Firm Quote and Trade-Through Disclosure Rules for Options

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

Release No. 34-44078; File No. S7-17-00

RIN 3235-AH96

Firm Quote and Trade-Through Disclosure Rules for Options

AGENCY: Securities and Exchange Commission

ACTION: Final rule; extension of compliance date

SUMMARY: The Securities and Exchange Commission ("Commission") is extending the compliance date for Rule 11Ac1-7 of the Securities Exchange Act of 1934. Rule 11Ac1-7 requires a broker-dealer to disclose to its customer when the customer's order for listed options is executed at a price inferior to a better published quote, unless the transaction was effected on a market that participates in an intermarket linkage plan approved by the Commission. This rule was published on December 1, 2000 (65 FR 75439).

DATES: Effective Date: The effective date for Rule 11Ac1-7, published on December 1, 2000 (65 FR 75439), remains February 1, 2001.

Compliance Date: The compliance date for Rule 11Ac1-7 is extended from April 1, 2001 to October 1, 2001.

FOR FURTHER INFORMATION CONTACT: Jennifer Colihan, Special Counsel, at (202) 942-0735, Division of Market Regulation, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-1001.

SUPPLEMENTARY INFORMATION: On November 17, 2000, the Commission adopted Rule 11Ac1-7¹ ("Rule") under the Securities Exchange Act of 1934 ("Exchange Act") to require a broker-dealer to disclose to its customer when the customer's order for listed options is executed at a price inferior to a better published quote ("intermarket trade-through"), and to disclose the better published quote available at that time.² This disclosure must be made in writing at or before the completion of the transaction, and may be provided in conjunction with the confirmation statement routinely sent to investors. 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 quote. In addition, broker-dealers will not be required to provide the disclosure required by the Rule if the customer's order is executed as part of a block trade.

In the Adopting Release, the Commission noted that it would reconsider the compliance date if the options exchanges continued to make substantial progress towards implementing a linkage plan.³ The Commission notes that while progress has been made toward implementing the linkage plan approved by the Commission in July 2000,⁴ efforts in this regard have not yet resulted in a linkage that can be implemented before the compliance date of April 1, 2001. Specifically, the options markets have achieved their goal of narrowing the selection of linkage providers to three and are on schedule to make the final selection. In addition, on March 12, 2001, the Linkage Plan participants filed an amendment to the Linkage Plan to conform the Linkage Plan to the minimum requirements set forth by the Commission in adopting Rule 11Ac1-7 and therefore, to allow broker-dealers effecting transactions on their markets to be eligible for an exemption from the disclosure requirements of Rule 11Ac1-7 once implementation is completed. In a letter dated February 20, 2001, the Securities Industry Association requested, on behalf of its member firms, that the Commission extend the compliance date of the rule.⁵

Because the Commission believes that options exchanges have continued to make substantial progress towards implementing a linkage, it is extending the compliance date of Rule 11Ac1-7 for six months, to October 1, 2001. The extension is intended to allow the options markets to make a final selection of the vendor to build the linkage, and provide the options exchanges with time to integrate their internal systems into the linkage system, once built. The Commission believes that good cause exists to extend the compliance date so that the options markets can implement a linkage before imposing the disclosure requirements of the Rule on broker-dealers.

The Commission finds, in accordance with Section 553(b)(3)(A) of the Administrative Procedures Act,⁶ that extending the compliance date relates solely to agency organization, procedure, or practice, and does not relate to a substantive rule. Accordingly, notice, opportunity for public comment, and publication prior to the extension is unnecessary.

By the Commission.

Jonathan G. Katz
Secretary

Dated: March 15, 2001

Footnotes

¹ 17 CFR 240.11Ac1-7.

² See Securities Exchange Act Release No. 43591 (November 17, 2000), 65 FR 75439 (December 1, 2000) ("Adopting Release").

³ Id.

⁴ See Securities Exchange Act Release No. 43086 (July 28, 2000), 65 FR 48023 (August 4, 2000) ("Linkage Plan").

⁵ See letter from Marc E. Lackritz, President, Securities Industry Association, to Annette Nazareth, Director, Division of Market Regulation, Commission, dated February 20, 2001 (explaining the difficulty broker-dealers face in their efforts to comply with Rule 11Ac1-7 before an options linkage is fully implemented).

⁶ 5 U.S.C. 553(b)(3)(A).

http://www.sec.gov/rules/final/34-44078.htm