[Federal Register: February 10, 2004 (Volume 69, Number 27)]
[Notices]
[Page 6354-6356]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10fe04-145]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49183; File No. SR-NYSE-2002-32]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Order Approving Proposed Rule Change and Amendment Nos. 1, 2, 3, and 4
To Incorporate Interpretive Material to Several NYSE Rules
February 4, 2004.
I. Introduction
On August 12, 2002, the New York Stock Exchange (``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 incorporate interpretive material to several
existing NYSE Rules. On March 11, 2003, the Exchange filed Amendment
No. 1 to the proposed rule change.\3\ On May 21, 2003, the Exchange
filed Amendment No. 2 to the proposed rule change.\4\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Mary Yeager, Assistant Secretary, NYSE, to
Nancy J. Sanow, Assistant Director, Division of Market Regulation
(``Division''), Commission, dated March 10, 2003 (``Amendment No.
1'').
\4\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE
to Nancy J. Sanow, Assistant Director, Division, Commission, dated
May 20, 2003 (``Amendment No. 2'').
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On June 9, 2003, the proposed rule change, as amended by Amendment
Nos. 1 and 2, was published for comment in the Federal Register.\5\ The
Commission received no comments on the proposed rule change, as
amended. On June 11, 2003, the NYSE filed Amendment No. 3 to the
proposed rule change.\6\ On January 29, 2004, the NYSE filed Amendment
No. 4 to the proposed rule change.\7\ This order approves the proposed
rule change, as amended.
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\5\ See Securities Exchange Act Release No. 47961 (June 2,
2003), 68 FR 34453.
\6\ See letter from Mary Yeager, Assistant Secretary, NYSE, to
Nancy J. Sanow, Assistant Director, Division, Commission, dated June
10, 2003 (``Amendment No. 3''). In Amendment No. 3, the Exchange
added the phrase ``or rejected'' to a sentence within NYSE Rule
91.10 to clarify that transactions that are not rejected are deemed
to be accepted for the purposes of NYSE Rule 91.10. This sentence
now reads that ``[t]ransactions which are not then confirmed or
rejected in accordance with the procedures above are deemed to have
been accepted.'' This is a technical amendment and is not subject to
notice and comment.
\7\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE,
to Nancy J. Sanow, Assistant Director, Division, Commission, dated
January 29, 2004 (``Amendment No. 4''). In Amendment No. 4, the
Exchange provided the Commission with examples of different
scenarios for confirming principal transactions under NYSE Rule
91.10. This is a technical amendment and is not subject to notice
and comment.
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II. Description of the Proposed Rule Change
The NYSE filed the proposed rule change to codify long-standing
interpretive material to several NYSE rules and to respond to
recommendations made by an independent consultant retained by the
NYSE.\8\
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\8\ See In the Matter of New York Stock Exchange, Inc., 70
S.E.C. Docket 106, Securities Exchange Act Release No. 41574 (June
29, 1999), Administrative Proceeding File No. 3-9925.
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A. NYSE Rule 72
NYSE Rule 72 delineates the basic rule governing the priority and
precedence of bids and offers at the same price on the Exchange. NYSE
Rule 72(b) provides that certain types of agency cross transactions at
a given price receive priority over pre-existing bids or offers at that
price. The Exchange proposes to add a sentence to NYSE Rule 72(b) to
clarify that a broker whose cross is broken up because another member
has provided price improvement must follow the crossing procedures of
NYSE Rule 76 before completing the balance of the cross.
The Exchange is also proposing to add an example to NYSE Rule 72(b)
to illustrate its interpretation that a sale ``clears the floor,''
meaning all bids and offers not satisfied in a given transaction are
deemed to be simultaneously re-entered and on parity with each other.
B. NYSE Rule 75
The Exchange is proposing to codify formally in NYSE Rule 75 its
long-standing practice that Floor disputes involving $10,000 or more,
or questioned trades, can be referred for resolution to a panel of
three Floor Governors, Senior Floor Officials, or
[[Page 6355]]
Executive Floor Officials, or any combination thereof if the parties to
the dispute so agree. The proposed rule change further provides that
members may, as an alternative, resolve such disputes through the
arbitration procedures established under the Exchange's Constitution
and Rules.
C. NYSE Rule 91
NYSE Rule 91.10 addresses the procedures a member follows to
confirm a transaction involving another member who has elected to take
or supply for his own account the securities named in an order
entrusted to him. The Exchange is proposing to amend NYSE Rule 91.10 to
make clear in the rule that only a member may confirm a transaction in
the situations covered by the rule. The Exchange is also proposing to
add a sentence to the Rule to clarify that transactions that are not
confirmed or rejected are deemed to have been accepted.\9\ In addition,
the Exchange proposes to amend NYSE Rule 91.10 to provide that a member
receiving a report of execution of a transaction where another member
acted as principal triggers the member's unconditional right to reject
the trade as soon as practicable, given the prevailing circumstances.
Furthermore, the Exchange is amending NYSE Rule 91.10 to clarify that
disputes as to whether there was sufficient time to reject the trade
would be resolved under NYSE Rule 75.
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\9\ See Amendment No. 3, supra note 6.
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The Exchange provided several examples of situations involving
confirmation of a principal trade by a specialist \10\ and whether the
member took timely action. Under Rule 91.10, three different scenarios
can occur in situations involving confirmation of a principal trade by
a specialist. First, the broker can determine to take no action, in
which case the transaction with the specialist would be deemed
confirmed/accepted under NYSE Rule 91.10 since ``transactions which are
not then confirmed or rejected * * * are deemed to have been
accepted.'' Second, the broker could determine to go to the
specialist's post as soon as practicable under the prevailing
circumstances to confirm the transaction by initialing the memorandum
record of the specialist which shows the details of the trade and to
return it to the specialist. Third, the broker could determine to go to
the specialist's post as soon as practicable under the prevailing
circumstances to reject the trade.
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\10\ See Amendment No. 4, supra note 7. The Exchange also
confirmed that the scenarios provided by the Exchange regarding
principal trades by a specialist would also apply to members
involved in a principal transaction with any Exchange member.
Telephone conversation between Donald Siemer, Director of Rule
Development, Market Surveillance Division, NYSE, and Terri Evans,
Assistant Director, Division, Commission on February 3, 2004.
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What is reasonable for a floor broker in taking timely action under
NYSE Rule 91.10 depends on his location on the trading floor in
relation to where the specialist's post is located, how busy he is, how
timely the customer was in relaying his instructions to confirm/reject/
do nothing, as well as prevailing market conditions. Any disagreement
about whether a member or member organization took timely action in
rejecting a trade or about whether a transaction was properly deemed to
have been accepted under NYSE Rule 91.10 would be resolved in
accordance with NYSE Rule 75, which gives the final determination to a
Floor Official. If called upon to resolve such a dispute, a Floor
Official would be expected to weigh the factors noted above. Any
resolution of the dispute would, of necessity, depend on the unique
facts of each particular situation. A Floor broker who received a
report of execution within one minute of a trade, was located in close
proximity to the trading post, and who took no action upon receiving
the execution report, might, in the judgment of a Floor Official, be
precluded from rejecting a trade after a period that could be as brief
as several minutes, if the Floor Official concluded that the broker had
not acted as soon as practicable under the circumstances. Conversely, a
broker who did not receive an execution report until 10 or 15 minutes
after the trade, and was actively executing orders in another trading
room, might be deemed to have acted as soon as practicable in rejecting
a trade after a period of a half hour or more, depending on the Floor
Official's assessment of the reasonableness of the broker's actions.
The Exchange is also proposing to amend NYSE Rule 91.20 to replace
the term ``should'' with ``must,'' to reflect the mandatory nature of
the procedures outlined, pertaining to principal transactions effected
against orders in a specialist's possession.
The Exchange proposes to add NYSE Rule 91.50 regarding the
rejection of specialist's principal transactions. The proposed rule
states that if there is a continued pattern of rejections of a
specialist's principal transactions, a Floor Official may be called
upon to require the broker to review his actions. If a customer gives a
continued pattern of rejection instructions to a Floor broker to reject
any trade where the specialist acted as principal, a Floor Official
would be able to review the appropriateness of the continued pattern of
rejections by the broker, to make sure he is representing his customer
as fiduciary and not giving the specialist, in effect, a kind of
conditional order that is not recognized under Exchange rules. If a
continued pattern of rejections does occur because the customer will
not accept executions with the specialist as contra party, the Floor
broker should represent the order himself or herself to ensure
appropriate representation of the order in accordance with the broker's
fiduciary responsibility to the customer. The proposed NYSE Rule 91.50
clarifies, however, that neither the Floor Official's review of a
broker's actions, nor the characterization of an order as a conditional
order compromises the unconditional right of a broker to reject any
trade where the specialist trades as principal. The proposed rule
further provides that a broker's exercise of his right to reject a
trade will not trigger a disciplinary action against the broker.
D. NYSE Rule 95
The Exchange is proposing to add material to NYSE Rule 95(a) making
clear that members may not create an order or a material term of an
order, but must receive an order from off the Floor which includes all
the material terms of an order, regardless of how familiar they are
with a customer's strategy.
E. NYSE Rule 115A
NYSE Rule 115A provides, among other matters, procedures for
members to confirm transactions on openings. The Exchange is proposing
to add to NYSE Rule 115A an intra-rule cross-reference to make clear
that while a broker should confirm a transaction as promptly as
possible, the specialist is not responsible for losses 30 minutes after
the opening.
F. NYSE Rule 116
The Exchange is proposing three changes to NYSE Rule 116. First,
the Exchange proposes to amend NYSE Rule 116.20 to state directly a
prohibition against a Floor broker ``stopping'' stock. Second, the
Exchange is proposing to amend NYSE Rule 116.30(3)(a) to make clear
that a specialist should ``stop'' an order in a minimum variation
market only when there is an imbalance in the quotation suggesting the
likelihood of price improvement for the ``stopped'' order. And third,
the Exchange is proposing to add to NYSE Rule 116.40 a cross-reference
to NYSE Rule 123C, which codifies the Exchange's procedures regarding
execution of market-on-close and limit-on-close orders.
[[Page 6356]]
III. Discussion and Commission Findings
After careful review, 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
proposed rule change, as amended, is consistent with section 6(b)(5) of
the Act,\12\ which requires among other things, that the rules of the
Exchange are designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market, and
in general to protect investors and the public interest.
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\11\ The Commission has considered the proposed rules' 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 believes that the proposed rule change codifies
current practices on the Exchange and existing interpretations of NYSE
rules and is responsive to recommendations made by an independent
consultant retained by the Exchange.\13\ The Commission also believes
that the proposed rule change should clarify Exchange members' rights
and obligations under certain rules such as a broker having to recross
a clean agency cross when there has been price improvement, a member's
ability to resolve certain disputes involving a monetary difference of
$10,000 or more by a panel or through arbitration, a member's
requirement to receive all material terms of an order from the member's
customer off the floor of the Exchange, a specialist's responsibility
for losses incurred by other members because of an opening transaction,
and the conditions for stopping stock.
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\13\ See supra note 8.
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Moreover, the Commission believes the proposed rule change will
clarify the process by which a member can confirm or reject a
transaction involving another member who has elected to take or supply
for his own account the security named in an order entrusted to
him.\14\ The Commission notes that several of the changes to NYSE Rule
91 codify the NYSE's prior interpretation of this rule. As a result,
the Commission believes that codification of these interpretations will
add greater transparency to the NYSE's rules. Further, the Commission
notes that the proposed changes to NYSE Rule 91 aim to maintain a
degree of flexibility in the rule to accommodate various situations
occurring during the trading day.
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\14\ The Commission notes that Exchange members should assure
that any agency issues are addressed by their respective customer
agreements.
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With respect to the changes proposed for NYSE Rule 91.50, the
Commission notes that a Floor Official's review of a broker's continued
pattern of rejections of a specialist's principal transactions in no
way compromises the unconditional right of a broker to reject any trade
where the specialist trades as principal. Furthermore, the Commission
notes that the proposed rule provides that no disciplinary process
would be triggered by the broker exercising his or her right to reject
a trade.
IV. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\15\ that the proposed rule change (SR-NYSE-2002-32), as amended,
is approved.
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\15\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-2825 Filed 2-9-04; 8:45 am]
BILLING CODE 8010-01-P