Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending NYSE Arca Rules Governing Doing Business With the Public, 62354-62358 [E8-24754]

Download as PDF 62354 Federal Register / Vol. 73, No. 203 / Monday, October 20, 2008 / Notices 19(b)(3)(A) of the Act 13 and Rule 19b– 4(f)(6) thereunder.14 A proposed rule change filed under 19b–4(f)(6) normally may not become operative prior to 30 days after the date of filing.15 However, Rule 19b– 4(f)(6)(iii) 16 permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange has requested that the Commission waive the 30-day operative delay so that the proposal may become operative upon filing. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest. The Commission hereby grants the Exchange’s request and designates the proposal operative upon filing.17 At any time within 60 days of the filing of such proposed rule change the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors or otherwise in furtherance of the purposes of the Act. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–NYSE–2008–100 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. 13 15 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). 15 17 CFR 240.19b–4(f)(6)(iii). In addition, Rule 19b–4(f)(6)(iii) requires that a self-regulatory organization submit to the Commission written notice of its intent to file the proposed rule change, along with a brief description and text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. The Exchange has requested the Commission to waive this five-day pre-filing notice requirement. The Commission hereby grants this request. 16 Id. 17 For the purposes only of waiving the 30-day operative delay, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). mstockstill on PROD1PC66 with NOTICES 14 17 VerDate Aug<31>2005 16:42 Oct 17, 2008 Jkt 217001 All submissions should refer to File Number SR–NYSE–2008–100. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission’s Public Reference Room, on official business days between the hours of 10 a.m. and 3 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–NYSE– 2008–100 and should be submitted on or before November 10, 2008. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.18 Florence E. Harmon, Acting Secretary. [FR Doc. E8–24753 Filed 10–17–08; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–58748; File No. SR– NYSEArca–2008–102] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending NYSE Arca Rules Governing Doing Business With the Public October 8, 2008. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that, on September 25, 2008, NYSE Arca, Inc. 18 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 15 U.S.C. 78a. 3 17 CFR 240.19b–4. 1 15 PO 00000 Frm 00109 Fmt 4703 Sfmt 4703 (‘‘NYSE Arca’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been substantially prepared by the Exchange. The Exchange has designated the proposed rule change as constituting a ‘‘non-controversial’’ rule change under paragraph (f)(6) of Rule 19b–4 under the Act,4 which renders the proposal effective upon receipt of this filing by the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend certain rules that govern an Exchange member’s conduct in doing business with the public. The proposed rule change would require member organizations to integrate the responsibility for supervision of a member organization’s public customer options business into its overall supervisory and compliance program. In addition, the Exchange proposes to amend certain rules to strengthen member organizations’ supervisory procedures and internal controls as they relate to a member’s public customer options business. The text of the proposed rule is available on the Exchange’s Web site at http:// www.nyse.com, at the Exchange’s principal office, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of the proposed rule change is to create a supervisory structure for options that is similar to 4 17 E:\FR\FM\20OCN1.SGM CFR 240.19b–4(f)(6). 20OCN1 mstockstill on PROD1PC66 with NOTICES Federal Register / Vol. 73, No. 203 / Monday, October 20, 2008 / Notices that required by New York Stock Exchange (‘‘NYSE’’) and Financial Industry Regulatory Authority (‘‘FINRA’’) (f/k/a the National Association of Securities Dealers (‘‘NASD’’)) rules.5 The proposed rule change would eliminate the requirement that member organizations qualified to do a public customer business in options must designate a single person to act as Senior Registered Options Principal (‘‘SROP’’) for the member organization and that each such member organization designate a specific individual as a Compliance Registered Options Principal (‘‘CROP’’). Instead member organizations would be required to integrate the SROP and CROP functions into their overall supervisory and compliance programs. The SROP concept was first introduced by the Chicago Board Options Exchange (‘‘CBOE’’) during the early years of the development of the listed options market. Previously, under CBOE rules, member organizations were required to designate one or more persons qualified as ROPs having supervisory responsibilities in respect to the member organization’s options business. As the number of ROPs at larger member organizations began to increase, options exchanges imposed an additional requirement that member organizations designate one of their ROPs as the SROP. This was intended to eliminate confusion as to where the compliance and supervisory responsibilities lay by centralizing in a single supervisory officer overall responsibility for the supervision of a member organization’s options activities.6 Subsequently, following the recommendation of the Commission’s Options Study, options exchanges required member organizations to designate a CROP to be responsible for the member organization’s overall compliance program in respect to its options activities.7 The CROP may be the same person who is designated as SROP. Since the SROP and CROP requirements were first imposed, the supervisory function in respect to the options activities of most securities firms has been integrated into the matrix of supervisory and compliance functions in respect to the firms’ other securities activities. This not only reflects the maturity of the options market, but also recognizes the ways in which the uses of options themselves 5 See NYSE Rule 342 and NASD Rule 3010. Securities and Exchange Commission, 96th Cong., 1st Sess., Report of the Special Study of the Options Markets (Comm. Print 1978) 316 fn. 11 (‘‘Options Study’’). 7 Id. at p. 335. 6 See VerDate Aug<31>2005 16:42 Oct 17, 2008 Jkt 217001 have become more integrated with other securities in the implementation of particular strategies. Thus, the current requirement for a separately designated senior supervisor in respect to all aspects of a member organization’s options activities, rather than clarifying the allocation of supervisory responsibilities within the member organization, may have just the opposite effect by failing to take into account the way in which these responsibilities are actually assigned. In addition, by permitting supervision of a member organization’s options activities to be handled in the same manner as the supervision of its other securities activities as well as its futures activities, the proposed rule change is designed to ensure that supervisory responsibility over each segment of the member organization’s business is assigned to the best qualified persons in the member organization, thereby enhancing the overall quality of supervision. The same holds true for the compliance function. For example, most member organizations have designated one person to have supervisory responsibility over the application of margin requirements and other matters pertaining to the extension of credit. The proposed rule change would enable a member organization to include within the scope of such a person’s duties the supervision over the proper margining of options accounts, thereby assuring that the most qualified person is charged with this responsibility and at the same time eliminating any uncertainty that might now exist as to whether this responsibility lies with the senior credit supervisor or with the SROP. Similarly, the proposed rule change would allow a member organization to specifically designate one or more individuals as being responsible for approving a ROP’s acceptance of discretionary accounts8 and exceptions to a member organization’s suitability standards for trading uncovered short options.9 The proposed rule change would allow member organizations the flexibility to assign such responsibilities, which formerly rested with the SROP and/or CROP, to more than one ROP-qualified individual where the member organization believes it advantageous to do so to enhance its supervisory or compliance structure. Typically, a member organization may wish to divide these functions on the basis of geographic region or functional considerations. The proposed 8 See proposed Rule 9.18(e). 9 See proposed Rule 9.18(b)(6)(C). PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 62355 amendment to Rule 9.26 would clarify the qualification requirements for individuals designated as ROPs.10 The proposed rule change would require options discretionary accounts, the acceptance of which must be approved by a ROP-qualified individual (other than the ROP who accepted the account), to be supervised in the same manner as the supervision of other securities accounts that are handled on a discretionary basis. The proposed rule change would also eliminate the requirement that discretionary options orders be approved on the day of entry by a ROP (with one exception, as described below). This requirement predates the Options Study and is not consistent with the use of supervisory tools in computerized format or exception reports generated after the close of a trading day. No similar requirement exists for supervision of other securities accounts that are handled on a discretionary basis.11 Discretionary orders must be reviewed in accordance with a member organization’s written supervisory procedures. The proposed rule change would ensure that supervisory responsibilities are assigned to specific ROP-qualified individuals, thereby enhancing the quality of supervision. The proposed rule change would revise Exchange Rule 9.18(e) by adding, as Commentary .02, a requirement that any member organization that does not utilize computerized surveillance tools for the frequent and appropriate review of discretionary account activity must establish and implement procedures to require ROP-qualified individuals who have been designated to review discretionary accounts to approve and initial each discretionary order on the day entered. The Exchange believes that any member organization that does not utilize computerized surveillance tools to monitor discretionary account activity should continue to be required to perform the daily manual review of discretionary orders. Under the proposed rule change, options discretionary accounts would continue to receive frequent appropriate supervisory review by designated ROPqualified individuals. Additionally, member organizations would continue to be required to designate ROPqualified individuals to review and approve the acceptance of options discretionary accounts in order to determine whether the ROP accepting the account had a reasonable basis for believing that the customer was able to 10 See commentaries .02 and .04 to proposed Rule 9.26. 11 See e.g., NYSE Rule 408. E:\FR\FM\20OCN1.SGM 20OCN1 mstockstill on PROD1PC66 with NOTICES 62356 Federal Register / Vol. 73, No. 203 / Monday, October 20, 2008 / Notices understand and bear the risks of the proposed strategies or transactions. This requirement would provide an additional level of supervisory audit over options discretionary accounts that do not exist for other securities discretionary accounts. In addition, the proposed rule change would require that each member organization submit to the Exchange a written report by April 1 of each year that details the member organization’s supervision and compliance effort, including its options compliance program, during the preceding year and reports on the adequacy of the member organization’s ongoing compliance processes and procedures.12 Proposed Rule 9.18(d)(2)(H) would require that each member organization submit, by April 1 of each year, a copy of the Rule 9.18(d)(2)(G) annual report to one or more of its control persons or, if the member organization has no control person, to the audit committee of its board of directors or its equivalent committee or group.13 Proposed Rule 9.18(d)(2)(G) would provide that a member organization that specifically includes its options compliance program in a report that complies with substantially similar requirements of NYSE and NASD rules will be deemed to have satisfied the requirements of Rules 9.18(d)(2)(G) and 9.18(d)(2)(H). Although the proposed rule change would eliminate entirely the positions and titles of the SROP and CROP, member organizations would still be required to designate a single general partner or executive officer to assume overall authority and responsibility for internal supervision, control of the member organization and compliance with securities laws and regulations.14 Member organizations would also be required to designate specific qualified individuals as having supervisory or compliance responsibilities over each aspect of the member organization’s options activities and to set forth the names and titles of these individuals in their written supervisory procedures.15 This is consistent with the integration of options supervision into the overall supervisory and compliance structure of a member organization. In connection with the approval of the proposed rule change, the Exchange intends to review member organizations’ written supervisory and compliance procedures 12 See proposed Rule 9.18(d)(2)(G) which is modeled after NYSE Rule 342.30. 13 Proposed Rule 9.18(d)(2)(H) is modeled after NYSE Rule 354. 14 See proposed Rule 9.18(d)(1). 15 See commentary .01 to proposed Rule 9.18(d). VerDate Aug<31>2005 16:42 Oct 17, 2008 Jkt 217001 in the course of the Exchange’s routine examination of member organizations to ensure that supervisory and compliance responsibilities are adequately defined. The Exchange believes that the proposed rule change recognizes that options are no longer in their infancy, have become more integrated with other securities in the implementation of particular strategies, and thus should not continue to be regulated as though they are a new and experimental product. The Exchange believes that the proposed rule change is appropriate and does not materially alter the supervisory operations of member organizations. The Exchange believes the supervisory and compliance structure in place for non-options products at most member organizations is not materially different from the structure in place for options. Supervisory Procedures and Internal Controls The Exchange also proposes to amend certain rules to strengthen member and member organizations’ supervisory procedures and internal controls as they relate to a member’s public customer options business. The proposed rule changes described below are modeled after NYSE, NASD and CBOE rules approved by the Commission in 2004 16 and in 2007,17 respectively. The Exchange believes the following proposal to strengthen member supervisory procedures and internal controls is appropriate and consistent with the preceding proposal to integrate options and non-options sales practice supervision and compliance functions. The proposed revisions to Exchange Rule 9.18(d)(1)(C) would require the development and implementation of written policies and procedures reasonably designed to supervise sales managers and other supervisory personnel who service customer options accounts (i.e., who act in the capacity of a registered representative).18 This requirement would apply to branch office managers, sales managers, regional/district sales managers, or any person performing a similar supervisory function. Such policies and procedures are expected to encompass all options sales-related activities. Proposed Rule 9.18(d)(1)(C)(i) would require that supervisory reviews of producing sales 16 See Securities Exchange Act Release No. 49882 (June 17, 2004), 69 FR 35108 (June 23, 2004) (SR– NYSE–2002–36), and Securities Exchange Act Release No. 49883 (June 17, 2004), 69 FR 35092 (June 23, 2004) (SR–NASD–2002–162). 17 See Securities Exchange Act Release No. 56492 (September 21, 2007), 72 FR 54952 (September 27, 2007) (SR–CBOE–2007–106). 18 Proposed Rule 9.18(d)(1)(C) is modeled after NYSE Rule 342.19. PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 managers be conducted by a qualified ROP who is either senior to, or otherwise ‘‘independent of,’’ the producing manager under review.19 This provision is intended to ensure that all options sales activity of a producing manager is monitored for compliance with applicable regulatory requirements by persons who do not have a personal interest in such activity. Proposed Rule 9.18(d)(1)(C)(ii) would provide a limited exception for members so limited in size and resources that there is no qualified person senior to, or otherwise independent of, the producing manager to conduct the review. In this case, the reviews may be conducted by a qualified ROP to the extent practicable. Under proposed Rule 9.18(d)(1)(C)(iii), a member relying on the limited size and resources exception would be required to document the factors used to determine that compliance with each of the ‘‘senior’’ or ‘‘otherwise independent’’ standards of Rule 9.18(d)(1)(C)(i) is not possible, and that the required supervisory systems and procedures in place with respect to any producing manager comply with the provisions of Rule 9.18(d)(1)(C)(i) to the extent practicable. Proposed paragraph (d)(1)(C)(iv) of Rule 9.18 would provide that a member organization that complies with requirements of NYSE or NASD rules that are substantially similar to the requirements in Rules 9.18(d)(1)(C)(i), (d)(1)(C)(ii) and (d)(1)(C)(iii) will be deemed to have met such requirements. Under proposed Rule 9.18(d)(2)(A), a member, upon a customer’s written instructions, may hold mail for a customer who will not be at his or her usual address for no longer than two months if the customer is on vacation or traveling, or three months if the customer is going abroad. This 19 An ‘‘otherwise independent’’ person is defined in proposed Rule 9.18(d)(1)(C)(i) as one who: Is either senior to, or otherwise independent of, the producing manager under review. For purposes of this Rule, an ‘‘otherwise independent’’ person: May not report either directly or indirectly to the producing manager under review; must be situated in an office other than the office of the producing manager; must not otherwise have supervisory responsibility over the activity being reviewed; and must alternate such review responsibility with another qualified person every two years or less. Further, if a person designated to review a producing manager receives an override or other income derived from that producing manager’s customer activity that represents more than 10% of the designated person’s gross income derived from the member organization over the course of a rolling twelve-month period, the member organization must establish alternative senior or otherwise independent supervision of that producing manager to be conducted by a qualified Registered Options Principal other than the designated person receiving the income. E:\FR\FM\20OCN1.SGM 20OCN1 Federal Register / Vol. 73, No. 203 / Monday, October 20, 2008 / Notices provision would help ensure that members that hold mail for customers who are away from their usual addresses, do so only pursuant to the customer’s written instructions and for a specified, relatively short period of time.20 Proposed Rule 9.18(d)(2)(B) would require that, before a customer options order is executed, the account name or designation must be placed upon the memorandum for each transaction. In addition, only a qualified ROP would be permitted to approve any changes in account names or designations. The ROP also would be required to document the essential facts relied upon in approving the changes and maintain the record in a central location. A member would be required to preserve any account designation change documentation for a period of not less than three years, with the documentation preserved for the first two years in an easily accessible place, as the term ‘‘easily accessible place’’ is used in Rule 17a–4 of the Act.21 The Exchange believes the proposed rule would help to protect account name and designation information from possible fraudulent activity.22 Proposed Rule 9.18(d)(2)(C) would require member organizations to develop and maintain adequate controls over each of their business activities. The proposed rule further would require that such controls include the establishment of procedures to independently verify and test the supervisory systems and procedures for those business activities. Member organizations would be required to include in the annual report prepared pursuant to Rule 9.18(d)(2)(G) a review of the member organization’s efforts in this regard, including a summary of the tests conducted and significant exceptions identified. The Exchange believes proposed Rule 9.18(d)(2)(C)(i) would enhance the quality of member organizations’ supervision.23 Proposed Rule 9.18(d)(2)(C)(ii) would provide that a member organization that complies with requirements of NYSE or NASD rules that are substantially similar to the requirements in Rule 9.18(d)(2)(C)(i) will be deemed to have met such requirements. mstockstill on PROD1PC66 with NOTICES 20 Proposed Rule 9.18(d)(2)(A) is modeled after NASD Rule 3110(i). 21 17 CFR 240.17a–4. 22 Propose Rule 9.18(d)(2)(B) is modeled after NASD Rule 3110(j). 23 Proposed Rule 9.18(d)(2)(C)(i) is modeled after NYSE Rule 342.23. Paragraph (C)(ii) would provide that a member organization that complies with requirements of NYSE or the NASD that are substantially similar to the requirements in Rule 9.18(d)(2)(C)(i) will be deemed to have met such requirements. VerDate Aug<31>2005 16:42 Oct 17, 2008 Jkt 217001 Proposed Rule 9.18(d)(2)(D)(1) would establish requirements for branch office inspections similar to the requirements of NYSE Rule 342.24. Specifically, proposed Rule 9.18(d)(2)(D)(2) would require a member organization to inspect each supervisory branch office at least annually and each nonsupervisory branch office at least once every three years.24 The proposed rule further would require that persons who conduct a member organization’s annual branch office inspection must be independent of the direct supervision or control of the branch office (i.e., not the branch office manager, or any person who directly or indirectly reports to such manager, or any person to whom such manager directly reports). The Exchange believes that requiring branch office inspections be conducted by someone who has no significant financial interest in the success of a branch office should lead to more objective and vigorous inspections. Under proposed Rule 9.18(d)(2)(E), any member organization seeking an exemption, pursuant to Rule 9.18(d)(2)(D)(ii), from the annual branch office inspection requirement would be required to submit to the Exchange written policies and procedures for systematic risk-based surveillance of its branch offices, as defined in Rule 9.18(d)(2)(E). Proposed Rule 9.18(d)(2)(F) would require that annual branch office inspection programs include, at a minimum, testing and verification of specified internal controls.25 Proposed Rule 9.18(d)(2)(D)(3) would provide that a member organization that complies with requirements of NYSE or NASD rules that are substantially similar to the requirements in Rules 9.18(d)(2)(D), (E) and (F) will be deemed to have met such requirements. In conjunction with the proposed changes to Rules 9.18(d)(2)(D), (E) and (F), the Exchange proposes to amend Rule 9.18(m) Commentary .01 to define ‘‘branch office’’ in a way that is substantially similar to the definition of branch office in NYSE Rule 342.10. Proposed Rule 9.18(d)(2)(G)(4) would require a member organization to 24 Proposed Rules 9.18(d)(2)(D)(1)(i) and (ii) would provide members with two exceptions from the annual branch office inspection requirement; a member may demonstrate to the satisfaction of the Exchange that other arrangements may satisfy the Rule’s requirements for a particular branch office, or based upon a member organization’s written policies and procedures providing for a systematic risk-based surveillance system, the member organization submits a proposal to the Exchange and receives, in writing, an exemption from this requirement pursuant to Rule 9.18(d)(2)(E). 25 Proposed Rules 9.18(d)(2)(E) and (d)(2)(F) are modeled after NYSE Rules 342.25 and 342.26. PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 62357 designate a Chief Compliance Officer (‘‘CCO’’). Proposed Rule 9.18(d)(2)(G)(5) would require each member organization’s Chief Executive Officer (‘‘CEO’’), or equivalent, to certify annually that the member organization has in place processes to: (1) Establish and maintain policies and procedures reasonably designed to achieve compliance with applicable Exchange rules and federal securities laws and regulations; (2) modify such policies and procedures as business, regulatory, and legislative changes and events dictate; and (3) test the effectiveness of such policies and procedures on a periodic basis, the timing of which is reasonably designed to ensure continuing compliance with Exchange rules and federal securities laws and regulations. Proposed Rule 9.18(d)(2)(G)(5) further would require the CEO to attest that the CEO has conducted one or more meetings with the CCO in the preceding 12 months to discuss the compliance processes in proposed Rule 9.18(d)(2)(G)(5)(ii), that the CEO has consulted with the CCO and other officers to the extent necessary to attest to the statements in the certification, and the compliance processes are evidenced in a report, reviewed by the CEO, CCO, and such other officers as the member organization deems necessary to make the certification, that is provided to the member organization’s board of directors and audit committee (if such committee exists).26 Rule 9.18(e) allows member organizations to exercise time and price discretion on orders for the purchase or sale of a definite number of options contracts in a specified security. The Exchange proposes to amend Rule 9.18(e) to limit the duration of this discretionary authority to the day it is granted, absent written authorization to the contrary. In addition, the proposed rule would require any exercise of time and price discretion to be reflected on the customer order ticket. The proposed one-day limitation would not apply to time and price discretion exercised for orders affected with or for an institutional account pursuant to valid Good-Till-Cancelled instructions issued on a ‘‘not held’’ basis. The Exchange believes that investors will receive greater protection by clarifying the time such discretionary orders remain pending.27 26 Proposed Rule 9.18(d)(2)(G)(5) is modeled after NASD Rule 3013 and NYSE Rule 342.30(e). 27 Proposed Rule 9.18(e)(i) is modeled after NASD Rule 2510(d)(l). E:\FR\FM\20OCN1.SGM 20OCN1 62358 Federal Register / Vol. 73, No. 203 / Monday, October 20, 2008 / Notices The proposed rule changes listed above are substantially similar to changes already implemented by the NYSE, NASD (n/k/a FINRA) and CBOE.28 2. Statutory Basis The proposed rule change would integrate the supervision and compliance functions relating to member organizations’ public customer option activities into the overall supervisory structure of a member organization, thereby eliminating any uncertainty over where supervisory responsibilities lies. The proposed rule change would also foster the strengthening of member organizations’ internal controls and supervisory systems. As such, the proposed rule changes are consistent with, and further the objectives of, Section 6(b)(5) 29 of the Act, in that they are designed to promote just and equitable principles of trade, to prevent fraudulent and manipulative acts and practices, to remove impediments to and perfect the mechanisms of a free and open market and a national market system, and in general, to protect investors and public interest. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. This rule change is consistent with the regulatory framework maintained by the NYSE, FINRA and CBOE and as such does not impose any burden on competition or significantly affect the protection of investors. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were solicited or received with respect to the proposed rule change. mstockstill on PROD1PC66 with NOTICES III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Pursuant to Section 19(b)(3)(A) of the Act 30 and Rule 19b–4(f)(6) 31 thereunder, NYSE Arca has designated this proposed rule change as one that does not: (i) Significantly affect the protection of investors or the public interest; 28 See supra notes 16 and 17. U.S.C. 78f(b)(5). 30 15 U.S.C. 78s(b)(3)(A). 31 17 CFR 240.19b–4(f)(6). 29 15 VerDate Aug<31>2005 16:42 Oct 17, 2008 Jkt 217001 (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, if consistent with the protection of investors and the public interest. The Exchange notes that the proposed amendment does not propose any new policies or provisions that are unique or unproven and is substantially similar to NYSE, FINRA, and CBOE rules. For the foregoing reasons, the Exchange believes that this rule filing qualifies for expedited effectiveness as a ‘‘noncontroversial’’ rule change under paragraph (f)(6) of Rule 19b–4 of the Act. The Exchange provided the Commission with written notice of its intent to file this proposed rule change at least five business days prior to the date of the filing.32 The Exchange requests that the Commission waive the 30-day operative delay contained in Rule 19b–4(f)(6) of the Act so that certain Exchange Rules that govern an Exchange member’s conduct in doing business with the public can come immediately inline with those of the NYSE, FINRA, and CBOE, thereby providing simplicity and clarity for cross-member firms. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest. The Commission therefore grants the Exchange’s request and designates the proposal to be operative upon filing.33 At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: 32 Id. Rule 19b–4(f)(6)(iii) requires a selfregulatory organization to give the Commission written notice of its intent to file a proposed rule change at least five business days prior to the date of the filing of the proposed rule, or such shorter time as designated by the Commission. The Exchange has satisfied this requirement. 33 For purposes only of waiving the 30-day operative delay, the Commission has considered the proposed rule’s impact on efficiency, competition and capital formation. See 15 U.S.C. 78c(f). PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–NYSEArca–2008–102 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–NYSEArca–2008–102. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission’s Public Reference Section, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of the filing will also be available for inspection and copying at NYSE Arca’s principal office and on its Internet Web site at http:// www.nyse.com. 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– NYSEArca–2008–102 and should be submitted on or before November 10, 2008. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.34 Florence E. Harmon, Acting Secretary. [FR Doc. E8–24754 Filed 10–17–08; 8:45 am] BILLING CODE 8011–01–P 34 17 E:\FR\FM\20OCN1.SGM CFR 200.30–3(a)(12). 20OCN1

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[Federal Register Volume 73, Number 203 (Monday, October 20, 2008)]
[Notices]
[Pages 62354-62358]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-24754]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58748; File No. SR-NYSEArca-2008-102]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Amending NYSE Arca 
Rules Governing Doing Business With the Public

October 8, 2008.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that, on September 25, 2008, NYSE Arca, Inc. (``NYSE Arca'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been substantially prepared by the Exchange. 
The Exchange has designated the proposed rule change as constituting a 
``non-controversial'' rule change under paragraph (f)(6) of Rule 19b-4 
under the Act,\4\ which renders the proposal effective upon receipt of 
this filing by the Commission. The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend certain rules that govern an 
Exchange member's conduct in doing business with the public. The 
proposed rule change would require member organizations to integrate 
the responsibility for supervision of a member organization's public 
customer options business into its overall supervisory and compliance 
program. In addition, the Exchange proposes to amend certain rules to 
strengthen member organizations' supervisory procedures and internal 
controls as they relate to a member's public customer options business. 
The text of the proposed rule is available on the Exchange's Web site 
at http://www.nyse.com, at the Exchange's principal office, and at the 
Commission's Public Reference Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of those statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant parts of such 
statements.

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

1. Purpose
    The purpose of the proposed rule change is to create a supervisory 
structure for options that is similar to

[[Page 62355]]

that required by New York Stock Exchange (``NYSE'') and Financial 
Industry Regulatory Authority (``FINRA'') (f/k/a the National 
Association of Securities Dealers (``NASD'')) rules.\5\ The proposed 
rule change would eliminate the requirement that member organizations 
qualified to do a public customer business in options must designate a 
single person to act as Senior Registered Options Principal (``SROP'') 
for the member organization and that each such member organization 
designate a specific individual as a Compliance Registered Options 
Principal (``CROP''). Instead member organizations would be required to 
integrate the SROP and CROP functions into their overall supervisory 
and compliance programs.
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    \5\ See NYSE Rule 342 and NASD Rule 3010.
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    The SROP concept was first introduced by the Chicago Board Options 
Exchange (``CBOE'') during the early years of the development of the 
listed options market. Previously, under CBOE rules, member 
organizations were required to designate one or more persons qualified 
as ROPs having supervisory responsibilities in respect to the member 
organization's options business. As the number of ROPs at larger member 
organizations began to increase, options exchanges imposed an 
additional requirement that member organizations designate one of their 
ROPs as the SROP. This was intended to eliminate confusion as to where 
the compliance and supervisory responsibilities lay by centralizing in 
a single supervisory officer overall responsibility for the supervision 
of a member organization's options activities.\6\ Subsequently, 
following the recommendation of the Commission's Options Study, options 
exchanges required member organizations to designate a CROP to be 
responsible for the member organization's overall compliance program in 
respect to its options activities.\7\ The CROP may be the same person 
who is designated as SROP.
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    \6\ See Securities and Exchange Commission, 96th Cong., 1st 
Sess., Report of the Special Study of the Options Markets (Comm. 
Print 1978) 316 fn. 11 (``Options Study'').
    \7\ Id. at p. 335.
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    Since the SROP and CROP requirements were first imposed, the 
supervisory function in respect to the options activities of most 
securities firms has been integrated into the matrix of supervisory and 
compliance functions in respect to the firms' other securities 
activities. This not only reflects the maturity of the options market, 
but also recognizes the ways in which the uses of options themselves 
have become more integrated with other securities in the implementation 
of particular strategies. Thus, the current requirement for a 
separately designated senior supervisor in respect to all aspects of a 
member organization's options activities, rather than clarifying the 
allocation of supervisory responsibilities within the member 
organization, may have just the opposite effect by failing to take into 
account the way in which these responsibilities are actually assigned. 
In addition, by permitting supervision of a member organization's 
options activities to be handled in the same manner as the supervision 
of its other securities activities as well as its futures activities, 
the proposed rule change is designed to ensure that supervisory 
responsibility over each segment of the member organization's business 
is assigned to the best qualified persons in the member organization, 
thereby enhancing the overall quality of supervision. The same holds 
true for the compliance function.
    For example, most member organizations have designated one person 
to have supervisory responsibility over the application of margin 
requirements and other matters pertaining to the extension of credit. 
The proposed rule change would enable a member organization to include 
within the scope of such a person's duties the supervision over the 
proper margining of options accounts, thereby assuring that the most 
qualified person is charged with this responsibility and at the same 
time eliminating any uncertainty that might now exist as to whether 
this responsibility lies with the senior credit supervisor or with the 
SROP.
    Similarly, the proposed rule change would allow a member 
organization to specifically designate one or more individuals as being 
responsible for approving a ROP's acceptance of discretionary 
accounts\8\ and exceptions to a member organization's suitability 
standards for trading uncovered short options.\9\ The proposed rule 
change would allow member organizations the flexibility to assign such 
responsibilities, which formerly rested with the SROP and/or CROP, to 
more than one ROP-qualified individual where the member organization 
believes it advantageous to do so to enhance its supervisory or 
compliance structure. Typically, a member organization may wish to 
divide these functions on the basis of geographic region or functional 
considerations. The proposed amendment to Rule 9.26 would clarify the 
qualification requirements for individuals designated as ROPs.\10\
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    \8\ See proposed Rule 9.18(e).
    \9\ See proposed Rule 9.18(b)(6)(C).
    \10\ See commentaries .02 and .04 to proposed Rule 9.26.
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    The proposed rule change would require options discretionary 
accounts, the acceptance of which must be approved by a ROP-qualified 
individual (other than the ROP who accepted the account), to be 
supervised in the same manner as the supervision of other securities 
accounts that are handled on a discretionary basis. The proposed rule 
change would also eliminate the requirement that discretionary options 
orders be approved on the day of entry by a ROP (with one exception, as 
described below). This requirement predates the Options Study and is 
not consistent with the use of supervisory tools in computerized format 
or exception reports generated after the close of a trading day. No 
similar requirement exists for supervision of other securities accounts 
that are handled on a discretionary basis.\11\ Discretionary orders 
must be reviewed in accordance with a member organization's written 
supervisory procedures. The proposed rule change would ensure that 
supervisory responsibilities are assigned to specific ROP-qualified 
individuals, thereby enhancing the quality of supervision.
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    \11\ See e.g., NYSE Rule 408.
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    The proposed rule change would revise Exchange Rule 9.18(e) by 
adding, as Commentary .02, a requirement that any member organization 
that does not utilize computerized surveillance tools for the frequent 
and appropriate review of discretionary account activity must establish 
and implement procedures to require ROP-qualified individuals who have 
been designated to review discretionary accounts to approve and initial 
each discretionary order on the day entered. The Exchange believes that 
any member organization that does not utilize computerized surveillance 
tools to monitor discretionary account activity should continue to be 
required to perform the daily manual review of discretionary orders.
    Under the proposed rule change, options discretionary accounts 
would continue to receive frequent appropriate supervisory review by 
designated ROP-qualified individuals. Additionally, member 
organizations would continue to be required to designate ROP-qualified 
individuals to review and approve the acceptance of options 
discretionary accounts in order to determine whether the ROP accepting 
the account had a reasonable basis for believing that the customer was 
able to

[[Page 62356]]

understand and bear the risks of the proposed strategies or 
transactions. This requirement would provide an additional level of 
supervisory audit over options discretionary accounts that do not exist 
for other securities discretionary accounts.
    In addition, the proposed rule change would require that each 
member organization submit to the Exchange a written report by April 1 
of each year that details the member organization's supervision and 
compliance effort, including its options compliance program, during the 
preceding year and reports on the adequacy of the member organization's 
ongoing compliance processes and procedures.\12\
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    \12\ See proposed Rule 9.18(d)(2)(G) which is modeled after NYSE 
Rule 342.30.
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    Proposed Rule 9.18(d)(2)(H) would require that each member 
organization submit, by April 1 of each year, a copy of the Rule 
9.18(d)(2)(G) annual report to one or more of its control persons or, 
if the member organization has no control person, to the audit 
committee of its board of directors or its equivalent committee or 
group.\13\
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    \13\ Proposed Rule 9.18(d)(2)(H) is modeled after NYSE Rule 354.
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    Proposed Rule 9.18(d)(2)(G) would provide that a member 
organization that specifically includes its options compliance program 
in a report that complies with substantially similar requirements of 
NYSE and NASD rules will be deemed to have satisfied the requirements 
of Rules 9.18(d)(2)(G) and 9.18(d)(2)(H).
    Although the proposed rule change would eliminate entirely the 
positions and titles of the SROP and CROP, member organizations would 
still be required to designate a single general partner or executive 
officer to assume overall authority and responsibility for internal 
supervision, control of the member organization and compliance with 
securities laws and regulations.\14\ Member organizations would also be 
required to designate specific qualified individuals as having 
supervisory or compliance responsibilities over each aspect of the 
member organization's options activities and to set forth the names and 
titles of these individuals in their written supervisory 
procedures.\15\ This is consistent with the integration of options 
supervision into the overall supervisory and compliance structure of a 
member organization. In connection with the approval of the proposed 
rule change, the Exchange intends to review member organizations' 
written supervisory and compliance procedures in the course of the 
Exchange's routine examination of member organizations to ensure that 
supervisory and compliance responsibilities are adequately defined.
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    \14\ See proposed Rule 9.18(d)(1).
    \15\ See commentary .01 to proposed Rule 9.18(d).
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    The Exchange believes that the proposed rule change recognizes that 
options are no longer in their infancy, have become more integrated 
with other securities in the implementation of particular strategies, 
and thus should not continue to be regulated as though they are a new 
and experimental product. The Exchange believes that the proposed rule 
change is appropriate and does not materially alter the supervisory 
operations of member organizations. The Exchange believes the 
supervisory and compliance structure in place for non-options products 
at most member organizations is not materially different from the 
structure in place for options.
Supervisory Procedures and Internal Controls
    The Exchange also proposes to amend certain rules to strengthen 
member and member organizations' supervisory procedures and internal 
controls as they relate to a member's public customer options business. 
The proposed rule changes described below are modeled after NYSE, NASD 
and CBOE rules approved by the Commission in 2004 \16\ and in 2007,\17\ 
respectively. The Exchange believes the following proposal to 
strengthen member supervisory procedures and internal controls is 
appropriate and consistent with the preceding proposal to integrate 
options and non-options sales practice supervision and compliance 
functions.
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    \16\ See Securities Exchange Act Release No. 49882 (June 17, 
2004), 69 FR 35108 (June 23, 2004) (SR-NYSE-2002-36), and Securities 
Exchange Act Release No. 49883 (June 17, 2004), 69 FR 35092 (June 
23, 2004) (SR-NASD-2002-162).
    \17\ See Securities Exchange Act Release No. 56492 (September 
21, 2007), 72 FR 54952 (September 27, 2007) (SR-CBOE-2007-106).
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    The proposed revisions to Exchange Rule 9.18(d)(1)(C) would require 
the development and implementation of written policies and procedures 
reasonably designed to supervise sales managers and other supervisory 
personnel who service customer options accounts (i.e., who act in the 
capacity of a registered representative).\18\ This requirement would 
apply to branch office managers, sales managers, regional/district 
sales managers, or any person performing a similar supervisory 
function. Such policies and procedures are expected to encompass all 
options sales-related activities. Proposed Rule 9.18(d)(1)(C)(i) would 
require that supervisory reviews of producing sales managers be 
conducted by a qualified ROP who is either senior to, or otherwise 
``independent of,'' the producing manager under review.\19\ This 
provision is intended to ensure that all options sales activity of a 
producing manager is monitored for compliance with applicable 
regulatory requirements by persons who do not have a personal interest 
in such activity.
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    \18\ Proposed Rule 9.18(d)(1)(C) is modeled after NYSE Rule 
342.19.
    \19\ An ``otherwise independent'' person is defined in proposed 
Rule 9.18(d)(1)(C)(i) as one who: Is either senior to, or otherwise 
independent of, the producing manager under review. For purposes of 
this Rule, an ``otherwise independent'' person: May not report 
either directly or indirectly to the producing manager under review; 
must be situated in an office other than the office of the producing 
manager; must not otherwise have supervisory responsibility over the 
activity being reviewed; and must alternate such review 
responsibility with another qualified person every two years or 
less. Further, if a person designated to review a producing manager 
receives an override or other income derived from that producing 
manager's customer activity that represents more than 10% of the 
designated person's gross income derived from the member 
organization over the course of a rolling twelve-month period, the 
member organization must establish alternative senior or otherwise 
independent supervision of that producing manager to be conducted by 
a qualified Registered Options Principal other than the designated 
person receiving the income.
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    Proposed Rule 9.18(d)(1)(C)(ii) would provide a limited exception 
for members so limited in size and resources that there is no qualified 
person senior to, or otherwise independent of, the producing manager to 
conduct the review. In this case, the reviews may be conducted by a 
qualified ROP to the extent practicable. Under proposed Rule 
9.18(d)(1)(C)(iii), a member relying on the limited size and resources 
exception would be required to document the factors used to determine 
that compliance with each of the ``senior'' or ``otherwise 
independent'' standards of Rule 9.18(d)(1)(C)(i) is not possible, and 
that the required supervisory systems and procedures in place with 
respect to any producing manager comply with the provisions of Rule 
9.18(d)(1)(C)(i) to the extent practicable.
    Proposed paragraph (d)(1)(C)(iv) of Rule 9.18 would provide that a 
member organization that complies with requirements of NYSE or NASD 
rules that are substantially similar to the requirements in Rules 
9.18(d)(1)(C)(i), (d)(1)(C)(ii) and (d)(1)(C)(iii) will be deemed to 
have met such requirements.
    Under proposed Rule 9.18(d)(2)(A), a member, upon a customer's 
written instructions, may hold mail for a customer who will not be at 
his or her usual address for no longer than two months if the customer 
is on vacation or traveling, or three months if the customer is going 
abroad. This

[[Page 62357]]

provision would help ensure that members that hold mail for customers 
who are away from their usual addresses, do so only pursuant to the 
customer's written instructions and for a specified, relatively short 
period of time.\20\
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    \20\ Proposed Rule 9.18(d)(2)(A) is modeled after NASD Rule 
3110(i).
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    Proposed Rule 9.18(d)(2)(B) would require that, before a customer 
options order is executed, the account name or designation must be 
placed upon the memorandum for each transaction. In addition, only a 
qualified ROP would be permitted to approve any changes in account 
names or designations. The ROP also would be required to document the 
essential facts relied upon in approving the changes and maintain the 
record in a central location. A member would be required to preserve 
any account designation change documentation for a period of not less 
than three years, with the documentation preserved for the first two 
years in an easily accessible place, as the term ``easily accessible 
place'' is used in Rule 17a-4 of the Act.\21\ The Exchange believes the 
proposed rule would help to protect account name and designation 
information from possible fraudulent activity.\22\
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    \21\ 17 CFR 240.17a-4.
    \22\ Propose Rule 9.18(d)(2)(B) is modeled after NASD Rule 
3110(j).
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    Proposed Rule 9.18(d)(2)(C) would require member organizations to 
develop and maintain adequate controls over each of their business 
activities. The proposed rule further would require that such controls 
include the establishment of procedures to independently verify and 
test the supervisory systems and procedures for those business 
activities. Member organizations would be required to include in the 
annual report prepared pursuant to Rule 9.18(d)(2)(G) a review of the 
member organization's efforts in this regard, including a summary of 
the tests conducted and significant exceptions identified. The Exchange 
believes proposed Rule 9.18(d)(2)(C)(i) would enhance the quality of 
member organizations' supervision.\23\
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    \23\ Proposed Rule 9.18(d)(2)(C)(i) is modeled after NYSE Rule 
342.23. Paragraph (C)(ii) would provide that a member organization 
that complies with requirements of NYSE or the NASD that are 
substantially similar to the requirements in Rule 9.18(d)(2)(C)(i) 
will be deemed to have met such requirements.
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    Proposed Rule 9.18(d)(2)(C)(ii) would provide that a member 
organization that complies with requirements of NYSE or NASD rules that 
are substantially similar to the requirements in Rule 9.18(d)(2)(C)(i) 
will be deemed to have met such requirements.
    Proposed Rule 9.18(d)(2)(D)(1) would establish requirements for 
branch office inspections similar to the requirements of NYSE Rule 
342.24. Specifically, proposed Rule 9.18(d)(2)(D)(2) would require a 
member organization to inspect each supervisory branch office at least 
annually and each non-supervisory branch office at least once every 
three years.\24\ The proposed rule further would require that persons 
who conduct a member organization's annual branch office inspection 
must be independent of the direct supervision or control of the branch 
office (i.e., not the branch office manager, or any person who directly 
or indirectly reports to such manager, or any person to whom such 
manager directly reports). The Exchange believes that requiring branch 
office inspections be conducted by someone who has no significant 
financial interest in the success of a branch office should lead to 
more objective and vigorous inspections.
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    \24\ Proposed Rules 9.18(d)(2)(D)(1)(i) and (ii) would provide 
members with two exceptions from the annual branch office inspection 
requirement; a member may demonstrate to the satisfaction of the 
Exchange that other arrangements may satisfy the Rule's requirements 
for a particular branch office, or based upon a member 
organization's written policies and procedures providing for a 
systematic risk-based surveillance system, the member organization 
submits a proposal to the Exchange and receives, in writing, an 
exemption from this requirement pursuant to Rule 9.18(d)(2)(E).
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    Under proposed Rule 9.18(d)(2)(E), any member organization seeking 
an exemption, pursuant to Rule 9.18(d)(2)(D)(ii), from the annual 
branch office inspection requirement would be required to submit to the 
Exchange written policies and procedures for systematic risk-based 
surveillance of its branch offices, as defined in Rule 9.18(d)(2)(E). 
Proposed Rule 9.18(d)(2)(F) would require that annual branch office 
inspection programs include, at a minimum, testing and verification of 
specified internal controls.\25\ Proposed Rule 9.18(d)(2)(D)(3) would 
provide that a member organization that complies with requirements of 
NYSE or NASD rules that are substantially similar to the requirements 
in Rules 9.18(d)(2)(D), (E) and (F) will be deemed to have met such 
requirements.
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    \25\ Proposed Rules 9.18(d)(2)(E) and (d)(2)(F) are modeled 
after NYSE Rules 342.25 and 342.26.
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    In conjunction with the proposed changes to Rules 9.18(d)(2)(D), 
(E) and (F), the Exchange proposes to amend Rule 9.18(m) Commentary .01 
to define ``branch office'' in a way that is substantially similar to 
the definition of branch office in NYSE Rule 342.10.
    Proposed Rule 9.18(d)(2)(G)(4) would require a member organization 
to designate a Chief Compliance Officer (``CCO''). Proposed Rule 
9.18(d)(2)(G)(5) would require each member organization's Chief 
Executive Officer (``CEO''), or equivalent, to certify annually that 
the member organization has in place processes to: (1) Establish and 
maintain policies and procedures reasonably designed to achieve 
compliance with applicable Exchange rules and federal securities laws 
and regulations; (2) modify such policies and procedures as business, 
regulatory, and legislative changes and events dictate; and (3) test 
the effectiveness of such policies and procedures on a periodic basis, 
the timing of which is reasonably designed to ensure continuing 
compliance with Exchange rules and federal securities laws and 
regulations.
    Proposed Rule 9.18(d)(2)(G)(5) further would require the CEO to 
attest that the CEO has conducted one or more meetings with the CCO in 
the preceding 12 months to discuss the compliance processes in proposed 
Rule 9.18(d)(2)(G)(5)(ii), that the CEO has consulted with the CCO and 
other officers to the extent necessary to attest to the statements in 
the certification, and the compliance processes are evidenced in a 
report, reviewed by the CEO, CCO, and such other officers as the member 
organization deems necessary to make the certification, that is 
provided to the member organization's board of directors and audit 
committee (if such committee exists).\26\
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    \26\ Proposed Rule 9.18(d)(2)(G)(5) is modeled after NASD Rule 
3013 and NYSE Rule 342.30(e).
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    Rule 9.18(e) allows member organizations to exercise time and price 
discretion on orders for the purchase or sale of a definite number of 
options contracts in a specified security. The Exchange proposes to 
amend Rule 9.18(e) to limit the duration of this discretionary 
authority to the day it is granted, absent written authorization to the 
contrary. In addition, the proposed rule would require any exercise of 
time and price discretion to be reflected on the customer order ticket. 
The proposed one-day limitation would not apply to time and price 
discretion exercised for orders affected with or for an institutional 
account pursuant to valid Good-Till-Cancelled instructions issued on a 
``not held'' basis. The Exchange believes that investors will receive 
greater protection by clarifying the time such discretionary orders 
remain pending.\27\
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    \27\ Proposed Rule 9.18(e)(i) is modeled after NASD Rule 
2510(d)(l).

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[[Page 62358]]

    The proposed rule changes listed above are substantially similar to 
changes already implemented by the NYSE, NASD (n/k/a FINRA) and 
CBOE.\28\
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    \28\ See supra notes 16 and 17.
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2. Statutory Basis
    The proposed rule change would integrate the supervision and 
compliance functions relating to member organizations' public customer 
option activities into the overall supervisory structure of a member 
organization, thereby eliminating any uncertainty over where 
supervisory responsibilities lies. The proposed rule change would also 
foster the strengthening of member organizations' internal controls and 
supervisory systems. As such, the proposed rule changes are consistent 
with, and further the objectives of, Section 6(b)(5) \29\ of the Act, 
in that they are designed to promote just and equitable principles of 
trade, to prevent fraudulent and manipulative acts and practices, to 
remove impediments to and perfect the mechanisms of a free and open 
market and a national market system, and in general, to protect 
investors and public interest.
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    \29\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. This rule change is 
consistent with the regulatory framework maintained by the NYSE, FINRA 
and CBOE and as such does not impose any burden on competition or 
significantly affect the protection of investors.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Pursuant to Section 19(b)(3)(A) of the Act \30\ and Rule 19b-
4(f)(6) \31\ thereunder, NYSE Arca has designated this proposed rule 
change as one that does not:
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    \30\ 15 U.S.C. 78s(b)(3)(A).
    \31\ 17 CFR 240.19b-4(f)(6).
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    (i) Significantly affect the protection of investors or the public 
interest;
    (ii) impose any significant burden on competition; and
    (iii) become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, if 
consistent with the protection of investors and the public interest.
    The Exchange notes that the proposed amendment does not propose any 
new policies or provisions that are unique or unproven and is 
substantially similar to NYSE, FINRA, and CBOE rules. For the foregoing 
reasons, the Exchange believes that this rule filing qualifies for 
expedited effectiveness as a ``non-controversial'' rule change under 
paragraph (f)(6) of Rule 19b-4 of the Act.
    The Exchange provided the Commission with written notice of its 
intent to file this proposed rule change at least five business days 
prior to the date of the filing.\32\ The Exchange requests that the 
Commission waive the 30-day operative delay contained in Rule 19b-
4(f)(6) of the Act so that certain Exchange Rules that govern an 
Exchange member's conduct in doing business with the public can come 
immediately inline with those of the NYSE, FINRA, and CBOE, thereby 
providing simplicity and clarity for cross-member firms. The Commission 
believes that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest. The Commission 
therefore grants the Exchange's request and designates the proposal to 
be operative upon filing.\33\
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    \32\ Id. Rule 19b-4(f)(6)(iii) requires a self-regulatory 
organization to give the Commission written notice of its intent to 
file a proposed rule change at least five business days prior to the 
date of the filing of the proposed rule, or such shorter time as 
designated by the Commission. The Exchange has satisfied this 
requirement.
    \33\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition and capital formation. See 15 U.S.C. 78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2008-102 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-NYSEArca-2008-102. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Section, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of the filing will also be available for 
inspection and copying at NYSE Arca's principal office and on its 
Internet Web site at http://www.nyse.com. 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-NYSEArca-2008-102 and should be 
submitted on or before November 10, 2008.
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    \34\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-24754 Filed 10-17-08; 8:45 am]
BILLING CODE 8011-01-P