[Federal Register: April 17, 2003 (Volume 68, Number 74)]
[Notices]
[Page 19048-19051]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17ap03-135]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47671; File No. SR-NYSE-2002-11]
Self-Regulatory Organizations; Order Granting Approval to
Proposed Rule Change and Amendment No. 1 and Notice of Filing And Order
Granting Accelerated Approval to Amendment No. 2 Thereto by the New
York Stock Exchange, Inc. to Establish a Six-Month Pilot Program
Permitting a Floor Broker to Use an Exchange Authorized and Issued
Portable Telephone on the Exchange Floor
April 11, 2003.
On February 28, 2002, the New York Stock Exchange, Inc. (``NYSE''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC''), 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 implement a six-month pilot
program that would amend NYSE Rule 36 (Communication Between Exchange
and Members' Offices) to allow a Floor broker's use of an Exchange
authorized and provided portable telephone on the Exchange Floor upon
approval by the
[[Page 19049]]
Exchange. On December 30, 2002, the Exchange submitted Amendment No. 1
to the proposed rule change.\3\ The proposed rule change, as amended by
Amendment No. 1, was published in the Federal Register on January 28,
2003.\4\ One comment was received on the published proposed rule
change, as amended by Amendment No. 1.\5\ On March 24, 2003, the
Exchange filed Amendment No. 2 to the proposed rule change.\6\ This
order approves the proposed rule change, as amended by Amendment Nos. 1
and 2. Amendment No. 2 is being approved on an accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE,
to Nancy J. Sanow, Assistant Director, Division of Market Regulation
(``Division''), Commission, dated December 30, 2002 (``Amendment No.
1''). Amendment No. 1 replaces the filing in its entirety and
provides, in the proposed rule text and the purpose section of the
filing, clarification and further details on the use of Exchange
authorized and issued portable telephones on the Exchange Floor, and
also proposes, among others, a pilot program for six months.
\4\ See Securities Exchange Act Release No. 47221 (January 21,
2003), 68 FR 4261.
\5\ See letter from Thomas N. McManus, Executive Director and
Counsel, Morgan Stanley & Co. Incorporated, to Jonathan G. Katz,
Secretary, Commission, dated March 6, 2003 (``Morgan Stanley
Letter'').
\6\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE,
to Nancy J. Sanow, Assistant Director, Division, Commission, dated
March 21, 2003 (``Amendment No. 2''). Amendment No. 2 specifies the
timing for the notification and implementation of the six-month
pilot program as well as for the completion of a study, and
eliminates the proposed prohibition against using Exchange
authorized and provided portable telephones for orders in Investment
Company Units (as defined in Section 703.16 of the Listed Company
Manual), also known as Exchange-Traded Funds (``ETFs''). See notes
11 through 15, and accompanying text. Amendment No. 2 also extends
the statutory time for the Commission to take action on the filing
for a period of forty-five days.
---------------------------------------------------------------------------
I. Description of the Proposal
NYSE Rule 36 governs the establishment of telephone or electronic
communications between the Exchange's Trading Floor and any other
location. Rule 36.20 prohibits the use of portable telephone
communications between the Trading Floor and any off-Floor location.
According to the Exchange, the only way that voice communication can be
conducted today by Floor brokers between the Trading Floor and an off-
Floor location is by means of a telephone located at a broker's booth.
Communications often involve a customer calling a broker at the booth
for ``market look'' information. A broker may not use a portable phone
currently in a trading crowd at the point of sale to speak with a
person located off the Floor.
The Exchange proposes to amend NYSE Rule 36 to permit a Floor
broker to use an Exchange authorized and issued portable telephone on
the Floor with the approval of the Exchange. As noted above, the
Exchange currently does not permit the use of portable telephones on
its Floor. Thus, a Floor broker would be permitted to engage in direct
voice communication from the point of sale to an off-Floor location,
such as a member firm's trading desk or the office of one of the
broker's customers. Such communications would permit the broker to
accept orders consistent with Exchange rules, provide status and oral
execution reports as to orders previously received, as well as provide
``market look'' observations as are routinely transmitted from a
broker's booth location today. Only portable telephones authorized and
issued by the Exchange would be permitted on the Exchange Floor. Any
other type of portable telephone would continue to be prohibited.
Under the proposal, both incoming and outgoing calls, and orders on
such calls, would be allowed, provided the requirements of all other
Exchange rules have been met. A broker would not be permitted to
represent and execute any order received as a result of such voice
communication unless the order was first properly recorded by the
member and entered into the Exchange's Front End Systemic Capture
(``FESC'').\7\ In addition, Exchange rules require that any Floor
broker receiving orders from the public over portable phones must be
properly qualified to do direct access business under Exchange Rules
342 and 345, among others.\8\ As a result, NYSE Rule 36 would be
amended to specifically state that any Floor broker receiving orders
from the public over portable phones must be properly qualified to do a
public customer business.
---------------------------------------------------------------------------
\7\ See Securities Exchange Act Release No. 43689 (December 7,
2000), 65 FR 79145 (December 18, 2000) (SR-NYSE-98-25). See also
Securities Exchange Act Release No. 44943 (October 16, 2001), 66 FR
53820 (October 24, 2001) (SR-NYSE-2001-39) (discussing certain
exceptions to FESC, such as orders to offset an error, or a bona
fide arbitrage, which may be entered within 60 seconds after a trade
is executed). The Exchange believes that the exceptions to FESC for
bona fide arbitrage and orders to offset transactions made in error
do not raise unique issues with respect to the use of portable
telephones on the Floor. The NYSE believes that the purpose of the
FESC requirement is to ensure that orders are entered into an
Exchange data base before they are executed, thereby minimizing the
possibility that orders are being initiated on the Floor in
contravention of NYSE and SEC rules. Members may, however, initiate
bona fide arbitrage and error offset orders on the Floor, as
expressly permitted by NYSE Rule 112 and SEC Rule 11a-1. The
Exchange believes that the use of portable telephones, therefore,
does not raise on-Floor trading concerns as to these types of orders
because these orders are not normally transmitted by phone.
Telephone conversation between Jeff Rosenstrock, Senior Special
Counsel, NYSE, and Cyndi Rodriguez, Special Counsel, Division,
Commission, on April 11, 2003.
\8\ For more information regarding Exchange requirements for
conducting a public business on the Exchange Floor, see Information
Memo 01-41 (November 21, 2001), Information Memo 01-18 (July 11,
2001) (available on www.nyse.com/regulation/regulation.html), and
Information Memo 91-25 (July 8, 1991).
---------------------------------------------------------------------------
Furthermore, the Exchange originally proposed in Amendment No. 1
that it would not permit portable communications at the point of sale
for orders in ETFs, because there was an exception to NYSE Rule 123(e)
that permitted orders in ETFs to first be executed and then entered
into FESC.\9\ In its original filing, the NYSE stated that technical
restraints would be developed to implement this policy, thus preventing
the use of portable phones where ETFs currently trade. The NYSE,
however, determined that technical restraints could not be developed to
prevent the use of portable phones in the Expanded Blue Room of the
NYSE where ETFs currently trade. As a result, in Amendment No. 2, the
Exchange proposed to eliminate the exception to NYSE Rule 123(e) for
ETFs \10\ and allow the use of portable phones for orders in ETFs.\11\
Orders in ETFs would thus be subject to the same FESC requirements as
orders in any other security listed on the Exchange. The Exchange
states that requiring orders in ETFs to be first entered into FESC
before execution or representation on the Floor would place them on an
equal footing with orders in other securities with respect to order
entry and recording procedures. As a result, the Exchange believes that
allowing portable phones for orders in ETFs should be permitted. The
Exchange also notes that the same surveillance procedures applicable to
trading in all other equities would also apply to ETFs.
---------------------------------------------------------------------------
\9\ See Securities Exchange Act Release No. 45246 (January 7,
2002), 67 FR 1527 (January 11, 2002) (SR-NYSE-2001-52) (discussing
an exception to FESC that allowed orders in ETFs to be entered
within 90 seconds of execution for a one-year pilot period). See
also Securities Exchange Act Release No. 46713 (October 23, 2002),
67 FR 66033 (October 29, 2002) (SR-NYSE-2002-48) (extending the
exception until January 5, 2004), and note 7 and accompanying text.
\10\ The Exchange stated in Amendment No. 2 that a separate
proposed rule change would be filed with the Commission to eliminate
the exception in Supplementary Material .23 of NYSE Rule 123(e) for
ETF orders. See SR-NYSE-2003-09 which discusses in more detail the
rational for eliminating the exception.
\11\ See Amendment No. 2, supra note .
---------------------------------------------------------------------------
Although the Exchange originally stated in Amendment No. 1 that the
proposal would be implemented on a six-month pilot basis from the date
of Commission approval, and contained a
[[Page 19050]]
commitment to complete, within three months of Commission approval, a
study of communications on the Exchange Floor pursuant to the
recommendation of an Independent Consultant retained by the
Exchange,\12\ the Exchange now proposes in Amendment No. 2 to provide
for Exchange authorized and provided portable phones on the Exchange
Floor as a six-month pilot beginning on or about May 1, 2003.\13\
Furthermore, the Exchange has committed to complete the study within
three months of implementation of the pilot program, which would be on
or about August 1, 2003.\14\ The Exchange has also committed to notify
the Division, OCIE, and the Exchange's membership within one week prior
to the actual implementation date of this proposal.\15\
---------------------------------------------------------------------------
\12\ See In the Matter of New York Stock Exchange, 70 S.E.C.
Docket 106, Release No. 41574, 1999 WL 430863 (June 29, 1999).
\13\ See Amendment No. 2, supra note 6.
\14\ See Amendment No. 2, supra note 6.
\15\ See Amendment No. 2, supra note 6. The Commission notes
that should the NYSE be unable to implement the filing on or about
May 1st, it would have to submit a rule proposal under Section 19(b)
of the Act to change the date.
---------------------------------------------------------------------------
In its filing, the Exchange also noted that specialists are subject
to separate restrictions in NYSE Rule 36 on their ability to engage in
voice communications from the specialist post to an off-Floor
location.\16\ The Exchange's proposed amendment to NYSE Rule 36 would
not apply to specialists, who would continue to be prohibited from
speaking from the post to upstairs trading desks or customers.
---------------------------------------------------------------------------
\16\ See Securities Exchange Act Release No. 46560 (September
26, 2002), 67 FR 62088 (October 3, 2002) (SR-NYSE-00-31) (discussing
restrictions on specialists' communications from the post).
---------------------------------------------------------------------------
II. Discussion
After careful review, the Commission finds that the proposed rule
change and Amendment Nos. 1 and 2 are consistent with the requirements
of the Act and the rules and regulations thereunder applicable to a
national securities exchange.\17\ In particular, the Commission finds
that the proposal, as amended, is consistent with section 6(b)(5) of
the Act,\18\ which requires, among other things, that the Exchange's
rules 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.
---------------------------------------------------------------------------
\17\ In approving this proposed rule change, the Commission has
considered its impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\18\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Specifically, the proposal, as amended, would eliminate the
requirement that an off-Floor customer must communicate with the
Exchange Floor by calling a broker's booth and using the booth clerk as
an intermediary to access the trading crowd, which may help to
facilitate transactions in securities consistent with section 6(b)(5)
of the Act.\19\ While the Commission believes that the proposal to
permit a Floor broker to use an Exchange authorized and issued portable
telephone on the Floor on a six-month pilot basis could provide certain
benefits, as stated by the NYSE in its filing, such as more direct
access to the Exchange's trading crowds, and increased speed in the
transmittal, and execution, of orders, it believes there are certain
concerns.
---------------------------------------------------------------------------
\19\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The prohibition on the use of portable telephones in trading crowds
on the NYSE was adopted in 1988.\20\ In approving the prohibition, the
Commission noted that the use of portable telephones in the trading
crowd was different from such access at a booth phone. In particular,
the Commission stated that the ability of a customer to communicate
directly with a broker in the trading crowd could provide a significant
time and place advantage to the customer, who invariably would be a
large or institutional customer. The Commission also noted certain
concerns that could result from such advantage.
---------------------------------------------------------------------------
\20\ The proposal resulting in the adoption of the prohibition
was in response to a Commission order setting aside actions by the
Exchange denying two of its members permission to install telephone
connections to communicate from the Exchange Floor with non-member
customers located off-Floor. See Securities Exchange Act Release No.
24429, May 6, 1987, 38 SEC Doc. 432. The NYSE's proposal that was
ultimately approved by the Commission permitted access to non-member
customers at the Floor booth, but prohibited such access through
portable phones that could be used in the trading crowd.
---------------------------------------------------------------------------
While the Commission recognized that the NYSE had reasonable
concerns for imposing the portable phone prohibition, the Commission
noted that the NYSE's decision to prohibit the use of portable
telephones on the Floor was not the only approach that could be
consistent with the Act. The Commission further stated that its order
did not foreclose an exchange from devising a program that would permit
the use of portable telephones.
Under NYSE rules, a broker would not be permitted to represent and
execute an order unless it was inputted into FESC. In addition, the
filing has been amended so that only Exchange authorized and issued
portable telephones would be permitted on the Floor. The benefit of
this requirement is that the Exchange would have access to all phone
records. This ability to track phone calls, along with the data
captured in FESC, should aid the Exchange in surveilling for compliance
with Exchange rules and address concerns identified in the adoption of
the original prohibition. In this regard, the Commission notes that
proper surveillance is an essential component of any telephone access
policy to an Exchange Trading Floor. Surveillance procedures should
help to ensure that Floor brokers who are interacting with the public
on portable phones are authorized to do so, as NYSE Rule 36 will
require,\21\ and that orders are being handled in compliance with NYSE
rules. The six-month pilot approval should provide the NYSE with an
opportunity to review these procedures and address any potential
concerns that have arisen during the pilot.
---------------------------------------------------------------------------
\21\ See note 8 and accompanying text for other NYSE requirement
that Floor brokers be properly qualified before doing a public
customer business.
---------------------------------------------------------------------------
The Commission notes that the NYSE is expected to complete within
three months of implementation of the portable phones a study of
communications on the Exchange Floor, pursuant to a recommendation of
an Independent Consultant retained by the Exchange.\22\ In addition to
this study, the Commission requests that the Exchange report any
problems, surveillance or enforcement matters associated with the Floor
brokers use of an Exchange authorized and issued portable telephone on
the Floor. If the NYSE decides to request permanent approval or an
extension of the pilot, we would expect, in addition to the report due
in three months, that the NYSE submit information documenting the usage
of the phones, any problems that have occurred, and any advantages or
disadvantages that have resulted.\23\
---------------------------------------------------------------------------
\22\ See supra note 12.
\23\ This information along with any proposal to extend, or
permanently approve, the pilot should be submitted at least two to
three months prior to the expiration of the six-month pilot.
---------------------------------------------------------------------------
In summary, the Commission notes that the proposal, by enabling
customers to speak directly to a Floor broker in a trading crowd on
Exchange authorized and issued portable phones, rather than being
routed through the Floor broker booth, may help to expedite orders and
make more direct the flow of
[[Page 19051]]
information. The six-month pilot should help the Exchange to provide
information to the Commission to ensure that these benefits exist, and
provide for fair access with adequate monitoring of the orders being
taken, and information being provided, over the portable phones.\24\
---------------------------------------------------------------------------
\24\ In addition, as noted above, the Commission received one
comment letter in support of the proposed rule change and Amendment
No. 1. This commenter stated that the proposal would improve the
overall quality of the flow of information and the efficiency of the
communication process between the Exchange Floor and off-Floor
participants, including both ``direct access'' investors and
``upstairs'' trading desks of NYSE member organizations.
Furthermore, the commenter considered the use of portable phones to
communicate directly to and from the Floor as enabling vigorous
competition, innovative trading services, and faster executions on
the Floor. See Morgan Stanley Letter, supra note 5. The commenter
also suggested that the Exchange should aim to implement the rule
change as fully contemplated and not make calls on portable phones
linked through the booth, as some market participants might desire.
In response, the Exchange stated that they were aware of certain
market participants who preferred that phone calls between Floor
brokers and off-Floor participants be connected through a Floor
booth intermediary, and that, while technologically Floor brokers
would have the ability on their portable phones to conference in
Floor booth intermediaries on calls, such action is not required by
this proposal. Telephone conversation between Jeff Rosenstrock,
Attorney, NYSE, and Cyndi Rodriguez, Special Counsel, Division,
Commission, on April 11, 2003.
---------------------------------------------------------------------------
Finally, the Commission finds good cause for approving Amendment
No. 2 prior to the thirtieth day after the date of publication of the
notice of filing thereof in the Federal Register.\25\ Since the NYSE is
also proposing in a separate rule filing to eliminate the exception to
NYSE Rule 123(e), which provided that orders in ETFs must be entered
into FESC within 90 seconds of execution,\26\ the Commission believes
that good cause exists to approve the portion of Amendment No. 2 that
would allow the use of Exchange-provided and authorized portable phones
for orders in ETFs on the Floor. As noted above, the prohibition of
using portable phones for ETF orders was based on the 90-second delay
for inputting ETF orders in FESC. Because this exception to FESC has
been eliminated, the Commission believes that portable phones can be
used for ETF orders as with other equity securities.\27\ In addition,
the Commission believes that it is beneficial to investors and Exchange
members that the NYSE specified, in Amendment No. 2, a general time
frame of approximately May 1, 2003 to implement the pilot program and
of August 1, 2003 to complete the study of communications on the
Exchange Floor. This should help firms and brokers in planning for the
upcoming changes. Finally, we believe notice for NYSE members, the
Division, and OCIE one week prior to the pilot program's implementation
will be beneficial to market participants and the Commission. Based on
the above, we believe good cause exists to grant accelerated approval
to Amendment No. 2, consistent with sections 19 and 6(b) of the
Act.\28\
---------------------------------------------------------------------------
\25\ 15 U.S.C. 78s(b)(2).
\26\ See notes 9 and 10, and accompanying text.
\27\ During the pilot, the NYSE should address whether
additional surveillance would be needed because of the derivative
nature of the ETFs.
\28\ 15 U.S.C. 78s and 15 U.S.C. 78f(b).
---------------------------------------------------------------------------
III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 2, including whether Amendment No. 2
is consistent with the Act. Persons making written submissions should
file six copies thereof with the Secretary, Securities and Exchange
Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. Copies of
the submission, all subsequent amendments, all written statements with
respect to Amendment No. 2 that are filed with the Commission, and all
written communications relating to Amendment No. 2 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 inspection and copying in the Commission's Public
Reference Room. Copies of such filing will also be available for
inspection and copying at the principal office of the NYSE. All
submissions should refer to File No. SR-NYSE-2002-11 and should be
submitted by May 8, 2003.
IV. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\29\ that the proposed rule change and Amendment No. 1 (SR-NYSE-
2002-11) be, and it hereby is, approved, and that Amendment No. 2 be,
and it hereby is, approved on an accelerated basis, as a pilot program
for six months beginning on or about May 1, 2003.
---------------------------------------------------------------------------
\29\ 15 U.S.C. 78s(b)(2).
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\30\
---------------------------------------------------------------------------
\30\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-9472 Filed 4-16-03; 8:45 am]
BILLING CODE 8010-01-P