Notice of an Application of the New York Stock Exchange, Inc. for an Exemption Pursuant to Section 36 of the Securities Exchange Act of 1934 and Request for Comment, 40748-40756 [E5-3742]
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40748
Federal Register / Vol. 70, No. 134 / Thursday, July 14, 2005 / Notices
B. Purpose of the Matching Program
G. Disposal of Records
Chapter 84 of title 5, United States
Code (U.S.C.) requires OPM to offset
specific benefits by a percentage of
benefits payable under Title II of the
Social Security Act. The matching will
enable OPM to compute benefits at the
correct rate and determine eligibility for
benefits.
Records causing closeout or suspend
actions will be annotated and returned
to OPM for record keeping purposes. All
records returned to OPM are considered
‘‘response’’ records and any not used in
the update process must be purged by
SSA immediately after all processing is
completed.
C. Authority for Conducting the
Matching Program
[FR Doc. 05–13827 Filed 7–13–05; 8:45 am]
BILLING CODE 6325–38–P
Chapter 84, title 5, United States
Code.
SECURITIES AND EXCHANGE
COMMISSION
D. Categories of Records and
Individuals Covered by the Match
[Release No. 34–51998; File No. S7–06–05]
The two SSA records systems
involved in the match are (1) Master
Files of Social Security Number (SSN)
Holders and SSN Applications, 60–0058
(SSA/OEEAS) and (2) the Master
Beneficiary Record, 60–0090 (SSA–
ORSIS), The OPM records consist of
annuity data from its system of records
entitled OPM/Central 1—Civil Service
Retirement and Insurance Records, last
published on October 8, 1999, at 64 FR
54930, and as amended at 65 FR 25775,
May 3, 2000.
E. Description of the Match and Records
OPM will provide SSA an extract
from the Annuity Master File and from
pending claims snapshot records via the
File Transfer Management System
(FTMS). The extracted file will contain
identifying information concerning the
disability annuitant, child survivor, or
surviving spouse who may be eligible
for an annuity under FERS. Each record
will be matched to SSA’s records and
requested information transmitted back
to OPM.
F. Privacy Safeguards and Security
Both SSA and OPM will safeguard
information provided by the reciprocal
agency as follows: Access to the records
matched and to any records created by
the match will be restricted to only
those authorized employees and
officials who need the records to
perform their official duties in
connection with the uses of the
information authorized in the
agreement. Records matched or created
by this exchange will be stored in an
area that is physically safe. Records
used during this exchange will be
processed under the immediate
supervision and control of authorized
personnel in a manner which will
protect confidentiality of the records.
Either OPM or SSA may make onsite
inspection or make other provisions to
ensure that adequate safeguards are
being maintained by the other agency.
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Notice of an Application of the New
York Stock Exchange, Inc. for an
Exemption Pursuant to Section 36 of
the Securities Exchange Act of 1934
and Request for Comment
July 8, 2005.
On May 26, 2005, the Securities and
Exchange Commission received an
application from the New York Stock
Exchange, Inc. (‘‘NYSE’’) for an
exemption pursuant to Section 36 1 of
the Securities Exchange Act of 1934,2 in
accordance with the procedures set
forth in Exchange Act Rule 0–12.3 The
NYSE requests exemptive relief from
Section 12(a) 4 of the Exchange Act to
permit its members, brokers and dealers
to trade certain unregistered debt
securities on the NYSE’s Automated
Bond System.5 We are publishing this
notice and a proposed exemptive order
to provide interested persons with an
opportunity to comment.6
I. Background
Section 12(a) of the Exchange Act
provides in relevant part that it ‘‘shall
be unlawful for any member, broker or
dealer to effect any transaction in any
security (other than an exempted
security) on a national securities
exchange unless a registration is
effective as to such security for such
exchange.’’ Section 12(b) 7 of the
1 15 U.S.C. 78mm. Section 36 of the Exchange Act
gives the Commission the authority to exempt any
person, security or transaction from any Exchange
Act provision by rule, regulation or order, to the
extent that the exemption is necessary or
appropriate in the public interest and consistent
with the protection of investors.
2 15 U.S.C. 78a et seq.
3 17 CFR 240.0–12. Exchange Act Rule 0–12 sets
forth the procedures for filing applications for
orders for exemptive relief pursuant to Section 36.
4 15 U.S.C. 78l(a).
5 The NYSE’s application for exemptive relief is
included as Appendix A.
6 The Commission’s proposed exemptive order is
included as Appendix B.
7 15 U.S.C. 78l(b).
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Exchange Act dictates how the
registration referred to in Section 12(a)
must be accomplished. Accordingly, all
equity and debt securities that are not
‘‘exempted securities’’ 8 or are not
otherwise exempt from Exchange Act
registration must be registered by the
issuer under the Exchange Act before a
member, broker or dealer may trade that
class of securities on a national
securities exchange.
Contrarily, brokers or dealers who
trade debt securities otherwise than on
a national securities exchange may trade
debt securities regardless of whether the
issuer registered that class of debt under
the Exchange Act. This is so because
Exchange Act registration for securities
traded other than on a national
securities exchange is required only for
certain equity securities. In particular,
Section 12(g) 9 of the Exchange Act, the
only Exchange Act provision other than
Section 12(a) to impose an affirmative
Exchange Act registration requirement,
requires the registration of equity
securities only.10
As the Commission has stated in the
past, we believe that this disparate
regulatory treatment may have
negatively and unnecessarily affected
the structure and development of the
debt markets.11 In 1994, to reduce
existing regulatory distinctions between
exchange-traded debt securities and
debt securities that trade in the ‘‘overthe-counter’’ (‘‘OTC’’) market, we
adopted Exchange Act Rule 3a12–11.12
Rule 3a12–11 provides for the automatic
effectiveness of Form 8–A 13 registration
statements for exchange-traded debt
securities, exempts exchange-traded
debt from the borrowing restrictions
under Section 8(a) 14 of the Exchange
Act, and exempts exchange-traded debt
8 An exempted security may be traded on a
national securities exchange absent Exchange Act
registration. Section 3(a)(12) of the Exchange Act
[15 U.S.C. 78c(a)(12)] defines exempted security to
include securities such as government securities,
municipal securities, various trust fund interests,
pooled income fund interests and church plan
interests.
9 15 U.S.C. 78l(g).
10 Section 12(g)(1) of the Exchange Act and Rule
12g–1 [17 CFR 240.12g–1] promulgated thereunder
require an issuer to register a class of equity
securities if the issuer of the securities, at the end
of its fiscal year, has more than $10,000,000 in total
assets and a class of equity securities held by 500
or more recordholders. When Congress amended
the Exchange Act in 1964 to add Section 12(g), it
extended the registration requirement to specified
equity securities that are not exchange-traded. No
comparable provision was provided for debt
securities that are not exchange-traded.
11 See Release Nos. 34–34922 (November 1, 1994)
[59 FR 55342], and 34–34139 (June 1, 1994) [59 FR
29398].
12 17 CFR 240.3a12–11. Release No. 34–34922
(November 1, 1994) [59 FR 55342].
13 17 CFR 249.208a.
14 15 U.S.C. 78h(a).
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Federal Register / Vol. 70, No. 134 / Thursday, July 14, 2005 / Notices
from most of the proxy and information
statement requirements under Sections
14(a), (b) and (c) of the Exchange Act.15
Despite these efforts, the vast majority of
secondary trading of debt securities
continues to occur in the OTC market,
which suggests that there still may be
regulatory impediments that need to be
addressed.16
In addition, we have sought to
increase the level of transparency in the
public debt markets. We have long
believed that price transparency in the
U.S. capital markets is fundamental to
promoting the fairness and efficiency of
our markets.17 In 1998, the
Commission’s staff conducted a review
of the public debt markets and found
that in the area of corporate debt
securities, price transparency was
deficient.18 Following the staff’s 1998
review, the Commission requested the
National Association of Securities
Dealers, Inc. (‘‘NASD’’) to adopt rules
requiring dealers to report transactions
in corporate debt securities and
preferred stock to the NASD and to
develop a real-time price quotation
system.19
II. Summary of the Application
The NYSE requests us to permit its
members, brokers and dealers to trade
certain classes of debt securities not
registered under Section 12(b) of the
Exchange Act on the NYSE’s Automated
Bond System.20 The NYSE asserts that
15 15 U.S.C. 78n(a), (b) and (c). Rule 3a12–11
states that Rules 14a–1, 14a–2(a), 14a–9, 14a–13,
14b–1, 14b–2, 14c–1, 14c–6 and 14c–7 continue to
apply to the exchange-traded debt securities for
which Rule 3a12–11 provides exemptive relief [17
CFR 240.14a–1, 14a–2(a), 14a–9, 14a–13, 14b–1,
14b–2, 14c–1, 14c–6 and 14c–7].
16 The NYSE estimates that there are over 22,000
publicly offered corporate bond issues having a par
value in excess of $3 trillion but only 8% of the $3
trillion par value is registered under the Exchange
Act and so may be traded on the NYSE’s Automated
Bond System. See the NYSE’s application for
exemptive relief.
17 See Testimony of Chairman Arthur Levitt
Before the House Subcommittee on Finance and
Hazardous Materials, Committee on Commerce,
Concerning Transparency in the United States Debt
Market and Mutual Fund Fees and Expenses
(September 29, 1998).
18 Id.
19 Id. The NASD was asked to undertake this
initiative for two reasons. First, the vast majority of
debt securities are traded on the OTC market.
Second, the Commission believed that the NASD
possessed the required infrastructure to undertake
the initiative and this would obviate the need to
‘‘reinvent the wheel.’’ See Testimony of Chairman
Arthur Levitt Before the House Subcommittee on
Finance and Hazardous Materials, Committee on
Commerce, Concerning Hedge Fund Activities in
the U.S. Financial Markets (March 18, 1999).
20 For purposes of the requested exemption, the
term ‘‘debt security’’ would be defined as any
security that, if the class of securities were listed
on the NYSE, would be listed under Sections
102.03 or 103.05 of the NYSE’s Listed Company
Manual. A debt security would not include any
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the statutory distinctions referred to
above put the NYSE at a competitive
`
disadvantage vis-a-vis the OTC market
with respect to the trading of debt.21
Further, the NYSE asserts that investors
are adversely impacted by this
distinction. The NYSE believes that the
adverse impact on investors is
twofold.22 First, the NYSE asserts that
investors are deprived of the advantage
of competing markets. Second, the
NYSE asserts that the Automated Bond
System is generally more transparent
than the OTC market.23 The NYSE states
that, in contrast to OTC bond trading,
the Automated Bond System reports bid
and ask quotations and last sale prices,
exclusive of any mark-ups, mark-downs
or other charges. In addition, the NYSE
states that all Automated Bond System
trades are reported instantaneously. The
NYSE further asserts that it is not aware
of any comparable level of transparency
that exists currently.
Notwithstanding any competitive
disadvantage to the NYSE that may have
resulted from existing statutory
distinctions or the potential benefits to
investors of increased competition and
enhanced transparency,24 we believe
that we must still balance these benefits
against any loss of Exchange Act
protections that could result if we
determine to grant the requested
exemptive relief. Further, as explained
below, we believe that any proposed
relief only should be granted in a way
that mitigates any lost Exchange Act
protections.
We view the potential loss of the
comprehensive public information that
an issuer must provide under Section
13(a) of the Exchange Act as perhaps the
security that, if the class of securities were listed
on the NYSE, would be listed under Sections
703.19 or 703.21 of the NYSE’s Listed Company
Manual. Provided, however, under no
circumstances would a debt security include any
security that is defined as an ‘‘equity security’’
under Section 3(a)(11) of the Exchange Act [15
U.S.C. 78c(a)(11)].
21 See the NYSE’s application for exemptive
relief.
22 See the NYSE’s application for exemptive
relief.
23 The Automated Bond System is an automated
trading and information system that allows member
firms to enter directly into the system and execute
debt security orders through remote terminals that
match them on a price and time priority basis.
24 A May 2004 study entitled ‘‘Transparency of
Corporate Bond Markets’’ by the Technical
Committee of the International Organization of
Securities Commissions found that transparency
supports market efficiency, fosters investor
confidence and strengthens investor protection. A
similar study of U.S. corporate debt markets found
that greater transparency reduces transaction costs
of corporate bond trading. See ‘‘Corporate Bond
Market Transparency and Transaction Costs’’ by
Amy K. Edwards, Lawrence E. Harris and Michael
S. Piwowar (March 2005). See https://papers.ssrn.
com/sol3/papers.cfm?abstract_id=593823.
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40749
most significant factor weighing against
relief.25 To address this concern, the
NYSE proposes that any exemption be
conditioned on two important
protections designed to prevent the loss
of Exchange Act disclosure. First, relief
would be limited to a class of debt
securities whose offer and sale was
registered under the Securities Act of
1933.26 This limitation is designed to
ensure that investors would have access
to the detailed disclosure in the
Securities Act registration statement for
the debt securities, including a trust
indenture qualified under the Trust
Indenture Act of 1939.27
Second, relief would be limited to
issuers of debt securities with at least
one class of equity securities registered
under Section 12(b) and listed on the
NYSE.28 This condition is designed to
guarantee that substantially all of the
public information that would be
available if the debt securities were
registered under Section 12(b) would
remain available with respect to the
issuer of the debt securities covered by
the exemption. The only significant
Exchange Act disclosure for debt
registered under Section 12 that would
not continue to be provided under the
proposed exemptive relief would be:
• The extremely limited information
contained in the Form 8–A required for
Exchange Act registration; 29
25 15 U.S.C. 78m(a). Section 13(a) provides the
Exchange Act’s comprehensive disclosure standards
that require an issuer of securities registered under
the Exchange Act to file annual, quarterly and
current reports with the Commission.
26 15 U.S.C. 77a et seq.
27 15 U.S.C. 77aaa–77bbbb.
28 The debt securities of a wholly-owned
subsidiary of a company with at least one class of
equity securities registered under Section 12(b) of
the Exchange Act and listed on the NYSE also
would be covered by the proposed relief. In
addition to the Exchange Act disclosure obligations
mentioned below that would no longer apply to a
parent debt issuer whose debt could be traded
under the exemption, all other Exchange Act
disclosure obligations also would not apply to a
wholly-owned subsidiary of that company,
assuming that the wholly-owned subsidiary had no
other class of securities registered or reporting
under the Exchange Act. The NYSE asserts that the
Exchange Act disclosures and other public
information available with respect to the whollyowned debt issuer’s parent, the consolidation of a
wholly-owned subsidiary’s financial information
into its parent’s financial statements, as well as the
information regarding the wholly-owned
subsidiary’s debt securities available under the trust
indenture and otherwise, are designed to ensure
that all interested parties receive necessary
information regarding the debt securities.
29 Form 8–A is the short-form registration
statement used by companies to register a class of
securities under the Exchange Act. The form
requires a description of the registrant’s securities
pursuant to Item 202 of Regulation S–K or S–B, and
in certain circumstances, the filing of all constituent
instruments, including any contracts or other
documents, that define, limit or qualify the rights
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Federal Register / Vol. 70, No. 134 / Thursday, July 14, 2005 / Notices
• The listing of the class of debt on
the annual report’s cover page;
• The disclosure of material
modifications to instruments defining
the rights of debt holders and material
limitations or qualifications to the rights
of debt holders required by Item 3.03 of
Form 8–K; and
• Certain exhibits to an issuer’s
annual and quarterly reports defining
the rights of debt holders as provided in
Item 601(b)(4) of Regulation S–K,
although most of the exhibits required
by Item 601 are filed as exhibits to the
Securities Act registration statement for
the debt securities.
We preliminarily believe that the loss
of this information is outweighed by the
proposed relief’s benefits to all
interested parties, but will consider any
public comment to the contrary. We also
further note that this information is not
required to be disclosed for debt traded
in the OTC market. Further, the
condition of the proposed exemptive
order requiring the issuer of the debt
security to have at least one class of
common or preferred equity securities
registered under Section 12(b) of the
Exchange Act and listed on the NYSE is
designed to assure that the issuer of debt
securities has a significant and
continuous listing (and oversight)
relationship with the NYSE.30 This
relationship will allow the NYSE to
better monitor issuers whose debt is
traded on the Automated Bond System
and will ensure that the issuers of
traded debt satisfy the NYSE’s
comprehensive listing standards for
equity securities.
In addition to the Exchange Act
disclosure obligations that would no
longer apply, holders of debt securities
traded in reliance on the proposed relief
would not be protected by the antifraud
proscriptions of Exchange Act Rules
14a–9 and 14c–6 or the shareholder
communications provisions in Exchange
Act Rules 14a–13, 14b–1, 14b–2 and
14c–7, which govern the transmission of
proxy and information statements to
beneficial owners of securities.
Although solicitations of debt holders
are infrequent,31 in its 1994 rulemaking,
the Commission determined that the
exemptive relief afforded by Exchange
Act Rule 3a12–11 should not encompass
of the holders of the class of securities. The
disclosures required by the form may be furnished
by incorporation by reference to other filings with
the Commission.
30 In the case of an issuer that is a wholly-owned
subsidiary, the issuer’s parent would need to have
at least one class of common or preferred equity
securities registered under Section 12(b) of the
Exchange Act and listed on the NYSE.
31 According to the NYSE, only six solicitations
of debt holders of NYSE-listed debt securities
occurred during 2004.
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these antifraud and shareholder
communications provisions.32 We
believe that other requirements, the
contractual terms of the trust indenture,
and economic motivations for
intermediaries to serve the needs of
their customers would help to mitigate
the loss of these protections.
Specifically, the antifraud protection
afforded by Exchange Act Rule 10b–5 33
would continue to apply to soliciting
materials sent to holders of debt traded
in reliance on the proposed exemption.
In addition, NYSE Rule 451 34 requires
NYSE member firms to transmit copies
of all proxy and consent solicitation
materials to beneficial owners.35
Furthermore, we note that none of these
provisions applies to debt securities
traded in the OTC market.
We also acknowledge that, if we grant
the requested relief, the NYSE’s listing
standards generally would no longer
apply to any debt traded, but not listed,
on the Automated Bond System. This
would include all debt currently listed
on the system that qualifies for trading
under the requested exemption because
the NYSE intends to formally delist all
debt securities that qualify for the
exemption, if we approve its
application.36 Without a listing
requirement, issuers of debt securities
would no longer be required to notify
the NYSE about various corporate
actions related to the issuer’s debt.
However, the following actions by the
32 In Release No. 34–34922, the Commission
noted that the proxy rules relating to the
transmission of materials to beneficial owners not
only provide protection to investors, but also
benefit issuers by facilitating their ability to
communicate directly with their debtholders.
Exchange Act Rules 14a–13, 14b–1 and 14b–2
establish procedures by which companies can
request a list of their non-objecting beneficial
owners from banks, brokers and similar
intermediaries holding shares on behalf of such
owners.
33 17 CFR 240.10b–5.
34 Paragraph 2451 of the NYSE Guide.
35 Although banks and other intermediaries that
are not NYSE member firms would not be subject
to NYSE Rule 451, many of these intermediaries
owe fiduciary obligations to their beneficial owner
customers that would cause them to continue
transmitting soliciting materials to their customers
even in the absence of an explicit Commission
requirement.
36 As noted, debt that trades on the NYSE that
does not qualify for the exemptive relief would
continue to be ‘‘listed’’ on the NYSE. To distinguish
between ‘‘listed’’ debt and ‘‘traded’’ debt, the NYSE
would: provide definitions of, and distinguish
between, listed debt securities and traded debt
securities on the Automated Bond System log-on
screen and on the NYSE’s web site; directly provide
each NYSE member and each NYSE listed company
with notification clarifying the distinction between
listed and traded debt, as well as notification that
eligible listed debt will be delisted and, instead,
traded on the Automated Bond System; and issue
a press release explaining the Section 36 relief.
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NYSE should alleviate concerns in this
regard:
• The NYSE would engage a third
party data vendor to provide the NYSE
and its members with a customized online reference for corporate actions
relevant to debt securities trading on the
Automated Bond System.37 This
information is similar to, although less
comprehensive than, the information
that the NYSE currently receives
pursuant to its rules for the continued
listing of debt securities.38 Unlike some
of the information that the NYSE
currently receives pursuant to its rules
for the continued listing of debt, the
information provided by the third party
data vendor would be available only to
the NYSE and its members. While the
NYSE has undertaken to hire a third
party data vendor, the vendor’s
engagement and availability of the
contemplated information would not be
a formal condition to the proposed
relief; and
• The NYSE has filed proposed rule
changes (SR–NYSE–2004–69) on
Exchange Act Form 19b–4 that would
specify the exchange’s initial and
continued requirements for trading
unregistered debt securities on the
Automated Bond System. In particular,
the amended rules would state that
trading on the NYSE’s Automated Bond
System could only commence for debt
securities with an outstanding market
value or principal amount of at least $10
million and trading would be
suspended if the outstanding market
value or principal amount fell below $1
million. In addition, the proposed rule
would allow the NYSE to suspend
trading in a debt security if, among
other things, the issuer’s assets were
substantially reduced, the issuer
declared bankruptcy, or the NYSE
determined that the issuer engaged in
operations that are contrary to the
public interest. The Commission is
publishing for comment the NYSE’s
37 The NYSE intends to engage Xcitek, LLC as its
third party data vendor.
38 According to the NYSE, Xcitek, LLC’s tracking
service will provide notification of calls
(redemptions), notice of defaults in the payment of
interest, notice of consent solicitations and other
corporate actions related to public debt including
tender offers, issuer name changes and CUSIP
number changes. The tracking service will not
provide notification of changes in transfer agent or
trustee, changes in the collateral deposited under a
trust indenture, changes or unusual conditions
related to the payment of interest, the issuance or
authentication of duplicate bonds, all of which
must be provided for listed debt securities. The
NYSE asserts that the loss of certain information
currently provided under the NYSE Listed
Company Manual for listed debt securities is
outweighed by the proposed relief’s benefits to all
parties with an interest.
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Federal Register / Vol. 70, No. 134 / Thursday, July 14, 2005 / Notices
proposed rule changes concurrently
with our publication of this notice.39
In addition to the previously noted
actions that the NYSE intends to take,
and conditions to the exemption, the
proposed exemptive relief would be
available only for debt securities of an
issuer whose transfer agent for the debt
security is registered under Section 17A
of the Exchange Act and for classes of
debt securities whose indenture is
qualified under the Trust Indenture Act.
The first condition is designed to ensure
that the transfer agents providing
services to issuers of debt securities
trading pursuant to the exemption
would be subject to Section 17A of the
Exchange Act and the rules thereunder
and to the Commission’s oversight. The
second condition is designed to ensure
that specific protections afforded to debt
holders under the Trust Indenture Act
are included in the debt securities’ trust
indenture.
III. Request for Comment
We request and encourage any
interested person to submit comments
regarding the NYSE’s application as
well as the terms of our proposed
exemptive order, including whether the
request should be granted.40 In
particular, we solicit comment on the
following questions:
• Is the scope of the requested
exemption appropriate?
• Would the requested exemption
increase competition in the public debt
markets?
• Would the requested exemption
increase the transparency of the public
debt markets?
• Would an issuer’s Exchange Act
reports for its equity securities and all
other public information related to the
issuer’s class of debt adequately inform
investors about the debt securities
covered by the requested exemption?
• Should the requested exemption
relieve issuers of debt securities and
other applicable parties from the
antifraud proscriptions of Exchange Act
Rules 14a–9 and 14c–6 and/or from
Exchange Act Rules 14a–13, 14b–1,
14b–2 and 14c–7, which govern the
transmission to beneficial owners of
proxy and consent materials and
information statements, as proposed?
Does Exchange Act Rule 10b–5 provide
adequate antifraud protection against
misstatements or material omissions in
proxy or information statements and
related materials? Is there any
significant concern that banks, brokers
and similar intermediaries would refuse
39 See
Release No. 34–51999 (July 8, 2005).
Commission’s proposed exemptive order is
included as Appendix B.
40 The
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18:32 Jul 13, 2005
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or fail to transmit proxy materials to
beneficial owners if Rules 14b–1 and
14b–2 no longer expressly applied?
• Should the requested exemption
apply to a wholly-owned subsidiary of
a company with at least one class of
equity securities registered under
Section 12(b) and listed on the NYSE, if
the wholly-owned subsidiary
independently does not satisfy the
conditions for relief? Should the
wholly-owned subsidiary’s parent have
to guarantee the subsidiary’s debt
securities for the requested exemption
to apply?
• Are there any other differences
between exchange-traded debt and debt
traded in the OTC market that warrant
a more restrictive regulatory treatment
for exchange-traded debt?
• Are there any implications or
concerns that may arise because NYSE
members would be able to trade a debt
security without the NYSE entering into
a formal listing arrangement with the
issuer of the debt security?
• Should we condition the proposed
exemption on any additional NYSE
listing standards?
• Are the conditions sufficiently
designed so that investors are
appropriately protected?
• Are the bases triggering suspension
of trading (e.g., bankruptcy, substantial
reduction in assets, or NYSE
determination that the issuer engaged in
operations contrary to the public
interest) appropriate? Should any be
removed? Are there any others that
should be added?
• Is the use of a third party data
vendor adequate to provide the NYSE
and its members with sufficient
information regarding corporate actions
relevant to debt securities traded on the
Automated Bond System? If not, what
additional information or measures
would be appropriate? Should any such
information or measures be required as
an additional condition of the
exemption?
• Is the information to be provided by
Xcitek, LLC to the NYSE and its
members significant enough to justify its
inclusion in the proposed exemptive
order as a formal condition to relief?
Comments should be received on or
before August 15, 2005. Comments may
be submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/other.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number S7–06–05 on the subject line.
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Paper Comments
• Send paper comments in triplicate
to Jonathan G. Katz, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–9303.
All submissions should refer to File
Number S7–06–05. This file number
should be included on the subject line
if e-mail is used. To help us process and
review your comments more efficiently,
please use only one method. The
Commission will post all comments on
the Commission’s Internet Web site
(https://www.sec.gov/rules/other.shtml).
Comments are also available for public
inspection and copying in the
Commission’s Public Reference Room,
100 F Street, NE., Washington, DC
20549. All comments received will be
posted without change; we do not edit
personal identifying information from
submissions. You should submit only
information that you wish to make
available publicly.
For further information, you may
contact Sean Harrison, Special Counsel,
Office of Rulemaking, at (202) 551–
3430, or Robert T. Plesnarski, Deputy
Chief Counsel, Office of Chief Counsel,
at 202–551–3832 in the Division of
Corporation Finance or Timothy Fox,
Attorney, or Michael Gaw, Senior
Special Counsel, Office of Market
Supervision, at (202) 551–5643 and
(202) 551–5602, respectively, in the
Division of Market Regulation, at the
U.S. Securities and Exchange
Commission, 100 F Street, NE.,
Washington, DC 20549.
By the Commission.
J. Lynn Taylor,
Assistant Secretary.
Appendices
A The New York Stock Exchange’s
application for an exemption pursuant
to Section 36 of the Exchange Act
B Proposed order granting the New
York Stock Exchange’s application for
an exemption pursuant to Section 36 of
the Exchange Act
Appendix A
May 26, 2005.
Jonathan G. Katz, Secretary, Securities and
Exchange Commission, 450 Fifth Street NW.,
Washington, DC 20549–0609.
Dear Mr. Katz: The New York Stock
Exchange, Inc. (the ‘‘Exchange’’) requests that
the Securities and Exchange Commission (the
‘‘Commission’’) provide relief pursuant to
Section 36 41 of the Securities Exchange Act
of 1934 (the ‘‘Exchange Act’’) 42 to provide an
exemption from the provisions of Section
41 15
42 15
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U.S.C. 78a.
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12(a) 43 of the Exchange Act to permit NYSE
members and member organizations to trade
certain debt securities that are not registered
under Section 12(b) 44 of the Exchange Act.
Conditions Applicable to the Exemptive
Relief Requested
The Exchange requests that the
Commission provide exemptive relief with
respect to Section 12(a), which provides in
relevant part that it shall be unlawful for any
‘‘member, broker, or dealer to effect any
transaction in any security (other than an
exempted security) on a national securities
exchange unless a registration is effective as
to such security for such exchange.’’ 45 The
Exchange further asks that this exemption be
granted to allow NYSE members and member
organizations to trade debt securities that
satisfy the following conditions:
1. The issuer of the debt securities
registered the offer and sale of that class of
debt securities under the Securities Act of
1933, as amended (the ‘‘1933 Act’’),46
2. The issuer of the debt securities or the
issuer’s parent, if the issuer is a whollyowned subsidiary, has at least one class of
common or preferred equity securities
registered under Section 12(b) 47 of the
Exchange Act and listed on the New York
Stock Exchange, and
3. The transfer agent for the debt securities
is registered under Section 17A 48 of the
Exchange Act.
In connection with this exemptive request,
the NYSE undertakes that it will take or has
taken the following steps:
(a) The NYSE will provide definitions of
‘‘listed’’ debt securities and ‘‘traded’’ debt
securities on the Automated Bond System
(the ‘‘ABS’’) log-on screen and on the
NYSE’s Web site,
(b) The NYSE will distinguish between
‘‘listed’’ debt securities and ‘‘traded’’ debt
securities on the ABS and on the NYSE Web
site’s bond issue directory,49
(c) The NYSE will directly provide each
member organization and each listed
43 15
U.S.C. 78l(a).
U.S.C. 78l(b).
45 If the Commission grants exemptive relief from
Section 12(a), members, brokers and dealers would
be able to trade on the NYSE eligible debt securities
that had not been registered under Section 12(b),
which prescribes the procedures for an issuer’s
registration of a security and the information
required to be submitted. Similarly, the Exchange
would no longer need to comply with the
provisions of Section 12(d) regarding the
certification of listing and registration of debt
securities.
46 15 U.S.C. 77a.
47 15 U.S.C. 78l(b).
48 15 U.S.C. 78q–1.
49 The NYSE will distinguish debt securities
‘‘listed’’ on the ABS from those ‘‘traded’’ on the
ABS on the three different screens used to view
the market and through which orders may be
entered: (1) The book showing all the orders in a
particular security; (2) the summary book showing
aggregate interest at each price in a particular
security; and (3) the display of the best bid/offer,
price range, and calculated accrued interest in a
particular security. As will be clearly noted on the
ABS log-on screen, ‘‘listed’’ debt securities will be
identified by a letter or symbol, ‘‘traded’’ debt
securities will be identifiable due to the absence of
such letter or symbol. The location of the indicator
will be the same on all three screens.
44 15
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company notification via letter and/or email
prior to the date that trading of the debt
securities commences on the ABS to clarify
the distinction between ‘‘listed’’ debt
securities and ‘‘traded’’ debt securities and to
provide notification that eligible listed debt
securities will be delisted and, instead,
traded on the ABS,
(d) The NYSE will issue a press release
upon launch of this initiative stating that
‘‘listed’’ debt securities trade along side
‘‘traded’’ debt securities on the ABS, and
(e) The NYSE has contracted with Xcitek,
LLC, (‘‘Xcitek’’), a third-party bond issue
tracking service, for the provision of
information prior to the date that this
exemption is granted by the SEC.
Xcitek’s tracking service provides the
NYSE a customized on-line reference for
corporate actions relevant to bonds. The
tracking system provides information and
data electronically to the NYSE, and
provides:
• Notification of calls (redemptions) of
traded bonds,
• Notification of tender offers for traded
bonds,
• Notice of defaults in payment of interest
on traded bonds,
• Notice of consent solicitations for traded
bonds, and
• Notice of corporate actions for traded
bonds (includes tender offers, issuer name
changes, cusip number changes).
The tracking system does not provide
notification of changes in trustees, obligors or
transfer agents with respect to traded debt
securities. The NYSE has entered into a oneyear contract with Xcitek to provide this
information electronically on a daily basis.
Xcitek independently obtains, researches and
organizes the information. The NYSE does
not itself verify the information provided by
Xcitek. To the extent that in the future,
Xcitek is no longer willing or able to provide
this information, the NYSE will contract with
another third party for the provision of
similar information.
The NYSE has separately filed SR–NYSE–
2004–69 (December 3, 2004) and Amendment
No. 1 to 2004–69 (March 15, 2005) on
Exchange Act Form 19b–4 to propose NYSE
Rules 1400 and 1401 that set forth the
requirements for trading unlisted debt
securities on the ABS. Proposed Rule 1400
provides that, for purposes of this exemption:
‘‘The term Debt Securities includes only
securities that, if they were to be listed on the
New York Stock Exchange, would be listed
under Sections 102.03 or 103.05 of the New
York Stock Exchange’s Listed Company
Manual; provided, however, that such
securities shall not include any security that
is defined as an ‘‘equity security’’ under
Section 3(a)(11) of the Exchange Act.
For the avoidance of doubt, note that the
term ‘‘Debt Securities’’ does not include a
security that, if listed on the New York Stock
Exchange, would have been listed under
Sections 703.19 or 703.21 of the New York
Stock Exchange’s Listed Company Manual.
The references to Sections 102.03, 103.05,
703.19, and 703.21 of the NYSE’s Listed
Company Manual are to those sections as in
effect on January 31, 2005.’’
Proposed Rule 1401 specifies that only
Debt Securities with an outstanding market
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value or principal amount of at least $10
million will be permitted to be traded by
NYSE members and member organizations
on the ABS. Proposed Rule 1401 also
specifies that trading in Debt Securities will
be suspended if:
• The outstanding aggregate market value
or principal amount of the Debt Securities
has fallen to less than $1,000,000, or
• The Debt Securities may no longer be
traded by NYSE members or member
organizations on an unregistered basis
pursuant to this exemptive request.
In order to ensure that debt securities have
at least $10,000,000 in aggregate market value
or principal amount at the time trading
commences, the NYSE will review two
existing corporate bond issue data bases that
provide issue size information for the
preponderance of corporate bonds.
To monitor the $1,000,000 suspension
threshold, the NYSE will generally utilize the
third party tracking system to monitor partial
redemptions and tender offers. The most
prevalent reason for outstanding principal
amounts to fall below $1 million is when the
price of the bond declines because of a
default or potential bankruptcy. Prices of
bonds in these situations will be monitored.
We will also monitor the media for warnings
of possible difficulties, in addition to ratings
downgrades.
With respect to debt securities that are
currently listed on the NYSE, the Exchange
intends to apply to delist debt securities that
satisfy the NYSE’s requirements for traded
debt and, instead, to trade those debt
securities on the ABS on an unlisted basis.
As described above, the NYSE will be
contacting listed companies to provide
notification that eligible listed debt securities
will be delisted and, instead, traded on the
ABS.
The NYSE will also inform listed
companies of the NYSE’s intention to
identify currently outstanding or newly
issued unlisted debt securities that are
eligible to be traded by NYSE members and
member organizations on the ABS. The
NYSE’s Fixed Income Markets Division will
review a variety of sources, including SEC
Securities Act filings and bond offerings
posted daily in financial publications in
order to identify additional unlisted debt
securities that have been issued by a NYSE
equity-listed company or wholly-owned
subsidiary and that satisfy the requirements
of proposed Rules 1400 and 1401. The NYSE
intends to provide an opportunity for NYSE
members and member organizations to trade
all eligible debt securities. Once unlisted
debt securities are identified and verified as
satisfying the requirements of proposed Rule
1400 and 1401, the NYSE will notify NYSE
members and member organizations that
such unlisted debt securities are eligible to be
traded on the ABS through ticker notices
and postings on the ABS website.
Debt securities that do not satisfy the
proposed requirements of Exchange Rules
1400 and 1401 may continue to be listed on
the NYSE. Debt securities that would not
satisfy the proposed requirements for trading
include convertible debt securities, debt
securities that were listed under Sections
703.19 and 21 of the NYSE’s Listed Company
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Manual, debt issued by listed company
subsidiaries that are not wholly owned,
foreign government debt and debt issued by
an issuer that does not have equity securities
listed on the NYSE.
Background
In 1992, the Exchange wrote to the
Commission requesting that it grant a similar
exemption pursuant to Section 3(a)(12) of the
Exchange Act.50 The Exchange pointed out
that, while debt securities traded on a
national securities exchange must be
registered under Section 12(b) of the
Exchange Act,51 debt securities traded ‘‘overthe-counter’’ (‘‘OTC’’) were not subject to the
same requirement. In fact, debt securities
traded OTC need not even be issued by
reporting companies. The Exchange argued
that these statutory distinctions put it at a
competitive disadvantage with respect to the
OTC market. In an effort to be responsive, in
November 1994, the Commission amended
certain Exchange Act rules to ‘‘reduce
regulatory distinctions between exchangetraded debt securities required to be
registered under Section 12 of the Exchange
Act and bonds traded over-the-counter for
which such registration is not required.’’ 52 In
doing so, the Commission acknowledged that
‘‘regulatory distinctions may have
unnecessarily and unintentionally affected
the structure and development of the debt
markets.’’ 53
The Exchange Act Bond Registration
Requirement
In the Exchange’s view, the Exchange Act
registration requirement for corporate bonds
to be traded on exchanges continues to have
an anti-competitive impact on exchange bond
markets. Under Section 12(g) of the Exchange
Act,54 only equity securities are required to
be registered to be traded in the OTC market.
In contrast, corporate bond issues may trade
on a national securities exchange only if
those bonds are registered under the
Exchange Act.
The Exchange estimates that, in 1992, 90%
of the par value of outstanding corporate debt
(excluding private placements) was issued by
reporting companies, but only 35% of that
debt was registered under the Exchange Act.
Currently, the Exchange estimates that 95%
of the par value of outstanding corporate debt
(excluding private placements) is issued by
reporting companies, but only 8% of that
debt is registered under the Exchange Act.55
50 15 U.S.C. 78c(a)(12). See Letter from Donald J.
Solodar, Executive Vice President, New York Stock
Exchange, to William H. Heyman, Director, Division
of Market Regulation, Securities and Exchange
Commission, and Linda C. Quinn, Director,
Division of Corporation Finance, Securities and
Exchange Commission, dated April 7, 1992.
51 See footnote 4 supra.
52 See Securities Exchange Act Release No. 34–
34922 (November 1, 1994), 59 FR 55342 (Nov. 7,
1994). The Commission, among other things,
exempted debt securities listed on a national
securities exchange from Sections 14(a), 14(b) and
14(c) of the Exchange Act.
53 See footnote 9 supra.
54 15 U.S.C. 78l(g).
55 While there are no definitive numbers as to the
size of the corporate bond market, based upon
issues rated by the Nationally Recognized Securities
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As a result, the Exchange’s bond market
remains small and has declined over the last
decade. In 1991, approximately 1,800
corporate bond issues having a par value of
$287 billion were traded on the Exchange,
representing 675 issuers. At the end of 2004,
the Exchange had some 500 corporate bond
issues trading (having a par value of $230
billion), representing 220 issuers. In
comparison, the Exchange estimates that
there are over 22,000 publicly offered
corporate bond issues, with a combined par
value in excess of $2.8 trillion, trading in the
OTC secondary markets in the United States
without being registered under Section 12(b)
of the Exchange Act. Thus, while there are
over 22,000 corporate bond issues that can be
traded on the OTC market, only about 500 of
these issues may be traded on exchanges.
Clearly, despite the reforms undertaken by
the Commission in 1994, the Exchange
believes that fewer companies are deciding to
register their debt securities under the
Exchange Act, and the number of debt
securities eligible for trading on national
securities exchanges continues to diminish.
The consequences of the continued
disparity in regulatory treatment of exchange
and OTC debt securities are not limited to the
competitive constraints on the Exchange. The
Exchange believes that investors in corporate
bonds are adversely impacted. In contrast to
OTC bond trading, the Exchange’s bond
market has long disseminated both last sale
prices as they occur on the Exchange
exclusive of any mark-ups, mark-downs, or
other charges, and bid and ask quotations.
Continuous last sale price disclosure has
existed since 1867, when the stock and bond
ticker first went into operation. In 1919, the
stock and bond tickers commenced separate
operations, and in 1977, the bond high-speed
quote line began the dissemination of last
sale prices and quotations to market data
providers, such as Bloomberg, Reuters, ILX
and others. Today, this market data is
available through some 400,000 market data
displays providing subscribers—primarily
securities firms and financial institutions—
with direct instantaneous access to this
information, throughout each trading day.
Instantaneous means within one to two
seconds of the actual trade. The Exchange is
not aware of any comparable level of
transparency—trade prices, quotations, and
speed of availability for corporate bond
prices—that exists currently elsewhere or
will exist in the foreseeable future. The
Exchange believes that all of this
transparency is lost when a bond delists
from, or is not traded on, the Exchange.56
Rating Organizations (‘‘NRSRO’’), the Exchange
estimates that there are over 22,000 publicly offered
corporate bond issues, having a par value in excess
of $3 trillion. These numbers do not include assetbacked securities, medium-term note offerings, or
commercial paper. Telephone conversation between
Fred Siesel, Consultant to the New York Stock
Exchange and Dan Wyzocki, President, First Data
Services (November 8, 2004).
56 One instance in which this transparency may
be lost is when a company with both listed equity
and debt is merged or reorganizes with another
company. The successor may list its stock on the
Exchange but leave its debt in a now wholly owned
subsidiary, which may seek to delist its debt to
avoid separate Section 13 reporting requirements.
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Exchange bond trading is conducted
through the ABS, which began operations in
1977. The ABS is a web-based trading
system for fixed income securities to which
Exchange member firms subscribe and
through which they enter and match
customer bond orders on a strict price and
time priority basis. The system provides
member subscribers with access to screens
that display the order ‘‘book’’ in each bond
in best price order and in the time sequence
received. Completed, locked-in trades are
submitted to the clearing corporation (i.e.,
Depository Trust Clearing Corporation) with
calculated accrued interest. ABS centralizes
bond trading and facilitates the high-speed
dissemination of last sale prices and
quotations to market data providers via the
Exchange’s dedicated bond quote line. ABS
primarily serves the ‘‘small-lot’’ corporate
bond market. Small-lot bond buyers and
sellers are primarily individuals, bank trust
accounts, and small institutions. In addition,
bond dealers will use ABS to offset socalled ‘‘tail-end’’ bond positions acquired in
the course of large-lot trading. As noted
above, ABS is the only system, known to us,
providing the public with real-time
disclosure of quotations and trade prices,
exclusive of mark-ups/mark-downs,
commissions, or other charges.
Bond Issue Information
Because information that is disclosed in
connection with the registration of bonds
under the Exchange Act is generally also
available through other Commission filings
and other means, the Exchange believes that
permitting a broker or dealer to effect a
transaction in a debt security without
requiring Exchange Act registration of
eligible debt securities will not result in any
significant loss of bond or issuer information
to investors. First, the Exchange is only
requesting exemptive relief with respect to
the trading by NYSE members and member
organizations of debt securities issued by
eligible listed companies and their wholly
owned subsidiaries. In order for debt
securities to be traded by NYSE members and
member organizations, the listed company
must have equity securities listed on the
NYSE and, thus, already be subject to the
requirements of Section 13 of the Exchange
Act. Information about the listed company
will remain available to investors even in the
absence of an Exchange Act registration
requirement for bonds of these issuers or
their wholly owned subsidiaries.
Second, only debt securities that are
registered under the 1933 Act would be
eligible to be traded by NYSE members and
Once delisted from the Exchange, the debt is traded
only OTC, and the Exchange believes that investors
lose the benefit of the transparency provided by the
real time reporting of quotations and trades on the
Exchange.
Examples of such delisting, include Southwestern
Bell debt (Securities Exchange Act Release No. 34–
42141 (Nov. 16, 1999), 64 FR 63833 (Nov. 22, 1999))
and Pacific Bell debt (Securities Exchange Act
Release No. 34–42142 (Nov. 16, 1999) 64 FR 63833
(Nov. 22, 1999)). Other examples have involved the
debt of Mobil Corporation, Outdoor Systems, ITT
Corporation, Chrysler Auburn Hills, Texaco,
Ralston-Purina, Time-Warner Entertainment, New
England Telephone and New York Telephone.
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member organizations on the ABS.
Additionally, under Section 15(d) of the
Exchange Act, issuers not required to register
their debt securities under Section 12 of the
Exchange Act are subject to Section 13
reporting requirements for the fiscal year
following the effective date of a registration
statement filed under the 1933 Act.57 Issuers
must continue to file such reports so long as
they have a class of securities with at least
300 ‘‘holders of record’’ as defined under
Exchange Act Rule 12g5–1.58 Therefore, with
respect to eligible debt securities that have
been issued by the wholly owned subsidiary
of a listed company, that wholly owned
subsidiary may or may not itself be currently
subject to the requirements of Section 15(d)
or Section 13 of the Exchange Act.
The 1933 Act registration statements
themselves supply much of the relevant
information needed by the bond markets and
investors. Indeed, for the most part, the
Exchange Act registration Form 8–A simply
incorporates by reference the information
found in the 1933 Act registration statement.
The 1933 Act registration statement also
contains a much more detailed and relevant
description of the debt issue than is required
by Rule 12b–3 of the Exchange Act.59 The
description contained in the term sheet of the
registration statement provides the
information necessary to trade that issue—
whether on an exchange or OTC. The issue
description contained in the Form 8–A
registration statement does not provide the
information needed to trade bonds.
Most of the other disclosure items required
in connection with debt securities arise with
respect to Forms 8–K, 10–Q and 10–K. These
forms would continue to be filed by eligible
listed companies and, where required by
Sections 15(d) or 13 under the Exchange Act,
by eligible wholly owned subsidiaries,
regardless of whether the debt securities are
registered under the Exchange Act. Item 2.04
of Form 8–K requires disclosure of any
triggering event, such as a default, that
accelerates or increases a direct financial
obligation. Item 3.03 of Form 8–K requires
disclosure of any material modification to the
rights of security holders. Item 601(b)(4) of
Regulation S–K (required to be included in
10–Ks and 10–Qs) discusses the definition of
the rights of debt holders. Part II—Item 3(a)
of Form 10–Q requires that, to the extent that
the registrant has not previously disclosed
such information on Form 8–K, the registrant
must provide information regarding defaults
in the payment of principal, interest, sinking
fund, etc., ‘‘with respect to any indebtedness
of the registrant or any of its significant
subsidiaries exceeding 5 percent of the total
assets of the registrant and its consolidated
subsidiaries * * *’’ (emphasis added). Thus,
57 15
U.S.C. 78o(d).
CFR 240.12g5–1.
59 17 CFR 240.12b–3. Rule 12b–3 requires that
wherever the title of securities is required to be
stated one shall also indicate ‘‘the type and general
character of the securities * * *.’’ For funded debt,
issuers are required to state the following: the rate
of interest, the maturity date (or dates for serial
issues), an indication if the payment of principal or
interest is contingent, a brief indication of the
priority of the issue, and, if the issue is convertible,
a statement to that effect.
58 17
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the Form 10–Q requires disclosure of defaults
in the payment of principal, interest, sinking
fund, etc. for any bonds of the registrant,
irrespective of whether such bonds are
exchange-listed or not.
If, as described above, a wholly owned
subsidiary ceases to provide Exchange Act
reports itself, much of the information that
had been provided by the wholly owned
subsidiary will be provided instead by the
wholly owned subsidiary’s listed parent
company in its own Exchange Act reports.
The listed parent company, however, will not
be required to list and describe the debt
securities issued by the wholly owned
subsidiary on the cover page of its own
annual report on Form 10–K or to include as
an exhibit to its own Forms 10–K or 10–Q the
exhibits that would have been required to be
filed by the wholly owned subsidiary
pursuant to Item 601(b)(4) of Regulation S–
K (relating to creation of a new class of
securities or indebtedness or the
modification of existing rights of security
holders).
There are also a variety of databases
providing bond information, including
information regarding the listing and/or
trading location of a bond. A few examples
of these database services include: Standard
& Poor’s Bond Guide, the Mergent Bond
Record, First Data Services’ BORAS,
Bloomberg and the Commission’s EDGAR
internet service, among other services. In
addition, the Exchange’s own bond issue
directory is available on the Exchange’s web
site and carries the description of each listed
bond issue, including bonds currently
exempt from Exchange Act registration
requirements, such as Tennessee Valley
Authority and the International Bank for
Reconstruction and Development (World
Bank) bonds.
Most notably, of course, OTC bond trading
functions without the information obtained
as a result of Exchange Act registration. OTC
bond trading relies on the information
disclosed in the 1933 Act registration
statement and the indentures filed under the
Trust Indenture Act, including amendments
to the indenture affecting the rights of
bondholders.
Debt securities traded by NYSE members
and member organizations on the ABS(will
not be subject to the provisions of the NYSE’s
Listed Company Manual that relate to debt
securities that are listed on the NYSE. While
both traded and listed debt securities are
subject to the same quantitative thresholds
for initial trading/listing and continued
trading/listing, listed debt securities are also
subject to other requirements, including:
• Issuers of listed debt securities are
required to provide immediate notice to the
NYSE and the public of defaults or other
unusual circumstances relating to the
payment of interest;
• Issuers of listed debt securities are
required to provide immediate notice to the
NYSE and the public of any corporate action
it (or third parties) may take towards the
redemption, retirement or cancellation of the
security;
• Issuers of listed debt securities are
subject to requirements for transfer agents;
and
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• Issuers of listed debt securities are
required to submit a listing application in
order to list the securities.
As noted above, in the case of traded debt
securities, the NYSE will obtain notice
regarding defaults and redemptions through
the third-party tracking system.
No Justification for Disparate Treatment
In summary, the disparate regulation
between exchanges and the OTC markets has
occurred without deliberate design. In 1934,
Congress determined to regulate all listed
issuers, and did not distinguish between
listed equity and listed debt. Of course, at the
time, the only place a company could be
‘‘listed’’ was on an exchange. In 1964,
Congress properly determined to extend
Exchange Act registration requirements to
issuers having a substantial number of public
shareholders and to require them to file
periodic reports with the Commission, even
if they were not listed on an exchange. The
focus, however, was on those companies
with public stockholders, so Section 12(g) of
the Exchange Act was made applicable only
to issuers of equity held by the requisite
number of holders. As a result, publicly held
debt that is not listed does not trigger the
registration requirement.60
We believe that this exemptive relief is
consistent with the Commission’s interest in
greater bond market transparency. We also
believe that removing unnecessary anticompetitive barriers to exchange trading of
debt of reporting companies and their
consolidated subsidiaries will go a long way
towards providing bond investors with the
transparency that we all agree is so
important. We urge the Commission to use its
exemptive power to remove the requirement
that bonds of NYSE-listed equity issuers and
their consolidated subsidiaries must be
registered under the Exchange Act in order
to be traded on an exchange. This dichotomy
between exchange and OTC bond markets
has existed too long and should be ended.
Sincerely yours,
/s/ Mary Yeager
cc: Alan L. Beller, Annette L. Nazareth,
David Shillman, Paula Dubberly, Robert
Plesnarski, Sean Harrison, Michael Gaw,
Timothy C. Fox.
Appendix B—Proposed Order Granting
the New York Stock Exchange’s
Application for an Exemption Pursuant
to Section 36 of the Securities Exchange
Act of 1934
This is a proposed order regarding the
exemptive application of the New York Stock
Exchange, Inc. (‘‘NYSE’’). Before issuing any
final order, the Commission will consider
60 Also at that time, Section 15(d) was amended
to replace the asset-size standard with a holder-ofrecord standard. See Securities Exchange Act
Release No. 34–7492 (January 5, 1965), 30 FR 483
(1965). Because of the widespread use of street
name holding, however, the vast majority of bonds
issued by bond-only companies fall outside the
reporting requirement of Section 15(d). Thus
Section 15(d), though it applies to both equity and
debt, does not fill the gap left by Section 12(g), and
does not achieve Exchange Act ongoing reporting
for the bonds of most bond-only companies.
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public comments received on the NYSE’s
exemptive application and proposed order.
I. Introduction
On May 26, 2005, the Commission received
an application from the NYSE for an
exemption pursuant to Section 36 61 of the
Securities Exchange Act of 1934 (the
‘‘Exchange Act’’),62 in accordance with the
procedures set forth in Exchange Act Rule 0–
12.63 The NYSE has requested exemptive
relief from Section 12(a) 64 of the Exchange
Act to permit its members and brokers or
dealers to trade certain unregistered debt
securities on the NYSE’s Automated Bond
System. This order grants the NYSE’s
application for an exemption.
II. Proposed Order Granting the New York
Stock Exchange’s Application for an
Exemption Pursuant to Section 36 of the
Securities Exchange Act of 1934
Section 12(a) of the Exchange Act provides
in relevant part that it shall be unlawful for
any ‘‘member, broker or dealer to effect any
transaction in any security (other than an
exempted security) on a national securities
exchange unless a registration is effective as
to such security for such exchange.’’ Section
12(b) 65 of the Exchange Act dictates how the
registration referred to in Section 12(a) must
be accomplished. Accordingly, all equity and
debt securities that are not ‘‘exempted
securities’’ or are not otherwise exempt from
Exchange Act registration must be registered
by the issuer under the Exchange Act before
a member, broker or dealer may trade that
class of securities on a national securities
exchange.
Contrarily, brokers or dealers who trade
debt securities otherwise than on a national
securities exchange may trade debt securities
regardless of whether the issuer registered
that class of debt under the Exchange Act.
This is so because Exchange Act registration
for securities traded other than on a national
securities exchange is required only for
certain equity securities. In particular,
Section 12(g) 66 of the Exchange Act, the only
Exchange Act provision other than Section
12(a) to impose an affirmative Exchange Act
registration requirement, requires the
registration of equity securities only.67
As the Commission has stated in the past,
we believe that this disparate regulatory
treatment may have negatively and
61 15 U.S.C. 78mm. Section 36 of the Exchange
Act gives the Commission the authority to exempt
any person, security or transaction from any
Exchange Act provision by rule, regulation or order,
to the extent that the exemption is necessary or
appropriate in the public interest and consistent
with the protection of investors.
62 15 U.S.C. 78a et seq.
63 CFR 240.0–12. Exchange Act Rule 0–12 sets
forth procedures for filing applications for orders
for exemptive relief pursuant to Section 36.
64 15 U.S.C. 78l(a).
65 15 U.S.C. 78l(b).
66 15 U.S.C. 78l(g).
67 Section 12(g)(1) of the Exchange Act and Rule
12g–1 [17 CFR 240.12g–1] promulgated thereunder
require an issuer to register a class of equity
securities if the issuer of the securities, at the end
of its fiscal year, has more than $10,000,000 in total
assets and a class of equity securities held by 500
or more recordholders.
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18:32 Jul 13, 2005
Jkt 205001
unnecessarily affected the structure and
development of the debt markets.68 In 1994,
to reduce existing regulatory distinctions
between exchange-traded debt securities and
debt securities that trade in the ‘‘over-thecounter’’ (‘‘OTC’’) market, we adopted
Exchange Act Rule 3a12–11.69 Rule 3a12–11
provides for the automatic effectiveness of
Form 8–A registration statements for
exchange-traded debt securities, exempts
exchange-traded debt from the borrowing
restrictions under Section 8(a) 70 of the
Exchange Act, and exempts exchange-traded
debt from certain proxy and information
statement requirements under Sections 14(a),
(b) and (c) of the Exchange Act.71 Despite
these efforts, the vast majority of secondary
trading of debt securities continues to occur
in the OTC market, which suggests that there
still may be regulatory impediments that
need to be addressed.72
In addition, we have sought to increase the
level of transparency in the public debt
markets. We have long believed that price
transparency in the U.S. capital markets is
fundamental to promoting the fairness and
efficiency of our markets.73 In 1998, the
Commission’s staff conducted a review of the
public debt markets and found that in the
area of corporate debt securities, price
transparency was deficient.74 Following the
staff’s 1998 review, the Commission
requested the National Association of
Securities Dealers, Inc. (‘‘NASD’’) to adopt
rules requiring dealers to report transactions
in corporate debt securities and preferred
stock to the NASD and to develop a real-time
price quotation system.75
We view the exemptive relief requested by
the NYSE as another step to improve the
public debt markets. The Commission
believes that granting the NYSE’s application
will serve the public interest by minimizing
unnecessary regulatory disparity and
promoting competition. Currently, unlike on
68 See Release Nos. 34–34922 (November 1, 1994)
[59 FR 55342], and 34–34139 (June 1, 1994) [59 FR
29398].
69 17 CFR 240.3a12–11.
70 15 U.S.C. 78h(a).
71 15 U.S.C. 78n(a), (b) and (c).
72 The NYSE estimates that there are over 22,000
publicly offered corporate bond issues having a par
value in excess of $3 trillion but only 8% of the $3
trillion par value is registered under the Exchange
Act and so may be traded on the NYSE’s Automated
Bond System. See the NYSE’s application for
exemptive relief.
73 See Testimony of Chairman Arthur Levitt
Before the House Subcommittee on Finance and
Hazardous Materials, Committee on Commerce,
Concerning Transparency in the United States Debt
Market and Mutual Fund Fees and Expenses
(September 29, 1998).
74 Id.
75 Id. The NASD was asked to undertake this
initiative for two reasons. First, the NASD is the
self-regulatory agency for the OTC market, the
market on which the vast majority of debt securities
are traded. Second, the Commission believed that
the NASD possessed the required infrastructure to
undertake the initiative and this would obviate the
need to ‘‘reinvent the wheel.’’ See Testimony of
Chairman Arthur Levitt Before the House
Subcommittee on Finance and Hazardous Materials,
Committee on Commerce, Concerning Hedge Fund
Activities in the U.S. Financial Markets (March 18,
1999).
PO 00000
Frm 00071
Fmt 4703
Sfmt 4703
40755
a national securities exchange, broker dealers
may trade debt securities in the OTC market
regardless of whether the issuer registered
that class of debt under the Exchange Act.
The exemption is designed to minimize that
disparate regulatory treatment and promote
competition between the debt security
markets. Moreover, the exemption may
provide greater transparency than exists on
the current OTC market.
At the same time, the conditions of the
exemption serve to protect investors by
alleviating any reduction in information
available as a result of the exemption.
Further, the conditions are designed to
ensure that investors continue to have access
to comprehensive public information about
an issuer, including the issuer’s detailed
disclosure in a registration statement filed
under the Securities Act of 1933 registration
statement and accompanying trust indenture
qualified under the Trust Indenture Act of
1939, and substantially all of the public
information that would be available if the
securities were registered under Section 12 of
the Exchange Act.
In granting this relief, we expect that the
NYSE will design and implement all rules
related to the relief in a manner that protects
investors and the public interest and does not
unfairly discriminate between customers,
issuers, brokers or dealers.
Accordingly, it is ordered pursuant to
Section 36 of the Exchange Act that, under
the terms and conditions set forth below, a
NYSE member, broker or dealer may effect a
transaction on the NYSE’s Automated Bond
System in a debt security that has not been
registered under Section 12(b) of the
Exchange Act without violating Section 12(a)
of the Exchange Act.
For purposes of this order, a ‘‘debt
security’’ is:
Any security that, if the class of securities
were listed on the NYSE, would be listed
under Sections 102.03 or 103.05 of the
NYSE’s Listed Company Manual. A debt
security does not include any security that,
if the class of securities were listed on the
NYSE, would be listed under Sections 703.19
or 703.21 of the NYSE’s Listed Company
Manual. Provided, however, under no
circumstances does a debt security include
any security that is defined as an ‘‘equity
security’’ under Section 3(a)(11) of the
Exchange Act.
References to Sections 102.03, 103.05,
703.19, and 703.21 of the NYSE’s Listed
Company Manual are to those sections as in
effect on January 31, 2005.
For purposes of this order, the following
conditions must be satisfied:
(1) The issuer of the debt security has
registered the offer and sale of such securities
under the Securities Act of 1933;76
(2) The issuer of the debt security, or the
issuer’s parent company if the issuer is a
wholly-owned subsidiary,77 has at least one
class of common or preferred equity
76 15
U.S.C. 77a et seq.
terms ‘‘parent’’ and ‘‘wholly-owned’’ have
the same meanings as defined in Rule 1–02 of
Regulation S–X [17 CFR 210.1–02].
77 The
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Federal Register / Vol. 70, No. 134 / Thursday, July 14, 2005 / Notices
securities registered under Section 12(b) of
the Exchange Act and listed on the NYSE;
(3) The transfer agent of the debt security
is registered under Section 17A 78 of the
Exchange Act;
(4) The trust indenture for the debt security
is qualified under the Trust Indenture Act of
1939; 79 and
(5) The NYSE has complied with the
undertakings to distinguish between debt
securities registered under Section 12(b) of
the Exchange Act and listed on the NYSE and
debt securities trading under this order, as set
forth in the NYSE’s exemptive application.
By the Commission.
[NAME]
[TITLE]
[FR Doc. E5–3742 Filed 7–13–05; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–52001; File No. 4–208]
Intermarket Trading System; Order
Granting Approval of the Twenty First
Amendment to the ITS Plan Relating to
the Recognition of the Automatic
Generation of Outgoing ITS
Commitments
July 8, 2005.
On April 27, 2005, the Intermarket
Trading System Operating Committee
(‘‘ITSOC’’) submitted to the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
11A of the Securities Exchange Act of
1934 (‘‘Act’’),1 and Rule 11Aa3–
thereunder,2 a proposed amendment
(‘‘Twenty First Amendment’’) to the
restated ITS Plan.3 The proposed
amendment recognized the automatic
generation of outgoing ITS
commitments in circumstances where
members in the Participants’ markets
send such commitments
contemporaneously with trading at
inferior prices, disseminating a locking
bid/offer in their own market, or a block
78 15
U.S.C. 78q–1.
79 15 U.S.C. 77aaa–77bbbb.
1 15 U.S.C. 78k–1.
2 17 CFR 240.11Aa3–2.
3 The ITS Plan is a National Market System
(‘‘NMS’’) plan, which was designed to facilitate
intermarket trading in exchange-listed equity
securities based on current quotation information
emanating from the linked markets. See Securities
Exchange Act Release No. 19456 (January 27, 1983),
48 FR 4938 (February 3, 1983).
The ITS Participants include the American Stock
Exchange LLC (Amex’’), the Boston Stock Exchange,
Inc. (‘‘BSE’’); the Chicago Board Options Exchange,
Inc. (‘‘CBOE’’); the Chicago Stock Exchange
(‘‘CHX’’), Inc., the Cincinnati Stock Exchange, Inc.
(‘‘CSE’’), the National Association of Securities
Dealers, Inc. (‘‘NASD’’), the New York Stock
Exchange, Inc. (‘‘NYSE’’), the Pacific Exchange, Inc.
(‘‘PCX’’), and the Philadelphia Stock Exchange, Inc.
(‘‘Phlx’’) (‘‘Participants’’).
VerDate jul<14>2003
18:32 Jul 13, 2005
Jkt 205001
trade. Notice of the proposed
amendment appeared in the Federal
Register on June 6, 2005.4 The
Commission received no comments on
the proposed amendment. This order
approves the proposed amendment.
The Commission finds that the
proposed amendment is consistent with
the Act, in particular, with Sections
11A(a)(1)(C)(ii) and (D),5 which provide
for fair competition among the
Participants and their members, and the
linking of all markets for qualified
securities through communications and
data processing facilities which foster
efficiency, enhance competition,
increase the information available to
brokers, dealers, and investors, facilitate
the offsetting of investors’ orders, and
contribute to best execution of such
orders. Further, the Commission finds
that the amendment is consistent with
Rule 11A3–2(c)(2) under the Act,6
which requires among other things, that
a plan amendment must be necessary or
appropriate in the public interest, for
the protection of investors and the
maintenance of fair and orderly markets,
and shall remove impediments to, and
perfect the mechanisms of, a national
market system. Specifically, the
Commission believes that the proposed
amendment, which permits the
members in the Participants’ markets to
send computer generated commitments
contemporaneously with trading at
inferior prices, disseminating a locking
bid/offer, or a block trade, should enable
Participants to effect transactions that
otherwise would appear to violate the
trade-through rule while simultaneously
fulfilling their obligations under the ITS
Plan.
It is therefore ordered, pursuant to
Section 11A(a)(3)(B) of the Act 7 that the
proposed Twenty First Amendment be,
and hereby is, approved.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.8
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E5–3730 Filed 7–13–05; 8:45 am]
BILLING CODE 8010–01–P
4 See Securities Exchange Act Release No. 51755
(May 27, 2005), 70 FR 32853.
5 15 U.S.C. 78k–1(a)(1)(C)(ii) and (D).
6 17 CFR 240.11A3–2(c)(2).
7 15 U.S.C. 78k1(a)(3)(B).
8 17 CFR 200.30–3(a)(29).
PO 00000
Frm 00072
Fmt 4703
Sfmt 4703
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 35–27997]
Filing Under the Public Utility Holding
Company Act of 1935, as Amended
(‘‘Act’’)
July 7, 2005.
Notice is hereby given that the
following filing(s) has/have been made
with the Commission pursuant to
provisions of the Act and rules
promulgated under the Act. All
interested persons are referred to the
application(s) and/or declaration(s) for
complete statements of the proposed
transaction(s) summarized below. The
application(s) and/or declaration(s) and
any amendment(s) is/are available for
public inspection through the
Commission’s Branch of Public
Reference.
Interested persons wishing to
comment or request a hearing on the
application(s) and/or declaration(s)
should submit their views in writing by
August 2, 2005, to the Secretary,
Securities and Exchange Commission,
Washington, DC 20549–0609, and serve
a copy on the relevant applicant(s) and/
or declarant(s) at the address(es)
specified below. Proof of service (by
affidavit or, in the case of an attorney at
law, by certificate) should be filed with
the request. Any request for hearing
should identify specifically the issues of
facts or law that are disputed. A person
who so requests will be notified of any
hearing, if ordered, and will receive a
copy of any notice or order issued in the
matter. After August 2, 2005, the
application(s) and/or declaration(s), as
filed or as amended, may be granted
and/or permitted to become effective.
Western Massachusetts Electric
Company (70–10308)
Western Massachusetts Electric
Company (‘‘WMECO’’), a public utility
subsidiary of Northeast Utilities, a
registered public utility holding
company, has filed with the
Commission an application/declaration
(‘‘Application’’) under sections 6(a) and
7 of the Act seeking authorization to
maintain its common equity-to-total
capitalization ratio below the
Commission’s threshold of 30% (the
‘‘30% Threshold’’) when certain Rate
Reduction Bonds (non-recourse
securitization bonds) are included in the
calculation of the ratio, through
December 31, 2006 (the ‘‘Authorization
Period’’). The term ‘‘total capitalization’’
is defined to include, where applicable,
common stock equity (comprised of
common stock, additional paid in
capital, retained earnings, accumulated
E:\FR\FM\14JYN1.SGM
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]]>Agencies
[Federal Register Volume 70, Number 134 (Thursday, July 14, 2005)]
[Notices]
[Pages 40748-40756]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-3742]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51998; File No. S7-06-05]
Notice of an Application of the New York Stock Exchange, Inc. for
an Exemption Pursuant to Section 36 of the Securities Exchange Act of
1934 and Request for Comment
July 8, 2005.
On May 26, 2005, the Securities and Exchange Commission received an
application from the New York Stock Exchange, Inc. (``NYSE'') for an
exemption pursuant to Section 36 \1\ of the Securities Exchange Act of
1934,\2\ in accordance with the procedures set forth in Exchange Act
Rule 0-12.\3\ The NYSE requests exemptive relief from Section 12(a) \4\
of the Exchange Act to permit its members, brokers and dealers to trade
certain unregistered debt securities on the NYSE's Automated Bond
System.\5\ We are publishing this notice and a proposed exemptive order
to provide interested persons with an opportunity to comment.\6\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78mm. Section 36 of the Exchange Act gives the
Commission the authority to exempt any person, security or
transaction from any Exchange Act provision by rule, regulation or
order, to the extent that the exemption is necessary or appropriate
in the public interest and consistent with the protection of
investors.
\2\ 15 U.S.C. 78a et seq.
\3\ 17 CFR 240.0-12. Exchange Act Rule 0-12 sets forth the
procedures for filing applications for orders for exemptive relief
pursuant to Section 36.
\4\ 15 U.S.C. 78l(a).
\5\ The NYSE's application for exemptive relief is included as
Appendix A.
\6\ The Commission's proposed exemptive order is included as
Appendix B.
---------------------------------------------------------------------------
I. Background
Section 12(a) of the Exchange Act provides in relevant part that it
``shall be unlawful for any member, broker or dealer to effect any
transaction in any security (other than an exempted security) on a
national securities exchange unless a registration is effective as to
such security for such exchange.'' Section 12(b) \7\ of the Exchange
Act dictates how the registration referred to in Section 12(a) must be
accomplished. Accordingly, all equity and debt securities that are not
``exempted securities'' \8\ or are not otherwise exempt from Exchange
Act registration must be registered by the issuer under the Exchange
Act before a member, broker or dealer may trade that class of
securities on a national securities exchange.
---------------------------------------------------------------------------
\7\ 15 U.S.C. 78l(b).
\8\ An exempted security may be traded on a national securities
exchange absent Exchange Act registration. Section 3(a)(12) of the
Exchange Act [15 U.S.C. 78c(a)(12)] defines exempted security to
include securities such as government securities, municipal
securities, various trust fund interests, pooled income fund
interests and church plan interests.
---------------------------------------------------------------------------
Contrarily, brokers or dealers who trade debt securities otherwise
than on a national securities exchange may trade debt securities
regardless of whether the issuer registered that class of debt under
the Exchange Act. This is so because Exchange Act registration for
securities traded other than on a national securities exchange is
required only for certain equity securities. In particular, Section
12(g) \9\ of the Exchange Act, the only Exchange Act provision other
than Section 12(a) to impose an affirmative Exchange Act registration
requirement, requires the registration of equity securities only.\10\
---------------------------------------------------------------------------
\9\ 15 U.S.C. 78l(g).
\10\ Section 12(g)(1) of the Exchange Act and Rule 12g-1 [17 CFR
240.12g-1] promulgated thereunder require an issuer to register a
class of equity securities if the issuer of the securities, at the
end of its fiscal year, has more than $10,000,000 in total assets
and a class of equity securities held by 500 or more recordholders.
When Congress amended the Exchange Act in 1964 to add Section 12(g),
it extended the registration requirement to specified equity
securities that are not exchange-traded. No comparable provision was
provided for debt securities that are not exchange-traded.
---------------------------------------------------------------------------
As the Commission has stated in the past, we believe that this
disparate regulatory treatment may have negatively and unnecessarily
affected the structure and development of the debt markets.\11\ In
1994, to reduce existing regulatory distinctions between exchange-
traded debt securities and debt securities that trade in the ``over-
the-counter'' (``OTC'') market, we adopted Exchange Act Rule 3a12-
11.\12\ Rule 3a12-11 provides for the automatic effectiveness of Form
8-A \13\ registration statements for exchange-traded debt securities,
exempts exchange-traded debt from the borrowing restrictions under
Section 8(a) \14\ of the Exchange Act, and exempts exchange-traded debt
[[Page 40749]]
from most of the proxy and information statement requirements under
Sections 14(a), (b) and (c) of the Exchange Act.\15\ Despite these
efforts, the vast majority of secondary trading of debt securities
continues to occur in the OTC market, which suggests that there still
may be regulatory impediments that need to be addressed.\16\
---------------------------------------------------------------------------
\11\ See Release Nos. 34-34922 (November 1, 1994) [59 FR 55342],
and 34-34139 (June 1, 1994) [59 FR 29398].
\12\ 17 CFR 240.3a12-11. Release No. 34-34922 (November 1, 1994)
[59 FR 55342].
\13\ 17 CFR 249.208a.
\14\ 15 U.S.C. 78h(a).
\15\ 15 U.S.C. 78n(a), (b) and (c). Rule 3a12-11 states that
Rules 14a-1, 14a-2(a), 14a-9, 14a-13, 14b-1, 14b-2, 14c-1, 14c-6 and
14c-7 continue to apply to the exchange-traded debt securities for
which Rule 3a12-11 provides exemptive relief [17 CFR 240.14a-1, 14a-
2(a), 14a-9, 14a-13, 14b-1, 14b-2, 14c-1, 14c-6 and 14c-7].
\16\ The NYSE estimates that there are over 22,000 publicly
offered corporate bond issues having a par value in excess of $3
trillion but only 8% of the $3 trillion par value is registered
under the Exchange Act and so may be traded on the NYSE's Automated
Bond System. See the NYSE's application for exemptive relief.
---------------------------------------------------------------------------
In addition, we have sought to increase the level of transparency
in the public debt markets. We have long believed that price
transparency in the U.S. capital markets is fundamental to promoting
the fairness and efficiency of our markets.\17\ In 1998, the
Commission's staff conducted a review of the public debt markets and
found that in the area of corporate debt securities, price transparency
was deficient.\18\ Following the staff's 1998 review, the Commission
requested the National Association of Securities Dealers, Inc.
(``NASD'') to adopt rules requiring dealers to report transactions in
corporate debt securities and preferred stock to the NASD and to
develop a real-time price quotation system.\19\
---------------------------------------------------------------------------
\17\ See Testimony of Chairman Arthur Levitt Before the House
Subcommittee on Finance and Hazardous Materials, Committee on
Commerce, Concerning Transparency in the United States Debt Market
and Mutual Fund Fees and Expenses (September 29, 1998).
\18\ Id.
\19\ Id. The NASD was asked to undertake this initiative for two
reasons. First, the vast majority of debt securities are traded on
the OTC market. Second, the Commission believed that the NASD
possessed the required infrastructure to undertake the initiative
and this would obviate the need to ``reinvent the wheel.'' See
Testimony of Chairman Arthur Levitt Before the House Subcommittee on
Finance and Hazardous Materials, Committee on Commerce, Concerning
Hedge Fund Activities in the U.S. Financial Markets (March 18,
1999).
---------------------------------------------------------------------------
II. Summary of the Application
The NYSE requests us to permit its members, brokers and dealers to
trade certain classes of debt securities not registered under Section
12(b) of the Exchange Act on the NYSE's Automated Bond System.\20\ The
NYSE asserts that the statutory distinctions referred to above put the
NYSE at a competitive disadvantage vis-[agrave]-vis the OTC market with
respect to the trading of debt.\21\ Further, the NYSE asserts that
investors are adversely impacted by this distinction. The NYSE believes
that the adverse impact on investors is twofold.\22\ First, the NYSE
asserts that investors are deprived of the advantage of competing
markets. Second, the NYSE asserts that the Automated Bond System is
generally more transparent than the OTC market.\23\ The NYSE states
that, in contrast to OTC bond trading, the Automated Bond System
reports bid and ask quotations and last sale prices, exclusive of any
mark-ups, mark-downs or other charges. In addition, the NYSE states
that all Automated Bond System trades are reported instantaneously. The
NYSE further asserts that it is not aware of any comparable level of
transparency that exists currently.
---------------------------------------------------------------------------
\20\ For purposes of the requested exemption, the term ``debt
security'' would be defined as any security that, if the class of
securities were listed on the NYSE, would be listed under Sections
102.03 or 103.05 of the NYSE's Listed Company Manual. A debt
security would not include any security that, if the class of
securities were listed on the NYSE, would be listed under Sections
703.19 or 703.21 of the NYSE's Listed Company Manual. Provided,
however, under no circumstances would a debt security include any
security that is defined as an ``equity security'' under Section
3(a)(11) of the Exchange Act [15 U.S.C. 78c(a)(11)].
\21\ See the NYSE's application for exemptive relief.
\22\ See the NYSE's application for exemptive relief.
\23\ The Automated Bond System is an automated trading and
information system that allows member firms to enter directly into
the system and execute debt security orders through remote terminals
that match them on a price and time priority basis.
---------------------------------------------------------------------------
Notwithstanding any competitive disadvantage to the NYSE that may
have resulted from existing statutory distinctions or the potential
benefits to investors of increased competition and enhanced
transparency,\24\ we believe that we must still balance these benefits
against any loss of Exchange Act protections that could result if we
determine to grant the requested exemptive relief. Further, as
explained below, we believe that any proposed relief only should be
granted in a way that mitigates any lost Exchange Act protections.
---------------------------------------------------------------------------
\24\ A May 2004 study entitled ``Transparency of Corporate Bond
Markets'' by the Technical Committee of the International
Organization of Securities Commissions found that transparency
supports market efficiency, fosters investor confidence and
strengthens investor protection. A similar study of U.S. corporate
debt markets found that greater transparency reduces transaction
costs of corporate bond trading. See ``Corporate Bond Market
Transparency and Transaction Costs'' by Amy K. Edwards, Lawrence E.
Harris and Michael S. Piwowar (March 2005). See https://papers.
ssrn.com/sol3/ papers. cfm? abstract -- id= 593823.
---------------------------------------------------------------------------
We view the potential loss of the comprehensive public information
that an issuer must provide under Section 13(a) of the Exchange Act as
perhaps the most significant factor weighing against relief.\25\ To
address this concern, the NYSE proposes that any exemption be
conditioned on two important protections designed to prevent the loss
of Exchange Act disclosure. First, relief would be limited to a class
of debt securities whose offer and sale was registered under the
Securities Act of 1933.\26\ This limitation is designed to ensure that
investors would have access to the detailed disclosure in the
Securities Act registration statement for the debt securities,
including a trust indenture qualified under the Trust Indenture Act of
1939.\27\
---------------------------------------------------------------------------
\25\ 15 U.S.C. 78m(a). Section 13(a) provides the Exchange Act's
comprehensive disclosure standards that require an issuer of
securities registered under the Exchange Act to file annual,
quarterly and current reports with the Commission.
\26\ 15 U.S.C. 77a et seq.
\27\ 15 U.S.C. 77aaa-77bbbb.
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Second, relief would be limited to issuers of debt securities with
at least one class of equity securities registered under Section 12(b)
and listed on the NYSE.\28\ This condition is designed to guarantee
that substantially all of the public information that would be
available if the debt securities were registered under Section 12(b)
would remain available with respect to the issuer of the debt
securities covered by the exemption. The only significant Exchange Act
disclosure for debt registered under Section 12 that would not continue
to be provided under the proposed exemptive relief would be:
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\28\ The debt securities of a wholly-owned subsidiary of a
company with at least one class of equity securities registered
under Section 12(b) of the Exchange Act and listed on the NYSE also
would be covered by the proposed relief. In addition to the Exchange
Act disclosure obligations mentioned below that would no longer
apply to a parent debt issuer whose debt could be traded under the
exemption, all other Exchange Act disclosure obligations also would
not apply to a wholly-owned subsidiary of that company, assuming
that the wholly-owned subsidiary had no other class of securities
registered or reporting under the Exchange Act. The NYSE asserts
that the Exchange Act disclosures and other public information
available with respect to the wholly-owned debt issuer's parent, the
consolidation of a wholly-owned subsidiary's financial information
into its parent's financial statements, as well as the information
regarding the wholly-owned subsidiary's debt securities available
under the trust indenture and otherwise, are designed to ensure that
all interested parties receive necessary information regarding the
debt securities.
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The extremely limited information contained in the Form 8-
A required for Exchange Act registration; \29\
---------------------------------------------------------------------------
\29\ Form 8-A is the short-form registration statement used by
companies to register a class of securities under the Exchange Act.
The form requires a description of the registrant's securities
pursuant to Item 202 of Regulation S-K or S-B, and in certain
circumstances, the filing of all constituent instruments, including
any contracts or other documents, that define, limit or qualify the
rights of the holders of the class of securities. The disclosures
required by the form may be furnished by incorporation by reference
to other filings with the Commission.
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[[Page 40750]]
The listing of the class of debt on the annual report's
cover page;
The disclosure of material modifications to instruments
defining the rights of debt holders and material limitations or
qualifications to the rights of debt holders required by Item 3.03 of
Form 8-K; and
Certain exhibits to an issuer's annual and quarterly
reports defining the rights of debt holders as provided in Item
601(b)(4) of Regulation S-K, although most of the exhibits required by
Item 601 are filed as exhibits to the Securities Act registration
statement for the debt securities.
We preliminarily believe that the loss of this information is
outweighed by the proposed relief's benefits to all interested parties,
but will consider any public comment to the contrary. We also further
note that this information is not required to be disclosed for debt
traded in the OTC market. Further, the condition of the proposed
exemptive order requiring the issuer of the debt security to have at
least one class of common or preferred equity securities registered
under Section 12(b) of the Exchange Act and listed on the NYSE is
designed to assure that the issuer of debt securities has a significant
and continuous listing (and oversight) relationship with the NYSE.\30\
This relationship will allow the NYSE to better monitor issuers whose
debt is traded on the Automated Bond System and will ensure that the
issuers of traded debt satisfy the NYSE's comprehensive listing
standards for equity securities.
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\30\ In the case of an issuer that is a wholly-owned subsidiary,
the issuer's parent would need to have at least one class of common
or preferred equity securities registered under Section 12(b) of the
Exchange Act and listed on the NYSE.
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In addition to the Exchange Act disclosure obligations that would
no longer apply, holders of debt securities traded in reliance on the
proposed relief would not be protected by the antifraud proscriptions
of Exchange Act Rules 14a-9 and 14c-6 or the shareholder communications
provisions in Exchange Act Rules 14a-13, 14b-1, 14b-2 and 14c-7, which
govern the transmission of proxy and information statements to
beneficial owners of securities. Although solicitations of debt holders
are infrequent,\31\ in its 1994 rulemaking, the Commission determined
that the exemptive relief afforded by Exchange Act Rule 3a12-11 should
not encompass these antifraud and shareholder communications
provisions.\32\ We believe that other requirements, the contractual
terms of the trust indenture, and economic motivations for
intermediaries to serve the needs of their customers would help to
mitigate the loss of these protections. Specifically, the antifraud
protection afforded by Exchange Act Rule 10b-5 \33\ would continue to
apply to soliciting materials sent to holders of debt traded in
reliance on the proposed exemption. In addition, NYSE Rule 451 \34\
requires NYSE member firms to transmit copies of all proxy and consent
solicitation materials to beneficial owners.\35\ Furthermore, we note
that none of these provisions applies to debt securities traded in the
OTC market.
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\31\ According to the NYSE, only six solicitations of debt
holders of NYSE-listed debt securities occurred during 2004.
\32\ In Release No. 34-34922, the Commission noted that the
proxy rules relating to the transmission of materials to beneficial
owners not only provide protection to investors, but also benefit
issuers by facilitating their ability to communicate directly with
their debtholders. Exchange Act Rules 14a-13, 14b-1 and 14b-2
establish procedures by which companies can request a list of their
non-objecting beneficial owners from banks, brokers and similar
intermediaries holding shares on behalf of such owners.
\33\ 17 CFR 240.10b-5.
\34\ Paragraph 2451 of the NYSE Guide.
\35\ Although banks and other intermediaries that are not NYSE
member firms would not be subject to NYSE Rule 451, many of these
intermediaries owe fiduciary obligations to their beneficial owner
customers that would cause them to continue transmitting soliciting
materials to their customers even in the absence of an explicit
Commission requirement.
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We also acknowledge that, if we grant the requested relief, the
NYSE's listing standards generally would no longer apply to any debt
traded, but not listed, on the Automated Bond System. This would
include all debt currently listed on the system that qualifies for
trading under the requested exemption because the NYSE intends to
formally delist all debt securities that qualify for the exemption, if
we approve its application.\36\ Without a listing requirement, issuers
of debt securities would no longer be required to notify the NYSE about
various corporate actions related to the issuer's debt. However, the
following actions by the NYSE should alleviate concerns in this regard:
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\36\ As noted, debt that trades on the NYSE that does not
qualify for the exemptive relief would continue to be ``listed'' on
the NYSE. To distinguish between ``listed'' debt and ``traded''
debt, the NYSE would: provide definitions of, and distinguish
between, listed debt securities and traded debt securities on the
Automated Bond System log-on screen and on the NYSE's web site;
directly provide each NYSE member and each NYSE listed company with
notification clarifying the distinction between listed and traded
debt, as well as notification that eligible listed debt will be
delisted and, instead, traded on the Automated Bond System; and
issue a press release explaining the Section 36 relief.
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The NYSE would engage a third party data vendor to provide
the NYSE and its members with a customized on-line reference for
corporate actions relevant to debt securities trading on the Automated
Bond System.\37\ This information is similar to, although less
comprehensive than, the information that the NYSE currently receives
pursuant to its rules for the continued listing of debt securities.\38\
Unlike some of the information that the NYSE currently receives
pursuant to its rules for the continued listing of debt, the
information provided by the third party data vendor would be available
only to the NYSE and its members. While the NYSE has undertaken to hire
a third party data vendor, the vendor's engagement and availability of
the contemplated information would not be a formal condition to the
proposed relief; and
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\37\ The NYSE intends to engage Xcitek, LLC as its third party
data vendor.
\38\ According to the NYSE, Xcitek, LLC's tracking service will
provide notification of calls (redemptions), notice of defaults in
the payment of interest, notice of consent solicitations and other
corporate actions related to public debt including tender offers,
issuer name changes and CUSIP number changes. The tracking service
will not provide notification of changes in transfer agent or
trustee, changes in the collateral deposited under a trust
indenture, changes or unusual conditions related to the payment of
interest, the issuance or authentication of duplicate bonds, all of
which must be provided for listed debt securities. The NYSE asserts
that the loss of certain information currently provided under the
NYSE Listed Company Manual for listed debt securities is outweighed
by the proposed relief's benefits to all parties with an interest.
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The NYSE has filed proposed rule changes (SR-NYSE-2004-69)
on Exchange Act Form 19b-4 that would specify the exchange's initial
and continued requirements for trading unregistered debt securities on
the Automated Bond System. In particular, the amended rules would state
that trading on the NYSE's Automated Bond System could only commence
for debt securities with an outstanding market value or principal
amount of at least $10 million and trading would be suspended if the
outstanding market value or principal amount fell below $1 million. In
addition, the proposed rule would allow the NYSE to suspend trading in
a debt security if, among other things, the issuer's assets were
substantially reduced, the issuer declared bankruptcy, or the NYSE
determined that the issuer engaged in operations that are contrary to
the public interest. The Commission is publishing for comment the
NYSE's
[[Page 40751]]
proposed rule changes concurrently with our publication of this
notice.\39\
---------------------------------------------------------------------------
\39\ See Release No. 34-51999 (July 8, 2005).
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In addition to the previously noted actions that the NYSE intends
to take, and conditions to the exemption, the proposed exemptive relief
would be available only for debt securities of an issuer whose transfer
agent for the debt security is registered under Section 17A of the
Exchange Act and for classes of debt securities whose indenture is
qualified under the Trust Indenture Act. The first condition is
designed to ensure that the transfer agents providing services to
issuers of debt securities trading pursuant to the exemption would be
subject to Section 17A of the Exchange Act and the rules thereunder and
to the Commission's oversight. The second condition is designed to
ensure that specific protections afforded to debt holders under the
Trust Indenture Act are included in the debt securities' trust
indenture.
III. Request for Comment
We request and encourage any interested person to submit comments
regarding the NYSE's application as well as the terms of our proposed
exemptive order, including whether the request should be granted.\40\
In particular, we solicit comment on the following questions:
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\40\ The Commission's proposed exemptive order is included as
Appendix B.
---------------------------------------------------------------------------
Is the scope of the requested exemption appropriate?
Would the requested exemption increase competition in the
public debt markets?
Would the requested exemption increase the transparency of
the public debt markets?
Would an issuer's Exchange Act reports for its equity
securities and all other public information related to the issuer's
class of debt adequately inform investors about the debt securities
covered by the requested exemption?
Should the requested exemption relieve issuers of debt
securities and other applicable parties from the antifraud
proscriptions of Exchange Act Rules 14a-9 and 14c-6 and/or from
Exchange Act Rules 14a-13, 14b-1, 14b-2 and 14c-7, which govern the
transmission to beneficial owners of proxy and consent materials and
information statements, as proposed? Does Exchange Act Rule 10b-5
provide adequate antifraud protection against misstatements or material
omissions in proxy or information statements and related materials? Is
there any significant concern that banks, brokers and similar
intermediaries would refuse or fail to transmit proxy materials to
beneficial owners if Rules 14b-1 and 14b-2 no longer expressly applied?
Should the requested exemption apply to a wholly-owned
subsidiary of a company with at least one class of equity securities
registered under Section 12(b) and listed on the NYSE, if the wholly-
owned subsidiary independently does not satisfy the conditions for
relief? Should the wholly-owned subsidiary's parent have to guarantee
the subsidiary's debt securities for the requested exemption to apply?
Are there any other differences between exchange-traded
debt and debt traded in the OTC market that warrant a more restrictive
regulatory treatment for exchange-traded debt?
Are there any implications or concerns that may arise
because NYSE members would be able to trade a debt security without the
NYSE entering into a formal listing arrangement with the issuer of the
debt security?
Should we condition the proposed exemption on any
additional NYSE listing standards?
Are the conditions sufficiently designed so that investors
are appropriately protected?
Are the bases triggering suspension of trading (e.g.,
bankruptcy, substantial reduction in assets, or NYSE determination that
the issuer engaged in operations contrary to the public interest)
appropriate? Should any be removed? Are there any others that should be
added?
Is the use of a third party data vendor adequate to
provide the NYSE and its members with sufficient information regarding
corporate actions relevant to debt securities traded on the Automated
Bond System? If not, what additional information or measures would be
appropriate? Should any such information or measures be required as an
additional condition of the exemption?
Is the information to be provided by Xcitek, LLC to the
NYSE and its members significant enough to justify its inclusion in the
proposed exemptive order as a formal condition to relief?
Comments should be received on or before August 15, 2005. Comments
may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/other.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number S7-06-05 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-9303.
All submissions should refer to File Number S7-06-05. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (https://www.sec.gov/rules/other.shtml). Comments are
also available for public inspection and copying in the Commission's
Public Reference Room, 100 F Street, NE., Washington, DC 20549. All
comments received will be posted without change; we do not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly.
For further information, you may contact Sean Harrison, Special
Counsel, Office of Rulemaking, at (202) 551-3430, or Robert T.
Plesnarski, Deputy Chief Counsel, Office of Chief Counsel, at 202-551-
3832 in the Division of Corporation Finance or Timothy Fox, Attorney,
or Michael Gaw, Senior Special Counsel, Office of Market Supervision,
at (202) 551-5643 and (202) 551-5602, respectively, in the Division of
Market Regulation, at the U.S. Securities and Exchange Commission, 100
F Street, NE., Washington, DC 20549.
By the Commission.
J. Lynn Taylor,
Assistant Secretary.
Appendices
A The New York Stock Exchange's application for an exemption
pursuant to Section 36 of the Exchange Act
B Proposed order granting the New York Stock Exchange's application
for an exemption pursuant to Section 36 of the Exchange Act
Appendix A
May 26, 2005.
Jonathan G. Katz, Secretary, Securities and Exchange Commission,
450 Fifth Street NW., Washington, DC 20549-0609.
Dear Mr. Katz: The New York Stock Exchange, Inc. (the
``Exchange'') requests that the Securities and Exchange Commission
(the ``Commission'') provide relief pursuant to Section 36 \41\ of
the Securities Exchange Act of 1934 (the ``Exchange Act'') \42\ to
provide an exemption from the provisions of Section
[[Page 40752]]
12(a) \43\ of the Exchange Act to permit NYSE members and member
organizations to trade certain debt securities that are not
registered under Section 12(b) \44\ of the Exchange Act.
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\41\ 15 U.S.C. 78mm.
\42\ 15 U.S.C. 78a.
\43\ 15 U.S.C. 78l(a).
\44\ 15 U.S.C. 78l(b).
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Conditions Applicable to the Exemptive Relief Requested
The Exchange requests that the Commission provide exemptive
relief with respect to Section 12(a), which provides in relevant
part that it shall be unlawful for any ``member, broker, or dealer
to effect any transaction in any security (other than an exempted
security) on a national securities exchange unless a registration is
effective as to such security for such exchange.'' \45\ The Exchange
further asks that this exemption be granted to allow NYSE members
and member organizations to trade debt securities that satisfy the
following conditions:
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\45\ If the Commission grants exemptive relief from Section
12(a), members, brokers and dealers would be able to trade on the
NYSE eligible debt securities that had not been registered under
Section 12(b), which prescribes the procedures for an issuer's
registration of a security and the information required to be
submitted. Similarly, the Exchange would no longer need to comply
with the provisions of Section 12(d) regarding the certification of
listing and registration of debt securities.
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1. The issuer of the debt securities registered the offer and
sale of that class of debt securities under the Securities Act of
1933, as amended (the ``1933 Act''),\46\
---------------------------------------------------------------------------
\46\ 15 U.S.C. 77a.
---------------------------------------------------------------------------
2. The issuer of the debt securities or the issuer's parent, if
the issuer is a wholly-owned subsidiary, has at least one class of
common or preferred equity securities registered under Section 12(b)
\47\ of the Exchange Act and listed on the New York Stock Exchange,
and
---------------------------------------------------------------------------
\47\ 15 U.S.C. 78l(b).
---------------------------------------------------------------------------
3. The transfer agent for the debt securities is registered
under Section 17A \48\ of the Exchange Act.
---------------------------------------------------------------------------
\48\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------
In connection with this exemptive request, the NYSE undertakes
that it will take or has taken the following steps:
(a) The NYSE will provide definitions of ``listed'' debt
securities and ``traded'' debt securities on the Automated Bond
System[reg] (the ``ABS[reg]'') log-on screen
and on the NYSE's Web site,
(b) The NYSE will distinguish between ``listed'' debt securities
and ``traded'' debt securities on the ABS[reg] and on the
NYSE Web site's bond issue directory,\49\
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\49\ The NYSE will distinguish debt securities ``listed'' on the
ABS[reg] from those ``traded'' on the ABS[reg]
on the three different screens used to view the market and through
which orders may be entered: (1) The book showing all the orders in
a particular security; (2) the summary book showing aggregate
interest at each price in a particular security; and (3) the display
of the best bid/offer, price range, and calculated accrued interest
in a particular security. As will be clearly noted on the
ABS[reg] log-on screen, ``listed'' debt securities will
be identified by a letter or symbol, ``traded'' debt securities will
be identifiable due to the absence of such letter or symbol. The
location of the indicator will be the same on all three screens.
---------------------------------------------------------------------------
(c) The NYSE will directly provide each member organization and
each listed company notification via letter and/or email prior to
the date that trading of the debt securities commences on the
ABS[reg] to clarify the distinction between ``listed''
debt securities and ``traded'' debt securities and to provide
notification that eligible listed debt securities will be delisted
and, instead, traded on the ABS[reg],
(d) The NYSE will issue a press release upon launch of this
initiative stating that ``listed'' debt securities trade along side
``traded'' debt securities on the ABS[reg], and
(e) The NYSE has contracted with Xcitek, LLC, (``Xcitek''), a
third-party bond issue tracking service, for the provision of
information prior to the date that this exemption is granted by the
SEC.
Xcitek's tracking service provides the NYSE a customized on-line
reference for corporate actions relevant to bonds. The tracking
system provides information and data electronically to the NYSE, and
provides:
Notification of calls (redemptions) of traded bonds,
Notification of tender offers for traded bonds,
Notice of defaults in payment of interest on traded
bonds,
Notice of consent solicitations for traded bonds, and
Notice of corporate actions for traded bonds (includes
tender offers, issuer name changes, cusip number changes).
The tracking system does not provide notification of changes in
trustees, obligors or transfer agents with respect to traded debt
securities. The NYSE has entered into a one-year contract with
Xcitek to provide this information electronically on a daily basis.
Xcitek independently obtains, researches and organizes the
information. The NYSE does not itself verify the information
provided by Xcitek. To the extent that in the future, Xcitek is no
longer willing or able to provide this information, the NYSE will
contract with another third party for the provision of similar
information.
The NYSE has separately filed SR-NYSE-2004-69 (December 3, 2004)
and Amendment No. 1 to 2004-69 (March 15, 2005) on Exchange Act Form
19b-4 to propose NYSE Rules 1400 and 1401 that set forth the
requirements for trading unlisted debt securities on the
ABS[reg]. Proposed Rule 1400 provides that, for purposes
of this exemption:
``The term Debt Securities includes only securities that, if
they were to be listed on the New York Stock Exchange, would be
listed under Sections 102.03 or 103.05 of the New York Stock
Exchange's Listed Company Manual; provided, however, that such
securities shall not include any security that is defined as an
``equity security'' under Section 3(a)(11) of the Exchange Act.
For the avoidance of doubt, note that the term ``Debt
Securities'' does not include a security that, if listed on the New
York Stock Exchange, would have been listed under Sections 703.19 or
703.21 of the New York Stock Exchange's Listed Company Manual. The
references to Sections 102.03, 103.05, 703.19, and 703.21 of the
NYSE's Listed Company Manual are to those sections as in effect on
January 31, 2005.''
Proposed Rule 1401 specifies that only Debt Securities with an
outstanding market value or principal amount of at least $10 million
will be permitted to be traded by NYSE members and member
organizations on the ABS[reg]. Proposed Rule 1401 also
specifies that trading in Debt Securities will be suspended if:
The outstanding aggregate market value or principal
amount of the Debt Securities has fallen to less than $1,000,000, or
The Debt Securities may no longer be traded by NYSE
members or member organizations on an unregistered basis pursuant to
this exemptive request.
In order to ensure that debt securities have at least
$10,000,000 in aggregate market value or principal amount at the
time trading commences, the NYSE will review two existing corporate
bond issue data bases that provide issue size information for the
preponderance of corporate bonds.
To monitor the $1,000,000 suspension threshold, the NYSE will
generally utilize the third party tracking system to monitor partial
redemptions and tender offers. The most prevalent reason for
outstanding principal amounts to fall below $1 million is when the
price of the bond declines because of a default or potential
bankruptcy. Prices of bonds in these situations will be monitored.
We will also monitor the media for warnings of possible
difficulties, in addition to ratings downgrades.
With respect to debt securities that are currently listed on the
NYSE, the Exchange intends to apply to delist debt securities that
satisfy the NYSE's requirements for traded debt and, instead, to
trade those debt securities on the ABS[reg] on an
unlisted basis. As described above, the NYSE will be contacting
listed companies to provide notification that eligible listed debt
securities will be delisted and, instead, traded on the
ABS[reg].
The NYSE will also inform listed companies of the NYSE's
intention to identify currently outstanding or newly issued unlisted
debt securities that are eligible to be traded by NYSE members and
member organizations on the ABS[reg]. The NYSE's Fixed
Income Markets Division will review a variety of sources, including
SEC Securities Act filings and bond offerings posted daily in
financial publications in order to identify additional unlisted debt
securities that have been issued by a NYSE equity-listed company or
wholly-owned subsidiary and that satisfy the requirements of
proposed Rules 1400 and 1401. The NYSE intends to provide an
opportunity for NYSE members and member organizations to trade all
eligible debt securities. Once unlisted debt securities are
identified and verified as satisfying the requirements of proposed
Rule 1400 and 1401, the NYSE will notify NYSE members and member
organizations that such unlisted debt securities are eligible to be
traded on the ABS[reg] through ticker notices and
postings on the ABS[reg] website.
Debt securities that do not satisfy the proposed requirements of
Exchange Rules 1400 and 1401 may continue to be listed on the NYSE.
Debt securities that would not satisfy the proposed requirements for
trading include convertible debt securities, debt securities that
were listed under Sections 703.19 and 21 of the NYSE's Listed
Company
[[Page 40753]]
Manual, debt issued by listed company subsidiaries that are not
wholly owned, foreign government debt and debt issued by an issuer
that does not have equity securities listed on the NYSE.
Background
In 1992, the Exchange wrote to the Commission requesting that it
grant a similar exemption pursuant to Section 3(a)(12) of the
Exchange Act.\50\ The Exchange pointed out that, while debt
securities traded on a national securities exchange must be
registered under Section 12(b) of the Exchange Act,\51\ debt
securities traded ``over-the-counter'' (``OTC'') were not subject to
the same requirement. In fact, debt securities traded OTC need not
even be issued by reporting companies. The Exchange argued that
these statutory distinctions put it at a competitive disadvantage
with respect to the OTC market. In an effort to be responsive, in
November 1994, the Commission amended certain Exchange Act rules to
``reduce regulatory distinctions between exchange-traded debt
securities required to be registered under Section 12 of the
Exchange Act and bonds traded over-the-counter for which such
registration is not required.'' \52\ In doing so, the Commission
acknowledged that ``regulatory distinctions may have unnecessarily
and unintentionally affected the structure and development of the
debt markets.'' \53\
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\50\ 15 U.S.C. 78c(a)(12). See Letter from Donald J. Solodar,
Executive Vice President, New York Stock Exchange, to William H.
Heyman, Director, Division of Market Regulation, Securities and
Exchange Commission, and Linda C. Quinn, Director, Division of
Corporation Finance, Securities and Exchange Commission, dated April
7, 1992.
\51\ See footnote 4 supra.
\52\ See Securities Exchange Act Release No. 34-34922 (November
1, 1994), 59 FR 55342 (Nov. 7, 1994). The Commission, among other
things, exempted debt securities listed on a national securities
exchange from Sections 14(a), 14(b) and 14(c) of the Exchange Act.
\53\ See footnote 9 supra.
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The Exchange Act Bond Registration Requirement
In the Exchange's view, the Exchange Act registration
requirement for corporate bonds to be traded on exchanges continues
to have an anti-competitive impact on exchange bond markets. Under
Section 12(g) of the Exchange Act,\54\ only equity securities are
required to be registered to be traded in the OTC market. In
contrast, corporate bond issues may trade on a national securities
exchange only if those bonds are registered under the Exchange Act.
---------------------------------------------------------------------------
\54\ 15 U.S.C. 78l(g).
---------------------------------------------------------------------------
The Exchange estimates that, in 1992, 90% of the par value of
outstanding corporate debt (excluding private placements) was issued
by reporting companies, but only 35% of that debt was registered
under the Exchange Act. Currently, the Exchange estimates that 95%
of the par value of outstanding corporate debt (excluding private
placements) is issued by reporting companies, but only 8% of that
debt is registered under the Exchange Act.\55\ As a result, the
Exchange's bond market remains small and has declined over the last
decade. In 1991, approximately 1,800 corporate bond issues having a
par value of $287 billion were traded on the Exchange, representing
675 issuers. At the end of 2004, the Exchange had some 500 corporate
bond issues trading (having a par value of $230 billion),
representing 220 issuers. In comparison, the Exchange estimates that
there are over 22,000 publicly offered corporate bond issues, with a
combined par value in excess of $2.8 trillion, trading in the OTC
secondary markets in the United States without being registered
under Section 12(b) of the Exchange Act. Thus, while there are over
22,000 corporate bond issues that can be traded on the OTC market,
only about 500 of these issues may be traded on exchanges. Clearly,
despite the reforms undertaken by the Commission in 1994, the
Exchange believes that fewer companies are deciding to register
their debt securities under the Exchange Act, and the number of debt
securities eligible for trading on national securities exchanges
continues to diminish.
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\55\ While there are no definitive numbers as to the size of the
corporate bond market, based upon issues rated by the Nationally
Recognized Securities Rating Organizations (``NRSRO''), the Exchange
estimates that there are over 22,000 publicly offered corporate bond
issues, having a par value in excess of $3 trillion. These numbers
do not include asset-backed securities, medium-term note offerings,
or commercial paper. Telephone conversation between Fred Siesel,
Consultant to the New York Stock Exchange and Dan Wyzocki,
President, First Data Services (November 8, 2004).
---------------------------------------------------------------------------
The consequences of the continued disparity in regulatory
treatment of exchange and OTC debt securities are not limited to the
competitive constraints on the Exchange. The Exchange believes that
investors in corporate bonds are adversely impacted. In contrast to
OTC bond trading, the Exchange's bond market has long disseminated
both last sale prices as they occur on the Exchange exclusive of any
mark-ups, mark-downs, or other charges, and bid and ask quotations.
Continuous last sale price disclosure has existed since 1867, when
the stock and bond ticker first went into operation. In 1919, the
stock and bond tickers commenced separate operations, and in 1977,
the bond high-speed quote line began the dissemination of last sale
prices and quotations to market data providers, such as Bloomberg,
Reuters, ILX and others. Today, this market data is available
through some 400,000 market data displays providing subscribers--
primarily securities firms and financial institutions--with direct
instantaneous access to this information, throughout each trading
day. Instantaneous means within one to two seconds of the actual
trade. The Exchange is not aware of any comparable level of
transparency--trade prices, quotations, and speed of availability
for corporate bond prices--that exists currently elsewhere or will
exist in the foreseeable future. The Exchange believes that all of
this transparency is lost when a bond delists from, or is not traded
on, the Exchange.\56\
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\56\ One instance in which this transparency may be lost is when
a company with both listed equity and debt is merged or reorganizes
with another company. The successor may list its stock on the
Exchange but leave its debt in a now wholly owned subsidiary, which
may seek to delist its debt to avoid separate Section 13 reporting
requirements. Once delisted from the Exchange, the debt is traded
only OTC, and the Exchange believes that investors lose the benefit
of the transparency provided by the real time reporting of
quotations and trades on the Exchange.
Examples of such delisting, include Southwestern Bell debt
(Securities Exchange Act Release No. 34-42141 (Nov. 16, 1999), 64 FR
63833 (Nov. 22, 1999)) and Pacific Bell debt (Securities Exchange
Act Release No. 34-42142 (Nov. 16, 1999) 64 FR 63833 (Nov. 22,
1999)). Other examples have involved the debt of Mobil Corporation,
Outdoor Systems, ITT Corporation, Chrysler Auburn Hills, Texaco,
Ralston-Purina, Time-Warner Entertainment, New England Telephone and
New York Telephone.
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Exchange bond trading is conducted through the
ABS[reg], which began operations in 1977. The
ABS[reg] is a web-based trading system for fixed income
securities to which Exchange member firms subscribe and through
which they enter and match customer bond orders on a strict price
and time priority basis. The system provides member subscribers with
access to screens that display the order ``book'' in each bond in
best price order and in the time sequence received. Completed,
locked-in trades are submitted to the clearing corporation (i.e.,
Depository Trust Clearing Corporation) with calculated accrued
interest. ABS[reg] centralizes bond trading and
facilitates the high-speed dissemination of last sale prices and
quotations to market data providers via the Exchange's dedicated
bond quote line. ABS[reg] primarily serves the ``small-
lot'' corporate bond market. Small-lot bond buyers and sellers are
primarily individuals, bank trust accounts, and small institutions.
In addition, bond dealers will use ABS[reg] to offset so-
called ``tail-end'' bond positions acquired in the course of large-
lot trading. As noted above, ABS[reg] is the only system,
known to us, providing the public with real-time disclosure of
quotations and trade prices, exclusive of mark-ups/mark-downs,
commissions, or other charges.
Bond Issue Information
Because information that is disclosed in connection with the
registration of bonds under the Exchange Act is generally also
available through other Commission filings and other means, the
Exchange believes that permitting a broker or dealer to effect a
transaction in a debt security without requiring Exchange Act
registration of eligible debt securities will not result in any
significant loss of bond or issuer information to investors. First,
the Exchange is only requesting exemptive relief with respect to the
trading by NYSE members and member organizations of debt securities
issued by eligible listed companies and their wholly owned
subsidiaries. In order for debt securities to be traded by NYSE
members and member organizations, the listed company must have
equity securities listed on the NYSE and, thus, already be subject
to the requirements of Section 13 of the Exchange Act. Information
about the listed company will remain available to investors even in
the absence of an Exchange Act registration requirement for bonds of
these issuers or their wholly owned subsidiaries.
Second, only debt securities that are registered under the 1933
Act would be eligible to be traded by NYSE members and
[[Page 40754]]
member organizations on the ABS[reg]. Additionally, under
Section 15(d) of the Exchange Act, issuers not required to register
their debt securities under Section 12 of the Exchange Act are
subject to Section 13 reporting requirements for the fiscal year
following the effective date of a registration statement filed under
the 1933 Act.\57\ Issuers must continue to file such reports so long
as they have a class of securities with at least 300 ``holders of
record'' as defined under Exchange Act Rule 12g5-1.\58\ Therefore,
with respect to eligible debt securities that have been issued by
the wholly owned subsidiary of a listed company, that wholly owned
subsidiary may or may not itself be currently subject to the
requirements of Section 15(d) or Section 13 of the Exchange Act.
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\57\ 15 U.S.C. 78o(d).
\58\ 17 CFR 240.12g5-1.
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The 1933 Act registration statements themselves supply much of
the relevant information needed by the bond markets and investors.
Indeed, for the most part, the Exchange Act registration Form 8-A
simply incorporates by reference the information found in the 1933
Act registration statement. The 1933 Act registration statement also
contains a much more detailed and relevant description of the debt
issue than is required by Rule 12b-3 of the Exchange Act.\59\ The
description contained in the term sheet of the registration
statement provides the information necessary to trade that issue--
whether on an exchange or OTC. The issue description contained in
the Form 8-A registration statement does not provide the information
needed to trade bonds.
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\59\ 17 CFR 240.12b-3. Rule 12b-3 requires that wherever the
title of securities is required to be stated one shall also indicate
``the type and general character of the securities * * *.'' For
funded debt, issuers are required to state the following: the rate
of interest, the maturity date (or dates for serial issues), an
indication if the payment of principal or interest is contingent, a
brief indication of the priority of the issue, and, if the issue is
convertible, a statement to that effect.
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Most of the other disclosure items required in connection with
debt securities arise with respect to Forms 8-K, 10-Q and 10-K.
These forms would continue to be filed by eligible listed companies
and, where required by Sections 15(d) or 13 under the Exchange Act,
by eligible wholly owned subsidiaries, regardless of whether the
debt securities are registered under the Exchange Act. Item 2.04 of
Form 8-K requires disclosure of any triggering event, such as a
default, that accelerates or increases a direct financial
obligation. Item 3.03 of Form 8-K requires disclosure of any
material modification to the rights of security holders. Item
601(b)(4) of Regulation S-K (required to be included in 10-Ks and
10-Qs) discusses the definition of the rights of debt holders. Part
II--Item 3(a) of Form 10-Q requires that, to the extent that the
registrant has not previously disclosed such information on Form 8-
K, the registrant must provide information regarding defaults in the
payment of principal, interest, sinking fund, etc., ``with respect
to any indebtedness of the registrant or any of its significant
subsidiaries exceeding 5 percent of the total assets of the
registrant and its consolidated subsidiaries * * *'' (emphasis
added). Thus, the Form 10-Q requires disclosure of defaults in the
payment of principal, interest, sinking fund, etc. for any bonds of
the registrant, irrespective of whether such bonds are exchange-
listed or not.
If, as described above, a wholly owned subsidiary ceases to
provide Exchange Act reports itself, much of the information that
had been provided by the wholly owned subsidiary will be provided
instead by the wholly owned subsidiary's listed parent company in
its own Exchange Act reports. The listed parent company, however,
will not be required to list and describe the debt securities issued
by the wholly owned subsidiary on the cover page of its own annual
report on Form 10-K or to include as an exhibit to its own Forms 10-
K or 10-Q the exhibits that would have been required to be filed by
the wholly owned subsidiary pursuant to Item 601(b)(4) of Regulation
S-K (relating to creation of a new class of securities or
indebtedness or the modification of existing rights of security
holders).
There are also a variety of databases providing bond
information, including information regarding the listing and/or
trading location of a bond. A few examples of these database
services include: Standard & Poor's Bond Guide, the Mergent Bond
Record, First Data Services' BORAS, Bloomberg and the Commission's
EDGAR internet service, among other services. In addition, the
Exchange's own bond issue directory is available on the Exchange's
web site and carries the description of each listed bond issue,
including bonds currently exempt from Exchange Act registration
requirements, such as Tennessee Valley Authority and the
International Bank for Reconstruction and Development (World Bank)
bonds.
Most notably, of course, OTC bond trading functions without the
information obtained as a result of Exchange Act registration. OTC
bond trading relies on the information disclosed in the 1933 Act
registration statement and the indentures filed under the Trust
Indenture Act, including amendments to the indenture affecting the
rights of bondholders.
Debt securities traded by NYSE members and member organizations
on the ABS( will not be subject to the provisions of the NYSE's
Listed Company Manual that relate to debt securities that are listed
on the NYSE. While both traded and listed debt securities are
subject to the same quantitative thresholds for initial trading/
listing and continued trading/listing, listed debt securities are
also subject to other requirements, including:
Issuers of listed debt securities are required to
provide immediate notice to the NYSE and the public of defaults or
other unusual circumstances relating to the payment of interest;
Issuers of listed debt securities are required to
provide immediate notice to the NYSE and the public of any corporate
action it (or third parties) may take towards the redemption,
retirement or cancellation of the security;
Issuers of listed debt securities are subject to
requirements for transfer agents; and
Issuers of listed debt securities are required to
submit a listing application in order to list the securities.
As noted above, in the case of traded debt securities, the NYSE
will obtain notice regarding defaults and redemptions through the
third-party tracking system.
No Justification for Disparate Treatment
In summary, the disparate regulation between exchanges and the
OTC markets has occurred without deliberate design. In 1934,
Congress determined to regulate all listed issuers, and did not
distinguish between listed equity and listed debt. Of course, at the
time, the only place a company could be ``listed'' was on an
exchange. In 1964, Congress properly determined to extend Exchange
Act registration requirements to issuers having a substantial number
of public shareholders and to require them to file periodic reports
with the Commission, even if they were not listed on an exchange.
The focus, however, was on those companies with public stockholders,
so Section 12(g) of the Exchange Act was made applicable only to
issuers of equity held by the requisite number of holders. As a
result, publicly held debt that is not listed does not trigger the
registration requirement.\60\
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\60\ Also at that time, Section 15(d) was amended to replace the
asset-size standard with a holder-of-record standard. See Securities
Exchange Act Release No. 34-7492 (January 5, 1965), 30 FR 483
(1965). Because of the widespread use of street name holding,
however, the vast majority of bonds issued by bond-only companies
fall outside the reporting requirement of Section 15(d). Thus
Section 15(d), though it applies to both equity and debt, does not
fill the gap left by Section 12(g), and does not achieve Exchange
Act ongoing reporting for the bonds of most bond-only companies.
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We believe that this exemptive relief is consistent with the
Commission's interest in greater bond market transparency. We also
believe that removing unnecessary anti-competitive barriers to
exchange trading of debt of reporting companies and their
consolidated subsidiaries will go a long way towards providing bond
investors with the transparency that we all agree is so important.
We urge the Commission to use its exemptive power to remove the
requirement that bonds of NYSE-listed equity issuers and their
consolidated subsidiaries must be registered under the Exchange Act
in order to be traded on an exchange. This dichotomy between
exchange and OTC bond markets has existed too long and should be
ended.
Sincerely yours,
/s/ Mary Yeager
cc: Alan L. Beller, Annette L. Nazareth, David Shillman, Paula
Dubberly, Robert Plesnarski, Sean Harrison, Michael Gaw, Timothy C.
Fox.
Appendix B--Proposed Order Granting the New York Stock Exchange's
Application for an Exemption Pursuant to Section 36 of the Securities
Exchange Act of 1934
This is a proposed order regarding the exemptive application of
the New York Stock Exchange, Inc. (``NYSE''). Before issuing any
final order, the Commission will consider
[[Page 40755]]
public comments received on the NYSE's exemptive application and
proposed order.
I. Introduction
On May 26, 2005, the Commission received an application from the
NYSE for an exemption pursuant to Section 36 \61\ of the Securities
Exchange Act of 1934 (the ``Exchange Act''),\62\ in accordance with
the procedures set forth in Exchange Act Rule 0-12.\63\ The NYSE has
requested exemptive relief from Section 12(a) \64\ of the Exchange
Act to permit its members and brokers or dealers to trade certain
unregistered debt securities on the NYSE's Automated Bond System.
This order grants the NYSE's application for an exemption.
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\61\ 15 U.S.C. 78mm. Section 36 of the Exchange Act gives the
Commission the authority to exempt any person, security or
transaction from any Exchange Act provision by rule, regulation or
order, to the extent that the exemption is necessary or appropriate
i
