SECURITIES AND EXCHANGE COMMISSION

(Release No. 34-46003; File No. S7-17-00)

May 30, 2002

ORDER GRANTING TEMPORARY EXEMPTION FOR BROKER-DEALERS FROM THE TRADE-THROUGH DISCLOSURE RULE

In July 2000, the Commission approved an intermarket linkage plan, in which all five options exchanges¹ are currently participants ("Linkage Plan").² Also in July 2000, the Commission proposed, and in November 2000 adopted, Rule 11Ac1-7 ("Trade-Through Disclosure Rule") under the Securities Exchange Act of 1934 ("Exchange Act").³

The Trade-Through Disclosure Rule requires a broker-dealer to disclose to a customer when the customer's order for a listed option is executed at a price inferior to the best-published quote ("intermarket trade-through"), and to disclose the better published quote available at that time. However, a broker-dealer is not required to disclose to its customer an intermarket trade-through if the broker-dealer effects the transaction on an exchange that participates in an approved linkage plan that includes provisions reasonably designed to limit customers' orders from being executed at prices that trade through a better published price. In addition, broker-dealers are not required to provide the disclosure required by the rule if the customer's order is executed as part of a block trade. Once implemented, the Linkage Plan would reasonably limit intermarket trade-throughs on each of the options markets, ⁴ provided that the Options Exchanges remain participants in the Linkage Plan.⁵ Under these circumstances, broker-dealers effecting transactions on options exchanges that participate in the Linkage Plan would be excepted from the disclosure requirements of the Trade-Through Disclosure Rule.

To date, the options exchanges have taken steps to implement the Linkage Plan. Specifically, the options exchanges have selected The Options Clearing Corporation ("OCC") to be the linkage provider and have worked closely with OCC to develop the technical requirements related to the linkage's central core or "hub" to and from which all linkage orders would be routed. The Options Exchanges have informed the Commission that they are completing the process of evaluating their internal systems to determine the extent of modification necessary to integrate their systems into the central hub and beginning to modify those systems.

The Commission has twice extended the compliance date of the Trade-Through Disclosure Rule for broker-dealers, most recently until April 1, 2002, because of its reluctance to impose on broker-dealers the costs of complying with the disclosure requirements of the rule while the Options Exchanges are working to implement the Linkage Plan, which would render such disclosures unnecessary.⁶

In addition, on March 27, 2002, the Commission issued an Order temporarily exempting for 90 days broker-dealers from compliance with the Trade-Through Disclosure Rule.⁷ At that time, the Commission stated that it would consider a further extension of the 90-day temporary exemption at the time it considered a proposal to repeal the Trade-Through Disclosure Rule, which it directed the staff to develop.⁸ Today, the Commission has separately proposed a repeal of the Trade-Through Disclosure Rule.⁹

Today, the Commission also approved amendments to the Linkage Plan, proposed by the Options Exchanges on April 15, 2002, that permit an exchange to withdraw from participation in the Linkage Plan only if it can satisfy the Commission that it can accomplish, by alternative means, the same goals as the Linkage Plan of limiting intermarket trade-throughs of prices on other markets.¹⁰ The amendment also requires the Options Exchanges to implement the linkage in two phases by specified dates.¹¹ As a result of the Commission's approval of the amendments to the Linkage Plan, the principal purpose of the Trade-Through Disclosure Rule - to require customers' orders to be executed on exchanges that participate in a linkage that limits intermarket trade-throughs or, in the alternative, to provide customers with additional information about the execution of their orders - has been accomplished.

The Commission, therefore, believes it is appropriate in the public interest and consistent with the protection of investors at this time to temporarily exempt until January 1, 2003 broker-dealers from the requirements of the Trade-Through Disclosure Rule while the Commission receives and considers comments on the proposed repeal of the Trade-Through Disclosure Rule.

Accordingly,

IT IS ORDERED, pursuant to Section 36 of the Act,¹² that broker-dealers are exempt from compliance with the Trade-Through Disclosure Rule until January 1, 2003.

By the Commission.

Margaret H. McFarland
Deputy Secretary

__________________________

1	The exchanges currently trading options are the American Stock Exchange ("Amex"), the Chicago Board Options Exchange ("CBOE"), the International Securities Exchange ("ISE"), the Pacific Exchange ("PCX"), and the Philadelphia Stock Exchange ("Phlx") (collectively, "Options Exchanges").
2	See Securities Exchange Act Release No. 43086 (July 28, 2000), 65 FR 48023 (August 4, 2000). The Linkage Plan approved by the Commission in July 2000 is the plan filed by the Amex, CBOE, and ISE. Subsequently, the PCX and Phlx joined the Linkage Plan. See Securities Exchange Act Release Nos. 43310 (September 20, 2000), 65 FR 58583 (September 29, 2000) (approving an amendment to the Linkage Plan adding the PCX as a participant); and 43311 (September 20, 2000), 65 FR 58584 (September 29, 2000) (approving an amendment to the Linkage Plan adding the Phlx as a participant).
3	17 CFR 240.11Ac1-7. See also Securities Exchange Act Release Nos. 43591 (November 17, 2000), 65 FR 75439 (December 1, 2000); and 43085 (July 28, 2000), 65 FR 47918 (August 4, 2000).
4	The Commission approved an amendment to the previously-approved Linkage Plan that would permit broker-dealers executing orders on participating exchanges to satisfy the exception to the disclosure requirements of the Trade-Through Disclosure Rule. Securities Exchange Act Release No. 44482 (June 27, 2001), 66 FR 35470 (July 5, 2001).
5	The Commission today is approving an amendment to the Linkage Plan proposed by the options exchanges that deletes the provision that permits any participant to withdraw after 30 days written notice and requires, instead, that a participant wishing to withdraw from the Linkage Plan must first satisfy the Commission that it can accomplish, by alternative means, the same goals as the Linkage Plan of limiting trade-throughs of prices on other markets. Securities Exchange Act Release No. 46001 (May 30, 2002).
6	See Securities Exchange Act Release Nos. 44078 (March 15, 2001), 66 FR 15792 (March 21, 2001); and 44852 (September 26, 2001), 66 FR 50103 (October 2, 2001).
7	Securities Exchange Act Release No. 45654 (March 27, 2002), 67 FR 15637 (April 2, 2002).
8	Id.
9	Securities Exchange Act Release No. 46002 (May 30, 2002).
10	Securities Exchange Act Release No. 46001 (May 30, 2002).
11	Id. The first phase will comprise those elements of the linkage that are necessary to send and receive orders required under the Linkage Plan to be automatically executed by the exchange receiving the order. The Options Exchanges will begin full intermarket testing of the first phase by December 1, 2002, and will implement this phase no later than February 1, 2003. The second phase will comprise the remaining elements of the linkage. The exchanges will begin testing of this second phase by March 1, 2003, and will implement this phase no later than April 30, 2003.
12	15 U.S.C. 78mm.