Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the New York Stock Exchange, Inc. Relating to Amendments to Rule 460.20

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35929; File No. SR-NYSE-95-21]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the New York Stock Exchange, Inc. Relating to Amendments to

Rule 460.20

June 30, 1995.

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

(``Act''), 15 U.S.C. Sec. 78s(b)(1), notice is hereby given that on May

26, 1995, the New York Stock Exchange, Inc. (``NYSE'' of ``Exchange'')

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

proposed rule change as described in Items I, II, and III below, which

Items have been prepared by the self-regulatory organization. The

Commission is publishing this notice to solicit comments on the

proposed rule change from interested persons.

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

of the Proposed Rule Change

The proposed rule change consists of an amendment to NYSE Rule

460.20 that would delete the requirement for an associated specialist

of an approved person acting as an underwriter in a distribution of a

security in which the associated specialist is registered to ``give up

the book'' commencing with the ``cooling-off'' period specified in Rule

10b-6 under the Act \1\ until the approved person has completed its

participation in the distribution.

\1\ Rule 10b-6 is an anti-manipulation rule that, subject to

certain exceptions, prohibits persons engaged in a distribution of

securities from bidding for or purchasing, or inducing others to

purchase, such securities, any security of the same class and series

as those securities, or any right to purchase any such security

(``related securities'') until they have completed their

participation in a distribution. The provisions of Rule 10b-6 apply

to issuers, selling shareholders, underwriters, prospective

underwriters, dealers, brokers, and other persons who have agreed to

participate or are participating in the distribution, as defined in

Rule 10b-6(c)(5), and their ``affiliated purchasers,'' as defined in

Rule 10b-6(c)(6), including broker-dealer affiliates. The applicable

cooling off period is described in (xi) and (xii) of Rule 10b-

6(a)(4). See 17 CFR 240.10b-6.

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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 IV 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

Currently, when an affiliated entity is participating in a

distribution of a security in which the specialist organization is

registered, the specialist organization is required to withdraw from

the market commencing with the applicable cooling off period specified

in Rule 10b-6 under the Act until the affiliate has completed its

participation in the distribution.\2\ NYSE Rule 460.20 provides that

the specialist organization must ``give up the book'' (i.e., cease to

function as a market maker) to an unaffiliated specialist organization,

which then assumes all market making responsibilities under NYSE rules,

until the approved person (affiliate) has completed its participation

in the distribution, at which time the regular specialist organization

regains the ``book'' and resumes its market making activities.

\2\ See Rule 10b-6(a)(4)(xi), 17 CFR 240.10b-6(a)(4)(xi).

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In May 1993, the Commission approved amendments to Rule 10b-6, and

the adoption of new Rule 10b-6A, to permit NASD market makers to

continue to make markets in a stock while participating in an

underwriting of that stock, subject to several restrictions on their

level of market making activity. (These restrictions are popularly

referred to as ``passive market making.'')\3\ The Commission's passive

market making restrictions cannot be appropriately extended to Exchange

specialists, who are subject to an affirmative obligation to deal when

necessary to contribute to the maintenance of a fair and orderly

market. The Exchange is concerned, however, that failure to provide

exemptive relief from Rule 10b-6 for NYSE specialist units affiliated

with underwriting firms may have a detrimental effect on the Exchange's

ability to compete for issuer listings and on the willingness of large

firms to invest capital in the specialist business.

\3\ See Securities Exchange Act Release No. 32117 (Apr. 8,

1993), 58 FR 19528. In general, Rule 10b-6A permits ``passive market

making'' in connection with the distributions of certain securities

quoted on the Nasdaq Stock Market during the Rule 10b-6 cooling-off

period, the period when the rule's provisions otherwise would

prohibit such transactions. A passive market maker's bids and

purchases, however, are limited to the highest current independent

bid i.e., a bid of a market maker who is not participating in the

distribution and is not an affiliated purchaser of a participating

market maker. Furthermore, Rule 10b-6A contains certain eligibility

criteria, volume limitations on purchases, and notification and

disclosure requirements. See Rule 10b-6A(c)(2) (Level of Bid),

(c)(3) (Requirements to Lower the Bid), (c)(4) (Purchase

Limitation), (c)(5) (Limitation on Displayed Size), (c)(6)

(Identification of a Passive Market Making Bid), (c)(7)

(Notification and Reporting to the NASD). See 17 CFR 240.10b-

6A(c)(2) through (c)(6).

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The Exchange has filed a request with the Commission \4\ for

exemptive relief

[[Page 35760]]

from certain provisions of Rules 10b-6 and 10b-13 (``Petition for

Exemptive Relief'').\5\ The proposed rule change contained in this 19b-

4 filing would delete the requirement to ``give up the book'' in order

to make Rule 460.20 compatible with the Exchange's Petition for

Exemptive Relief.\6\ Rule 10b-6 currently requires an ``affiliated

purchaser'' (i.e., the specialist organization that is associated with

a broker-dealer participant in a distribution of a security in which

the specialist organization is registered) to withdraw from the market

during a certain period before and during the distribution.\7\ The

proposed relief would allow such a specialist organization to continue

to make a market in such stocks during such period, provided that it

has obtained an exemption from certain Exchange rules pursuant to

Exchange Rule 98 and agrees to certain monitoring requirements.

\4\ The Division of Market Regulation (``Division'') is

currently reviewing the Exchange's petition requesting regulatory

relief. At the conclusion of the Division's review, the Division

will make publicly available both the Exchange's petition and the

Division's response to the petition. Any exemptive relief granted

would supersede the relief previously granted by the Commission in

Letter regarding Application of Rules 10b-6 and 10b-13 to

Specialists Affiliated with NYSE Member Firms, (TP File No. 92-284)

(Sept. 15, 1992).

\5\ Rule 10b-13 under the Act, among other things, prohibits a

person making a tender offer or exchange offer for any equity

security from, directly or indirectly, purchasing or making any

arrangement to purchase any such security (or any security that is

immediately convertible or exchangeable for such security),

otherwise than pursuant to the offer, from the time the offer is

publicly announced until its expiration, including any extension

thereof. Rule 10b-13 also applies to the dealer-manager of a tender

offer because the dealer-manager acts as the agent of the bidder to

facilitate the bidder's objectives. See 17 CFR 240.10b-13.

The Exchange is seeking relief from Rule 10b-13 to allow

affiliated specialists to continue their market making functions in

their respective specialty securities in connection with certain

mergers or tender or exchange offers in which an affiliated broker-

dealer is participating.

\6\ The Exchange's proposal is to conform NYSE rules with the

exemption to be granted separately by the Division in response to

the Exchange's Petition for Exemptive Relief. Therefore, the

approval of the proposed rule change is contingent upon the Division

granting the requested exemptive relief.

\7\ Absent an exemption from or exception to Rule 10b-6,

Exchange specialists that are affiliated with a person participating

in a distribution of securities would be precluded from bidding for

or purchasing such securities, any security of the same class and

series as those securities, or any related securities.

Rule 98 affords exemptive relief for entities in a control

relationship with a specialist organization from restrictions in NYSE

Rules 104, 104.13, 105, 113.20, and 460.10 that would otherwise be

applicable to such entities' transactions in securities in which the

specialist organization is registered, or to business transactions with

the issuers of such securities.\8\ Pursuant to Rule 98 and the

implementing guidelines promulgated thereunder, the specialist

organization and the affiliated entity must be operated as separate and

distinct organizations, and ``Chinese Wall'' procedures must be

established that place substantial limits on access to, and

communication of, trading information, including positions and

strategies, between the two organizations. Rule 98 exemptive relief is

conditioned on the organizations' receiving prior written approval from

the Exchange, which conducts an annual review to ensure that all

conditions for the exemption are being met.

\8\ See NYSE Rule 104 (limiting a specialist's ability to effect

purchases and sales regarding affiliated entities); NYSE Rule 104.13

(requiring that certain transactions be effected only for investment

purposes); NYSE Rule 105 (limiting a specialist's interests in pools

and options); NYSE Rule 113.20 (prohibiting a specialist from

``popularizing'' any security in which it is registered); NYSE Rule

460.10 (prohibiting control relationships, business transactions,

and finder's fees between the issuer and the specialist).

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The Exchange believes that the restrictions on the flow of

information between the affiliated specialist and its approved person

contained in Exchange Rule 98, along with the additional safeguards

(such as transaction monitoring by the Exchange, the specialist and the

approved person) contained in its Petition for Exemptive Relief, make

it appropriate to amend Rule 460.20 to delete its requirement for such

specialist to ``give up the book'' to an unaffiliated specialist during

a distribution in which the approved person participates.

2. Statutory Basis

The proposed rule change is consistent with Section 6(b)(5) of the

Act in that it is designed to prevent fraudulent and manipulative acts

and practices and to perfect the mechanism of a free and open market.

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

The Exchange does not believe that the proposed rule change will

impose any inappropriate burden on competition.

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

Rule Change Received From Members, Participants, or Others

No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for

Commission Action

Within 35 days of the publication of this notice in the Federal

Register or within such other period (i) as the Commission may

designate up to 90 days of such date if it finds such longer period to

be appropriate and publishes its reasons for so finding or (ii) as to

which the self-regulatory organization consents, the Commission will:

(A) By order approve the proposed rule change, or

(B) Institute proceedings to determine whether the proposed rule

change should be disapproved.

IV. 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, 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 Section, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such filing will also be available

for inspection and copying at the principal office of the Exchange. All

submissions should refer to File No. SR-NYSE-95-21 and should be

submitted by July 26, 1995.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.

Jonathan G. Katz,

Secretary.

[FR Doc. 95-16932 Filed 7-10-95; 8:45 am]

BILLING CODE 8010-01-M