[Federal Register: August 8, 2007 (Volume 72, Number 152)]
[Notices]
[Page 44601-44603]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08au07-118]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-56183; File No. SR-NYSE-2007-42]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing of Proposed Rule Change as Modified by Amendment No. 1
Thereto Relating to Rule 103B (``Specialist Stock Allocation'')
August 2, 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 April 20, 2007, the New York Stock Exchange LLC (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been substantially prepared by NYSE.
NYSE filed Amendment No. 1 to the proposed rule change on July 20,
[[Page 44602]]
2007. The Commission is publishing this notice to solicit comments on
the proposed rule change, as amended, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing with the Commission an amendment to Rule
103B (``Specialist Stock Allocation'') to permit specialist member
organizations to trade Exchange-Traded Funds (``ETFs'') in a specialist
capacity while at the same time registered as a specialist in
securities which are a component thereof, subject to Exchange approval
of policies and procedures demonstrably isolating information regarding
the respective issues. The text of the proposed rule change is
available on the Exchange's Web site (http://www.nyse.com), at the
principal office of the Exchange, and at 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 Exchange 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 Exchange 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
When approved by the Commission on May 7, 2001,\3\ section VIII of
Rule 103B prohibited member organizations from applying for allocation
of an ETF where such member organization was already registered as a
specialist in any component security of such ETF, and conversely that
where a member organization is already registered as a specialist in an
ETF and a security in which it is also registered as a specialist
becomes a component security of such ETF, the member organization must
withdraw one or the other of such registrations or establish a separate
member organization for the ETF. The Exchange explained the reason for
this separation:
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\3\ See Securities Exchange Act Release No. 44272 (May 7, 2001),
66 FR 26898 (May 15, 2001) (SR-NYSE-2001-07).
This restriction is necessary to avoid the possibility of ``wash
sales'' in a situation where the specialist in the ETF needs to
hedge by buying or selling component stock of the ETF, and could
inadvertently be trading with a proprietary bid or offer made by a
specialist in the same member organization who is making a market in
the component security.\4\
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\4\ Id. at 26900.
The rule amendment proposed a solution to the problem by providing
that member organizations could conduct the ETF activities in a
separate member organization. The Exchange states that, while concerns
regarding wash sales in the context of ETF and component security
trading remain real, the costs and expenses of maintaining two separate
member organizations, both to the member organization \5\ and to the
Exchange,\6\ are seen to strongly recommend a second resolution of this
problem.
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\5\ Because of the requirement for two separate organizations,
firms are required to have two broker-dealer registrations, file
separate monthly financial reports, support two accounting and
compliance departments, and maintain separate management and
reporting structures.
\6\ In 2005, the Exchange estimated that approximately 2,100
examiner hours were devoted to the examination of ETF specialists.
Such numbers would be sharply reduced if member organizations were
allowed, as proposed, to include such functions within the same
organization, as the combination of activities in one entity instead
of two would, by its nature, reduce the member organizations
examined and eliminate review of duplicative functions.
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Accordingly, the Exchange is proposing to permit member
organizations, subject to Exchange approval, to establish policies and
procedures to isolate \7\ the activities of such member organization in
the trading of ETFs and any component securities in which it may be
registered, thus eliminating the required redundancies and attendant
expense inherent in the current rule requirement for separate firms.
Such policies and procedures must, at a minimum, include information
barriers that prevent the flow of non-public information between a
member organization's ETF specialist on the one hand and the member
organization's specialist in an associated component security on the
other hand.
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\7\ See, for example, comparable provisions of NYSE Information
Memo 91-22 (June 21, 1991), the NASD/NYSE Joint Memo on Chinese Wall
Policies and Procedures for procedural structures to assure the
effective containment of trading information.
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The Exchange states that its Division of Member Firm Regulation has
a Chinese Wall examination program to evaluate the integrity of
information barriers to ensure confidentiality of trading information
among the various trading departments at its member firms and their
approved persons and will adapt it to the review of specialist firms
also trading ETFs along with component securities. These information
barriers are, and will continue to be, tested and reviewed on site for
breaches and weaknesses by Exchange examination staff on an annual
basis and for cause, when warranted. To determine whether the firm has
developed and implemented adequate information barriers between its
Specialist Equity and ETF Trading Operations, examiners will review,
on-site, the combined specialist firm's written policies and procedures
and physical layout for adequacy. In addition, appropriate individuals
both within the affected departments as well as other areas of the
specialist firm will be interviewed to determine whether firm policies
have been appropriately disseminated and implemented. Also, the
examiners will test member organization controls and will determine,
based upon their review, whether the firm's relevant information
barriers and related policies and procedures are adequate to preclude
the improper sharing of trading information (both equity and ETF) and
whether there have been any apparent breaches of those barriers. In
addition, the Exchange will periodically assess its surveillance and
examination procedures to determine whether they are adequate to assure
that member organizations and market participants do not engage in
manipulative or improper trading. The Exchange believes that these
measures will assure the adequate and appropriate surveillance of the
single member organization permitted by the proposed amendments.
The isolation of trading activities acts to address the issue of
``wash sales'' in the context of ETF and component securities. The rule
does not, however, prohibit usual and customary sharing of information
regarding trades after the fact, and so allows appropriate risk and
hedging activity, treasury management and other such similar
activities.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of section 6(b)(5) of the Act \8\ because it is
designed 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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\8\ 15 U.S.C. 78f(b)(5).
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[[Page 44603]]
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
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
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
A. By order approve such proposed rule change; or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
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-NYSE-2007-42 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-NYSE-2007-42. 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 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-2007-42 and should be
submitted on or before August 29, 2007.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\9\
Florence E. Harmon,
Deputy Secretary.
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\9\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E7-15432 Filed 8-7-07; 8:45 am]
BILLING CODE 8010-01-P