Unlisted Trading Privileges

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249

[Release No. 34-35323; File No. S7-4-95]

RIN 3235-AG28

Unlisted Trading Privileges

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rulemaking.

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

SUMMARY: The Securities and Exchange Commission (``Commission'') is

proposing new rules and amendments to existing rules concerning

unlisted trading privileges (``UTP'') in listed initial public

offerings (``IPOs''). The proposed rules would reduce the period that

exchanges have to wait before extending UTP to any listed IPO security,

from the third trading day, to the first trade reported by the listing

exchange to the Consolidated Tape. The proposed 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 the securities.

DATES: Comments should be submitted on or before March 13, 1995.

ADDRESSES: Interested persons should submit three copies of their

written data, views and opinions to Jonathan G. Katz, Secretary,

Securities and Exchange Commission, 450 Fifth Street, N.W., D.C. 20549,

and should refer to File No. S7-4-95. All submissions will be made

available for public inspection and copying at the Commission's Public

Reference Room, Room No. 1024, 450 Fifth Street, N.W., Washington, D.C.

20549.

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

Office of Self-Regulatory Oversight and Market Structure, Division of

Market Regulation, Securities and Exchange Commission, (Mail Stop 5-1),

450 5th Street, N.W., Washington D.C. 20549.

SUPPLEMENTARY INFORMATION:

I. Background

On October 22, 1994, the Unlisted Trading Privileges Act of 1994

(``UTP Act'') became effective. The UTP Act amends Section 12(f) of the

Securities Exchange Act of 1934 (``Exchange Act''). Section 12(f)

governs when a national securities exchange (``exchange'') may trade a

security that is not listed and registered on that exchange, i.e. by

extending unlisted trading privileges (``UTP'') to the security.

Pursuant to the UTP Act, the Commission today is proposing rules under

Section 12(f).

A. Section 12(f) Prior to the UTP Act

Prior to the UTP Act, Section 12(f) required exchanges to apply to

the Commission before extending UTP to a particular security.1 An

exchange application for the extension of UTP named the security (or

frequently, securities) for which the applicant exchange sought

Commission approval for UTP. The Commission was required to provide

interested parties with at least ten days notice of the application,

which the Commission accomplished by publishing each UTP application

for comment in the Federal Register at least ten days prior to

approving UTP for a security. In addition, prior to approving the UTP

application, the Commission had to find that the extension of UTP to

each security named, if listed and registered on another exchange

(``listed security'' on a ``listing exchange''), would be consistent

with the maintenance of fair and orderly markets and the protection of

investors. If so, the [[Page 7719]] Commission published an approval

order in the Federal Register.

\1\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).

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

Section 12(f) gave interested parties an opportunity to comment and

to participate in a hearing regarding the extension of UTP to any

security. Pursuant to Section 12(f), the Commission processed hundreds

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

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

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

over ten years.

As a consequence of the application, publication, and approval

process, applicant exchanges had to wait several weeks before competing

with listing exchanges that already were trading the securities.

Moreover, while exchanges were required to await Commission approval

before competing with the listing exchange, dealers trading off an

exchange could trade any security immediately upon its effective

registration with the Commission.2

\2\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. Over-the-counter (``OTC'')

dealers are not subject to the Section 12(a) listing requirement

because they do not transact business on an exchange.

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

As noted above, Section 12(f) also 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 relate to UTP. Accordingly, the

staff reviewed each application to ensure, among other things, 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 and over 99% of the applications were approved.

In response to the Concept Release that initiated the Market 2000

Study,3 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.4 Shortly after

publication of the Concept Release, the Telecommunications and Finance

Subcommittee of the House Committee on Energy and Commerce

(``Subcommittee'') began working on draft legislation to amend Section

12(f).5 These efforts, along with the efforts and support of the

various self-regulatory organizations, ultimately led to the UTP Act.

\3\See Securities Exchange Act Release No. 30920 (July 14,

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

\4\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).

\5\The Subcommittee held a hearing on the UTP Act on June 22,

1994, at which a Division representative and representatives of

several self-regulatory organizations appeared and submitted written

comments on the legislation. 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'').

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

B. Statutory Changes Under Amended Section 12(f)

The UTP Act, among other matters, removes 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 amendment generally allows an

exchange to extend UTP to any security when it becomes listed and

registered on another exchange or included in Nasdaq,6 subject to

certain limitations.

\6\Section 12(f), as amended, also removes the application and

approval requirements for exchange UTP in securities that are

registered under 12(g) of the Exchange Act (generally, ``OTC

securities''). Exchange extensions of UTP to OTC securities, and

specifically to Nasdaq/National Market securities, are subject to

limitations provided in Section 12(f) and provided in an on-going

pilot program. See Securities Exchange Act Release No. 34371 (July

13, 1994), 59 FR 37103. While the UTP Act removed the relevant

application procedures for Nasdaq stocks, UTP in OTC securities

continues to be subject to the on-going pilot program and the

limitations it provides. For that reason, the Commission will

consider issues involved in UTP extensions to OTC securities as the

Commission continues its on-going review of the operation of the

pilot program.

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

First, the UTP Act contains special provisions for the extension of

UTP to any listed security that is the subject of an initial public

offering (``listed IPO security'').7 The amendment includes a

temporary provision that requires exchanges to wait until the third day

of trading in any listed IPO security on the listing exchange before

they may allow their members to trade the security pursuant to UTP.

This provision also requires the Commission to prescribe by rule or

regulation, within 180 days of the enactment of the UTP Act (or before

April 21, 1995), the mandatory delay (or, ``duration of the

interval''), if any, that should apply to UTP extensions to listed IPO

securities.8

\7\Section 12(f)(1)(B), read jointly with Section

12(f)(1)(A)(ii), 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).

\8\Specifically, amended Section 12(f)(1)(C) provides:

Not later than 180 days after the date of enactment of the

Unlisted Trading Privileges Act of 1994, the Commission shall

prescribe, by rule or regulation, the duration of the interval

referred to in this subparagraph (B), if any, as the Commission

determines to be necessary or appropriate for the maintenance of

fair and orderly markets, the protection of investors, or otherwise

in furtherance of the purposes of this title. Until the earlier of

the effective date of such rule or regulation, or 240 days after

such date of enactment, such interval shall begin 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

and end at the conclusion of the next trading day.

In short, this provision requires exchanges (until the earlier

of the effective date of a Commission rule, or 240 days after the

enactment of the UTP Act) to wait until the third trading day in a

listed IPO security before trading the security pursuant to UTP.

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

Second, Section 12(f)(1)(D) provides the Commission with rulemaking

authority to prescribe, by rule or regulation, additional procedures or

requirements for extending UTP to any security.

Third, new Section 12(f)(2) 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 in the security. Pursuant

to Section 12(f)(2)(A)(ii), an exchange seeking to reinstate its

ability to extend UTP to the security, following a Commission

suspension, must file an application with the Commission. The exchange

must apply 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 [[Page 7720]] Exchange Act. New

Section 12(f)(2) requires public notice and Commission review of

applications to reinstate UTP that has been suspended summarily by the

Commission. The procedures and Commission standard of review for

approval of a reinstatement application are substantially similar to

the application and review process that previously preceded an

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

12(f) and the rules thereunder.

These amendments to Section 12(f) reduce the waiting period that

previously delayed exchange extensions of UTP to securities listed on

other exchanges, or to certain securities traded OTC. In addition, the

amendments direct the Commission to prescribe rules for UTP in listed

IPO securities, and otherwise empowers the Commission to establish

rules for UTP generally as the Commission deems appropriate in

furtherance of the purposes of the Exchange Act.

II. Proposed Rules and Amendments to Existing Rules Pursuant to Amended

Section 12(f)

As described in more detail below, the Commission is proposing two

new rules and amendments to and rescissions of existing rules.

Specifically, the Commission is proposing new Rule 12f-2 concerning UTP

in listed IPO securities, and is soliciting comment on alternatives to

the proposed rule that would be consistent with the UTP Act. The

Commission also is proposing and soliciting comment on new Rule 12f-5

regarding exchange rules to ensure the maintenance of fair and orderly

markets and the protection of investors for all securities traded

pursuant to UTP. To provide consistency between the amendments to

Section 12(f) and the rules thereunder, the Commission also is

proposing to amend existing Rules 12f-1 and 12f-3 and to rescind

existing Rules 12f-2 and 12f-6. Finally, the Commission is soliciting

comment on whether other Commission action concerning intermarket

linkages, as they affect UTP in listed securities, is necessary to

facilitate the operation of the UTP Act.

A. Listed Securities That Are the Subject of an Initial Public Offering

(Proposed Rule 12f-2)

As discussed above, the UTP Act generally allows exchanges to

extend UTP to securities when they become listed and registered on

another exchange or included in Nasdaq, except in the case of listed

IPO securities. In this regard, the UTP Act establishes a temporary

provision that requires exchanges to wait until the third day of

trading in the security on the listing exchange before extending UTP to

the security. Before April 21, 1995, the Commission must prescribe by

rule or regulation the appropriate waiting period, if any, that would

apply before an exchange may extend UTP to any listed IPO security

following the commencement of its IPO.

The Commission is proposing new Rule 12f-2 under the Exchange Act

to establish the waiting period that would govern the extension of UTP

to a security that is the subject of an IPO. Proposed Rule 12f-2 would

provide that an exchange may extend UTP to a listed IPO security when

at least one transaction in the subject security has been effected on

the listing exchange and the transaction has been reported pursuant to

an effective transaction reporting plan as defined in Rule 11Aa3-1

under the Exchange Act.9 The proposed rule, therefore, would

shorten 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), to the

time that it takes to effect and report the initial trade in the

security on a listing exchange.

\9\17 CFR 240.11Aa3-1 (1991).

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

Rule 12f-2 would define the term ``subject security'' to mean a

security that is the subject of an initial public offering, as that

term is defined in Section 12(f)(1)(G) of the Exchange Act. To ensure

that the proposed rule would not provide any means to circumvent other

Section 12(f) objectives and requirements, the proposed rule also would

provide that the extension of UTP pursuant to the rule would be subject

to all the provisions set forth in Section 12(f) of the Exchange Act,

as amended, and any rule or regulation promulgated thereunder, or which

may be promulgated thereunder while the extension is in effect.

The Commission preliminarily believes that it is appropriate to

minimize regulatory restraints on competition for trading listed IPO

securities. Shortening the interval for UTP in listed IPO securities

should enhance the ability of exchanges to compete for order flow in

the subject securities, especially in light of the fact that OTC

dealers may trade IPO securities immediately upon effective

registration with the Commission. Accordingly, in the absence of a

compelling reason to impose a restriction that would inhibit

competition among exchanges, the Commission initially believes that

competing exchanges should be able to extend UTP to a listed IPO

security after the first trade in the security on the listing exchange

has been effected and reported.

The Commission is proposing a one-trade interval before exchanges

may extend UTP to a listed IPO security because the Commission

preliminarily believes that the first transaction in an IPO, as

disseminated on the consolidated tape, conveys essential information to

the public concerning the pre-evaluated offering price of the security.

In addition, the timing of the initial trade and commencement of

trading in a new issue entail significant coordination involving the

issuer, the listing exchange, and the underwriters of the public

offering of the security. If competing exchanges were to allow their

members to trade a listed IPO security before it initially trades on

the listing exchange, it may be difficult to ensure that all the

preparation for the IPO had been completed before public trading in the

security commenced.

During the legislative process preceding the UTP Act, conflicting

views arose among interested parties concerning the appropriate waiting

period, if any, for UTP in listed IPO securities. At the UTP Hearing,

testimony and evidence were presented to show the negative impact that

a mandatory waiting period for UTP has on competition.10 At the

same time, however, one interested party asserted that listed IPO

securities should trade in a central location for a ``short'' period of

time to help ensure market efficiency immediately following an IPO, and

that immediate UTP in listed IPO securities could increase the cost of

raising capital for issuers.11

\10\See prepared testimony of Nicholas A. Giordano, President

and Chief Executive Officer, Philadelphia Stock Exchange, UTP

Hearing, supra note 5.

\11\See prepared testimony of Edward A. Kwalwasser, Executive

Vice President, Regulation, New York Stock Exchange, UTP Hearing,

id.

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

In a report to Congress on the UTP Act, the House Committee on

Energy and Commerce provided guidance concerning specific matters it

considered relevant to the present Commission rulemaking and resolution

of the above concerns:

The Committee expects that, in undertaking the IPO rulemaking

authorized under the bill, the Commission will seek comments on the

benefits associated with streamlining the regulatory process and

enhancing competitive opportunities among market centers with

respect to UTP in IPOs, and the identification of the negative

effects if any that granting immediate UTP might [[Page 7721]] have

on the distribution of these securities. The Committee further

expects the Commission to consider the experience of the third

market trading in listed IPOs in the course of its examination of

these questions. Finally, the Committee expects the markets to

cooperate in providing the Commission with data regarding the nature

and effect of trading activity (including, for example, any

volatility effects on the security) in connection with IPO listings

in order to enable the Commission to determine whether the benefits

of confining early trading in IPOs to one marketplace are outweighed

by the benefits of removing regulatory delays that inhibit

competition among market.12

\12\H.R. Rep. No. 626, 103d Cong., 2d Sess. (1994).

The Commission seeks comment on each of these matters. The

Commission believes that 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,

would be particularly useful in its review.

The Commission also seeks comment on the one-trade waiting period

as proposed. To the extent that commenters believe a waiting period is

appropriate, the Commission requests that they provide data to

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

Commenters also may wish to provide an analysis of the effects of the

current two-day waiting period. Finally, the Commission would be

interested in receiving alternative proposed rules from commenters who

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

appropriate.

B. Exchange Rules for Securities to Which Unlisted Trading Privileges

are Extended (Proposed Rule 12f-5)

Section 12(f)(1)(D), 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 is proposing 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.

This rule is intended to preserve a benefit of Commission review of

UTP applications 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. In general, applicant

exchanges had listing rules in place that provided for transactions for

most product classes of securities. Occasionally, however, an exchange

would submit a UTP application to the Commission to trade a new or

unusual product class of securities that had been approved for trading

on the listing exchange, but had not been approved for trading on the

applicant exchange.13

\13\Prior to the UTP Act, exchanges were not permitted to apply

to the Commission for UTP in any security for which the applicant

exchange had not adopted listing standards and proper trading rules,

pursuant to Section 19(b) of the Exchange Act and Rule 19b-4

thereunder. Proposed Rule 12f-5 would make explicit the obligation

to have the necessary rules in place before extending UTP to a

specific type of security.

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

For example, the Commission would approve a proposed rule change to

the Commission, pursuant to Section 19(b) of the Exchange Act, by an

exchange to list and trade a new type of security. The proposed rule

change established exchange rules to ensure the maintenance of fair and

orderly markets in the securities and sufficient mechanisms for

regulatory oversight of the named securities to provide for the

protection of investors. A regional stock exchange occasionally filed a

UTP application for the security without submitting a similar proposed

rule change pursuant to Section 19(b) of the Exchange Act. The

Commission's review procedures for UTP applications identified those

instances so that necessary rules would be in place on the applicant

exchange in order to ensure the maintenance of fair and orderly markets

and the protection of investors.

The Commission is proposing Rule 12f-5 to require exchanges to

ensure that these rules and oversight mechanisms exist on their

exchanges for the relevant securities before extending UTP to the

securities. The proposed rule reconfirms to exchanges their obligation

to evaluate their extensions of UTP before allowing their members to

trade the securities.

In soliciting comment on the proposed rule, the Commission is

particularly interested in the views of market participants and other

commenters concerning the need for the rule and whether it would, in

practice, help ensure that an exchange has all the necessary rules in

place to provide for fair and orderly markets in all securities to

which the exchange extends UTP.

C. Proposed Amendments to Existing Rules 12f-1 and 12f-3, and Proposed

Rescission of Existing 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

is proposing to amend or rescind these rules to reflect statutory

changes, and is soliciting comment on whether these proposed changes

are appropriate.

First, the Commission is proposing to amend Rule 12f-1,14 to

limit its operation to an exchange's application to reinstate UTP after

a Commission suspension. Section 12(f), as amended, requires an

exchange to apply to the Commission for UTP if the Commission has

suspended the exchange's extension of UTP to the security. The proposed

amendment would 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.

\14\17 CFR 240.12f-1 (1991).

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

Second, the Commission is proposing to rescind existing Rule 12f-2

and remove Form 27 referred to in the rule.15 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'' immaterially for those purposes. The rule and form provide

an exemption from reapplication for UTP in these cases. The Commission

is proposing to rescind the rule because the application procedures,

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

\15\17 CFR 240.12f-2 (1991).

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

Third, the Commission is proposing to rescind the last sentence of

paragraph (b) of Rule 12f-3.16 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 includes

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. Finally, the

Rule requires the exchange, upon suspension or

[[Page 7722]] termination, promptly to file Form 28 with the

Commission.

\16\17 CFR 240.12f-3 (1991).

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

The Commission believes this final requirement no longer is

necessary because exchanges are no longer required to apply to the

Commission to extend UTP to a security. Thus, notifying the Commission

of termination or suspension of UTP serves no purpose. The Commission,

therefore, is proposing to rescind that last requirement from the Rule

concerning Form 28, and to remove Form 28, in order to conform further

with efforts to streamline the regulatory process concerning UTP.

Finally, the Commission is proposing to rescind Rule 12f-6.17

This rule exempts a merged exchange from the UTP application process in

certain circumstances. The exemption no longer is necessary because the

waiting period that restrained exchanges from extending UTP to most

securities has been eliminated by the UTP Act.

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

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

The Commission is soliciting comment on each of these proposed

Commission rule changes. The Commission is interested in comments on

whether the proposed amendments and rescissions accomplish the

Commission's goals with respect to the amendments or rescissions. The

Commission also is interested in receiving comments concerning the

continued necessity of other provisions of the rules, given the recent

amendment to Section 12(f) of the Exchange Act.

D. Solicitation of Comment on Structural Implications of Immediate UTP

The Commission is seeking comment on whether any Commission action

is necessary under Section 12(f), in order to carry out the

congressional objectives of linked markets as required by Section

11A(a)(1)(D),18 to make changes to the consolidated quotation,

trade reporting, and routing of customer and principal interest in

securities that are traded pursuant to UTP, now that exchanges and

linking facilities will have less time to prepare for multiple exchange

market trading in the securities. The Commission is particularly

interested in comments concerning any existing procedural delays that

should be corrected by Commission action in order to ensure that the

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

\18\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.

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

III. Initial Regulatory Flexibility Analysis

The Commission has prepared an Initial Regulatory Flexibility

Analysis (``IRFA'') in accordance with 5 U.S.C. Sec. 603 regarding the

proposed rules. The following summarizes the conclusions of the IRFA.

The IRFA uses certain definitions of ``small businesses'' adopted

by the Commission for purposes of the Regulatory Flexibility Act

(``RFA''). As described in Section II, above, the Commission is

proposing rules and changes to existing rules under Section 12(f) to

comply with the UTP Act directives and to further the objectives of

this recent amendment. Proposed Rule 12f-2 would require exchanges to

wait, before extending UTP to such a security, until the listing

exchange effects and reports the first transaction in the security.

Proposed Rule 12f-2 primarily has an impact on competitive

initiatives of the self-regulatory organizations, which are not small

businesses for the purposes of the RFA.19 The proposed rules also

may have some economic effect on some businesses that may be, from time

to time, small businesses for the purposes of the RFA. Specifically,

the proposed rule may affect the order-routing choices available to

broker-dealer firms and would designate the moment at which regional

exchange specialist firms may compete for order flow in any listed IPO

security. Some broker-dealers and some regional specialist firms may be

small businesses. The Commission believes, however, that the economic

impact of the rule may not be ``significant'' and the number of ``small

businesses'' that would be affected by the rule may not be

``substantial,'' as contemplated by the RFA. In this regard, the

Commission notes, among other things, that listed IPO securities

comprise only a fraction of the overall number of securities available

for order-routing by broker-dealers and for trading by regional

specialist firms, and only a small number of those firms are ``small

businesses.'' Furthermore, neither small nor large businesses would be

subject to reporting, recordkeeping, or other compliance requirements

under the proposal.

\19\The relevant rule under the Act, 17 CFR 240.0-10, provides

that, for the purposes of the RFA, ``small business'' (when

referring to a broker or dealer) shall mean a broker or dealer that

had total capital of less than $500,000 on the date in the prior

fiscal year as of which its audited financial statements were

prepared, or if not required to be prepared, on the last business

day of the preceding fiscal year. Also, ``small business'' does not

include any entity that is affiliated with another entity that is

not a small business.

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

The other proposals would restate existing standards for exchange

extensions of UTP, and would amend existing rules under Section 12(f)

to conform to the UTP Act and, therefore, should have no economic

impact for the purposes of the RFA.

A copy of the Initial Regulatory Flexibility Analysis may be

obtained by contacting Betsy Prout, Attorney, Office of Market

Supervision, Division of Market Regulation, Securities and Exchange

Commission, Washington, D.C. 20549, (202) 942-0170.

IV. Effects on Competition

Section 23(a)(2) of the Exchange Act20 requires the

Commission, in adopting rules under the Exchange Act, to consider any

anti-competitive effects of the rules and to balance these effects

against the regulatory benefits gained in furthering the purposes of

the Act. As discussed in more detail above, the extension of unlisted

trading privileges allows exchanges to compete with the listing

exchange, other exchanges, and with dealers for order flow in the

relevant securities. The rules promulgated under Section 12(f),

therefore, may directly affect competition among market centers and

their members. In addition, firms sending orders to the market centers

for execution may also be affected by limitations that the proposed

rules may place on their order-routing practices. The Commission is

soliciting comment on the effect the proposed rules, and the proposed

changes to existing rules, may have on exchanges, associations, their

members, and order-routing firms.

\20\15 U.S.C. 78w(a)(2).

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

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 proposes to

amend Part 240 of Chapter II of Title 17 of the Code of Federal

Regulations to read 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-

[[Page 7723]] 23, 80a-29, 80a-37, 80b-3, 80b-4, and 80b-11, unless

otherwise noted.

* * * * *

2. By amending Sec. 240.12f-1 by revising the section heading and

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

(a)(6) as (a)6) and (a)(7), adding paragraph (a)(5), and revising newly

designated (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). 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. By revising Sec. 240.12f-2 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 when at least one

transaction in the subject security has been effected on the national

securities exchange upon which the security is listed and the

transaction has been reported pursuant to an effective transaction

reporting plan as defined in Sec. 240.11Aa3-1.

(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) Definition. For purposes of this section, 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) of the Act (15

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

4. By amending Sec. 240.12f-3 by revising paragraph (b) to read as

follows:

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

privileges.

(a) * * *

(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. By adding Sec. 240.12f-5, 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.

Sec. 240.12f-6 [Removed]

6. By removing and reserving Sec. 240.12f-6.

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.

Sec. 249.27 and 249.28 [Removed]

8. By removing Sec. 249.27 and Sec. 249.28.

By the Commission.

Dated: February 2, 1995.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95-3175 Filed 2-8-95; 8:45 am]

BILLING CODE 8010-01-P