letter, Chx letter, PSE letter, Phlx response, and

PSE response, supra note 4.

\23\See CS First Boston letter, Lehman letter, and NYSE letter,

supra note 4.

\24\See Phlx Study, supra note 6.

---------------------------------------------------------------------------

The Phlx Study shows high volume in IPOs during the early days of

trading, particularly on the first and second day of trading. Based on

this data, the Phlx Study states that a restriction on UTP in IPOs

creates a substantial negative effect on competition, both in relation

to the listing exchange and OTC dealers.25 The Phlx Study

concludes that the Commission should adopt a rule for UTP in listed

IPOs that would allow the regional exchanges to trade the securities on

the first day of trading.

\25\See supra note 9.

---------------------------------------------------------------------------

These competitive concerns were reiterated by the other comment

letters supporting the proposed rule.26 One regional exchange also

states that it has listed IPOs simultaneously with the NYSE and has

seen no adverse effect related to the dual listings.27 This

exchange argues that the NYSE has not been able to identify any adverse

effects from the dual listing of IPOs. Another regional exchange states

that, since the UTP Act reduced the waiting period to two days, there

have been no instances of pricing disparities, inordinate volatility,

or issuer complaints for securities traded by regional exchanges on the

third trading day of IPOs, and no offering has been adversely affected

by regional trading.28

\26\See BSE letter, Chx letter, and PSE letter, supra note 4.

\27\See Chx letter, supra note 4.

\28\See PSE letter, supra note 4.

---------------------------------------------------------------------------

The Commission received three comment letters, one from the NYSE

and two from underwriters, expressing opposition to proposed Rule 12f-

2.29 These commenters believe that immediate regional exchange

trading of IPOs would increase price volatility in the trading of IPO

securities because the underwriters would not have sufficient time to

ensure an orderly distribution of the securities. Two of the commenters

argued that the temporary two-day delay should continue in

place,30 while the third commenter recommends at the very least a

one-day trading delay.31 Those proposing a two-day delay base

their recommendation on data compiled by Lehman Brothers (``Lehman

Study''), showing higher volatility in some Nasdaq IPOs than in

selected NYSE IPOs. The two letters assert that this data demonstrates

that dispersed initial trading of IPOs in the Nasdaq market is more

volatile than initial centralized trading of IPOs.

\29\See NYSE letter, CS First Boston letter, and Lehman letter,

supra note 4.

\30\See NYSE letter and Lehman letter, supra note 4.

\31\See CS First Boston letter, supra note 4.

---------------------------------------------------------------------------

The Commission received two comment letters from two regional

exchanges in response to the comments opposing the proposed

rule.32 One of these commenters believes that National Market

System procedures and practices are capable of providing effective

[[Page 20894]] pricing for IPOs, contrary to the concerns voiced by the

opposing comment letters.33 The commenter also believes that only

upward price volatility risk exists for early IPO trading, particularly

because underwriters may place stabilizing bids in IPOs to limit

declines in the prices of the securities.

\32\PSE response and Phlx response, supra note 4.

\33\PSE response, supra note 4.

---------------------------------------------------------------------------

The second response letter reiterates these points, and also notes

that regional exchange opening, high, low, and closing prices in IPOs

that were dually-listed among one regional exchange and the NYSE were

consistent with NYSE comparable prints.34 In addition to providing

its reasons for believing that price volatility in early trading of

IPOs is limited to upward movements in the price of the security, the

commenter also concludes that price volatility is generated by supply

and demand in securities and that, as a natural by-product of a free

and open market, price volatility should never be used as a reason to

exclude some equally-regulated competitors from the marketplace.35

\34\See Phlx response, supra note 4.

\35\As discussed in Section III.C., infra, the Phlx response and

the Chx letter suggest enhancements to certain Intermarket Trading

System (``ITS'') procedures in order to facilitate the extension of

unlisted trading privileges pursuant to the new streamlined

requirements for UTP under the UTP Act.

---------------------------------------------------------------------------

C. Commission Response

The Commission is adopting a revised version of Rule 12f-2. Instead

of requiring exchanges to wait until the listing exchange of an IPO

reports the first trade in the security to the Consolidated Tape, as

originally proposed, exchanges will be required to wait, before trading

the security pursuant to a grant of UTP, until the opening of business

on the day following the IPO. For the reasons discussed below, the

Commission believes that this ``one-trading-day'' delay for UTP in

listed IPOs is appropriate for the maintenance of fair and orderly

markets, the protection of investors, and otherwise in furtherance of

the purposes of the Exchange Act, as required by the UTP Act.

As a general matter, the Commission agrees with the regional

exchanges that early UTP in IPO securities would enhance the ability of

multiple markets to compete with the listing exchange for the

substantial volume occurring on the initial trading days of IPOs. As

discussed below, however, several commenters raise the possibility that

virtually immediate UTP in IPO securities could complicate the pricing

and orderly distribution of IPO securities by increasing the risk of

price volatility as the securities are distributed immediately to the

public. In light of these concerns, and in particular those raised by

the underwriters who believe that IPO pricing may be at risk if there

were no opportunity for early centralized trading, the Commission is

adopting a rule to provide a one-trading-day delay for UTP in IPO

securities.

The Commission believes that a one-trading-day delay to precede UTP

in listed IPOs is appropriate at this time primarily because the

Commission is concerned that the first day of trading in an IPO on an

exchange presents special circumstances, including initial pricing, an

attempt to effectuate an orderly distribution of securities, high

trading volume, and the resulting potential for high price volatility

in the securities, that could have a significant effect on pricing and

distribution of IPOs. In light of the comments regarding the possible

impact of immediate UTP for the IPO process, the Commission believes,

therefore, that a one-trading-day delay is warranted in order to ensure

the protection of investors as required by the UTP Act, and by the

Exchange Act in general.

The Phlx Study and Phlx response discuss the five IPO securities

that were dually-listed on one regional exchange and the NYSE, and

state that regional trades virtually always occurred within the NYSE

daily trading range on the first and second trading days of the IPO.

The Commission considers this limited amount of data insufficient to

show that immediate UTP will not increase price volatility across the

markets. In addition to the limited number of occurrences reviewed,

this information only addresses listings on one exchange competing with

the listing exchange, rather than the effects of five markets trading

the IPO simultaneously with the listing exchange.

The Commission also believes that there is insufficient evidence on

the record to warrant a longer waiting period than the first trading

day to precede UTP in listed IPOs. It appears that the risk of high

price volatility for listed IPOs and the resultant impact on IPO

distributions decreases after the first day of trading.

In light of the concerns raised and the limited nature of the

trading data available, the Commission is adopting the one-trading-day

delay for UTP in listed IPOs. The Commission currently believes that

this one-day restriction is necessary and appropriate for the

maintenance of fair and orderly markets and the protection of investors

with respect to IPOs. This conclusion is premised on the importance of

the initial trading of IPOs for the offering process, the concerns

raised regarding orderly IPO distribution, and the limited data

responding to those concerns.

The Commission is sympathetic to concerns that a one-trading-day

delay for exchange extensions of UTP will restrict regional exchange

trading, while OTC dealers will continue to be free to trade the

securities upon effective registration. The evidence presented in the

Phlx study, however, shows that in virtually all IPOs studied, OTC

market makers trade the securities only in extremely small volume, if

at all, on the first day of the IPO. The Commission believes,

therefore, that any competitive advantage to OTC market makers is

minimal, and is outweighed by the benefit to investors and the capital

formation process that should be accrued by decreasing the risk of

price volatility in the IPO securities.

The Commission will continue, of course, to monitor the experience

with the trading of IPOs under the amended Rule. The Commission is

willing to consider revisiting the question of the appropriate waiting

period for UTP in listed IPOs after experience has been gained with the

amended rules.

Two commenters who urged adoption of the proposed rule also

responded to the Commission's solicitation of comments on any necessary

enhancements to National Market Systems to facilitate operation of the

UTP Act. One commenter suggested that all ITS Participants should be

permitted to participate in the opening on the first day of trading on

the listing exchange via the ITS.36 Another commenter stated that

the new UTP trading regimen necessitates more reactive procedures by

the ITS Participants and the Securities Industry Automation Corporation

(``SIAC''), the ITS facilities manager.37 The commenter urged SIAC

to make ITS automatically available for any UTP security on the day

following a regional exchange's request that the security be available

for ITS use.

\36\See Chx letter, supra note 4.

\37\See Phlx response, supra note 4.

---------------------------------------------------------------------------

The Commission urges the ITS Participants to enhance their

procedures for ITS eligibility of securities. The Commission notes that

the ITS Pre-Opening Application and the ITS Trade-Through Rule are

designed, in part, to ensure orderly pricing of securities among the

various Participant market centers. Thus, the Commission believes that

the ITS Participants should move forward to ensure that the ITS is

available for use by all interested [[Page 20895]] participant markets

in time to participate in the opening trade of a listed IPO security on

the second day the security trades.

IV. Exchange Rules for Securities to Which Unlisted Trading Privileges

are Extended (Rule 12f-5)

Section 12(f)(1)(D) of the Exchange Act, as amended, authorizes the

Commission to prescribe, by rule or regulation, such additional

procedures or requirements for extending UTP to any security as the

Commission deems necessary or appropriate for the maintenance of fair

and orderly markets, the protection of investors and the public

interest, or otherwise in furtherance of the purposes of the Exchange

Act. Pursuant to this authority, the Commission proposed Rule 12f-5,

which would prohibit an exchange from extending UTP to any security

unless the exchange has in effect a rule or rules providing for

transactions in the class or type of security to which the exchange

extends UTP.

The Commission solicited comment on whether proposed Rule 12f-5

would help ensure that an exchange has the necessary rules in place to

provide for fair and orderly markets in all securities to which the

exchange extends UTP. The Commission received one response to this

question.38 This commenter supported the rule, and requested that

the Commission, in this release, clarify that, prior to commencing UTP

trading, an exchange should be required to have entered into

appropriate information sharing agreements with foreign exchanges (or

the Commission with foreign regulators), comparable to that required of

the listing exchange for the particular product.39

\38\See Amex letter, supra note 4.

\39\The commenter also suggested that the Commission make clear

that OTC transactions in exchange-listed securities must be subject

to the same regulatory requirements as those imposed by the listing

exchange and by other exchanges trading the security pursuant to

UTP, which could be accomplished by a amendment to the rules of the

National Association of Securities Dealers. The Commission believes

that this recommendation is outside the scope of the present

rulemaking, which deals specifically with exchange extensions of

UTP.

---------------------------------------------------------------------------

The Commission is adopting Rule 12f-5, as proposed, as a means to

ensure that exchanges meet their obligation under the Exchange Act to

have these rules and oversight mechanisms in place on their exchanges

for the relevant securities before extending UTP to the securities. As

discussed in the Proposing Release, the rule is intended to preserve a

benefit of Commission review of UTP applications that was required by

Section 12(f) prior to the UTP Act. Previously, the Commission reviewed

each UTP application to ensure that the applicant exchange had rules in

place to cover the trading of the product class of the security for

which the exchange applied. Now that the Commission will no longer

review UTP applications, the Commission believes that the requirements

set forth in Rule 12f-5 are appropriate because the rule confirms to

exchanges their obligation to evaluate their extensions of UTP to

determine that the exchanges are authorized to list the product class

of securities before allowing their members to trade the securities.

Finally, in regard to the comment that exchanges must enter into an

appropriate information sharing agreement for all securities traded

thereon, Rule 12f-5 will ensure that an exchange granting UTP in a

security has secured previous Commission approval to trade the product

class of security pursuant to Section 19(b) of the Exchange Act.40

The Commission, in such approval process, will have determined the

adequacy of information sharing arrangements for the particular

exchange.

\40\15 U.S.C. 78s(b).

---------------------------------------------------------------------------

V. Amendments to Rules 12f-1 and 12f-3, and Rescission of Previous

Rules 12f-2 and 12f-6

Several of the rules prescribed under former Section 12(f)

concerned the application process for extensions of UTP. The Commission

proposed to amend or rescind these rules to reflect statutory changes,

and solicited comment on whether the proposed changes were appropriate.

No comments were received on these proposals. The Commission is

adopting the amendments to existing Rules 12f-1 and 12f-3, and is

rescinding existing Rules 12f-2 and 12f-6, as proposed.

First, Rule 12f-141 is amended to limit its operation to an

exchange's application to reinstate UTP after a Commission suspension.

The amended rule will require essentially the same format for

applications to reinstate UTP as was required by the rule under former

Section 12(f) for applications to extend UTP. The Commission believes

the amendment is an appropriate means to carry out the intention of the

new Section 12(f)(2) requirement for exchange UTP applications in cases

where exchanges seek to reinstate UTP for a security that was

previously suspended by the Commission.

\41\17 CFR 240.12f-1 (1991).

---------------------------------------------------------------------------

Second, Rule 12f-2 is rescinded and Form 27, referred to in

previous Rule 12f-2, is removed.42 This rule and form dealt with

instances where an exchange might have been required to cease extending

UTP, and to reapply for UTP, in a security that was ``changed'' (as

described in the rule) immaterially for those purposes. The rule and

form provide an exemption from reapplication for UTP in these cases.

The Commission is rescinding these items because the application

procedures, from which the rule provided an exemption, no longer exist.

\42\17 CFR 240.12f-2 (1991).

---------------------------------------------------------------------------

Third, the Commission is rescinding the last sentence of paragraph

(b) of Rule 12f-3.43 Rule 12f-3 allows the issuer of a security

that is traded pursuant to UTP, or any broker or dealer who makes a

market in the security, or any other person having a bona fide interest

in the question of termination or suspension of UTP in the security, to

apply to the Commission for the termination or suspension of UTP in the

security. The Rule also identifies the categories of information that

should be provided in the application, which include the applicant's

statement that it has sent a copy of the application to the exchange

from which the suspension or termination is sought. Thereafter, the

Rule provides that the exchange may terminate or suspend UTP in the

security in accordance with its rules. The Rule also required the

exchange, upon suspension or termination, promptly to file Form 28 with

the Commission.

\43\17 CFR 240.12f-3 (1991).

---------------------------------------------------------------------------

This final requirement no longer is necessary because exchanges are

no longer required to apply to the Commission to extend UTP to a

security. The Commission, therefore, is rescinding that last

requirement from the Rule concerning Form 28 and is removing Form 28 to

conform further with efforts to streamline the regulatory process

concerning UTP.

Finally, the Commission is rescinding Rule 12f-6, which exempted a

merged exchange from the UTP application process in certain

circumstances.44 The exemption no longer is necessary because the

waiting period that restrained exchanges from extending UTP to most

securities no longer exists.

\44\17 CFR 240.12f-6 (1991).

---------------------------------------------------------------------------

VI. Effects on Competition and Regulatory Flexibility Act

Considerations

Section 23(a)(2) of the Exchange Act45 requires that the

Commission, when adopting rules under the Exchange Act, consider the

anticompetitive effects of those rules, if any, and balance any

anticompetitive impact against the [[Page 20896]] regulatory benefits

gained in terms of furthering the purposes of the Exchange Act. The

Commission believes that adoption of Rules 12f-2 and 12f-5, and the

amendments to Rules 12f-1 and 12f-3, and the rescission of previous

Rules 12f-2 (to be replaced with new Rule 12f-2) and 12f-6 will not

impose any burden on competition not necessary or appropriate in

furtherance of the purposes of the Exchange Act. Specifically, as

discussed in more detail above, the Commission believes that the new

Rule 12f-2 one-trading-day delay for UTP in IPOs provides a minimal

restraint on competition among market centers which is outweighed by

the benefits associated with the resulting reduction of potential price

volatility risk in IPO securities. In addition, the one-trading-day

delay is shorter than the current temporary two-trading day delay.

\45\15 U.S.C. 78w(a)(2).

---------------------------------------------------------------------------

The Commission has prepared a Final Regulatory Flexibility Analysis

(``FRFA'') regarding the amendments and rescissions to the rules under

Section 12(f), in accordance with 5 U.S.C. 604. The FRFA notes the

minimal economic effect on the minimal number of small businesses, if

any, that may be generated by these amendments to and rescissions of

these rules under Section 12(f) of the Exchange Act. In addition, the

FRFA notes that Rule 12f-2 should reduce the risk of high price

volatility, and possible associated risk of loss to investors, in

listed IPOs. The Commission believes that the benefits of reducing risk

to investors outweigh the potential costs, if any, that might be

incurred by, for example, small specialist firms on regional exchanges.

A copy of the FRFA will be available for inspection and copying in

the Commission's Public Reference Section, 450 Fifth Street, N.W.,

Washington, D.C. 20549.

VII. Effective Date

The new rules and amendments to the Commission's rules and forms

shall be effective immediately, in accordance with the Administrative

Procedure Act, which allows effectiveness in less than 30 days after

publication for, inter alia, ``a substantive rule which grants or

recognizes an exemption or relieves a restriction.'' 5 U.S.C.

553(d)(1). Moreover, the Administrative Procedures Act allows for

accelerated effectiveness ``as provided by the agency for good cause

and published with the Rule.'' 5 U.S.C. 553(d)(3). Accelerated

effectiveness of the rules and amendments is necessary in order to

ensure compliance with the UTP Act, which requires the Commission to

prescribe the duration of the waiting period, if any, for UTP in listed

IPOs ``[n]ot later than 180 days after the date of enactment of the

Unlisted Trading Privileges Act of 1994 * * *.''46

\46\Section 12(f)(1)(C), as amended, 15 U.S.C. 78l(f)(1)(C).

---------------------------------------------------------------------------

List of Subjects in 17 CFR Parts 240 and 249

Reporting and recordkeeping requirements, Securities.

For the reasons set out in the preamble, the Commission hereby

amends title 17, chapter II of the Code of Federal Regulations as

follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF

1934

1. The authority citation for Part 240 continues to read in part as

follows:

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg,

77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p,

78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-

37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.

* * * * *

2. Section 240.12f-1 is amended by revising the section heading and

introductory text of paragraph (a), redesignating paragraphs (a)(5) and

(a)(6) as paragraphs (a)(6) and (a)(7), adding paragraph (a)(5), and

revising newly designated paragraph (a)(6) to read as follows:

Sec. 240.12f-1 Applications for permission to reinstate unlisted

trading privileges.

(a) An application to reinstate unlisted trading privileges may be

made to the Commission by any national securities exchange for the

extension of unlisted trading privileges to any security for which such

unlisted trading privileges have been suspended by the Commission,

pursuant to section 12(f)(2)(A) of the Act (15 U.S.C. 78l(2)(A)). One

copy of such application, executed by a duly authorized officer of the

exchange, shall be filed and shall set forth:

(1) * * *

(5) The date of the Commission's suspension of unlisted trading

privileges in the security on the exchange;

(6) Any other information which is deemed pertinent to the question

of whether the reinstatement of unlisted trading privileges in such

security is consistent with the maintenance of fair and orderly markets

and the protection of investors; and

* * * * *

3. Section 240.12f-2 is revised to read as follows:

Sec. 240.12f-2 Extending unlisted trading privileges to a security

that is the subject of an initial public offering.

(a) General Provision--A national securities exchange may extend

unlisted trading privileges to a subject security on or after such

national securities exchange opens for trading on the day that follows

the day on which the initial public offering of such subject security

commences.

(b) The extension of unlisted trading privileges pursuant to this

section shall be subject to all the provisions set forth in Section

12(f) of the Act (15 U.S.C. 78l(f)), as amended, and any rule or

regulation promulgated thereunder, or which may be promulgated

thereunder while the extension is in effect.

(c) Definitions. For the purposes of this section:

(1) The term subject security shall mean a security that is the

subject of an initial public offering, as that term is defined in

section 12(f)(1)(G)(i) of the Act (15 U.S.C. 78l(f)(1)(G)(i)), and

(2) An initial public offering commences at such time as is

described in section 12(f)(1)(G)(ii) of the Act (15 U.S.C.

78l(f)(1)(G)(ii)).

4. Section 240.12f-3 is amended by revising paragraph (b) to read

as follows:

Sec. 240.12f-3. Termination or suspension of unlisted trading

privileges.

* * * * *

(b) Unlisted trading privileges in any security on any national

securities exchange may be suspended or terminated by such exchange in

accordance with its rules.

5. Section 240.12f-5 is added to read as follows:

Sec. 240.12f-5 Exchange rules for securities to which unlisted trading

privileges are extended.

A national securities exchange shall not extend unlisted trading

privileges to any security unless the national securities exchange has

in effect a rule or rules providing for transactions in the class or

type of security to which the exchange extends unlisted trading

privileges.

6. Section 240.12f-6 is removed and reserved.

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

7. The authority citation for Part 249 continues to read in part as

follows:

Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;

* * * * *

Secs. 249.27 and 248.28 [Removed]

8. Sections 249.27 and 248.28 are removed.

[[Page 20897]] Dated: April 21, 1995.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95-10487 Filed 4-27-95; 8:45 am]

BILLING CODE 8010-01-P