Self-Regulatory Organizations; New York Stock Exchange, Inc.; Order Approving Proposed Rule Change and Amendment No. 1 and Notice of Filing and Order Granting Accelerated Approval of Amendment Nos. 2 and 3 Relating to Original Continued Listing Criteria

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41502; File No. SR-NYSE-99-13]

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

Order Approving Proposed Rule Change and Amendment No. 1 and Notice of

Filing and Order Granting Accelerated Approval of Amendment Nos. 2 and

3 Relating to Original Continued Listing Criteria

June 9, 1999.

I. Introduction

On March 31, 1999, the New York Stock Exchange, Inc. (``NYSE'' or

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

(``SEC'' or ``Commission'') pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4

thereunder,\2\ a proposed rule change relating to amendments to the

NYSE's Listed Company Manual (``Manual'') regarding the original and

continued listing criteria and procedures of the Exchange. On April 21,

1999, the Exchange submitted Amendment No. 1 to the proposed rule

change.\3\

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

\2\ 17 CFR 240.19b-4.

\3\ See Letter from James E. Buck, Senior Vice President and

Secretary, NYSE, to Richard Strasser, Assistant Director, Division

of Market Regulation (``Division''), SEC, dated April 21, 1999. In

Amendment No. 1, the NYSE resubmitted the entire filing to clarify

several aspects of the proposal.

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Notice of the proposal was published in the Federal Register on May

3, 1999.\4\ The Commission did not receive any comment letters on the

proposal. On May 27, 1999, the NYSE submitted Amendment No. 2 to the

proposed rule change.\5\ On June 8, 1999, the NYSE submitted Amendment

No. 3 to the proposed rule change.\6\ In this notice

[[Page 32589]]

and order, the Commission is seeking comment from interested persons on

Amendment Nos. 2 and 3 and is approving the proposed rule change and

Amendment No. 1 as well as Amendment Nos. 2 and 3 on an accelerated

basis.

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\4\ See Securities Exchange Act Release No. 41324 (April 22,

1999), 64 FR 23710.

\5\ See Letter from James E. Buck, Senior Vice President and

Secretary, NYSE, to Richard Strasser, Assistant Director, Division,

SEC, dated May 27, 1999. In Amendment No. 2, the NYSE proposes to

amend the international ``cash flow standard'' in the original

proposal to require $100 million in aggregate earnings for the last

three fiscal years instead of $25 million as is currently the case.

Companies would also be required to report a minimum of $25 million

in earnings for each of the two most recent years, instead of simply

reporting a positive amount of earnings for the last three fiscal

years.

\6\ See Letter from James E. Buck, Senior Vice President and

Secretary, NYSE, to Richard Strasser, Assistant Director, Division,

SEC, dated June 8, 1999. In Amendment No. 3, the NYSE proposes to

codify the Exchange's policy regarding the use of financial data to

grant eligibility clearance to an issuer that has less than three

years of operating history and to clarify that real estate

investment trusts and closed-end management investment companies

listing with a three-year operating history must satisfy the

original listing standards, set forth in paragraph 102.01 of the

Manual.

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II. Description of the Proposal

The proposal clarifies and codifies the Exchange's criteria and

procedures for evaluating a company's original and continued listing

eligibility.

A. Original Listing Criteria and Procedures

The NYSE proposes to revise the size component of the Exchange's

issuer financial eligibility criteria and the general eligibility

listing criteria. The proposal also would codify the Exchange staff's

authority to analyze the suitability of an applicant company for

listing on the Exchange even if the applicant meets the Exchange's

quantitative criteria. Currently, this authority is codified only in

the suspension and delisting section of the Manual.

The proposal also would raise the minimum requirement for aggregate

market value of publicly-held shares from $40 million to $100 million

for all listings other than spin-offs and initial public offerings

(``IPOs'') \7\ (including carve-outs \8\). The NYSE proposes to raise

the standard for spin-offs and IPOs to $60 million.

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\7\ The Exchange proposes to define an IPO as a company that,

prior to its original listing, did not have a class of common stock

registered under the Act. The Exchange notes that this definition

differs from the definition of an IPO in Section 12(f)(1)(G)(i) of

the Act, which turns on whether a company has a reporting obligation

under the Act prior to a stock offering. Because the Exchange is

applying its definition of IPO in the context of the original

listing of common stock, the Exchange believes it is more

appropriate to focus on the existence of U.S. publicly-traded stock

rather than on prior reporting requirements. For example, while a

company may have a reporting requirement under the Act if it

conducted a public sale of debt securities, that would not be

relevant in considering the appropriateness of listing a company's

first public class of common stock.

\8\ The Exchange proposes to define a carve-out as the initial

offering of an equity security to the public by a publicly-traded

company for an underlying interest in its existing business (which

may be a subsidiary, division, or business unit). In the case of a

``target stock,'' the security is treated in the same way as any

other second class of stock of the issuer.

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In addition, the proposal replaces the existing net tangible assets

(``NTAs'') test, which is currently the additional measure of a

company's size, with a stockholders' equity test ($460 million for IPOs

or spin-offs and $100 million for all other domestic listings).\9\ The

Exchange in determining whether a company satisfies the stockholders'

equity test would look to the composition of the stockholders' equity

to determine the origination of such equity. The proposal also would

clarify that the test is an alternate measure of size to be relied upon

where circumstances warrant an alternate measure and where the

applicant's public market capitalization is no more than 10 percent

below the public market value listing standard. Such circumstances may

include situations in which large private holdings drive down the

public market capitalization or changing market forces drive down the

price of the stock.

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\9\ For non-U.S. companies, the $100 million requirement applies

to all issuers and will be measured under this proposal in

stockholders' equity instead of the current NTA valuation.

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Finally, the proposal codifies the NYSE's practice of accepting a

written commitment from the underwriter for IPOs (for spin-offs, from

the parent company's investment banker or other financial advisor) to

demonstrate whether the company satisfies the public market value

requirement of $60 million ($100 million worldwide for non-U.S.

issuers).

B. Original Financial Listing Criteria and Procedures

The proposal codifies and amends the Exchange's current policies

and practices with respect to the financial criteria and policies for

domestic companies seeking to list with the Exchange. Currently, a

company that seeks to qualify for listing on the Exchange under its

domestic standards must meet one of three financial tests. Two of these

tests call for an analysis of the company's ``demonstrated earning

power under competitive conditions.'' The third test, which only

applies to companies with at least $500,000,000 in market

capitalization and $200,000,000 in revenues during the most recent

fiscal year, analyzes the company's ``demonstrated earning power--

adjusted net income,'' as such term is currently defined in the

footnotes accompanying the rules.

According to the NYSE, in conducting its review of the financial

condition of an applicant company, the Exchange historically has relied

upon financial statements presented to it by the company as obtained

from SEC filings. If the Exchange relied on the adjustments presented

in SEC filings in granting financial clearance to the company, the

company would be required to include these adjustments in its original

listing application as a condition of eligibility clearance. The

proposal codifies the Exchange's financial listing standards and

current practices, as well as clarifies and modifies the relevant

interpretations.

1. ``Pre-Tax Adjusted Earnings'' Standard

The proposal replaces the current requirement that applicants

``demonstrate * * * earning power under competitive conditions'' with a

standard intended to provide more specificity.The proposed standard is

``pre-tax earnings from continuing operations and after minority

interest and equity in the earnings or losses of investees as

adjusted.'' The term, ``pre-tax earnings'' incorporates the current

standard of ``income before federal income taxes.'' The phrase, ``from

continuing operations,'' focuses the analysis on ongoing operations and

excludes any discontinued operations included in the company's

historical financial statements.\10\

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\10\ The Exchange notes that accounting rules specify that, upon

management's commitment to discontinue an operation, financial

statements for all relevant periods presented must be restated. If a

commitment is made after the period under Exchange review and the

historical financial statements have not yet been restated, the

Exchange will rely on the company to prepare a presentation of the

adjusted data and provide an agreed upon procedures letter provided

by the company's outside audit firm. The auditor's letter will state

the procedures performed with respect to calculating the pre-tax

earnings from continuing operations and after minority interest and

equity in the earnings or losses of investees as adjusted giving

effect to the discontinuance for each period under review.

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The clause, ``after minority interest'' removes the interest of an

affiliate of the applicant company accrued to owners other than the

applicant company due to its less than 10 percent ownership.\11\ The

phrase, ``after equity in the earnings or losses of investees,'' arises

when an applicant company has an ownership interest in another

corporation, the results of which are not consolidated into the

applicant company's financial statements due to the application of the

governing accounting principles. The results of investments that accrue

to the company will be accounted for in the Exchange's analysis to

determine

[[Page 32590]]

whether or not the company is eligible for listing.\12\

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\11\ For example, where a subsidiary that has a 20 percent

privately held (minority) interest, only 80 percent of the interest

in the subsidiary is reflected in the public stock. In this

scenario, although 100 percent of the subsidiary is consolidated

into the applicant parent's operations, the Exchange would make the

appropriate adjustment in its analysis to include 80 percent of the

earnings in the subsidiary by adjusting the pre-tax income for the

reported minority interest provided such minority interest is not

included as part of the company's pre-tax income on the face of the

financial statement.

\12\ This will be effected by including these results from the

company's income statement provided such results are not included as

part of the company's pre-tax income on the face of the financial

statement.

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Finally, the proposal enumerates certain adjustments that

applicants will make to the amount computed pursuant to pre-tax

earnings. These adjustments would be part of the proposed standard and,

as such, would apply to every listing applicant. Applicant companies

may only apply those adjustments arising from events specifically

identified in the company's SEC filing(s) as to both categorization and

amount. Thus, in order for an adjustment to be appropriately applied,

it must be specifically identified and the amount applied must be

specifically disclosed in the SEC filing, or subject to an agreed upon

procedures letter in certain cases.\13\

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\13\ The above-referenced adjustments are measured and

recognized in accordance with the relevant accounting literature,

such as that published by the Financial Accounting Standards Board

(``FASB''), the Accounting Principles Board (``APB''), the Emerging

Issues Task Force (``EITF''), the American Institute of Certified

Public Accountants (``AICPA''), and the SEC.

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a. Use of Proceeds for Retiring Debt or Making Acquisitions

The Exchange currently relies on the use of proceeds anticipated

from an equity offering in determining the financial eligibility of a

company seeking to list its securities on the Exchange. The Exchange

evaluates companies under a three-year eligibility review. In reviewing

a company's historical results, the Exchange will continue to consider

the effect of the offering on that three-year review period where the

proceeds are used to pay existing indebtedness or to fund an

acquisition. For deleveragings (i.e., using the proceeds of an offering

to pay off debt), the Exchange will conduct its review as if the

recapitalization occurred on the first day of the first year of its

three-year analysis. In applying the standard, the actual historic

interest paid each year on the debt to be retired by the application of

the proceeds will be removed, and the principal amount of the debt will

be retired. The pro forma effects (i.e., the effects ``as if'' the debt

had been retired in an earlier period) of the deleveraging for the

latest fiscal year and the interim period will be reflected in the

company's SEC filing. If that specific debt was incurred prior to that

period, the company would need to prepare adjusted financial statements

to account for the relevant preceding periods.\14\

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\14\ Adjustments will not be made on any interest or principal

payment(s) made on indebtedness other than that specifically being

retired. The proposal requires that this adjustment be accompanied

by an agreed upon procedures letter provided by the company's

outside audit firm. The auditor's letter will state the procedures

performed with respect to the existence of the debt and the accuracy

of the adjustments applied to the company's historical pre-tax

earnings reflecting the retirement of the principal amount of the

debt and the actual historic interest payments made.

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Similarly, with regard to the use of proceeds for acquisitions, the

Exchange conducts its review as if the acquisition occurred on the

first day of the first year of its analysis, provided the historical

financial statements of the acquiree for such period are included in

the company's SEC filings. The starting point for this analysis is the

company's SEC filing, which will include a pro forma presentation for

the latest fiscal year and the subsequent interim period.\15\ The

Exchange then reviews the historical financials of the company included

in the registration statement and treats the acquisition for listing

eligibility purposes as if it were consummated on the first day of the

earliest fiscal year included in the acquiree's financial statements

presented in the filing. The Exchange combines the historical results

of the company with the historical results of the acquiree and reflects

the purchase accounting of the acquisition for the periods presented.

Specifically, the adjustments would be limited to the combination, as

well as the allocation of the purchase price including adjusting assets

and liabilities of the acquiree to fair value recognizing any

intangibles (and associated amortization and depreciation) and the

effects of any additional financing to complete the acquisition.\16\

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\15\ This pro forma presentation will give effect to those

acquisitions that meet the significance test of SEC Rule 3-05 of

Regulation S-X (``Rule 3-05''). Generally, the historical financial

statements of the acquiree included in the filing also will be

limited to the requisite periods disclosed pursuant the Rule 3-05

significance test.

\16\ The Exchange proposes to require that these adjustments, if

not set forth in the SEC filing, be accompanied by an agreed upon

procedures letter provided by the company's outside audit firm at

the request of the company. The auditor's letter would state the

procedures performed with respect to showing the effect of the

relevant acquisition on the applicant company.

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b. Acquisitions and Dispositions

In instances other than those associated with the use of proceeds,

the proposal limits the Exchange's analysis to those acquisitions and

dispositions that are disclosed as such in a company's financial

statements in accordance with Rule 3-05 and Article 11-01(b)(2) of

Regulation S-X. Unlike the use of proceeds to fund an acquisition, in

this instance, the adjustment for the acquisition or disposition will

be limited to those periods for which pro forma financial data are

presented in the SEC filing.\17\ If no detailed disclosure is provided

for a particular acquisition or disposition, and the acquisition or

disposition is only a factual, non-material, un-qualified reference,

then the acquisition or disposition will not be given effect because it

cannot be substantiated within the four corners of the company's SEC

filing.

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\17\ If there is a pro forma presentation included in the

company's SEC filing that does not specify pre-tax earnings from

continuing operations, minority interest, and equity in the earnings

or losses of investees, the company must prepare the relevant data.

The presentation of the adjusted data will need to be accompanied by

an agreed upon procedures letter provided by the company's outside

audit firm. The auditor's letter will state the procedures performed

with respect to showing the effect of the expansion of the pro forma

presentation from the SEC filing into a more comprehensive income

statements.

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If the event that the applicant company has less than three years

of operating history and is acquiring (either completed or committed)

an entity with the requisite operating history, the Exchange will

consider the combined operating history of the acquiror and acquiree

for the preceding period(s) in conducting its financial eligibility

review. If it is necessary to combine historical financial statements

of the acquiree and acquiror to enable the Exchange to conduct its

analysis (e.g., overlapping fiscal years), then the combined data would

need to be accompanied by an agreed upon procedures letter provided by

the company's outside audit firm at the request of the company.

The NYSE proposes not to require the agreed upon procedures letter

if the SEC filing under review makes it self-evident that the company

would qualify for listing on the Exchange irrespective of the

acquisition or disposition.

c. Merger or Acquisition Related Costs Recorded Under Pooling of

Interests

The proposal excludes legal and accounting fees and other costs

incurred by a company in effecting a merger or acquiring another entity

accounted for as a pooling of interests (whether or not the transaction

is consummated).

d. Certain Charges or Income Specifically Disclosed in the Filing

Consistent with the NYSE's past practice, the proposal excludes

several items in assessing the applicant company's earnings strength or

its cash

[[Page 32591]]

flow. These items have been excluded either because they are associated

with a company's adopted exit plan (as defined in the accounting

literature) or, based on the Exchange's experience in assessing ongoing

earnings strength, they are not necessarily recurring.

Charges or Income Related to an Adopted Exit Plan

When a company adopts a specified exit plan, the following charges

or income, if disclosed in the company's SEC filing, recorded in the

company's financial statements in accordance with generally accepted

accounting principles (``GAAP''), and associated with the

implementation of that plan, would be excluded by the Exchange in its

proposed financial analysis: (1) the costs of severance and termination

benefits that are incurred as part of an exit plan; (2) costs and

associated revenues and expenses associated with the elimination or

reduction of product lines for which an exit plan has been adopted; (3)

costs incurred to consolidate, close, or re-locate plant or office

facilities associated with an exit plan; and (4) loss or gain on

disposal of long-lived assets, which, by its definition, relates to

assets that will no longer be held by the company.

Environmental Clean-Up Costs

The NYSE proposes to remove environmental clean-up costs incurred

in the remediation of environmental problems from the company's

historical financial results. However, companies may not make

adjustments for annual maintenance or on-going costs of compliance with

environmental laws.

Litigation Settlements

Litigation settlement costs, including any settlement amounts,

interest payments and penalties so disclosed in a company's filings

would be removed from the company's historic financial results.

Companies may not make an adjustment for on-going, customary legal

fees.

e. Impairment Charges on Long-Lived Assets

Asset write downs that reflect the net realizable value of a long-

lived asset would be excluded from historic financial results.

f. Gains or Losses Associated with Sales of a Subsidiary's or

Investee's Stock

If a company has an ownership interest in another entity, or has a

wholly-owned subsidiary, any gain or loss associated with the sale of

all or part of the company's interest would be excluded from the

company's historic results.

g. Regulation S-X Article 11 Adjustments

Pro forma adjustments contained in a company's pro forma financial

presentation provided in a current filing with the SEC are required to

be made in accordance with SEC rules and regulations governing Article

11 ``Pro forma Financial Information.'' The Exchange will review the

company's financial statements in the context of any such adjustments,

which are subject to SEC review. These adjustments would be limited to

the current registration statement as to types of adjustments, amounts

and years disclosed (except for use of proceeds as discussed above).

2. ``Adjusted Cash Flow'' Standard

In addition to the Pre-Tax Adjusted Earnings standard discussed

above, a second standard is available to companies with at least $500

million of market capitalization and $200 million of revenues in the

most recent 12-month period. Companies that meet the size criteria may

currently use an ``adjusted net income'' test for the last three fiscal

years of at least $25 million in the aggregate, with all years being

positive.

The proposal codifies the standard applicable to the companies

meeting the above-stated $500 million/$200 million threshold by

incorporating the fundamental aspects of the footnote in the current

Manual into the rule. In addition, the standard will explicitly

indicate that the test includes adjustments for two purposes: the use

of proceeds and acquisitions, discussed above. The Exchange is

proposing to limit the adjustments incorporated into this standard

because the remaining adjustments may or may not have cash-flow

implications for a particular company. Those that do have a cash flow

effect will already have been accounted for in the operating activity

section of the company's cash flow statement.

C. Policy Clarifications

The proposal also adopts several policies clarifying the use of the

adjustments enumerated above, requiring the issuance of a press release

by companies whose adjusted financial data were relied upon by the

Exchange in granting eligibility clearance, and delineating the

consequences of restated financial statements.

First, all adjustments must be disclosed as such in the SEC filing

of the applicant company--the amount must be within the four corners of

the SEC filing or subject to an agreed upon procedures letter, as

discussed above. Second, except as noted above,\18\ as a general rule,

the Exchange will only accept the application of an adjustment in the

year in which the event giving rise to the adjustment occurred. Thus,

no event can give rise to an adjustment in the financial statements for

any prior year.

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\18\ The two exceptions are: (1) The use of proceeds for

deleveraging and acquisitions and dispositions (for companies

currently in registration for an equity offering) and (2)

acquisitions and dispositions.

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Third, any company for which the Exchange relies on adjustments to

historical financial data in granting financial eligibility clearance

must take steps to ensure full public disclosure of how it qualified.

The Exchange recognizes that, although listing applications are a

matter of public record, many investors may not be aware that they are

available and may believe that only the most recent publicly available

SEC document is relied upon in evaluating a company. Thus, the proposal

imposes two requirements on issuers. First, it codifies the Exchange's

requirement that any adjusted financial data relied upon by the

Exchange in granting financial clearance to the company must be

included in the company's listing application. Second, the proposal

requires these issuers to issue a press release stating that pro forma

financial adjustments were used to qualify the company and all relevant

additional information is available to the public upon request.

With respect to companies that restate financial statements due to

a change from unacceptable accounting principles and/or correction of

errors, the proposal codifies the Exchange's policy of reviewing the

company's status at the time of the restatement. Once a company issues

a restatement that affects one of the years used by the Exchange to

qualify the company for listing, the Exchange will determine whether or

not the company would have qualified at the time of its original

financial clearance with the restated numbers. If not, the company will

be subject to suspension and delisting procedures unless the company

meets the original listing standards at the time of the restatement

using the most recent three fiscal years of financial statements as

restated.

D. Standards for Non-U.S. Issues

The proposal makes several changes to Section 103 of the Manual

pertaining to non-U.S. companies to clarify the rules and to carry

forward relevant

[[Page 32592]]

items from the revisions pertaining to domestic companies.

Specifically, the NYSE proposed to make adjustments for foreign

currency for non-U.S. companies because their operations are inherently

tied to the underlying fundamentals of their respective national

economies. For purposes of this adjustment, the Exchange deems a

currency devaluation of more than ten percent as against the U.S.

dollar to be significant. The proposal also increase the aggregate

amount from $25 million to $100 million for its adjusted cash flow

standard and narrows to two years the requisite itemized annual

financial analysis for non-U.S. companies to the two most recent fiscal

years, which would be required to be reported at a minimum of $25

million. Reconciliation to U.S. GAAP of the third year back would only

be required if the Exchange determines that it is necessary to

demonstrate that the aggregate $100 million threshold is satisfied. In

addition, for non-U.S. companies, the definition of IPOs is the same as

for domestic issues, but the representation of market value to be

received in connection with a spin-off may also come from the parent

company's transfer agent.

E. Real Estate Investment Trusts

The proposal also codified a policy the Exchange has applied

regarding the original listing criteria for real estate investment

trusts (``REITs''). The Exchange generally lists REITs either in

connection with IPO or shortly thereafter, when the REIT does not have

a three-day operating history, so long as the REIT has at least $60

million is stockholders' equity.\19\ REITs listing with a three-year

operating history must qualify under the standard equity original

listing standards.\20\

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\19\ For those REITs listing in conjunction with an offering,

this requirement would need to be evidenced by a written commitment

from the underwriter (or, in the case of a spin-off or carved-out,

from the parent company's investment banker or other financial

advisor). The Exchange, however, retains the discretion to deny

listing to a REIT if it determines that, based upon a comprehensive

financial analysis, it is unlikely to be able to maintain its

financial status.

\20\ See Amendment No. 3, supra note 6 (adding rule language to

clarify that both REITs and closed-end funds with a 3 year operating

history must meet original financial listing standards set forth in

paragraph 102.01 of the Manual).

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F. Continued Listing Procedures

The NYSE proposes to revise its continued listing criteria by

codifying existing practice with respect to companies that qualify for

listing based, at least in part, upon adjusted historical data.

Specifically, under the proposed continued listing criteria a company

would be subject to delisting if it had NTAs or an aggregate market

value of its common stock of less than $12 million and average net

income of less than $600,000 for the past three years. In calculating

average net income for a company during the initial three years

following its listing, the Exchange takes into consideration those

specific adjustments made to the company's historical financial data

for the relevant year in the original listing application. This

consideration is limited both as to the specific adjustment made during

the initial clearance as well as to the year in which the adjusted was

made.

The Exchange also proposes to revise and codify the procedures

instituted when a company is identified by Exchange staff as being

below the continued listing criteria. The proposal imposes specific

time frames with respect to the notification, monitoring, and

suspension and delisting, where appropriate, of these companies'

securities. In addition, the proposal modifies the Exchange's current

practice of requiring companies to return to original listing standards

within 36 months. Instead, the proposal requires these companies to

return to good standing within six quarters of being notified of this

status.

III. Discussion

The Commission finds that the proposal is consistent with the Act

and in particular with those provisions applicable to a national

securities exchange.\21\ Specifically, the Commission believes that the

proposal is consistent with the requirements of Section 6(b)(5) of the

Act \22\ because it is designed to promote just and equitable

principles of trade, to remove impediments to, and perfect the

mechanism of a free and open market and, in general, to protect

investors and the public interest. The Commission believes that the

proposal, by codifying, expanding, and clarifying existing listing

criteria and procedures, strikes a reasonable balance between the

Exchange's obligation to protect investors and investor confidence in

the market, and its parallel obligation to perfect the mechanism of a

free and open market. The proposal establishes reasonable procedures

for issuers, while giving the Exchange the ability to deny, limit, or

delist an issuer that has failed to meet the substantive standards

outlined in the NYSE's Manual.

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\21\ In approving this rule, the Commission has considered the

proposed rule change's impact on efficiency, competition, and

capital formation. 15 U.S.C. 78c(f).

\22\ 15 U.S.C. 78f(b)(5).

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Primarily, the proposal codifies the Exchange's present listing

practices and procedures. The general system of Exchange review of

applicant companies remains essentially unchanged. In the past, many of

these procedures were not codified. As a result, it was often unclear

to issuers and other market participants how the Exchange's listing

procedures were applied in particular cases. As the proposal sets forth

more clearly the listing criteria applicable to issuers, the Commission

believes that it should enhance transparency in listing decisions,

thereby promoting just and equitable principles of trade and removing

impediments to a free and open market.

Specifically, the Exchange clarifies and codifies the size

component of the financial eligibility and general eligibility listing

criteria and establishes the NYSE's authority to investigate the

suitability of an applicant company beyond the Exchange's quantitative

criteria. The requisite aggregate market value of publicly-held shares

would increase from $40 million to $60 million for spin-offs and IPOs

(including carve-outs) and $100 million for all other listings. To

demonstrate that the company will satisfy the public market value

requirement of $60 million, the proposal codifies the practice of

accepting a written commitment from the underwriter for IPOs. Lastly,

the proposal replaces the NTA test with a stockholders' equity test,

retaining the $60 million and $100 million thresholds and clarifying

that the stockholders' equity test is an alternative test for measuring

a company's size.

The Commission believes the proposed increases to the threshold

requirements should ensure that only companies of a certain minimum

size are included among those listed on the Exchange, thereby

protecting investors by raising the minimum standard for listed

companies. The Commission also believes that it is reasonable for the

Exchange to accept a written commitment from the underwriter for IPOs,

which, by definition, could not satisfy the requisite minimum aggregate

market value of publicly-held shares. Additionally, the Commission

believes that the proposed stockholders' equity test is simpler than

the existing NTA test and could better reflect a company's value in the

current economy because it accounts for intangibles and hard assets,

which are frequently found on companies' balance sheets.

The NYSE also proposes to codify and revise its financial

eligibility standards for original listing. First, the proposal

replaces the current requirement that

[[Page 32593]]

applicants ``demonstrate * * * earnings power under competitive

conditions'' with a new standard, the ``pre-tax earning from continuing

operations and after minority interest and equity in the earnings or

losses of investees as adjusted.'' The proposal then enumerates the

adjustments to be made to the amount computed under the new standard,

clarifying that applicant companies may only apply those adjustments

arising from events specifically identified in the company's SEC

filings as to both categorization and amount. The permissible

adjustments include: use of proceeds (for paying off existing debt or

funding an acquisition), acquisitions and dispositions, exclusion of

merger or acquisition related costs recorded under pooling of

interests, exclusion of charges of income specifically disclosed in the

applicant's SEC filing for certain enumerated costs, exclusion of

impairment charges on long-lived assets, exclusion of gains or losses

associated with sales of a subsidiary's or investee's stock, regulation

S-X Article 11 adjustments, and exclusion of the cumulative effect of

adoption of a New Accounting Standard. These adjustments are measured

and recognized in accordance with the relevant accounting literature.

The Commission believes that the new standard more explicitly

defines the analysis conducted by the Exchange in evaluating applicant

companies. The Commission also believes that by codifying its current

practice regarding adjustments, the Exchange increases the transparency

of the financial criteria applied to companies seeking to list on the

Exchange. The codification of the adjustments also ensures that the

financial criteria are applied consistently and are easily auditable,

thereby protecting investors and reducing the possibility of unfair

discrimination between companies seeking to list on the Exchange.

Second, the proposal clarifies and codifies a second listing

standard, available to companies with at least $500 million of market

capitalization and $200 million of revenues in the most recent 12-month

period. By incorporating the current footnote into the standard itself,

the NYSE transforms the ``adjusted net income'' test into the new

``adjusted cash flow'' standard. The new standard also specifies that

the adjustments included in this standard are limited to the use of

proceeds and acquisitions because the remaining adjustments may not

have cash-flow implications for a particular company. The Commission

believes that codifying these listing standards increases the

transparency of the listing criteria for companies seeking to list on

the Exchange. Providing an alternative standard for listing also

encourages a free and open market by giving companies that are of a

sufficient size an opportunity to list that do not meet the ``pretax

earnings'' standard but are otherwise qualified.

The NYSE also proposes several policy clarifications regarding the

use of adjustments in the listing process. First, all adjustments must

be disclosed as such in the SEC filing of the applicant company, either

within the four corners of the SEC filing or subject to an agreed upon

procedures letter. Second, adjustments will only be applied in the year

in which the event giving rise to the adjustment occurred, except for

the use of proceeds for deleveraging and acquisitions and dispositions,

and acquisitions and dispositions. Third, companies whose adjusted

financial data was relied on by the Exchange in granting eligibility

clearance must include all adjusted financial data in the company's

listing application and issue a press release to the same effect. The

proposal also delineates the Exchange's procedure for reviewing a

company's status at the time of a restatement of financial statements,

due to a change from unacceptable to acceptable accounting principles

and/or correction of efforts, including the consequences of restating

financial statements.

The Commission believes that the NYSE's proposal to codify and

modify the use of each of these adjustments in the evaluation of

applicant companies should provide greater transparency in the listing

process. This enhanced transparency should assist all market

participants, including prospective companies and investors, in better

understanding the significance of the NYSE's decision to list a given

issuer on the Exchange.

Specifically, the Commission believes that it is appropriate for

the Exchange to limit all adjustments to those disclosed as such in the

issuer's filings with the Commission or as subject to an agreed upon

procedures letter provided by the issuer's independent outside auditor.

Any other adjustments could lack sufficient reliability to be

considered by the Exchange in its listing decision. The Commission also

believes that it is reasonable to limit the use of adjustments to the

year in which the event giving rise to the adjustment occurred, with

the two delineated exceptions, because generally, applying such

adjustments to prior periods may, to some extent, distort a particular

company's financial picture. Finally, the Commission believes that the

NYSE's proposal to require companies that were evaluated using adjusted

financial data to include all adjusted financial data in their listing

applications and to issue press releases about the adjustments is

appropriate because such actions should enable potential investors to

better understand the companies' financial situation and the manner in

which such companies were granted clearance to list on the Exchange.

The NYSE also proposes to revise several aspects of the listing

criteria for non-U.S. companies which carry forward relevant items from

the revisions pertaining to domestic companies, including: (1)

Replacing the NTA test with the stockholder's equity test as an

alternative measure of size; (2) using the same definition of IPO's as

for domestic issuers, but also allowing the representation of market

value required in connection with a spin-off to come from the parent

company's transfer agent; and (3) allowing adjustments for foreign

currency for a currency devaluation of more than ten percent. With

respect to the ``adjusted cash flow'' standard, the proposal increases

the aggregate amount to $100 million in operating cash flow, and

narrows to two years the requisite itemized annual financial analysis

for non-U.S. companies whereby each of the two most recent fiscal years

would be required to be reported at a minimum of $25 million in

operating cash flow. Reconciliation to U.S. GAAP of the third year back

is required only if the Exchange determines that reconciliation is

necessary to demonstrate that the aggregate $100 million threshold is

satisfied.

The Commission believes that the proposed changes should provide a

better evaluation of a non-U.S. company's financial health, and also

simplify the non-U.S. company listing criteria because they parallel

the benchmark applied in the pre-tax adjusted earnings standard for

non-U.S. companies.\23\ The Commission does not believe it is

appropriate for the Exchange to impose different listing criteria on

non-U.S. issuers given that they may face different financial

challenges than those encountered by domestic issuers. The Commission

believes that codifying these changes increases transparency for

financial criteria applied to non-U.S. companies seeking to list on the

Exchange.

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\23\ See Securities Exchange Act Release No. 41459 (May 27,

1999), 64 FR 30088.

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The proposal also codifies the Exchange's policy regarding the

original listing criteria for REITs. Generally, the Exchange will

authorize the listing of a REIT if it has at least $60 million in

[[Page 32594]]

stockholders' equity, but will not consider those with less than $60

million in stockholders' equity. For those REITs listing in conjunction

with an offering, the requirement must be evidenced by a written

commitment from the underwriter. Furthermore, the Exchange may deny

listing to a REIT if the Exchange determines, based upon comprehensive

financial analysis, but the REIT is unlikely to maintain its financial

status. REITs with greater than a three-year operating history are

subject to the listing criteria described in this proposal.

The Commission recognizes that in many cases the applicant REIT is

not a traditional operating entity and therefore, it may not be

appropriate to apply the general earnings standards specified in the

Exchange's Manual at the time of listing. Thus, the Commission believes

that the Exchange's proposed minimum listing criteria of $60 million in

stockholders' equity is an acceptable means for screening out those

REITs that the Exchange believes are unsuitable for listing due to

insufficient assets. The Commission recognizes that the stockholders'

equity test is intended as a minimum standard and supports the

Exchange's direction to determine that, with respect to a given REIT,

notwithstanding sufficient sharholder's equity, the REIT may be

unsuitable for listing.

Finally, the NYSE proposes two amendments to its continued listing

criteria. First, in calculating average net income for a company during

the initial three years following its listing, the Exchange will

consider those specific adjustments made to the company's historical

financial data for the relevant year in the original listing

application. The consideration will be limited to the specific

adjustment made during the initial clearance and to the year in which

the adjustment was made.

Second, the proposal revises and codifies the procedures instituted

when a company is identified by Exchange staff as being below the

continued listing criteria by imposing specific time frames with

respect to the notification, monitoring, and suspension and delisting

of these companies' securities. The proposal also requires that the

companies return to good standing by satisfying the continued listing

standards within six quarters of being notified of this status.

The Commission believes that proposed revisions and codification of

the continued listing criteria should enhance investor protection by

ensuring that companies that fail to satisfy the continued listing

criteria are identified, reviewed, and then subjected to specified

delisting procedures. Moreover, those companies falling below the

NYSE's continued listing criteria are provided with transparent,

detailed procedures for addressing their status. The Commission notes

that proposed changes to NYSE Rule 499 are intended to confirm that

rule to the changes proposed to the continued listing criteria in NYSE

Rule 802.

The Commission finds good cause for approving proposed Amendment

Nos. 2 and 3 prior to the thirtieth day after the day after the date of

publication of notice of filing in the Federal Register. Amendment No.

2 addresses the ``adjusted cash flow'' standard with respect to non-

U.S. companies. The proposal increases the aggregate amount to $100

million, narrows to two years the requisite itemized annual financial

analysis for non-U.S. companies whereby each of the two most recent

fiscal years would be required to be reported at a minimum of $25

million, and requires reconciliation U.S. GAAP of the third year back

only if the Exchange determines that reconciliation is necessary to

demonstrate that the aggregate $100 million threshold is satisfied.\24\

The Commission believes Amendment No. 2 is a reasonable mechanism for

addressing the differences between non-U.S. and U.S. companies, helps

to ensure that the financial criteria applies to non-U.S. companies

seeking to list on the Exchange are fully transparent and applied

consistently, and encourages a free and open market by allowing non-

U.S. companies to list on the NYSE.

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\24\ See, not 11, supra.

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In Amendment No. 3, the NYSE proposes to codify the Exchange's

policy regarding the use of financial data to grant eligibility

clearance to an issuer that has less than three years of operating

history and clarifies that REITs and Funds listing with a three-year

operating history must qualify under the original listing standards for

equity securities. As noticed, the proposed rule change discussed the

Exchange's policy regarding the use of financial data to grant

clearance to an issuer with less than three years of operating history

but the proposal did not codify this policy. The Commission believes

that codifying the policy is consistent with the purpose of the Act

because it increases the transparency of the financial criteria applied

to companies seeking to list on the exchange and ensures that the

financial criteria are applied consistently across applicant companies.

For these same reasons, the Commission believes it is appropriate for

the Exchange to codify the applicable listing criteria for REITs and

Funds listing with a three-year operating history, instead of

addressing only those situations where a REIT or Fund has less than a

three-year operating history. Accordingly, the Commission believes that

it is consistent with Section 6 of the Act \25\ to accelerate approval

of Amendment Nos. 2 and 3.

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\25\ 15 U.S.C. 78f.

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IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and

arguments concerning Amendment Nos. 2 and 3, including whether those

amendments are consistent with the Act. Persons making written

submissions should file six copies thereof with the Secretary,

Securities and Exchange Commission, 450 Fifth Street, NW, Washington,

DC 20549-0609. 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 Room. 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-99-13 and should be submitted by July 8, 1999.

V. Conclusion

It is therefore ordered, pursuant to Section 19((b)(2) of the

Act,\26\ that the proposed rule change (SR-NYSE-99-13), as amended,

codifying and revising the NYSE's original and continued listing

criteria and procedures, is approved.

\26\ 15 U.S.C. 78s(b)(2).

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For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\27\

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\27\ 17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 99-15351 Filed 6-16-99; 8:45 am]

BILLING CODE 8010-01-M