Self-Regulatory Organizations; New York Stock Exchange, Inc.; Notice of Filing of a Proposed Rule Change and Amendment Nos. 1 and 2 Thereto Relating to Amendments to the Exchange's Allocation Policy and Procedures (NYSE Rules 103A, 103B, 123E and 476A), 18791-18797 [E6-5368]

Download as PDF Federal Register / Vol. 71, No. 70 / Wednesday, April 12, 2006 / Notices approved the Nasdaq Exchange’s registration as a national securities exchange on January 13, 2006.7 As noted in the Nasdaq Exchange Order, once the Nasdaq Exchange begins operations as a national securities exchange, a security will be considered for listing on the Nasdaq Exchange only of it is registered pursuant to Section 12(b) of the Act or is subject to an exemption. Further, in the Nasdaq Exchange Order, the Commission noted that Nasdaq had notified Commission staff that it intended to request appropriate regulatory relief to facilitate the efficient registration of its issuers’ securities under Section 12(b) of the Act. Nasdaq also represented that it would seek an exemption for certain issuers that are currently not required to be registered under Section 12(g) of the Act.8 The Commission noted in the Nasdaq Exchange Order that it expected Nasdaq to provide notice to the public and its issuers of any request and provide issuers with an opportunity to opt-out of the process. Nasdaq filed this proposed rule change to give it the authority to act on behalf of its issuers and to provide notice of its plans. It is therefore ordered, pursuant to Section 19(b)(2) of the Act,9 that the proposed rule change (SR–NASD–2006– 028) be, and hereby is, approved. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.10 Nancy M. Morris, Secretary. [FR Doc. E6–5364 Filed 4–11–06; 8:45 am] BILLING CODE 8010–01–P [Release No. 34–53602; File No. SR-NYSE– 2005–40] Self-Regulatory Organizations; New York Stock Exchange, Inc.; Notice of Filing of a Proposed Rule Change and Amendment Nos. 1 and 2 Thereto Relating to Amendments to the Exchange’s Allocation Policy and Procedures (NYSE Rules 103A, 103B, 123E and 476A) (https://www.nyse.com), at the Exchange’s Office of the Secretary, and at the Commission’s Public Reference Room. The text of the proposed rule change is also available on the Commission’s Web site (https:// www.sec.gov/rules/sro.shtml). II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change SECURITIES AND EXCHANGE COMMISSION April 5, 2006. 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 June 6, 2005, New York Stock Exchange, Inc. (‘‘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 prepared by NYSE. NYSE filed Amendment No. 1 to the proposed rule change on October 28, 2005.3 NYSE filed Amendment No. 2 to the proposed rule change on February 9, 2006.4 The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange is proposing to amend NYSE Rules 103A, 103B, 123E and 476A with respect to the manner in which securities are allocated to specialist organizations. The text of the proposed rule change is available on the Exchange’s Web site 1 15 U.S.C. 78s(b)(1). CFR 240.19b-4. 3 In Amendment No. 1, the Exchange clarified certain aspects of the purpose section and rule text of the proposed rule change. Amendment No. 1 clarified that certain of the proposed amendments to NYSE Rules 103A, 103B and 123E are organizational changes that are intended to provide clarity with respect to the operation of the allocation policy and procedures. Amendment No. 1 also further explained the Exchange’s decision to move from a subjective standard in the allocation process to an objective standard. Amendment No. 1 supersedes the original filing in its entirety. 4 In Amendment No. 2, the Exchange further clarified certain aspects of the purpose section and rule text of the proposed rule change. Amendment No. 2 clarified that the proposed amendments to NYSE Rule 103B includes a requirement that specialist firms describe in their blanket allocation applications any contacts they, or any individual acting on their behalf, have had with any employee of the listing company, or any individual acting on behalf of that company, with regard to its prospective listing on the Exchange. In addition, Amendment No. 2 further explained the data that will be provided to the Allocation Committee (‘‘Committee’’). Amendment No. 2 supersedes Amendment No. 1 in its entirety. wwhite on PROD1PC61 with NOTICES 2 17 7 See Securities Exchange Act Release No. 53128 (January 13, 2006), 71 FR 3550 (January 23, 2006) (Findings, Opinion, and Order of the Commission approving the application of the Nasdaq Stock Market LLC for registration as a national securities exchange) (‘‘Nasdaq Exchange Order’’). The Nasdaq Exchange may not operate as a national securities exchange until certain conditions have been satisfied. See id. 8 15 U.S.C. 78l(g). 9 15 U.S.C. 78s(b)(2). 10 17 CFR 200.30–3(a)(12). VerDate Aug<31>2005 17:42 Apr 11, 2006 Jkt 208001 18791 PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 In its filing with the Commission, the Exchange included statements concerning the purpose of, and basis for, the proposed rule change, as amended, and discussed any comments it received on the proposed rule change, as amended. 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 The Exchange proposes to amend NYSE Rules 103A, 103B, 123E and 476A with respect to the manner in which securities are allocated to specialist organizations on the Exchange. The Exchange proposes to amend its allocation policy and procedures by placing greater emphasis on performance measures that objectively assess specialist market-making in order to provide more meaningful information for the Committee’s consideration. The Exchange represents that this would be accomplished by eliminating the Specialist Performance Evaluation Questionnaire (‘‘SPEQ’’), a subjective tool that has become less meaningful as a result of the sharp reduction in the number of specialist firms, and replacing it with a series of objective measures that compare specialist performance against defined standards based on actual trading data. Unlike the SPEQ, which provided tier rankings for firms only, the objective performance measures will permit comparisons by stock, panel, and post, as well as by firm, and thus, will more clearly distinguish between strong and weak performance. In addition, the objective performance measures will evaluate individual specialist performance as well as performance of the entire firm. The SPEQ is limited to an evaluation of firm-wide performance. The use of these measures will also enable specialist E:\FR\FM\12APN1.SGM 12APN1 18792 Federal Register / Vol. 71, No. 70 / Wednesday, April 12, 2006 / Notices firms to better manage and more easily improve performance. The objective performance measures will improve the allocation process by preventing specialist firms from proposing sub-par performers as the designated specialist for new listings and may serve to disqualify entire specialist firms from the allocation process for a period of time based on continued poor performance. In this way, the new measures will serve as a potent incentive to improved marketmaking and encourage superior specialist performance. The Exchange is also proposing additional changes to the allocation policy (NYSE Rule 103B) and related changes to the rules governing performance improvement actions (NYSE Rule 103A), the issuance of summary fines (NYSE Rule 476A), and specialist combination review policy (NYSE Rule 123E).5 wwhite on PROD1PC61 with NOTICES Allocation Policy and Procedures NYSE Rule 103B contains the Exchange’s requirements with respect to allocation of securities to specialist member organizations (‘‘Allocation Policy’’). The Exchange represents that the intent of the Allocation Policy is: (1) To ensure that securities are allocated in an equitable and fair manner and that all specialist units have a fair opportunity for allocations based on established criteria and procedures; (2) to provide an incentive for ongoing enhancement of performance by specialist units; (3) to provide the best possible match between the specialist unit and security; and (4) to contribute to the strength of the specialist system. The Exchange represents that decisions as to the allocation of securities on the Exchange are made by the Committee. This Committee is comprised of market professionals who use their judgment to make allocation decisions based on the allocation criteria specified in the Allocation 5 See Securities Exchange Act Release No. 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006) (order approving SR-NYSE–2005–77) (‘‘Merger Release’’). The Merger Release contains conforming language changes to reflect the new entities that will exist as a result of the Exchange’s merger with Archipelago Holdings, Inc. In addition, the Merger Release amended NYSE Rule 103B, with respect to the allocation of the proposed new NYSE Group stock to: (i) Give NYSE Group the right to determine the number and identity of specialist firms that will be included in the group from which it shall choose its specialist, provided the group consists of at least four specialist firms; and (ii) provide NYSE Group with the same material with respect to each specialist firm applicant as would have been reviewed by the Committee in allocating other securities. Telephone conversation between Deanna Logan, Principal Rule Counsel, NYSE and David Michehl, Attorney, Division of Market Regulation (‘‘Division’’), Commission on February 28, 2006. VerDate Aug<31>2005 17:42 Apr 11, 2006 Jkt 208001 Policy. The current allocation criteria includes the SPEQ, objective performance measures, listing company input, allocations received, capital, disciplinary history, and the Committee’s professional judgment. Elimination of SPEQ The Exchange states that the SPEQ is a quarterly survey on specialist performance completed by Floor Broker members of the Exchange. The SPEQ requires Floor Brokers to rate and provide written comments on the performance of specialist firms with whom they deal regularly on the Floor. Floor Broker evaluations of specialist firm performance focuses on five functional areas—dealer, service, competitiveness, communications and administrative. Floor Brokers rate specialist firms on a 0% to 100% scale, in ten-point increments, that reflect the percentage of the time that the broker feels the specialist firm engaged in the described behavior. An evaluation of 100% is defined as ‘‘always’’ and an evaluation of 0% is defined as ‘‘never’’. The Exchange represents that the SPEQ process uses a relative scoring methodology that combines Floor Broker scores for any one specialist firm to determine each firm’s overall performance and performance in each of the five functional areas. The scores are then arrayed from highest to lowest, and the specialist firms receive a ranking for the overall score and within each function. Also, a range of ranks is determined that identifies where a firm stood in relation to other units whose scores were not statistically different. From these rankings, the specialist firms are aligned into tiers, up to a maximum of four, with each tier containing those specialist firms with similar rankings. The Committee receives information on SPEQ results only as to the tier classifications. Although SPEQ has been an important mechanism for evaluation of specialist performance for both allocation and performance improvement action purposes, the Exchange represents that certain weaknesses in its use as an assessment tool have become apparent. For example, SPEQ evaluations are subjective, with ratings based on personal experiences rather than comparisons with accepted objective standards. Further, except for the written comments, which are not incorporated into the formula for SPEQ rankings, SPEQ does not focus on market-making by individual specialists. Importantly, as the number of specialist firms has decreased, SPEQ tier classifications have become tightly PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 clustered with statistically insignificant differences among the firms.6 Also, SPEQ participants recognize the limitations of SPEQ and have requested a more meaningful process for evaluating specialist performance. For these reasons, the Exchange proposes eliminating SPEQ and replacing it with the objective measures described below. The Exchange represents that by addressing the deficiencies of SPEQ in today’s environment, these measures will enable a more meaningful comparison of specialist performance at all levels, based on truly objective criteria. Expansion of the Use of Objective Measures The Exchange also proposes to add objective measures designed to evaluate market quality using pre-determined standards of performance based on actual trading data. The measures will rate the performance of stocks, individual specialists and specialist firms overall. Data will be provided to specialists on a daily basis, and monthly and quarterly to the Committee. In addition, the performance information derived from the objective measures will be made available to listing companies to aid in their decision as to the choice of a specialist firm. The Exchange proposes to add two new objective measures of specialist performance and to change an existing measure. The Exchange represents that one new measure is price continuity. Price continuity measures the absolute value of the price change, if any, from one trade to the next, in the same stock. Currently, price continuity is part of the existing near neighbor analysis,7 which is among the information provided to specialists and the Committee. However, current continuity percentages are too tightly clustered because of tighter markets, making it difficult to derive useful data for comparison purposes. In addition, there are no trading standards specifically related to price continuity against which to measure performance. The Exchange proposes making price continuity an independent measure and has 6 The Exchange states that there are currently seven firms registered as specialists in equity securities on the NYSE. As recently as 2000, there were 25 specialist firms. 7 An explanation of the near neighbor performance measure was given in SR-NYSE–1995– 05. See Securities Exchange Act Release No. 35927 (June 30, 1995), 60 FR 35764 (July 11, 1995); See also Securities Exchange Act Release No. 38158 (January 10, 1997), 62 FR 2704 (January 17, 1997) (making permanent the near neighbor pilot). Telephone conversation between Deanna Logan, Principal Rule Counsel, NYSE and David Michehl, Attorney, Division, Commission on February 28, 2006. E:\FR\FM\12APN1.SGM 12APN1 Federal Register / Vol. 71, No. 70 / Wednesday, April 12, 2006 / Notices wwhite on PROD1PC61 with NOTICES developed appropriate benchmarks and standards to enable an objective comparison of each individual specialist’s market-making as it relates to price continuity. The Exchange has also developed a system to identify acceptable and unacceptable performance for this measure. The second new objective measure is depth. Depth refers to the price movement of a stock during a sequence of transactions totaling a particular volume. Currently, depth is measured over 3,000-share volume sequences and is also part of the near neighbor analysis. The Exchange is proposing to make depth an independent measure 8 and to add three new volume sequences—5,000, 10,000 and 25,000 shares—and has developed appropriate benchmarks and standards for this measure as well. According to the Exchange, the benchmarks and standards developed for continuity and depth have been reviewed with two university professors from the Massachusetts Institute of Technology, with whom the Exchange consults on matters relating to allocation measures. For each measure, eligible securities 9 are grouped by price and non-block volume into categories. Eligibility requirements for securities include minimum average price, volume, and number of trades.10 Each category has two performance benchmarks based on actual trading data. Each benchmark has upper and lower performance ranges. Each trading day, the performance of eligible securities will be compared with the upper and lower ranges for the two benchmarks used for each measure and assigned a classification of upper, middle or lower. Upper classifications are worth two points, middle classifications are worth one point and lower classifications are worth negative one point. The points earned for each of the two performance benchmarks within each measure will be combined to 8 Telephone conversation between Deanna Logan, Principal Rule Counsel, NYSE and David Michehl, Attorney, Division, Commission on March 2, 2006. 9 Eligible securities are all Exchange-listed domestic common stocks. 10 An eligible security will be evaluated on any day when any of the following conditions exists: (a) The security’s average trading price is between $1 and $200; (b) the security’s Exchange non-block volume (trades under 25,000 shares) is at least 100 shares; or (c) the security had at least five depth sequences on the Exchange (for depth only) or at least five Exchange transactions (for continuity only); (d) an individual security’s overall quarterly depth and continuity score will be calculated only if it had daily scores on more than 31 days in the quarter. VerDate Aug<31>2005 17:42 Apr 11, 2006 Jkt 208001 determine an overall score for the relevant measure. The overall scores for each measure are combined to determine the security’s daily score. Scores range from four points (for upper classifications in both continuity and depth) to negative two points (for lower classifications in both continuity and depth). Daily scores will be provided to specialist firms at the end of each day, monthly scores at the end of each month and quarterly scores at the end of each quarter.11 The Committee will be provided with the monthly scores for each specialist firm. In addition, the Exchange will provide the Committee with average daily non-block volume and price activity and average continuity and depth scores for each of the maximum of twenty most active stocks 12 handled by the individual who is identified by his/her firm to be the designated specialist for the stock of the listing company. The information will include trading data for the current month through the week preceding the distribution of the security data sheet to the specialists plus the three preceding calendar months. The existing measure to be changed is SuperDOT turnaround for orders received by the specialist. Currently, this measure is based on the percentage of total post-opening market orders that are either executed or ‘‘stopped’’ within 60 seconds of the time they are received by the specialist. The Exchange proposes tightening this benchmark to 30 seconds to better reflect actual trading conditions and to focus performance on the individual post and panels rather than the firm overall performance.13 11 Telephone conversation between Deanna Logan, Principal Rule Counsel, NYSE and David Michehl, Attorney, Division, Commission on March 2, 2006. 12 The Exchange represents that the average daily non-block volume is generally determined using data on the total number of shares traded during the most recent prior three months divided by the number of trading days in that period. The number of stocks is determined by creating a list of stocks traded most frequently by a specialist, ranked by average daily non-block volume. If the list contains less than twenty stocks, information on all stocks contained in the list is provided to the Committee. If the list contains more than twenty stocks, information on only the twenty most active stocks contained in the list is provided to the Committee. Telephone conversation between Deanna Logan, Principal Rule Counsel, NYSE and David Michehl, Attorney, Division, Commission on April 4, 2006. 13 The Exchange intends to review the continued applicability of this measure after the implementation of the NYSE HYBRID MARKETsm. See Securities Exchange Act Release No. 53539 (March 22, 2006), 71 FR 16353 (March 31, 2006) (order approving the NYSE HYBRID MARKETsm). PO 00000 Frm 00091 Fmt 4703 Sfmt 4703 18793 The Exchange believes that the use of these objective measures will provide for a more meaningful comparison of specialist performance and will promote better market-making as a result of the availability of more objective and detailed information and competition among the firms for allocations. Unlike the subjective criteria, which provided tier rankings for firms only, the objective performance measures will permit comparisons by stock, panel, and post, as well as by firm, and thus, will more clearly distinguish between strong and weak performance. The use of these measures will also enable specialist firms to better manage and more easily improve performance. Although the Exchange believes that the objective measures provide the more meaningful comparison, it is also acknowledged that subjective input from the Floor brokers and off-Floor customers with direct knowledge of the performance of specialist firms and individual specialists, may serve a useful purpose in the evaluation process. To this end, the proposed rule change includes a provision for providing subjective information to the Committee. The Exchange continues to develop the specific format of how the subjective information will be provided to the Committee, in consultation with constituent committees 14 that have previously provided feedback on the allocation process. In addition, the Exchange proposes a number of other changes to NYSE Rule 103B. In summary, these changes are as follows: A. As noted above, the Committee will receive performance information regarding both the specialist firm and the individual designated by the firm to handle the security should the firm receive the allocation. Currently, the Committee only receives performance information with respect to the firm. B. In order to provide an incentive to specialist firms to ensure quality performance, provisions will be added that poor performance may result in the inability of an individual specialist or a specialist firm from applying for or receiving allocations, as follows: 14 The Exchange represents that the constituent committees consist of the Institutional Traders Advisory Committee, the Upstairs Traders Advisory Committee, the Exchange Traders Advisory Committee, the Market Performance Committee and the proposed Hybrid Performance Committee. Telephone conversation between Deanna Logan, Principal Rule Counsel, NYSE and David Michehl, Attorney, Division, Commission on March 2, 2006. E:\FR\FM\12APN1.SGM 12APN1 18794 Federal Register / Vol. 71, No. 70 / Wednesday, April 12, 2006 / Notices SPECIALIST FIRM Criteria Duration of criteria Period of ineligibility Overall depth or continuity score below 1.90 and more than one standard deviation below average score for all specialist firms. Same as above ........................................................................................ Same as above ........................................................................................ Overall 30-second DOT turnaround percentage below 90% .................. Two panels at same post with 30-second DOT turnaround percentages below 75%. Two consecutive months ............... One month. Three consecutive months ............ Three out of six months ................ One month .................................... One month .................................... Two Two One One months. months. month. month. INDIVIDUAL SPECIALIST Criteria Duration of criteria Period of ineligibility Any of the assigned securities that the individual specialist handled most frequently during a month receive overall a depth or continuity score below 0.5015. Same as above ........................................................................................ Panel with 30-second DOT turnaround percentage below 75% ............. Three consecutive months ............ Two months. Three out of five months ............... One month .................................... Two months. One month. 15 Telephone conversation between Deanna Logan, Principal Rule Counsel, NYSE and David Michehl, Attorney, Division, Commission on April 4, 2006. C. The composition of the ninemember Committee will be changed, as illustrated in the chart below, in order to equalize representation on the Allocation Panel and the Committee and to give non-Floor constituents a greater role in the allocation process. Committee member type Current rule Proposed Floor Broker ........................................................ 3 Governors (1 may be Independent) ............. 4 At least 1 Floor Governor, Executive Floor Official or Senior Floor Official. Allied Member .................................................... 3 Others (1 must be Independent). 2 ....................................................................... Institutional ......................................................... Chairperson ........................................................ 1. Floor Broker ..................................................... ...................................................................... D. Each standing Committee will be selected one month before its term commences and will elect its chairperson at that time. Currently, the rule provides that the chairperson is elected two months before his/her term starts. E. The requirement that the Committee chairperson be approved by the Quality of Markets Committee (‘‘QOM’’) of the Exchange Board of Directors will be eliminated. As a result of corporate governance changes in 4 At least 1 Allied Member and at least 1 Institutional Representative. 1 Floor Broker or Allied Member/Institutional Representative. In alternating terms, an additional Floor Broker or Allied Member/Institutional Representative will be chosen for the Committee. The Committee members will select a chairperson from the dominant group on the Committee that term. No reappointments as chairperson until all members of Allocation Panel in same category have served a term as chairperson. December 2003, the Exchange’s Board of Directors no longer has an active QOM. F. In order to encourage more participation from various constituent representatives on the Committee, the term of service for Committee members will be modified as follows: Proposed terms of service 4-month term ............................................................................................ Terms staggered so that every 2 months, 4–5 members rotate off ........ Reappointment possible, provided a minimum of 2 months have passed since expiration of term. wwhite on PROD1PC61 with NOTICES Current terms of service 2-month term. No staggered terms. No reappointment until all members of Allocation Panel in same category have served a term. G. Provide standing Committee with quarterly information identifying the individuals designated in each allocation application and the number VerDate Aug<31>2005 20:05 Apr 11, 2006 Jkt 208001 of allocations they received, to provide informational continuity among Committees. PO 00000 Frm 00092 Fmt 4703 Sfmt 4703 H. As a mechanism to facilitate greater efficiency in the allocation process, the Committee quorum requirement is modified as follows: E:\FR\FM\12APN1.SGM 12APN1 Federal Register / Vol. 71, No. 70 / Wednesday, April 12, 2006 / Notices Committee member type Current rule Floor Broker ........................................................ Allied Member .................................................... Institutional ......................................................... 6, at least 2 Governors .................................... 1. None required. I. Increase the number of Allocation Panel members from 69+ to 75+ to encompass the need for added allied Proposed member and institutional representation on the Committee. Panel member type Floor Broker ........................................................ Floor Broker Governors ...................................... Sr./Exec. Floor Officials ...................................... Allied Members ................................................... Institutional ......................................................... 28 ..................................................................... 10 ..................................................................... 5 (minimum) ..................................................... 15 including those on MPC16 .......................... 11 including those on MPC ............................. Any 7 members of the standing Committee. J. Modify the composition of the Allocation Panel: Current rule 16 MPC Proposed 20 10 5 (minimum). 20 including those on MPC. 20 including those on MPC. stands for Market Performance Committee. K. In order to make the process more efficient, the number of specialist firms selected for the interview pool under Option 2 of the Allocation Policy will be modified to four firms, including one firm designated as instrumental by the listing company. Currently, the rule provides that the pool may be composed of three, four or five firms. L. Redefine the ‘‘quiet period’’ for specialist contact with a listing company so that it commences solely with the date that allocation applications are solicited for that issuer. M. Extend the requirement that the specialist firm’s designated specialist remain the primary specialist in an allocated security from six months to one year unless the listed company agrees to a change, in which case the specialist must provide written notice of the change and the listed company’s agreement to the Committee and Market Surveillance. N. Extend the ‘‘Allocation Sunset Policy’’ for initial public offerings (‘‘IPOs’’) from three months to six months and for Exchange traded funds (‘‘ETFs’’) from three months to one year. Updated information on objective performance measures and disciplinary data will be provided to companies after three months (IPOs) and six months (ETFs). O. Provide the Committee with more disciplinary history: Current rule Proposed Provided as to firms only .......................................................................... Informal discipline (Summary Fines and Admonition and Education letters) is reported as follows: market maintenance—12 months from time of issuance; non-market maintenance—6 months from time of issuance. Significant pending Enforcement matters once action is authorized ....... Hearing Panel decisions, for 12 months after they become final ............ wwhite on PROD1PC61 with NOTICES 18795 P. Eliminate the provision that NYSE Rule 103A performance improvement action criteria (timeliness of openings, SuperDOTreg; turnaround, etc.) be reported to the Committee. Currently, the rule requires this information to be reported as a ‘‘pass’’ or ‘‘fail’’. The revised system will provide the Committee with more detailed information. Q. In order to expedite the process, specialist firms will be required to designate an individual specialist for each listing, regardless of whether they apply for the allocation. Included in this requirement is the specialist firm’s obligation to describe any contacts they, or any individual acting on their behalf, have had with any employee of the listing company, or any individual acting on behalf of that company, with regard to its prospective listing on the Exchange. This will enable staff to produce individual performance data in VerDate Aug<31>2005 17:42 Apr 11, 2006 Jkt 208001 Provided for designated specialist and firm. All informal discipline for 12 months from time of issuance. Same. Final Hearing Panel decisions, for three years after they become final. a timely manner for firms that may be selected for interview pools on a ‘‘without prejudice’’ basis. R. Provide the listing company with the same objective performance measure information the Committee considered, with respect to the members of its interview pool. In addition, as noted in ‘‘N’’ and ‘‘T’’ herein, provide the listing company with disciplinary history for the firms in the interview pool and their designated specialists. S. Preclude specialists, and anyone acting in their behalf, from offering to pay for or subsidize the cost of services or other incentives provided to a listing company in whole or in part by third parties in order to avoid even the semblance of impropriety. T. Provide that interview pools for the allocation of closed-end funds by the same issuer will remain operative for a nine-month period following the selection of a specialist. Any further PO 00000 Frm 00093 Fmt 4703 Sfmt 4703 closed-end fund listings from the same issuer in the nine-month period will be able to select any specialist from this group or ask for the matter to be referred to the Committee, in which case the group dissolves. The fund will be given updated objective performance and disciplinary information before making its decision. If a specialist firm/ individual is ineligible for an allocation, that firm will be dropped from the group. If an individual specialist is no longer with a firm at the time of a new allocation of a closed-end fund, the firm will be dropped from the group. U. Delete references to QOM from NYSE Rule 103B. V. Substitute the term ‘‘admonition letter’’ for ‘‘cautionary letter.’’ W. Eliminate the requirement that the Committee chair receive orientation from the QOM. X. In order to provide an incentive for ongoing enhancement of performance E:\FR\FM\12APN1.SGM 12APN1 wwhite on PROD1PC61 with NOTICES 18796 Federal Register / Vol. 71, No. 70 / Wednesday, April 12, 2006 / Notices by specialist firms, add the following to the list of factors considered by a special committee consisting of certain members of the Committee, which determines the allocation of ETFs under this policy: The extent to which a specialist organization has supported in the past, and will continue to support, the Exchange’s efforts to strengthen and expand its ETF market. Y. Allow the issuer of a structured product to participate in the specialist interview via a senior official of its subsidiary participating in the issuance of the structured product. Additionally, the following amendments are proposed to NYSE Rule 103A: A. Delete references to SPEQ. B. Provide new criteria for performance improvement actions, as follows: i. SuperDOT market order turnaround: In any case where a firm: (a) Does not turn around 90% of its DOT orders in 30 seconds or less (previously 60 seconds) during any quarter (previously two quarters) in a rolling four-quarter period; or (b) Has two panels at the same post with 30-second turnaround percentages below 75% for any one quarter. ii. Market Depth: In any case where a firm has: (a) An overall quarterly Depth score below 1.90 and more than one standard deviation below the average quarterly Depth score for all specialist firms for two consecutive quarters, or (b) An overall quarterly Depth score below 1.90 and more than one standard deviation below the average quarterly Depth score for all specialist firms for two out of four consecutive quarters, or (c) More than ten percent of its eligible stocks with overall quarterly Depth scores below 0.50 and the percent is more than one standard deviation above the Floor average for two consecutive quarters. iii. Price Continuity In any case where a firm has: (a) An overall quarterly Continuity score that is below 1.90 and more than one standard deviation below the average quarterly Continuity score for all specialist firms for two consecutive quarters, or (b) An overall quarterly Continuity score that is below 1.90 and more than one standard deviation below the average quarterly Continuity score for all specialist firms for two out of four consecutive quarters, or (c) More than ten percent of its eligible stocks with overall quarterly Continuity scores below 0.50 and the percent is more than one standard VerDate Aug<31>2005 17:42 Apr 11, 2006 Jkt 208001 deviation above the Floor average for two consecutive quarters. Further, the Exchange proposes to eliminate references to SPEQ and add references to the proposed objective measures in NYSE Rule 123E (Specialist Combination Review Policy). Finally, the Exchange proposes to add NYSE Rule 103B to the list of rules for which summary fines are available, specifically NYSE Rule 476A (Imposition of Fines for Minor Violation(s) of Rules) to allow the Exchange to sanction members’ and member organizations’ less serious violations of NYSE Rule 103B pursuant to the minor fine provisions of NYSE Rule 476A. organization consents, the Commission will: A. By order approve such proposed rule change, as amended; or B. Institute proceedings to determine whether the proposed rule change, as amended, should be disapproved. 2. Statutory Basis • 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 Number SR–NYSE–2005–40 on the subject line. The Exchange believes that the proposed rule change is consistent with the provisions of Section 6(b)(5) of the Act 17 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. The Exchange believes that the proposed rule change is consistent with these objectives in that it enables the Exchange to further enhance the process by which securities are allocated. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange believes that the proposed rule change will 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 The Exchange has not solicited, and does not intend to solicit, comments regarding the proposed rule change. The Exchange has not received any unsolicited written comments from members or other interested parties. 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 17 15 PO 00000 U.S.C. 78f(b)(5). Frm 00094 Fmt 4703 Sfmt 4703 IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change, as amended, is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments 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–2005–40. 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 (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 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–2005–40 and should be submitted on or before May 3, 2006. E:\FR\FM\12APN1.SGM 12APN1 Federal Register / Vol. 71, No. 70 / Wednesday, April 12, 2006 / Notices For the Commission, by the Division of Market Regulation, pursuant to delegated authority.18 Nancy M. Morris, Secretary. [FR Doc. E6–5368 Filed 4–11–06; 8:45 am] II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–53600; File No. SR– NYSEArca–2006–07] Self-Regulatory Organizations; NYSE Acra, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change, and Amendment No. 1 Thereto, Relating to Exchange Fees and Charges April 4, 2006. 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 March 21, 2006, NYSE Arca, Inc. (‘‘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 prepared by the Exchange. On March 31, 2006, the Exchange filed Amendment No. 1 to the proposed rule change.3 The Exchange has designated this proposal as one establishing or changing a due, fee, or other charge imposed by the Exchange under Section 19(b)(3)(A)(ii),4 and Rule 19b–4(f)(2) thereunder,5 which renders the proposal effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend its Schedule of Fees and Charges for Exchange Services (‘‘Schedule’’) in order to assess a royalty fee on options contracts traded on certain Exchange Traded Funds (‘‘ETFs’’). The text of the proposed rule change, as amended, is available on the Exchange’s Web site at https://www.nysearca.com, at the Exchange’s Office of the Secretary, and at the Commission’s Public Reference Room. wwhite on PROD1PC61 with NOTICES 18 17 CFR 200.30–3(a)(12). 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 Amendment No. 1 made clarifying changes to the rule text and purpose section of the proposed rule change. 4 15 U.S.C. 78s(b)(3)(A)(ii). 5 17 CFR 240.19b–4(f)(2). 11 VerDate Aug<31>2005 19:57 Apr 11, 2006 Jkt 208001 In its filing with the Commission, the Exchange included statements concerning the purpose of, and basis for, the proposed rule change, as amended, and discussed any comments it received on the proposal. 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 the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to amend its Schedule in order to assess a $0.10 royalty fee on options contracts traded on the following ETFs: the Russell 1000 Index Fund (IWB), The Russell 1000 Value Index Fund (IWD), the Russell 2000 Index Fund (IWM), the Russell 2000 Value Index Fund (IWN), the Russell 2000 Growth Fund (IWO), and the Russell Midcap Index Fund (IWR). The Exchange proposes to charge $0.10 per contract side on all market maker, firm and broker dealer transactions. According to the Exchange, consistent with the present Schedule, customers will not be assessed the royalty fee. The Exchange also proposes to add additional language to footnote 6 of the Trade-Related Charges section of the Schedule. According to the Exchange, this language is being added to cross reference an existing section in the Schedule that contains information on how royalty fees associated with Options Strategy Executions are assessed. These fees are explained under the ‘‘Limit of Fees on Options Strategy Executions’’ section of the Schedule. The Exchange notes that the additional language to this footnote simply serves as a reference to the existing explanation. 2. Statutory Basis The Exchange believes that the proposed rule change, as amended, is consistent with Section 6(b) of the Act,6 in general, and furthers the objectives of Section 6(b)(4) of the Act,7 in particular, in that it is designed to provide for the equitable allocation of reasonable dues, fees, and other charges among its 6 15 7 15 PO 00000 U.S.C. 78f(b). U.S.C. 78f(b)(4). Frm 00095 Fmt 4703 Sfmt 4703 18797 members and issuers and other persons using its facilities. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change, as amended, 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 No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change, as amended, has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act 8 and subparagraph (f)(2) of Rule 19b–4 thereunder,9 since it establishes or changes a due, fee or other charge imposed by the Exchange. At any time within 60 days of the filing of such 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 the furtherance of the purposes of the Act.10 IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change, as amended, is consistent with the Act. Comments may be submitted by any of the following methods: 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 Number SR–NYSEArca–2006–07 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, 8 15 U.S.C. 78s(b)(3)(A)(ii). CFR 240.19b–4(f)(2). 10 The effective date of the original proposed rule change is March 21, 2006, and the effective date of Amendment No. 1 is March 31, 2006. For purposes of calculating the 60-day period within which the Commission may summarily abrogate the proposed rule change under Section 19(b)(3)(C) of the Act, the Commission considers the period to commence on March 31, 2006, the date on which the Exchange filed Amendment No. 1. See 15 U.S.C. 78s(b)(3)(C). 9 17 E:\FR\FM\12APN1.SGM 12APN1

Agencies

[Federal Register Volume 71, Number 70 (Wednesday, April 12, 2006)]
[Notices]
[Pages 18791-18797]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-5368]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53602; File No. SR-NYSE-2005-40]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Notice of Filing of a Proposed Rule Change and Amendment Nos. 1 and 2 
Thereto Relating to Amendments to the Exchange's Allocation Policy and 
Procedures (NYSE Rules 103A, 103B, 123E and 476A)

April 5, 2006.
    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 June 6, 2005, New York Stock Exchange, Inc. (``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 prepared by NYSE. NYSE filed 
Amendment No. 1 to the proposed rule change on October 28, 2005.\3\ 
NYSE filed Amendment No. 2 to the proposed rule change on February 9, 
2006.\4\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange clarified certain aspects 
of the purpose section and rule text of the proposed rule change. 
Amendment No. 1 clarified that certain of the proposed amendments to 
NYSE Rules 103A, 103B and 123E are organizational changes that are 
intended to provide clarity with respect to the operation of the 
allocation policy and procedures. Amendment No. 1 also further 
explained the Exchange's decision to move from a subjective standard 
in the allocation process to an objective standard. Amendment No. 1 
supersedes the original filing in its entirety.
    \4\ In Amendment No. 2, the Exchange further clarified certain 
aspects of the purpose section and rule text of the proposed rule 
change. Amendment No. 2 clarified that the proposed amendments to 
NYSE Rule 103B includes a requirement that specialist firms describe 
in their blanket allocation applications any contacts they, or any 
individual acting on their behalf, have had with any employee of the 
listing company, or any individual acting on behalf of that company, 
with regard to its prospective listing on the Exchange. In addition, 
Amendment No. 2 further explained the data that will be provided to 
the Allocation Committee (``Committee''). Amendment No. 2 supersedes 
Amendment No. 1 in its entirety.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to amend NYSE Rules 103A, 103B, 123E and 
476A with respect to the manner in which securities are allocated to 
specialist organizations.
    The text of the proposed rule change is available on the Exchange's 
Web site (https://www.nyse.com), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room. The text of 
the proposed rule change is also available on the Commission's Web site 
(https://www.sec.gov/rules/sro.shtml).

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, as 
amended, and discussed any comments it received on the proposed rule 
change, as amended. 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
    The Exchange proposes to amend NYSE Rules 103A, 103B, 123E and 476A 
with respect to the manner in which securities are allocated to 
specialist organizations on the Exchange.
    The Exchange proposes to amend its allocation policy and procedures 
by placing greater emphasis on performance measures that objectively 
assess specialist market-making in order to provide more meaningful 
information for the Committee's consideration. The Exchange represents 
that this would be accomplished by eliminating the Specialist 
Performance Evaluation Questionnaire (``SPEQ''), a subjective tool that 
has become less meaningful as a result of the sharp reduction in the 
number of specialist firms, and replacing it with a series of objective 
measures that compare specialist performance against defined standards 
based on actual trading data. Unlike the SPEQ, which provided tier 
rankings for firms only, the objective performance measures will permit 
comparisons by stock, panel, and post, as well as by firm, and thus, 
will more clearly distinguish between strong and weak performance. In 
addition, the objective performance measures will evaluate individual 
specialist performance as well as performance of the entire firm. The 
SPEQ is limited to an evaluation of firm-wide performance. The use of 
these measures will also enable specialist

[[Page 18792]]

firms to better manage and more easily improve performance.
    The objective performance measures will improve the allocation 
process by preventing specialist firms from proposing sub-par 
performers as the designated specialist for new listings and may serve 
to disqualify entire specialist firms from the allocation process for a 
period of time based on continued poor performance. In this way, the 
new measures will serve as a potent incentive to improved market-making 
and encourage superior specialist performance.
    The Exchange is also proposing additional changes to the allocation 
policy (NYSE Rule 103B) and related changes to the rules governing 
performance improvement actions (NYSE Rule 103A), the issuance of 
summary fines (NYSE Rule 476A), and specialist combination review 
policy (NYSE Rule 123E).\5\
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 53382 (February 27, 
2006), 71 FR 11251 (March 6, 2006) (order approving SR-NYSE-2005-77) 
(``Merger Release''). The Merger Release contains conforming 
language changes to reflect the new entities that will exist as a 
result of the Exchange's merger with Archipelago Holdings, Inc. In 
addition, the Merger Release amended NYSE Rule 103B, with respect to 
the allocation of the proposed new NYSE Group stock to: (i) Give 
NYSE Group the right to determine the number and identity of 
specialist firms that will be included in the group from which it 
shall choose its specialist, provided the group consists of at least 
four specialist firms; and (ii) provide NYSE Group with the same 
material with respect to each specialist firm applicant as would 
have been reviewed by the Committee in allocating other securities. 
Telephone conversation between Deanna Logan, Principal Rule Counsel, 
NYSE and David Michehl, Attorney, Division of Market Regulation 
(``Division''), Commission on February 28, 2006.
---------------------------------------------------------------------------

Allocation Policy and Procedures

    NYSE Rule 103B contains the Exchange's requirements with respect to 
allocation of securities to specialist member organizations 
(``Allocation Policy''). The Exchange represents that the intent of the 
Allocation Policy is: (1) To ensure that securities are allocated in an 
equitable and fair manner and that all specialist units have a fair 
opportunity for allocations based on established criteria and 
procedures; (2) to provide an incentive for ongoing enhancement of 
performance by specialist units; (3) to provide the best possible match 
between the specialist unit and security; and (4) to contribute to the 
strength of the specialist system.
    The Exchange represents that decisions as to the allocation of 
securities on the Exchange are made by the Committee. This Committee is 
comprised of market professionals who use their judgment to make 
allocation decisions based on the allocation criteria specified in the 
Allocation Policy. The current allocation criteria includes the SPEQ, 
objective performance measures, listing company input, allocations 
received, capital, disciplinary history, and the Committee's 
professional judgment.

Elimination of SPEQ

    The Exchange states that the SPEQ is a quarterly survey on 
specialist performance completed by Floor Broker members of the 
Exchange. The SPEQ requires Floor Brokers to rate and provide written 
comments on the performance of specialist firms with whom they deal 
regularly on the Floor. Floor Broker evaluations of specialist firm 
performance focuses on five functional areas--dealer, service, 
competitiveness, communications and administrative. Floor Brokers rate 
specialist firms on a 0% to 100% scale, in ten-point increments, that 
reflect the percentage of the time that the broker feels the specialist 
firm engaged in the described behavior. An evaluation of 100% is 
defined as ``always'' and an evaluation of 0% is defined as ``never''.
    The Exchange represents that the SPEQ process uses a relative 
scoring methodology that combines Floor Broker scores for any one 
specialist firm to determine each firm's overall performance and 
performance in each of the five functional areas. The scores are then 
arrayed from highest to lowest, and the specialist firms receive a 
ranking for the overall score and within each function. Also, a range 
of ranks is determined that identifies where a firm stood in relation 
to other units whose scores were not statistically different. From 
these rankings, the specialist firms are aligned into tiers, up to a 
maximum of four, with each tier containing those specialist firms with 
similar rankings. The Committee receives information on SPEQ results 
only as to the tier classifications.
    Although SPEQ has been an important mechanism for evaluation of 
specialist performance for both allocation and performance improvement 
action purposes, the Exchange represents that certain weaknesses in its 
use as an assessment tool have become apparent. For example, SPEQ 
evaluations are subjective, with ratings based on personal experiences 
rather than comparisons with accepted objective standards. Further, 
except for the written comments, which are not incorporated into the 
formula for SPEQ rankings, SPEQ does not focus on market-making by 
individual specialists. Importantly, as the number of specialist firms 
has decreased, SPEQ tier classifications have become tightly clustered 
with statistically insignificant differences among the firms.\6\ Also, 
SPEQ participants recognize the limitations of SPEQ and have requested 
a more meaningful process for evaluating specialist performance. For 
these reasons, the Exchange proposes eliminating SPEQ and replacing it 
with the objective measures described below. The Exchange represents 
that by addressing the deficiencies of SPEQ in today's environment, 
these measures will enable a more meaningful comparison of specialist 
performance at all levels, based on truly objective criteria.
---------------------------------------------------------------------------

    \6\ The Exchange states that there are currently seven firms 
registered as specialists in equity securities on the NYSE. As 
recently as 2000, there were 25 specialist firms.
---------------------------------------------------------------------------

Expansion of the Use of Objective Measures

    The Exchange also proposes to add objective measures designed to 
evaluate market quality using pre-determined standards of performance 
based on actual trading data. The measures will rate the performance of 
stocks, individual specialists and specialist firms overall. Data will 
be provided to specialists on a daily basis, and monthly and quarterly 
to the Committee. In addition, the performance information derived from 
the objective measures will be made available to listing companies to 
aid in their decision as to the choice of a specialist firm.
    The Exchange proposes to add two new objective measures of 
specialist performance and to change an existing measure. The Exchange 
represents that one new measure is price continuity. Price continuity 
measures the absolute value of the price change, if any, from one trade 
to the next, in the same stock. Currently, price continuity is part of 
the existing near neighbor analysis,\7\ which is among the information 
provided to specialists and the Committee. However, current continuity 
percentages are too tightly clustered because of tighter markets, 
making it difficult to derive useful data for comparison purposes. In 
addition, there are no trading standards specifically related to price 
continuity against which to measure performance. The Exchange proposes 
making price continuity an independent measure and has

[[Page 18793]]

developed appropriate benchmarks and standards to enable an objective 
comparison of each individual specialist's market-making as it relates 
to price continuity. The Exchange has also developed a system to 
identify acceptable and unacceptable performance for this measure.
---------------------------------------------------------------------------

    \7\ An explanation of the near neighbor performance measure was 
given in SR-NYSE-1995-05. See Securities Exchange Act Release No. 
35927 (June 30, 1995), 60 FR 35764 (July 11, 1995); See also 
Securities Exchange Act Release No. 38158 (January 10, 1997), 62 FR 
2704 (January 17, 1997) (making permanent the near neighbor pilot). 
Telephone conversation between Deanna Logan, Principal Rule Counsel, 
NYSE and David Michehl, Attorney, Division, Commission on February 
28, 2006.
---------------------------------------------------------------------------

    The second new objective measure is depth. Depth refers to the 
price movement of a stock during a sequence of transactions totaling a 
particular volume. Currently, depth is measured over 3,000-share volume 
sequences and is also part of the near neighbor analysis. The Exchange 
is proposing to make depth an independent measure \8\ and to add three 
new volume sequences--5,000, 10,000 and 25,000 shares--and has 
developed appropriate benchmarks and standards for this measure as 
well.
---------------------------------------------------------------------------

    \8\ Telephone conversation between Deanna Logan, Principal Rule 
Counsel, NYSE and David Michehl, Attorney, Division, Commission on 
March 2, 2006.
---------------------------------------------------------------------------

    According to the Exchange, the benchmarks and standards developed 
for continuity and depth have been reviewed with two university 
professors from the Massachusetts Institute of Technology, with whom 
the Exchange consults on matters relating to allocation measures. For 
each measure, eligible securities \9\ are grouped by price and non-
block volume into categories. Eligibility requirements for securities 
include minimum average price, volume, and number of trades.\10\ Each 
category has two performance benchmarks based on actual trading data. 
Each benchmark has upper and lower performance ranges. Each trading 
day, the performance of eligible securities will be compared with the 
upper and lower ranges for the two benchmarks used for each measure and 
assigned a classification of upper, middle or lower. Upper 
classifications are worth two points, middle classifications are worth 
one point and lower classifications are worth negative one point. The 
points earned for each of the two performance benchmarks within each 
measure will be combined to determine an overall score for the relevant 
measure. The overall scores for each measure are combined to determine 
the security's daily score. Scores range from four points (for upper 
classifications in both continuity and depth) to negative two points 
(for lower classifications in both continuity and depth). Daily scores 
will be provided to specialist firms at the end of each day, monthly 
scores at the end of each month and quarterly scores at the end of each 
quarter.\11\
---------------------------------------------------------------------------

    \9\ Eligible securities are all Exchange-listed domestic common 
stocks.
    \10\ An eligible security will be evaluated on any day when any 
of the following conditions exists: (a) The security's average 
trading price is between $1 and $200; (b) the security's Exchange 
non-block volume (trades under 25,000 shares) is at least 100 
shares; or (c) the security had at least five depth sequences on the 
Exchange (for depth only) or at least five Exchange transactions 
(for continuity only); (d) an individual security's overall 
quarterly depth and continuity score will be calculated only if it 
had daily scores on more than 31 days in the quarter.
    \11\ Telephone conversation between Deanna Logan, Principal Rule 
Counsel, NYSE and David Michehl, Attorney, Division, Commission on 
March 2, 2006.
---------------------------------------------------------------------------

    The Committee will be provided with the monthly scores for each 
specialist firm. In addition, the Exchange will provide the Committee 
with average daily non-block volume and price activity and average 
continuity and depth scores for each of the maximum of twenty most 
active stocks \12\ handled by the individual who is identified by his/
her firm to be the designated specialist for the stock of the listing 
company. The information will include trading data for the current 
month through the week preceding the distribution of the security data 
sheet to the specialists plus the three preceding calendar months.
---------------------------------------------------------------------------

    \12\ The Exchange represents that the average daily non-block 
volume is generally determined using data on the total number of 
shares traded during the most recent prior three months divided by 
the number of trading days in that period. The number of stocks is 
determined by creating a list of stocks traded most frequently by a 
specialist, ranked by average daily non-block volume. If the list 
contains less than twenty stocks, information on all stocks 
contained in the list is provided to the Committee. If the list 
contains more than twenty stocks, information on only the twenty 
most active stocks contained in the list is provided to the 
Committee. Telephone conversation between Deanna Logan, Principal 
Rule Counsel, NYSE and David Michehl, Attorney, Division, Commission 
on April 4, 2006.
---------------------------------------------------------------------------

    The existing measure to be changed is SuperDOT[reg] turnaround for 
orders received by the specialist. Currently, this measure is based on 
the percentage of total post-opening market orders that are either 
executed or ``stopped'' within 60 seconds of the time they are received 
by the specialist. The Exchange proposes tightening this benchmark to 
30 seconds to better reflect actual trading conditions and to focus 
performance on the individual post and panels rather than the firm 
overall performance.\13\
---------------------------------------------------------------------------

    \13\ The Exchange intends to review the continued applicability 
of this measure after the implementation of the NYSE HYBRID 
MARKETsm. See Securities Exchange Act Release No. 53539 
(March 22, 2006), 71 FR 16353 (March 31, 2006) (order approving the 
NYSE HYBRID MARKETsm).
---------------------------------------------------------------------------

    The Exchange believes that the use of these objective measures will 
provide for a more meaningful comparison of specialist performance and 
will promote better market-making as a result of the availability of 
more objective and detailed information and competition among the firms 
for allocations. Unlike the subjective criteria, which provided tier 
rankings for firms only, the objective performance measures will permit 
comparisons by stock, panel, and post, as well as by firm, and thus, 
will more clearly distinguish between strong and weak performance. The 
use of these measures will also enable specialist firms to better 
manage and more easily improve performance.
    Although the Exchange believes that the objective measures provide 
the more meaningful comparison, it is also acknowledged that subjective 
input from the Floor brokers and off-Floor customers with direct 
knowledge of the performance of specialist firms and individual 
specialists, may serve a useful purpose in the evaluation process. To 
this end, the proposed rule change includes a provision for providing 
subjective information to the Committee. The Exchange continues to 
develop the specific format of how the subjective information will be 
provided to the Committee, in consultation with constituent committees 
\14\ that have previously provided feedback on the allocation process.
---------------------------------------------------------------------------

    \14\ The Exchange represents that the constituent committees 
consist of the Institutional Traders Advisory Committee, the 
Upstairs Traders Advisory Committee, the Exchange Traders Advisory 
Committee, the Market Performance Committee and the proposed Hybrid 
Performance Committee. Telephone conversation between Deanna Logan, 
Principal Rule Counsel, NYSE and David Michehl, Attorney, Division, 
Commission on March 2, 2006.
---------------------------------------------------------------------------

    In addition, the Exchange proposes a number of other changes to 
NYSE Rule 103B. In summary, these changes are as follows:
    A. As noted above, the Committee will receive performance 
information regarding both the specialist firm and the individual 
designated by the firm to handle the security should the firm receive 
the allocation. Currently, the Committee only receives performance 
information with respect to the firm.
    B. In order to provide an incentive to specialist firms to ensure 
quality performance, provisions will be added that poor performance may 
result in the inability of an individual specialist or a specialist 
firm from applying for or receiving allocations, as follows:

[[Page 18794]]



                             Specialist Firm
------------------------------------------------------------------------
                                       Duration of         Period of
             Criteria                   criteria         ineligibility
------------------------------------------------------------------------
Overall depth or continuity score  Two consecutive     One month.
 below 1.90 and more than one       months.
 standard deviation below average
 score for all specialist firms.
Same as above....................  Three consecutive   Two months.
                                    months.
Same as above....................  Three out of six    Two months.
                                    months.
Overall 30-second DOT turnaround   One month.........  One month.
 percentage below 90%.
Two panels at same post with 30-   One month.........  One month.
 second DOT turnaround
 percentages below 75%.
------------------------------------------------------------------------


                          Individual Specialist
------------------------------------------------------------------------
                                       Duration of         Period of
             Criteria                   criteria         ineligibility
------------------------------------------------------------------------
Any of the assigned securities     Three consecutive   Two months.
 that the individual specialist     months.
 handled most frequently during a
 month receive overall a depth or
 continuity score below 0.50\15\.
Same as above....................  Three out of five   Two months.
                                    months.
Panel with 30-second DOT           One month.........  One month.
 turnaround percentage below 75%.
------------------------------------------------------------------------
\15\ Telephone conversation between Deanna Logan, Principal Rule
  Counsel, NYSE and David Michehl, Attorney, Division, Commission on
  April 4, 2006.

    C. The composition of the nine-member Committee will be changed, as 
illustrated in the chart below, in order to equalize representation on 
the Allocation Panel and the Committee and to give non-Floor 
constituents a greater role in the allocation process.

------------------------------------------------------------------------
    Committee member type         Current rule            Proposed
------------------------------------------------------------------------
Floor Broker................  3 Governors (1 may    4 At least 1 Floor
                               be Independent).      Governor, Executive
                                                     Floor Official or
                                                     Senior Floor
                                                     Official.
                              3 Others (1 must be
                               Independent).
Allied Member...............  2...................  4 At least 1 Allied
                                                     Member and at least
                                                     1 Institutional
                                                     Representative.
Institutional...............  1...................
Chairperson.................  Floor Broker........  1 Floor Broker or
                                                     Allied Member/
                                                     Institutional
                                                     Representative.
                              ....................  In alternating
                                                     terms, an
                                                     additional Floor
                                                     Broker or Allied
                                                     Member/
                                                     Institutional
                                                     Representative will
                                                     be chosen for the
                                                     Committee.
                                                    The Committee
                                                     members will select
                                                     a chairperson from
                                                     the dominant group
                                                     on the Committee
                                                     that term.
                                                    No reappointments as
                                                     chairperson until
                                                     all members of
                                                     Allocation Panel in
                                                     same category have
                                                     served a term as
                                                     chairperson.
------------------------------------------------------------------------

    D. Each standing Committee will be selected one month before its 
term commences and will elect its chairperson at that time. Currently, 
the rule provides that the chairperson is elected two months before 
his/her term starts.
    E. The requirement that the Committee chairperson be approved by 
the Quality of Markets Committee (``QOM'') of the Exchange Board of 
Directors will be eliminated. As a result of corporate governance 
changes in December 2003, the Exchange's Board of Directors no longer 
has an active QOM.
    F. In order to encourage more participation from various 
constituent representatives on the Committee, the term of service for 
Committee members will be modified as follows:

------------------------------------------------------------------------
        Current terms of service            Proposed terms of service
------------------------------------------------------------------------
4-month term...........................  2-month term.
Terms staggered so that every 2 months,  No staggered terms.
 4-5 members rotate off.
Reappointment possible, provided a       No reappointment until all
 minimum of 2 months have passed since    members of Allocation Panel in
 expiration of term.                      same category have served a
                                          term.
------------------------------------------------------------------------

    G. Provide standing Committee with quarterly information 
identifying the individuals designated in each allocation application 
and the number of allocations they received, to provide informational 
continuity among Committees.
    H. As a mechanism to facilitate greater efficiency in the 
allocation process, the Committee quorum requirement is modified as 
follows:

[[Page 18795]]



------------------------------------------------------------------------
    Committee member type         Current rule            Proposed
------------------------------------------------------------------------
Floor Broker................  6, at least 2         Any 7 members of the
                               Governors.            standing Committee.
Allied Member...............  1...................
Institutional...............  None required.......
------------------------------------------------------------------------

    I. Increase the number of Allocation Panel members from 69+ to 75+ 
to encompass the need for added allied member and institutional 
representation on the Committee.
    J. Modify the composition of the Allocation Panel:

------------------------------------------------------------------------
      Panel member type           Current rule            Proposed
------------------------------------------------------------------------
Floor Broker................  28..................  20
Floor Broker Governors......  10..................  10
Sr./Exec. Floor Officials...  5 (minimum).........  5 (minimum).
Allied Members..............  15 including those    20 including those
                               on MPC\16\.           on MPC.
Institutional...............  11 including those    20 including those
                               on MPC.               on MPC.
------------------------------------------------------------------------
\16\ MPC stands for Market Performance Committee.

    K. In order to make the process more efficient, the number of 
specialist firms selected for the interview pool under Option 2 of the 
Allocation Policy will be modified to four firms, including one firm 
designated as instrumental by the listing company. Currently, the rule 
provides that the pool may be composed of three, four or five firms.
    L. Redefine the ``quiet period'' for specialist contact with a 
listing company so that it commences solely with the date that 
allocation applications are solicited for that issuer.
    M. Extend the requirement that the specialist firm's designated 
specialist remain the primary specialist in an allocated security from 
six months to one year unless the listed company agrees to a change, in 
which case the specialist must provide written notice of the change and 
the listed company's agreement to the Committee and Market 
Surveillance.
    N. Extend the ``Allocation Sunset Policy'' for initial public 
offerings (``IPOs'') from three months to six months and for Exchange 
traded funds (``ETFs'') from three months to one year. Updated 
information on objective performance measures and disciplinary data 
will be provided to companies after three months (IPOs) and six months 
(ETFs).
    O. Provide the Committee with more disciplinary history:

------------------------------------------------------------------------
              Current rule                           Proposed
------------------------------------------------------------------------
Provided as to firms only..............  Provided for designated
                                          specialist and firm.
Informal discipline (Summary Fines and   All informal discipline for 12
 Admonition and Education letters) is     months from time of issuance.
 reported as follows: market
 maintenance--12 months from time of
 issuance; non-market maintenance--6
 months from time of issuance.
Significant pending Enforcement matters  Same.
 once action is authorized.
Hearing Panel decisions, for 12 months   Final Hearing Panel decisions,
 after they become final.                 for three years after they
                                          become final.
------------------------------------------------------------------------

    P. Eliminate the provision that NYSE Rule 103A performance 
improvement action criteria (timeliness of openings, SuperDOTreg; 
turnaround, etc.) be reported to the Committee. Currently, the rule 
requires this information to be reported as a ``pass'' or ``fail''. The 
revised system will provide the Committee with more detailed 
information.
    Q. In order to expedite the process, specialist firms will be 
required to designate an individual specialist for each listing, 
regardless of whether they apply for the allocation. Included in this 
requirement is the specialist firm's obligation to describe any 
contacts they, or any individual acting on their behalf, have had with 
any employee of the listing company, or any individual acting on behalf 
of that company, with regard to its prospective listing on the 
Exchange. This will enable staff to produce individual performance data 
in a timely manner for firms that may be selected for interview pools 
on a ``without prejudice'' basis.
    R. Provide the listing company with the same objective performance 
measure information the Committee considered, with respect to the 
members of its interview pool. In addition, as noted in ``N'' and ``T'' 
herein, provide the listing company with disciplinary history for the 
firms in the interview pool and their designated specialists.
    S. Preclude specialists, and anyone acting in their behalf, from 
offering to pay for or subsidize the cost of services or other 
incentives provided to a listing company in whole or in part by third 
parties in order to avoid even the semblance of impropriety.
    T. Provide that interview pools for the allocation of closed-end 
funds by the same issuer will remain operative for a nine-month period 
following the selection of a specialist. Any further closed-end fund 
listings from the same issuer in the nine-month period will be able to 
select any specialist from this group or ask for the matter to be 
referred to the Committee, in which case the group dissolves. The fund 
will be given updated objective performance and disciplinary 
information before making its decision. If a specialist firm/individual 
is ineligible for an allocation, that firm will be dropped from the 
group. If an individual specialist is no longer with a firm at the time 
of a new allocation of a closed-end fund, the firm will be dropped from 
the group.
    U. Delete references to QOM from NYSE Rule 103B.
    V. Substitute the term ``admonition letter'' for ``cautionary 
letter.''
    W. Eliminate the requirement that the Committee chair receive 
orientation from the QOM.
    X. In order to provide an incentive for ongoing enhancement of 
performance

[[Page 18796]]

by specialist firms, add the following to the list of factors 
considered by a special committee consisting of certain members of the 
Committee, which determines the allocation of ETFs under this policy: 
The extent to which a specialist organization has supported in the 
past, and will continue to support, the Exchange's efforts to 
strengthen and expand its ETF market.
    Y. Allow the issuer of a structured product to participate in the 
specialist interview via a senior official of its subsidiary 
participating in the issuance of the structured product.
    Additionally, the following amendments are proposed to NYSE Rule 
103A:
    A. Delete references to SPEQ.
    B. Provide new criteria for performance improvement actions, as 
follows:
    i. SuperDOT[supreg] market order turnaround:
    In any case where a firm:
    (a) Does not turn around 90% of its DOT orders in 30 seconds or 
less (previously 60 seconds) during any quarter (previously two 
quarters) in a rolling four-quarter period; or
    (b) Has two panels at the same post with 30-second turnaround 
percentages below 75% for any one quarter.
    ii. Market Depth:
    In any case where a firm has:
    (a) An overall quarterly Depth score below 1.90 and more than one 
standard deviation below the average quarterly Depth score for all 
specialist firms for two consecutive quarters, or
    (b) An overall quarterly Depth score below 1.90 and more than one 
standard deviation below the average quarterly Depth score for all 
specialist firms for two out of four consecutive quarters, or
    (c) More than ten percent of its eligible stocks with overall 
quarterly Depth scores below 0.50 and the percent is more than one 
standard deviation above the Floor average for two consecutive 
quarters.
    iii. Price Continuity
    In any case where a firm has:
    (a) An overall quarterly Continuity score that is below 1.90 and 
more than one standard deviation below the average quarterly Continuity 
score for all specialist firms for two consecutive quarters, or
    (b) An overall quarterly Continuity score that is below 1.90 and 
more than one standard deviation below the average quarterly Continuity 
score for all specialist firms for two out of four consecutive 
quarters, or
    (c) More than ten percent of its eligible stocks with overall 
quarterly Continuity scores below 0.50 and the percent is more than one 
standard deviation above the Floor average for two consecutive 
quarters.
    Further, the Exchange proposes to eliminate references to SPEQ and 
add references to the proposed objective measures in NYSE Rule 123E 
(Specialist Combination Review Policy).
    Finally, the Exchange proposes to add NYSE Rule 103B to the list of 
rules for which summary fines are available, specifically NYSE Rule 
476A (Imposition of Fines for Minor Violation(s) of Rules) to allow the 
Exchange to sanction members' and member organizations' less serious 
violations of NYSE Rule 103B pursuant to the minor fine provisions of 
NYSE Rule 476A.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6(b)(5) of the Act \17\ 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. The Exchange believes that the proposed rule change is 
consistent with these objectives in that it enables the Exchange to 
further enhance the process by which securities are allocated.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change will 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

    The Exchange has not solicited, and does not intend to solicit, 
comments regarding the proposed rule change. The Exchange has not 
received any unsolicited written comments from members or other 
interested parties.

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, as amended; or
    B. Institute proceedings to determine whether the proposed rule 
change, as amended, 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, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NYSE-2005-40 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-2005-40. 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 (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 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-2005-40 and should be submitted on or before May 3, 
2006.


[[Page 18797]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
---------------------------------------------------------------------------

    \18\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Nancy M. Morris,
Secretary.
[FR Doc. E6-5368 Filed 4-11-06; 8:45 am]
BILLING CODE 8010-01-P
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