
[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
