
[Federal Register Volume 81, Number 4 (Thursday, January 7, 2016)]
[Notices]
[Pages 820-826]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-33313]



[[Page 820]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76814; File No. SR-NYSE-2015-02]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Amendment Nos. 1 and 2 and Order Granting 
Accelerated Approval of Proposed Rule Change, as Modified by Amendment 
Nos. 1 and 2 Thereto, Amending Sections 312.03(b) and 312.04 of the 
NYSE Listed Company Manual To Exempt Early Stage Companies From Having 
To Obtain Shareholder Approval Before Issuing Shares for Cash to 
Related Parties, Affiliates of Related Parties or Entities in Which a 
Related Party Has a Substantial Interest

December 31, 2015.

I. Introduction

    New York Stock Exchange LLC (``NYSE'' or the ``Exchange'') filed on 
April 16, 2015, 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 exempt early stage companies from having to 
obtain shareholder approval before issuing shares to related parties, 
affiliates of related parties, or entities in which a related party has 
a substantial interest. The proposed rule change was published for 
comment in the Federal Register on May 6, 2015.\3\ The Commission 
received no comment letters on the proposal. On June 18, 2015, the 
Commission designated a longer period for Commission action on the 
proposed rule change \4\ and on August 4, 2015, initiated proceedings 
under Section 19(b)(2)(B) of the Act \5\ to determine whether to 
approve or disapprove the proposed rule change.\6\ In response to the 
Order Instituting Proceedings, the Commission received a comment letter 
from the Exchange and Amendment No. 1 to the proposed rule change.\7\ 
The Commission also received a recommendation regarding the proposed 
rule change from the Office of the Investor Advocate (``OIAD'') \8\ and 
a comment letter.\9\ On October 30, 2015, the Commission extended the 
time period for Commission action \10\ and on November 12, 2015, the 
Exchange submitted a letter responding to the comments.\11\ On December 
10, 2015, the Exchange filed Amendment No. 2 to the proposed rule 
change.\12\ This order approves the proposed rule change, as modified 
by Amendment Nos. 1 and 2.
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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. 74849 (April 30, 
2015), 80 FR 26118 (May 6, 2015) (``Notice'').
    \4\ See Securities Exchange Act Release No. 75248 (June 18, 
2015), 80 FR 36385 (June 24, 2015) (extending the time period for 
Commission action to August 4, 2015).
    \5\ 15 U.S.C. 78s(b)(2)(B).
    \6\ See Securities Exchange Act Release No. 75599 (August 4, 
2015), 80 FR 47979 (August 10, 2015) (``Order Instituting 
Proceedings'').
    \7\ See letter to Brent J. Fields, Secretary, Commission from 
Clare F. Saperstein, Associate General Counsel, New York Stock 
Exchange, dated August 31, 2015 (``NYSE Response Letter I'') and 
Amendment No. 1 to the proposed rule change dated August 31, 2015. 
In Amendment No. 1, the Exchange stated that it believed there was a 
potential ambiguity in the proposed rule language submitted as part 
of the original proposal. Amendment No. 1 amends the original 
proposed rule language to clarify that the proposed exemption from 
shareholder approval transactions involving the sale of stock for 
cash by an early stage company applies not only to a related party, 
as originally proposed, but also to a subsidiary, affiliate or other 
closely-related person of a related party; or any company or entity 
in which a related party has a substantial direct or indirect 
interest.
    \8\ See Memorandum to the Commission from Rick. A. Fleming, 
Office of the Investor Advocate, Commission, dated October 16, 2015 
(``OIAD Recommendation''). As discussed in more detail below, the 
Commission has carefully considered the OIAD Recommendation. The 
OIAD was established pursuant to Section 915 of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act, Pub. L. 111-203, sec. 
911, 124 Stat. 1376, 1822 (July 21, 2010) (the ``Dodd-Frank Act''). 
The Dodd-Frank Act authorizes the Investor Advocate, among other 
things, to identify areas in which investors would benefit from 
changes in the regulations of the Commission or the rules of self-
regulatory organizations and to propose to the Commission changes in 
the regulations or orders of the Commission that may be appropriate 
to promote the interests of investors.
    \9\ See Public comment email from Suzanne Shatto, dated October 
16, 2015 (``Shatto Letter'').
    \10\ See Securities Exchange Act Release No. 76323 (October 30, 
2015), 80 FR 68585 (November 5, 2015) (extending the time period for 
Commission action to December 31, 2015).
    \11\ See letter to Brent J. Fields, Secretary, Commission from 
Clare F. Saperstein, Associate General Counsel, New York Stock 
Exchange, dated November 12, 2015 (``NYSE Response Letter II'').
    \12\ In Amendment No. 2, the Exchange amended the proposed rule 
language to clarify that (i) an early stage company may not use the 
proposed exemption to fund an acquisition of stock or assets of 
another company that would otherwise require shareholder approval 
under Section 312.03(b) of the Listed Company Manual; (ii) any sale 
of a listed company's securities at a below-market price constitutes 
equity compensation under Section 303A.08 of the Manual and is 
therefore subject to the shareholder approval requirements under 
that rule; and (iii) shareholder approval of any issuance is 
required if any of the subparagraphs of Section 312.03 require such 
approval, notwithstanding the fact that the transaction does not 
require approval under Section 312.03(b) or one or more of the other 
subparagraphs. See also letter to Brent J. Fields, Secretary, 
Commission from Martha Redding, Senior Counsel and Assistant 
Secretary, New York Stock Exchange, dated December 14, 2015 
(``Amendment No. 2'').
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II. Description of the Proposed Rule Change, as Modified by Amendment 
Nos. 1 and 2

    The Exchange proposes to amend Sections 312.03(b) and 312.04 of the 
Listed Company Manual (``Manual'') to provide an exemption to an 
``early stage company'' listed on the Exchange from having to obtain 
shareholder approval, under certain circumstances, before issuing 
shares of common stock, or securities convertible into or exercisable 
for common stock, to a (1) director, officer \13\ or substantial 
security holder \14\ of the company (``Related Party'' or ``Related 
Parties''), (2) subsidiary, affiliate or closely-related person of a 
Related Party or (3) company or entity in which a Related Party has a 
substantial direct or indirect interest (together, a ``Proposed 
Exempted Party'' or ``Proposed Exempted Parties'').\15\ In particular, 
shareholder approval will no longer be required under Section 312.03(b) 
for an ``early stage company,'' before the issuance of shares for cash 
to a Proposed Exempted Party, provided that the company's audit 
committee or a comparable committee comprised solely of independent 
directors reviews and approves of all such transactions prior to their 
completion.\16\ Today, shareholder approval is required prior to the 
issuance of shares, among other things, where the number of shares to 
be issued to the Proposed Exempted Party exceeds either 1% of the 
number of shares of common stock or 1% of the voting power outstanding 
before the issuance (or 5% of the number of shares or voting power, if 
the Related Party is classified as such solely because it is a 
substantial security holder, and the issuance relates to a sale of 
stock for cash, at a price at least as great as each of the book and 
market value of the

[[Page 821]]

company's common stock).\17\ Shareholder approval is also required for 
issuances relating to 20% or more of the company's common stock, and 
prior to any issuance that will result in a change of control.\18\
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    \13\ Section 312.04(h) of the Manual states that the term 
``officer'' has the same meaning as defined by the Commission in 
Rule 16a-1(f) under the Act.
    \14\ Section 312.04(e) of the Manual states that an interest 
consisting of less than either 5% of the number of shares of common 
stock or 5% of the voting power outstanding of a company or entity 
shall not be considered a substantial interest or cause the holder 
of such an interest to be regarded as a substantial security holder.
    \15\ The Exchange seeks to permit early stage companies to sell 
up to 19.9% of their outstanding equity securities to the Proposed 
Exempted Parties ``without undertaking the costly and time-consuming 
process of obtaining shareholder approval.'' See NYSE Response 
Letter I, supra note 7.
    \16\ The Exchange believes that independent committee review and 
approval of Related Party transactions is an appropriate safeguard 
to protect shareholder interests because directors owe a fiduciary 
duty to their shareholders and can be held personally liable for any 
violation of that duty. See NYSE Response Letter I, supra note 7.
    \17\ The Exchange states that neither The NASDAQ Stock Market 
LLC (``NASDAQ'') nor NYSE MKT LLC (``NYSE MKT'') has a rule 
comparable to Section 312.03(b) requiring listed companies to obtain 
shareholder approval prior to 1% (or in certain cases 5%) share 
issuances in cash sales to a Proposed Exempted Party. See Notice, 
supra note 3, at 26120. Thus, the Exchange believes the proposed 
rule change is necessary to enable the Exchange to compete with 
NASDAQ for the listing of early stage companies. See id.
    \18\ See Sections 312.03(c) and 312.03(d) of the Manual.
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    In addition, the Exchange proposes to amend Section 312.03(b) to 
make clear that the proposed exemption will not be applicable to a sale 
of securities by a listed company to any person subject to the 
provisions of Section 312.03(b) in a transaction, or series of 
transactions, whose proceeds will be used to fund an acquisition of 
stock or assets of another company where such person has a direct or 
indirect interest in the company or assets to be acquired or in the 
consideration to be paid for such acquisition.\19\
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    \19\ See Amendment No. 2, supra note 12. The Exchange states 
that this amendment is intended to address concerns that a listed 
company may sell its securities to a Proposed Exempted Party and 
then use the proceeds to acquire stock or assets from a company in 
which that Proposed Exempted Party had a direct or indirect 
interest. See id. The Exchange believes that ``permitting this sort 
of two-step transaction would enable companies to utilize the 
proposed exemption for acquisition transactions rather than capital 
raising and is inconsistent with the intended purpose of the 
exemption.'' See id. See also NASDAQ Rule 5635 which requires 
shareholder approval when acquiring stock or assets of another 
company where an officer, director, or substantial security holder 
has a 5% (or collectively 10% or greater interest) directly or 
indirectly in the company or assets to be acquired and the 
outstanding common shares or voting power to be issued will increase 
by 5% or more.
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    The Exchange also proposes to clarify in Section 312.03(b) that the 
sale of stock to a Related Party that is an employee, director or 
service provider is subject to the equity compensation rules in Section 
303A.08 of the Manual.\20\ Accordingly, an early stage company will be 
unable to issue securities to a Related Party that is an employee, 
director or service provider, at a discount to the then-current market 
price, without complying with the shareholder approval requirements of 
Section 303A.08. Furthermore, the Exchange proposes to include a 
statement in Section 312.03(b) that shareholder approval is required if 
any of the subparagraphs of Section 312.03 require such approval, 
notwithstanding the fact that the transaction does not require approval 
under Section 312.03(b) or one or more of the other subparagraphs in 
Section 312.03.\21\ Therefore, the Exchange states that shareholder 
approval requirements of Sections 312.03(c) \22\ and 312.03(d) \23\ 
will still be applicable.\24\
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    \20\ For example, a sale of stock by an early stage company to 
any of such Related Parties at a discount to the then market price 
will be treated as equity compensation under Section 303A.08 
notwithstanding the exemption from shareholder approval provided 
under Section 312.03(b). Consequently, an early stage company will 
be required to either: (i) Obtain shareholder approval of such sale, 
or (ii) issue such shares under an equity compensation plan that had 
previously been approved by shareholders and for which shareholder 
approval under Section 303A.08 is not otherwise required.
    \21\ See also Section 312.04(a) of the Manual.
    \22\ Section 312.03(c) of the Manual, with certain exceptions, 
requires shareholder approval of any issuance of securities in any 
transaction or related transactions relating to 20% or more of a 
listed company's stock before the issuance. When applying Section 
312.03(c), the Exchange states that it reviews issuances to 
determine whether they are related and should be aggregated for 
purposes of the rule. See Notice, supra note 3, at 26120. The 
Exchange analyzes the relationship between separate stock issuances 
if they occur within a short period of time, are made to the same or 
related parties, or if there is a common use of proceeds. See id. 
The Exchange represents that it will engage in this analysis with 
respect to any series of sales made by an early stage company to a 
Related Party. See id. Moreover, should the Exchange determine that 
it is necessary to aggregate the series of sales and, as aggregated, 
the total number of shares sold exceeds 19.9% of the shares 
outstanding, shareholder approval will be required pursuant to 
Section 312.03(c). See id.
    \23\ Section 312.03(d) of the Manual requires shareholder 
approval prior to an issuance giving rise to a change of control.
    \24\ See Notice, supra note 3, at 26119-20. The Commission 
notes, however, that Section 312.03(c)(2) of the Manual contains an 
exception for sales of common stock (or securities convertible into 
common stock) for cash in a ``bona fide private financing,'' as 
defined in Section 312.04(g), if certain requirements are met.
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    The Exchange also proposes to amend Section 312.04 to include a 
definition of the term ``early stage company.'' \25\ The Exchange 
proposes to define an early stage company as a company that has not 
reported revenues greater than $20 million in any two consecutive 
fiscal years since its incorporation.\26\ The Exchange represents that 
a company's annual financial statements prior to listing on the 
Exchange will also be considered when determining if the company should 
lose its early stage company designation.\27\
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    \25\ See proposed Section 312.04(k) of the Manual.
    \26\ A company that qualifies as an early stage company does not 
necessarily maintain such designation indefinitely and can lose its 
designation as an early stage company anytime it reports two 
consecutive fiscal years with revenues greater than $20 million each 
year. See Notice, supra note 3, at 26119. The Exchange believes that 
only a small number of currently listed companies will qualify under 
the proposed exemption from shareholder approval. See id. at 26120.
    \27\ See Notice, supra note 3, at 26119, n.6. As an example, the 
Exchange states that if a company files an annual report with the 
Commission one year after listing on the Exchange and such annual 
report shows that the company has had revenues greater than $20 
million in each of two consecutive years (even if one of those years 
was prior to listing on the Exchange), the company will lose its 
early stage company designation at that time. See id. Moreover, once 
the early stage company designation is lost, it cannot be regained 
if the subject company later reports reduced revenues. See id. at 
26120.
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    Lastly, the Exchange also proposes to delete obsolete text from 
Section 312.03 of the Manual related to a limited transition period 
that is no longer relevant.

III. Summary of Comments Received

    As noted above, the Commission received a comment letter on the 
proposed rule change,\28\ the OIAD Recommendation,\29\ and two 
supplemental submissions from the Exchange.\30\ The OIAD and the 
comment letter each recommended that the Commission disapprove the 
proposed rule change.\31\
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    \28\ See supra note 9.
    \29\ See supra note 8.
    \30\ See supra notes 7 and 11.
    \31\ See OIAD Recommendation, supra note 8, at 3; and Shatto 
Letter, supra note 9. The Shatto Letter stated that it concurred 
with the reasoning of the OIAD Recommendation and requested that the 
Exchange explain the ``driving necessity that caused the NYSE to put 
forth [the] proposal.''
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A. Dilution of Economic and Ownership Interest

    OIAD expressed the view that the proposed rule change is 
inconsistent with investor protection because it could result in 
economic dilution of the value and ownership control of an existing 
shareholder's interest in an early stage company.\32\ OIAD reasoned 
that the proposed rule change could allow shares of an early stage 
company to be sold to substantial security holders at a discount to 
book or fair market value without shareholder approval unless the 
transaction exceeded twenty percent of outstanding shares or resulted 
in a change of control of the issuer.\33\ OIAD stated that ``[w]hen new 
shares are sold at a discount from the greater of book or fair market 
value, it results in economic dilution'' that ``reduces the value of an 
existing shareholder's investment in the issuer.'' \34\
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    \32\ See OIAD Recommendation, supra note 8, at 7.
    \33\ See id.
    \34\ See id.
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    In addition, OIAD highlighted that ``all Related Parties . . . 
could obtain a significantly larger share of ownership control by 
paying the then-current market price for additional shares in a private 
transaction, without a vote of the existing shareholders.'' \35\ In 
effect,

[[Page 822]]

OIAD believed that such issuances result in an immediate transfer of 
value from existing shareholders to the new shareholder who injects a 
``less-than-proportionate share of capital into the business.'' \36\ 
Finally, OIAD also noted that current investors in these companies 
would face potential dilution of their voting interest in connection 
with issuances to Related Parties.\37\
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    \35\ See id.
    \36\ See id. OIAD also stated that even if an infusion of 
capital into a company could be in an existing shareholder's long-
term best interest, when the recipient of new shares is a Related 
Party, it creates a risk that the company may be engaging in a 
``sweetheart deal'' that is motivated by a conflict of interest. See 
id. at 8. In such circumstances, the transaction creates a 
heightened risk of harm to existing shareholders, and therefore, 
such shareholders should be given the opportunity to evaluate the 
merits of the transaction and to vote on whether to approve it. See 
id.
    \37\ See id.
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    In response, the Exchange stated that OIAD's analysis failed to 
consider circumstances that make it ``commercially reasonable to price 
private placement issuances at a discount to the then current market 
price.'' \38\ The Exchange stated that ``a discount is commercially 
reasonable because investors in private placements are generally unable 
to resell the shares they purchase in the public market until either 
the end of the applicable Rule 144 holding period or such time as the 
company files and obtains effectiveness of a registration statement.'' 
\39\ In addition, the Exchange asserted that the resale limitations on 
restricted securities make them ``riskier and more illiquid in the 
hands of the purchaser in a private placement and therefore less 
valuable.'' \40\ Accordingly, ``it is generally necessary to sell 
shares in a private placement at a lower price than the prevailing 
public market price.'' \41\ Moreover, the Exchange stated that a 
discount in the sale of shares in a private placement should only be 
viewed as economically dilutive if there are other sources of capital 
available on better terms.\42\
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    \38\ See NYSE Response Letter II, supra note 11, at 1.
    \39\ See id. at 1-2.
    \40\ See id. at 2.
    \41\ See id.
    \42\ See id.
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    The Exchange also noted that Section 312.03(d) of the Manual 
provides a ``significant limitation'' on any increase in the relative 
voting power of Related Parties by requiring shareholder approval of 
any share issuance that gives rise to a change of control.\43\ As a 
result, the Exchange represented that ``the proposed exemption could 
never be used as a mechanism for obtaining overall control of a listed 
company without shareholder approval.'' \44\ Furthermore, the Exchange 
asserted that ``the voting rights of existing shareholders are not 
being diluted in any unfair manner'' because ``investors in any private 
placement will receive voting rights on the same terms as all other 
shareholders.'' \45\
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    \43\ See id.
    \44\ See id.
    \45\ See id.
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B. Time-Sensitive Situations

    OIAD suggested that the Exchange's existing rules already provide a 
way for early stage companies to address time-sensitive situations 
without first obtaining shareholder approval.\46\ Specifically, OIAD 
identified Section 312.05 of the Manual as providing ``NYSE-listed 
issuers assistance when the delay in securing shareholder approval 
would seriously jeopardize the financial viability of the enterprise.'' 
\47\
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    \46\ See OIAD Recommendation, supra note 8, at 8.
    \47\ See id. Section 312.05 of the Manual provides that 
``[e]xceptions may be made to the shareholder approval policy in 
Para. 312.03 upon application to the Exchange when (1) the delay in 
securing stockholder approval would seriously jeopardize the 
financial viability of the enterprise and (2) reliance by the 
company on this exception is expressly approved by the Audit 
Committee of the Board.''
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    In response, the Exchange stated that OIAD's suggested application 
of Section 312.05 is ``inconsistent with the language and longstanding 
application of the limited exemption from obtaining shareholder 
approval.'' \48\ The Exchange stated that the intent and current 
application of Section 312.05 is only for circumstances where ``a 
bankruptcy filing is the only realistic alternative'' for a 
company.\49\ In other words, the exemption is ``intended for use in a 
crisis'' and not as a ``useful tool to enable [e]arly [s]tage 
[c]ompanies to meet their ongoing capital needs.'' \50\ Furthermore, as 
``illustrative of the fact that the exemption is rarely a realistic 
option,'' the Exchange highlighted the fact that it has not received a 
single financial distress exemption application in the last year.\51\
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    \48\ See NYSE Letter Response II, supra note 11, at 2.
    \49\ See id.
    \50\ See id.
    \51\ See id.
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C. Audit Committee Approval

    OIAD stated that the audit committee (or a comparable committee of 
independent directors) approval requirement is not an adequate 
substitute for a shareholder vote on Related Party transactions,\52\ 
explaining that ``[a]lthough the audit committee performs many critical 
functions that serve to protect the interests of investors, an audit 
committee will not always reach the same conclusion as shareholders 
regarding the best interest of the company.'' \53\ As a result, OIAD 
believed that certain corporate actions that significantly impact 
shareholders' interests should be subject to shareholder approval, 
similar to the standard for equity compensation plans.\54\ The Order 
Instituting Proceedings also raised questions about whether the audit 
committee would be an appropriate substitute for the approval of 
shareholders.\55\
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    \52\ See OIAD Recommendation, supra note 8, at 8.
    \53\ See id.
    \54\ See id. at 9.
    \55\ See Order Instituting Proceedings, supra note 6, at 47978.
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    In response, the Exchange stated that directors owe a fiduciary 
duty to the shareholders they represent and can be held personally 
liable for any violation of that duty.\56\ The Exchange further noted 
that independent directors are often well-positioned to evaluate 
related party transactions because of their knowledge of company 
affairs.\57\
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    \56\ See NYSE Response Letter I, supra note 7.
    \57\ See id.
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D. Reduced Qualitative Standards for Listed Companies

    OIAD expressed concern that the proposal reflects a ``race to the 
bottom'' among the exchanges,\58\ believing that the Commission 
``should be encouraging the exchanges to enhance their standards, not 
devolve to the lowest common denominator because of competitive 
concerns.'' \59\ OIAD stated that investors have an expectation that 
listed companies on NYSE are subject to heightened qualitative listing 
standards.\60\ Given these public expectations, OIAD believed ``it is 
inadvisable to create what could be considered a de facto second tier 
on the NYSE, with lower corporate governance standards for smaller 
companies,'' \61\ warning that this could lead to ``significant 
investor confusion'' about the listing standards on the Exchange 
because not all listed companies would have ``the same standards of 
accountability.'' \62\
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    \58\ See OIAD Recommendation, supra note 8, at 9.
    \59\ See id.
    \60\ See id.
    \61\ See id. at 9. Moreover, OIAD believed that the benefit to 
be afforded to a small subset of early stage company issuers listed 
on NYSE would be unreasonable when weighed against the possible 
investor confusion concerning corporate governance and shareholder 
rights on the Exchange. See id. at 10.
    \62\ See id. at 9-10. OIAD also stated that the proposal ``does 
not appear to take any meaningful steps to preclude likely investor 
confusion; for example, NYSE's Manual will not otherwise describe or 
highlight the proposed exception.'' See id. at 10.

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[[Page 823]]

    In response, the Exchange stated that the concerns of creating a 
``de facto two-tier exchange'' and ``race to the bottom'' are misplaced 
because only a limited number of companies would qualify for the 
proposed exemption.\63\ In addition, the Exchange emphasized that the 
proposal would only provide an exemption to early stage companies from 
shareholder approval for transactions that would also be exempt from 
shareholder approval under the exchange listing rules of NASDAQ and 
NYSE MKT.\64\
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    \63\ See NYSE Response Letter II, supra note 11, at 3-4.
    \64\ See id. at 4. The Exchange also stated that early stage 
companies would remain subject to the shareholder approval 
requirement for private placements relating to more than 20% of 
their outstanding shares without regard to price. See id. 
Accordingly, ``even if the proposal is approved, the Exchange's 
requirements would remain higher than those on other exchanges.'' 
Id.
     Furthermore, in response to commenter concerns that the 
proposal would lead to investor confusion about which shareholder 
approval standards would apply to specific listed companies, the 
Exchange noted that all listing exchanges currently have exemptions 
in their corporate governance requirements that apply to different 
categories of issuers (e.g., controlled companies), so having a 
limited exemption in its rules for early stage companies would not 
be novel to investors. See id. The Exchange also asserted that, to 
alleviate concerns with respect to how investors would become aware 
that an early stage company qualifies for the proposed exemption, 
companies generally disclose the applicability of exemptions in 
their annual reports or proxy statements filed with the Commission. 
See id. Moreover, the Exchange stated that it believes early stage 
companies that were likely to avail themselves of the proposed 
exemption ``should include disclosures in their SEC filings about 
that fact and the possible risks to investors.'' See id. Given the 
limited nature of the exemption, the Exchange stated that a separate 
designation for early stage companies would be ``confusing and would 
be unnecessary given the issuers' own disclosure obligations.'' See 
id.
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E. Impact of Proposal on Efficiency, Competition, and Capital Formation

    OIAD stated that the Notice does not provide sufficient information 
for the Commission to evaluate the proposal's impact on efficiency, 
competition, and capital formation, under Section 3(f) of the Act,\65\ 
in particular highlighting that the Notice does not provide a ``count 
or description of the current NYSE-listed companies that would qualify 
for the proposed exemption, nor is there a count or description of the 
larger universe of such companies listed on other exchanges or quoted 
over-the-counter.'' \66\ OIAD also stated that the Notice did not 
describe how many companies list (or delist) in a given year and how 
often, if ever, such companies accessed capital through private 
placements to Related Parties.\67\ OIAD further emphasized that there 
is no description of the cost imposed on companies seeking shareholder 
approval in those instances, or the suggestion that any of those 
companies experienced issues with the level of access to capital 
afforded by NYSE's listing standards.\68\ OIAD suggested that the 
Exchange obtain information regarding NASDAQ-listed companies that 
would qualify as early stage companies on the Exchange,\69\ asserting 
that ``such information would allow for a data-driven and meaningful 
consideration of the proposed rule's impact on efficiency, competition, 
and capital formation.'' \70\
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    \65\ See OIAD Recommendation, supra note 8, at 10.
    \66\ See id. at 10-11.
    \67\ See id. at 11.
    \68\ See id.
    \69\ See id.
    \70\ See id.
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    In response, the Exchange provided data on the impact of the 
proposal. The Exchange stated that there are currently 21 listed 
companies (out of 2,133 operating companies listed on the Exchange) 
that would qualify as an early stage company under the proposal.\71\ 
Based on the data provided, the Exchange asserted that the impact of 
the proposal would be minimal as the number of early stage companies 
``is tiny both in absolute terms and as a percentage of listed 
companies (less than 1%).'' \72\ In addition, the Exchange highlighted 
from the data that the availability of the proposed exemption to early 
stage companies would typically be for a limited period.\73\ The 
Exchange also stated that it did not believe data on NASDAQ-listed 
companies would be ``particularly helpful'' given that ``a large 
percentage of NASDAQ listed companies do not qualify for listing on the 
Exchange and that transfers between the two exchanges are relatively 
infrequent.'' \74\
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    \71\ See NYSE Response Letter II, supra note 11, at 3. The 
Exchange noted that many of these 21 companies do not have an 
extensive history of selling stock in private placements to fund 
their operations while listed on the Exchange. See id. Furthermore, 
the Exchange stated that 13 out of 15 companies that were designated 
as early stage companies a year ago that no longer qualify as such 
continue to be listed on the Exchange, while only five companies 
listed in the past year currently qualify as early stage companies. 
See id.
    \72\ See id.
    \73\ See id.
    \74\ See id.
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    In addition, the Exchange explained that the costs to comply with 
the proposed exemption will vary depending on the company and, among 
other things, the number and type of shareholders.\75\ Based on the 
Exchange's experience in the listing of early stage companies on its 
affiliated exchange, NYSE MKT, the Exchange stated that such listed 
companies are ``frequently highly dependent on capital infusions from 
private placements in which management and significant shareholders 
participate to enable them to continue their operations until they 
reach the point of commercialization.'' \76\ The Exchange represented 
that these companies frequently raise capital in transactions that 
would have required shareholder approval under Section 312.03(b), but 
to which shareholder approval requirements are not applicable under 
NYSE MKT or NASDAQ rules.\77\ Furthermore, the Exchange stated that it 
believed that, ``while the companies that would avail themselves of the 
proposed exemption would likely be very small, the alternative could be 
very significant to the survival and success of those that utilize 
it.'' \78\
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    \75\ See id.
    \76\ See id. The Exchange stated that NYSE MKT lists many ``R&D-
focused biotech companies and exploration stage mining companies.'' 
Id.
    \77\ See id.
    \78\ See id.
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IV. 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.\79\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\80\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, 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; 
and are not designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers. The Commission recognizes that some 
commenters did not support the proposed rule change. The Commission, 
however, must approve a proposed rule change if it finds that the 
proposed rule change is consistent with the requirements of the Act and 
the

[[Page 824]]

applicable rules and regulations thereunder.\81\
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    \79\ 15 U.S.C. 78f(b). 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).
    \80\ 15 U.S.C. 78f(b)(5).
    \81\ 15 U.S.C. 78s(b)(2)(C)(i).
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    The development and enforcement of meaningful corporate governance 
listing standards for a national securities exchange is of substantial 
importance to financial markets and the investing public, especially 
given investor expectations regarding the nature of companies that have 
achieved an exchange listing for their securities. The corporate 
governance standards embodied in the listing standards of national 
securities exchanges, in particular, play an important role in assuring 
that exchange-listed companies observe good governance practices, 
including safeguarding the interests of shareholders with respect to 
certain potentially dilutive transactions.\82\ Commenters raised 
several concerns with the proposed rule change.
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    \82\ See, e.g., Securities Exchange Act Release No. 48108 (June 
30, 2003), 68 FR 39995 (July 3, 2003) (approving equity compensation 
shareholder approval rules of both the NYSE and the National 
Association of Securities Dealers, Inc. n/k/a NASDAQ). See also 
Securities Exchange Act Release No. 58375 (August 18, 2008), 73 FR 
49498 (August 21, 2008) (order approving registration of BATS 
Exchange, Inc. noting that qualitative listing requirements 
including shareholder approval rules are designed to ensure that 
companies trading on a national securities exchange will adequately 
protect the interest of public shareholders).
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    As discussed above, OIAD noted that the proposed rule change could 
result in economic dilution of the value and ownership control of an 
existing shareholder's interest in an early stage company.\83\ OIAD 
expressed concern that the potential for a greater percentage of shares 
to be issued at a discount to substantial security holders, without a 
shareholder vote, could lead to harmful dilution of the economic value 
of existing shares.\84\ OIAD also expressed concern that the voting 
power of existing shareholders could be inappropriately diluted as a 
result of the proposal's increased flexibility to issue additional 
shares at fair market value to all Related Parties.\85\
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    \83\ See OIAD Recommendation, supra note 8, at 7. See also 
Shatto Letter, supra note 9, which stated that it concurred with the 
reasoning of the OIAD Recommendation. Therefore, the Commission 
notes that any discussion in this Order addressing the concerns 
raised in the OIAD Recommendation, by its terms, also applies to the 
Shatto Letter concerns.
    \84\ See OIAD Recommendation, supra note 8, at 7.
    \85\ See id.
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    The Commission has carefully considered these and the other 
concerns expressed by the commenters. The Commission nevertheless 
finds, however, that the proposed rule change, on balance, is 
consistent with the Act, for the reasons set forth below.
    The Commission acknowledges that the proposed rule change, by 
expanding the circumstances under which an early stage company could 
issue additional stock without shareholder approval, raises concern 
that such companies could engage in transactions with a harmful 
dilutive impact on existing shareholders. In the Commission's view, 
however, the significant proposed limitations on the ability of early 
stage companies to engage in such transactions, together with the 
countervailing potential benefits to the ability of small issuers to 
efficiently raise capital, and to fair competition among the listing 
exchanges, sufficiently offset those risks. Because the proposal allows 
early stage companies the flexibility to meet their financing needs 
while still preserving significant shareholder rights afforded under 
the other provisions of Section 312.03, the Commission finds that the 
proposal is consistent with investor protection and the public 
interest.
    First, the Commission notes that the additional flexibility 
provided by the proposed rule change for early stage companies to issue 
additional stock without shareholder approval is limited by other 
important Exchange rules. For one, any discounted issuance of stock to 
an early stage company's officers or directors, or to a substantial 
security holder that is an employee or other service provider, would 
require shareholder approval under the Exchange's equity compensation 
rules.\86\ Shareholder approval also generally is required for an 
issuance of additional stock, even at fair market value, that is in 
excess of 20% of an issuer's outstanding shares.\87\
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    \86\ See Amendment No. 2, supra note 12.
    \87\ The Commission notes that Section 312.03(c)(2) of the 
Manual contains an exception for sales of common stock (or 
securities convertible into common stock) for cash in a ``bona fide 
private financing,'' as defined in Section 312.04(g), if certain 
requirements are met. These require, among other things, that the 
offering is priced at or above book or fair market value. See 
Section 312.03(c) of the Manual. Shareholder approval also would be 
required if the transaction would result in a change of control. See 
Section 312.03(d) of the Manual.
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    In addition, the proposed rule change requires that, for all such 
transactions, the approval of the early stage company's audit 
committee, or a comparable committee comprised solely of independent 
directors, first be obtained. The Commission has long acknowledged the 
important role an independent Board committee has in protecting 
shareholders from potential conflicts of interest.\88\ The Commission 
agrees with the Exchange that an independent committee review and 
approval of these transactions is an appropriate safeguard to protect 
shareholder interests. As noted by the Exchange, the knowledge of 
independent directors of the company's business affairs, together with 
their fiduciary obligations to shareholders, make them well-positioned 
to effectively protect shareholder interests under these 
circumstances.\89\
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    \88\ For example, the Commission stated in approving an NASD 
proposed rule change regarding related party transactions that 
``requiring an independent body of the board of directors to approve 
all related party transactions should help to protect investors 
because directors not related to management should be less likely to 
approve of related party transactions that could be detrimental to 
the interests of shareholders.'' See Securities Act Release No. 
48745 (November 1, 2003), 68 FR 64154, 64179 (November 12, 2003) 
(NASD and NYSE proposed rule change regarding corporate governance). 
See also Securities Act Release No. 9862 (July 1, 2015), 80 FR 38995 
(July 8, 2015) (concept release on possible revisions to audit 
committee disclosures). See also Securities Act Release No. 8220 
(April 9, 2003), 68 FR 18788 (April 16, 2003) (adopting Exchange Act 
Rule 10A-3 prohibiting national securities exchanges and national 
securities associations from listing any securities of an issuer 
that is not in compliance with the audit committee requirements 
mandated by the Sarbanes-Oxley Act of 2002).
    \89\ See NYSE Response Letter I, supra note 7.
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    The Commission believes that an independent director committee is a 
proper forum, in executing its fiduciary duty, to review and approve 
these transactions and can appropriately protect shareholder interests. 
Additionally, the Commission notes that the Exchange, as a self-
regulatory organization, is required, among other things, to enforce 
compliance with all Exchange rules, including its listing standards. To 
help the Exchange appropriately surveil its listed companies for 
compliance with the shareholder approval rules, under Section 703.01(A) 
of the Manual, listed companies are required to submit in writing, in 
advance of any issuance, a supplemental listing application to issue 
any additional shares of a listed security, including shares issued in 
a private transaction. Section 703.01(A) also requires that the company 
state whether shareholder approval is required under Exchange rules 
and, if so, when it was obtained. These provisions facilitate the 
monitoring of listed companies for compliance with the shareholder 
approval rules under the Manual and should aid the Exchange in 
monitoring compliance with the requirements for issuing private 
securities under the exemption, as well as whether shareholder approval 
is required under the change of control or equity compensation rules, 
among others.\90\ As provided by the Act, any future changes to 
exchange listing standards, including the shareholder

[[Page 825]]

approval provisions, will have to be submitted under Section 19(b) of 
the Act. The Commission will, of course, evaluate any future proposed 
rule changes to exchange listing standards for consistency with the 
requirements under the Act, including to ensure adequate investor 
protection for shareholders.
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    \90\ See Sections 312.03(d) and 303A.08 of the Manual.
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    The Commission also believes that facilitating the ability of early 
stage companies to efficiently raise needed capital under the limited 
circumstances permitted by the proposed rule change is in the public 
interest. By definition, early stage companies are those that have not 
yet generated significant revenue from operations, and may therefore 
need to raise capital quickly in order to fund their ongoing 
operations. Allowing early stage companies to flexibly raise capital, 
subject to audit committee approval and the other limitations described 
above, but without the delays inherent in a shareholder vote, could 
improve the business prospects of such companies and ultimately inure 
to the benefit of shareholders.
    Further, the Commission recognizes that, as noted by the Exchange, 
the rules of other listing exchanges such as NASDAQ and NYSE MKT permit 
early stage companies similar flexibility in issuing additional stock 
without shareholder approval. While the Commission acknowledges OIAD's 
concern about a ``race to the bottom'' by the exchanges, the Commission 
also is cognizant of the fact that the exchanges operate in a highly 
competitive environment, including with respect to the listing of 
issuers. If the Commission were not to allow the Exchange to provide 
the same flexibility to listed companies offered by other listing 
markets, the Exchange Act goal of facilitating fair competition among 
the exchanges could be undermined. At the same time, investor 
protection might not materially improve, since early stage companies 
seeking the flexibility proposed by the Exchange simply may choose to 
list on NASDAQ or NYSE MKT.
    The Commission notes that, in determining to approve the Exchange's 
proposed rule change, the Commission has considered, under Section 3(f) 
of the Act, whether the action will promote efficiency, competition, 
and capital formation.\91\ The proposed rule change would allow early 
stage companies to more timely access the capital markets when they 
critically need funds. To the extent that the proposed rule change 
would make it easier for such companies to raise the needed capital and 
continue their operations, it would likely improve the allocation of 
capital thus enhancing efficiency. On the other hand, if the rule 
change is primarily used by Related Parties to more easily gain control 
of a company and in the process expropriate other (minority) 
shareholders, then the proposed rule change could have a negative 
effect on efficiency. Given that Section 312.03(d) of the Manual 
significantly limits any increase in the relative voting power of 
Related Parties by requiring shareholder approval of any share issuance 
that gives rise to a change of control, the proposed rule change is 
unlikely to lead to significant minority shareholder expropriation.
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    \91\ See 15 U.S.C. 78c(f).
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    By making it less costly for early stage companies to raise 
additional capital they need to continue their operations, the proposed 
rule change will promote capital formation. Allowing these companies to 
stay afloat and grow also increases the likelihood that they would 
raise more funds in the future, further enhancing capital formation. In 
addition, the proposed rule change could enhance competition by 
allowing NYSE to compete for the listing of these companies in a 
competitive environment that allows these companies to list on other 
markets such as NASDAQ or NYSE MKT. In conclusion, the Commission 
believes that the proposed rule change could promote efficiency, 
competition, and capital formation.
    Finally, the Commission acknowledges the important contributions 
that are being made by its Investor Advocate on a range of important 
policy matters, including those raised by individual proposed rule 
changes filed by the exchanges, such as the proposal that is the 
subject of this Order. While the Commission today determined that the 
NYSE's proposed rule change is consistent with the Act, the Commission 
encourages the Investor Advocate to continue bringing important matters 
to our attention, including identifying circumstances where incremental 
changes, while consistent with the Act, may be contributing to 
cumulative impacts that harm investors or impede fair and orderly 
markets. In this instance, the comments of the Investor Advocate 
prompted the Exchange to bolster the justification for its proposal, 
including through the provision of additional data, and to clarify its 
limited scope. As a result, the extent and quality of information 
available to the Commission in considering the proposed rule change was 
substantially enhanced, to the benefit of investors and all market 
participants. As our markets and regulatory structure continue to 
evolve, the views of the Investor Advocate will remain critical in 
helping the Commission further its mission of protecting investors, 
maintaining fair, orderly, and efficient markets, and facilitating 
capital formation.
    For the reasons discussed above, the Commission believes that the 
proposed rule change, as modified by Amendment Nos. 1 and 2, is 
consistent with the Act.\92\
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    \92\ The Commission also finds that deleting obsolete language 
in Section 312.03 of the Manual, relating to the limited transition 
period described above, is consistent with Section 6(b)(5) of the 
Act.
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V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether this filing, as 
modified by whether Amendment Nos. 1 and 2, is consistent with the Act. 
Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSE-2015-02 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSE-2015-02. This file 
number should be included on the subject line if email is used. To help 
the Commission 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 (http://www.sec.gov/rules/sro.shtml). 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. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the

[[Page 826]]

filing also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NYSE-2015-02 and should be submitted on or before 
January 28, 2016.

VI. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment Nos. 1 and 2

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act, to approve the proposed rule change, as modified by Amendment 
Nos. 1 and 2, prior to the 30th day after the date of publication of 
Amendment Nos. 1 and 2 in the Federal Register. As discussed above, 
Amendment No. 1 merely clarified that the proposed exemption from 
shareholder approval transactions involving the sale of stock for cash 
by an early stage company applies not only to a Related Party, as 
originally proposed, but also to a subsidiary, affiliate or other 
closely-related person of a Related Party; or any company or entity in 
which a Related Party has a substantial direct or indirect 
interest.\93\ Similarly, Amendment No. 2 clarified that (i) an early 
stage company may not use the proposed exemption to fund an acquisition 
of stock or assets of another company that would otherwise require 
shareholder approval under Section 312.03(b) of the Manual; (ii) any 
sale of a listed company's securities at a below-market price to an 
employee, director or service provider constitutes equity compensation 
under Section 303A.08 of the Manual and is therefore subject to the 
shareholder approval requirements under that rule; and (iii) 
shareholder approval of any issuance is required if any of the 
subparagraphs of Section 312.03 require such approval, notwithstanding 
the fact that the transaction does not require approval under Section 
312.03(b) or one or more of the other subparagraphs.\94\ The Commission 
believes that these revisions provide greater clarity on the 
application of the proposal and remove uncertainty as to which 
transactions the Exchange proposes to exempt from shareholder approval 
under Section 312.03.
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    \93\ See supra note 7.
    \94\ See Amendment No. 2, supra note 12.
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    Accordingly, the Commission finds good cause for approving the 
proposed rule change, as modified by Amendment Nos. 1 and 2, on an 
accelerated basis, pursuant to Section 19(b)(2) of the Act.

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\95\ that the proposed rule change (SR-NYSE-2015-02), as modified by 
Amendment Nos. 1 and 2, be, and hereby is, approved.
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    \95\ 15 U.S.C. 78f(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\96\
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    \96\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-33313 Filed 1-6-16; 8:45 am]
 BILLING CODE 8011-01-P


