Self-Regulatory Organizations; New York Stock Exchange LLC; Order Approving Proposed Rule Change, as Modified by Amendment No. 1 Thereto, Amending NYSE Rule 98 and Related Rules To Redefine Specialist Operations at the NYSE, 48260-48268 [E8-18964]
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Federal Register / Vol. 73, No. 160 / Monday, August 18, 2008 / Notices
available by DTC.5 Any Participant for
which a Settling Bank has refused to
settle must make arrangement for any
payment due DTC.
Once the Settling Bank
acknowledgement process has been
completed, DTC utilizes the Federal
Reserve Bank’s National Settlement
Service (‘‘NSS’’) to effect end-of-day
cash settlement.
DTC is proposing that the cut-off time
for Settling Banks to acknowledge their
settlement balance be the later of 4:15
pm or 30 minutes after DTC has posted
final net-net settlement balances. DTC is
proposing this change to enable DTC to
be in a position to release the credit
amount due Participants at an earlier
time. Since DTC provides each Settling
Bank with online reports throughout the
processing day, which reflect gross
debits, gross credits, and the net debit
or credit for each Participant and a netnet figure for the Settling Bank, DTC
believes that this earlier cut-off time
should not cause any undo burden. In
the event that a Settling Bank is
experiencing difficulty in identifying
customer cash flows or has another
extenuating circumstance and as a result
needs more time to acknowledge
settlement, that Settling Bank would
have to notify the Settlement
department of its request for additional
time prior to 4:15 pm.
DTC believes that the proposed rule
change is consistent with the
requirements of Section 17A of the Act 6
and the rules and regulations
thereunder applicable to DTC because it
should promote the prompt and
accurate clearance and settlement of
securities transactions by enabling DTC
to send the NSS file to the Federal
Reserve Bank of New York earlier in the
day thus completing settlement earlier.
(B) Self-Regulatory Organization’s
Statement on Burden on Competition
DTC does not believe that the
proposed rule change would have any
impact or impose any burden on
competition.
(C) Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
sroberts on PROD1PC70 with NOTICES
Written comments relating to the
proposed rule change have been
received and addressed by amendment
to the proposed rule change. DTC will
5 The end-of-day net-net figure is the net of all
participants’ net balances after cross endorsement
with the National Securities Clearing Corporation
for which a Settling Bank settles, including its own
accounts.
6 15 U.S.C. 78q–1.
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notify the Commission if it receives
additional comments.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within thirty-five 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
ninety days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve such proposed
rule change 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 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–DTC–2008–06 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street, NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–DTC–2008–06. 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
Section, 100 F Street, NE., Washington,
PO 00000
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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 DTC and on
DTC’s Web site at https://www.dtcc.com/
downloads/legal/rule_filings/2008/dtc/
2008-06.pdf. 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–DTC–
2008–06 and should be submitted on or
before September 8, 2008.
For the Commission by the Division of
Trading and Markets, pursuant to delegated
authority.7
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8–19028 Filed 8–15–08; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–58328; File No. SR–NYSE–
2008–45]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Order
Approving Proposed Rule Change, as
Modified by Amendment No. 1 Thereto,
Amending NYSE Rule 98 and Related
Rules To Redefine Specialist
Operations at the NYSE
August 7, 2008.
I. Introduction
On June 11, 2008, 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 proposed rule
change to amend NYSE Rule 98 and
related rules to allow its member
organizations greater flexibility in
structuring their specialist operations
and managing their risk. The proposed
rule change was published for comment
in the Federal Register on July 3, 2008.3
On August 7, 2008, the NYSE filed
Amendment No. 1 to the proposed rule
change.4 The Commission received no
7 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 58052
(June 27, 2008), 73 FR 38274 (‘‘Notice’’).
4 In Amendment No. 1, the NYSE revises the text
of proposed NYSE Rule 460.10 to conform it to the
description of proposed NYSE Rule 460.10 as set
forth in the Notice. Because Amendment No. 1 is
1 15
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comments on the proposal. This order
approves the proposed rule change, as
amended.
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II. Background and Introduction
The NYSE adopted NYSE Rule 98 in
1986 when NYSE specialist firms,
which had been independent memberowned entities, were increasingly
becoming affiliates of larger member
organizations.5 Because of the
specialists’ unique position in the
market, NYSE Rule 98 requires an
organizational separation between the
specialist and any affiliates. The
purpose of that separation is to
eliminate or control conflicts of interest
between the specialist’s responsibilities
to the market and to any customer
orders the specialist may represent as
agent, and the business activities of the
specialist’s affiliates.
NYSE Rule 98 currently applies to
specialist organizations and ‘‘approved
persons’’ of specialist organizations.
‘‘Approved persons’’ are entities that are
in a control relationship with a
specialist organization, or share a
common corporate parent with the
specialist organization and are engaged
in a kindred business.6 NYSE Rule 98
subjects all approved persons of a
specialist organization to the NYSE
specialist rules. Among other things,
approved persons are subject to
restrictions on their ability to trade in
specialty stock options, restrictions on
certain of their business transactions
with issuers for whom the specialist
organization is the registered specialist,
and limits on the amount of securities
of such issuers that the specialist and
approved persons may own in the
aggregate.
To avoid unnecessarily restricting a
member organization’s overall
operations, however, the current rules
provide that each approved person may
separately seek NYSE approval to be
exempted from most of these
restrictions. To obtain such an
exemption, an approved person and the
specialist member organization with
which such approved person is to be
associated must obtain the written
agreement of NYSE Regulation, Inc.
(‘‘NYSE Regulation’’) that the approved
person and such member organization
have established policies and
procedures that are consistent with the
guidelines prescribed by NYSE Rule 98.
These guidelines set out in detail how
approved persons and their associated
technical in nature, the Commission is not
publishing it for comment.
5 See Securities Exchange Act Release No. 23768
(November 3, 1986), 51 FR 41183 (November 13,
1986) (SR–NYSE–85–25).
6See NYSE Rules 2(d) and 304(e).
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specialist organizations should structure
and conduct their respective businesses
in order to ensure complete separation
between the specialist organization and
the rest of the member organization. For
example, these guidelines require (1) the
specialist unit to be housed in a separate
corporate entity and broker-dealer from
its approved persons; (2) the
maintenance of separate books and
records, financial accounting, and
required capital by the specialist unit;
and (3) procedures to safeguard
confidential information derived from
business interactions with the issuer or
contained in draft research reports
prepared by the approved person.
NYSE Rule 98 currently limits the
ability of a specialist member
organization and its approved persons
to share operational support personnel,
and permits dual affiliation only if the
specialist member organization and
approved person provide the Exchange
with a written statement of the duties of
such person and why it is necessary for
the individual to have a dual affiliation.
Any changes to dual affiliations must be
submitted to the Exchange for approval
in advance of making such change.
The current NYSE rules also limit the
ability of a specialist, its member
organization, and approved persons to
manage the specialist member
organization’s trading risks.
Specifically, NYSE Rule 98 restricts an
approved person from being involved in
any trading decisions of an associated
specialist member organization and
NYSE Rule 105 restricts the specialist
member organization’s ability to trade in
options and security futures on
securities allocated to the specialist
member organization.
The NYSE believes that NYSE Rule 98
creates an administrative burden on
specialist organizations and their
approved persons because each
approved person must continually
update a separate exemption for each
activity that would otherwise be
restricted. The NYSE also believes that
its current rule unnecessarily constrains
the ability of specialist organizations
and their approved persons to manage
the specialist organization’s risks and
places them at a competitive
disadvantage vis-a-vis other market
making or trading firms. Accordingly,
the NYSE proposes to amend NYSE
Rule 98 to provide member
organizations with more flexibility with
regard to how they structure their
specialist operations and manage risk.
NYSE also proposes to make conforming
changes to other NYSE rules that rely on
the NYSE Rule 98 exemptions for
approved persons.
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As discussed in further detail below,
the revisions to NYSE Rule 98 would
include: (1) Redefining the persons to
whom NYSE Rule 98 would apply; (2)
allowing specialist operations to be
integrated into a member organization;
(3) permitting a specialist unit to share
non-trading related services with its
member organization or approved
persons; and (4) providing flexibility to
member organizations and their
approved persons in how to conduct
risk management of specialist
operations.
After careful review, and as discussed
below, 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.7 In particular, the
Commission finds that the proposed
rule change, as amended, is consistent
with Section 6(b)(5) of the Act,8 which
requires that the rules of the 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 a national securities system, and, in
general, to protect investors and the
public interest.
The restrictions in current NYSE Rule
98 and related rules are intended to
address two primary concerns. The first
concern is the potential that an affiliate
could unfairly use non-public
information, such as information on a
specialist’s book or information
regularly provided to him by other
market participants because of his
central role as a primary market
specialist. If a specialist’s affiliates had
access to such information, it would
have a perceived advantage over
competing firms and the public at large
in trading stocks assigned to the
affiliated specialist. The same concern
about the potential for unfair use of nonpublic information would arise if the
specialist had advance information
about the activities of its affiliates (e.g.,
a change in the firm’s buy or sell
recommendation or an imminent block
transaction away from the market).
Access to such information would allow
the specialist to position itself to benefit
from price changes that might result
once that information became publicly
available. The second concern is that a
specialist unit could favor its affiliates
by providing orders placed by the
affiliate with more favorable executions
7 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).
8 15 U.S.C. 78f(b)(5).
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and by providing useful market
information to the affiliated firm (or to
its broker on the exchange trading floor)
but not to others. In some cases, such
conflicts of interest could result in the
specialist neglecting his duty to make a
fair and orderly market by giving an
affiliate’s principal or agency orders a
more favorable execution.
The potential for misuse of nonpublic information and conflicts of
interest, if not addressed by appropriate
procedures and the monitoring and
surveillance of the continuing adequacy
of such procedures, could result in
potential manipulative market activity
and informational advantages benefiting
the approved person, the specialist unit,
or the customers of either. As discussed
in more detail below, the Commission
believes that the changes NYSE
proposes to make to NYSE Rule 98 and
related rules address these concerns.
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III. Proposed Amendments to NYSE
Rule 98
In response to concerns described
above with current NYSE Rule 98,
NYSE proposes a wholesale change to
NYSE Rule 98 that would apply a more
principles-based approach. In addition,
under the proposed rule, instead of
reviewing whether to grant each
approved person an exemption from
NYSE Rule 98, NYSE Regulation would
review whether the specialist unit itself
has adequate policies, procedures,
controls, and surveillance designed to
prevent the misuse of specialist
confidential information 9 and nonpublic order 10 information. If the
specialist unit has such policies,
procedures, controls, and surveillance,
the specialist rules would generally only
be applicable to the specialist unit and
not to affiliates of the specialist. In
addition to the information barriers and
other NYSE Regulation approved
controls, specialists would continue to
be subject to Exchange rules that govern
their access to and use of non-public
order information.11
9 ‘‘Specialist confidential information’’ means any
non-public information relating to a specialist unit’s
trading or quoting in its specialty securities,
including positions or any other indication of a
specialist’s trading or quoting interest, the specialist
algorithm, or any other public information relating
to a specialist’s interactions with its specialist
security, but not including non-public order
information. See proposed NYSE Rule 98(b)(6).
10 A ‘‘Non-public order’’ is an order, whether
expressed electronically or verbally, or any
information regarding a reasonably imminent nonpublic transaction or series of transactions entered
or intended for entry or execution on the NYSE and
which is not publicly available on a real-time basis
via an NYSE-provided data-feed. See proposed
NYSE Rule 98(b)(7).
11 See, e.g., NYSE Rules 70.20(h)(ii), 104(b), 115,
and 115A.
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A. Operating a Specialist Unit
Under proposed NYSE Rule 98(c), a
member organization must obtain prior
written approval from NYSE Regulation
to operate a specialist unit. To obtain
such approval, NYSE Regulation would
have to determine that the specialist
unit has: (i) Adopted and implemented
comprehensive written procedures and
guidelines governing the conduct and
supervision of business handled by the
specialist unit; (ii) established a process
for regular review of such written
policies and procedures; and (iii)
implemented controls and surveillances
reasonably designed to prevent and
detect violations of these procedures
and guidelines. These policies and
procedures would have to be reasonably
designed to maintain the confidentiality
of specialist confidential information
and non-public order information. In
this regard, proposed NYSE Rule 98(c)
would require a member organization’s
policies and procedures to prohibit
approved persons and the member
organization’s departments, divisions,
or aggregation units that are not part of
the specialist unit from having access to
specialist confidential information and
non-public order information.12 In
addition, such policies and procedures
would have to prohibit a specialist unit
from having access to material nonpublic order information in the
possession of other aggregation units of
the member organization related to the
securities allocated to that specialist
unit.13
Further, a specialist unit that is not
operated as part of an integrated
proprietary aggregation unit would have
to comply with all the requirements of
an aggregation unit.14 Accordingly, as
required by Rule 200(f) of Regulation
SHO, such a specialist unit would have
to have a written plan of organization
that specifies its trading objectives and
meets all the other requirements of an
independent trading unit under
Regulation SHO.15
The proposed rule would permit
senior managers who are not dedicated
to the specialist unit and are associated
12 However, a specialist may make available to a
Floor broker associated or affiliated with an
approved person or member organization any
information that the specialist would be permitted
to provide under Exchange rules to an unaffiliated
Floor broker. See proposed NYSE Rule
98(c)(2)(A)(ii).
13 See proposed NYSE Rules 98(c)(1) and (c)(2).
14 See proposed NYSE Rules 98(b)(11) and
98(c)(2)(B).
15 See 17 CFR 242.200(f). To be exempt from the
restrictions in NYSE Rule 105 pursuant to proposed
Rule 98(f)(1), the written plan of organization
required by Rule 200(f) of Regulation SHO would
need to specify the specialist unit’s trading
objectives for trading in related products.
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with either an approved person or a
member organization that runs a
specialist unit to provide management
oversight to the specialist unit. A
member organization’s policies and
procedures would need to be reasonably
designed to ensure that such
management oversight does not conflict
with or compromise the specialist unit’s
compliance with the specialist rules.
The proposed rule would also provide
specific guidelines for access by the
senior managers not assigned to the
specialist unit to specialist confidential
information or non-public order
information, which are designed to
prevent the misuse of such information.
For example, proposed NYSE Rule
98(c)(2)(E) would provide that if a
senior manager is called upon for risk
management purposes and gains access
to specialist confidential information or
non-public order information in
connection with that role, the senior
manager must not make (directly or
indirectly) specialist confidential
information or non-public order
information available to the persons or
systems responsible for making trading
decisions in aggregation units,
departments, divisions, or trading desks
that are not part of the specialist unit,
including the customer-facing
departments. The senior manager also
must not use such information to
directly or indirectly influence the dayto-day trading decisions of the other
aggregation units of the member
organization or approved person with
respect to the securities allocated to the
specialist unit.16
Proposed NYSE Rule 98(c) would
enumerate certain bright line divisions
that the specialist unit must maintain,
including information barriers between
the specialist unit and investment
banking, research, and customer-facing
departments and approved persons.
These divisions are designed to ensure
that the specialist unit cannot access
material non-public information about
securities allocated to that unit from
either its approved persons or nonspecialist operations of a parent member
organization.17 In addition, as discussed
above, these divisions are designed to
ensure that a member organization’s
departments, divisions, or aggregation
units not part of the specialist unit,
including investment banking, research,
and customer-facing departments,
cannot access specialist confidential
information or non-public order
16 See proposed NYSE Rule 98(c)(2)(E). See
Notice, supra note 3, at 73 FR at 38278.
17 See proposed NYSE Rule 98(c)(2)(C).
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information.18 Finally, a specialist unit
would be required to maintain or have
allocated to it net capital sufficient to
meet the requirements of NYSE Rule
104.21.19
NYSE Regulation would review a
member organization’s surveillance
plans and internal controls to ensure
that they are reasonably designed to
protect information as required under
the proposed rule. As with the current
rule, NYSE Regulation would also
review whether a member organization
has implemented internal audit
procedures to ensure compliance with
such organization’s NYSE Rule 98
policies and procedures. The Exchange
represents that the NYSE Regulation
review for approving a specialist unit
would be as rigorous as the current
review for obtaining an exemption from
current NYSE Rule 98.20 As with the
current NYSE Rule 98 exemption
process, staff from both the Market
Surveillance Division of NYSE
Regulation, as well as staff from the
Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) who are
responsible for the routine examinations
of specialist units, would be involved in
reviewing a specialist unit’s written
policies and procedures and proposed
automated surveillances and controls.21
After a member organization has been
approved to operate a specialist unit,
NYSE Regulation and FINRA would
conduct examinations to determine
whether a specialist unit’s policies and
procedures continue to meet the rule
requirements and whether the controls
and automated surveillances are
functioning as designed. As part of the
examinations, NYSE Regulation and
FINRA would conduct on-site reviews
of a specialist unit to review for
breaches of the controls or
surveillances.22 In addition, NYSE
states that a specialist unit would need
to seek approval from NYSE Regulation,
before making any material changes to
its operations.23
The Commission finds that the
requirements in proposed Rule 98(c) are
consistent with the Act. The
Commission believes that the proposed
rule change, as amended, establishes
guidelines for a member organization’s
18 See proposed NYSE Rule 98(c)(2)(A)(i) and
supra notes 12 and 13 and accompanying text.
19 See proposed NYSE Rule 98(c)(2)(D).
20 See Notice, supra note 3, at 73 FR at 38278.
21 See Notice, supra note 3, at 73 FR at 38279. In
the Notice, the Exchange stated that ‘‘[w]here
feasible, NYSE Regulation will expect specialist
units to use automated surveillances to check for
breaches of the information barriers required by the
proposed rule.’’ Id.
22 Id.
23 Id.
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policies and procedures that will protect
against the improper disclosure and
sharing of specialist confidential
information and non-public order
information.
B. Operating a Specialist Unit Within an
Integrated Proprietary Aggregation Unit
Proposed NYSE Rule 98 would permit
a member organization to seek approval
to operate a specialist unit within an
integrated proprietary aggregation unit.
An ‘‘integrated proprietary aggregation
unit’’ is proposed to be defined to mean
a department, division, or desk that
meets the requirements of the definition
of an ‘‘independent trading unit’’ under
Rule 200 of Regulation SHO with a
trading objective to engage in
proprietary trading, including marketmaking activities.24 An integrated
proprietary aggregation unit must be
separate from any investment banking,
research, or customer-facing
department.25
To protect specialist confidential
information and non-public order
information, a member organization
would be permitted to operate a
specialist unit within an integrated
proprietary aggregation unit, if NYSE
Regulation approves such operations
and the member organization: (i) Adopts
and implements comprehensive written
procedures and guidelines governing
the conduct and supervision of business
handled by the unit; (ii) establishes a
process for regular review of such
written policies and procedures; and
(iii) implements controls and
surveillances reasonably designed to
prevent and detect violations of these
procedures and guidelines.26
In addition, to operate a specialist
unit within an integrated proprietary
aggregation unit, the specialist unit’s
policies and procedures would have to
meet those requirements for operating a
specialist unit pertaining to information
barriers associated with the specialist
unit and non-specialist unit operations,
net capital requirements, and senior
management oversight.27 A specialist
unit operating within an integrated
proprietary aggregation unit would not
be required to separately comply with
all requirements of a Regulation SHO
independent trading unit because the
integrated proprietary aggregation unit
of which it is a part would be required
24 See proposed NYSE Rule 98(b)(11) and (14); 17
CFR 242.200(f).
25 See proposed NYSE Rule 98(b)(14).
26 See proposed NYSE Rule 98(d)(1) and (2).
27 See proposed NYSE Rules 98(d)(2)(A) and
98(c)(2)(A), (C), (D), and (E).
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48263
to comply with Rule 200(f) of
Regulation SHO.28
The member organization’s policies
and procedures would also need to
restrict access within the integrated
proprietary aggregation unit to nonpublic order information. Specifically,
except for senior managers pursuant to
policies and procedures adopted under
proposed NYSE Rule 98(c)(2)(E), the
specialist unit must not permit systems
and individuals not assigned to the
specialist unit to have access to nonpublic order information.29 For
example, because the specialist
application protocol interface
(‘‘specialist API’’) currently has access
to non-public order information,
systems not dedicated to the specialist
unit could not be integrated with the
specialist API. Accordingly, the trading
algorithms of the integrated proprietary
aggregation unit that are not dedicated
to the specialist unit must not have
access to any non-public order
information via the specialist API, or
any other system.30
A member organization’s policies and
procedures would have to prohibit
individuals assigned to the specialist
unit, while on the Exchange floor,31
from communicating with individuals
or systems responsible for making
trading decisions for the integrated
proprietary aggregation unit.32 However,
such policies and procedures could
permit a specialist unit employee to
move, on an intra-day basis, to an offFloor location and engage in a nonspecialist related role within the
integrated proprietary aggregation
unit.33 The policies and procedures of a
member organization that chooses to
allow individuals to so move must be
reasonably designed to prohibit such
individual from (1) making any nonpublic order information or specialist
confidential information available to
individuals or systems responsible for
28 See supra note 24 and accompanying text. The
Exchange states that there may be some Regulation
SHO issues in connection with how a member
organization may choose to structure its specialist
unit within an integrated proprietary aggregation
unit or provide risk management to the specialist
unit pursuant to proposed NYSE Rule 98(f).
Accordingly, the Exchange represents that it would
not approve a specialist unit to operate under
proposed NYSE Rule 98 until all Regulation SHO
issues that may arise have been resolved. See
Notice, supra note 3, at 73 FR at 38279.
29 See proposed NYSE Rule 98(d)(2)(B)(i) and (ii).
30 See Notice, supra note 3, at 73 FR 38279.
31 NYSE rules define being on the Floor to
include the trading Floor of the Exchange, and the
premises immediately adjacent thereto, such as the
various entrances and lobbies of 11 Wall Street, 18
New Street, 12 Broad Street, and 18 Broad Street,
as well as the telephone lobby in the first basement
of 11 Wall Street. See NYSE Rule 112(b).
32 See proposed NYSE Rule 98(d)(2)(B)(iii).
33 See proposed NYSE Rule 98(d)(2)(B)(iv).
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making trading decisions for the
integrated proprietary aggregation unit
and (2) using any non-public order
information or, except for certain risk
management activities as described
below,34 specialist confidential
information in connection with making
trading decisions for the integrated
proprietary aggregation unit.35
Proposed NYSE Rule 98 would no
longer require separate books and
records for a specialist unit operating
within an integrated proprietary
aggregation unit. However, to allow
NYSE Regulation to review the trading
activity by the specialist unit at the
Exchange without having to parse
through commingled records, under
proposed NYSE Rule 98(d)(2)(C), an
integrated proprietary aggregation unit
would have to maintain records of its
specialist’s accounts in a manner that is
separate from the accounts of the
integrated proprietary aggregation
unit.36 Similarly, to ensure that NYSE
Regulation can review the trading
activities of the integrated proprietary
aggregation unit, proposed NYSE Rule
98(d)(4) would require an integrated
proprietary aggregation unit to maintain
audit trail information for any trading
by such unit, including trading at the
Exchange and at other market centers.
Further, the proposed amendments to
NYSE Rule 132B would apply the Order
Tracking System (‘‘OTS’’) requirements
to trading by a specialist unit, and if
applicable, an integrated proprietary
aggregation unit.37 A member
organization would be required to
maintain sufficient records to
reconstruct in a time-sequenced manner
its trading in securities allocated to the
specialist unit and any trading by the
integrated proprietary aggregation unit
in those securities in other market
centers or trading in related products.38
The Commission finds that the
NYSE’s proposal to permit a member
organization to operate a specialist unit
within an integrated proprietary
aggregation unit is consistent with the
Act. The Commission believes that the
guidelines established for member
organization policies and procedures
and NYSE Regulation review are
designed to protect specialist
confidential information and non-public
34 See
Section III(D) infra.
proposed NYSE Rule 98(d)(2)(B)(iv).
36 See NYSE Rule 98(d)(2)(C).
37 The order tracking provisions in NYSE Rule
132B currently do not apply to members effecting
on the Floor proprietary transactions when they are
acting in the capacity of a specialist, a Registered
Competitive Market Maker, or a Competitive
Trader. The proposed amendments in NYSE Rule
132B would apply the order tracking provisions in
the rule to those persons.
38 See proposed NYSE Rule 98(d)(4).
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35 See
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order information and mitigate the
potential for conflicts of interest in a
member organization. The Commission
also believes that operation of a
specialist unit within an integrated
proprietary aggregation unit need not
interfere with the specialist’s obligations
under Exchange Rules. In particular,
proposed NYSE Rule 98(d) would
establish that the specialist rules would
apply to any trading on or through the
systems and facilities of the Exchange
by the integrated proprietary aggregation
unit through the specialist unit in the
securities that are allocated to the
specialist unit and to the integrated
proprietary aggregation unit if the
integrated proprietary aggregation unit
causes the specialist unit to violate the
specialist rules.39 In this regard, NYSE
states that if there is a conflict between
the specialist unit’s market making
obligations and the integrated
proprietary aggregation unit’s trading,
the presumption would be in favor of
the specialist unit’s market making
obligations.40
C. Sharing Non-Trading Related
Services
Proposed NYSE Rule 98(e) would
allow a specialist member organization
and its approved persons to share nontrading related services, subject to the
approval of NYSE Regulation. To obtain
approval to share non-trading related
services, the specialist unit would be
required to: (i) Adopt written policies
and procedures governing the sharing of
non-trading related services; (ii)
establish a process for regular review of
such written policies and procedures;
and (iii) implement controls and
surveillances reasonably designed to
prevent and detect violations of those
policies and procedures. At a minimum,
the specialist unit’s policies and
procedures would have to be reasonably
designed to provide that the specialist
unit and the member organization or
approved person must maintain the
confidentiality of specialist confidential
information and non-public order
information. Under no circumstances
may non-public order information or
specialist confidential information be
made available to a member’s
organizations investment banking,
research, or customer-facing
departments.41
The Commission finds that NYSE’s
proposal to allow a specialist unit to
share certain non-trading related
services with its member organization or
approved person is consistent with the
39 See
proposed NYSE Rule 98(d)(3).
Notice, supra note 3, at 73 FR at 38280.
41 See NYSE Rule 98(e)(2).
40 See
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Act because such sharing would be
conducted pursuant to policies and
procedures designed to protect
specialist confidential information and
non-public order information.
Moreover, such policies and procedures
would be reviewed by NYSE Regulation
prior to a member organization being
approved to share non-trading related
services and NYSE Regulation and
FINRA would examine on an ongoing
basis whether the specialist unit’s
policies and procedures and controls
comply with the requirements of the
rule.42
D. Risk Management
1. Changes to NYSE Rule 105
NYSE Rule 105 currently limits the
ability of specialists, specialist
organizations and approved persons
(and any officer or employee thereof) to
conduct risk management trading in
options and single stock futures on
stock in which the specialist is
registered. The Guidelines for
Specialists’ Specialty Stock Option and
Single Stock Futures Transactions
Pursuant to Rule 105 (‘‘Rule 105
Guidelines’’) currently sets forth the
permissible options positions that a
specialist may establish and maintain
for the purpose of hedging risks
associated with holding specialty
stocks. The proposed amendments to
NYSE Rule 105 would limit the
applicability of the rule to the specialist
unit itself (and any officer or employee
thereof); approved persons would no
longer be subject to NYSE Rule 105.43
Paragraph (m)(i) of the Rule 105
Guidelines currently prohibits
specialists, their member organization
and their approved persons (or officer or
employee thereof) from acting in any
market-making capacity in an option or
security future overlying a security in
which the specialist is registered. An
approved person may seek an exception
from these restrictions under NYSE Rule
98 and paragraphs (m)(ii) and (iii) of the
Rule 105 Guidelines exempt such
approved person to engage in such
market making activities. Such
approved person, however, may not also
act as a market maker in any equity
security in which the associated
specialist is registered and which
underlies an option or security future in
42 See
Notice, supra note 3, at 73 FR 38281.
Rule 105(a), which prohibits specialists,
their member organization and their approved
persons (or officer or employee thereof) from being
directly or indirectly interested in a pool dealing or
trading in a stock in which such member is
registered as a specialist, would continue to apply
to approved persons.
43 NYSE
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which the approved person is acting as
market maker.44
Consistent with the proposal to
amend NYSE Rule 105 so that approved
persons are no longer subject to the
Rule, the proposed rule change would
eliminate the reference to ‘‘approved
persons’’ in paragraph (m)(i) of the Rule
105 Guidelines. Thus, an approved
person and an integrated proprietary
aggregation unit would not be
prohibited by NYSE Rules from
engaging in options or security futures
market-making activities. In addition,
the proposed rule change would delete
paragraphs (m)(ii) and (m)(iii), which
apply only to approved persons, from
the Rule 105 Guidelines.
The Commission believes that these
proposed changes to NYSE Rule 105
and the Rule 105 Guidelines are
consistent with the Act. Under proposed
NYSE Rule 98, the specialist unit would
be walled-off from approved persons
pursuant to a member organization’s
policies and procedures reviewed by
NYSE Regulation that must be
reasonably designed to protect against
the improper disclosure and sharing of
specialist confidential information and
non-public order information. The
Commission believes that these barriers
between the specialist unit and other
business activities of a member
organization, including market making
in securities in which a specialist is
registered and related securities, will
limit the potential for unfair use of nonpublic order information, manipulation
and other improper trading practices,
and conflicts of interest.
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2. Proposed Risk Management Models
Proposed NYSE Rule 98(f) would
broaden the ability of specialist units to
trade in related products and expand
the universe of who may be involved in
managing the risk of the specialist unit.
In this regard, the NYSE proposes three
models for a specialist unit to set up its
risk management operation.
Specifically, under the first model, risk
management may be conducted within
the specialist unit itself.45 Under the
second model, risk management may be
conducted within an integrated
proprietary aggregation unit.46 Under
the third model, risk management may
be conducted within another affiliate of
the specialist unit.47 Regardless of the
risk management model, the specialist
unit would be responsible for its
44 Paragraph
(m)(ii) of the Rule 105 Guidelines.
See proposed NYSE Rule 98(f)(1).
46 See proposed NYSE Rule 98(f)(2).
47 See proposed NYSE Rule 98(f)(3).
45
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quoting or trading decisions at the
Exchange.48
a. Specialist Unit Risk Management
NYSE Rule 105 limits a specialist
unit’s trading in options and single
stock futures on stock in which the
specialist is registered. Proposed NYSE
Rule 98(f)(1) would allow a specialist
unit to seek an exemption from NYSE
Rule 105 for the purpose of conducting
risk management trading. A specialist
unit and its officers and employees
would continue to be prohibited from
engaging in any capacity as a market
maker in options or security futures
overlying securities in which the
specialist is registered. To obtain an
exemption from the NYSE Rule 105
restrictions, the specialist unit would
have to: (i) Adopt and implement
comprehensive written procedures and
guidelines governing the conduct of
trading in related products; (ii) establish
a process for regular review of such
written procedures and guidelines; and
(iii) implement controls and
surveillances reasonably designed to
prevent and detect violations of these
procedures and guidelines. These
policies and procedures would have to
be reasonably designed to ensure that
the individuals or systems responsible
for trading related products do not have
access to non-public order information
or except as described below,49
specialist confidential information.50
Individuals who work on the Exchange
Floor would not be permitted to trade or
direct trading in related products,51 nor
would the specialist API be permitted to
make any trading decisions in related
products.52 Accordingly, any trading in
related products by the specialist unit
48 See Notice, supra note 3, at 73 FR at 38281; see
also proposed NYSE Rules 98(f)(2)(A)(i) and
98(f)(3)(C)(iv).
49 See infra notes 55–56 and accompanying text.
50 The proposed rule change would permit a
specialist unit to transfer a specialist back and forth
from the Floor of the Exchange to a specialist unit
desk upstairs that trades in related products, so long
as that specialist is registered and qualified to trade
in related products and non-public order
information is not used when trading in related
products. In such case, however, a specialist unit
must have policies and procedures reasonably
designed to ensure that a specialist who moves off
the Floor of the Exchange does not make available
or use any non-public information or, unless
otherwise specified, specialist confidential
information, to which the specialist may have had
access while on the Floor of the Exchange. See
proposed NYSE Rule 98(f)(1)(A)(iii).
51 See proposed NYSE Rule 98(f)(1)(A)(ii); Notice,
supra note 3, at 73 FR at 38281.
52 See proposed NYSE Rule 98(f)(1)(A)(iv). Under
the proposal, a specialist unit that has not been
approved for an exemption from NYSE Rule 105
would still be permitted to enter orders in options
or single-stock futures from the Floor, subject to the
requirements of NYSE Rule 105; see also Notice,
supra note 3, at 73 FR at 38281.
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48265
would have to be conducted by an offFloor, i.e., ‘‘upstairs’’ office, by
individuals who are qualified and
registered to trade in the marketplaces
where such trading occurs.53
The NYSE proposes to allow
individuals or systems responsible for
trading related products to have limited
access to specialist confidential
information. Specifically, individuals or
systems, including computer
algorithms, responsible for making
trading decisions in related products
may have electronic access to the
specialist unit’s trades at the Exchange
in securities allocated to the specialist
unit, provided that such trades have
been printed to the Consolidated
Tape.54
In addition, a senior manager of the
specialist unit would be permitted to
provide risk management oversight of
both Floor specialist operations and any
specialist unit upstairs trading in related
products.55 Such oversight, however,
would have to be done pursuant to
policies and procedures reasonably
designed to prevent the specialist unit
senior managers who have access to
non-public order information or
specialist confidential information from
making such information available to
the individuals or systems on the
upstairs trading desk responsible for
trading related products within the
specialist unit or using such information
to directly or indirectly influence
trading in related products by that
upstairs desk.56 The proposed rule also
would bar specialists from directly
entering or executing trades in related
products while on the Floor of the
Exchange.57
The Commission believes that the
proposal to permit a specialist unit to
conduct risk management within the
specialist unit itself is consistent with
the Act. The Commission notes that the
proposed rule would require a specialist
unit’s policies and procedures to be
reasonably designed to ensure that the
individuals or systems responsible for
trading related products do not have
access to non-public order information
or, except under limited conditions,
specialist confidential information.
The Commission believes that those
limited circumstances in which
specialist confidential information may
53 The Exchange notes that the member
organization with the specialist unit would have to
be a member of FINRA or another self-regulatory
organization, as required by each marketplace
where the specialist unit proposes to trade. See
Notice, supra note 3, at 73 FR at 38281.
54 See proposed NYSE Rule 98(f)(1)(A)(v).
55 See proposed NYSE Rule 98(f)(1)(A)(vi).
56 Id.
57 See proposed NYSE Rule 98(f)(1)(ii).
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be used to manage a specialist unit’s
risks would not be a misuse of
information. The Commission does not
believe that information about trades
that have been printed to the
Consolidated Tape would provide the
member organization with an unfair
advantage because such trades would be
publicly available.58
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b. Integrated Proprietary Aggregation
Unit Risk Management
Proposed NYSE Rule 98(f)(2) would
permit an integrated proprietary
aggregation unit to conduct risk
management trading related to the
specialist unit’s trading.59 NYSE
Regulation would need to approve the
integrated proprietary aggregation unit
to conduct such risk management
trading.
Proposed NYSE Rule 98(f)(2)
incorporates the requirements described
above for conducting risk management
trading within the specialist unit itself,
except for the requirement in proposed
NYSE Rule 98(f)(1)(A)(vi) relating to
senior managers of the specialist unit.60
The requirement in proposed NYSE
Rule 98(f)(1)(A)(vi) is not applicable
where risk management is being
conducted by an integrated proprietary
aggregation unit, because senior
managers of the specialist unit would
not be providing risk management
oversight. In addition, an integrated
proprietary aggregation unit would be
required to: (i) Adopt and implement
comprehensive written procedures and
guidelines governing the conduct of risk
management of the specialist unit; (ii)
establish a process for regular review of
such written procedures and guidelines;
and (iii) implement controls and
surveillances reasonably designed to
prevent and detect violations of these
procedures and guidelines.
Rule 98 (f)(2)(A)(i) would permit the
‘‘upstairs’’ risk management desk to
electronically direct the specialist unit’s
trading or quoting, subject to the
58 Once trades are disseminated publicly, the
individuals or systems, including computer
algorithms, responsible for trading in related
products may have access to the specialist unit’s
aggregate net long or short position that includes
the printed trades.
59 An integrated proprietary aggregation unit
conducting risk management trading outside of its
specialist unit pursuant to proposed NYSE Rule
98(f)(2) would not require an exemption from the
requirements of NYSE Rule 105(b)–(d) and the Rule
105 Guidelines because, under the proposed
changes to NYSE Rule 105, the prohibitions on risk
management trading would apply only to the
specialist unit itself and not to approved persons.
See supra Section III(D)(1).
60 See proposed NYSE Rule 98(f)(2)(A). An
integrated proprietary aggregation units would have
to meet the requirements of proposed NYSE Rule
98(f)(1)(A)(i)–(v), see supra notes 49–54 and
accompanying text.
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specialist unit’s market making
obligations. To provide the
recommendations to the specialist unit,
the ‘‘upstairs’’ risk management desk
would be permitted to have real-time
access both to the integrated proprietary
aggregation unit’s positions in related
products and other securities and to the
specialist unit’s positions in securities
allocated to it, provided that such
specialist unit’s positions comprise only
trades that have been printed to the
Consolidated Tape.61
The Commission finds that the
proposal to permit a specialist unit’s
risk management operations to be
performed by an integrated proprietary
aggregation unit of which it is part is
consistent with the Act. The
Commission believes that the policies
and procedures an integrated
proprietary aggregation unit would be
required to establish and that NYSE
Regulation would need to review would
protect specialist confidential
information and non-public order
information.
The Commission also believes that the
proposed NYSE Rule 98 would continue
to mitigate conflicts of interest between
the specialist’s responsibilities to the
market and the business activities of
specialist affiliates. In this regard, the
proposed rule would require the
specialist unit to determine whether any
recommendations provided to it by an
‘‘upstairs’’ risk management desk are
consistent with its market making
obligations, including Exchange
specialist rules. Thus, the Commission
expects that the specialist unit would
accept or reject such recommendations
in a manner that is consistent with its
market making obligations.
c. Approved Person or Member
Organization Risk Management
Finally, under proposed NYSE Rule
98(f)(3) an approved person or a
member organization that runs a
specialist unit could seek approval of
NYSE Regulation to conduct risk
management trading related to the
specialist unit’s trading.62 This
alternative would provide brokerdealers the flexibility to keep the
specialist unit as a separate member
organization or aggregation unit, yet
have an approved person or separate
61 See Notice, supra note 3, at 73 FR at 38282; see
also proposed Rule 98(f)(2)(A)(i).
62 An affiliate of a specialist unit conducting risk
management trading pursuant to proposed NYSE
Rule 98(f)(3) would not require an exemption from
the requirements of NYSE Rule 105(b)–(d) and the
Rule 105 Guidelines because, under the proposed
changes to NYSE Rule 105, the prohibitions on risk
management trading would apply only to the
specialist unit itself and not to approved persons.
See supra Section III(D)(1).
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aggregation unit provide risk
management services for the specialist
unit. Under this option, the approved
person or member organization would
provide the same type of risk
management as an integrated
proprietary aggregation unit that
includes that the specialist unit under
proposed NYSE Rule 98(f)(2). Thus, as
required for an integrated proprietary
aggregation unit under proposed NYSE
Rule 98(f)(2) described above, proposed
NYSE Rule 98(f)(3) would require an
approved person or member
organization conducting such risk
management to: (i) Adopt and
implement comprehensive written
procedures and guidelines governing
the conduct of risk management of the
specialist unit; (ii) establish a process
for regular review of such written
procedures and guidelines; and (iii)
implement controls and surveillances
reasonably designed to prevent and
detect violations of these procedures
and guidelines.63 These policies and
procedures must be reasonably designed
to satisfy the requirements in the rule,
including that individuals and systems
responsible for managing the risk of the
specialist unit could not have access to
non-public order information, or with
certain exceptions, specialist
confidential information.64 These
exceptions are limited to allowing
individuals and systems responsible for
managing the risk of the specialist unit
to have electronic access to the
specialist unit’s trades once they are
printed to the Consolidated Tape.65 In
addition, an approved person or
member organization could
electronically direct the specialist unit’s
trading or quoting, subject to the
specialist unit’s market making
obligations.
The Commission finds that the
proposed rule change to permit an
approved person or a member
organization associated with a specialist
unit to conduct its risk management
trading related to the specialist unit’s
trading is consistent with the Act. The
Commission believes that the policies
and procedures an approved person or
member organization would be required
to establish and that NYSE Regulation
would need to revise would protect
specialist confidential information and
non-public order information.
The Commission also believes that
proposed NYSE Rule 98 would continue
to mitigate conflicts of interest between
the specialist’s responsibilities to the
market and the business activities of
63 See
proposed Rule 98(f)(3)(C).
proposed Rule 98(f)(3)(C)(ii).
65 See supra note 54 and accompanying text.
64 See
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specialist affiliates. In this regard, the
proposed rule would require the
specialist unit to determine whether any
recommendations provided to it by an
‘‘upstairs’’ risk management desk are
consistent with its market making
obligations, including Exchange
specialist rules. Thus, the Commission
expects that the specialist unit would
accept or reject such recommendations
in a manner that is consistent with its
market making obligations.
E. Failure To Maintain Confidentiality,
Reporting Obligations, and Breaches
Proposed NYSE Rule 98(g) would
provide that, if a specialist becomes
aware of non-public material
information from its approved person or
parent member organization, the
specialist may have to cease acting as a
specialist temporarily in the security
involved. Proposed NYSE Rule 98(i)
would provide that any breach of the
proposed NYSE Rule 98 could result in
disciplinary action, including the
withdrawal of one or more securities
allocated to the specialist unit or
withdrawal of approval to operate a
specialist unit. Both rules are
substantially similar to provisions in
current NYSE Rule 98 66 and the
Commission believes they are consistent
with the Act.
Paragraphs (1) and (2) of proposed
NYSE Rule 98(h) are substantially
similar to the current reporting
obligations in current NYSE Rule 98.67
Proposed NYSE Rule 98(h)(1) would
require ‘‘after the fact’’ reporting of
information regarding material
investment banking activities in which
the member organization or approved
person has been engaged and material
research reports, recommendations, etc.
pertaining to any security that has been
allocated to the specialist unit. Proposed
NYSE Rule 98(h)(2) would require ‘‘after
the fact’’ reporting of information about
determinations regarding whether the
specialist should cease acting as
specialist in the event the specialist unit
receives non-public information.
Paragraphs (3) and (4) of proposed
NYSE Rule 98(h) would add a new
requirement for specialist units to report
any actual breaches, or internal
investigations of possible breaches, of
the information barriers required by the
rule. In particular, a specialist unit
would be required to conduct an
internal investigation into any trading
activity that may be a result of a breach
of information barriers required by
proposed NYSE Rule 98. In addition, on
a quarterly basis, a specialist unit would
have to report in writing to NYSE
Regulation whether it has commenced
such an internal investigation, the
quarterly progress of any open
investigations, what remedial measures,
if any, were taken, and the completion
of any internal investigation, including
the methodology and results of such
investigation, any internal disciplinary
action taken, and any referral of the
matter to the NYSE, another selfregulatory organization, or the
Commission.68
The Commission finds that proposed
NYSE Rule 98(h) is consistent with the
Act and would provide NYSE
Regulation with an additional tool to
monitor compliance with NYSE Rule
98. The Commission notes that NYSE
designed the reporting obligation for
internal investigations in the proposed
rule to be effectively similar to the
reporting obligation in other NYSE
rules.69
F. Existing Specialists
1. NYSE Rule 98 (Former)
Because a current specialist may
decide to keep its current operational
structure or delay implementation of a
new operational structure, the NYSE
proposes to retain current NYSE Rule 98
but limit its applicability to specialist
organizations and their associated
approved persons operating as of the
date of this Order. Specifically, current
NYSE Rule 98 would be re-designated
as ‘‘Rule 98 (Former)’’ in the NYSE
Rules until all specialist units are
approved for operation pursuant to the
proposed rule.70 Except for the sharing
of non-trading related services, as
discussed below, such member
organization and its approved persons
would continue to be subject to NYSE
Rule 98 (Former) as well as the
‘‘(Former)’’ versions of NYSE Rules that
reference exemptions from Rule 98
(Former) for approved persons. Any
new specialist units would be required
to comply with proposed NYSE Rule 98.
Any significant changes to the status
quo after the effective date of the
proposed rule would require the
member organization to apply for
approval pursuant to the procedures of
proposed NYSE Rule 98.71
The Commission finds that the
NYSE’s proposal to continue to permit
current specialist units to operate under
current NYSE Rule 98, redesignated as
NYSE Rule 98 (Former), is consistent
with the Act. Allowing specialist units
to continue to operate under current
NYSE Rule 98 would provide specialist
units time to develop or modify their
policies and procedures and avoid any
unnecessary disruption in their
businesses.
2. Sharing of Non-Trading Related
Services
The proposed rule change would
provide that a member organization
operating pursuant to NYSE Rule 98
(Former) could apply for approval from
NYSE Regulation to share non-trading
related services.72 Any such sharing of
non-trading related services would be
pursuant to proposed NYSE Rule
98(e).73
The Commission finds that the NYSE
proposal to permit specialist units
operating under NYSE Rule 98 (Former)
to seek approval under proposed NYSE
Rule 98 to share non-trading related
services is consistent with the Act.
Specialist units operating under NYSE
Rule 98 (Former) and their approved
persons would be required to maintain
informational barriers prescribed by the
current NYSE Rule 98 Guidelines. The
Commission believes that those
Guidelines, combined with the
requirements under proposed NYSE
Rule 98(e) regarding the sharing of nontrading related services would protect
against the misuse of non-public
information.
G. Additional Rule Changes
As described above, under the
proposed rule, instead of reviewing
whether to grant each approved person
an exemption from NYSE Rule 98,
NYSE Regulation would review the
specialist unit’s policies, procedures,
controls, and surveillance. For this
reason, the NYSE proposes to amend the
NYSE rules that refer to approved
persons and to the need for an
exemption from NYSE Rule 98.
1. Proposed Amendments to NYSE Rule
98A
NYSE Rule 98A currently requires
approved persons to agree in writing not
to cause a specialist or odd-lot dealer to
violate rules applicable to the specialist
or odd-lot dealer. The rule further
requires that approved persons report to
the Exchange any off-Floor orders for
securities in which an associated
specialist member organization
specializes for any account in which the
approved person has a direct or indirect
interest.
68 See
66 See
current NYSE Rule 98, Guidelines (i) and
(k).
67 See
current NYSE Rule 98, Guidelines (j).
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proposed NYSE Rule 98(h)(4).
NYSE Rules 351(e) and 342.21.
70 See proposed NYSE Rule 98 (Former).
71 See Notice, supra note 3, at 73 FR at 38276.
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69 See
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72 See
NYSE Rule 98 (Former), Guidelines(c).
supra notes 41–42 and accompanying text
for a discussion of these rules.
73 See
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Under the proposed amendments to
NYSE Rule 98A, approved persons
would no longer be required to agree in
writing not to cause a specialist or oddlot dealer to violate rules applicable to
the specialist or odd-lot dealer.
Approved persons also would no longer
be required to report any off-Floor
orders for securities in which an
associated specialist member
organization specializes for any account
in which the approved person has a
direct or indirect interest to the
Exchange. The Commission believes
that the elimination of these
requirements is consistent with the Act
because, under proposed NYSE Rule 98,
the specialist unit would be walled-off
from approved persons.
2. Proposed Amendments to NYSE
Rules 99, 102, 103B, 104, and 113
NYSE Rules 99, 103B, 104, and 113
currently specifically apply to approved
persons, unless such approved person
has obtained an exemption under Rule
98. Under the proposed rule change,
current NYSE Rules 99, 103B, 104, and
113 would be amended to remove
references to approved persons.74 The
Commission believes that the
elimination of the references to
approved persons in these rules is
consistent with the Act because, under
proposed NYSE Rule 98, the specialist
unit would be walled-off from approved
persons.
NYSE Rule 102 currently governs
trading in related products by an oddlot dealer. The Commission believes
that the deletion of current NYSE Rule
102 is consistent with the Act. The
Commission notes that the Exchange no
longer has separate odd-lot dealers and
all specialists are also responsible for
odd-lot trading in securities in which
they are registered. The Commission
also notes that specialists would be
subject to the standards set forth in
proposed Rules NYSE 98 and 105.
sroberts on PROD1PC70 with NOTICES
3. Proposed Amendments to NYSE Rule
460
Current NYSE Rule 460.10 prohibits a
specialist, its member organization or
approved person (or officer or employee
thereof) from, individually or in the
aggregate, owning more than 10% of the
outstanding shares of any equity
security in which the specialist is
74 For the period of time that the current NYSE
Rule 98 stays in the NYSE Rules as ‘‘NYSE Rule 98
(Former),’’ each of NYSE Rules 99, 103B, 104, and
113 will have two forms: One to meet the
requirements of NYSE Rule 98 (Former) and one to
meet the requirements of proposed NYSE Rule 98.
The version of the rules that relate to NYSE Rule
98 (Former) will be similarly designated with the
‘‘(Former)’’ title either for the entire rule, or for a
section of a rule, as appropriate.
VerDate Aug<31>2005
16:50 Aug 15, 2008
Jkt 214001
registered.75 Current NYSE Rule 460.10
also requires such person to report to
the NYSE when it, directly or indirectly,
acquires more than 5% of the
outstanding shares of such equity
security and promptly dispose or reduce
such interest if advised to do so by the
Exchange. A specialist, its member
organization or approved person (or
officer or employee thereof) may exceed
the 10% ownership threshold for
derivative securities whose values are
based on an underlying currency or
index only with the approval of the
NYSE; however, in no event may such
person directly or indirectly own more
than 25% of such derivative securities.
The proposed amendments to NYSE
Rule 460 would make changes so that it
would apply only to the specialist
member and his specialist unit and not
to his member organization or approved
persons. In addition, the proposed
amendments would replace the 10%
ownership limitation set forth in NYSE
Rule 460.10 with a requirement that the
specialist unit report to the Exchange
the beneficial ownership of more than
5% of an equity security that is
allocated to it. The specialist unit would
be required to update such reports if its
beneficial ownership exceeds 10% or
falls below 5%. In addition, the
specialist unit would be prohibited from
acquiring, directly or indirectly, more
than 25% of the outstanding shares in
any security allocated to the specialist
unit. 76 The proposed amendments to
NYSE Rule 460 would apply to
specialist units operating under
proposed NYSE Rule 98, as well as to
specialist member organizations that
continue to operate under NYSE Rule 98
(Former).
The Commission believes that the
proposed changes to NYSE Rule 460.10
are consistent with the Act. Consistent
with the NYSE’s proposed changes to
Rule 98, the changes to Rule 460 would
apply the restrictions in the rule only to
the specialist. The Commission believes
that, because of the policies and
procedures a specialist unit or any
integrated proprietary aggregation unit
in which it is a part would be required
to implement, these changes to Rule 460
are consistent with the Act. Further, the
Commission believes that, because of
the increased competition among
markets in NYSE listed securities, the
elimination of the restrictions in Rule
460.10 are consistent with the Act.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act, that the
proposed rule change (SR–NYSE–2008–
45), as modified by Amendment No. 1,
be, and it hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.77
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8–18964 Filed 8–15–08; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–58340; File No. SR–Phlx–
2007–33]
Self-Regulatory Organizations;
Philadelphia Stock Exchange, Inc.;
Order Granting Approval of a
Proposed Rule Change, as Modified by
Amendment Nos. 1 and 2 Thereto,
Relating to Margining
August 11, 2008.
On April 5, 2007, the Philadelphia
Stock Exchange, Inc. (‘‘Phlx’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’ or ‘‘Exchange Act’’),1 and
Rule 19b–4 2 thereunder, a proposed
rule change to amend its margin rules.
On July 31, 2007, Phlx filed
Amendment No. 1 to the proposed rule
change. On May 19, 2008, Phlx filed
Amendment No. 2 to the proposed rule
change.3 The proposal was published in
the Federal Register on July 7, 2008.4
The Commission received no comments
on the proposal. This order approves the
proposed rule change, as modified by
Amendment Nos. 1 and 2.
The Exchange proposed to streamline
and make more efficient its margin rules
and procedures by: (1) Adding a new
section to Rule 721 (Proper and
Adequate Margin) requiring each
member to indicate in writing to the
Exchange that such member shall be
bound by the initial and maintenance
margin requirements of either the
Chicago Board Options Exchange
(‘‘CBOE’’) or New York Stock Exchange
(‘‘NYSE’’); and (2) eliminating Rules 724
(Guaranteed Accounts) and 725 (Daily
77 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Amendment No. 2 replaced and superseded the
original filing and Amendment No. 1 in their
entirety.
4 Exchange Act Release No. 58045 (June 26, 2008),
73 FR 38487.
1 15
75 The prohibitions in current NYSE Rule 460.10
do not apply if the security is a convertible security,
American Depositary Receipt, Global Depositary
Receipt or exchange-traded funds tied to the equity
securities, current or index warrants.
76 See Amendment No. 1, supra note 4.
PO 00000
Frm 00082
Fmt 4703
Sfmt 4703
E:\FR\FM\18AUN1.SGM
18AUN1
]]>Agencies
[Federal Register Volume 73, Number 160 (Monday, August 18, 2008)]
[Notices]
[Pages 48260-48268]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-18964]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-58328; File No. SR-NYSE-2008-45]
Self-Regulatory Organizations; New York Stock Exchange LLC; Order
Approving Proposed Rule Change, as Modified by Amendment No. 1 Thereto,
Amending NYSE Rule 98 and Related Rules To Redefine Specialist
Operations at the NYSE
August 7, 2008.
I. Introduction
On June 11, 2008, 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
proposed rule change to amend NYSE Rule 98 and related rules to allow
its member organizations greater flexibility in structuring their
specialist operations and managing their risk. The proposed rule change
was published for comment in the Federal Register on July 3, 2008.\3\
On August 7, 2008, the NYSE filed Amendment No. 1 to the proposed rule
change.\4\ The Commission received no
[[Page 48261]]
comments on the proposal. This order approves the proposed rule change,
as amended.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 58052 (June 27,
2008), 73 FR 38274 (``Notice'').
\4\ In Amendment No. 1, the NYSE revises the text of proposed
NYSE Rule 460.10 to conform it to the description of proposed NYSE
Rule 460.10 as set forth in the Notice. Because Amendment No. 1 is
technical in nature, the Commission is not publishing it for
comment.
---------------------------------------------------------------------------
II. Background and Introduction
The NYSE adopted NYSE Rule 98 in 1986 when NYSE specialist firms,
which had been independent member-owned entities, were increasingly
becoming affiliates of larger member organizations.\5\ Because of the
specialists' unique position in the market, NYSE Rule 98 requires an
organizational separation between the specialist and any affiliates.
The purpose of that separation is to eliminate or control conflicts of
interest between the specialist's responsibilities to the market and to
any customer orders the specialist may represent as agent, and the
business activities of the specialist's affiliates.
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 23768 (November 3,
1986), 51 FR 41183 (November 13, 1986) (SR-NYSE-85-25).
---------------------------------------------------------------------------
NYSE Rule 98 currently applies to specialist organizations and
``approved persons'' of specialist organizations. ``Approved persons''
are entities that are in a control relationship with a specialist
organization, or share a common corporate parent with the specialist
organization and are engaged in a kindred business.\6\ NYSE Rule 98
subjects all approved persons of a specialist organization to the NYSE
specialist rules. Among other things, approved persons are subject to
restrictions on their ability to trade in specialty stock options,
restrictions on certain of their business transactions with issuers for
whom the specialist organization is the registered specialist, and
limits on the amount of securities of such issuers that the specialist
and approved persons may own in the aggregate.
---------------------------------------------------------------------------
\6\See NYSE Rules 2(d) and 304(e).
---------------------------------------------------------------------------
To avoid unnecessarily restricting a member organization's overall
operations, however, the current rules provide that each approved
person may separately seek NYSE approval to be exempted from most of
these restrictions. To obtain such an exemption, an approved person and
the specialist member organization with which such approved person is
to be associated must obtain the written agreement of NYSE Regulation,
Inc. (``NYSE Regulation'') that the approved person and such member
organization have established policies and procedures that are
consistent with the guidelines prescribed by NYSE Rule 98. These
guidelines set out in detail how approved persons and their associated
specialist organizations should structure and conduct their respective
businesses in order to ensure complete separation between the
specialist organization and the rest of the member organization. For
example, these guidelines require (1) the specialist unit to be housed
in a separate corporate entity and broker-dealer from its approved
persons; (2) the maintenance of separate books and records, financial
accounting, and required capital by the specialist unit; and (3)
procedures to safeguard confidential information derived from business
interactions with the issuer or contained in draft research reports
prepared by the approved person.
NYSE Rule 98 currently limits the ability of a specialist member
organization and its approved persons to share operational support
personnel, and permits dual affiliation only if the specialist member
organization and approved person provide the Exchange with a written
statement of the duties of such person and why it is necessary for the
individual to have a dual affiliation. Any changes to dual affiliations
must be submitted to the Exchange for approval in advance of making
such change.
The current NYSE rules also limit the ability of a specialist, its
member organization, and approved persons to manage the specialist
member organization's trading risks. Specifically, NYSE Rule 98
restricts an approved person from being involved in any trading
decisions of an associated specialist member organization and NYSE Rule
105 restricts the specialist member organization's ability to trade in
options and security futures on securities allocated to the specialist
member organization.
The NYSE believes that NYSE Rule 98 creates an administrative
burden on specialist organizations and their approved persons because
each approved person must continually update a separate exemption for
each activity that would otherwise be restricted. The NYSE also
believes that its current rule unnecessarily constrains the ability of
specialist organizations and their approved persons to manage the
specialist organization's risks and places them at a competitive
disadvantage vis-a-vis other market making or trading firms.
Accordingly, the NYSE proposes to amend NYSE Rule 98 to provide member
organizations with more flexibility with regard to how they structure
their specialist operations and manage risk. NYSE also proposes to make
conforming changes to other NYSE rules that rely on the NYSE Rule 98
exemptions for approved persons.
As discussed in further detail below, the revisions to NYSE Rule 98
would include: (1) Redefining the persons to whom NYSE Rule 98 would
apply; (2) allowing specialist operations to be integrated into a
member organization; (3) permitting a specialist unit to share non-
trading related services with its member organization or approved
persons; and (4) providing flexibility to member organizations and
their approved persons in how to conduct risk management of specialist
operations.
After careful review, and as discussed below, 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.\7\ In particular, the
Commission finds that the proposed rule change, as amended, is
consistent with Section 6(b)(5) of the Act,\8\ which requires that the
rules of the 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 a national securities system, and, in
general, to protect investors and the public interest.
---------------------------------------------------------------------------
\7\ 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).
\8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The restrictions in current NYSE Rule 98 and related rules are
intended to address two primary concerns. The first concern is the
potential that an affiliate could unfairly use non-public information,
such as information on a specialist's book or information regularly
provided to him by other market participants because of his central
role as a primary market specialist. If a specialist's affiliates had
access to such information, it would have a perceived advantage over
competing firms and the public at large in trading stocks assigned to
the affiliated specialist. The same concern about the potential for
unfair use of non-public information would arise if the specialist had
advance information about the activities of its affiliates (e.g., a
change in the firm's buy or sell recommendation or an imminent block
transaction away from the market). Access to such information would
allow the specialist to position itself to benefit from price changes
that might result once that information became publicly available. The
second concern is that a specialist unit could favor its affiliates by
providing orders placed by the affiliate with more favorable executions
[[Page 48262]]
and by providing useful market information to the affiliated firm (or
to its broker on the exchange trading floor) but not to others. In some
cases, such conflicts of interest could result in the specialist
neglecting his duty to make a fair and orderly market by giving an
affiliate's principal or agency orders a more favorable execution.
The potential for misuse of non-public information and conflicts of
interest, if not addressed by appropriate procedures and the monitoring
and surveillance of the continuing adequacy of such procedures, could
result in potential manipulative market activity and informational
advantages benefiting the approved person, the specialist unit, or the
customers of either. As discussed in more detail below, the Commission
believes that the changes NYSE proposes to make to NYSE Rule 98 and
related rules address these concerns.
III. Proposed Amendments to NYSE Rule 98
In response to concerns described above with current NYSE Rule 98,
NYSE proposes a wholesale change to NYSE Rule 98 that would apply a
more principles-based approach. In addition, under the proposed rule,
instead of reviewing whether to grant each approved person an exemption
from NYSE Rule 98, NYSE Regulation would review whether the specialist
unit itself has adequate policies, procedures, controls, and
surveillance designed to prevent the misuse of specialist confidential
information \9\ and non-public order \10\ information. If the
specialist unit has such policies, procedures, controls, and
surveillance, the specialist rules would generally only be applicable
to the specialist unit and not to affiliates of the specialist. In
addition to the information barriers and other NYSE Regulation approved
controls, specialists would continue to be subject to Exchange rules
that govern their access to and use of non-public order
information.\11\
---------------------------------------------------------------------------
\9\ ``Specialist confidential information'' means any non-public
information relating to a specialist unit's trading or quoting in
its specialty securities, including positions or any other
indication of a specialist's trading or quoting interest, the
specialist algorithm, or any other public information relating to a
specialist's interactions with its specialist security, but not
including non-public order information. See proposed NYSE Rule
98(b)(6).
\10\ A ``Non-public order'' is an order, whether expressed
electronically or verbally, or any information regarding a
reasonably imminent non-public transaction or series of transactions
entered or intended for entry or execution on the NYSE and which is
not publicly available on a real-time basis via an NYSE-provided
data-feed. See proposed NYSE Rule 98(b)(7).
\11\ See, e.g., NYSE Rules 70.20(h)(ii), 104(b), 115, and 115A.
---------------------------------------------------------------------------
A. Operating a Specialist Unit
Under proposed NYSE Rule 98(c), a member organization must obtain
prior written approval from NYSE Regulation to operate a specialist
unit. To obtain such approval, NYSE Regulation would have to determine
that the specialist unit has: (i) Adopted and implemented comprehensive
written procedures and guidelines governing the conduct and supervision
of business handled by the specialist unit; (ii) established a process
for regular review of such written policies and procedures; and (iii)
implemented controls and surveillances reasonably designed to prevent
and detect violations of these procedures and guidelines. These
policies and procedures would have to be reasonably designed to
maintain the confidentiality of specialist confidential information and
non-public order information. In this regard, proposed NYSE Rule 98(c)
would require a member organization's policies and procedures to
prohibit approved persons and the member organization's departments,
divisions, or aggregation units that are not part of the specialist
unit from having access to specialist confidential information and non-
public order information.\12\ In addition, such policies and procedures
would have to prohibit a specialist unit from having access to material
non-public order information in the possession of other aggregation
units of the member organization related to the securities allocated to
that specialist unit.\13\
---------------------------------------------------------------------------
\12\ However, a specialist may make available to a Floor broker
associated or affiliated with an approved person or member
organization any information that the specialist would be permitted
to provide under Exchange rules to an unaffiliated Floor broker. See
proposed NYSE Rule 98(c)(2)(A)(ii).
\13\ See proposed NYSE Rules 98(c)(1) and (c)(2).
---------------------------------------------------------------------------
Further, a specialist unit that is not operated as part of an
integrated proprietary aggregation unit would have to comply with all
the requirements of an aggregation unit.\14\ Accordingly, as required
by Rule 200(f) of Regulation SHO, such a specialist unit would have to
have a written plan of organization that specifies its trading
objectives and meets all the other requirements of an independent
trading unit under Regulation SHO.\15\
---------------------------------------------------------------------------
\14\ See proposed NYSE Rules 98(b)(11) and 98(c)(2)(B).
\15\ See 17 CFR 242.200(f). To be exempt from the restrictions
in NYSE Rule 105 pursuant to proposed Rule 98(f)(1), the written
plan of organization required by Rule 200(f) of Regulation SHO would
need to specify the specialist unit's trading objectives for trading
in related products.
---------------------------------------------------------------------------
The proposed rule would permit senior managers who are not
dedicated to the specialist unit and are associated with either an
approved person or a member organization that runs a specialist unit to
provide management oversight to the specialist unit. A member
organization's policies and procedures would need to be reasonably
designed to ensure that such management oversight does not conflict
with or compromise the specialist unit's compliance with the specialist
rules. The proposed rule would also provide specific guidelines for
access by the senior managers not assigned to the specialist unit to
specialist confidential information or non-public order information,
which are designed to prevent the misuse of such information. For
example, proposed NYSE Rule 98(c)(2)(E) would provide that if a senior
manager is called upon for risk management purposes and gains access to
specialist confidential information or non-public order information in
connection with that role, the senior manager must not make (directly
or indirectly) specialist confidential information or non-public order
information available to the persons or systems responsible for making
trading decisions in aggregation units, departments, divisions, or
trading desks that are not part of the specialist unit, including the
customer-facing departments. The senior manager also must not use such
information to directly or indirectly influence the day-to-day trading
decisions of the other aggregation units of the member organization or
approved person with respect to the securities allocated to the
specialist unit.\16\
---------------------------------------------------------------------------
\16\ See proposed NYSE Rule 98(c)(2)(E). See Notice, supra note
3, at 73 FR at 38278.
---------------------------------------------------------------------------
Proposed NYSE Rule 98(c) would enumerate certain bright line
divisions that the specialist unit must maintain, including information
barriers between the specialist unit and investment banking, research,
and customer-facing departments and approved persons. These divisions
are designed to ensure that the specialist unit cannot access material
non-public information about securities allocated to that unit from
either its approved persons or non-specialist operations of a parent
member organization.\17\ In addition, as discussed above, these
divisions are designed to ensure that a member organization's
departments, divisions, or aggregation units not part of the specialist
unit, including investment banking, research, and customer-facing
departments, cannot access specialist confidential information or non-
public order
[[Page 48263]]
information.\18\ Finally, a specialist unit would be required to
maintain or have allocated to it net capital sufficient to meet the
requirements of NYSE Rule 104.21.\19\
---------------------------------------------------------------------------
\17\ See proposed NYSE Rule 98(c)(2)(C).
\18\ See proposed NYSE Rule 98(c)(2)(A)(i) and supra notes 12
and 13 and accompanying text.
\19\ See proposed NYSE Rule 98(c)(2)(D).
---------------------------------------------------------------------------
NYSE Regulation would review a member organization's surveillance
plans and internal controls to ensure that they are reasonably designed
to protect information as required under the proposed rule. As with the
current rule, NYSE Regulation would also review whether a member
organization has implemented internal audit procedures to ensure
compliance with such organization's NYSE Rule 98 policies and
procedures. The Exchange represents that the NYSE Regulation review for
approving a specialist unit would be as rigorous as the current review
for obtaining an exemption from current NYSE Rule 98.\20\ As with the
current NYSE Rule 98 exemption process, staff from both the Market
Surveillance Division of NYSE Regulation, as well as staff from the
Financial Industry Regulatory Authority, Inc. (``FINRA'') who are
responsible for the routine examinations of specialist units, would be
involved in reviewing a specialist unit's written policies and
procedures and proposed automated surveillances and controls.\21\
---------------------------------------------------------------------------
\20\ See Notice, supra note 3, at 73 FR at 38278.
\21\ See Notice, supra note 3, at 73 FR at 38279. In the Notice,
the Exchange stated that ``[w]here feasible, NYSE Regulation will
expect specialist units to use automated surveillances to check for
breaches of the information barriers required by the proposed
rule.'' Id.
---------------------------------------------------------------------------
After a member organization has been approved to operate a
specialist unit, NYSE Regulation and FINRA would conduct examinations
to determine whether a specialist unit's policies and procedures
continue to meet the rule requirements and whether the controls and
automated surveillances are functioning as designed. As part of the
examinations, NYSE Regulation and FINRA would conduct on-site reviews
of a specialist unit to review for breaches of the controls or
surveillances.\22\ In addition, NYSE states that a specialist unit
would need to seek approval from NYSE Regulation, before making any
material changes to its operations.\23\
---------------------------------------------------------------------------
\22\ Id.
\23\ Id.
---------------------------------------------------------------------------
The Commission finds that the requirements in proposed Rule 98(c)
are consistent with the Act. The Commission believes that the proposed
rule change, as amended, establishes guidelines for a member
organization's policies and procedures that will protect against the
improper disclosure and sharing of specialist confidential information
and non-public order information.
B. Operating a Specialist Unit Within an Integrated Proprietary
Aggregation Unit
Proposed NYSE Rule 98 would permit a member organization to seek
approval to operate a specialist unit within an integrated proprietary
aggregation unit. An ``integrated proprietary aggregation unit'' is
proposed to be defined to mean a department, division, or desk that
meets the requirements of the definition of an ``independent trading
unit'' under Rule 200 of Regulation SHO with a trading objective to
engage in proprietary trading, including market-making activities.\24\
An integrated proprietary aggregation unit must be separate from any
investment banking, research, or customer-facing department.\25\
---------------------------------------------------------------------------
\24\ See proposed NYSE Rule 98(b)(11) and (14); 17 CFR
242.200(f).
\25\ See proposed NYSE Rule 98(b)(14).
---------------------------------------------------------------------------
To protect specialist confidential information and non-public order
information, a member organization would be permitted to operate a
specialist unit within an integrated proprietary aggregation unit, if
NYSE Regulation approves such operations and the member organization:
(i) Adopts and implements comprehensive written procedures and
guidelines governing the conduct and supervision of business handled by
the unit; (ii) establishes a process for regular review of such written
policies and procedures; and (iii) implements controls and
surveillances reasonably designed to prevent and detect violations of
these procedures and guidelines.\26\
---------------------------------------------------------------------------
\26\ See proposed NYSE Rule 98(d)(1) and (2).
---------------------------------------------------------------------------
In addition, to operate a specialist unit within an integrated
proprietary aggregation unit, the specialist unit's policies and
procedures would have to meet those requirements for operating a
specialist unit pertaining to information barriers associated with the
specialist unit and non-specialist unit operations, net capital
requirements, and senior management oversight.\27\ A specialist unit
operating within an integrated proprietary aggregation unit would not
be required to separately comply with all requirements of a Regulation
SHO independent trading unit because the integrated proprietary
aggregation unit of which it is a part would be required to comply with
Rule 200(f) of Regulation SHO.\28\
---------------------------------------------------------------------------
\27\ See proposed NYSE Rules 98(d)(2)(A) and 98(c)(2)(A), (C),
(D), and (E).
\28\ See supra note 24 and accompanying text. The Exchange
states that there may be some Regulation SHO issues in connection
with how a member organization may choose to structure its
specialist unit within an integrated proprietary aggregation unit or
provide risk management to the specialist unit pursuant to proposed
NYSE Rule 98(f). Accordingly, the Exchange represents that it would
not approve a specialist unit to operate under proposed NYSE Rule 98
until all Regulation SHO issues that may arise have been resolved.
See Notice, supra note 3, at 73 FR at 38279.
---------------------------------------------------------------------------
The member organization's policies and procedures would also need
to restrict access within the integrated proprietary aggregation unit
to non-public order information. Specifically, except for senior
managers pursuant to policies and procedures adopted under proposed
NYSE Rule 98(c)(2)(E), the specialist unit must not permit systems and
individuals not assigned to the specialist unit to have access to non-
public order information.\29\ For example, because the specialist
application protocol interface (``specialist API'') currently has
access to non-public order information, systems not dedicated to the
specialist unit could not be integrated with the specialist API.
Accordingly, the trading algorithms of the integrated proprietary
aggregation unit that are not dedicated to the specialist unit must not
have access to any non-public order information via the specialist API,
or any other system.\30\
---------------------------------------------------------------------------
\29\ See proposed NYSE Rule 98(d)(2)(B)(i) and (ii).
\30\ See Notice, supra note 3, at 73 FR 38279.
---------------------------------------------------------------------------
A member organization's policies and procedures would have to
prohibit individuals assigned to the specialist unit, while on the
Exchange floor,\31\ from communicating with individuals or systems
responsible for making trading decisions for the integrated proprietary
aggregation unit.\32\ However, such policies and procedures could
permit a specialist unit employee to move, on an intra-day basis, to an
off-Floor location and engage in a non-specialist related role within
the integrated proprietary aggregation unit.\33\ The policies and
procedures of a member organization that chooses to allow individuals
to so move must be reasonably designed to prohibit such individual from
(1) making any non-public order information or specialist confidential
information available to individuals or systems responsible for
[[Page 48264]]
making trading decisions for the integrated proprietary aggregation
unit and (2) using any non-public order information or, except for
certain risk management activities as described below,\34\ specialist
confidential information in connection with making trading decisions
for the integrated proprietary aggregation unit.\35\
---------------------------------------------------------------------------
\31\ NYSE rules define being on the Floor to include the trading
Floor of the Exchange, and the premises immediately adjacent
thereto, such as the various entrances and lobbies of 11 Wall
Street, 18 New Street, 12 Broad Street, and 18 Broad Street, as well
as the telephone lobby in the first basement of 11 Wall Street. See
NYSE Rule 112(b).
\32\ See proposed NYSE Rule 98(d)(2)(B)(iii).
\33\ See proposed NYSE Rule 98(d)(2)(B)(iv).
\34\ See Section III(D) infra.
\35\ See proposed NYSE Rule 98(d)(2)(B)(iv).
---------------------------------------------------------------------------
Proposed NYSE Rule 98 would no longer require separate books and
records for a specialist unit operating within an integrated
proprietary aggregation unit. However, to allow NYSE Regulation to
review the trading activity by the specialist unit at the Exchange
without having to parse through commingled records, under proposed NYSE
Rule 98(d)(2)(C), an integrated proprietary aggregation unit would have
to maintain records of its specialist's accounts in a manner that is
separate from the accounts of the integrated proprietary aggregation
unit.\36\ Similarly, to ensure that NYSE Regulation can review the
trading activities of the integrated proprietary aggregation unit,
proposed NYSE Rule 98(d)(4) would require an integrated proprietary
aggregation unit to maintain audit trail information for any trading by
such unit, including trading at the Exchange and at other market
centers. Further, the proposed amendments to NYSE Rule 132B would apply
the Order Tracking System (``OTS'') requirements to trading by a
specialist unit, and if applicable, an integrated proprietary
aggregation unit.\37\ A member organization would be required to
maintain sufficient records to reconstruct in a time-sequenced manner
its trading in securities allocated to the specialist unit and any
trading by the integrated proprietary aggregation unit in those
securities in other market centers or trading in related products.\38\
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\36\ See NYSE Rule 98(d)(2)(C).
\37\ The order tracking provisions in NYSE Rule 132B currently
do not apply to members effecting on the Floor proprietary
transactions when they are acting in the capacity of a specialist, a
Registered Competitive Market Maker, or a Competitive Trader. The
proposed amendments in NYSE Rule 132B would apply the order tracking
provisions in the rule to those persons.
\38\ See proposed NYSE Rule 98(d)(4).
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The Commission finds that the NYSE's proposal to permit a member
organization to operate a specialist unit within an integrated
proprietary aggregation unit is consistent with the Act. The Commission
believes that the guidelines established for member organization
policies and procedures and NYSE Regulation review are designed to
protect specialist confidential information and non-public order
information and mitigate the potential for conflicts of interest in a
member organization. The Commission also believes that operation of a
specialist unit within an integrated proprietary aggregation unit need
not interfere with the specialist's obligations under Exchange Rules.
In particular, proposed NYSE Rule 98(d) would establish that the
specialist rules would apply to any trading on or through the systems
and facilities of the Exchange by the integrated proprietary
aggregation unit through the specialist unit in the securities that are
allocated to the specialist unit and to the integrated proprietary
aggregation unit if the integrated proprietary aggregation unit causes
the specialist unit to violate the specialist rules.\39\ In this
regard, NYSE states that if there is a conflict between the specialist
unit's market making obligations and the integrated proprietary
aggregation unit's trading, the presumption would be in favor of the
specialist unit's market making obligations.\40\
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\39\ See proposed NYSE Rule 98(d)(3).
\40\ See Notice, supra note 3, at 73 FR at 38280.
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C. Sharing Non-Trading Related Services
Proposed NYSE Rule 98(e) would allow a specialist member
organization and its approved persons to share non-trading related
services, subject to the approval of NYSE Regulation. To obtain
approval to share non-trading related services, the specialist unit
would be required to: (i) Adopt written policies and procedures
governing the sharing of non-trading related services; (ii) establish a
process for regular review of such written policies and procedures; and
(iii) implement controls and surveillances reasonably designed to
prevent and detect violations of those policies and procedures. At a
minimum, the specialist unit's policies and procedures would have to be
reasonably designed to provide that the specialist unit and the member
organization or approved person must maintain the confidentiality of
specialist confidential information and non-public order information.
Under no circumstances may non-public order information or specialist
confidential information be made available to a member's organizations
investment banking, research, or customer-facing departments.\41\
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\41\ See NYSE Rule 98(e)(2).
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The Commission finds that NYSE's proposal to allow a specialist
unit to share certain non-trading related services with its member
organization or approved person is consistent with the Act because such
sharing would be conducted pursuant to policies and procedures designed
to protect specialist confidential information and non-public order
information. Moreover, such policies and procedures would be reviewed
by NYSE Regulation prior to a member organization being approved to
share non-trading related services and NYSE Regulation and FINRA would
examine on an ongoing basis whether the specialist unit's policies and
procedures and controls comply with the requirements of the rule.\42\
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\42\ See Notice, supra note 3, at 73 FR 38281.
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D. Risk Management
1. Changes to NYSE Rule 105
NYSE Rule 105 currently limits the ability of specialists,
specialist organizations and approved persons (and any officer or
employee thereof) to conduct risk management trading in options and
single stock futures on stock in which the specialist is registered.
The Guidelines for Specialists' Specialty Stock Option and Single Stock
Futures Transactions Pursuant to Rule 105 (``Rule 105 Guidelines'')
currently sets forth the permissible options positions that a
specialist may establish and maintain for the purpose of hedging risks
associated with holding specialty stocks. The proposed amendments to
NYSE Rule 105 would limit the applicability of the rule to the
specialist unit itself (and any officer or employee thereof); approved
persons would no longer be subject to NYSE Rule 105.\43\
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\43\ NYSE Rule 105(a), which prohibits specialists, their member
organization and their approved persons (or officer or employee
thereof) from being directly or indirectly interested in a pool
dealing or trading in a stock in which such member is registered as
a specialist, would continue to apply to approved persons.
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Paragraph (m)(i) of the Rule 105 Guidelines currently prohibits
specialists, their member organization and their approved persons (or
officer or employee thereof) from acting in any market-making capacity
in an option or security future overlying a security in which the
specialist is registered. An approved person may seek an exception from
these restrictions under NYSE Rule 98 and paragraphs (m)(ii) and (iii)
of the Rule 105 Guidelines exempt such approved person to engage in
such market making activities. Such approved person, however, may not
also act as a market maker in any equity security in which the
associated specialist is registered and which underlies an option or
security future in
[[Page 48265]]
which the approved person is acting as market maker.\44\
---------------------------------------------------------------------------
\44\ Paragraph (m)(ii) of the Rule 105 Guidelines.
---------------------------------------------------------------------------
Consistent with the proposal to amend NYSE Rule 105 so that
approved persons are no longer subject to the Rule, the proposed rule
change would eliminate the reference to ``approved persons'' in
paragraph (m)(i) of the Rule 105 Guidelines. Thus, an approved person
and an integrated proprietary aggregation unit would not be prohibited
by NYSE Rules from engaging in options or security futures market-
making activities. In addition, the proposed rule change would delete
paragraphs (m)(ii) and (m)(iii), which apply only to approved persons,
from the Rule 105 Guidelines.
The Commission believes that these proposed changes to NYSE Rule
105 and the Rule 105 Guidelines are consistent with the Act. Under
proposed NYSE Rule 98, the specialist unit would be walled-off from
approved persons pursuant to a member organization's policies and
procedures reviewed by NYSE Regulation that must be reasonably designed
to protect against the improper disclosure and sharing of specialist
confidential information and non-public order information. The
Commission believes that these barriers between the specialist unit and
other business activities of a member organization, including market
making in securities in which a specialist is registered and related
securities, will limit the potential for unfair use of non-public order
information, manipulation and other improper trading practices, and
conflicts of interest.
2. Proposed Risk Management Models
Proposed NYSE Rule 98(f) would broaden the ability of specialist
units to trade in related products and expand the universe of who may
be involved in managing the risk of the specialist unit. In this
regard, the NYSE proposes three models for a specialist unit to set up
its risk management operation. Specifically, under the first model,
risk management may be conducted within the specialist unit itself.\45\
Under the second model, risk management may be conducted within an
integrated proprietary aggregation unit.\46\ Under the third model,
risk management may be conducted within another affiliate of the
specialist unit.\47\ Regardless of the risk management model, the
specialist unit would be responsible for its quoting or trading
decisions at the Exchange.\48\
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\45\ See proposed NYSE Rule 98(f)(1).
\46\ See proposed NYSE Rule 98(f)(2).
\47\ See proposed NYSE Rule 98(f)(3).
\48\ See Notice, supra note 3, at 73 FR at 38281; see also
proposed NYSE Rules 98(f)(2)(A)(i) and 98(f)(3)(C)(iv).
---------------------------------------------------------------------------
a. Specialist Unit Risk Management
NYSE Rule 105 limits a specialist unit's trading in options and
single stock futures on stock in which the specialist is registered.
Proposed NYSE Rule 98(f)(1) would allow a specialist unit to seek an
exemption from NYSE Rule 105 for the purpose of conducting risk
management trading. A specialist unit and its officers and employees
would continue to be prohibited from engaging in any capacity as a
market maker in options or security futures overlying securities in
which the specialist is registered. To obtain an exemption from the
NYSE Rule 105 restrictions, the specialist unit would have to: (i)
Adopt and implement comprehensive written procedures and guidelines
governing the conduct of trading in related products; (ii) establish a
process for regular review of such written procedures and guidelines;
and (iii) implement controls and surveillances reasonably designed to
prevent and detect violations of these procedures and guidelines. These
policies and procedures would have to be reasonably designed to ensure
that the individuals or systems responsible for trading related
products do not have access to non-public order information or except
as described below,\49\ specialist confidential information.\50\
Individuals who work on the Exchange Floor would not be permitted to
trade or direct trading in related products,\51\ nor would the
specialist API be permitted to make any trading decisions in related
products.\52\ Accordingly, any trading in related products by the
specialist unit would have to be conducted by an off-Floor, i.e.,
``upstairs'' office, by individuals who are qualified and registered to
trade in the marketplaces where such trading occurs.\53\
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\49\ See infra notes 55-56 and accompanying text.
\50\ The proposed rule change would permit a specialist unit to
transfer a specialist back and forth from the Floor of the Exchange
to a specialist unit desk upstairs that trades in related products,
so long as that specialist is registered and qualified to trade in
related products and non-public order information is not used when
trading in related products. In such case, however, a specialist
unit must have policies and procedures reasonably designed to ensure
that a specialist who moves off the Floor of the Exchange does not
make available or use any non-public information or, unless
otherwise specified, specialist confidential information, to which
the specialist may have had access while on the Floor of the
Exchange. See proposed NYSE Rule 98(f)(1)(A)(iii).
\51\ See proposed NYSE Rule 98(f)(1)(A)(ii); Notice, supra note
3, at 73 FR at 38281.
\52\ See proposed NYSE Rule 98(f)(1)(A)(iv). Under the proposal,
a specialist unit that has not been approved for an exemption from
NYSE Rule 105 would still be permitted to enter orders in options or
single-stock futures from the Floor, subject to the requirements of
NYSE Rule 105; see also Notice, supra note 3, at 73 FR at 38281.
\53\ The Exchange notes that the member organization with the
specialist unit would have to be a member of FINRA or another self-
regulatory organization, as required by each marketplace where the
specialist unit proposes to trade. See Notice, supra note 3, at 73
FR at 38281.
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The NYSE proposes to allow individuals or systems responsible for
trading related products to have limited access to specialist
confidential information. Specifically, individuals or systems,
including computer algorithms, responsible for making trading decisions
in related products may have electronic access to the specialist unit's
trades at the Exchange in securities allocated to the specialist unit,
provided that such trades have been printed to the Consolidated
Tape.\54\
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\54\ See proposed NYSE Rule 98(f)(1)(A)(v).
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In addition, a senior manager of the specialist unit would be
permitted to provide risk management oversight of both Floor specialist
operations and any specialist unit upstairs trading in related
products.\55\ Such oversight, however, would have to be done pursuant
to policies and procedures reasonably designed to prevent the
specialist unit senior managers who have access to non-public order
information or specialist confidential information from making such
information available to the individuals or systems on the upstairs
trading desk responsible for trading related products within the
specialist unit or using such information to directly or indirectly
influence trading in related products by that upstairs desk.\56\ The
proposed rule also would bar specialists from directly entering or
executing trades in related products while on the Floor of the
Exchange.\57\
---------------------------------------------------------------------------
\55\ See proposed NYSE Rule 98(f)(1)(A)(vi).
\56\ Id.
\57\ See proposed NYSE Rule 98(f)(1)(ii).
---------------------------------------------------------------------------
The Commission believes that the proposal to permit a specialist
unit to conduct risk management within the specialist unit itself is
consistent with the Act. The Commission notes that the proposed rule
would require a specialist unit's policies and procedures to be
reasonably designed to ensure that the individuals or systems
responsible for trading related products do not have access to non-
public order information or, except under limited conditions,
specialist confidential information.
The Commission believes that those limited circumstances in which
specialist confidential information may
[[Page 48266]]
be used to manage a specialist unit's risks would not be a misuse of
information. The Commission does not believe that information about
trades that have been printed to the Consolidated Tape would provide
the member organization with an unfair advantage because such trades
would be publicly available.\58\
---------------------------------------------------------------------------
\58\ Once trades are disseminated publicly, the individuals or
systems, including computer algorithms, responsible for trading in
related products may have access to the specialist unit's aggregate
net long or short position that includes the printed trades.
---------------------------------------------------------------------------
b. Integrated Proprietary Aggregation Unit Risk Management
Proposed NYSE Rule 98(f)(2) would permit an integrated proprietary
aggregation unit to conduct risk management trading related to the
specialist unit's trading.\59\ NYSE Regulation would need to approve
the integrated proprietary aggregation unit to conduct such risk
management trading.
---------------------------------------------------------------------------
\59\ An integrated proprietary aggregation unit conducting risk
management trading outside of its specialist unit pursuant to
proposed NYSE Rule 98(f)(2) would not require an exemption from the
requirements of NYSE Rule 105(b)-(d) and the Rule 105 Guidelines
because, under the proposed changes to NYSE Rule 105, the
prohibitions on risk management trading would apply only to the
specialist unit itself and not to approved persons. See supra
Section III(D)(1).
---------------------------------------------------------------------------
Proposed NYSE Rule 98(f)(2) incorporates the requirements described
above for conducting risk management trading within the specialist unit
itself, except for the requirement in proposed NYSE Rule
98(f)(1)(A)(vi) relating to senior managers of the specialist unit.\60\
The requirement in proposed NYSE Rule 98(f)(1)(A)(vi) is not applicable
where risk management is being conducted by an integrated proprietary
aggregation unit, because senior managers of the specialist unit would
not be providing risk management oversight. In addition, an integrated
proprietary aggregation unit would be required to: (i) Adopt and
implement comprehensive written procedures and guidelines governing the
conduct of risk management of the specialist unit; (ii) establish a
process for regular review of such written procedures and guidelines;
and (iii) implement controls and surveillances reasonably designed to
prevent and detect violations of these procedures and guidelines.
---------------------------------------------------------------------------
\60\ See proposed NYSE Rule 98(f)(2)(A). An integrated
proprietary aggregation units would have to meet the requirements of
proposed NYSE Rule 98(f)(1)(A)(i)-(v), see supra notes 49-54 and
accompanying text.
---------------------------------------------------------------------------
Rule 98 (f)(2)(A)(i) would permit the ``upstairs'' risk management
desk to electronically direct the specialist unit's trading or quoting,
subject to the specialist unit's market making obligations. To provide
the recommendations to the specialist unit, the ``upstairs'' risk
management desk would be permitted to have real-time access both to the
integrated proprietary aggregation unit's positions in related products
and other securities and to the specialist unit's positions in
securities allocated to it, provided that such specialist unit's
positions comprise only trades that have been printed to the
Consolidated Tape.\61\
---------------------------------------------------------------------------
\61\ See Notice, supra note 3, at 73 FR at 38282; see also
proposed Rule 98(f)(2)(A)(i).
---------------------------------------------------------------------------
The Commission finds that the proposal to permit a specialist
unit's risk management operations to be performed by an integrated
proprietary aggregation unit of which it is part is consistent with the
Act. The Commission believes that the policies and procedures an
integrated proprietary aggregation unit would be required to establish
and that NYSE Regulation would need to review would protect specialist
confidential information and non-public order information.
The Commission also believes that the proposed NYSE Rule 98 would
continue to mitigate conflicts of interest between the specialist's
responsibilities to the market and the business activities of
specialist affiliates. In this regard, the proposed rule would require
the specialist unit to determine whether any recommendations provided
to it by an ``upstairs'' risk management desk are consistent with its
market making obligations, including Exchange specialist rules. Thus,
the Commission expects that the specialist unit would accept or reject
such recommendations in a manner that is consistent with its market
making obligations.
c. Approved Person or Member Organization Risk Management
Finally, under proposed NYSE Rule 98(f)(3) an approved person or a
member organization that runs a specialist unit could seek approval of
NYSE Regulation to conduct risk management trading related to the
specialist unit's trading.\62\ This alternative would provide broker-
dealers the flexibility to keep the specialist unit as a separate
member organization or aggregation unit, yet have an approved person or
separate aggregation unit provide risk management services for the
specialist unit. Under this option, the approved person or member
organization would provide the same type of risk management as an
integrated proprietary aggregation unit that includes that the
specialist unit under proposed NYSE Rule 98(f)(2). Thus, as required
for an integrated proprietary aggregation unit under proposed NYSE Rule
98(f)(2) described above, proposed NYSE Rule 98(f)(3) would require an
approved person or member organization conducting such risk management
to: (i) Adopt and implement comprehensive written procedures and
guidelines governing the conduct of risk management of the specialist
unit; (ii) establish a process for regular review of such written
procedures and guidelines; and (iii) implement controls and
surveillances reasonably designed to prevent and detect violations of
these procedures and guidelines.\63\ These policies and procedures must
be reasonably designed to satisfy the requirements in the rule,
including that individuals and systems responsible for managing the
risk of the specialist unit could not have access to non-public order
information, or with certain exceptions, specialist confidential
information.\64\ These exceptions are limited to allowing individuals
and systems responsible for managing the risk of the specialist unit to
have electronic access to the specialist unit's trades once they are
printed to the Consolidated Tape.\65\ In addition, an approved person
or member organization could electronically direct the specialist
unit's trading or quoting, subject to the specialist unit's market
making obligations.
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\62\ An affiliate of a specialist unit conducting risk
management trading pursuant to proposed NYSE Rule 98(f)(3) would not
require an exemption from the requirements of NYSE Rule 105(b)-(d)
and the Rule 105 Guidelines because, under the proposed changes to
NYSE Rule 105, the prohibitions on risk management trading would
apply only to the specialist unit itself and not to approved
persons. See supra Section III(D)(1).
\63\ See proposed Rule 98(f)(3)(C).
\64\ See proposed Rule 98(f)(3)(C)(ii).
\65\ See supra note 54 and accompanying text.
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The Commission finds that the proposed rule change to permit an
approved person or a member organization associated with a specialist
unit to conduct its risk management trading related to the specialist
unit's trading is consistent with the Act. The Commission believes that
the policies and procedures an approved person or member organization
would be required to establish and that NYSE Regulation would need to
revise would protect specialist confidential information and non-public
order information.
The Commission also believes that proposed NYSE Rule 98 would
continue to mitigate conflicts of interest between the specialist's
responsibilities to the market and the business activities of
[[Page 48267]]
specialist affiliates. In this regard, the proposed rule would require
the specialist unit to determine whether any recommendations provided
to it by an ``upstairs'' risk management desk are consistent with its
market making obligations, including Exchange specialist rules. Thus,
the Commission expects that the specialist unit would accept or reject
such recommendations in a manner that is consistent with its market
making obligations.
E. Failure To Maintain Confidentiality, Reporting Obligations, and
Breaches
Proposed NYSE Rule 98(g) would provide that, if a specialist
becomes aware of non-public material information from its approved
person or parent member organization, the specialist may have to cease
acting as a specialist temporarily in the security involved. Proposed
NYSE Rule 98(i) would provide that any breach of the proposed NYSE Rule
98 could result in disciplinary action, including the withdrawal of one
or more securities allocated to the specialist unit or withdrawal of
approval to operate a specialist unit. Both rules are substantially
similar to provisions in current NYSE Rule 98 \66\ and the Commission
believes they are consistent with the Act.
---------------------------------------------------------------------------
\66\ See current NYSE Rule 98, Guidelines (i) and (k).
---------------------------------------------------------------------------
Paragraphs (1) and (2) of proposed NYSE Rule 98(h) are
substantially similar to the current reporting obligations in current
NYSE Rule 98.\67\ Proposed NYSE Rule 98(h)(1) would require ``after the
fact'' reporting of information regarding material investment banking
activities in which the member organization or approved person has been
engaged and material research reports, recommendations, etc. pertaining
to any security that has been allocated to the specialist unit.
Proposed NYSE Rule 98(h)(2) would require ``after the fact'' reporting
of information about determinations regarding whether the specialist
should cease acting as specialist in the event the specialist unit
receives non-public information. Paragraphs (3) and (4) of proposed
NYSE Rule 98(h) would add a new requirement for specialist units to
report any actual breaches, or internal investigations of possible
breaches, of the information barriers required by the rule. In
particular, a specialist unit would be required to conduct an internal
investigation into any trading activity that may be a result of a
breach of information barriers required by proposed NYSE Rule 98. In
addition, on a quarterly basis, a specialist unit would have to report
in writing to NYSE Regulation whether it has commenced such an internal
investigation, the quarterly progress of any open investigations, what
remedial measures, if any, were taken, and the completion of any
internal investigation, including the methodology and results of such
investigation, any internal disciplinary action taken, and any referral
of the matter to the NYSE, another self-regulatory organization, or the
Commission.\68\
---------------------------------------------------------------------------
\67\ See current NYSE Rule 98, Guidelines (j).
\68\ See proposed NYSE Rule 98(h)(4).
---------------------------------------------------------------------------
The Commission finds that proposed NYSE Rule 98(h) is consistent
with the Act and would provide NYSE Regulation with an additional tool
to monitor compliance with NYSE Rule 98. The Commission notes that NYSE
designed the reporting obligation for internal investigations in the
proposed rule to be effectively similar to the reporting obligation in
other NYSE rules.\69\
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\69\ See NYSE Rules 351(e) and 342.21.
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F. Existing Specialists
1. NYSE Rule 98 (Former)
Because a current specialist may decide to keep its current
operational structure or delay implementation of a new operational
structure, the NYSE proposes to retain current NYSE Rule 98 but limit
its applicability to specialist organizations and their associated
approved persons operating as of the date of this Order. Specifically,
current NYSE Rule 98 would be re-designated as ``Rule 98 (Former)'' in
the NYSE Rules until all specialist units are approved for operation
pursuant to the proposed rule.\70\ Except for the sharing of non-
trading related services, as discussed below, such member organization
and its approved persons would continue to be subject to NYSE Rule 98
(Former) as well as the ``(Former)'' versions of NYSE Rules that
reference exemptions from Rule 98 (Former) for approved persons. Any
new specialist units would be required to comply with proposed NYSE
Rule 98. Any significant changes to the status quo after the effective
date of the proposed rule would require the member organization to
apply for approval pursuant to the procedures of proposed NYSE Rule
98.\71\
---------------------------------------------------------------------------
\70\ See proposed NYSE Rule 98 (Former).
\71\ See Notice, supra note 3, at 73 FR at 38276.
---------------------------------------------------------------------------
The Commission finds that the NYSE's proposal to continue to permit
current specialist units to operate under current NYSE Rule 98,
redesignated as NYSE Rule 98 (Former), is consistent with the Act.
Allowing specialist units to continue to operate under current NYSE
Rule 98 would provide specialist units time to develop or modify their
policies and procedures and avoid any unnecessary disruption in their
businesses.
2. Sharing of Non-Trading Related Services
The proposed rule change would provide that a member organization
operating pursuant to NYSE Rule 98 (Former) could apply for approval
from NYSE Regulation to share non-trading related services.\72\ Any
such sharing of non-trading related services would be pursuant to
proposed NYSE Rule 98(e).\73\
---------------------------------------------------------------------------
\72\ See NYSE Rule 98 (Former), Guidelines(c).
\73\ See supra notes 41-42 and accompanying text for a
discussion of these rules.
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The Commission finds that the NYSE proposal to permit specialist
units operating under NYSE Rule 98 (Former) to seek approval under
proposed NYSE Rule 98 to share non-trading related services is
consistent with the Act. Specialist units operating under NYSE Rule 98
(Former) and their approved persons would be required to maintain
informational barriers prescribed by the current NYSE Rule 98
Guidelines. The Commission believes that those Guidelines, combined
with the requirements under proposed NYSE Rule 98(e) regarding the
sharing of non-trading related services would protect against the
misuse of non-public information.
G. Additional Rule Changes
As described above, under the proposed rule, instead of reviewing
whether to grant each approved person an exemption from NYSE Rule 98,
NYSE Regulation would review the specialist unit's policies,
procedures, controls, and surveillance. For this reason, the NYSE
proposes to amend the NYSE rules that refer to approved persons and to
the need for an exemption from NYSE Rule 98.
1. Proposed Amendments to NYSE Rule 98A
NYSE Rule 98A currently requires approved persons to agree in
writing not to cause a specialist or odd-lot dealer to violate rules
applicable to the specialist or odd-lot dealer. The rule further
requires that approved persons report to the Exchange any off-Floor
orders for securities in which an associated specialist member
organization specializes for any account in which the approved person
has a direct or indirect interest.
[[Page 48268]]
Under the proposed amendments to NYSE Rule 98A, approved persons
would no longer be required to agree in writing not to cause a
specialist or odd-lot dealer to violate rules applicable to the
specialist or odd-lot dealer. Approved persons also would no longer be
required to report any off-Floor orders for securities in which an
associated specialist member organization specializes for any account
in which the approved person has a direct or indirect interest to the
Exchange. The Commission believes that the elimination of these
requirements is consistent with the Act because, under proposed NYSE
Rule 98, the specialist unit would be walled-off from approved persons.
2. Proposed Amendments to NYSE Rules 99, 102, 103B, 104, and 113
NYSE Rules 99, 103B, 104, and 113 currently specifically apply to
approved persons, unless such approved person has obtained an exemption
under Rule 98. Under the proposed rule change, current NYSE Rules 99,
103B, 104, and 113 would be amended to remove references to approved
persons.\74\ The Commission believes that the elimination of the
references to approved persons in these rules is consistent with the
Act because, under proposed NYSE Rule 98, the specialist unit would be
walled-off from approved persons.
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\74\ For the period of time that the current NYSE Rule 98 stays
in the NYSE Rules as ``NYSE Rule 98 (Former),'' each of NYSE Rules
99, 103B, 104, and 113 will have two forms: One to meet the
requirements of NYSE Rule 98 (Former) and one to meet the
requirements of proposed NYSE Rule 98. The version of the rules that
relate to NYSE Rule 98 (Former) will be similarly designated with
the ``(Former)'' title either for the entire rule, or for a section
of a rule, as appropriate.
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NYSE Rule 102 currently governs trading in related products by an
odd-lot dealer. The Commission believes that the deletion of current
NYSE Rule 102 is consistent with the Act. The Commission notes that the
Exchange no longer has separate odd-lot dealers and all specialists are
also responsible for odd-lot trading in securities in which they are
registered. The Commission also notes that specialists would be subject
to the standards set forth in proposed Rules NYSE 98 and 105.
3. Proposed Amendments to NYSE Rule 460
Current NYSE Rule 460.10 prohibits a specialist, its member
organization or approved person (or officer or employee thereof) from,
individually or in the aggregate, owning more than 10% of the
outstanding shares of any equity security in which the specialist is
registered.\75\ Current NYSE Rule 460.10 also requires such person to
report to the NYSE when it, directly or indirectly, acquires more than
5% of the outstanding shares of such equity security and promptly
dispose or reduce such interest if advised to do so by the Exchange. A
specialist, its member organization or approved person (or officer or
employee thereof) may exceed the 10% ownership threshold for derivative
securities whose values are based on an underlying currency or index
only with the approval of the NYSE; however, in no event may such
person directly or indirectly own more than 25% of such derivative
securities.
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\75\ The prohibitions in current NYSE Rule 460.10 do not apply
if the security is a convertible security, American Depositary
Receipt, G
