[Federal Register: December 6, 2007 (Volume 72, Number 234)]
[Notices]
[Page 68911-68913]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06de07-95]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-56868; File No. SR-Amex-2007-125]
Self-Regulatory Organizations; American Stock Exchange LLC;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
To Establish a Riskless Principal and Other Exceptions to Amex Rules
Prohibiting Members' Proprietary Trading While in Possession of Like or
Better-Priced Customer Orders
November 29, 2007.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on November 16, 2007, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared substantially by the Amex. The
Amex has submitted the proposed rule change under section 19(b)(3)(A)
of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ which renders the
proposal effective upon filing with the Commission. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Amex proposes to adopt changes to Rules 24--AEMI, ``Limitations
on Members' Trading Because of Customers' Orders,'' 151--AEMI,
``Purchases and Sales While Holding Unexecuted Market Order,'' and
152--AEMI, ``Taking or Supplying Stock to Fill Customer's Order,'' to:
(i) provide for a ``riskless principal'' and other exceptions to the
Amex's general rules against members entering proprietary orders while
in possession of a customer order that could trade at the same price;
and (ii) make various ``housekeeping'' changes to eliminate duplicative
or unnecessary portions of the AEMI rules.
The text of the proposed rule change is available at http://www.amex.com
, the principal offices of the Amex, and the Commission's
Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Amex included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Amex has prepared summaries, set forth in sections
A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
To provide greater flexibility in trading methods available on the
Amex, while still sufficiently protecting customer orders, the Amex
proposes to adopt a ``riskless principal'' and other exceptions
detailed below to its general rules against a member entering a
proprietary order while in possession of a customer order that could
trade at the same price. These new exceptions, which are the same as
those adopted by the New York Stock Exchange LLC (``NYSE'') in July
2007,\5\ will be added to Rule 24--AEMI (which is the Amex equivalent
of NYSE Rule 92, ``Limitations on Members' Trading Because of
Customers' Orders'') and will promote regulatory consistency.
Additionally, the Amex proposes to make certain housekeeping changes
occasioned by the changes to Rule 24--AEMI. Among other things, the
Amex proposes to: (i) Eliminate Rule 150--AEMI, which substantially
overlaps with and is being folded into Rule 24--AEMI; and (ii) add a
riskless principal exception to the general restrictions in Rule 152--
AEMI against a member supplying/taking stock to fill a customer's
order.
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\5\ See Securities Exchange Act Release Nos. 56017 (July 5,
2007), 72 FR 38110 (July 12, 2007) (order approving File No. SR-
NYSE-2007-21); and 56088 (July 18, 2007), 72 FR 40351 (July 24,
2007) (notice of filing and immediate effectiveness of File No. SR-
NYSE-2007-63).
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Riskless Principal Exception and Other Changes to Rule 24--AEMI
Rule 24--AEMI is substantially and structurally similar to the
version of NYSE Rule 92 that existed until the NYSE amended its rule in
July 2007.\6\ In relevant part, the Amex intends to adopt the substance
of those NYSE amendments to:
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\6\ See note 5, supra.
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Add a ``riskless principal'' exception that would allow a
member to trade a security as principal while holding one or more
customer orders in the security to permit the member to pass on to its
customer(s) the prices received on the Exchange; \7\
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\7\ A member would be permitted to aggregate only those customer
orders where the order types and instructions (including tick
restrictions) permit such aggregation. Such aggregating meets the
standards set forth in the July 18, 2005, no-action letter from the
Division of Trading and Markets (``Division'') (f/k/a the Division
of Market Regulation) to the Securities Industry Association
(``SIA''), in which the Division granted a riskless principal
exemption from Rule 10a-1 under the Act to permit a broker-dealer to
fill a customer order without complying with the ``tick'' provisions
of Rule 10a-1, in certain situations and subject to certain
conditions. See letter from James Brigagliano, Assistant Director,
Division, Commission, to Ira Hammerman, Senior Vice President and
General Counsel, SIA, dated July 18, 2005.
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Amend certain customer consent requirements to allow a
customer to give affirmative prior blanket--rather than order-by-
order--consent to a member trading while in possession of a customer
order, as permitted by the rule, provided that the requisite
disclosures to the customer regarding potential trading-along, opt-out
rights, and allocation methodology are periodically made \8\ and such
informed
[[Page 68912]]
customer consent has been documented; \9\
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\8\ The required periodic disclosures would include affirmative
notice of: (i) the fact that the member may trade along with the
customer's order, subject to the customer's right to affirmatively
opt-out of such trading-along on an order-by-order basis or to
modify the instructions obtained under the blanket consent; and (ii)
the method by which the member organization will allocate shares to
the customer's order (including the allocation methodology for
riskless principal transactions that include Rule 24--AEMI(b)
proprietary orders and orders from customers that have and/or have
not consented to trade along with such proprietary orders). The
Exchange would not require a specific allocation methodology (e.g.,
strict time priority, precedence based on size, etc.), but would
require it to be fair and reasonable, consistently applied,
consistent with the rules governing parity of orders, and not
unfairly discriminatory against any particular class of accounts or
types of orders.
\9\ Acceptable documentation of customer consent following
delivery of the required disclosures would be: (i) A signed writing
from the customer that acknowledges receipt of the required
disclosures and provides consent; or (ii) in the case of oral
customer consent, by a written notice from the member sent to the
customer documenting the provision of such required disclosures and
such oral consent. Once a customer has provided affirmative consent
and so long the firm continues to provide written disclosures on a
periodic basis, the firm will not need to renew such affirmative
consent.
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Expand the class of customers eligible to give affirmative
consent from institutional investors with 10,000-share orders or more
to all institutional investors and individual investors with orders of
10,000 shares (worth at least $100,000) or more; and
Add an exception which would permit specialists to trade
proprietarily ahead of held customer orders 2\1/2\ hours after the
close of regular trading and up to 15 minutes prior to the following
trading day's opening, thereby better allowing the specialists to hedge
their trading risk and bring their dealer accounts in line with trading
in away markets.
According to the Amex, these changes will serve to harmonize Rule
24--AEMI with the guidelines of the Financial Industry Regulatory
Authority, Inc. (``FINRA,'' f/k/a NASD) on members trading while in
possession of customer orders, commonly known as the ``Manning Rule,''
\10\ so as to provide a more consistent regulatory environment for
broker-dealers. The Amex intends to make the same amendments in
substance to its Rule 24--AEMI as the NYSE made to its Rule 92, with
slight differences discussed below.
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\10\ See FINRA IM 2110-2 and FINRA Rule 2111.
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New NYSE Rule 92(c)(3) requires, among other things, that in order
to avail itself of the riskless principal transaction:
A member must submit a report of execution of the facilitated
order to a designated Exchange database as required by NYSE Rule
123(f). The member must also submit to the same database, within
such time frame and in such format as the Exchange may from time to
time require, an electronic report containing data elements
sufficient to provide an electronic link of the execution of the
facilitated order to all of the underlying orders.
The referenced ``Exchange database'' is the NYSE's Front End
Systemic Capture (``FESC'') database. The Amex does not have a database
that is able to capture order and execution data with respect to
riskless principal transactions in the same manner as FESC.
Accordingly, the Amex's regulatory staff will need to surveil for
proper use of the new riskless principal exemption simultaneous with
general surveillance of transactions where members trade ahead of
customers orders under pre-existing exceptions to Rule 24--AEMI. Should
a transaction appear to be a riskless principal transaction, Amex
Regulation will validate that all elements required by the exception
are met by requesting and reviewing supporting documentation from the
members involved, rather than automatically surveilling for violations
as the NYSE is presumably able to do with its FESC system. Accordingly,
because technological differences require the development of a slightly
different audit trail, Amex's corresponding paragraph in Rule 24--AEMI
will state:
A member or member organization must maintain a contemporaneous
record of every execution on a riskless principal basis, which
record shall be submitted to the Exchange within such time frame, in
such format, and containing such information (in addition to any
information required by Rule 153--AEMI) as the Exchange may from
time to time require to validate the riskless principal nature of
the transaction.
Other wording, structural, or grammatical differences between
comparable sections of NYSE Rule 92 and Rule 24--AEMI are not intended
to create substantive differences and are intended only to add clarity
where the Amex thought necessary for its members.\11\
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\11\ For example, while the NYSE chose to make the riskless
principal exception a separate subsection (c) to its Rule 92 (with
the remaining exceptions listed in NYSE Rule 92(d)), Amex preferred
to list all exceptions--including the riskless principal transaction
exception--in the same subsection of its equivalent Rule 24--
AEMI(c). For another example, NYSE Rule 92(b) begins:
A member or member organization may enter a proprietary order
while representing a customer order that could be executed at the
same price, provided that the customer's order is designated not
held and is for (i) an institutional account, or (ii) over 10,000
shares, unless such orders are less than $100,000 in value, and the
member organization periodically provides written disclosures to its
customers and obtains and documents affirmative customer consent,
under the following conditions. * * *
Comparable Rule 24--AEMI(b), as proposed to be amended,
provides:
A member or member organization may enter a proprietary order
while representing a customer order which could be executed at the
same price, provided:
(1) The customer's order is designated not held and is (i) an
institutional account, or (ii) over 10,000 shares (unless such
orders are less than $100,000 in value); and the member organization
has periodically provided written disclosures to such customer of
the possibility and allocation methodology of its potential trading
along and obtained and documented such customer's affirmative
consent to same; and
(2) one of the following conditions exists. * * *
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Housekeeping Changes
Existing Rule 24--AEMI substantially overlaps with existing Rule
150--AEMI, in that both rules recite the general prohibitions upon, and
exceptions to, an Amex member trading a proprietary order while in
possession of a customer order that could be executed at the same
price. To eliminate future confusion, the Amex proposes to eliminate
Rule 150--AEMI (which is a vestige of pre-AEMI Amex Rule 150) in favor
of merging the two rules into Rule 24--AEMI (which was originally
patterned after NYSE Rule 92). This will result in three exceptions
being added to Rule 24--AEMI, but no substantive expansion of the list
of exceptions available pre-amendment (except as noted above by
expanding the exceptions to include the recent changes made to
comparable NYSE Rule 92).\12\
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\12\ Note, however, that the former Rule 150--AEMI(c)(5)
exception for a purchase or sale of an exchange-traded fund by a
specialist where the specialist is on parity with another broker-
dealer order pursuant to the Exchange's rules (e.g., Rule 126--AEMI)
has been incorporated in new Rule 24--AEMI(c)(7) as ``any purchase
or sale of any security * * * by a specialist whose bid (offer) is
on parity with a customer's order pursuant to Rule 126--AEMI.'' The
new phrasing more accurately describes the operation and application
of Rule 126--AEMI, under which a specialist has been and is
permitted to trade on parity with a customer under a variety of
circumstances broader than reflected in former Rule 150--AEMI(c)(5).
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Additionally, Commentary .06 to Rule 24--AEMI will now clarify that
the riskless principal exception of new subsection (c)(10) applies only
to orders entered from off the floor of the Exchange, and that
specialists, in particular, remain bound by Rule 155--AEMI,
``Precedence Accorded to Orders Entrusted to Specialists,'' which
contains no such exception (replacing existing Commentary .06, which
deals with the interplay between the now-defunct Intermarket Trading
System Plan and Rule 24--AEMI).
Finally, Rule 152--AEMI (originally patterned after NYSE Rule 91),
which currently contains the general prohibitions upon, and exceptions
to, supplying/taking stock to fill a customer's order, will be amended
to incorporate the new riskless principal transaction exception, as
such transactions, by definition, include a member supplying/taking
stock to fill a customer's order.\13\
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\13\ The Amex notes that the NYSE did not so amend its
comparable NYSE Rule 91, although it is not clear why.
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[[Page 68913]]
2. Statutory Basis
The proposed rule change is designed to be consistent with
Regulation NMS,\14\ as well as section 6(b) of the Act,\15\ in general,
and furthers the objectives of section 6(b)(5) of the Act,\16\ in
particular, in that it is 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 a national market system, and, in
general, to protect investors and the public interest.
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\14\ 17 CFR 242.600 et. seq.
\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Amex believes that the proposed rule change does not impose any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No formal written comments were solicited or received with respect
to the proposed rule change itself, but Amex staff have had numerous
communications with representatives of the Securities Industry and
Financial Markets Association, which have requested that the Amex amend
its rules to match the recent changes to NYSE Rules 92, as described
above.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Amex has designated the proposed rule change as one that: (1)
Does not significantly affect the protection of investors or the public
interest; (2) does not impose any significant burden on competition;
and (3) does not become operative for 30 days from the date of filing,
or such shorter time as the Commission may designate if consistent with
the protection of investors and the public interest. In addition, as
required under Rule 19b-4(f)(6)(iii),\17\ the Amex provided the
Commission with written notice of its intention to file the proposed
rule change, along with a brief description of the text of the proposed
rule change, at least five business days prior to filing the proposal
with the Commission. Therefore, the proposed rule change has become
effective pursuant to section 19(b)(3)(A) of the Act \18\ and Rule 19b-
4(f)(6) thereunder.\19\
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\17\ 17 CFR 240.19b-4(f)(6)(iii).
\18\ 15 U.S.C. 78s(b)(3)(A).
\19\ 17 CFR 240.19b-4(f)(6).
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The Amex has requested the Commission to waive the 30-day operative
delay because of the commencement of full industry compliance with
Rules 610 and 611 of Regulation NMS \20\ and the broker-dealer
community's desire to have the riskless principal exception in place at
all automated market centers as soon as possible. In addition, the Amex
states that the proposed changes are similar to those adopted by the
NYSE and do not raise new issues.
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\20\ 17 CFR 242.610 and 17 CFR 242.611.
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The Commission hereby grants the Amex's request \21\ and believes
that waiving the 30-day operative delay is consistent with the
protection of investors and the public interest because the changes to
Rule 24--AEMI are substantially similar to changes adopted previously
by the NYSE.\22\ The remaining changes to Rules 24--AEMI and 152--AEMI,
and the elimination of Rule 150--AEMI, are designed to streamline and
clarify the Amex's rules and do not raise new regulatory issues. For
these reasons, the Commission designates that the proposed rule change
become operative immediately.
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\21\ For purposes of waiving the 30-day operative delay, the
Commission has considered the proposal's impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
\22\ See note 5, supra.
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At any time within 60 days of the filing of the proposed rule
change, the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change 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 e-mail to rule-comments@sec.gov. Please include
File Number SR-Amex-2007-125 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-Amex-2007-125. This file
number should be included on the subject line if e-mail 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 inspection and
copying in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of the Amex. 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 publicly available. All
submissions should refer to File Number SR-Amex-2007-125 and should be
submitted on or before December 27, 2007.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-23593 Filed 12-5-07; 8:45 am]
BILLING CODE 8011-01-P