Unlisted Trading Privileges

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-42209; File No. S7-29-99]

RIN 3235-AH85

Unlisted Trading Privileges

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission is proposing a change

to Rule 12f-2 under the Securities Exchange Act of 1934, which governs

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

offerings (``IPOs''). Under the proposed rule change, a national

securities exchange extending UTP privileges to an IPO security listed

on another exchange would no longer be required to wait until the day

after trading has commenced on the listing exchange to allow trading in

that security. Instead, a national securities exchange would be

permitted to begin trading in an IPO issue pursuant to UTP immediately

after the first trade in the security is reported by the listing

exchange to the Consolidated Tape.

DATES: Comments should be submitted on or before January 31, 2000.

ADDRESSES: Interested persons should submit three copies of their

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

Securities and Exchange Commission, 450 Fifth Street, N.W., Washington,

DC 20549-0609. Comments may also be submitted electronically to the

following e-mail address: [email protected]. All comment letters

should refer to File No. S7-29-99. All submissions will be made

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

Reference Room, 450 Fifth Street, N.W., Washington, DC 20549.

Electronically-submitted comments will be posted on the Commission's

Internet website (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Kevin Ehrlich, Attorney, at (202) 942-

0778 or Ira Brandriss, Attorney, at (202) 942-0148, Division of Market

Regulation, Securities and Exchange Commission, 450 Fifth Street, N.W.,

Washington, DC 20549-1001.

SUPPLEMENTARY INFORMATION:

I. Background

Section 12(f) of the Act \1\ governs when a national securities

exchange (``exchange'') may extend UTP to a security, i.e., allow

trading in a security

[[Page 69976]]

that is not listed and registered on that exchange.\2\ Section 12(f)

was substantially amended by the UTP Act of 1994 (``UTP Act'').\3\

Prior to that time, exchanges had to apply to the Commission for

approval before extending UTP to a particular security. This process

entailed notice of the application in the Federal Register, a period

for interested parties to comment on the application, and formal

Commission approval based on a finding that extension of UTP to the

security would be consistent with the maintenance of fair and orderly

markets and the protection of investors. The UTP Act, among other

matters, removed the application, notice, and Commission approval

process from Section 12(f) (except in cases of Commission suspension of

UTP in a particular security on an exchange). Accordingly, the UTP Act

eliminated the extensive UTP approval process for all securities listed

and registered on an exchange. Nevertheless, as discussed in detail

below, the exchanges must wait one full day before they can extend UTP

to a listed IPO security as defined in Section 12(f)(1)(G)(i) and

(ii).\4\

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

\2\ Section 12(a) generally prohibits trading on an exchange of

any security that is not registered (listed) on that exchange.

Section 12(f) excludes from this restriction securities traded

pursuant to UTP that are registered on another national securities

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

exchange allows its members to trade the security as if it were

listed on the exchange. Over-the-counter (``OTC'') dealers are not

subject to the Section 12(a) registration requirement because they

do not transact business on an exchange.

\3\ Pub. L. No. 103-389, 108 Stat. 4081 (1994).

\4\ Section 12(f)(1)(B), read jointly with

Section12(f)(1)(A)(ii), as amended, provides this exception for

listed IPO securities. In defining securities that fall within the

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

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

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

Securities Act of 1933; and

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

registration statement with respect to the offering, was not subject

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

and

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

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

trading on the national securities exchange with which such security

is registered.

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A. The Waiting Period

In passing the UTP Act, Congress considered the question of whether

a waiting period should be imposed on exchanges trading an IPO security

pursuant to UTP. During the legislative process, conflicting views

arose among interested parties concerning the appropriate waiting

period, if any, for extending UTP to an IPO security.\5\

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\5\ At Congressional hearings, testimony and evidence were

presented, on one hand, to show the negative impact that a mandatory

waiting period for UTP would have on competition. An interested

party in favor of a mandatory waiting period asserted, on the other

hand, that listed IPO securities should trade in a central location

for a ``short'' period of time to help ensure market efficiency

immediately following an IPO, and that immediate UTP in listed IPO

securities could increase the cost of raising capital for issuers.

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As a result, Congress temporarily permitted UTP exchanges to trade

an IPO security only after two days of trading had occurred on the

exchange on which the security was registered and listed. It also

required the Commission to prescribe, by rule or regulation within 180

days of the legislation's enactment, the duration of the interval, if

any, that UTP exchanges would be required to wait before trading in

listed IPOs.\6\ In a report to Congress on the UTP Act, the House

Committee on Energy and Commerce described the interim waiting period

as ``a temporary exception'' to the general authority it granted to

exchanges to extend UTP immediately. In leaving the ultimate decision

on the issue in the hands of the Commission, the Committee expressed

the view that the rulemaking process would afford an opportunity for

the conflicting concerns and suggestions to be examined and

resolved.\7\

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\6\ Amended Section 12(f)(1)(C) required exchanges (until the

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

after the enactment of the UTP Act) to wait until the third trading

day in a listed IPO security before trading the security pursuant to

UTP.

\7\ The Committee stated that:

The Committee expects that, in undertaking the IPO rulemaking

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

benefits associated with streamlining the regulatory process and

enhancing competitive opportunities among market centers with

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

effects if any that granting immediate UTP might have on the

distribution of these securities. The Committee further expects the

Commission to consider the experience of the third market trading in

listed IPOs in the course of its examination of these questions.

Finally, the Committee expects the markets to cooperate in providing

the Commission with data regarding the nature and effect of trading

activity (including, for example, any volatility effects on the

security) in connection with IPO listings in order to enable the

Commission to determine whether the benefits of confining early

trading in IPOs to one marketplace are outweighed by the benefits of

removing regulatory delays that inhibit competition among markets.

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

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B. The Commission's Original Proposal: Elimination of the Waiting

Period

Accordingly, on February 9, 1995, the Commission proposed for

comment Rule 12f-2,\8\ which would have virtually eliminated the

waiting period.\9\ Under the proposal, rather than continuing the

temporary requirement to wait two days, UTP exchanges would have been

permitted to begin trading in a listed IPO immediately after the first

trade executed on the listing exchange was reported by that exchange to

the Consolidated Tape. In proposing a one-trade interval for UTP in IPO

securities, the Commission stated that:

\8\ 17 CFR 240.12f-2.

\9\ Exchange Act Release No. 35323 (Feb. 2, 1995), 60 FR 7718

(Feb. 9, 1995).

Shortening the interval for UTP in listed IPO securities should

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

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

may trade IPO securities immediately upon effective registration

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

reason to impose a restriction that would inhibit competition among

exchanges, the Commission initially believes that competing

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

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

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been effected and reported.\10\

\10\ Exchange Act Release No. 35323 (Feb. 2, 1995), 60 FR 7718,

7720 (Feb. 9, 1995).

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The Commission noted that testimony and evidence were presented

during the legislative process preceding the UTP Act to show the

negative impact that a mandatory waiting period has on competition. The

Commission also pointed out that the third market traded listed IPO

securities with no delay. The Commission solicited comment on the

potential impact on markets and the distribution of securities, as well

as the experience of the third market.

The Commission received eight letters in response to the original

proposal, five of which supported the proposed rule, and three of which

opposed it.\11\ In addition, shortly before the proposed rules were

published, the Commission received a study from the Philadelphia Stock

Exchange (``Phlx''), submitted on behalf of itself, the Boston Stock

Exchange, the Chicago Stock Exchange, and the Pacific Stock Exchange

(now known as the Pacific Exchange).

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\11\ Favoring the proposal were the Boston Stock Exchange, Inc.,

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

(one letter commenting directly on the proposal, and one letter

responding to negative comments), and the Philadelphia Stock

Exchange, Inc. (letter responding to negative comments). Opposing

the proposal were the New York Stock Exchange, Inc., CS First

Boston, and Lehman Brothers. For a summary of the comments, see

Exchange Act Release No. 35637 (April 21, 1995), 60 FR 20891 (April

28, 1995).

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The Phlx study showed high trading volume in IPOs during the early

days of trading, particularly the first and second days of trading.

Citing this data, the regional exchanges argued that a restriction on

extending UTP to IPO securities created a substantial negative effect

on competition, both in relation to the listing exchange and OTC

dealers

[[Page 69977]]

trading listed securities (the ``third market'').\12\

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\12\ The Chicago Stock Exchange also stated that it had listed

IPOs simultaneously with the NYSE and had seen no adverse effect.

Similarly, the Phlx study found, in the case of five IPOs that were

dually or multiply listed on at least one regional exchange and the

NYSE, that the regional trades on the first two days virtually

always were within the NYSE daily trading range.

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On the other hand, the commenters opposing a reduced waiting

period--the New York Stock Exchange (``NYSE'') and two underwriting

firms--maintained that immediate regional exchange trading of IPOs

would increase price volatility in the trading of IPO securities. With

IPOs trading immediately on UTP exchanges, they argued, underwriters

would not have sufficient time to ensure an orderly distribution of the

securities.\13\ A study produced by Lehman Brothers at the time showed

higher volatility in some Nasdaq IPOs than in selected NYSE IPOs.

Opponents of the proposal cited this data in asserting that dispersed

initial trading of IPOs is more volatile than initial centralized

trading.\14\

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\13\ Two commenters advocated at the time that Congress's

temporary two-day delay should continue in place, while the third

recommended the retention of, at the very least, a one-day trading

delay.

\14\ Supporters countered that any increase in price volatility

in early trading of IPOs is limited to upward price movement.

Supporters also argued that price volatility is generated by supply

and demand, and, as a natural by-product of a free and open market,

should never be used as a reason to exclude some equally-regulated

competitors from the marketplace.

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C. Adoption of a Revised Version

On April 21, 1995, the Commission adopted a revised version of its

original proposal. Instead of allowing UTP exchanges to trade a listed

IPO as soon as the first trade on the listing exchange was reported to

the Consolidated Tape, the revised rule required them to wait until the

opening of business on the day following the IPO. In other words, a

one-day trading delay was established for UTP in listed IPOs.\15\

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\15\ See Exchange Act Release No. 35637 (April 21, 1995), 60 FR

20891 (April 28, 1995).

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In arriving at this position in 1995, the Commission acknowledged

the substantial volume of trading that occurs on the initial trading

days of IPOs. As a general matter, the Commission agreed with the

regional exchanges that early UTP in IPO securities would enhance the

ability of multiple markets to compete for this volume. However, it

also recognized a possibility that virtually immediate UTP in IPO

securities could complicate the pricing and orderly distribution of IPO

securities by increasing the risk of price volatility as the securities

are distributed to the public. The Commission noted particularly the

concern raised by the underwriters that believed that IPO pricing could

be at risk if there was no opportunity for early centralized trading.

Finally, a significant factor in the Commission's decision to adopt a

one-day trading delay in 1995 was the fact that insufficient data was

available with which to assess the potential impact of immediate IPO

trading in multiple markets.

The Commission stated at the time, however, that it would continue

to monitor the trading of IPOs, and that it would be willing to

consider revisiting the question of the appropriate waiting period for

extending UTP to listed IPO securities after experience had been gained

with the amended rules.\16\ The Commission believes that it is now

appropriate to revisit the one-day waiting period based on its

experience over the last four years, as well as results of a new study

submitted to the Commission by several regional exchanges.

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\16\ Id. at 20894.

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D. The 1998 Study

In August 1998, the Chicago Stock Exchange, the Cincinnati Stock

Exchange, and the Pacific Exchange presented to the SEC for review a

new study (``1998 Study''), examining the effects of immediate multiple

trading of IPO securities.\17\ The study was conducted at the request

of the Chicago Stock Exchange in response to the Commission's 1995

indication that it would be open to reconsidering the issue when new

data became available.

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\17\ Jay Ritter, Joe B. Cordell Eminent Scholar, University of

Florida, ``Unlisted Trading Privileges in Listed IPOs: Analysis of

the One-Day Delay,'' June 1998, available in public File No. S7-29-

99.

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The study comprised two sets of inquiries. Each compared a group of

newly issued securities that were permitted to trade immediately on

more than one exchange, with a group of IPO securities that were

similar in type but that were subject to the one-day trading delay. The

study examined whether bid-ask spreads and intraday price volatility

were greater for the IPOs that were dually or multiply traded than for

the IPOs that were not, compiling data from the first five days of

trading for each of the securities.

Specifically, the first analysis compared a group of nine dually

listed IPOs and six spin-offs \18\ that traded on more than one

exchange \19\ with a similar group of IPO securities that were not

dually or multiply listed. The two groups of offerings were issued

during the same general time period,\20\ and were similar in terms of

the industry of the issuer and the amount of proceeds from the

offering. Because an IPO as defined under the Act includes both

traditional IPOs and spin-offs, the study attempted to include both in

its analysis. Moreover, like IPOs, the spin-offs involve an issuance of

shares where there is no previous basis to establish an opening price.

The sampling for comparison was small because IPOs are rarely listed on

more than one exchange.

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\18\ In the spin-offs, the shareholders of a parent company were

issued IPO shares in a subsidiary company. Spin-offs are considered

to be ``technical IPOs''--i.e., transactions that are not

traditional initial issuances of shares to the general public in

exchange for cash, but that are currently included within the

definition of IPO in Section 12 of the Act.

\19\ Spin-offs and IPOs that were not considered IPOs under

Section 12 of the Act could be traded immediately on other

exchanges.

\20\ The dually or multiply listed IPOs and spin-offs examined

in this section of the study began trading between 1993 and 1997.

The comparison group of IPOs and spin-offs listed on only one

exchange were selected from among IPOs and spin-offs that began

trading between 1995 and 1997 because the one-day delay for UTP

trading of such securities first went into effect in 1995. The

comparison group was selected on the basis of similar industries and

proceeds. The sample group of dually-listed IPOs included the

following companies: Dr. Pepper/Seven-Up, Dean Witter/Discover,

Allstate, Urban Shopping Centers, Pac-Tel, Guidant Corp., PMI Group,

Hambrecht & Quist, Dominick's Supermarkets, Western Atlas Inc.,

Lehman Bros. Holdings, Promus Hotel Corp., Host Marriott Services,

360 deg. Communications, and Imation Corp. The control group of non-

dually listed IPOs included: Fresh Del Monte Produce, Donaldson

Lufkin Jenrette, American States Financial, Prentiss Properties

Trust, Excel Communications, Global DirectMail, capMAC Holdings,

Friedman Billings Ramsey, Circle K, Diamond Offshore Drilling,

Contifinancial, Renaissance Hotel Group, Red Roof Inns, Berg

Electronics, and Bell & Howell.

In terms of intraday price volatility (the daily standard

deviation of returns), the sample group produced volatility of 5.3%

while the control group had volatility of 6.89%. This difference

suggests that non-dually listed IPOs tend to be 30% more volatile

than dually listed IPOs. The study also showed that the bid-ask

spreads for each group were similar. The bid-ask spreads for the

dually listed group were a statistically insignificant 10% higher

than the control group for the first day of trading and only 5%

higher by the second day of trading.

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This first inquiry found that price volatility was higher on the

first day of trading for both groups of IPOs and spin-offs than on any

of the subsequent four days. However, the price volatility of IPOs and

spin-offs traded on only one exchange was approximately 30% higher than

that of the IPOs and spin-offs that were traded on at least two

exchanges. In addition, in its comparison of bid-ask spreads, the study

showed that there was no statistically significant difference between

the two groups. Thus, the study concluded, neither an analysis of price

volatility nor a survey of bid-ask spreads

[[Page 69978]]

revealed any evidence of damage to market quality caused by immediate

trading of IPOs on non-listing exchanges.

The second analysis compared a group of securities issued by

companies that underwent some type of restructuring and could be dually

or multiply traded because they were not subject to the UTP

prohibition, with a group of stocks that similarly were issued as a

result of reorganizations but that were subject to the UTP prohibition.

Although this sampling did not include securities of a private company

going public for the first time, the reorganizations are considered

``technical IPOs'' because they meet the Section 12(f) definition of an

IPO for the purposes of the statutory one-day trading delay.\21\ The

analysis compared data between 1994 and 1997 for eleven companies that

were not subject to the UTP prohibition with six companies that were.

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\21\ See note 4, supra.

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This second inquiry found that the price volatility on the first

day of trading in either group of securities was not exceptionally

high. Moreover, the price volatility of new issuances that traded on

more than one exchange the first day did not differ significantly from

that of the technical IPOs trading on only one exchange. The study also

found no significant differences in the bid-ask spreads between the

technical IPOs and the comparison group that traded on more than one

exchange the first day.\22\

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\22\ The second analysis compared eleven stocks of issuers that

underwent some form of restructuring between May 1994 and October

1997 that were not deemed to be an IPO, with six stocks that

underwent a restructuring between April 1997 and October 1997 but

that were deemed to be an IPO. The control group of stocks that were

not considered to be an IPO included: Illinova Corp., Rexel Corp.,

Burlington Northern Santa Fe, Walt Disney, Rockwell International,

Tenneco, Enron Corp., Rough Industries, Texas Utilities Co., First

Republic Bancorp, and Excel Communications. The sample group of

stocks that were considered to be an IPO included: CTG Resources,

New Century Energies, Pioneer Natural Resources, Fred Meyer Inc.,

Keyspan Energy, and U.S. Restaurant Properties.

The sample group of technical IPOs was less volatile than the

control group for four of the first five days of trading after the

restructuring. The ratio of volatility of the sample group compared

to the control group for the first five days of trading was: 0.96,

1.55, 0.59, 0.80 and 0.81. A ratio of 1 shows identical volatility.

Likewise, the bid-ask spreads were closer for the sample group than

the control group for the first five days of trading after a

restructuring. The ratio of bid-ask spreads of the sample group

compared to the control group for the first five days of trading

was: 0.80, 0.88, 0.69, 0.81, and 0.93. Again, a ratio of 1 shows

identical bid-ask spreads.

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The study concluded from these analyses that there is no empirical

basis for the contention that multiple exchange trading on the first

day of an IPO adversely affects market quality, either by increasing

price volatility or widening bid-ask spreads. In fact, the evidence

indicated that listed IPOs that are not traded on more than one

exchange can be more volatile than dually or multiply listed IPOs. The

study further noted that the third market, which is not subject to the

one-day delay, currently competes with the listing exchange in trading

IPOs on the first day with no visible adverse effect.

In addition, the study contained data demonstrating that regional

exchanges have been unable to attract a substantial share of first day

trading volume in IPOs even when not barred by the statute from

participating. For example, in the case of the dually or multiply

listed IPOs studied, the regional exchanges garnered an average of only

1.8% of the total trading volume on the first day. Although the

proportion increased over the next four trading days, it still remained

comparatively small. In the case of IPOs subject to the one-day trading

delay, the regional exchanges accounted for no more than an average 5%

of the total trading volume for days two through five. In view of the

small amount of volume at issue, the study concluded that eliminating

the one-day delay should not have a major impact on the market as a

whole. The study also observed that the current ban on first day

trading puts regional exchanges at a competitive disadvantage vis-a-vis

the third market, which is not subject to the one-day delay.

II. Discussion

A. Introduction

The Commission preliminarily believes that there is an absence of

significant evidence that the delay protects the markets and that,

accordingly, there is no justification for the continuance of the one-

day trading delay. Recent experience appears to support changing the

rule. The one-day trading delay appears to provide no real benefits to

the market for IPOs and actually inhibits competition among markets.

The lack of any problems over the last four years with reducing the

waiting period from two days to one day supports this conclusion.\23\

In addition, the 1998 study discussed above provides further evidence

that the one-day trading delay should be eliminated or reduced.

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\23\ While there have been frequent questions regarding which

transactions qualify as IPOs under the rule, there have not been

significant problems in terms of IPO pricing.

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As noted above, when the Commission first considered this issue in

1995, two commenters supported a two-day waiting period for IPOs,

arguing that IPOs would not have an orderly distribution and that there

would be increased price volatility on these two days. This, however,

has not turned out to be a concern on the second trading day as

evidenced by the successful trading since 1995 of IPO securities on the

second trading day by multiple markets. Therefore, based on this

experience and the 1998 Study, the Commission proposes to allow

exchanges to extend UTP to IPO securities after the first trade on the

listing market is reported to the Consolidated Tape.

B. Proposed Amendment

The Commission is proposing an amendment to Rule 12f-2(a) \24\ to

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

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

the listing exchange and the transaction has been reported pursuant to

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

under the Act.\25\ The proposed rule would reduce the mandatory waiting

period (or ``interval,'' as it is described in the Act) for extending

UTP in listed securities from one trading day, as specified in the

current Rule 12f-2(a), to the time that it takes to effect and report

the initial trade in the security on the listing exchange.

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\24\ 17 CFR 240.12f-2(a).

\25\ 17 CFR 240.11Aa3-1. The remaining paragraphs of Rule 12f-2,

paragraphs (b) and (c), which currently define subject securities

and require that the extension of UTP to an IPO security comply with

all the other provisions in Section 12(f), and the rules thereunder,

would remain unchanged.

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The Commission believes that it is appropriate to minimize

regulatory restraints on competition for trading listed IPO securities.

The proposed rule change should enhance the ability of exchanges to

compete for order flow in these securities, especially in light of the

fact that OTC dealers and alternative trading systems may already trade

IPO securities immediately upon effective registration with the

Commission. The Commission sees no compelling reason to maintain a

restriction that inhibits competition among the exchanges.

Moreover, the 1995 and 1998 studies show no evidence that the one-

day trading delay provides any tangible benefits to market quality. In

fact, the 1998 Study suggests that greater price volatility actually

exists on the first day of an IPO with the trading delay in place. The

1998 Study examined both bid-ask spreads and price volatility and

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was unable to determine that there was an adverse impact on market

quality resulting from the trading of IPO securities in multiple

markets.\26\ Especially in view of the rapidly expanding choices that

investors have for trade execution, placing unnecessary restrictions on

some markets in favor of others tends to hamper competition. While the

listing exchange should have the benefit of listing the IPO, other

markets should be permitted to provide a place for investors to trade

those securities.

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\26\ The Commission recognizes that the number of IPOs studied

was limited due to the low number of multiple IPO listings and the

current restrictions. The Commission still preliminarily believes

that the study's methodology is reasonable. For the definition of

``IPO,'' see note 4, supra.

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In 1995, the Commission expressed concern about maintaining the

delay but decided that prudence dictated a cautious approach. After

several years of experience with the one-day trading delay and analysis

of the impact, the Commission preliminarily believes that it is now

appropriate to lift the one-day trading delay for IPOs.

At the same time, the Commission preliminarily believes it

necessary to retain a minimal, one trade waiting requirement before

non-listing exchanges may begin trading. The first transaction in an

IPO, as disseminated on the Consolidated Tape, conveys essential

information to the public concerning the price of the security set by

the underwriting process. In addition, the timing of the initial trade

and commencement of trading in a new issue entail significant

coordination involving the issuer, the listing exchange, and the

underwriters of the public offering of the security. If competing

exchanges were to allow their members to trade a listed IPO security

before it initially traded on the listing exchange, it could be

difficult to ensure that all the preparation for the IPO had been

completed before public trading in the security commenced.\27\

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\27\ On December 9, 1999, Commission staff issued a no-action

letter to the regional exchanges clarifying the definition of IPO

for purposes of Rule 12f-2. The no-action letter would permit the

regional exchanges to begin trading securities in certain

``technical IPO'' transactions on the same day those securities

begin trading on another exchange on which they are listed. The no-

action letter identifies six examples of offerings that meet the

definition of IPO under Section 12(f) of the Act, but that are not

traditional, first time capital raising efforts. These examples

involve offerings of securities to an existing class of security

holders rather than an initial offering of shares to the general

public in exchange for cash. See letter from Annette L. Nazareth,

Director, Division of Market Regulation, SEC, to Paul B. O'Kelly,

Executive Vice President, Market Regulation and Legal, The Chicago

Stock Exchange, dated December 9, 1999.

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C. Solicitation of Comments

The Commission seeks comment on the one trade waiting period as

proposed. To the extent that commenters believe that the current one

day waiting period should remain unchanged, the Commission encourages

commenters to submit specific data illustrating the need to retain the

current waiting period. In addition, should a commenter believe that a

different interval should be used, the commission encourages commenters

to submit specific data supporting that belief. Relevant data might

include the potential negative effects on the pricing of an IPO. The

Commission also seeks comment on whether any changes to the

consolidated quotation system or trade reporting systems should be made

as a result of reducing the waiting interval from one day to the first

trade on the listing exchange. In addition, the Commission solicits

comment on the possible impact in trading and whether additional

procedures or enhancements may be necessary to ensure that a UTP market

does not commence trading prior to the first trade on the listing

exchange.

III. Costs and Benefits of the Proposed Amendments

The Commission is considering the costs and benefits of the

proposed amendment to the Rule. In terms of potential benefits to

market participants should the proposal be adopted, the proposed

amendment would allow UTP exchanges to compete with the listing

exchange and the third market for order flow on the first day an IPO

starts trading. Investors benefit when more participants offer

liquidity to the market. The proposed amendment would also reduce

compliance costs for UTP exchanges because they would not be required

to analyze transactions to determine which ones are IPOs under the

statutory definition and subject to the current one-day delay. As long

as they wait for one trade on the listing exchange, UTP exchanges would

be free to extend UTP to that security. In addition, issuers would

benefit from wider distribution of IPO securities and greater

opportunities for price discovery.

The proposed amendment could impact the listing exchanges because

they would lose a one-day trading advantage over other exchanges. In

addition, the members of the listing exchange could lose business

because order flow might be lost to other exchanges. The Commission

does not anticipate any other direct or indirect costs to U.S.

investors or other market participants because the rule would impose no

recordkeeping or compliance burdens.

The Commission requests comment on the costs and benefits of the

proposed amendment to Rule 12f-2(a). In particular, the Commission asks

commenters to address what, if any, effect the proposed rule amendment

could have on exchanges and their members and whether the proposed

amendment would generate the anticipated benefits or impose any costs

on market participants. In addition, the Commission asks commenters to

address what, if any, effect the proposed rule amendment could have on

issuers and other market participants.

IV. Initial Regulatory Flexibility Analysis

This Initial Regulatory Flexibility Analysis (``IRFA'') is being

prepared in accordance with Section 3(a) of the Regulatory Flexibility

Act (``RFA'').\28\ It relates to a proposed amendment to Rule 12f-2(a)

\29\ under the Exchange Act. The proposed amendment would permit

exchanges to extend UTP to an IPO security listed on another exchange

after the first trade on the listing exchange is reported to the

Consolidated Tape, rather than waiting one full trading day as

currently required.

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\28\ 5 U.S.C. 603(a).

\29\ 17 CFR 240.12f-2(a).

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A. Reasons for and Objectives of the Proposed Actions

This amendment is proposed to further the purposes of Section

11A(a)(1)(D) of the Exchange Act \30\ by fostering efficiency,

enhancing competition, increasing the amount of information available

to brokers, dealers, and investors, facilitating the offsetting of

investors' orders, and contributing to best execution of those orders.

The proposal would address a barrier to competition that currently

operates as a restriction on trading activity. Under the current one-

day trading delay, exchanges that do not list IPOs are unable to

compete with electronic trading systems and the third market for order

flow. The proposed rule change would facilitate competition among

various markets for order flow and enhance investor options for order

execution. The one-day trading delay does not appear to provide any

significant benefit to the marketplace, but rather appears to create a

barrier to competition. The proposed rule amendment would improve

competition and investor choice.

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\30\ 15 U.S.C. 78k-1(a)(1)(D).

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[[Page 69980]]

B. Legal Basis

Sections 12(f)(1)(C) and 12(f)(1)(D) provide the Commission with

rulemaking authority to prescribe procedures or requirements for

extending UTP to any security. In addition, Section 11A(a)(1)(D) sets

forth objectives for linked markets that the Commission should pursue.

These include fostering efficiency, enhancing competition, increasing

the amount of information available to brokers, dealers, and investors,

facilitating the offsetting of investors' orders, and contributing to

best execution of those orders. The changes to Rule 12f-2(a) are also

proposed under the Commission's authority set forth in Section 23(a) of

the Exchange Act.

C. Small Entities Subject to the Rule

The proposal would directly affect the national securities

exchanges, none of which is a small entity. Paragraph (e) of the Rule

0-10 \31\ states that the term ``small business,'' when referring to an

exchange, means any exchange that has been exempted from the reporting

requirements of Sec. 240.11Aa3-1. Thus there would be no impact for

purposes of the RFA on small businesses.

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\31\ 17 CFR 240.0-10(e).

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D. Reporting, Recordkeeping, and Other Compliance Requirements

The proposal would not impose any new reporting, recordkeeping, or

other compliance requirements on exchanges, or entities indirectly

affected by the proposal.

E. Duplicative, Overlapping or Conflicting Federal Rules

The Commission believes that there are no rules that duplicate,

overlap, or conflict with the proposed rules.

F. Significant Alternatives

The RFA directs the Commission to consider significant alternatives

that would accomplish the stated objectives, while minimizing any

significant economic impact on small entities. In connection with the

proposal, the Commission considered the following alternatives: (1) The

establishment of differing compliance or reporting requirements or

timetables that take into account the resources available to small

entities; (2) the clarification, consolidation, or simplification of

compliance and reporting requirements under the Rule for small

entities; (3) the use of performance rather than design standards; and

(4) an exemption from coverage of the Rule, or any part thereof, for

small entities.

The Commission believes that none of the above alternatives is

applicable to the proposed amendment. The exchanges are directly

subject to the requirements of Rule 12f-2(a) and are not ``small

entities'' because they are all national securities exchanges that do

not meet the definition of small entity. Therefore, the Commission does

not believe the alternatives are applicable in the present proposal.

G. Solicitation of Comments

The Commission encourages the submission of comments with respect

to any aspect of this Initial Regulatory Flexibility Analysis. In

particular, the Commission seeks comment on: (i) The number of small

entities, if any, that would be affected by the proposed rule; and (ii)

the impact that the proposed amendment would have, if any, on such

entities. Such comments will be considered in the preparation of the

Final Regulatory Flexibility Analysis, if the proposed amendment is

adopted, and will be placed in the same public file as comments on the

proposed rules themselves. Comments should be submitted in triplicate

to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450

Fifth Street, N.W., Washington, D.C. 20549-0609. Comments also may be

submitted electronically at the following E-mail address: rule-

[email protected]. All comment letters should refer to File No. S7-29-

99; this file number should be included on the subject line if E-mail

is used. Comment letters will be available for public inspection and

copying in the Commission's Public Reference Room, 450 Fifth Street,

N.W., Washington, D.C. 20549. Electronically submitted comment letters

also will be posted on the Commission's Internet web site (http://

www.sec.gov).

V. Paperwork Reduction Act

The Paperwork Reduction Act does not apply because the proposed

amendment does not impose recordkeeping or information collection

requirements, or other collections of information that require the

approval of the Office of Management and Budget under 44 U.S.C. 3501 et

seq.

VI. Effects on Competition, Efficiency, and Capital Formation

Section 23(a)(2) of the Exchange Act \32\ requires the Commission,

when promulgating rules under the Act, to consider the anti-competitive

effects of such rules. Moreover, Section 3 of the Exchange Act,\33\ as

amended by the National Securities Markets Improvement Act of 1996,\34\

provides that whenever the Commission is engaged in a rulemaking and is

required to determine whether an action is necessary or appropriate in

the public interest, the Commission must consider, in addition to the

protection of investors, whether the action will promote efficiency,

competition, and capital formation. The Commission notes that the 1998

Study submitted by the regional exchanges in support of their

rulemaking petition appears to indicate that the rule change would

promote competition.

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\32\ 15 U.S.C. 78w(a)(2).

\33\ 15 U.S.C. 78c.

\34\ Pub. L. No. 104-290, 110 Stat. 3416 (1996).

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The Commission requests comment on any anti-competitive effects the

proposed rule change may have on national securities exchanges,

associations, third markets, order routing firms, investors, issuers,

and other market participants. As stated above, the Commission also

notes that it has received a study that appears to indicate that the

proposed rule change would promote competition. The Commission requests

comment on, and appropriate data regarding the impact of, the proposed

rule change would promote efficiency, competition, and capital

formation.

For purposes of the Small Business Regulatory Enforcement Fairness

Act of 1996, the Commission is also requesting information regarding

the potential impact of the proposed rule on the economy on an annual

basis. Commentators should provide empirical data to support their

views.

VII. Statutory Authority

The rule amendments in this release are being proposed pursuant to

15 U.S.C. 78 et seq., particularly Sections 11A(a)(1)(D), 12(f)(1)(C),

12(f)(1)(D), and 23(a) of the Exchange Act, 15 U.S.C. 78k-1,

78l(f)(1)(C), 78l(f)(1)(D), 78w(a).

List of Subjects in 17 CFR Part 240

Reporting and recordkeeping requirements, Securities.

For the reasons set out in the preamble, the Commission proposes to

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

Regulations as follows:

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

1934

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

follows:

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee,

77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k,

78k-1, 78l,

[[Page 69981]]

78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d), 78mm, 79q,

79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and 80b-11, unless

otherwise noted.

* * * * *

2. Section 240.12f-2 is amended by revising paragraph (a) to read

as follows:

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

that is the subject of an initial public offering.

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

unlisted trading privileges to a subject security when at least one

transaction in the subject security has been effected on the national

securities exchange upon which the security is listed and the

transaction has been reported pursuant to an effective transaction

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

* * * * *

Dated: December 9, 1999.

By the Commission.

Jonathan G. Katz,

Secretary.

[FR Doc. 99-32472 Filed 12-14-99; 8:45 am]

BILLING CODE 8010-01-U