Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the New York Stock Exchange, Inc., Relating to Amendments to the Exchange's Allocation Policy and Procedures

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38669; File No. SR-NYSE-97-12]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

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

the Exchange's Allocation Policy and Procedures

May 22, 1997.

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

(``Act''),\1\ notice is hereby given that on April 16, 1997, the New

York Stock Exchange, Inc. (``NYSE'' or ``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.

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

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

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

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

of the Proposed Rule Change

The Exchange, pursuant to Rule 19b-4 of the Act, submits a proposed

rule change amending the NYSE's Allocation Policy and Procedures. The

text of the proposed rule change is as follows [new text is italicized;

deleted text is bracketed]

New York Stock Exchange, Inc., Allocation Policy and Procedures

I. Purpose

The current allocation process was established in 1976. [In

September 1987] T[t]he Quality of Markets Committee of the NYSE Board

of Directors has periodically appointed [a] special Allocation System

Review Committees (ARCs) to conduct [a] comprehensive reviews of the

allocation process. [The ARC's recommendations were implemented once

approved by the SEC in May 1990. A second and third committee were

appointed to review the policy and to make revisions where

appropriate.] The objective of each review was to preserve the

integrity of the original system and build upon its strengths, in order

to ensure that the allocation process:

(1) Is based on fairness and consistency;

(2) Maximizes the professionalism, expertise and objectivity of

committee members;

(3) Minimizes potential conflicts of interest;

(4) Rewards performance and provides an incentive for performance

improvement;

(5) Spreads reward and risk throughout the specialist system, in

order to contribute to its strength and continued viability;

(6) Provides the best possible match between specialist unit and

stock, and provides an opportunity for input from the listing company

for that purpose;

(7) Provides for education of all participants in the allocation

process; and

(8) Ensures the strength and autonomy of the Allocation Committee

in applying policy.

[Both committees concluded that, since its inception in 1976, the

allocation process has worked very well.] Because specialists can

expand their business only by increasing the number of their specialty

stocks, allocation criteria and procedures and the performance

evaluations on which they rely focus critical attention on customer

service and ongoing improvement in the level of specialists'

performance. The result is higher quality markets, benefiting the

investing public, listed companies and member organizations.

[The committee recognizes that one key to continued success is

ongoing education to ensure understanding of and commitment to the

allocation process. The effectiveness of the allocation system, and the

full confidence of the broad range of Exchange constituents in that

process, also depend on specialist performance data and can be

sustained only to the extent that the performance evaluation process

provides the highest quality data to the deliberative process. The

Allocation System Review Committee reviewed and developed

recommendations regarding the SPEQ

[[Page 29171]]

process in 1991. It is essential that the Exchange continue to

periodically review and seek to improve the specialist performance

evaluation process as well as the allocation system.]

This document presents the policy of the Exchange with respect to

the allocation of equity securities: (1) When a common stock is to be

initially listed on the Exchange: (2) when a security is to be

reallocated as a result of disciplinary or other proceedings under

Exchange Rules 103A, 475 and 476; or (3) when a specialist unit

voluntarily surrenders its registration in a security as a result of

possible disciplinary or performance improvement action. The purpose of

the allocation system is: (1) To ensure that securities are allocated

in an equitable and fair manner and that all specialist units have a

fair opportunity for allocations based on established criteria and

procedures; (2) to provide an incentive for ongoing enhancement of

performance by specialist units; (3) to provide the best possible match

between specialist unit and security and (4) to contribute to the

strength of the specialist system.

II. Allocation Committee

Responsibility

The Allocation Committee has sole responsibility for the allocation

of securities to specialist units under this policy pursuant to

authority delegated by the Board of Directors, and is overseen by the

Quality of Markets Committee of the Board (``QOMC''). The Allocation

Committee renders decisions based on the allocation criteria specified

in this policy (see Section IV). Allocation decisions are published for

Exchange Floor members and are communicated to listing companies by

Exchange staff. The Allocation Committee gives periodic reports to the

QOMC.

Composition

The composition of the Allocation Committee is intended to maximize

expertise and objectivity in the allocation process.

To this end, the committee is comprised of 7 Floor brokers,

including 3 broker Governors (1 of whom may be an independent/two

dollar broker), 4 other Floor brokers from the Allocation Panel (1 of

whom must be an independent/two dollar broker) and 2 allied members

from the Market Performance Committee or the panel. For options

allocations, only 1 Governor shall sit on the committee. Commission

brokers contribute their experience in conducting business with

specialists, as well as broad-based knowledge of units on the Floor.

Therefore, they have the largest representation on the committee.

Allied members often provide a perspective on the trading

characteristics of new listings and experience as an off-Floor customer

of the specialists. Including Governors on the committee adds

comprehensive knowledge of specialist performance as well as a broad

perspective and expertise relating to the Exchange.

The 9-member committee is chosen from an Allocation Panel (See

Section III), which includes Floor brokers, allied members, Governors,

and Senior Floor Officials. Selection of committee members within the

appropriate member categories is random as to individuals, but an

effort is made to appoint individuals who have not yet served on the

committee before reappointing past committee members. The Exchange also

tries to provide a balanced Floor geographical mix--3 Main Room, 2

Garage, 1 Blue Room, 1 Expanded Blue Room. Efforts are also made to

include no more than one broker or allied member whose firm is

affiliated with a specialist unit.

Term of Service

Committee members serve 4-month terms, and every two months four or

five members are rotated, thereby fostering continuity and objectivity

in the decision-making process.

A committee member whose term has expired is ineligible for

consecutive reappointment, but after two months is eligible for further

service if again randomly selected.

Quorum Requirement

A full Allocation Committee affords optimal participation, and

every effort is made to have 9 members for each allocation decision.

Whenever standing committee members are unable to serve for a

particular meeting or must abstain from deliberations regarding

particular stocks, randomly selected panel members may substitute to

complete a 9-member committee. A quorum requirement is established so

that allocation decisions can otherwise be made, provided there are 7

members including 6 Floor brokers, at least two of whom are Governors,

and 1 allied member. For options allocations, a quorum shall include

one Governor. In the event that any of the broker Governors on the

standing committee are not able to attend an Allocation Committee

meeting, or are unable to participate in the allocation of a particular

stock, the Exchange first seeks to substitute for such Governor(s) with

another broker Governor on the panel. If no such Governor is available,

a Senior Floor Official broker on the panel who is not currently a

standing member of the Allocation Committee may serve as a substitute

for a Governor for the purpose of meeting the Governor quorum

requirement. If no Senior Floor Official broker on the panel is

available, any Senior Floor Official broker on the standing committee

may substitute for the absent Governor(s) for the purpose of meeting

the Governor quorum requirement. The Exchange seeks as a substitute a

Senior Floor Official who is not currently a standing member of the

Allocation Committee in order to maximize the level of seniority of the

standing committee. In the event no current Floor broker or allied

panel member is available, a former Allocation Committee chairman may

substitute, but may not substitute for a Governor for the purpose of

meeting the Governor quorum requirement, unless such former Allocation

Committee chairman is a Senior Floor Official on the panel. A former

chairman brings unique experience and expertise to the process.

Chairman

The Allocation Committee chairman is selected from among the Floor

brokers on the standing committee whose firms conduct business with the

public, as well as Governors. (Governors and brokers whose firms are

affiliated with a specialist unit are ineligible to serve as chairman.)

All candidates for chairman must have experience on the Allocation

Committee to qualify. The chairman is elected by current Allocation

Committee members, including outgoing members, and members of the

committee who will be serving at the time of the chairman's

appointment.

While allocation decisions are made by the committee as a whole,

the chairman's role calls for leadership in conducting meetings in

accordance with policy and procedure, emphasizing the importance of

preserving the integrity of the allocation process, the committee's

responsibility to serve the best interests of the public and the

Exchange, and the need to suspend individual interest and avoid

possible conflicts of interest.

In order to foster a complete understanding of and ensure

consistency of the allocation process, each new chairman is elected two

months prior to the commencement of his or her term as chairman. The

eligible members will thus include the brokers with 4 to 6 months

remaining in their committee terms, plus the brokers selected for

rotation onto the committee two months hence. The chairman will

[[Page 29172]]

serve until the end of his or her committee term (i.e., two to six

months).

If elected prior to the commencement of his or her committee term

the chairman-elect will attend meetings as an observer and discuss the

allocations with the current chairman. If already serving on the

committee, the chairman-elect will likewise discuss the meetings with

the current chairman. Orientation of each new chairman will also be

provided by former chairmen of the Allocation Committee and by the

Quality of Markets Committee. A standardized agenda for education of

new chairmen will be made available.

Committee Member Abstentions

In making allocation decisions pursuant to this policy, it is the

responsibility of each Allocation Committee member to adhere strictly

to the approved allocation criteria. A committee member who feels he or

she cannot abide by the criteria due to potential conflict of interest

(e.g., allocation involving a relative, a financial interest, relief

specialists, etc.) should disqualify himself or herself from the

deliberations.

If an Allocation Committee member has an investment banking

relationship (defined as manager or co-manager of an underwriting

group) or is in an advisory fee relationship with an about-to-be listed

company, that committee member must abstain from allocation

deliberations with respect to that particular stock. A broker or allied

member whose firm is affiliated with a specialist unit must abstain

from deliberations regarding allocation of a stock for which that unit

has applied.

Committee Disclosure

The names of the standing committee members will be kept

confidential. Allocation Committee books will not be delivered to

committee members on the trading Floor. Committee members will pick up

their books at the Committee Support Services area.

Committee Information

Allocation policy provides the application form and related written

correspondence as the means by which interested parties transmit to the

Allocation Committee information pertinent to allocations. Exchange

members and investment bankers may not initiate contact with Allocation

Committee members pertaining to an upcoming allocation. Allocation

Committee members will enforce this prohibition. Allocation decisions

are made by the committee as a whole, based on the published allocation

criteria. Under all circumstances the confidentiality of the Allocation

Committee's deliberations is paramount.

Observation of Committee Meetings

All incoming committee members are expected to observe as many

committee meetings as possible prior to the commencement of their

committee terms.

III. Allocation Panel

Composition

The composition of the Allocation Panel reflects the committee

structure and includes 28 Floor brokers, [8] 12 allied members

(including the 4 allied members serving on the Market Performance

Committee), the 8 Floor broker Governors who are part of the panel by

virtue of their appointment as Governors, [the 4 allied members serving

on the Market Performance Committee,] and a minimum of 5 Senior Floor

Official brokers that have been appointed to the panel.

Selection

Panel members are nominated by the membership. A selection

committee, appointed by the Floor Directors, reviews the nominations

and recommends panel appointments to the Floor Directors, who finalize

recommendations for presentation to the QOMC. The selection committee

operates in accordance with such guidelines as are established and made

known to the membership from time to time. The selection committee and,

in turn, the Floor Directors seek to develop a representative panel

that maximizes professional expertise and broad exposure on the Floor

by including members from various types of firms and from diverse

locations on the Floor. To the maximum extent possible, the Floor

members on the panel are expected to be a core group of experienced,

senior professionals, such as former Allocation Committee chairmen,

Senior Floor Officials, and current and former Floor Governors.

In the case of allied members, the member organization is appointed

to the panel. The individual representative is then selected by the

organization. A Floor Director gives guidance to the organization in

selecting an appropriate representative.

Eligibility

Professional expertise and experience are essential to the

excellence of the allocation system. Therefore, a Floor member must

have a minimum of 5 years experience as a member on the Floor in order

to be eligible for appointment to the Allocation Panel. In the case of

allied members, the member organization shall select a representative

with at least 51 years of trading experience in listed equities and a

senior position on the trading desk. Each allied member may designate

one alternate who meets the Panel qualifications, subject to approval

by the Floor Directors.

Term of Service

Panel members are appointed to serve a one-year term. They may

serve a maximum of 6 consecutive one year terms. Once a panel member

has served a total of two 4-month committee terms, the member is

rotated off the panel at the next annual meeting of the Exchange. The

panel members serve staggered terms so that every 2 months 4 or 5

members rotate from the committee. Once rotated off, the member is

ineligible for appointment to the panel for one year. Governors are not

subject to the two committee term restriction, but remain on the panel

for as long as they are Governors. Senior Floor Officials are subject

to annual reappointment, but are not subject to the two committee term

restriction and are not limited to a maximum of six consecutive one

year terms.

IV. Allocation Criteria

Allocation decisions under this policy are based on the

professional judgment of the Allocation Committee in applying specified

criteria.

In order to ensure that a single criterion is not afforded too

great a weight in any allocation decision, and in order to ensure

consistency in the allocation process, the Allocation Committee will

base its decisions on the following:

(i) Results of the Specialist Performance Evaluation Questionnaire

(``SPEQ'') (to be given [no more than] 25% weight);

(ii) Objective performance measures; and

(iii) The committee's expert professional judgment in considering

the SPEQ, objective measures of performance, and other criteria as

enumerated below. Set forth below are the criteria, followed by an

explanation of each:

--SPEQ

--Objective performance measures

--Professional judgment

--Listing company input

--Allocations received

--Capital deficiency, disciplinary actions, justifiable complaints

--Foreign listing considerations

[[Page 29173]]

Specialist Performance Evaluation Questionnaire

The SPEQ includes several facets. Professional judgment determines

the relative weight of the various aspects listed below:

(a) Ratings in the current quarter, particularly relative to other

applicants;

(b) Improved ratings;

(c) Ratings over time (e.g., 4 quarters), to consider possible

aberrations in ratings;

(d) The strengths of the individual specialist designated by the

unit to handle the stock, relative to the strengths of the specialists

designated by other applicants, as indicated by SPEQ comments that

frequently refer to performance of individuals;

(e) Ratings and written comments on specific specialist functions

in relation to particular characteristics of the new listing; and

(f) Written SPEQ comments as to the performance of the entire unit.

Objective Measures of Performance

The objective performance measures include TTV, stabilization,

capital utilization, near neighbor analysis and such other measures as

may be adopted. Objective measures in Rule 103A include:

(a) Timeliness of regular openings;

(b) Promptness in seeking Floor official approval of a non-

regulatory delayed opening;

(c) Timeliness of DOT turnaround; and

(d) Response to administrative messages.

The objective measures are reported to the Allocation Committee as

a ``pass'' or ``fail'' as specified in Rule 103A.

Specialist dealer performance is measured in terms of participation

(TTV); [and] stabilization; capital utilization, which is the degree to

which the specialist unit uses its own capital in relation to the total

dollar value of training in the unit's stocks; and near neighbor

analysis, which is a measure of specialist performance and market

quality comparing performance in a stock to performance of stocks hat

have similar market characteristics. The Allocation Committee receives

the most recent data available and historical data with respect to each

applicant's performance in relation to other units evaluated during the

same time period.

The Allocation Committee is informed if an applicant has been

subject to a performance improvement action in the most recent four

quarters.

Although stocks are allocated to units, as noted above, the

committee may give consideration to the person who will serve as the

specialist. Therefore, it is important that the application accurately

represent the unit's plans as to the individual who will handle the

stock.

Professional Judgment

The expert, professional judgment of the members of the Allocation

Committee is crucial to the allocation decision-making process.

Decisions are based on professional judgment, rather than mathematical

calculation. Each committee member evaluates the data and determines

how the specified criteria should be applied in each allocation, based

on his or her expertise and experience from the viewpoint of his or her

role in the Exchange community. In addition to the SPEQ and the

objective performance measures described above, the committee also

considers listing company input, allocations received, capital and

disciplinary and cautionary data, as detailed below.

Listing Company Input

Listing on the New York Stock Exchange is a significant development

for a company, and the assignment of a specialist through the

allocation process is an important step. The Exchange's Allocation

Policy is intended to provide listing companies with a choice of

alternatives as to how their specialist unit may be selected. The

listing company may choose to have its specialist unit selected by the

Allocation Committee, in accordance with the criteria specified in the

Allocation Policy, and the exercise of the Committee's expert

professional judgment. Alternatively, the listing company may choose to

become more directly involved in the selection process. In that case,

the company may request that the Allocation Committee select specialist

units that would be appropriate to trade the company's stock, with the

company then making the final selection from among the group of units

as chosen by the Allocation Committee. Such a group shall consist of

three, four, or five units, selected by the Committee as demonstrably

deemed to be the most qualified to receive such allocation from among

the units that apply, based upon the criteria set forth in this policy.

These procedures shall apply to the allocation of a newly-listing

company, as well as the reallocation of an already listed company.

Specialist Unit Selected by Allocation Committee

If the listing company so chooses, the Allocation Committee shall

select the specialist unit to be allocated the company's stock based on

the Committee's expert assessment of the type of specialist unit that

would be most appropriate for the company, and the Committee's

professional evaluation of performance data and other relevant

information as specified in the Allocation Policy. The listing company

may submit a letter to the Allocation Committee describing the

characteristics (e.g., trading philosophy, policies on maintaining

communications with its listed companies, etc.) it believes would be

appropriate for the unit that would be selected to trade its stock. The

listing company may not, however, identify any particular specialist

unit in its letter, or specify characteristics so unique as to be

applicable only to a readily identifiable specialist unit.

Specialist Unit Selected by Listing Company

If the listing company so chooses, it may request that the

Allocation Committee select specialist units that would be appropriate

to trade the company's stock, with the company then making the final

selection. If the listing company chooses this alternative, the company

may either make no communication to the Allocation Committee, or it may

submit a letter (as noted in the preceding paragraph) to the Committee

describing the characteristics the company believes would be

appropriate for the units to be selected by the Committee. The listing

company may not, however, identify any particular specialist unit in

its letter, or specify characteristics so unique as to be applicable

only to a readily identifiable specialist unit.

Meetings Between Listing Company and Specialist Units

Within two business days after the selection of a group of

specialist units as described above (unless the Exchange has determined

to permit a longer time period in a particular case), the listing

company shall meet, either in person or by teleconference, with

representatives of each of the specialist units. Meetings to be held in

person shall normally be held at the Exchange, unless the Exchange has

agreed that they may be held elsewhere. At least one representative of

the listing company must be a senior official of the rank of Corporate

Secretary of above of that company. No more than three representatives

of each specialist unit may participate in the meeting, each of whom

must be employees of the specialist unit, and one of whom must be the

individual who is proposed to trade the company's stock.

[[Page 29174]]

Listing Company's Selection of Specialist Unit

Within one business day following its meeting with representatives

of the specialist units (or such longer time period as the Exchange may

permit in a particular case), the listing company shall select its

specialist unit in writing, signed by a senior official of the rank of

Corporate Secretary or higher duly authorized to so act on behalf of

the company. The Allocation Committee shall then confirm the allocation

of the stock to that unit, at which time the stock shall be deemed to

have been so allocated.

Allocation Applications

In their applications for the allocation of a listing company's

stock, specialist units must describe all pertinent factors as to why

they believe they should be allocated the stock. At a minimum, such

factors should include how the unit will allocate resources (staff and/

or capital) to accommodate this new issue and what new resources, if

any, will the unit need to acquire to service this stock [a description

of the unit's capital base]; identify and experience of the individual

proposed to trade the stock, with a description of other securities

traded by that individual; and a discussion of why that individual is

appropriate to trade the listing company's stock. If the listing

company has submitted a letter to the Allocation Committee as permitted

herein, a copy of such letter shall be made available to all specialist

units. In their applications to be allocated the stock of such company,

specialist units shall be expected to indicate how they meet the

characteristics described in the company's letter. If, within six

months of the date a newly-listed company begins trading on the

Exchange (or a company which has been reallocated begins trading with

its new unit), the specialist unit determines that the individual

specialist who trades the company's stock should be an individual other

than the one named in the allocation application, the specialist unit

shall so inform the Allocation Committee, in writing, and disclose its

reasons therefor. These letters shall be maintained in the permanent

records of the Committee.

In addition, specialist units must describe in their applications

to be allocated the stock of a listing company any contacts they, or

any individual acting on their behalf, have had with any employee of

that company, or any individual acting on behalf of that company with

regard to its prospective listing on the Exchange, within six months

prior to the date that allocation applications are solicited with

respect to that company.

Allocations Received

The committee is provided information on allocations received by

each unit in the preceding year and the current year, the number of

applicants for those stocks allocated in the past and the number of

stocks lost through corporate mergers, delistings or other such events

over which the specialist has no control. While a recent allocation

does not preclude a unit from being awarded a subsequent new listing,

the committee considers such factors in comparing similarly qualified

applicants.

Capital Deficiency Information

The committee is informed of any applicant that is in capital

violation, or is potentially in violation, based on a current check of

estimated capital data (conducted between the application deadline and

the date of the allocation meeting). A unit with a capital deficiency

will be informed in advance of the meeting and may provide information

for the committee explaining the circumstances of the unit's capital

situation. The unit's capital history will also be provided (frequency

of past violations and borderline situations).

Disciplinary and Cautionary Data

The committee is informed of disciplinary and cautionary actions,

as described below.

Cautionary letters and summary fines regarding market maintenance

are reported for 12 months beginning at the time of issuance.

All other cautionary letters and summary fines are reported for 6

months beginning at the time of issuance.

The preceding parameters apply equally to disciplinary or

cautionary actions that result from a justifiable complaint (public or

institutional complaint received via correspondence).

The committee is informed of significant pending enforcement

matters. The investigations are included in an allocation file when

[(a) a stipulation is signed or (b) when charges are issued] the

commencement of an enforcement action is authorized. If formal

disciplinary action is ultimately taken, the item would remain in the

file for [6] 12 months after a Hearing Panel decision is final.

Foreign Listing Considerations

The special characteristics of foreign issues often require the

specialist to commit extra resources in order to be a presence in the

foreign market. Therefore, in allocating a foreign issue, the committee

also considers a specialist applicant's commitment to establish and

maintain relationships with arbitrage houses and foreign brokerage

firms, and to gain familiarity with various aspects of trading

securities of foreign issuers.

V. Policy Notes

Spin-offs, Listing of Related Companies and Relistings

Spin-offs and related companies of listed companies and relistings

are treated as new listings, with allocation open to all units.

Information about the relationship to a listed company or prior listing

and the name of the specialist involved, is included on the stock data

sheet inviting specialist applications. The same information is

provided to the committee for consideration in their deliberations

regarding the allocation of the new listing. While committee members

use their own judgment to determine what consideration, if any, should

be given to that information, a listing company's request not to be

allocated to its former specialist unit (or the specialist in the

parent or related company) will be honored.

Listed Company Mergers

When two NYSE listed companies merge, the merged entity is assigned

to the specialist in the company that is determined to be the survivor-

in-fact (dominant company). Where no surviving/dominant entity can be

identified, the matter is referred to the Allocation Committee and all

specialist units are invited to apply.

In situations involving the merger of a listed company and an

unlisted company, where the unlisted company is determined to be the

survivor-in-fact, such company may choose to remain registered with the

specialist unit that had traded the listed company entity in the

merger, or it may request that the matter be referred to the Allocation

Committee. In such a case, applications will be invited from all

specialist units, and the Allocation Committee shall honor the

company's request not to be allocated to the specialist unit that had

traded the listed company.

``Target'' Stock. The specialist unit registered in such stock

prior to a separate listing shall remain registered in such stock after

its separate listing, unless the listing company requests that the

matter be referred to the Allocation Committee. In such a case,

applications will be invited from all specialist units, and the

Allocation Committee shall

[[Page 29175]]

honor the company's request not to be allocated to the specialist unit

that had traded the ``target'' stock.

Allocation Freeze Policy

In the event that a specialist unit: (i) loses its registration in

a specialty stock as a result of proceedings under Exchange Rules 103A,

475 or 476; or (ii) voluntarily withdraws its registration in a

specialty stock as a result of possible proceedings under those rules,

the unit will be ineligible to apply for future allocations for the six

month period immediately following the reassignment of the security

(Allocation Prohibition).

Following the Allocation Prohibition, a second six month period

will begin during which a specialist unit may apply for new listings,

provided that the unit demonstrates to the Exchange relevant efforts

taken to resolve the circumstances that triggered the Allocation

Prohibition. The determination as to whether a unit may apply for new

listings will be made by Exchange staff, in consultation with the Floor

Directors. The factors the Exchange will consider will vary depending

on the unit's particular situation, but may include one or more steps

such as:

--Supplying additional manpower/experience;

--Changes in professional staff;

--Attaining appropriate dealer participation;

--Enhancing back-office staff; and

--Implementing more stringent supervision/new procedures.

Allocation Sunset Policy

Allocation decisions shall remain effective with respect to any

initial public offering listing company which lists on the Exchange

within three months of such decision. If a listing company does not

list within three months, the matter shall be referred again to the

Allocation Committee, with applications invited from all units.

Support of the Allocation System

The Allocation Committee views positively a specialist unit's

applying for a broad range of issues.

Criteria for Applicants That Are Not Currently Specialists

Since an entity seeking to enter the specialist business does not

have a history directly comparable to that of existing units, the

Allocation Committee considers the following criteria with respect to

applicants that are not currently specialists.

1. Individuals proposed as specialists must have successfully

completed the Exchange's specialist examination.

2. The proposed unit must demonstrate that it understands the

specialist business, including the needs of brokers, their

organizations, and their customers.

3. The proposed unit must demonstrate an ability and willingness to

trade as necessary to maintain fair and orderly markets with depth and

liquidity, and facilitate the execution of orders.

(a) The proposed unit should indicate the extent of its capital

commitment to specializing over and above the minimum capital

requirements.

(b) The proposed unit must have sufficient specialist and clerical

support dedicated to maintaining and servicing the market in a

specialty stock.

(c) If the proposed specialist unit or any of its participants is

presently a specialist or market maker on any exchange, performance

during the prior 12 months, as evidenced by available data maintained

by such exchange which evaluates the quality of performance of the unit

or its participants as a specialist or market maker on such exchange,

will be considered by the Allocation Committee.

4. Other factors that will be considered by the Allocation

Committee include any action taken or warning issued within the past 12

months by any regulatory or self-regulatory organization against the

unit or any of its participants [relating to:] with respect to any

capital or operational problem, or any regulatory or disciplinary

matter.

(a) Any capital or operational problem; or

(b) Any Floor-related activity.

VI. Procedures

Applications

Whenever a security is to be allocated to a specialist, unit, all

specialist units are invited to submit applications to the Exchange

prior to the published deadline for the allocation of such security.

The application of any specialist unit shall be in such form as shall

be approved from time to time by the Exchange, but each applicant shall

be free to submit in writing such additional information in support of

its application as it may wish to bring to the attention of the

Allocation Committee.

Blanket Applications

All specialist units shall be deemed to have filed with the

Exchange a blanket application pursuant to which the applicant agrees

to accept the allocation of any security. Any security allocated to a

specialist unit on the basis of its blanket application shall not be

reflected in the records of the Exchange as a ``security gained'' nor

shall it prejudice that unit's eligibility for future allocations.

Decision Making

An allocation decision pursuant to this policy is made on the basis

of the specified criteria, by a majority vote of the committee members

present at the meeting and eligible to vote on such matter.

Announcement

Written notice of the name and post location of the successful

applicant are make known to the members of the Exchange and to the

issuer of the security allocated.

Registration of Specialists

Each member associated with the specialist unit to which any

security is allocated who acts as a regular specialist in such security

shall be registered as a specialist in such security pursuant to Rule

103.

VII. Education

Education of all participants is a key to ensuring continued

quality and consistency in the allocation process. A summary of the

education process follows:

New panel members receive an orientation conducted by former

Allocation Committee chairmen and staff, and serve as observers at

meetings before their terms begin. A standardized agenda for educating

allocation Committee members will be made available. The new Allocation

Committee chairman is elected two months in advance of his or her

appointment to provide time to observe and learn from the existing

chairman. The newly elected chairman also receives an orientation by

former committee chairmen and the Quality of Markets Committee. A

standardized agenda for educating new chairmen will be made available.

Education efforts regarding the allocation process are offered

periodically for specialists as well as the general membership.

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

[[Page 29176]]

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

The intent of the Exchange's Allocation Policy and Procedures is:

(1) To ensure that securities are allocated in an equitable and fair

manner and that all specialist units have a fair opportunity for

allocations based on established criteria and procedures; (2) to

provide an incentive for ongoing enhancement of performance by

specialist units; (3) to provide the best possible match between a

specialist unit and a security; and (4) to contribute to the strength

of the specialist system. In September 1987, the Quality of Markets

Committee (``QOMC'') appointed the first Allocation Review Committee

(``ARC'') to undertake a comprehensive review of the Exchange's then-

existing allocation procedures which had been in effect since 1976.

ARC's recommendations were filed with the SEC in 1988 and approved in

1990.\2\ In April 1991, the QOMC determined that the Allocation Policy

and Procedures should be re-examined and appointed a new committee, ARC

II, to do so. The Committee's recommendations were subsequently filed

with the Commission, and approved in 1993 as a one-year pilot.\3\ In

August 1994, the Exchange filed for and subsequently received permanent

approval of that pilot.\4\ In accordance with the Exchange's commitment

to preserve the integrity of the existing allocation system while

refining the allocation policy as necessary, ARC III convened in

November 1993. The Committee's recommendations were filed with the

Commission, and approved in September 1994.\5\ In December 1995, the

QOMC appointed ARC IV to continue to review the allocation process. The

Committee made several recommendations with respect to the Allocation

Policy and Procedures. Several of these recommendations were submitted

by the Exchange for immediate effectiveness in March 1997 for a seven-

month pilot period.\6\ Additional recommendations of ARC IV are being

submitted in this filing.

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

\2\ Securities Exchange Act Release No. 27803 (Mar. 14, 1990),

55 FR 10740 (Mar. 22, 1990) (order approving File No. SR-NYSE-88-

32).

\3\ Securities Exchange Act Release No. 33121 (Oct. 29, 1993),

58 FR 59085 (Nov. 5, 1993) (order approving File No. SR-NYSE-92-15).

\4\ Securities Exchange Act Release No. 34906 (Oct. 27, 1994),

59 FR 55142 (Nov. 3, 1994) (order approving File No. SR-NYSE-94-30).

\5\ Securities Exchange Act Release No. 34626 (Sept. 1, 1994),

59 FR 46457 (Sept. 8, 1994) (order approving File No. SR-NYSE-94-

18).

\6\ Securities Exchange Act Release No. 38373 (Mar. 7, 1997), 62

FR 13421 (Mar. 20, 1997) (notice of filing and immediate

effectiveness for a seven-month period of File No. SR-NYSE-97-04).

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

The principle changes to the Exchange's Allocation Policy and

Procedures are described below.

Mergers of listed and unlisted companies. Currently, companies

resulting from mergers of listed and unlisted companies are registered

by staff with the specialist in the listed company, regardless of size

or survivorship considerations. Under the proposal, a company resulting

from the merger of a listed company with an unlisted company would

remain with the specialist in the listed company unless the unlisted

company is determined to be the survivor-in-fact and the unlisted

company requests allocation, in which case, all units would be invited

to apply.

Targeted stock. Currently, there is no policy for targeted stock.

Under the proposal, these securities (also known as ``letter stock'')

typically are ``targeted'' to a specific aspect of an issuer's overall

business. When such a security is ``uncoupled'' and becomes an

independent entity, it would remain with the current specialist in the

target stock unless the issuer requests that the new stock be allocated

by the Allocation Committee.

Reporting of disciplinary actions. Currently, enforcement actions

are reported to the Allocation Committee when the stipulation is signed

or charges are issued. Such items remain in the file for 6 months after

a Hearing Panel decision is made final. Under the proposal, enforcement

actions would be reported to the Allocation Committee when an

enforcement case is authorized. Moreover, if formal disciplinary action

is ultimately taken, the item would remain in the file for 12 months

after a Hearing Panel decision is final. In addition, the current

policy interpretation that summary fines, not just cautionary letters,

for market maintenance are reported for 12 months, has been codified.

Allocation applications. Currently, a specialist's application for

an allocation of a particular issue must contain a description of the

unit's capital base. Under the proposal, the specialist is required to

describe how it will allocate resources (staff and/or capital) to

accommodate the new issue being applied for, and what new resources, if

any, will the unit need to service the stock being applied for.

Allocation ``Sunset'' Policy. Currently, a one year sunset policy

has been followed. Under the proposal, initial public offering

companies that list within three months after allocation would be

traded by the specialist unit that originally received the allocation.

Thereafter, the matter would be referred again to the Allocation

Committee, with applications invited from all units.

Allocation ``Freeze'' Policy. The Allocation Freeze Policy, which

provides that a specialist firm may not apply to be allocated a stock

following reallocation of a stock or voluntary withdrawal of

registration in a stock as a result of an Exchange disciplinary

proceeding would be incorporated into the Allocation Policy. The

Allocation Freeze Policy was approved in a prior filing, but was not

incorporated directly into the Allocation Policy.

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 longer 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

[[Page 29177]]

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. 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-97-12 and should be

submitted by June 19, 1997.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97-14018 Filed 5-28-97; 8:45 am]

BILLING CODE 8010-01-M