Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Amendment No. 3 and Order Granting Accelerated Approval to a Proposed Rule Change as Modified by Amendments No. 1, 2, and 3 Thereto Relating to Rule 18 (Compensation in Relation to System Failure), 40348-40351 [E7-14217]

Download as PDF 40348 Federal Register / Vol. 72, No. 141 / Tuesday, July 24, 2007 / Notices is not required to reproduce them. (5 U.S.C. 552(a)) Dated at Rockville, Maryland, this 16th day of July, 2007. For the U.S. Nuclear Regulatory Commission. Andrea D. Valentin, Chief, Regulatory Guide Branch, Division of Fuel, Engineering, and Radiological Research, Office of Nuclear Regulatory Research. [FR Doc. E7–14251 Filed 7–23–07; 8:45 am] BILLING CODE 7590–01–P SECURITIES AND EXCHANGE COMMISSION In the Matter of American Pad & Paper Co., The CattleSale Co., CHS Electronics, Inc., Cypost Corp., Gen-ID Lab Services, Inc., Global Business Information Directory, Inc., Golf Communities of America, Inc., GSL Holdings, Inc., Industrial Rubber Innovations, Inc., Instapay Systems, Inc., Midland, Inc., Orbit Brands Corp., Signal Apparel Co., Inc., and United Specialties, Inc., (n/k/a WaterColor Holdings, Inc.) File No. 500–1; Order of Suspension of Trading mstockstill on PROD1PC66 with NOTICES July 20, 2007. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of American Pad & Paper Co. because it has not filed any periodic reports since the period ended March 31, 2000. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of The CattleSale Co. because it has not filed any periodic reports since the period ended September 30, 2004. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of CHS Electronics, Inc. because it has not filed any periodic reports since the period ended September 30, 1999. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of Cypost Corp. because it has not filed any periodic reports since the period ended March 31, 2003. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of Gen-ID Lab Services, Inc. because it has not filed any periodic reports since the period ended September 30, 1998. It appears to the Securities and Exchange Commission that there is a VerDate Aug<31>2005 17:50 Jul 23, 2007 Jkt 211001 lack of current and accurate information concerning the securities of Global Business Information Directory, Inc. because it has not filed any periodic reports since September 9, 1999. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of Golf Communities of America, Inc. because it has not filed any periodic reports since the period ended March 31, 1999. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of GSL Holdings, Inc. because it has not filed any periodic reports since the period ended June 30, 2004. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of Industrial Rubber Innovations, Inc. because it has not filed any periodic reports since the period ended October 31, 1999. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of Instapay Systems, Inc. because it has not filed any periodic reports since the period ended September 30, 2004. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of Orbit Brands Corp. because it has not filed any periodic reports since December 31, 2004. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of Midland, Inc. because it has not filed any periodic reports since the period ended September 30, 1999. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of Signal Apparel Co., Inc. because it has not filed any periodic reports since the period ended June 30, 2000. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of United Specialties, Inc. (n/k/a WaterColor Holdings, Inc.) because it has not filed any periodic reports since the period ended September 30, 2003. The Commission is of the opinion that the public interest and the protection of investors require a suspension of trading in the securities of the above-listed companies. Therefore, it is ordered, pursuant to Section 12(k) of the Securities Exchange PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 Act of 1934, that trading in the abovelisted companies, including trading in the debt securities of CHS Electronics, Inc. and Midland, Inc., is suspended for the period from 9:30 a.m. EDT on July 20, 2007, through 11:59 p.m. EDT on August 2, 2007. By the Commission. J. Lynn Taylor, Assistant Secretary. [FR Doc. 07–3629 Filed 7–20–07; 12:03 pm] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56085; File No. SR–NYSE– 2007–09] Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Amendment No. 3 and Order Granting Accelerated Approval to a Proposed Rule Change as Modified by Amendments No. 1, 2, and 3 Thereto Relating to Rule 18 (Compensation in Relation to System Failure) July 17, 2007. I. Introduction On January 26, 2007, the New York Stock Exchange LLC (‘‘NYSE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposal to adopt Rule 18, ‘‘Compensation in Relation to Exchange System Failure,’’ which will provide a form of compensation to member organizations when a loss is sustained in relation to an Exchange system failure. The Exchange filed Amendments No. 1 and 2 to the proposal on February 1, 2007, and March 28, 2007, respectively. The proposal, as modified by Amendments No. 1 and 2, was published for comment in the Federal Register on April 5, 2007.3 The Commission received one comment letter regarding the proposal.4 The Exchange filed Amendment No. 3 with the Commission on June 21, 2007.5 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 55555 (March 29, 2007), 72 FR 16841 (‘‘Notice’’). 4 See letter from Jerry O’Connell, Chair, Trading Committee, Securities Industry and Financial Markets Association (‘‘SIFMA’’), to Nancy M. Morris, Secretary, Commission, dated April 26, 2007 (‘‘SIFMA Letter’’). On June 21, 2007, NYSE submitted a response to the SIFMA Letter. See letter from Mary Yeager, Assistant Secretary, NYSE, to Nancy M. Morris, Secretary, Commission (‘‘Response Letter’’). 5 Amendment No. 3: (i) Removed the exclusion of queuing from the proposed definition of Exchange 2 17 E:\FR\FM\24JYN1.SGM 24JYN1 Federal Register / Vol. 72, No. 141 / Tuesday, July 24, 2007 / Notices This order provides notice of filing of Amendment No. 3 and approves the proposal, as modified by Amendments No. 1, 2, and 3, on an accelerated basis. II. Description of the Proposal mstockstill on PROD1PC66 with NOTICES The Exchange proposes to adopt Rule 18, ‘‘Compensation in Relation to Exchange System Failure,’’ in order to establish a procedure to compensate member organizations in relation to Exchange system failures. The proposed rule defines an Exchange system failure as a ‘‘malfunction of the Exchange’s physical equipment, devices, and/or programming which results in an incorrect execution or no execution of an order that was received in Exchange systems. Misuse of Exchange systems is not considered an Exchange system failure.’’ 6 For a member organization to be eligible to receive payment for a claim, it must incur a net loss equal to or greater than $5,000. Member organizations are not permitted to aggregate losses incurred as a result of more than one system failure in order to satisfy the $5,000 minimum claim requirement. Proposed Rule 18 would require member organizations to informally notify the Exchange’s Division of Floor Operations of a suspected Exchange system failure by the opening of the next business day following an incident. Formal written notice of the suspected Exchange system failure must be provided to the Exchange’s Division of Floor Operations no later than the end of the third business day after the incident. Once in receipt of a claim, the Exchange’s Division of Floor Operations will verify that: (i) A valid order was accepted into the Exchange’s systems; and (ii) an Exchange system failure occurred during the execution or handling of that order. If all of the criteria for submitting a claim have been met, the claim will be qualified for processing with all other eligible claims system failure; (ii) withdrew the proposed modification of NYSE Rule 134; and (iii) clarified that the Chief Executive Officer or his or her designee shall make the final determinations on claims in the event that the members of the Compensation Review Panel are deadlocked. The text of Amendment No. 3 is available on the Exchange’s Web site (http://www.nyse.com), at the Exchange’s Office of the Secretary, and at the Commission’s Public Reference Room. 6 The Exchange’s original proposal, as described in the Notice, see supra note 3, stated that delays in order processing as a result of large volume or other capacity issues, commonly known as ‘‘queuing,’’ are not within the definition of Exchange system failures. In response to a comment in the SIFMA Letter, see supra note 4, NYSE revised the proposal to delete this aspect of the definition in Amendment No. 3. VerDate Aug<31>2005 17:50 Jul 23, 2007 Jkt 211001 at the end of the calendar month in which the incident occurred. The Exchange proposes to allot $500,000 each calendar month (‘‘Monthly Allotment’’) to be used for payments to member organizations that qualify for compensation under proposed Rule 18. The Monthly Allotments will not aggregate; however, in the event that less than $250,000 of the Monthly Allotment is paid out for a given calendar month, $50,000 of that month’s remaining Monthly Allotment (‘‘Supplemental Allotment’’) will be added to a supplemental fund available for payment in subsequent calendar months. This Supplemental Allotment will be used only to pay claims after the Monthly Allotment is exhausted. If claims are satisfied by the Monthly Allotment, the Supplemental Allotment, or any unused portion thereof, will be carried forward every month. Under the current proposal, there is no cap on the amount that may accrue over time from the Supplemental Allotments. The Exchange may determine to institute such a cap in the future. Any such determination would be formally reflected in the text of Rule 18. In addition, the Exchange represented in its proposal that, a few years after Rule 18’s implementation, Exchange management intends to review both the maximum dollar amount, if any, that may be accrued as part of the Supplemental Allotment and the Monthly Allotment to determine whether they are appropriate. The Exchange represents that any modification of the terms of the Supplemental Allotment or the Monthly Allotment will be filed with the Commission under Section 19(b)(1) of the Act as a proposed rule change. In the original proposal, the Exchange sought to amend Rule 134.40 to require that profits equal to or greater than $5,000 gained in relation to an Exchange system failure be remitted to the Exchange in order to be applied to payments to member organizations in the event that the Monthly Allotment and Supplemental Allotment were inadequate. However, in response to industry comment,7 in Amendment No. 3, the Exchange withdrew its proposed amendment to Rule 134.40. Thus, under Rule 134.40, member organizations must continue to report profits from Exchange error transactions to the Exchange, but they will not be required to remit any part of such profits to the Exchange. The Exchange proposes to establish a panel consisting of three Floor Governors and three Exchange PO 00000 7 See SIFMA Letter, supra note 4. Frm 00080 Fmt 4703 Sfmt 4703 40349 employees (‘‘Compensation Review Panel’’) that will review qualified claims and administer payments. The Compensation Review Panel will meet and review all the claims that are submitted for a calendar month in order to determine if each claim satisfies all the criteria for payment, and the amount to be paid on the claim (‘‘approved claims’’). As part of its determination, the Compensation Review Panel will review the actions of the member organization and its employees before and after the error occurred in order to determine if any of the claimant’s actions contributed to the loss sustained. The Compensation Review Panel may increase or reduce the amount deemed eligible for payment as a result of its review. All decisions by the Compensation Review Panel will be final. The determinations of the Compensation Review Panel will be by majority vote. In the event of deadlock, all relevant information about the claim will be sent to the Chief Executive Officer of the Exchange (‘‘CEO’’) of the Exchange or his or her designee,8 who will make a final determination. Like the determinations of the Compensation Review Panel, all the determinations of the CEO will be final. If the total dollar amount of approved claims is less than the Monthly Allotment, then the claims will be paid in full. If the total amount of approved claims exceeds the Monthly Allotment, then any Supplemental Allotment will be added to the Monthly Allotment in order to satisfy approved claims. In the event that the approved claims for a month exceed the sum of the Monthly Allotment and any Supplemental Allotment, the approved claims will be paid out to member organizations based on the proportion that each eligible claim bears to the total amount of all approved claims. Finally, the Exchange proposes to make NYSE Rule 18 effective retroactively to September 1, 2006. Following Commission approval of the proposed rule, member organizations may submit claims to the Exchange for any alleged Exchange system failures 8 The description of the proposal set forth in the Notice, see supra note 3, provided that, in the event of a deadlock, the CEO of the Exchange or the President or his or her designee would make the final determination. The inclusion of the President in this provision was an error on the Exchange’s part. In Amendment No. 3, the Exchange corrected this provision of the proposed rule change to reflect the Exchange’s intention that the CEO or his or her designee would serve this function. Telephone conversation between Deanna Logan, Director, Rule Development, NYSE, and Nathan Saunders, Special Counsel, Division of Market Regulation, Commission, on July 16, 2007. E:\FR\FM\24JYN1.SGM 24JYN1 40350 Federal Register / Vol. 72, No. 141 / Tuesday, July 24, 2007 / Notices system failure was narrower than the definition used by other exchanges.12 In response to this comment, in Amendment No. 3, the Exchange removed the exclusion of queuing from the definition of Exchange system failure. Second, the commenter objected to the proposed provision requiring remittance to the exchange of certain net gains resulting from system failure, stating that this element of the proposal III. Discussion would impose new obligations on After careful consideration of the member organizations to remit profits proposed rule change, the SIFMA Letter, that result not from any act or omission and the NYSE’s Response Letter, the on their part, but from an act or Commission finds that the proposed omission on the part of the Exchange. rule change, as amended, is consistent The commenter also questioned how with the requirements of the Act and the this proposed requirement could be rules and regulations thereunder reconciled with NYSE Rule 411, which applicable to a national securities requires members to resolve certain 9 In particular, the exchange. erroneous executions in favor of nonCommission finds that the proposal is member customers.13 In response to the consistent with Section 6(b)(5) of the Act,10 which requires, inter alia, that the comment letter, in Amendment No. 3, the Exchange withdrew its proposal to rules of a national securities exchange amend Rule 134.40 to require be designed to promote just and remittance of certain net gains. equitable principles of trade, to foster Third, the commenter argued that the cooperation and coordination with guidelines set forth in proposed Rule 18 persons engaged in regulating, clearing, for the Compensation Review Panel are settling, processing information with vague and subjective—specifically, the respect to, and facilitating transactions in securities, to remove impediments to provision allowing the Panel to award a and perfect the mechanism of a free and lesser amount than that claimed based on the actions or inactions of the open market and a national market claiming member. Fourth, with respect system, and, in general, to protect to the proposal that any deadlock of the investors and the public interest. The Commission believes that Compensation Review Panel would be proposed Rule 18 provides for a fair and broken by the Exchange’s CEO or his or reasonable process by which NYSE her designee, the commenter argued that member organizations may petition for decisions impacting the regulation and compensation when they suffer a loss compensation of NYSE member due to a system failure on the Exchange. organizations should be made by the In addition, the proposed amount of the Chief Regulatory Officer or some other Monthly Allotment and the senior officer within the Exchange’s Supplemental Allotment and the regulatory arm. In response to these procedures relating to requests for comments, NYSE stated its view that the compensation for Exchange system business judgment of the Compensation failures are reasonable. The Exchange Review Panel should be based on a has represented that it will review the reasonableness standard when this terms of the Supplemental Allotment panel evaluates whether a claimant and the Monthly Allotment to evaluate should have taken, and did take, actions whether they are sufficient and will file to mitigate the claimed loss. NYSE with the Commission a proposed rule further noted that the expert change under Section 19(b)(1) of the Act professional judgment of the CEO makes to reflect any proposed revisions. the CEO the appropriate person with The Commission received one whom to vest the authority to break a comment letter on the proposed rule deadlock of the Compensation Review 11 First, the commenter objected change. Panel. The Commission believes that the to the proposed exclusion of queuing proposed guidelines and tie-breaking delays from the definition of Exchange procedures for the Compensation system failure, stating that the Review Panel’s are reasonable in light of Exchange’s proposed definition of the Exchange’s goal to provide a mechanism to compensate members for 9 In approving this proposed rule change, the system failures. Commission has considered the proposed rule’s mstockstill on PROD1PC66 with NOTICES that occurred between September 1, 2006, and the date of Commission approval. A Monthly Allotment will be set aside for each calendar month in the period for which Rule 18 is retroactively effective. However, the Supplemental Allotment provision will not be retroactive, but will be effective beginning with the first calendar month after Commission approval of proposed Rule 18. impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 10 15 U.S.C. 78f(b)(5). 11 See SIFMA Letter, supra note 4. VerDate Aug<31>2005 17:50 Jul 23, 2007 Jkt 211001 12 See NYSE Arca Rule 14.2 and Nasdaq Rule 4626. 13 See NYSE Rule 411(a)(ii). PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 Pursuant to Section 19(b)(2) of the Act,14 the Commission finds good cause for approving the proposal prior to the thirtieth day after the publication of the proposal, as modified by Amendments No. 1, 2, and 3, in the Federal Register. In Amendment No. 3, the Exchange proposed to eliminate the exclusion of queuing from the definition of system failure, which would make this definition consistent with the definitions of system failure used by Nasdaq and NYSE Arca.15 In Amendment No. 3, the Exchange also retracted its proposal to amend Rule 134.40 to require remittance of profits resulting from Exchange system failure. Rule 134.40 will remain unchanged under the proposal, as modified by Amendment No 3. Finally, Amendment No. 3 clarified the tie-breaking procedures of the Compensation Review Panel. Thus, the changes proposed in Amendment No. 3 to the proposed rule change do not introduce any new regulatory issues, and the Commission finds good cause for approving the amended proposal on an accelerated basis. IV. Solicitation of Comments Concerning Amendment No. 3 Interested persons are invited to submit written data, views, and arguments concerning the proposed rule change as modified by Amendment No. 3, including whether it 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–2007–09 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, Station Place, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NYSE–2007–09. 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 14 15 U.S.C. 78s(b)(2). supra note 12. 15 See E:\FR\FM\24JYN1.SGM 24JYN1 Federal Register / Vol. 72, No. 141 / Tuesday, July 24, 2007 / Notices 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, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–NYSE–2007–09 and should be submitted on or before August 14, 2007. V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,16 that the proposed rule change (File No. SR– NYSE–2007–09), as modified by Amendments No. 1, 2, and 3, be, and it hereby is, approved on an accelerated basis. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.17 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–14217 Filed 7–23–07; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56088; File No. SR–NYSE– 2007–63] Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to Rule 92(d)(6), Limitations on Members’ Trading Because of Customers’ Orders mstockstill on PROD1PC66 with NOTICES July 18, 2007. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on July 13, 2007, the New York Stock Exchange LLC (‘‘NYSE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been substantially prepared by the Exchange. The Exchange has designated the proposed rule change as a ‘‘noncontroversial’’ rule change pursuant to Section 19(b)(3)(A) of the Act 3 and Rule 19b–4(f)(6) thereunder,4 which renders the proposed rule change 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 Exchange proposes to amend NYSE Rule 92 to permit specialists to trade between the hours of 6 p.m. and 9:15 a.m. Eastern Time (‘‘ET’’) in any security in which the specialist is registered, notwithstanding any open customer orders on the Display Book. The text of the proposed rule change is available on NYSE’s Web site (http:// www.nyse.com), at NYSE, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of, and basis for, the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to amend NYSE Rule 92 to permit specialists to trade for their dealer accounts after hours notwithstanding that they have unexecuted customer orders in their possession that could be executed at the same prices as the specialists’ trades. The proposed amendment would both minimize trading risks for specialists and harmonize NYSE Rule 92 with NASD’s Manning Rule.5 16 Id. 17 17 3 15 1 15 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 4 17 VerDate Aug<31>2005 17:50 Jul 23, 2007 5 Jkt 211001 PO 00000 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). See NASD Rule 2111 and IM–2110–2. Frm 00082 Fmt 4703 Sfmt 4703 40351 NYSE Rule 92 generally prohibits members or member organizations from entering proprietary orders ahead of, or along with, customer orders that are executable at the same price as the proprietary order. Because the rule is not limited to market hours, it prohibits, subject to certain exceptions, specialists from trading after hours in any security in which they are registered while they are holding unexecuted customer orders on their Book, which they have knowledge of, that could be executed at the same price as the specialist’s proposed trade (e.g., good-til-cancelled orders). At present, under NYSE rules, specialists remain responsible for orders that have been left on the Book after the trading and crossing sessions have closed even though they cannot execute those orders until the next Exchange trading session begins. Accordingly, if a specialist had such an order on the Book, any after-hours trading by the specialist in such security could violate Rule 92.6 Because of the specialist’s agency obligation to the Book after trading at NYSE has closed, the Rule 92 limit on specialist’s after-hours trading can increase the specialist’s trading risks, particularly where specialists are trading for the purpose of hedging their risk and/or bringing their dealer or investment account positions into parity with trading in away markets. To correct this, the Exchange proposes amending Rule 92 to permit specialists to trade for the dealer account after hours, notwithstanding unexecuted interest that is left on the specialist’s Book. The proposed change, in addition to properly allocating the obligation to protect customer orders after hours, also has the effect of harmonizing NYSE Rule 92 to its NASD counterpart, the Manning Rule. The Manning Rule generally prohibits NASD member firms that are holding a customer limit or market order from trading for that member’s market making proprietary account at a price that would satisfy the customer’s limit or market order without executing the customer’s order.7 Notably, however, the Manning 6 Specialists could trade and offer any betterpriced executions to their customers, but as a practical matter, because specialists may have to give up executions of transactions that were intended to hedge the specialist’s trading risks, this limitation effectively prevents the specialist from engaging in hedging transactions in most securities. 7 See NASD IM 2110–2 and Rule 2111. As originally approved, the Manning Rule applied only to trading during regular trading hours. In 1999, when NASD expanded the operation of certain Nasdaq transactions and the quotation and reporting systems and facilities to 6:30 p.m. ET, the Commission approved the extension of the E:\FR\FM\24JYN1.SGM Continued 24JYN1

Agencies

[Federal Register Volume 72, Number 141 (Tuesday, July 24, 2007)]
[Notices]
[Pages 40348-40351]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-14217]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56085; File No. SR-NYSE-2007-09]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Amendment No. 3 and Order Granting Accelerated 
Approval to a Proposed Rule Change as Modified by Amendments No. 1, 2, 
and 3 Thereto Relating to Rule 18 (Compensation in Relation to System 
Failure)

July 17, 2007.

I. Introduction

    On January 26, 2007, the New York Stock Exchange LLC (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposal to adopt Rule 18, ``Compensation in Relation to Exchange 
System Failure,'' which will provide a form of compensation to member 
organizations when a loss is sustained in relation to an Exchange 
system failure. The Exchange filed Amendments No. 1 and 2 to the 
proposal on February 1, 2007, and March 28, 2007, respectively. The 
proposal, as modified by Amendments No. 1 and 2, was published for 
comment in the Federal Register on April 5, 2007.\3\ The Commission 
received one comment letter regarding the proposal.\4\ The Exchange 
filed Amendment No. 3 with the Commission on June 21, 2007.\5\

[[Page 40349]]

This order provides notice of filing of Amendment No. 3 and approves 
the proposal, as modified by Amendments No. 1, 2, and 3, on an 
accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 55555 (March 29, 
2007), 72 FR 16841 (``Notice'').
    \4\ See letter from Jerry O'Connell, Chair, Trading Committee, 
Securities Industry and Financial Markets Association (``SIFMA''), 
to Nancy M. Morris, Secretary, Commission, dated April 26, 2007 
(``SIFMA Letter''). On June 21, 2007, NYSE submitted a response to 
the SIFMA Letter. See letter from Mary Yeager, Assistant Secretary, 
NYSE, to Nancy M. Morris, Secretary, Commission (``Response 
Letter'').
    \5\ Amendment No. 3: (i) Removed the exclusion of queuing from 
the proposed definition of Exchange system failure; (ii) withdrew 
the proposed modification of NYSE Rule 134; and (iii) clarified that 
the Chief Executive Officer or his or her designee shall make the 
final determinations on claims in the event that the members of the 
Compensation Review Panel are deadlocked. The text of Amendment No. 
3 is available on the Exchange's Web site (http://www.nyse.com), at 
the Exchange's Office of the Secretary, and at the Commission's 
Public Reference Room.
---------------------------------------------------------------------------

II. Description of the Proposal

    The Exchange proposes to adopt Rule 18, ``Compensation in Relation 
to Exchange System Failure,'' in order to establish a procedure to 
compensate member organizations in relation to Exchange system 
failures. The proposed rule defines an Exchange system failure as a 
``malfunction of the Exchange's physical equipment, devices, and/or 
programming which results in an incorrect execution or no execution of 
an order that was received in Exchange systems. Misuse of Exchange 
systems is not considered an Exchange system failure.'' \6\
---------------------------------------------------------------------------

    \6\ The Exchange's original proposal, as described in the 
Notice, see supra note 3, stated that delays in order processing as 
a result of large volume or other capacity issues, commonly known as 
``queuing,'' are not within the definition of Exchange system 
failures. In response to a comment in the SIFMA Letter, see supra 
note 4, NYSE revised the proposal to delete this aspect of the 
definition in Amendment No. 3.
---------------------------------------------------------------------------

    For a member organization to be eligible to receive payment for a 
claim, it must incur a net loss equal to or greater than $5,000. Member 
organizations are not permitted to aggregate losses incurred as a 
result of more than one system failure in order to satisfy the $5,000 
minimum claim requirement.
    Proposed Rule 18 would require member organizations to informally 
notify the Exchange's Division of Floor Operations of a suspected 
Exchange system failure by the opening of the next business day 
following an incident. Formal written notice of the suspected Exchange 
system failure must be provided to the Exchange's Division of Floor 
Operations no later than the end of the third business day after the 
incident.
    Once in receipt of a claim, the Exchange's Division of Floor 
Operations will verify that: (i) A valid order was accepted into the 
Exchange's systems; and (ii) an Exchange system failure occurred during 
the execution or handling of that order. If all of the criteria for 
submitting a claim have been met, the claim will be qualified for 
processing with all other eligible claims at the end of the calendar 
month in which the incident occurred.
    The Exchange proposes to allot $500,000 each calendar month 
(``Monthly Allotment'') to be used for payments to member organizations 
that qualify for compensation under proposed Rule 18. The Monthly 
Allotments will not aggregate; however, in the event that less than 
$250,000 of the Monthly Allotment is paid out for a given calendar 
month, $50,000 of that month's remaining Monthly Allotment 
(``Supplemental Allotment'') will be added to a supplemental fund 
available for payment in subsequent calendar months. This Supplemental 
Allotment will be used only to pay claims after the Monthly Allotment 
is exhausted. If claims are satisfied by the Monthly Allotment, the 
Supplemental Allotment, or any unused portion thereof, will be carried 
forward every month.
    Under the current proposal, there is no cap on the amount that may 
accrue over time from the Supplemental Allotments. The Exchange may 
determine to institute such a cap in the future. Any such determination 
would be formally reflected in the text of Rule 18. In addition, the 
Exchange represented in its proposal that, a few years after Rule 18's 
implementation, Exchange management intends to review both the maximum 
dollar amount, if any, that may be accrued as part of the Supplemental 
Allotment and the Monthly Allotment to determine whether they are 
appropriate. The Exchange represents that any modification of the terms 
of the Supplemental Allotment or the Monthly Allotment will be filed 
with the Commission under Section 19(b)(1) of the Act as a proposed 
rule change.
    In the original proposal, the Exchange sought to amend Rule 134.40 
to require that profits equal to or greater than $5,000 gained in 
relation to an Exchange system failure be remitted to the Exchange in 
order to be applied to payments to member organizations in the event 
that the Monthly Allotment and Supplemental Allotment were inadequate. 
However, in response to industry comment,\7\ in Amendment No. 3, the 
Exchange withdrew its proposed amendment to Rule 134.40. Thus, under 
Rule 134.40, member organizations must continue to report profits from 
Exchange error transactions to the Exchange, but they will not be 
required to remit any part of such profits to the Exchange.
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    \7\ See SIFMA Letter, supra note 4.
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    The Exchange proposes to establish a panel consisting of three 
Floor Governors and three Exchange employees (``Compensation Review 
Panel'') that will review qualified claims and administer payments. The 
Compensation Review Panel will meet and review all the claims that are 
submitted for a calendar month in order to determine if each claim 
satisfies all the criteria for payment, and the amount to be paid on 
the claim (``approved claims''). As part of its determination, the 
Compensation Review Panel will review the actions of the member 
organization and its employees before and after the error occurred in 
order to determine if any of the claimant's actions contributed to the 
loss sustained. The Compensation Review Panel may increase or reduce 
the amount deemed eligible for payment as a result of its review. All 
decisions by the Compensation Review Panel will be final.
    The determinations of the Compensation Review Panel will be by 
majority vote. In the event of deadlock, all relevant information about 
the claim will be sent to the Chief Executive Officer of the Exchange 
(``CEO'') of the Exchange or his or her designee,\8\ who will make a 
final determination. Like the determinations of the Compensation Review 
Panel, all the determinations of the CEO will be final.
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    \8\ The description of the proposal set forth in the Notice, see 
supra note 3, provided that, in the event of a deadlock, the CEO of 
the Exchange or the President or his or her designee would make the 
final determination. The inclusion of the President in this 
provision was an error on the Exchange's part. In Amendment No. 3, 
the Exchange corrected this provision of the proposed rule change to 
reflect the Exchange's intention that the CEO or his or her designee 
would serve this function. Telephone conversation between Deanna 
Logan, Director, Rule Development, NYSE, and Nathan Saunders, 
Special Counsel, Division of Market Regulation, Commission, on July 
16, 2007.
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    If the total dollar amount of approved claims is less than the 
Monthly Allotment, then the claims will be paid in full. If the total 
amount of approved claims exceeds the Monthly Allotment, then any 
Supplemental Allotment will be added to the Monthly Allotment in order 
to satisfy approved claims. In the event that the approved claims for a 
month exceed the sum of the Monthly Allotment and any Supplemental 
Allotment, the approved claims will be paid out to member organizations 
based on the proportion that each eligible claim bears to the total 
amount of all approved claims.
    Finally, the Exchange proposes to make NYSE Rule 18 effective 
retroactively to September 1, 2006. Following Commission approval of 
the proposed rule, member organizations may submit claims to the 
Exchange for any alleged Exchange system failures

[[Page 40350]]

that occurred between September 1, 2006, and the date of Commission 
approval. A Monthly Allotment will be set aside for each calendar month 
in the period for which Rule 18 is retroactively effective. However, 
the Supplemental Allotment provision will not be retroactive, but will 
be effective beginning with the first calendar month after Commission 
approval of proposed Rule 18.

III. Discussion

    After careful consideration of the proposed rule change, the SIFMA 
Letter, and the NYSE's Response Letter, the Commission finds that the 
proposed rule change, as amended, is consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to a 
national securities exchange.\9\ In particular, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\10\ 
which requires, inter alia, that the rules of a national securities 
exchange be designed to promote just and equitable principles of trade, 
to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information 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.
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    \9\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that proposed Rule 18 provides for a fair 
and reasonable process by which NYSE member organizations may petition 
for compensation when they suffer a loss due to a system failure on the 
Exchange. In addition, the proposed amount of the Monthly Allotment and 
the Supplemental Allotment and the procedures relating to requests for 
compensation for Exchange system failures are reasonable. The Exchange 
has represented that it will review the terms of the Supplemental 
Allotment and the Monthly Allotment to evaluate whether they are 
sufficient and will file with the Commission a proposed rule change 
under Section 19(b)(1) of the Act to reflect any proposed revisions.
    The Commission received one comment letter on the proposed rule 
change.\11\ First, the commenter objected to the proposed exclusion of 
queuing delays from the definition of Exchange system failure, stating 
that the Exchange's proposed definition of system failure was narrower 
than the definition used by other exchanges.\12\ In response to this 
comment, in Amendment No. 3, the Exchange removed the exclusion of 
queuing from the definition of Exchange system failure.
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    \11\ See SIFMA Letter, supra note 4.
    \12\ See NYSE Arca Rule 14.2 and Nasdaq Rule 4626.
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    Second, the commenter objected to the proposed provision requiring 
remittance to the exchange of certain net gains resulting from system 
failure, stating that this element of the proposal would impose new 
obligations on member organizations to remit profits that result not 
from any act or omission on their part, but from an act or omission on 
the part of the Exchange. The commenter also questioned how this 
proposed requirement could be reconciled with NYSE Rule 411, which 
requires members to resolve certain erroneous executions in favor of 
non-member customers.\13\ In response to the comment letter, in 
Amendment No. 3, the Exchange withdrew its proposal to amend Rule 
134.40 to require remittance of certain net gains.
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    \13\ See NYSE Rule 411(a)(ii).
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    Third, the commenter argued that the guidelines set forth in 
proposed Rule 18 for the Compensation Review Panel are vague and 
subjective--specifically, the provision allowing the Panel to award a 
lesser amount than that claimed based on the actions or inactions of 
the claiming member. Fourth, with respect to the proposal that any 
deadlock of the Compensation Review Panel would be broken by the 
Exchange's CEO or his or her designee, the commenter argued that 
decisions impacting the regulation and compensation of NYSE member 
organizations should be made by the Chief Regulatory Officer or some 
other senior officer within the Exchange's regulatory arm. In response 
to these comments, NYSE stated its view that the business judgment of 
the Compensation Review Panel should be based on a reasonableness 
standard when this panel evaluates whether a claimant should have 
taken, and did take, actions to mitigate the claimed loss. NYSE further 
noted that the expert professional judgment of the CEO makes the CEO 
the appropriate person with whom to vest the authority to break a 
deadlock of the Compensation Review Panel. The Commission believes that 
the proposed guidelines and tie-breaking procedures for the 
Compensation Review Panel's are reasonable in light of the Exchange's 
goal to provide a mechanism to compensate members for system failures.
    Pursuant to Section 19(b)(2) of the Act,\14\ the Commission finds 
good cause for approving the proposal prior to the thirtieth day after 
the publication of the proposal, as modified by Amendments No. 1, 2, 
and 3, in the Federal Register. In Amendment No. 3, the Exchange 
proposed to eliminate the exclusion of queuing from the definition of 
system failure, which would make this definition consistent with the 
definitions of system failure used by Nasdaq and NYSE Arca.\15\ In 
Amendment No. 3, the Exchange also retracted its proposal to amend Rule 
134.40 to require remittance of profits resulting from Exchange system 
failure. Rule 134.40 will remain unchanged under the proposal, as 
modified by Amendment No 3. Finally, Amendment No. 3 clarified the tie-
breaking procedures of the Compensation Review Panel. Thus, the changes 
proposed in Amendment No. 3 to the proposed rule change do not 
introduce any new regulatory issues, and the Commission finds good 
cause for approving the amended proposal on an accelerated basis.
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    \14\ 15 U.S.C. 78s(b)(2).
    \15\ See supra note 12.
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IV. Solicitation of Comments Concerning Amendment No. 3

    Interested persons are invited to submit written data, views, and 
arguments concerning the proposed rule change as modified by Amendment 
No. 3, including whether it 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 rule-comments@sec.gov. Please include 
File Number SR-NYSE-2007-09 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NYSE-2007-09. 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

[[Page 40351]]

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, on 
official business days between the hours of 10 a.m. and 3 p.m. Copies 
of such filing also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NYSE-2007-09 and should be submitted on or before August 
14, 2007.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (File No. SR-NYSE-2007-09), as 
modified by Amendments No. 1, 2, and 3, be, and it hereby is, approved 
on an accelerated basis.
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    \16\ Id.
    \17\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-14217 Filed 7-23-07; 8:45 am]
BILLING CODE 8010-01-P