[Federal Register: September 16, 2008 (Volume 73, Number 180)]
[Notices]
[Page 53469-53470]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16se08-97]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-58499; File No. SR-NYSE-2008-58]
Self-Regulatory Organizations; New York Stock Exchange LLC; Order
Approving Proposed Rule Change To Make Permanent a Pilot Program Under
Which the Exchange Excludes From Its Earnings Standard Gains or Losses
From Extinguishment of Debt Prior to Maturity
September 9, 2008.
I. Introduction
On July 22, 2008, the New York Stock Exchange LLC (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to enable the Exchange to adjust the earnings of
companies for purposes of the Exchange's pre-tax earnings standard by
excluding gains or losses recognized in connection with the
extinguishment of debt prior to its maturity. The proposed rule change
was published for comment in the Federal Register on August 5, 2008.\3\
The Commission received no comments on the proposal. This order
approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 58254 (July 30,
2008), 73 FR 45511.
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II. Description of the Proposal
The Exchange proposes to amend the earnings standard of section
102.01C(I) of the Exchange's Listed Company Manual (``Manual'') to
enable the Exchange to adjust the earnings of companies for purposes of
its pre-tax earnings standard by excluding gains or losses recognized
in connection with the extinguishment of debt prior to its maturity.
The adjustment would relate
[[Page 53470]]
only to gains or losses incurred in the three-year period under
examination for purposes of the earnings standard. The proposed
amendment was originally implemented for a six-month period as a Pilot
Program.\4\ The Pilot Program expired and was subsequently renewed for
an additional three months, expiring on September 2, 2008.\5\
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\4\ See Exchange Act Release No. 56195 (August 2, 2007), 72 FR
44904 (August 9, 2007) (SR-NYSE-2007-71).
\5\ See Exchange Act Release No. 57903 (June 2, 2008), 73 FR
32610 (June 9, 2008) (SR-NYSE-2008-43).
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Prior to the promulgation of Statement of Financial Accounting
Standards No. 145 (``SFAS No. 145'') in 2002, Financial Accounting
Standards Board Statement No. 4 (``FASB No. 4'') required that gains
and losses from the extinguishment of debt prior to its maturity that
were included in the determination of net income be aggregated and, if
material, classified as an extraordinary item, net of related income
tax effect. SFAS No. 145 rescinded FASB No. 4 and, as a result, gains
or losses in connection with the extinguishment of debt prior to its
maturity are now generally included in the calculation of operating
earnings under generally accepted accounting principles (``GAAP''). As
a result, the Exchange has stated that some companies that would not
otherwise be qualified to list may qualify as a result of the inclusion
in pre-tax income of gains from the extinguishment of debt prior to its
maturity. In addition, according to the Exchange, some prospective
listed companies whose operating earnings would have met the
requirements of the Exchange's pre-tax earnings test prior to 2002 are
now not qualified to list as they are required to include losses from
the extinguishment of debt prior to its maturity in pre-tax income. In
its proposal, the Exchange stated that in its experience, these gains
and losses are primarily noncash in nature and that the gains generally
represent the accelerated accrual of original issue discount, while the
losses generally represent the remaining unamortized portion of costs
incurred at the time of initial borrowing.
The Exchange believes that it is appropriate to return to its pre-
2002 approach of excluding gains and losses from debt extinguishment
from pre-tax earnings as calculated for purposes of its earnings
standard. In its proposal, the Exchange stated that the purpose of the
earnings standard is to determine the suitability for listing of
companies on a forward-looking basis in light of a sustained
demonstration of strong earnings. The Exchange does not believe that it
is relevant to include in pre-tax earnings gains and losses from the
extinguishment of debt prior to its maturity that are principally
nonrecurring in nature. Additionally, the Exchange believes that the
analyst community routinely excludes these gains and losses from their
analyses in making recommendations as to the desirability of investing
in companies' publicly-traded equity securities. The Exchange believes
that adjusting company earnings for gains and losses from the
extinguishment of debt prior to its maturity is consistent with the
adjustments that are currently permitted under section 102.01C for a
number of other nonrecurring charges to earnings that are included in
net income as recorded under GAAP, such as the exclusion of impairment
charges on long-lived assets, the exclusion of gains and losses on
sales of a subsidiary's or investee's stock and the exclusion of in-
process purchased research and development charges. The Exchange also
believes that this adjustment is reasonable given the purpose of the
earnings standard, which is to determine the suitability for listing of
companies on a forward-looking basis.
The Exchange has stated that, as with all companies listed on the
Exchange, the Financial Compliance staff of NYSE Regulation, Inc. will
monitor on an ongoing basis the compliance with the Exchange's
continued listing standards of any companies listed in reliance upon
the proposed amendment. The Exchange represents that such companies
will be subject to delisting if they are found at any time to be below
the Exchange's continued listing standards.
In its proposal, the Exchange stated that as it gains experience in
listing companies in reliance upon the proposed amendment, it will
continue to carefully reevaluate the appropriateness of the amendment.
If the Exchange becomes aware that companies listed pursuant to the
proposed amendment have difficulty complying with the Exchange's
continued listing standards, it will inform the Commission and discuss
with the Commission the desirability of the continued use of the
provision.
III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange
and, in particular, with section 6(b)(5) of the Act,\6\ which requires,
among other things, that the rules of a national securities exchange be
designed to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of, a free and open market and a national market
system, and, in general, to protect investors and the public
interest.\7\
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\6\ 15 U.S.C. 78f(b)(5).
\7\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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The Commission believes that the proposed rule change is consistent
with other adjustments the Exchange makes when evaluating applicants on
a forward-looking, post-IPO basis under the existing earnings standard
in section 102.01C(I) of the Manual and is reasonable given the purpose
of the earnings standard, which is to determine the suitability for
listing of companies on a forward-looking basis. The Commission notes
that these changes to the earnings standards will allow the Exchange to
adjust the earnings of companies for purposes of satisfying the
Exchange's pre-tax earnings standard, by excluding gains or losses
recognized in connection with the extinguishment of debt prior to its
maturity, and will not impact the preparation of financial statements
by the company listing on the Exchange. In addition, the Commission
notes that the Exchange will monitor companies listing using this new
adjustment and notes that the Exchange has agreed to discuss the
standard with the Commission should it prove difficult for such
companies to comply with the Exchange's continued listing standards.
IV. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\8\ that the proposed rule change (SR-NYSE-2008-58) be, and hereby
is, approved.
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\8\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-21543 Filed 9-15-08; 8:45 am]
BILLING CODE 8010-01-P