Self-Regulatory Organizations; New York Stock Exchange, Inc.; Order Approving Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 1 to Proposed Rule Change Permanently Approving the Pilot Program for the Listing Eligibility Criteria for Closed-End Management Investment Companies Registered Under The Investment Company Act of 1940

[Federal Register Volume 64, Number 87 (Thursday, May 6, 1999)]
[Notices]
[Pages 24435-24437]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-11360]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41346; File No. SR-NYSE-99-02]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Notice of Filing and Order 
Granting Accelerated Approval of Amendment No. 1 to Proposed Rule 
Change Permanently Approving the Pilot Program for the Listing 
Eligibility Criteria for Closed-End Management Investment Companies 
Registered Under The Investment Company Act of 1940

April 29, 1999.

I. Introduction

    On January 26, 1999, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 under the 
Act,\2\ a proposed rule change creating a pilot program (``pilot'') 
relating to the listing eligibility criteria for closed-end investment 
companies registered under the Investment Company Act of 1940 
(``Funds'').
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    Notice of the proposal was published in the Federal Register on 
February 3, 1999.\3\ The Commission received one comment letter on the 
proposal. On April 21, 1999, the NYSE submitted Amendment No. 1 to the 
proposed rule change.\4\ This notice and order approves the proposed 
rule change as amended and seeks comment from interested persons on 
Amendment No. 1.
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    \3\ See Securities Exchange Act Release No. 40979 (January 26, 
1999), 64 FR 5332 (February 3, 1999).
    \4\ See letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Jonathan G. Katz, Secretary, SEC, April 21, 1999 
(``Amendment No. 1''). In Amendment No. 1, the NYSE added a 
requirement that an applicant Fund, which is a spin-off or carve-
out, show that the new entity will satisfy the net assets test by 
submitting to the Exchange a letter from its parent company's 
investment banker or other financial advisor.
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II. Description of the Proposal

    The Exchange generally lists Funds either in connection with an 
initial public offering or shortly thereafter, when the fund does not 
have a three-year operating history and is thus considered newly 
formed. On January 26, 1999, the Exchange proposed to codify its policy 
regarding the listing of these newly organized Funds.\5\ The same day, 
the Commission granted partial accelerated approval to the proposal as 
a three-month pilot, effective until April 29, 1999.
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    \5\ The Exchange sought both accelerated approval to implement a 
three-month pilot program to amend its Listed Company Manual with 
respect to Funds and permanent approval of the rule change 
implemented in the pilot.
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    Under the pilot, if a Fund has at least $60 million in net assets, 
as evidenced by a firm underwriting commitment, the Exchange will 
generally authorize the listing of the Fund. This requirement is the 
minimum net asset requirement for listing. Additionally, the Exchange 
retains the discretion to deny listing to a Fund if it determines that, 
based upon a comprehensive financial analysis, it is unlikely that the 
particular Fund will be able to maintain its financial status. Any Fund 
with less than $60 million in net assets will not be considered for 
listing.
    Lastly, Funds are subject to continued financial listing standards. 
The Exchange generates a monthly exception report to identify companies 
below the

[[Page 24436]]

Exchange's continued listing standards. If a Fund is so identified by 
the Exchange's Financial Compliance Department, it will be subject to 
the same compliance and monitoring procedures imposed upon any other 
NYSE-listed company so identified.
    The Exchange is proposing an exception to the ``Firm underwriting 
commitment'' required in the pilot.\6\ The Exchange contends that spin-
offs and carve-outs are not the subjects of an underwriting and, 
therefore, are unable to submit the requisite undertaking letter. 
Accordingly, an applicant Fund, which is a spin-off or carve-out, must 
show that the new entity will satisfy the net assets test by submitting 
to the Exchange a letter from its parent company's investment banker or 
other financial advisor.
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    \6\ See Amendment No. 1, supra note 4.
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III. Summary of Comments

    The Commission received one comment letter from the Investment 
Company Institute (``ICI''),\7\ which opposed the proposal.\8\ The 
Exchange responded to this letter.\9\
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    \7\ The ICI is a national investment company industry 
association. Its membership includes 7,408 open-end investment 
companies (``mutual fund''), 499 closed-end investment companies and 
eight sponsors of unit investment trusts. The ICI notes that mutual 
fund members have assets of about $5.468 trillion, accounting for 
approximately 95% of total industry assets, and have over 62 million 
individual shareholders.
    \8\ See letter from Ari Burstein, Assistant Counsel, ICI, to 
Jonathan G. Katz, Secretary, SEC, March 1, 1999.
    \9\ See letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Jonathan G. Katz, Secretary, SEC, April 16, 
1999.
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    In its letter the ICI questioned a number of aspects of the 
proposal, including: the reason for proposing solely a net asset based 
eligibility listing standard; the rationale for the proposed $60 
million threshold; the application of the requirement (i.e., whether 
funds currently listed are grandfathered from the requirements); and, 
the existence of any other listing standards and requirements.
    In its response, the Exchange argued that the proposed rule change 
is merely a codification of an existing practice, which has evolved 
over time as a way to assess the financial viability of a newly 
organized Fund that does not have a three-year operating history 
against which the Exchange's general listing standards can be 
applied\10\ The Exchange also explained that ICI's concern that the net 
asset standard is the only standard applicable to Funds is unfounded 
because Funds are also subject to the Exchange's distribution and 
corporate governance standards. Finally, the Exchange stated that 
grandfather provisions are not necessary because the $60 million 
threshold is the minimum requirement imposed. The Exchange also noted 
that it is developing specific standards to judge a Fund for continued 
listing status.
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    \10\ The NYSE noted that the proposal omitted a projected 
earnings requirement that the Exchange determined provided minimal 
incremental value.
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IV. Discussion

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\11\ Specifically, the Commission believes the proposal is 
consistent with the Section 6(b)(5) \12\ requirements that the rules of 
an exchange be designed to promote just and equitable principals of 
trade, to remove impediments to and perfect the mechanisms of a free 
and open market and a national market system, and, in general, to 
protest investors and the public.
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    \11\ In approving the proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(5).
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    The Commission recognizes that in many cases the applicant Fund is 
not a traditional operating entity and therefore it is not possible to 
apply the earnings standards specified in the Exchange's Listed Company 
Manual at the time of listing. Thus, the Commission believes that the 
Exchange's proposed listing standard serves as an acceptable means for 
screening out those Funds that the Exchange believes are unsuitable for 
listing because of insufficient assets. The Commission recognizes that 
the net assets test in intended as a minimum standard and that the 
Exchange may, with respect to a given Fund, determine that, 
notwithstanding sufficient net assets, the Fund may otherwise be 
unsuited for listing.
    The Commission carefully considered the concerns expressed by the 
ICI in its letter opposing the proposal. Ultimately, the Commission 
concluded that the net asset standard codified by the Exchange in the 
proposal is a clear, nondiscriminatory standard that should promote 
transparency with respect to the Exchange listing standards for Funds 
and is not inconsistent with the Act. The Commission believes that the 
proposed standard should promote certainty and reduce costs in the 
listing process which should benefit investors and other market 
participants.
    The Commission finds good cause for approving proposed Amendment 
No. 1 prior to the thirtieth day after the date of publication of 
notice of filing in the Federal Register. The amendment addresses those 
Funds that would not be the subject of an underwriting (i.e., spin-offs 
and carve-outs), and as such, would be unable to submit the requisite 
undertaking letter. The proposed amendment would permit these Funds to 
show the NYSE that they meet the asset test through another acceptable 
means (i.e., through a representation by the parent company's 
investment banker or other financial advisor). Because the Commission 
believes the amendment is an appropriate accommodation for spin-offs 
and carve-outs, which could not comply with the original proposal, the 
Commission finds good cause for accelerating approval of Amendment No. 
1.

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1, including whether the proposed 
amendment is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, 
D.C. 20549-0609. Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. Sec. 552, will be available for 
inspection and copying at the Commission's Public Reference Room. 
Copies of such filing will also be available for inspection and copying 
at the principal office of the Exchange. All submissions should refer 
to File No. SR-NYSE-99-02 and should be submitted by May 27, 1999.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-NYSE-99-02), including 
Amendment No. 1, relating to the listing eligibility criteria for 
closed-end management investment companies registered under the 
Investment Company Act of 1940, is approved.

    \13\ 15 U.S.C. 78s(b)(2).

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[[Page 24437]]

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-11360 Filed 5-5-99; 8:45 am]
BILLING CODE 8010-01-M