Self-Regulatory Organizations; New York Stock Exchange, Inc. (n/k/a New York Stock Exchange LLC); Order Approving Proposed Rule Change and Amendment No. 1 Thereto Relating to Exchange Rule 312(f) Regarding Changes Within Member Organizations, 52202-52204 [E6-14563]
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sroberts on PROD1PC70 with NOTICES
52202
Federal Register / Vol. 71, No. 170 / Friday, September 1, 2006 / Notices
with respect to, and facilitating
transactions in securities, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
The commenter asserted that the
proposed rule change is unnecessary
because the current rules work well to
protect the public and the integrity of
the price discovery mechanism.10 The
commenter expressed concern that
removing the requirement for Floor
Official approval would diminish the
check and balance system that ensures
that a specialist matching an away bid
or offer is appropriate under the
circumstances. The commenter also
challenged the Exchange’s argument
that the proposed rule change is
consistent with certain current practices
in which specialists are permitted to
match away bids and offers, as with
exchange traded funds (‘‘ETFs’’). The
commenter argued that, because ETFs
are derivatively and objectively priced
and the Exchange is not the primary
market or price setting mechanism for
ETFs, as it is for equities, the proposed
rule change would not be appropriate
for equity securities.
In response to the commenter’s
argument that Floor Official approval is
a necessary safeguard against specialist
over-reaching, the Exchange asserted
that specialist transactions for their own
account are still subject to certain
Exchange Rules including ‘‘a specialist’s
affirmative and negative obligations, a
responsibility to maintain a two-sided
market with quotations that are timely
and accurately reflect market
conditions, and a duty to ensure that a
specialist’s principal transactions are
designed to contribute to the
maintenance of price continuity with
reasonable depth.’’ 11 The Exchange
argued that a Floor Official’s approval of
a destabilizing transaction for a
specialist’s proprietary account is only
one part of the test to determine
whether a specialist’s proprietary
transaction is proper. The Exchange also
stated that it would continue to surveil
specialists’ proprietary transactions for
compliance with the Exchange’s
Rules.12
In addition, the Exchange believed
that there is no basis for the
commenter’s argument that that
‘‘[p]rices are not objectively determined
* * *’’ with respect to transactions in
non-ETF equity securities and that
‘‘most investors look to prices prevailing
10 See
11 See
Rutherford Letter, supra note 4.
NYSE Response Letter, supra note 5, at 1.
12 Id.
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16:21 Aug 31, 2006
Jkt 208001
in the primary market, not nominal
bids/offers in tertiary markets.’’ 13 The
Exchange argued that the Commission’s
Order Protection Rule in Regulation
NMS 14 undermines the validity of the
commenter’s assertion.15 Further, the
Exchange believed that ‘‘investors and
specialists will review pricing
information from several sources and
assign each source the weight they
consider proper in making a trade or
investing decision.’’ 16 The Exchange
also believed that the proposed rule
change to permit certain specialist
trades at the NBBO price without
requiring Floor Official approval gives
the specialist increased flexibility to
keep the Exchange’s market
competitive.17
Amending NYSE Rules 104.10(5) and
(6) to permit specialists to effect a
destabilizing proprietary trade in an
equity security at a price that matches
the current NBBO should result in
specialists following the market as set
by the independent judgment of other
market participants. The Commission
believes that removing these restrictions
should enhance the specialist’s ability
to make competitive markets. The
Commission agrees with the Exchange
that the proposed rule change does not
relieve specialists of their obligations
under Federal securities laws or NYSE
Rules.18 A specialist’s ability to effect
proprietary transactions remains limited
under the Act and NYSE Rules. The
Commission notes that the Exchange is
obligated to surveil its specialists to
ensure their compliance with the Act
and the Exchange’s Rules.
Accelerated Approval of Amendment
No. 2
The Commission finds good cause to
approve Amendment No. 2 to the
proposed rule change, as amended,
prior to the thirtieth day after
Amendment No. 2 is published for
comment in the Federal Register
pursuant to Section 19(b)(2) of the
Act.19 Amendment No. 2 clarifies that a
specialist’s ability to effect destabilizing
dealer account transactions when
matching the NBBO applies when the
NBBO is established by another market
center. The Commission finds that
Amendment No. 2 provides clarification
in the rule text as to the intent of the
proposed rule filing. For these reasons,
the Commission believes that good
13 Id.
14 See Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496 (June 29, 2005).
15 See NYSE Response Letter, supra note 5, at 2.
16 Id. at 2.
17 Id. at 2.
18 Id. at 2.
19 15 U.S.C 78s(b)(2).
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cause exists to accelerate approval of
Amendment No. 2.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,20 that the
proposed rule change (File No. SR–
NYSE–2006–07), as amended by
Amendment No. 1 thereto, be, and
hereby is, approved, and that
Amendment No. 2 thereto, be, and
hereby is, approved on an accelerated
basis.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.21
Nancy M. Morris,
Secretary.
[FR Doc. E6–14529 Filed 8–31–06; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54368; File No. SR–NYSE–
2005–58]
Self-Regulatory Organizations; New
York Stock Exchange, Inc. (n/k/a New
York Stock Exchange LLC); Order
Approving Proposed Rule Change and
Amendment No. 1 Thereto Relating to
Exchange Rule 312(f) Regarding
Changes Within Member Organizations
August 25, 2006.
I. Introduction
On August 15, 2005, the New York
Stock Exchange, Inc. (n/k/a New York
Stock Exchange LLC) (‘‘NYSE’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
the ‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (the ‘‘Exchange Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change and on May 5, 2006, NYSE filed
Amendment No. 1 to the proposed rule
change.3 The proposed rule change, as
amended, concerns amendments to Rule
312(f) to, among other changes, 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. The
20 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Amendment No. 1 replaced the rule text in the
original filing in its entirety and proposed to clarify
that Rule 312(f) applies only to non-investment
grade debt and equity securities. Amendment No.
1 also added 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.
21 17
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Federal Register / Vol. 71, No. 170 / Friday, September 1, 2006 / Notices
proposed rule change, as amended, was
published for comment in the Federal
Register on May 26, 2006.4 The
Commission received two comment
letters on the proposal.5 On August 11,
2006, NYSE filed a response to the S&C
Letter.6 This order approves the
proposed rule change, as amended.
II. Description of the Proposed Rule
Change
NYSE Rule 312(f) (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 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 purpose of the proposed rule
change is to retain a process for
mitigating conflicts of interest that may
arise when recommending the securities
of companies in which a member
organization may have an interest, while
also reducing burdens on the industry
and the Exchange with respect to
making determinations regarding the
existence of a control relationship by
establishing clearer standards and
reducing interpretative questions.
(i) Proposed Codification To Exclude
Investment Grade Debt From Rule 312(f)
sroberts on PROD1PC70 with NOTICES
NYSE has interpreted Rule 312(f) to
apply only to non-investment grade debt
and equity securities.7 This proposal
would codify that interpretation.
4 See Securities Exchange Act Release No. 53840
(May 19, 2006), 71 FR 30458 (May 26, 2006).
5 See letter from John Ramsay, Managing Director,
Deputy General Counsel, Citigroup Global Markets
Inc. (‘‘Citigroup’’), to Nancy M. Morris, Secretary,
SEC, dated June 16, 2006 (the ‘‘Citigroup Letter’’)
and letter from Sullivan & Cromwell LLP (‘‘S&C’’)
to Nancy M. Morris, Secretary, SEC, dated June 16,
2006 (the ‘‘S&C Letter’’).
6 See letter from Mary Yeager, Assistant Secretary,
NYSE, to Catherine McGuire, Chief Counsel,
Division of Market Regulation, SEC, dated August
11, 2006 (the ‘‘NYSE Response’’).
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
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(ii) Proposed Expansion To Include All
Non-Investment Grade Debt and Equity
Securities
The proposed rule change would also
broaden the 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.
In addition, the proposed rule change
would extend the prohibition against
solicited transactions to the noninvestment 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
Finally, the proposed rule change
would 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 (e.g., any
recommendation would be subject to a
requirement to disclose to the customer
the existence and nature of the control
relationship at the time of
recommendation).9 The Exchange states
that for these types of relationships
disclosure is likely to function as an
adequate method for addressing the
conflicts of interest that could arise with
respect to a member’s recommendation
to buy or sell securities of many
affiliated entities. The Exchange
proposes to retain the prohibition on the
recommendation 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.
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.
8 See NYSE Rule 2.
9 See proposed Rule 312(f)(2). 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.
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52203
III. Summary of Comments Received
and NYSE Response
The Commission received two
comment letters (the Citigroup Letter
and the S&C Letter) on the proposal and
a response to the S&C Letter by NYSE.10
The Citigroup Letter expresses support
for the proposed changes to Rule 312(f).
The S&C Letter generally expresses
support for the proposed rule change,
but also notes reservations regarding: (1)
The expansion of the Rule 312(f)
restrictions to non-public securities, and
(2) the prohibitions contained in Rule
312(f)(1) concerning solicitation of
transactions in the securities of a
member organization, its parent or a
MAP.11
In responding to S&C’s reservation
regarding the extension of the coverage
of Rule 312(f) to non-publicly traded
securities, NYSE states that there is a
‘‘need to assure coverage of all postdistribution transactions by member
organizations in affiliated securities,
and not solely those which are sold
pursuant to public offerings.’’ 12 NYSE
also expresses the view that the
proposed change will not impose a
significant burden on trading in nonpublicly traded securities.13
In responding to S&C’s reservation
regarding the prohibitions contained in
Rule 312(f)(1), NYSE states that it
‘‘respectfully disagree[s] with the
suggestion that the prohibition against
the solicitation of transactions in the
securities of the member organization,
parent or [MAP] is at present
unwarranted [because] [t]he conflicts
which the original rule was written to
prevent have not disappeared.’’ 14 NYSE
also clarifies that ‘‘[i]t is not the
transaction which is prohibited, but
rather the recommendation of the
transaction; the Rule allows unsolicited
transactions.’’ 15
IV. Discussion and Findings
After careful review, the Commission
finds that 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) 16 of the Exchange Act.
10 S&C Letter. See also NYSE Response. Because
the Citigroup Letter did not express any
disagreement with the proposed rule change, the
NYSE Response does not address the Citigroup
Letter.
11 S&C Letter.
12 NYSE Response.
13 Id.
14 Id.
15 Id.
16 15 U.S.C. 78f(b)(5).
E:\FR\FM\01SEN1.SGM
01SEN1
52204
Federal Register / Vol. 71, No. 170 / Friday, September 1, 2006 / Notices
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. Section 3(f) of the
Exchange Act also 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 Commission believes that the
proposed rule change, as amended, 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 by
and under common control with
member organizations (other than
MAPs), subject to appropriate customer
disclosure of the relationship, by
expanding restrictions on effecting
solicited transactions to include nonpublic securities, and by codifying
NYSE interpretations as described
above.
V. Conclusions
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,17 that the
proposed rule change (SR–NYSE–2005–
58), as amended, be, and hereby is,
approved.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.18
Nancy M. Morris,
Secretary.
[FR Doc. E6–14563 Filed 8–31–06; 8:45 am]
BILLING CODE 8010–01–P
DEPARTMENT OF STATE
[Public Notice 5534]
sroberts on PROD1PC70 with NOTICES
Culturally Significant Object Imported
for Exhibition Determinations:
‘‘Cimabue and Early Italian Devotional
Painting’’
Summary: Notice is hereby given of
the following determinations: Pursuant
to the authority vested in me by the Act
of October 19, 1965 (79 Stat. 985; 22
U.S.C. 2459), Executive Order 12047 of
March 27, 1978, the Foreign Affairs
17 15
18 17
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
VerDate Aug<31>2005
16:21 Aug 31, 2006
Jkt 208001
Reform and Restructuring Act of 1998
(112 Stat. 2681, et seq.; 22 U.S.C. 6501
note, et seq.), Delegation of Authority
No. 234 of October 1, 1999, Delegation
of Authority No. 236 of October 19,
1999, as amended, and Delegation of
Authority No. 257 of April 15, 2003 [68
FR 19875], I hereby determine that the
object to be included in the exhibition
‘‘Cimabue and Early Italian Devotional
Painting,’’ imported from abroad for
temporary exhibition within the United
States, is of cultural significance. The
object is imported pursuant to a loan
agreement with the foreign owner or
custodian. I also determine that the
exhibition or display of the exhibit
object at The Frick Collection, New
York, New York, from on or about
October 3, 2006, until on or about
December 31, 2006, and at possible
additional venues yet to be determined,
is in the national interest. Public Notice
of these Determinations is ordered to be
published in the Federal Register.
For Further Information Contact: For
further information, including a
description of the exhibit object, contact
Paul Manning, Attorney-Adviser, Office
of the Legal Adviser, U.S. Department of
State (telephone: 202/453–8052). The
address is U.S. Department of State, SA–
44, 301 4th Street, SW., Room 700,
Washington, DC 20547–0001.
Dated: August 25, 2006.
C. Miller Crouch,
Principal Deputy Assistant Secretary for
Educational and Cultural Affairs, Department
of State.
[FR Doc. E6–14546 Filed 8–31–06; 8:45 am]
BILLING CODE 4710–05–P
DEPARTMENT OF STATE
[Public Notice 5535]
Culturally Significant Objects Imported
for Exhibition Determinations:
‘‘Domenico Tiepolo (1727–1804): A
New Testament’’
Summary: Notice is hereby given of
the following determinations: Pursuant
to the authority vested in me by the Act
of October 19, 1965 (79 Stat. 985; 22
U.S.C. 2459), Executive Order 12047 of
March 27, 1978, the Foreign Affairs
Reform and Restructuring Act of 1998
(112 Stat. 2681, et seq.; 22 U.S.C. 6501
note, et seq.), Delegation of Authority
No. 234 of October 1, 1999, Delegation
of Authority No. 236 of October 19,
1999, as amended, and Delegation of
Authority No. 257 of April 15, 2003 [68
FR 19875], I hereby determine that the
objects to be included in the exhibition
‘‘Domenico Tiepolo (1727–1804): A
New Testament,’’ imported from abroad
PO 00000
Frm 00153
Fmt 4703
Sfmt 4703
for temporary exhibition within the
United States, are of cultural
significance. The objects are imported
pursuant to loan agreements with the
foreign owners or custodians. I also
determine that the exhibition or display
of the exhibit objects at The Frick
Collection, New York, New York, from
on or about October 24, 2006, until on
or about January 7, 2007, and at possible
additional venues yet to be determined,
is in the national interest. Public Notice
of these Determinations is ordered to be
published in the Federal Register.
For Further Information Contact: For
further information, including a list of
the exhibit objects, contact Wolodymyr
Sulzynsky, Attorney-Adviser, Office of
the Legal Adviser, U.S. Department of
State (telephone: 202/453–8050). The
address is U.S. Department of State, SA–
44, 301 4th Street, SW., Room 700,
Washington, DC 20547–0001.
Dated: August 25, 2006.
C. Miller Crouch,
Principal Deputy Assistant Secretary for
Educational and Cultural Affairs, Department
of State.
[FR Doc. E6–14541 Filed 8–31–06; 8:45 am]
BILLING CODE 4710–05–P
DEPARTMENT OF STATE
[Public Notice 5537]
Culturally Significant Objects Imported
for Exhibition Determinations: ‘‘Eye On
Europe: Prints, Books, and Multiples,
1960—Now’’
Summary: Notice is hereby given of
the following determinations: Pursuant
to the authority vested in me by the Act
of October 19, 1965 (79 Stat. 985; 22
U.S.C. 2459), Executive Order 12047 of
March 27, 1978, the Foreign Affairs
Reform and Restructuring Act of 1998
(112 Stat. 2681, et seq.; 22 U.S.C. 6501
note, et seq.), Delegation of Authority
No. 234 of October 1, 1999, Delegation
of Authority No. 236 of October 19,
1999, as amended, and Delegation of
Authority No. 257 of April 15, 2003 [68
FR 19875], I hereby determine that the
objects to be included in the exhibition
‘‘Eye On Europe: Prints, Books, and
Multiples, 1960—Now’’ imported from
abroad for temporary exhibition within
the United States, are of cultural
significance. The objects are imported
pursuant to a loan agreement with the
foreign owners or custodians. I also
determine that the exhibition or display
of the exhibit objects at The Museum of
Modern Art, New York, New York, from
on or about October 10, 2006, until on
or about January 1, 2007, and at possible
additional venues yet to be determined,
E:\FR\FM\01SEN1.SGM
01SEN1
]]>Agencies
[Federal Register Volume 71, Number 170 (Friday, September 1, 2006)]
[Notices]
[Pages 52202-52204]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-14563]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54368; File No. SR-NYSE-2005-58]
Self-Regulatory Organizations; New York Stock Exchange, Inc. (n/
k/a New York Stock Exchange LLC); Order Approving Proposed Rule Change
and Amendment No. 1 Thereto Relating to Exchange Rule 312(f) Regarding
Changes Within Member Organizations
August 25, 2006.
I. Introduction
On August 15, 2005, the New York Stock Exchange, Inc. (n/k/a New
York Stock Exchange LLC) (``NYSE'' or the ``Exchange'') filed with the
Securities and Exchange Commission (``SEC'' or the ``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed
rule change and on May 5, 2006, NYSE filed Amendment No. 1 to the
proposed rule change.\3\ The proposed rule change, as amended, concerns
amendments to Rule 312(f) to, among other changes, 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.
The
[[Page 52203]]
proposed rule change, as amended, was published for comment in the
Federal Register on May 26, 2006.\4\ The Commission received two
comment letters on the proposal.\5\ On August 11, 2006, NYSE filed a
response to the S&C Letter.\6\ This order approves the proposed rule
change, as amended.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 replaced the rule text in the original
filing in its entirety and proposed to clarify that Rule 312(f)
applies only to non-investment grade debt and equity securities.
Amendment No. 1 also added 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\ See Securities Exchange Act Release No. 53840 (May 19,
2006), 71 FR 30458 (May 26, 2006).
\5\ See letter from John Ramsay, Managing Director, Deputy
General Counsel, Citigroup Global Markets Inc. (``Citigroup''), to
Nancy M. Morris, Secretary, SEC, dated June 16, 2006 (the
``Citigroup Letter'') and letter from Sullivan & Cromwell LLP
(``S&C'') to Nancy M. Morris, Secretary, SEC, dated June 16, 2006
(the ``S&C Letter'').
\6\ See letter from Mary Yeager, Assistant Secretary, NYSE, to
Catherine McGuire, Chief Counsel, Division of Market Regulation,
SEC, dated August 11, 2006 (the ``NYSE Response'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
NYSE Rule 312(f) (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
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 purpose of the proposed rule change is to retain a process for
mitigating conflicts of interest that may arise when recommending the
securities of companies in which a member organization may have an
interest, while also reducing burdens on the industry and the Exchange
with respect to making determinations regarding the existence of a
control relationship by establishing clearer standards and reducing
interpretative questions.
(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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
(ii) Proposed Expansion To Include All Non-Investment Grade Debt and
Equity Securities
The proposed rule change would also broaden the 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.
In addition, the proposed rule change would extend the prohibition
against solicited transactions 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.
---------------------------------------------------------------------------
\8\ See NYSE Rule 2.
---------------------------------------------------------------------------
(iii) Proposed Amendment To Permit Certain Recommendations If Disclosed
Finally, the proposed rule change would 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 (e.g., any
recommendation would be subject to a requirement to disclose to the
customer the existence and nature of the control relationship at the
time of recommendation).\9\ The Exchange states that for these types of
relationships disclosure is likely to function as an adequate method
for addressing the conflicts of interest that could arise with respect
to a member's recommendation to buy or sell securities of many
affiliated entities. The Exchange proposes to retain the prohibition on
the recommendation 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.
---------------------------------------------------------------------------
\9\ See proposed Rule 312(f)(2). 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.
---------------------------------------------------------------------------
III. Summary of Comments Received and NYSE Response
The Commission received two comment letters (the Citigroup Letter
and the S&C Letter) on the proposal and a response to the S&C Letter by
NYSE.\10\ The Citigroup Letter expresses support for the proposed
changes to Rule 312(f).
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\10\ S&C Letter. See also NYSE Response. Because the Citigroup
Letter did not express any disagreement with the proposed rule
change, the NYSE Response does not address the Citigroup Letter.
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The S&C Letter generally expresses support for the proposed rule
change, but also notes reservations regarding: (1) The expansion of the
Rule 312(f) restrictions to non-public securities, and (2) the
prohibitions contained in Rule 312(f)(1) concerning solicitation of
transactions in the securities of a member organization, its parent or
a MAP.\11\
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\11\ S&C Letter.
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In responding to S&C's reservation regarding the extension of the
coverage of Rule 312(f) to non-publicly traded securities, NYSE states
that there is a ``need to assure coverage of all post-distribution
transactions by member organizations in affiliated securities, and not
solely those which are sold pursuant to public offerings.'' \12\ NYSE
also expresses the view that the proposed change will not impose a
significant burden on trading in non-publicly traded securities.\13\
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\12\ NYSE Response.
\13\ Id.
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In responding to S&C's reservation regarding the prohibitions
contained in Rule 312(f)(1), NYSE states that it ``respectfully
disagree[s] with the suggestion that the prohibition against the
solicitation of transactions in the securities of the member
organization, parent or [MAP] is at present unwarranted [because] [t]he
conflicts which the original rule was written to prevent have not
disappeared.'' \14\ NYSE also clarifies that ``[i]t is not the
transaction which is prohibited, but rather the recommendation of the
transaction; the Rule allows unsolicited transactions.'' \15\
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\14\ Id.
\15\ Id.
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IV. Discussion and Findings
After careful review, the Commission finds that 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)
\16\ of the Exchange Act.
[[Page 52204]]
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. Section 3(f) of the Exchange Act also
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.
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\16\ 15 U.S.C. 78f(b)(5).
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The Commission believes that the proposed rule change, as amended,
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 by and under common control with member
organizations (other than MAPs), subject to appropriate customer
disclosure of the relationship, by expanding restrictions on effecting
solicited transactions to include non-public securities, and by
codifying NYSE interpretations as described above.
V. Conclusions
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\17\ that the proposed rule change (SR-NYSE-2005-58), as amended,
be, and hereby is, approved.
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\17\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-14563 Filed 8-31-06; 8:45 am]
BILLING CODE 8010-01-P
