Self-Regulatory Organizations; New York Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change Relating to Exchange Rule 312(f) Regarding Changes Within Member Organizations, 30458-30461 [E6-8096]

Download as PDF 30458 Federal Register / Vol. 71, No. 102 / Friday, May 26, 2006 / Notices 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 Exchange participants or other interested parties. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing proposed rule change is subject to section 19(b)(3)(A)(iii) of the Act 10 and Rule 19b–4(f)(6) thereunder 11 because the proposal: (i) Does not significantly affect the protection of investors or the public interest; (ii) does not impose any significant burden on competition; and (iii) does not become operative prior to 30 days after the date of filing or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest; provided that the Exchange has given the Commission notice of its intent to file the proposed rule change, along with a brief description and text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. NYSE satisfied the five-day pre-filing requirement. 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 furtherance of the purposes of the Act.12 jlentini on PROD1PC65 with NOTICES IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–NYSE–2006–31 on the subject line. U.S.C. 78s(b)(3)(A)(iii). CFR 240.19b–4(f)(6). 12 15 U.S.C. 78s(b)(3)(C). Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NYSE–2006–31. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission’s Public Reference Room. Copies of the filing also will be available for inspection and copying at the principal office of the NYSE. 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–2006–31 and should be submitted on or before June 16, 2006. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.13 Nancy M. Morris, Secretary. [FR Doc. E6–8095 Filed 5–25–06; 8:45 am] VerDate Aug<31>2005 16:12 May 25, 2006 Changes Within Member Organizations Rule 312(a) to (e) no changes. * * * * * (f)(1) After the completion of a distribution of its equity or noninvestment grade debt securities or those of any organization controlling the member organization or of any Material Associated Person (as used in Rule 17h– 1T of the Securities Exchange Act of 1934, as amended) of the member organization, no member [corporation] organization [which has any publicly held security outstanding] shall effect any transaction (except on an CFR 240.19b–4. No. 1 replaces the rule text in the original filing in its entirety and proposes to clarify that Rule 312(f) applies only to non-investment grade debt and equity securities. Amendment No. 1 also adds Material Associated Persons (‘‘MAPs’’), as that term is used in Rule 17h–1T of the Exchange Act, to the class of persons for whose securities the solicitation of trades is prohibited. 4 Exchange Act Rule 17h–1T describes certain indicia of MAP status: (i) Legal relationship between the broker or dealer and the associated person; (ii) overall financing requirements of the broker or dealer and the associated person, and the degree, if any, to which the broker or dealer and the associated person are financially dependent on each other; (iii) degree, if any, to which the broker or dealer or its customers rely on the associated person for operational support or services in connection with the broker’s or dealer’s business; (iv) level of risk present in the activities of the broker’s or dealer’s associated persons; and (v) extent to which the associated person has the authority or the ability to cause a withdrawal of capital from the broker or dealer. 3 Amendment SECURITIES AND EXCHANGE COMMISSION [Release No. 34–53840; File No. SR–NYSE– 2005–58] Self-Regulatory Organizations; New York Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change Relating to Exchange Rule 312(f) Regarding Changes Within Member Organizations May 19, 2006. Pursuant to section 19(b)(1) 1 of the Securities Exchange Act of 1934 (the 13 17 1 15 Jkt 208001 I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The NYSE is filing with the SEC the proposed amendment to Exchange Rule 312(f) to, among other changes, permit the recommendation of purchases and sales of shares of companies controlled and under common control with member organizations (other than MAPs),4 subject to appropriate customer disclosure of the relationship. Below is the text of the proposed rule change. Proposed new language is in italics; proposed deletions are in brackets. 2 17 BILLING CODE 8010–01–P 10 15 11 17 ‘‘Exchange Act’’), and Rule 19b–4 thereunder,2 notice is hereby given that on August 15, 2005, the New York Stock Exchange, Inc. (‘‘NYSE’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or the ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. On May 5, 2006, NYSE filed Amendment No. 1 to the proposed rule change.3 The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. PO 00000 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). Frm 00094 Fmt 4703 Sfmt 4703 E:\FR\FM\26MYN1.SGM 26MYN1 Federal Register / Vol. 71, No. 102 / Friday, May 26, 2006 / Notices unsolicited basis) for the account of any customer in, or make any recommendation with respect to, any such security [issued by such member corporation]. [or] (2) Any member organization that makes any recommendation of any [such] equity or non-investment grade debt security issued by any [corporation controlling] person controlled by or under common control with such member [corporation] organization (other than a Material Associated Person) [.], shall promptly disclose to such customer the existence and nature of such control at the time of recommendation and, if this disclosure is not made in writing, shall provide this disclosure in writing prior to the completion of the transaction. (3) No corporation which has any publicly held security outstanding shall, without the prior written approval of the Exchange, dispose of any such security for its own account and no member corporation shall acquire any such security for its own account or for the account of any corporation controlling, controlled by or under common control with such member corporation except with the prior written approval of the Exchange or pursuant to the terms and provisions of such security or of any agreement between the member corporation and the holder of such security, which agreement has previously been filed with and approved by the Exchange. The Exchange will approve such a disposition or acquisition of securities unless it determines that such action will impair the financial responsibility or operational capability of the member corporation. * * * * * Remainder of Rule 312 unchanged. A. Self-Regulatory Organization’s Statement of Purpose of, and Statutory Basis for, the Proposed Rule Change jlentini on PROD1PC65 with NOTICES (1) Purpose a. Background. Rule 312(f) (the ‘‘Rule’’) was adopted in 1970 when public ownership of member corporations was first permitted in order to address what were perceived to be potential conflicts in such transactions. Experience during the intervening 35 years 5 has indicated that certain 5 NYSE previously proposed the amendment of Rule 312(f) (which, at the time was Rule 312(g)) in 1982 (See File No. SR–NYSE–83–3). Exchange Act Release No. 19462 (January 28, 1983) (notice of filing of SR–NYSE–83–3). In the filing, NYSE stated that the rule created a ‘‘burden on competition’’ by placing ‘‘NYSE members and their customers at a competitive disadvantage’’ to similar organizations subject only to the SEC disclosure requirements. NYSE withdrew the proposal in 1994. That VerDate Aug<31>2005 16:12 May 25, 2006 Jkt 208001 potential conflicts can be effectively addressed by way of disclosure, rather than prohibition. Further, fundamental and wide-ranging changes in the securities industry since the Rule’s introduction also contributed to rendering aspects of the Rule unnecessary, outdated and unnecessarily burdensome to member organizations. In the course of responding to Rule 312(f) interpretive requests over time, the Exchange has noted changes in the business and regulatory environment that warrant reconsideration of the scope of Rule 312(f)’s application. These changes include: (i) The wide diversification of business conducted by member organizations and other entities in the same control family; and (ii) The nature of new products that are created for investors. The Exchange’s regulatory experience relative to Rule 312(f) has generally involved determinations as to the existence, or not, of a control relationship involving a member organization among the complicated interrelationships of, and equity investments by, financial organizations. The sole purpose of determining whether such a control relationship exists is to establish whether Rule 312(f) restrictions on the recommendation of stock issued by entities in the member organization’s corporate family apply to the member organization. The term ‘‘recommendation’’ in this context has been interpreted by NYSE to include solicited transactions, the issuance of research or market letters, and the use of ‘‘active’’ market making tactics (i.e., actively buying and selling a stock from a proprietary account as opposed to ‘‘passively’’ standing ready to buy or sell). Typical member organization Rule 312(f) interpretive requests involve submission to the Exchange of intricate factual representations regarding board representation, equity ownership, and/ or profit participation and will request concurrence with the opinion that no control relationship exists.6 Often, the proposal differed from the present proposal in allowing the recommendation of the member organization’s own publicly traded securities and those of its parent corporation, subject to appropriate disclosure of the relationship. The present proposal does not permit the recommendation of (or the solicited execution of trades in the shares of) a member organization or its parent following their initial distribution. 6 NYSE Rule 2 creates a presumption of control, in this context, where a person possesses the right to vote 25% or more of the voting securities, receives 25% or more of the net profits or is a director of the other person. Rule 2 defines a ‘‘person’’ as ‘‘a natural person, corporation, PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 30459 request will involve one or more investment partnerships, affiliated with a member organization, that hold an interest in a subject security. An officer of the member organization may be a general partner or on the board of directors of the subject security’s issuing company. The analysis to determine control of the subject security involves objective factors as well as consideration of the percentage of member organization personnel represented on the issuing company’s board of directors and/or their ability to influence the issuing company. Such directors, while not participants in dayto-day management of the issuing company, may exercise a degree of control over it resulting either from their voting power, from specially granted powers, or from participation in committees. Ultimately, the determination of control is often, in good measure, a subjective one. b. Proposed Amendments. The Rule, in pertinent part, currently prohibits a member organization from soliciting transactions in its own publicly traded securities and from making any recommendations with respect to its publicly traded securities or the securities issued by any corporation controlling, controlled by or under common control with such member corporation (i.e., the securities of any parent, sister, or subsidiary corporation relative to the member organization). The intent of the Rule is to mitigate conflicts of interest that may arise when recommending the public securities of companies in which the member organization may have an interest. i. Proposed Codification to Exclude Investment Grade Debt from Rule 312(f). NYSE has interpreted Rule 312(f) to apply only to non-investment grade debt and equity securities.7 This proposal would codify that interpretation. ii. Proposed Expansion to Include All NNon-Investment Grade Debt and Equity Securities. The proposed rule change would also broaden the partnership, association, joint stock company, trust, fund or any organized group of persons whether incorporated or not.’’ 7 Another common interpretive inquiry with respect to Rule 312(f) involves, and NYSE anticipates would continue to involve, a determination as to whether the security in question has ‘‘debt-like characteristics.’’ The Exchange has generally interpreted Rule 312(f) restrictions to not apply to investment grade debt and securities that function as investment grade debt. The interpretation as to whether a security functions as investment grade debt is based on the totality of the circumstances, e.g., (1) whether the shares of stock have fixed dividends; (2) whether the shares of stock are non-participatory in common dividends; (3) whether the shares of stock have limited voting rights; and (4) whether the shares of stock are non-convertible into common stock. E:\FR\FM\26MYN1.SGM 26MYN1 30460 Federal Register / Vol. 71, No. 102 / Friday, May 26, 2006 / Notices jlentini on PROD1PC65 with NOTICES application of the Rule to all noninvestment grade debt and equity securities, including privately placed issues. The current Rule’s prohibition applies only to publicly traded securities. The Rule currently prohibits effecting solicited transactions only as to the securities of member organizations. The proposed rule change would extend that prohibition to the non-investment grade debt and equity securities of companies controlling member organizations (e.g., parent companies) and MAPs. By their nature, MAPs can substantially influence a registered broker-dealer, and the inclusion of such entities along with controlling organizations 8 acts to limit inevitable conflicts of interest. iii. Proposed Amendment to Permit Certain Recommendations If Disclosed. The Exchange also proposes to amend the Rule to permit the recommendation of purchases and sales of shares of companies controlled by and under common control with member organizations (other than MAPs), subject to appropriate customer disclosure of the relationship.9 Given the varied and numerous sister corporations that a member organization owned by a diversified holding company may have, the Rule 312(f) restrictions on recommendations of securities issued by all such corporations can sometimes be an unnecessary burden to legitimate business activity. The rule has had the unintended impact of affecting the way merger and acquisition deals are structured, in that unnecessarily complex and unwieldy ownership models are developed primarily to avoid the 25% voting or profit presumption of control established by NYSE Rule 2. To alleviate these unintended burdens, the Exchange proposes amendments to Rule 312(f) that would permit member organizations to recommend equity or non-investment grade debt securities 10 issued by any person controlled by, or under common control with, a member organization (other than a MAP); however, any such recommendation would be subject to a requirement to disclose to the customer the existence and nature of such control at the time of recommendation. If the disclosure at the time of the recommendation is not made in writing, then the member must also provide this disclosure in writing prior to the 8 See NYSE Rule 2. See proposed Rule 312(f)(2). 10 As previously noted, the proposed change would broaden the application of the Rule to all securities including privately placed issues. The current Rule applies only to publicly traded securities. 9 VerDate Aug<31>2005 16:12 May 25, 2006 Jkt 208001 completion of the transaction.11 This proposal is consistent with and similar to other Exchange regulations such as Rule 472, which addresses the issue of research analysts’ conflicts, in part, through disclosure of potential conflicts involving ownership of equity that is the subject of research and market making activity involving the subject equity. While the Exchange believes that disclosure is adequate to address certain conflicts of interest that could arise with respect to a member’s recommendation to buy or sell securities of many affiliated entities, the Exchange believes that it is warranted to retain the prohibition on the solicitation of purchases in the securities of the member organization, any controlling organization or a MAP, given the greater potential for a conflict of interest inherent in such relationships. For instance, an employee of a member organization could act on material nonpublic information in connection with either the member organization or its parent. Of special concern is stock issued by the member organization itself, as a registered representative/ employee may attempt to drive up the price to increase the value of his or her company stock plan portfolio. To address these potential abuses, the Exchange is proposing to preserve the prohibition on making a recommendation or otherwise acting on such information in these contexts. (2) Statutory Basis The proposed rule change is consistent with the requirements of the Exchange Act, and the rules and regulations thereunder applicable to a national securities exchange, and in particular, with the requirements of section 6(b)(5) 12 of the Exchange Act. Section 6(b)(5) requires, among other things, that the rules of an 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 national market system, and in general, to protect investors and the public interest. In addition section 3(f) of the Exchange Act requires, among other things, whenever there is a requirement to consider or determine whether an action is necessary or appropriate in the public interest, to also consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation. The proposed change in Rule 312(f) will act 11 See 12 15 PO 00000 proposed Rule 312(f)(2). U.S.C. 78f(b)(5). Frm 00096 Fmt 4703 Sfmt 4703 to assure adequate and continuing protection for investors while promoting efficiency, competition, and capital formation by permitting the recommendation of purchases and sales of shares of companies controlled and under common control with member organizations (other than MAPs), subject to appropriate customer disclosure of the relationship, by expanding certain restrictions on effecting solicited transactions, and by codifying NYSE interpretations. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange believes that the proposal does not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Written comments were neither solicited nor received. 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 Exchange consents, the Commission will: (A) By order approve such proposed rule change, or (B) Institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change, as amended, is consistent with the Exchange Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–NYSE–2005–58 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, E:\FR\FM\26MYN1.SGM 26MYN1 Federal Register / Vol. 71, No. 102 / Friday, May 26, 2006 / Notices Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–9303. All submissions should refer to File Number SR–NYSE–2005–58. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/ rules/sro/shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission’s Public Reference Room, 100 F Street, NE., Washington, DC 20549. Copies of such filing will also be available for inspection and copying at the principal office of the NYSE. 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 the File Number SR–NYSE–2005–58 and should be submitted on or before June 16, 2006. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.13 Nancy M. Morris, Secretary. [FR Doc. E6–8096 Filed 5–25–06; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–53841, File No. SR–Phlx– 2006–33] Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to its Payment for Order Flow Pilot Program jlentini on PROD1PC65 with NOTICES May 19, 2006. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’)1, and Rule 19b–4 thereunder,2 13 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Aug<31>2005 16:12 May 25, 2006 Jkt 208001 notice is hereby given that on May 12, 2006, the Philadelphia Stock Exchange, Inc. (‘‘Phlx’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III, below, which Items have been prepared by the Phlx. The Phlx has designated this proposal as one changing a fee imposed by the Phlx under section 19(b)(3)(A)(ii) of the Act 3 and Rule 19b–4(f)(2) thereunder,4 which renders the proposal effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Phlx proposes to extend its payment for order flow pilot program, which is currently in effect until May 27, 2006,5 for an additional one-year period until May 27, 2007. This proposal is scheduled to expire on the same date as the one-year pilot program in effect in connection with the provisions of Exchange Rule 1080(l) relating to directed orders. 6 The text of the applicable section of the Exchange’s Summary of Equity Option Charges is available at the Commission’s Public Reference Room, at the Phlx, and on the Exchange’s Web site at http://www.phlx.com. 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 Phlx included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Phlx has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. 3 15 U.S.C. 78s(b)(3)(A)(ii). CFR 240.19b–4(f)(2). 5 See, e.g., Securities Exchange Act Release Nos. 53754 (May 3, 2006), 71 FR 27301 (May 10, 2006) (SR–Phlx–2006–25); 53078 (January 9, 2006), 71 FR 2289 (January 13, 2006) (SR–Phlx–2005–88); 52568 (October 6, 2005), 70 FR 60120 (October 14, 2005) (SR–Phlx–2005–58); and 51759 (May 27, 2005), 70 FR 32860 (June 6, 2005) (SR–Phlx–2004–91). 6 The provisions of Rule 1080(l) are in effect for a one-year pilot period currently scheduled to expire on May 27, 2006. The Exchange has filed a proposed rule change to extend the one-year pilot program for an additional year until May 27, 2007. See SR–Phlx–2006–27. 4 17 PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 30461 A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Currently, the following payment for order flow rates are in effect at the Exchange: (1) Equity options other than QQQQ 7 and FXI Options are assessed $0.60 per contract; (2) options on QQQQ are assessed $0.75 per contract; and (3) no payment for order flow fees are assessed on FXI Options.8 Trades resulting from either Directed or nonDirected Orders that are delivered electronically over AUTOM 9 and executed on the Exchange are assessed a payment for order flow fee, while nonelectronically-delivered orders (i.e., represented by a floor broker) are not assessed a payment for order flow fee.10 The Exchange recently amended its equity options payment for order flow program to rebate, on a quarterly basis, any excess payment for order flow funds that were collected but not requested for rebate by a specialist or Directed ROT.11 The Exchange states that, other than extending the date of the pilot program for an additional year until May 27, 2007, no other changes to its current payment for order flow program are being proposed at this time. 7 The Nasdaq-100, Nasdaq-100 Index, Nasdaq, The Nasdaq Stock Market, Nasdaq-100 SharesSM, Nasdaq-100 TrustSM, Nasdaq-100 Index Tracking StockSM, and QQQSM are trademarks or service marks of The Nasdaq Stock Market, Inc. (‘‘Nasdaq’’) and have been licensed for use for certain purposes by the Philadelphia Stock Exchange pursuant to a License Agreement with Nasdaq. The Nasdaq-100 Index (‘‘Index’’) is determined, composed, and calculated by Nasdaq without regard to the Licensee, the Nasdaq-100 TrustSM, or the beneficial owners of Nasdaq-100 SharesSM. The Exchange states that Nasdaq has complete control and sole discretion in determining, comprising, or calculating the Index or in modifying in any way its method for determining, comprising, or calculating the Index in the future. 8 The Exchange states that specialists and Directed Registered Options Traders (‘‘Directed ROTs’’) who participate in the Exchange’s payment for order flow program are assessed a payment for order flow fee, in addition to ROTs. Therefore, the payment for order flow fee is assessed, in effect, on equity option transactions between a customer and a ROT, a customer and a Directed ROT, or a customer and a specialist when a customer order is directed to a specialist or Directed ROT who participates in the Exchange’s payment for order flow program. 9 AUTOM is the Exchange’s electronic order delivery, routing, execution and reporting system, which provides for the automatic entry and routing of equity option and index option orders to the Exchange trading floor. See Exchange Rules 1014(b)(ii) and 1080. 10 Electronically-delivered orders do not include orders delivered through the Floor Broker Management System pursuant to Exchange Rule 1063. 11 See Securities Exchange Act Release No. 53754 (May 3, 2006), 71 FR 27301 (May 10, 2006) (SR– Phlx–2006–25). E:\FR\FM\26MYN1.SGM 26MYN1

Agencies

[Federal Register Volume 71, Number 102 (Friday, May 26, 2006)]
[Notices]
[Pages 30458-30461]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-8096]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53840; File No. SR-NYSE-2005-58]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change Relating to Exchange Rule 
312(f) Regarding Changes Within Member Organizations

May 19, 2006.
    Pursuant to section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Exchange Act''), and Rule 19b-4 thereunder,\2\ notice is 
hereby given that on August 15, 2005, the New York Stock Exchange, Inc. 
(``NYSE'' or the ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or the ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the Exchange. On May 5, 2006, NYSE filed Amendment No. 1 to the 
proposed rule change.\3\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaces the rule text in the original 
filing in its entirety and proposes to clarify that Rule 312(f) 
applies only to non-investment grade debt and equity securities. 
Amendment No. 1 also adds Material Associated Persons (``MAPs''), as 
that term is used in Rule 17h-1T of the Exchange Act, to the class 
of persons for whose securities the solicitation of trades is 
prohibited.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NYSE is filing with the SEC the proposed amendment to Exchange 
Rule 312(f) to, among other changes, permit the recommendation of 
purchases and sales of shares of companies controlled and under common 
control with member organizations (other than MAPs),\4\ subject to 
appropriate customer disclosure of the relationship. Below is the text 
of the proposed rule change. Proposed new language is in italics; 
proposed deletions are in brackets.
---------------------------------------------------------------------------

    \4\ Exchange Act Rule 17h-1T describes certain indicia of MAP 
status: (i) Legal relationship between the broker or dealer and the 
associated person; (ii) overall financing requirements of the broker 
or dealer and the associated person, and the degree, if any, to 
which the broker or dealer and the associated person are financially 
dependent on each other; (iii) degree, if any, to which the broker 
or dealer or its customers rely on the associated person for 
operational support or services in connection with the broker's or 
dealer's business; (iv) level of risk present in the activities of 
the broker's or dealer's associated persons; and (v) extent to which 
the associated person has the authority or the ability to cause a 
withdrawal of capital from the broker or dealer.
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Changes Within Member Organizations

    Rule 312(a) to (e) no changes.
* * * * *
    (f)(1) After the completion of a distribution of its equity or non-
investment grade debt securities or those of any organization 
controlling the member organization or of any Material Associated 
Person (as used in Rule 17h-1T of the Securities Exchange Act of 1934, 
as amended) of the member organization, no member [corporation] 
organization [which has any publicly held security outstanding] shall 
effect any transaction (except on an

[[Page 30459]]

unsolicited basis) for the account of any customer in, or make any 
recommendation with respect to, any such security [issued by such 
member corporation]. [or]
    (2) Any member organization that makes any recommendation of any 
[such] equity or non-investment grade debt security issued by any 
[corporation controlling] person controlled by or under common control 
with such member [corporation] organization (other than a Material 
Associated Person) [.], shall promptly disclose to such customer the 
existence and nature of such control at the time of recommendation and, 
if this disclosure is not made in writing, shall provide this 
disclosure in writing prior to the completion of the transaction.
    (3) No corporation which has any publicly held security outstanding 
shall, without the prior written approval of the Exchange, dispose of 
any such security for its own account and no member corporation shall 
acquire any such security for its own account or for the account of any 
corporation controlling, controlled by or under common control with 
such member corporation except with the prior written approval of the 
Exchange or pursuant to the terms and provisions of such security or of 
any agreement between the member corporation and the holder of such 
security, which agreement has previously been filed with and approved 
by the Exchange. The Exchange will approve such a disposition or 
acquisition of securities unless it determines that such action will 
impair the financial responsibility or operational capability of the 
member corporation.
* * * * *
    Remainder of Rule 312 unchanged.

A. Self-Regulatory Organization's Statement of Purpose of, and 
Statutory Basis for, the Proposed Rule Change

(1) Purpose
    a. Background. Rule 312(f) (the ``Rule'') was adopted in 1970 when 
public ownership of member corporations was first permitted in order to 
address what were perceived to be potential conflicts in such 
transactions. Experience during the intervening 35 years \5\ has 
indicated that certain potential conflicts can be effectively addressed 
by way of disclosure, rather than prohibition. Further, fundamental and 
wide-ranging changes in the securities industry since the Rule's 
introduction also contributed to rendering aspects of the Rule 
unnecessary, outdated and unnecessarily burdensome to member 
organizations.
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    \5\ NYSE previously proposed the amendment of Rule 312(f) 
(which, at the time was Rule 312(g)) in 1982 (See File No. SR-NYSE-
83-3). Exchange Act Release No. 19462 (January 28, 1983) (notice of 
filing of SR-NYSE-83-3). In the filing, NYSE stated that the rule 
created a ``burden on competition'' by placing ``NYSE members and 
their customers at a competitive disadvantage'' to similar 
organizations subject only to the SEC disclosure requirements. NYSE 
withdrew the proposal in 1994. That proposal differed from the 
present proposal in allowing the recommendation of the member 
organization's own publicly traded securities and those of its 
parent corporation, subject to appropriate disclosure of the 
relationship. The present proposal does not permit the 
recommendation of (or the solicited execution of trades in the 
shares of) a member organization or its parent following their 
initial distribution.
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    In the course of responding to Rule 312(f) interpretive requests 
over time, the Exchange has noted changes in the business and 
regulatory environment that warrant reconsideration of the scope of 
Rule 312(f)'s application. These changes include:
    (i) The wide diversification of business conducted by member 
organizations and other entities in the same control family; and
    (ii) The nature of new products that are created for investors.
    The Exchange's regulatory experience relative to Rule 312(f) has 
generally involved determinations as to the existence, or not, of a 
control relationship involving a member organization among the 
complicated interrelationships of, and equity investments by, financial 
organizations. The sole purpose of determining whether such a control 
relationship exists is to establish whether Rule 312(f) restrictions on 
the recommendation of stock issued by entities in the member 
organization's corporate family apply to the member organization. The 
term ``recommendation'' in this context has been interpreted by NYSE to 
include solicited transactions, the issuance of research or market 
letters, and the use of ``active'' market making tactics (i.e., 
actively buying and selling a stock from a proprietary account as 
opposed to ``passively'' standing ready to buy or sell).
    Typical member organization Rule 312(f) interpretive requests 
involve submission to the Exchange of intricate factual representations 
regarding board representation, equity ownership, and/or profit 
participation and will request concurrence with the opinion that no 
control relationship exists.\6\ Often, the request will involve one or 
more investment partnerships, affiliated with a member organization, 
that hold an interest in a subject security. An officer of the member 
organization may be a general partner or on the board of directors of 
the subject security's issuing company. The analysis to determine 
control of the subject security involves objective factors as well as 
consideration of the percentage of member organization personnel 
represented on the issuing company's board of directors and/or their 
ability to influence the issuing company. Such directors, while not 
participants in day-to-day management of the issuing company, may 
exercise a degree of control over it resulting either from their voting 
power, from specially granted powers, or from participation in 
committees. Ultimately, the determination of control is often, in good 
measure, a subjective one.
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    \6\ NYSE Rule 2 creates a presumption of control, in this 
context, where a person possesses the right to vote 25% or more of 
the voting securities, receives 25% or more of the net profits or is 
a director of the other person. Rule 2 defines a ``person'' as ``a 
natural person, corporation, partnership, association, joint stock 
company, trust, fund or any organized group of persons whether 
incorporated or not.''
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    b. Proposed Amendments. The Rule, in pertinent part, currently 
prohibits a member organization from soliciting transactions in its own 
publicly traded securities and from making any recommendations with 
respect to its publicly traded securities or the securities issued by 
any corporation controlling, controlled by or under common control with 
such member corporation (i.e., the securities of any parent, sister, or 
subsidiary corporation relative to the member organization). The intent 
of the Rule is to mitigate conflicts of interest that may arise when 
recommending the public securities of companies in which the member 
organization may have an interest.
    i. Proposed Codification to Exclude Investment Grade Debt from Rule 
312(f). NYSE has interpreted Rule 312(f) to apply only to non-
investment grade debt and equity securities.\7\ This proposal would 
codify that interpretation.
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    \7\ Another common interpretive inquiry with respect to Rule 
312(f) involves, and NYSE anticipates would continue to involve, a 
determination as to whether the security in question has ``debt-like 
characteristics.'' The Exchange has generally interpreted Rule 
312(f) restrictions to not apply to investment grade debt and 
securities that function as investment grade debt. The 
interpretation as to whether a security functions as investment 
grade debt is based on the totality of the circumstances, e.g., (1) 
whether the shares of stock have fixed dividends; (2) whether the 
shares of stock are non-participatory in common dividends; (3) 
whether the shares of stock have limited voting rights; and (4) 
whether the shares of stock are non-convertible into common stock.
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    ii. Proposed Expansion to Include All NNon-Investment Grade Debt 
and Equity Securities. The proposed rule change would also broaden the

[[Page 30460]]

application of the Rule to all non-investment grade debt and equity 
securities, including privately placed issues. The current Rule's 
prohibition applies only to publicly traded securities.
    The Rule currently prohibits effecting solicited transactions only 
as to the securities of member organizations. The proposed rule change 
would extend that prohibition to the non-investment grade debt and 
equity securities of companies controlling member organizations (e.g., 
parent companies) and MAPs. By their nature, MAPs can substantially 
influence a registered broker-dealer, and the inclusion of such 
entities along with controlling organizations \8\ acts to limit 
inevitable conflicts of interest.
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    \8\ See NYSE Rule 2.
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    iii. Proposed Amendment to Permit Certain Recommendations If 
Disclosed. The Exchange also proposes to amend the Rule to permit the 
recommendation of purchases and sales of shares of companies controlled 
by and under common control with member organizations (other than 
MAPs), subject to appropriate customer disclosure of the 
relationship.\9\ Given the varied and numerous sister corporations that 
a member organization owned by a diversified holding company may have, 
the Rule 312(f) restrictions on recommendations of securities issued by 
all such corporations can sometimes be an unnecessary burden to 
legitimate business activity. The rule has had the unintended impact of 
affecting the way merger and acquisition deals are structured, in that 
unnecessarily complex and unwieldy ownership models are developed 
primarily to avoid the 25% voting or profit presumption of control 
established by NYSE Rule 2.
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    \9\  See proposed Rule 312(f)(2).
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    To alleviate these unintended burdens, the Exchange proposes 
amendments to Rule 312(f) that would permit member organizations to 
recommend equity or non-investment grade debt securities \10\ issued by 
any person controlled by, or under common control with, a member 
organization (other than a MAP); however, any such recommendation would 
be subject to a requirement to disclose to the customer the existence 
and nature of such control at the time of recommendation. If the 
disclosure at the time of the recommendation is not made in writing, 
then the member must also provide this disclosure in writing prior to 
the completion of the transaction.\11\ This proposal is consistent with 
and similar to other Exchange regulations such as Rule 472, which 
addresses the issue of research analysts' conflicts, in part, through 
disclosure of potential conflicts involving ownership of equity that is 
the subject of research and market making activity involving the 
subject equity.
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    \10\ As previously noted, the proposed change would broaden the 
application of the Rule to all securities including privately placed 
issues. The current Rule applies only to publicly traded securities.
    \11\ See proposed Rule 312(f)(2).
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    While the Exchange believes that disclosure is adequate to address 
certain conflicts of interest that could arise with respect to a 
member's recommendation to buy or sell securities of many affiliated 
entities, the Exchange believes that it is warranted to retain the 
prohibition on the solicitation of purchases in the securities of the 
member organization, any controlling organization or a MAP, given the 
greater potential for a conflict of interest inherent in such 
relationships. For instance, an employee of a member organization could 
act on material non-public information in connection with either the 
member organization or its parent. Of special concern is stock issued 
by the member organization itself, as a registered representative/
employee may attempt to drive up the price to increase the value of his 
or her company stock plan portfolio. To address these potential abuses, 
the Exchange is proposing to preserve the prohibition on making a 
recommendation or otherwise acting on such information in these 
contexts.
(2) Statutory Basis
    The proposed rule change is consistent with the requirements of the 
Exchange Act, and the rules and regulations thereunder applicable to a 
national securities exchange, and in particular, with the requirements 
of section 6(b)(5) \12\ of the Exchange Act. Section 6(b)(5) requires, 
among other things, that the rules of an 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 national 
market system, and in general, to protect investors and the public 
interest. In addition section 3(f) of the Exchange Act requires, among 
other things, whenever there is a requirement to consider or determine 
whether an action is necessary or appropriate in the public interest, 
to also consider, in addition to the protection of investors, whether 
the action will promote efficiency, competition, and capital formation. 
The proposed change in Rule 312(f) will act to assure adequate and 
continuing protection for investors while promoting efficiency, 
competition, and capital formation by permitting the recommendation of 
purchases and sales of shares of companies controlled and under common 
control with member organizations (other than MAPs), subject to 
appropriate customer disclosure of the relationship, by expanding 
certain restrictions on effecting solicited transactions, and by 
codifying NYSE interpretations.
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    \12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposal does not impose any burden 
on competition that is not necessary or appropriate in furtherance of 
the purposes of the Exchange Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

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 Exchange consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Exchange Act. Comments may 
be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NYSE-2005-58 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary,

[[Page 30461]]

Securities and Exchange Commission, 100 F Street, NE., Washington, DC 
20549-9303.

All submissions should refer to File Number SR-NYSE-2005-58. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro/
shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of the NYSE. 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 the File Number SR-NYSE-2005-58 and should 
be submitted on or before June 16, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-8096 Filed 5-25-06; 8:45 am]
BILLING CODE 8010-01-P