[Federal Register Volume 60, Number 145 (Friday, July 28, 1995)]
[Notices]
[Pages 38875-38878]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18602]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36015; File No. SR-NYSE-94-34]


Self-Regulatory Organizations; Notice of Filing of Amendment No. 
2 to Proposed Rule Change by New York Stock Exchange, Inc. Relating to 
Amendment of Exchange Rule 92

July 21, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on July 13, 
1995, the New York Stock Exchange, Inc. (``NYSE'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared by the self-regulatory organization. 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

    As originally filed,\1\ the proposed rule change extended the 
applicability of Rule 29 to trades by a member or member organization 
on any market center and provided a limited exemption to permit member 
organizations to trade along with their customers when liquidating a 
block facilitation position. Amendment No. 1 to SR-NYSE-94-34 expanded 
the purpose section of the original filing.\2\ This Amendment No. 2 to 
SR-NYSE-94-34 revises the proposed rule change to specifically exclude 
transactions in securities not listed on the NYSE, transactions by a 
member organization acting in the capacity of a specialist or market 
maker on a regional exchange, to the extent that a principal trade is 
effected and immediately liquidated at the same price to a customer on 
that exchange. An additional limited exemption also would allow a 
member or member organization to trade along with a customer when 
engaging in bona fide arbitrage or risk arbitrage provided certain 
conditions are met.\3\

    \1\ The filing was published for public comment in Securities 
Exchange Act Release No. 35139 (December 22, 1994), 60 FR 156 
(January 3, 1995). The Commission published notice of an extension 
of the comment period in Securities Exchange Act Release No. 35274 
(January 25, 1995), 60 FR 6330 (February 1, 1995).
    \2\ Amendment No. 1 was included in the original publication for 
public comment. See Securities Exchange Act Release No. 35139, supra 
note 1.
    \3\ 17 CFR 240.19c-3 (1994).
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    The following is the text of the proposed rule change marked to 
reflect all of the proposed changes to the current rule. Additions to 
the current 

[[Page 38876]]
rule are in italics and deletions are in brackets.
Rule 92: Limitations on Members' Trading Because of Customers' Orders
    [(a) No member shall (1) personally buy or initiate the purchase of 
any security on the Exchange for his own account or for any account in 
which he, his member organization or any other member, allied member or 
approved person, in such organization or officer thereof, is directly 
or indirectly interested, while such member personally holds or has 
knowledge that his member organization holds an unexecuted market order 
to buy such security in the unit of trading for a customer, or (2) 
personally sell or initiate the sale of any security on the Exchange 
for any such account, while he personally holds or has knowledge that 
his member organization holds an unexecuted market order to sell such 
security in the unit of trading for a customer.
    (b) No member shall (1) personally buy or initiate the purchase of 
any security in the Exchange for any such account, at or below the 
price at which he personally holds or has knowledge that his member 
organization holds an unexecuted limited price order to buy such 
security in the unit of trading for a customer, or (2) personally sell 
or initiate the sale of any security on the Exchange for any such 
account at or above the price at which he personally holds or has 
knowledge that his member organization holds an unexecuted limited 
price order to sell such security in the unit of trading for customer.]
    (a) Except as provided in this Rule, no member or member 
organization shall cause the entry of an order to buy (sell) any 
Exchange-listed security on the Exchange or any other market center for 
any account in which such member or member organization or any approved 
person thereof is directly or indirectly interested (a ``proprietary 
order''), if the person responsible for the entry of such order has 
knowledge of any particular unexecuted customer's order to buy (sell) 
such security which could be executed at the same price.
    (b) A member or member organization may enter a proprietary order 
while representing a customer order which could be executed at the same 
price, provided the customer's order is not for the account of an 
individual investor, and the customer has given express permission, 
including an understanding of the relative price and size of allocated 
execution reports, under the following conditions:
    (1) the member or member organization is liquidating a position 
held in a proprietary facilitation account, and the customer's order is 
for 10,000 shares or more; or
    (2) the member or member organization is engaging in bona fide 
arbitrage or risk arbitrage transactions, and recording such 
transactions in an account used solely to record arbitrage transactions 
(an ``arbitrage account'').
    (c) The provisions of this Rule shall not apply to:
    (1) [to] any purchase or sale of any security in an amount of less 
than the unit of trading made by an odd-lot dealer to offset odd-lot 
orders for customers; [or]
    (2) [to] any purchase or sale of any security upon terms for 
delivery other than those specified in such unexecuted market or 
limited price order [.];
    (3) transactions by a member or member organization acting in the 
capacity of a market maker pursuant to Regulation 240.19c-3 of the 
Securities and Exchange Commission in a security listed on the 
Exchange; and
    (4) transactions by a member or member organization acting in the 
capacity of a specialist or market maker on another national securities 
exchange, to the extent that a riskless principal trade is effected and 
immediately liquidated at the same price to a customer on that 
exchange.
Supplementary Material
    .10 A member or employee of a member or member organization 
responsible for entering proprietary orders shall be presumed to have 
knowledge of a particular customer order unless the member organization 
has implemented a reasonable system of internal policies and procedures 
to prevent the misuse of information about customer orders by those 
responsible for entering such proprietary orders.
    .20 This Rule shall also apply to a member organization's member on 
the Floor, who may not execute a proprietary order at the same price, 
or at a better price, as an unexecuted customer order that he or she is 
representing, except to the extent the member organization itself could 
do so under this Rule.
    .30 For purposes of paragraph (b) above, the term ``account of an 
individual investor'' shall have the same meaning as the meaning 
ascribed to that term in Exchange Rule 80A. For purposes of paragraph 
(b)(1) above, the term ``proprietary facilitation account'' shall mean 
an account in which a member organization has a director interest and 
which is used to record transactions whereby the member organization 
acquires positions in the course of facilitating customer orders. Only 
those positions which are recorded in a proprietary facilitation 
account may be liquidated as provided in paragraph (b)(1). For purposes 
of paragraph (b)(2) above, the terms ``bona fide arbitrage'' and ``risk 
arbitrage' shall have the meaning ascribed to such terms in Securities 
Exchange Act Release 15533, January 26, 1979. All transactions effected 
pursuant to paragraph (b)(2) above must be recorded in an arbitrage 
account.
    [.10] .40 A member who issues a commitment or obligation to trade 
from the Exchange through ITS or any other Application of the System 
shall, as a consequence thereof, be deemed to be initiating a purchase 
or sale of a security on the Exchange as referred to in this Rule.
    [.20] .50 See paragraph (c)(i) of Rule 800 (Basket Trading: 
Applicability and Definitions) and paragraph 99 (Off-Hours Trading: 
Applicability and Definitions) in respect of the ability to initiate 
basket transactions and transactions through the ``off-Hours Trading 
Facility'' (as Rule 900 defines that term), respectively, 
notwithstanding the limitations of this Rule.

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 self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements.

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

1. Purpose \4\
    Currently, Exchange Rule 92 provides that members may not trade for 
their own accounts at a price at which they hold executable customer 
orders. The Rule, by its express terms, does not apply to member 
organizations or to transactions by members and member organizations in 
market centers other than the exchange. The rule does not 

[[Page 38877]]
contain any exceptions for any types of proprietary transactions, 
including transactions where a member firm trades for its own account 
along with a customer's block-size order when liquidating a proprietary 
block facilitation position, or transactions involving bona fide 
arbitrage and risk arbitrage, even if the customer has given permission 
for the firm to trade along with the order.

    \4\ This discussion consolidates the ``Purpose'' discussion as 
submitted in SR-NYSE-94-34 and Amendment No. 1 thereto, see supra 
note 1, and also discusses additional amendments to Rule 92 being 
filed herein.
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    The proposed amendments to Rule 92 make clear that the Rule applies 
only to transactions in NYSE-listed securities and extend the Rule's 
applicability to member organizations, and to transactions by members 
and member organizations in market centers other than the Exchange. The 
proposed amendments contain exemptions for liquidations of block 
facilitation transactions and for bona fide arbitrage and risk 
arbitrage, as discussed below. The proposed amendments also provide 
exemptions, as discussed below, for member organizations acting as 
market makers pursuant to Rule 19c-3 under the Act, or as regional 
stock exchange specialists or market makers. In addition, the proposed 
amendments provide an exemption for member organization proprietary 
transactions where the member organization has implemented information 
barrier procedures as discussed below.

Applicability of Rule 92 to Member Organizations

    The proposed amendments to Rule 92 would broaden the Rule's 
applicability to all proprietary trading in NYSE-listed stocks when a 
member organization has an agency order capable of execution at the 
price at which a proprietary trade is effected. The Exchange 
understands that in most ``trading along'' situations, the same Floor 
Broker represents the agency and proprietary orders and, even if that 
was not the case, it would be unacceptable for a firm to enter a 
proprietary order with a different broker, who could then compete 
directly with the broker representing the member firm's customer. To 
better deal with the current trading environment and still meet the 
high standard of ethical conduct the Exchange expects of its membership 
when dealing with their customers, the focus of Rule 92 should be 
placed on the member organization itself. Rule 92 was drafted and 
promulgated prior to the advent of block positioning and the 
proliferation of upstairs proprietary position trading by member 
organizations, but the Rule reflects fundamental concepts, rooted in 
agency law, that an agent must place a customer's interest ahead of the 
agent's proprietary interest. The Exchange and its constituent 
committees that reviewed the proposed amendments to the Rule believe it 
is appropriate to extend this emphasis on the priority of customer 
interest to the member organization itself, as well as to the 
organization's Floor members. While enforcement action has been taken 
regarding inappropriate proprietary trading vis-a-vis agency orders as 
violative of the NYSE Rule 476 prohibition against conduct inconsistent 
with just and equitable principles of trade, recent investigations drew 
the Exchange's attention to a practice of trading along with, but not 
ahead of, institutional customer orders with the consent of the 
consumer. When appropriate, the Exchange will continue to bring 
enforcement action for violations of Rule 476 in the context of 
inappropriate proprietary trading. The Exchange also believes that 
amending Rule 92 offers the best approach to addressing expectations on 
the subject of member organization proprietary trading in the context 
of block facilitation. The proposed amendments change the scope and 
focus of Rule 92 and strike an appropriate balance between block 
facilitation and customer protection.
Applicability of Rule 92 to Transactions by Members and Member 
Organizations in Market Centers other than the Exchange

    The proposed amendments to Rule 92 extend the application of the 
Rule to transactions by a member or member organization in a market 
center other than the Exchange. The Exchange believes it is appropriate 
that the broad concepts of agency law and fiduciary duty codified in 
paragraph (a) of Rule 92 be made applicable to all agency 
representation, irrespective of market center. The exceptions provided 
in paragraphs (b) and (c) are intended to apply to transactions by 
members and member organizations on the Exchange. Other market centers 
may choose to adopt, or not adopt, comparable exceptions. The Exchange, 
as well as other self-regulatory organizations, has a long history of 
regulating activities involving, for example, sales practices and the 
trading of a diverse range of financial products which occur in other 
market centers. Many of these regulatory activities are conducted 
through the Intermarket Surveillance Group.

Liquidation of Facilitation Positions

    The ability to liquidate a block facilitation position by trading 
along with a customer's block-size order is generally perceived by 
positioning firms and their institutional customers as a reasonable 
aspect of the block facilitation business, provided there is disclosure 
to customers and customer consent. The inability to liquidate such 
positions in these circumstances may impede the block facilitation 
business, as firms may be reluctant to assume block facilitation 
positions if they cannot liquidate them, subject to appropriate 
safeguards, while representing customer orders.
    The Exchange is proposing to amend Rule 92 to permit member 
organizations to trade along with a customer, when liquidating a block 
facilitation position, subject to the following conditions:
     The customer is not an individual investor,\5\

    \5\ The Exchange believes that consent to trade along should be 
given by a market professional and therefore is limiting these 
exemptions to orders which are not for the account of an individual 
investor.
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     The customer's order is for 10,000 shares or more;
     The customer has given express permission for the member 
organization to trade along with the order, including an understanding 
of the relative price and size of allocated execution reports;
     The member organization is liquidating a position acquired 
in the course of facilitating a block transaction; and
     The member organization's orders are for an account used 
to record transactions whereby the member organization acquires 
positions in the course of facilitating customer orders of 10,000 
shares or more (a ``proprietary facilitation account'').
    The Exchange intends to inform members and member organizations 
that, although the amended rule does not outline a specific method of 
record keeping evidencing that a customer has given permission to trade 
along, the burden of proof to demonstrate that customer consent was 
obtained will fall on the member or member organization.

Bona Fide Arbitrage and Risk Arbitrage Transactions

    The Exchange believes it would be appropriate for members and 
member organizations to be able to trade along with customers in bona 
fide arbitrage and risk arbitrage transactions, subject to the 
following conditions:
     The customer is not an individual investor;
     The customer has given express permission for the member 
organization to trade along with the order, including an understanding 
of the relative price and size of allocated execution reports; and
     The member organization's transactions are recorded in an 
account 

[[Page 38878]]
used solely to record arbitrage transactions (an ``arbitrage 
account'').
    As with the exception for liquidation of block facilitation 
positions, the burden of proof to demonstrate that customer consent was 
obtained would fall on the member or member organization. The terms 
``bona fide arbitrage'' and ``risk arbitrage'' would have the meaning 
ascribed to them in Securities Exchange Act Release No. 15533.\6\

    \6\ Securities Exchange Act Release No. 15533 (January 26, 
1979).
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Exception for Market Makers

    The Exchange's proposal would exempt from Rule 92 transactions by a 
member organization acting in the capacity of a market maker pursuant 
to Rule 19c-3 under the Act,\7\ and transactions by a regional exchange 
specialist or market maker, to the extent that a riskless principal 
trade is effected and immediately liquidated at the same price to a 
customer on that exchange.

    \7\ Rule 19c-3 under the Act provides that the rules of national 
securities exchanges may not impose off-board trading restrictions 
on securities listed after April 26, 1979.
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Information Barriers

    The amendments to Rule 92 provide that a member or employee of a 
member organization responsible for entering proprietary orders shall 
be presumed to have knowledge of a particular customer order unless the 
member organization has implemented a reasonable system of internal 
policies and procedures to prevent the misuse of information about 
customer orders by those responsible for entering such proprietary 
orders. Each member organization would have the flexibility to 
implement such procedures as it deemed appropriate to its own business 
operations.
2. Statutory Basis
    The basis under the Act for the proposed rule change is the 
requirement under Section 6(b)(5) that an Exchange have rules that are 
designed to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market 
and, in general, to protect investors and the public interest. The 
proposed rule change will enable member organizations to add depth and 
liquidity to the Exchange's market, while continuing to provide 
customer protection through the requirement of customer approval for 
trading along situations.

B. Self-Regulatory Organization's Statement on Burden on Competition

    As the proposed amendments to Rule 92 would apply equally to all 
market centers with respect to trading by NYSE members and member 
organizations, 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.

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

    The Exchange understands that the Commission has received comments 
on SR-NYSE-94-34 and Amendment No. 1 thereto from several self-
regulatory organizations and member organizations. The Exchange 
believes that issues raised by these commentators are addressed herein, 
and in a letter from James E. Buck, Senior Vice President and Secretary 
of the Exchange, to Brandon Becker, Director of the Division of Market 
Regulation, dated March 15, 1995.\8\

    \8\ This letter and all other comment letters received by the 
Commission regarding the NYSE's proposal are available in the 
Commission's public reference room in File No. SR-NYSE-94-34.
III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such other period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve the 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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, DC 20549. 
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 at the 
Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of the NYSE. All 
submissions should refer to File No. SR-NYSE-94-34 and should be 
submitted by August 18, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-18602 Filed 7-27-95; 8:45 am]
BILLING CODE 8010-01-M