Self-Regulatory Organizations; National Stock Exchange; Order Approving Proposed Rule Change, and Amendment Nos. 1 and 2 Thereto, To Amend the Exchange's Customer Priority Rule To Require Designated Dealers To Implement and Maintain Automated Compliance Systems, 71352-71354 [E5-6562]
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71352
Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Notices
APs who worked at Disciplined Firms
for less than 60 days more than ten
years ago to avoid triggering the
Requirements. In fact, only two firms
would have triggered the Requirements
under the former method but were not
so classified because of the 2003
modification, and neither has been
subject of any regulatory action. In its
latest review of the Requirements, NFA
revisited the question of whether further
modifications can be prudently made to
decrease the potential burden on NFA’s
membership and the Waiver Committee.
NFA studied data to examine the effect
of keeping the less than sixty days at a
Disciplined Firm requirement while
reducing the time away from
Disciplined Firms from ten to five years.
NFA’s analysis showed that reducing
the required period from 10 years to five
years while maintaining the less 60 days
cumulative tenure at Disciplined Firms
requirement yielded a population that is
of no more cause for concern than the
present system. Approximately 1,280
individuals are exempted from being
counted under the current system.
Reducing the required length of time
away from a Disciplined Firm to five
years would add approximately 275 APs
who would not have to be counted in
determining if a firm triggered the
Requirements. As was the case with the
group that has been exempted under the
current ten-year test, the number of
additional APs who would be exempted
under the proposed modification who
have been subject to any kind of
regulatory action is small.7
Based upon this data, NFA believes
that the triggering criteria as currently
set out in the Notice can be further
refined to reduce the burden on the
membership while still imposing
supervisory enhancements on firms that
pose a concern given the background of
their APs and principals at Disciplined
Firms. Not including APs and principals
who served less than sixty cumulative
days with Disciplined Firms more than
five years ago in calculating whether a
Member is subject to enhanced
supervision would also serve the
efficiency and fairness of the Waiver
Committee’s function by removing a few
7 Ten
individuals who have been subject to
actions by NFA or the CFTC are exempted from
being included in the calculation of whether a
Member has become a Telemarketing Firm under
the Notice’s current 10-year provision. The
proposed modification to reduce the required time
away from a Disciplined Firm to more than five
years would exempt six additional individuals who
have been subject to actions by NFA or the CFTC.
All charges against those individuals have been
resolved. None of the individuals has been
permanently barred from the industry and none of
them are currently registered.
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15:28 Nov 25, 2005
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non-problematic firms from the waiver
process.
2. Statutory Basis
The rule change is authorized by, and
consistent with, Section 15A(k) of the
Exchange Act.8
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The rule change will not impose any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Exchange Act and
the Commodity Exchange Act.9
C. Self-Regulatory Organization’s
Statement of Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
NFA discussed the proposed rule
change with its Special Committee to
Study Customer Protection Issues,
which voted to recommend the
proposed rule change. NFA did not
publish the proposed rule change to the
membership for comment. NFA did not
receive comment letters concerning the
proposed rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The proposed rule change is not
effective because the CFTC has not
approved the proposed rule change.
Within 60 days of the date of
effectiveness of the proposed rule
change, the Commission, after
consultation with the CFTC, may
summarily abrogate the proposed rule
change and require that the proposed
rule change be refiled in accordance
with the provisions of Section 19(b)(1)
of the Exchange Act.10
IV. Solicitation of Comments
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
No. SR–NFA–2005–01 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Jonathan G. Katz, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–9303.
All submissions should refer to File
No. SR–NFA–2005–01. This file number
should be included on the subject line
U.S.C. 78o–3(k).
U.S.C. 1.
10 15 U.S.C. 78s(b)(1).
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 (https://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. Copies of such filing will also be
available for inspection and copying at
the principal office of the NFA. 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 No.
SR–NFA–2005–01 and should be
submitted on or before December 19,
2005.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.11
Jonathan G. Katz,
Secretary.
[FR Doc. E5–6558 Filed 11–25–05; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–52807; File No. SR–NSX–
2005–06]
Self-Regulatory Organizations;
National Stock Exchange; Order
Approving Proposed Rule Change, and
Amendment Nos. 1 and 2 Thereto, To
Amend the Exchange’s Customer
Priority Rule To Require Designated
Dealers To Implement and Maintain
Automated Compliance Systems
November 18, 2005.
I. Introduction
On July 19, 2005, the National Stock
ExchangeSM (‘‘NSX’’ 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
8 15
97
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11 17
1 15
Sfmt 4703
CFR 200.30–3(a)(75).
U.S.C. 78s(b)(1).
E:\FR\FM\28NON1.SGM
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Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Notices
19b–4 thereunder,2 a proposed rule
change to amend the text of NSX Rule
12.6 (‘‘NSX’s Customer Priority Rule’’)
to require the Exchange’s Designated
Dealers 3 to implement and maintain
automated systems reasonably designed
to ensure compliance with the NSX
Customer Priority Rule.4 On October 5,
2005, the Exchange filed Amendment
No. 1 to the proposed rule change. On
October 7, 2005, the Exchange filed
Amendment No. 2 to the proposed rule
change. Notice of the proposed rule
change, as amended, was published for
comment in the Federal Register on
October 18, 2005.5 No comments were
received regarding the proposal. This
order approves the proposed rule
change, as amended.
II. Description of the Proposed Rule
Change
The NSX Customer Priority Rule,
currently provides, in part, that no
member of the Exchange shall: (i)
Personally buy or initiate the purchase
of any security traded on the Exchange
for its own account or for any account
in which it or any associated person of
the member is directly or indirectly
interested while such member holds or
has knowledge that any person
associated with it holds an unexecuted
market or limit price order to buy such
security in the unit of trading for a
customer, or (ii) sell or initiate the sale
of any such security for any such
account while it personally holds or has
knowledge that any person associated
with it holds an unexecuted market or
limit price order to sell such security in
the unit of trading for a customer.6
NSX proposes to amend the text of the
NSX Customer Priority Rule to require
2 17
CFR 240.19b–4.
Rule 5.5(a) defines ‘‘Designated Dealer’’ as
a specialist.
4 The Exchange filed this proposed rule change,
in part, pursuant to the provisions of the
Commission’s Order Instituting Administrative and
Cease-And-Desist Proceedings Pursuant to Sections
19(b) and 21C of the Securities Exchange Act of
1934, Making Findings, and Imposing Sanctions
entered May 19, 2005. See In the Matter of National
Stock Exchange and David Colker, Securities
Exchange Act Release No. 51715 (May 19, 2005)
(‘‘Administrative Order’’). In Section III.F.6. of the
Administrative Order, NSX undertook to file
proposed rule changes to require its designated
dealers to implement system enhancements, to the
extent practicable, such that when a dealer is in the
process of executing a proprietary trade while in
possession of a customer order that could trade in
place of some or all of the dealer’s side of the trade,
the designated dealer’s system will systemically
allocate the execution to the customer’s order
unless the trade meets a specified exemption in
NSX’s rules. Pursuant to the undertaking, the
proposed rule changes must also require that the
required system enhancements cannot be disabled
by NSX’s designated dealers.
5 See Securities Exchange Act Release No. 52576
(October 7, 2005), 70 FR 60594 (‘‘Notice’’).
6 See NSX Rule 12.6(a).
3 NSX
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the Exchange’s Designated Dealers to
implement and maintain automated
systems reasonably designed to ensure
compliance with the NSX Customer
Priority Rule.7 The proposed rule
change would also prohibit Designated
Dealers from disabling or disengaging
their automated systems, except under
limited circumstances.8 Furthermore,
the proposed rule would make clear
that, if a Designated Dealer holds for
execution on the Exchange a customer
buy order and a customer sell order that
can be crossed, the Designated Dealer’s
automated system shall systemically
cross them.9
NSX also proposes to provide that, for
purposes of Rule 12.6, a member or any
associated person of a member
responsible for entering orders for its
own account or any account in which it
is directly or indirectly interested shall
be presumed to have knowledge of a
particular customer order.10 The
proposed interpretation would also
provide that such presumption can be
rebutted by adequate evidence that
effectively demonstrates, to the
Exchange’s satisfaction, that the member
has implemented a reasonable system of
internal policies and procedures and
has as adequate system of internal
controls to prevent the misuse of
information about customer orders by
those responsible for entering such
proprietary orders.11
III. Discussion and Commission
Findings
The Commission has reviewed the
proposed rule change, as amended, and
finds that it is consistent with the Act
and the rules and regulations
thereunder applicable to a national
securities exchange.12 Specifically, the
Commission finds that the proposed
rule change, as amended, furthers the
objectives of Section 6(b)(1) 13 of the
Act, which requires the Exchange to be
so organized and have the capacity to be
able to carry out the purposes of the Act
and to comply, and to enforce
compliance by its members, with the
Act and the rules of the Exchange. In
addition, the Commission finds that the
proposed rule change, as amended, is
consistent with Section 6(b)(5) of the
7 See
Proposed NSX Rule 12.6(e).
8 Id.
9 See Proposed Interpretations and Policies .01 to
NSX Rule 12.6.
10 See Proposed Interpretations and Policies .03 to
NSX Rule 12.6.
11 Id.
12 In approving this proposed rule change, the
Commission notes that it has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
13 15 U.S.C. 78f(b)(1).
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71353
Act,14 which requires, among other
things, that the rules of a national
securities exchange be 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.
Currently, NSX Rule 12.6 prohibits an
NSX member from trading ahead of its
customers’ orders. Customer order
protection ensures that members
consider the orders of their customers
when executing their own orders and
thus prevents the isolation of customer
orders that might otherwise occur if a
member were freely able to trade ahead
of its customers’ orders. The
Commission believes that the proposed
rule change should enhance investor
confidence by helping to improve the
quality of executions for customers. By
ensuring a customer order’s priority
over the member’s proprietary trading,
more trade volume should be available
to be matched with the customer’s
order, resulting in quicker and more
frequent executions for customers.
Specifically, the Commission believes
that proposed NSX Rule 12.6(e) and
Interpretations and Policies .01 to NSX
Rule 12.6 should enhance the customer
protections already provided by NSX
Rule 12.6 by requiring NSX specialists
to implement and maintain automated
systems reasonably designed to ensure
compliance with NSX Rule 12.6 and
requiring that if an NSX specialist is
able to cross two customer orders, such
specialist’s automated system shall
systemically cross such order without
the specialist interposing itself as a
dealer.
Proposed Interpretations and Policies
.03 to NSX Rule 12.6 would define what
constitutes knowledge for purposes of
NSX Rule 12.6 to provide that a member
or any associated person of a member
responsible for entering orders for its
own account or any account in which it
is directly or indirectly interested shall
be presumed to have knowledge of a
particular unexecuted customer order
and would provide that such knowledge
can be rebutted by adequate evidence
that the member has implemented a
reasonable system of internal policies
and procedures and has an adequate
system of internal controls to prevent
misuse of information about customer
orders by those responsible for entering
such proprietary orders. The
Commission believes that the proposed
interpretation is substantially similar to
a rule of the New York Stock Exchange,
Inc. interpreting its trading ahead
14 15
E:\FR\FM\28NON1.SGM
U.S.C. 78f(b)(5).
28NON1
71354
Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Notices
rules,15 and that such proposed
interpretation raises no new issues or
regulatory concerns.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,16 that the
proposed rule change (File No. SR–
NSX–2005–06) and Amendment Nos. 1
and 2, thereto be, and hereby are,
approved.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.17
Jonathan G. Katz,
Secretary.
[FR Doc. E5–6562 Filed 11–25–05; 8:45 am]
BILLING CODE 8010–01–P
rule change (‘‘Amendment No. 1’’).3 On
August 12, 2005, the NYSE filed
Amendment No. 2 to the proposed rule
change (‘‘Amendment No. 2’’).4 The
proposed rule change was published for
comment in the Federal Register on
August 22, 2005.5 The Commission
received two comments on the proposal,
as amended.6 On October 31, 2005, the
Exchange filed a response to the
comment letters,7 and on the same day
the Exchange filed Amendment No. 3 to
the proposed rule change (‘‘Amendment
No. 3’’).8 This order approves the
proposed rule change, as amended by
Amendments Nos. 1 and 2, grants
accelerated approval to Amendment No.
3 to the proposed rule change, and
solicits comments from interested
persons on Amendment No. 3.
II. Description of the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
A. Description of the Proposal
[Release No. 34–52780; File No. SR–NYSE–
2004–64]
Self-Regulatory Organizations; New
York Stock Exchange, Inc.; Order
Approving Proposed Rule Change and
Amendments Nos. 1 and 2 Thereto and
Notice of Filing and Order Granting
Accelerated Approval to Amendment
No. 3 to the Proposed Rule Change
Relating to Exchange Rule 342
(‘‘Offices—Approval, Supervision and
Control’’)
November 16, 2005.
I. Introduction
On November 2, 2004, the New York
Stock Exchange, Inc. (‘‘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
amending NYSE Rule 342.30 (‘‘Annual
Reports’’) primarily to require each
member organization (‘‘Member
Organization’’) and each member not
associated with a member organization
(‘‘Member’’) to file with the Exchange
annual reports and to file a yearly
statement confirming the adequacy of
their compliance processes and
procedures. On July 11, 2005, the NYSE
filed Amendment No. 1 to the proposed
15 See Securities Exchange Act Release No. 44139
(March 30, 2001), 66 FR 18339 (April 6, 2001)
(approving proposed rule change SR–NYSE–94–34,
including Supplementary Material .10 of NYSE
Rule 92).
16 15 U.S.C. 78s(b)(2).
17 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
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15:28 Nov 25, 2005
Jkt 208001
1. Background
NYSE Rule 342 requires supervision
of the offices, departments and business
activities of Members and Member
Organizations. NYSE Rule 342.30,
which was adopted on May 27, 1988,
requires Members and Member
Organizations to prepare an Annual
Report addressing specified compliance
issues by April 1 of each year.
Currently, Member Organizations are
required to submit this report only to
their Chief Executive Officer (‘‘CEO’’) or
managing partner and Members are
required only to prepare, but are not
required to submit, the report.
3 In Amendment No. 1, which supplemented the
original filing, the Exchange added its proposed
Interpretive Handbook Interpretations 342.30(d)/01
and 342.30(e)/01 for purposes of clarifying issues
related to the designation of a Chief Compliance
Officer and the Annual Certification, respectively.
The text of interpretations 342.30(d)/01 and
342.30(e)/01 is available on the NYSE’s Web site
(https://www.NYSE.com), at the NYSE’s principal
office, and at the Commission’s Public Reference
Room.
4 In Amendment No. 2, which supplemented the
original filing, the Exchange modified proposed
interpretation 342.30(e)/01 in order to clarify the
obligations of Members and Member Organizations
in the preparation of annual certifications.
5 See Exchange Act Release No. 52259 (Aug. 15,
2005), 70 FR 48997 (Aug. 22, 2005) (the ‘‘Notice’’).
6 See letter from Scott C. Kursman, Senior Vice
President & Chief Counsel for Global Compliance,
Lehman Brothers, Inc. (‘‘Lehman Letter’’), dated
September 14, 2005, and letter from John Polanin,
Jr., Chairman, SIA Self-Regulation and Supervisory
Practices Committee, dated Sept. 14, 2005 (‘‘SIA
Letter’’).
7 See letter from Mary Yeager, Assistant Secretary,
NYSE, to Catherine McGuire, Chief Counsel,
Division of Market Regulation, Commission, dated
October 31, 2005.
8 In Amendment No. 3, which supplemented the
original filing, the Exchange amended the proposed
rule text to respond to certain of the commenters’
concerns.
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2. Provisions of the Proposed Rule
Change
The proposed rule change makes the
following changes relating to the
Annual Reports:
• The Annual Reports must be filed
with the Exchange by April 1 of each
year.
• The anti-money laundering
compliance programs required by
Exchange Rule 445 9 have been added to
the list of specific areas of compliance
that must be discussed in the Annual
Reports.
• Member Organizations must
designate a principal officer or general
partner as Chief Compliance Officer
(‘‘CCO’’).10
• Each Member, and the CEO (or
equivalent officer) of each Member
Organization, must submit a
certification attesting to the adequacy of
their organization’s compliance policies
and procedures.11
3. Regulatory Purpose of Proposed Rule
Change’s Provisions
(a) Submission of Annual Reports to
the Exchange.
Filing the Annual Reports with the
Exchange will provide timely
information about the compliance
efforts of Members and Member
Organizations, thereby strengthening
and making more efficient the
Exchange’s regulatory oversight, and
facilitating the required annual
certifications (see below).
Because submission of the Annual
Reports to the Exchange was previously
not required, the reports were typically
provided to the Exchange at the time of,
or in connection with, examinations of
Member Organizations and Members.12
Consequently, the Exchange did not
always receive important information in
a timely, efficient manner. Providing the
reports to Exchange staff at annual
intervals will afford the Exchange a
timely picture of the Members’ and
Member Organizations’ compliance
issues from the preceding year, a tool for
planning surveillance and
examinations, and more comprehensive
information for evaluation of
9 NYSE Rule 445 requires Members and Member
Organizations to develop and implement written
anti-money laundering programs consistent with
the Bank Secrecy Act (31 U.S.C. 5311, et seq. and
31 CFR 103.120 thereunder).
10 The Commission recently approved a similar
requirement in NASD’s Rule 3013. Securities
Exchange Act Release No. 50347 (September 10,
2004), 69 FR 56107 (September 17, 2004) (SR–
NASD–2003–176).
11 The Commission recently approved a similar
requirement in NASD’s new Rule 3013. See id.
12 Some Member Organizations already submit
the Annual Reports to the Exchange and/or make
them available to Exchange examiners.
E:\FR\FM\28NON1.SGM
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]]>Agencies
[Federal Register Volume 70, Number 227 (Monday, November 28, 2005)]
[Notices]
[Pages 71352-71354]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-6562]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-52807; File No. SR-NSX-2005-06]
Self-Regulatory Organizations; National Stock Exchange; Order
Approving Proposed Rule Change, and Amendment Nos. 1 and 2 Thereto, To
Amend the Exchange's Customer Priority Rule To Require Designated
Dealers To Implement and Maintain Automated Compliance Systems
November 18, 2005.
I. Introduction
On July 19, 2005, the National Stock ExchangeSM (``NSX''
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
[[Page 71353]]
19b-4 thereunder,\2\ a proposed rule change to amend the text of NSX
Rule 12.6 (``NSX's Customer Priority Rule'') to require the Exchange's
Designated Dealers \3\ to implement and maintain automated systems
reasonably designed to ensure compliance with the NSX Customer Priority
Rule.\4\ On October 5, 2005, the Exchange filed Amendment No. 1 to the
proposed rule change. On October 7, 2005, the Exchange filed Amendment
No. 2 to the proposed rule change. Notice of the proposed rule change,
as amended, was published for comment in the Federal Register on
October 18, 2005.\5\ No comments were received regarding the proposal.
This order approves the proposed rule change, as amended.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ NSX Rule 5.5(a) defines ``Designated Dealer'' as a
specialist.
\4\ The Exchange filed this proposed rule change, in part,
pursuant to the provisions of the Commission's Order Instituting
Administrative and Cease-And-Desist Proceedings Pursuant to Sections
19(b) and 21C of the Securities Exchange Act of 1934, Making
Findings, and Imposing Sanctions entered May 19, 2005. See In the
Matter of National Stock Exchange and David Colker, Securities
Exchange Act Release No. 51715 (May 19, 2005) (``Administrative
Order''). In Section III.F.6. of the Administrative Order, NSX
undertook to file proposed rule changes to require its designated
dealers to implement system enhancements, to the extent practicable,
such that when a dealer is in the process of executing a proprietary
trade while in possession of a customer order that could trade in
place of some or all of the dealer's side of the trade, the
designated dealer's system will systemically allocate the execution
to the customer's order unless the trade meets a specified exemption
in NSX's rules. Pursuant to the undertaking, the proposed rule
changes must also require that the required system enhancements
cannot be disabled by NSX's designated dealers.
\5\ See Securities Exchange Act Release No. 52576 (October 7,
2005), 70 FR 60594 (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
The NSX Customer Priority Rule, currently provides, in part, that
no member of the Exchange shall: (i) Personally buy or initiate the
purchase of any security traded on the Exchange for its own account or
for any account in which it or any associated person of the member is
directly or indirectly interested while such member holds or has
knowledge that any person associated with it holds an unexecuted market
or limit price order to buy such security in the unit of trading for a
customer, or (ii) sell or initiate the sale of any such security for
any such account while it personally holds or has knowledge that any
person associated with it holds an unexecuted market or limit price
order to sell such security in the unit of trading for a customer.\6\
---------------------------------------------------------------------------
\6\ See NSX Rule 12.6(a).
---------------------------------------------------------------------------
NSX proposes to amend the text of the NSX Customer Priority Rule to
require the Exchange's Designated Dealers to implement and maintain
automated systems reasonably designed to ensure compliance with the NSX
Customer Priority Rule.\7\ The proposed rule change would also prohibit
Designated Dealers from disabling or disengaging their automated
systems, except under limited circumstances.\8\ Furthermore, the
proposed rule would make clear that, if a Designated Dealer holds for
execution on the Exchange a customer buy order and a customer sell
order that can be crossed, the Designated Dealer's automated system
shall systemically cross them.\9\
---------------------------------------------------------------------------
\7\ See Proposed NSX Rule 12.6(e).
\8\ Id.
\9\ See Proposed Interpretations and Policies .01 to NSX Rule
12.6.
---------------------------------------------------------------------------
NSX also proposes to provide that, for purposes of Rule 12.6, a
member or any associated person of a member responsible for entering
orders for its own account or any account in which it is directly or
indirectly interested shall be presumed to have knowledge of a
particular customer order.\10\ The proposed interpretation would also
provide that such presumption can be rebutted by adequate evidence that
effectively demonstrates, to the Exchange's satisfaction, that the
member has implemented a reasonable system of internal policies and
procedures and has as adequate system of internal controls to prevent
the misuse of information about customer orders by those responsible
for entering such proprietary orders.\11\
---------------------------------------------------------------------------
\10\ See Proposed Interpretations and Policies .03 to NSX Rule
12.6.
\11\ Id.
---------------------------------------------------------------------------
III. Discussion and Commission Findings
The Commission has reviewed the proposed rule change, as amended,
and finds that it is consistent with the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\12\ Specifically, the Commission finds that the proposed rule
change, as amended, furthers the objectives of Section 6(b)(1) \13\ of
the Act, which requires the Exchange to be so organized and have the
capacity to be able to carry out the purposes of the Act and to comply,
and to enforce compliance by its members, with the Act and the rules of
the Exchange. In addition, the Commission finds that the proposed rule
change, as amended, is consistent with Section 6(b)(5) of the Act,\14\
which requires, among other things, that the rules of a national
securities exchange be 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.
---------------------------------------------------------------------------
\12\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\13\ 15 U.S.C. 78f(b)(1).
\14\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Currently, NSX Rule 12.6 prohibits an NSX member from trading ahead
of its customers' orders. Customer order protection ensures that
members consider the orders of their customers when executing their own
orders and thus prevents the isolation of customer orders that might
otherwise occur if a member were freely able to trade ahead of its
customers' orders. The Commission believes that the proposed rule
change should enhance investor confidence by helping to improve the
quality of executions for customers. By ensuring a customer order's
priority over the member's proprietary trading, more trade volume
should be available to be matched with the customer's order, resulting
in quicker and more frequent executions for customers. Specifically,
the Commission believes that proposed NSX Rule 12.6(e) and
Interpretations and Policies .01 to NSX Rule 12.6 should enhance the
customer protections already provided by NSX Rule 12.6 by requiring NSX
specialists to implement and maintain automated systems reasonably
designed to ensure compliance with NSX Rule 12.6 and requiring that if
an NSX specialist is able to cross two customer orders, such
specialist's automated system shall systemically cross such order
without the specialist interposing itself as a dealer.
Proposed Interpretations and Policies .03 to NSX Rule 12.6 would
define what constitutes knowledge for purposes of NSX Rule 12.6 to
provide that a member or any associated person of a member responsible
for entering orders for its own account or any account in which it is
directly or indirectly interested shall be presumed to have knowledge
of a particular unexecuted customer order and would provide that such
knowledge can be rebutted by adequate evidence that the member has
implemented a reasonable system of internal policies and procedures and
has an adequate system of internal controls to prevent misuse of
information about customer orders by those responsible for entering
such proprietary orders. The Commission believes that the proposed
interpretation is substantially similar to a rule of the New York Stock
Exchange, Inc. interpreting its trading ahead
[[Page 71354]]
rules,\15\ and that such proposed interpretation raises no new issues
or regulatory concerns.
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\15\ See Securities Exchange Act Release No. 44139 (March 30,
2001), 66 FR 18339 (April 6, 2001) (approving proposed rule change
SR-NYSE-94-34, including Supplementary Material .10 of NYSE Rule
92).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\16\ that the proposed rule change (File No. SR-NSX-2005-06) and
Amendment Nos. 1 and 2, thereto be, and hereby are, approved.
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\16\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. E5-6562 Filed 11-25-05; 8:45 am]
BILLING CODE 8010-01-P
