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]
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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
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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 (https://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 (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 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]
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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).
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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
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(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
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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
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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.
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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
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16:12 May 25, 2006
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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
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proposed Rule 312(f)(2).
U.S.C. 78f(b)(5).
Frm 00096
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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 (https://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,
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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 (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, 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
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16:12 May 25, 2006
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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 https://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
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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.
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\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.
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\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 (https://
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 (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, 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
