[Federal Register Volume 64, Number 202 (Wednesday, October 20, 1999)]
[Notices]
[Pages 56560-56562]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-27369]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41996; File No. SR-NYSE-98-47]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Order Approving Proposed Rule Change and Amendment No. 1 and Notice of
Filing and Order Granting Accelerated Approval of Amendment No. 2 to
Proposed Rule Change To Adopt Rule 440 I Requiring Records of
Compensation Arrangements Concerning Floor Brokerage
October 8, 1999.
I. Introduction
On December 23, 1998, the New York Stock Exchange, Inc. (``NYSE''
or ``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to adopt Rule 440 I, requiring
records of compensation arrangements concerning floor brokerage. On May
14, 1999, the Exchange filed Amendment No. 1 to the proposed rule
change.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter to Richard Strasser, Assistant Director, Division
of Market Regulation (``Division''), SEC, from James E. Buck, Senior
Vice President and Secretary, NYSE, dated May 12, 1999. In Amendment
No. 1, the Exchange explained why the proposed rule change would
apply only to floor members and member organizations but not to
``upstairs'' members and member organizations.
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The proposed rule change and Amendment No. 1 were published for
comment in the Federal Register on June 2, 1999.\4\ The Commission
received no comments on the proposal. On June 23, 1999, the NYSE
submitted Amendment No. 2 to the proposed rule change.\5\ This notice
and order approves the proposed rule change as amended and seeks
comment from interested persons concerning Amendment No. 2.
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\4\ Securities Exchange Act Release No. 41441 (May 24, 1999), 64
FR 29723.
\5\ See Letter to Richard Strasser, Assistant Director,
Division, SEC, from Daniel Parker Odell, Assistant Secretary, NYSE,
dated June 22, 1999. In Amendment No. 2, the Exchange revised the
proposed rule test in Supplementary Material .10(a) to exclude
compensation arrangements involving gross compensation of less than
$5,000, rather than the originally proposed level of $10,000.
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II. Description of the Proposal
Proposed Rule 440 I would require that every member not associated
with a member organization, and each member organization primarily
engaged as an agent in executing transactions on the Floor of the
Exchange, maintain a
[[Page 56561]]
written record of each type of compensation arrangement that they enter
into with other members, member organizations, non-member
organizations, or customers relating to transactions on the Floor. The
written record would include a description of each type of arrangement
and identify, by name, the parties to each type of arrangement in
effect.
In addition, proposed Rule 440 I, Supplementary Material .10 would
exclude the following compensation arrangements from the requirement to
maintain a written record:
(1) Arrangements involving gross compensation of less than $5,000
per year; \6\ and
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\6\ Id.
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(2) Arrangements involving orders transmitted solely through the
Exchange's electronic order routing system.\7\
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\7\ The NYSE is proposing to exclude orders transmitted solely
through the Exchange's electronic order routing system because the
Exchange believes the automatic feature of this system prevents
manipulation by independent floor brokers. Telephone conversation
between Mary Anne Furlong, Director, Rule and Interpretive
Standards, NYSE, and Heather Traeger, Attorney, Division, SEC, on
July 16, 1999.
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Proposed Rule 440 I, Supplementary Material .20 would provide that
a member or member organization is deemed to be primarily engaged as an
agent in executing transactions on the Floor of the Exchange if at
least 75% of its revenue is derived from floor brokerage.
The proposed would apply to members and member organizations
primarily engaged as agents in executing transactions on the Floor of
the Exchange. It would specify a type of record, records of
compensation arrangements, in addition to the records required to be
maintained under Exchange Act Rules 17a-3 \8\ and 17a-4,\9\ that the
Exchange believes is critical to providing the Exchange the ability to
monitor floor broker activities. The proposed would not apply to
``upstairs'' (i.e., off the Floor) members and member organizations.
The proposal explains that independent brokers do not generally have
independent supervisory structures nor are they subject to the same
formalized internal supervisory oversight as ``upstairs'' organizations
because many independent brokers act as sole proprietors with a limited
customer and product base.
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\8\ 17 CFR 240.18a-3.
\9\ 17 CFR 240.18a-4.
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III. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, with the requirements of Section 6(b).\10\ Specifically,
the Commission believes that by strengthening the Exchange's ability to
examine and surveil activities on the Exchange Floor, the proposal is
consistent with the Section 6(b)(5) \11\ requirements that the rules of
an exchange be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, to protect investors and the
public interest.\12\
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\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
\12\ In approving this rule, the Commission has considered the
proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
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The proposed rule change is intended to fulfill some of the
requirements of the undertakings contained in the order issued by the
Commission relating to the settlement of an enforcement action against
the NYSE for failure to enforce compliance with Section 11(a) and Rule
11a-1 of the Exchange Act and NYSE Rules 90, 95 and 111.\3\ The SEC
Order found that the NYSE's floor broker regulatory program suffered
from two major deficiencies: (1) The NYSE failed to take appropriate
action to police for profit-sharing or other performance-based
compensation of independent floor brokers; and (2) the NYSE suspended
its routine independent floor broker surveillance for extensive periods
of time.\14\ Pursuant to the SEC Order, among other things, the NYSE
agreed and was ordered to enhance and improve by June 28, 2000 its
regulation of independent floor brokers, member firm floor brokers,
specialists, registered competitive market makers and competitive
traders (collectively ``Floor Members'') by: (a) examining the floor
trading activities of all floor members every two years; (b) ongoing,
continuous surveillance of all floor members; (c) thoroughly
investigating indications of possible violations by floor members; (d)
ensuring that members of its regulatory staff are present on the NYSE
trading floor during trading hours to surveil for potential trading
violations; (e) ensuring adequate coordination among all staff
responsible for floor members surveillance, investigations, and
disciplinary matters; and (f) increasing staff with adequate expertise
in the regulations of floor members within the Department of Member
Trading Analysis. The Commission believes that, by strengthening the
Exchange's ability to examine and surveil independent floor brokers'
activities on the Exchange Floor, the proposed rule change is
consistent with and is an important step toward satisfying certain of
the undertakings relating to floor broker oversight.
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\13\ See In the Matter of New York Stock Exchange, Inc., SEC
Release No. 34-41574, June 29, 1999; Administrative Proceeding File
No. 3-9925 (``SEC Ordeer'').
\14\ Id.
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The proposal requires members and member organizations primarily
engaged as agents in executing transactions on the Floor of the
Exchange (i.e., firms where 75% of revenue is derived from floor
brokerage) to maintain a detailed written record of their compensation
agreements, unless the arrangement involves gross compensation of less
than $5,000 per year or involves orders transmitted solely through the
Exchange's electronic order routing system. The Commission finds that
requiring members and member organizations to maintain records of these
compensation arrangements will facilitate the Exchange's review of such
arrangements on an ongoing basis is part of the routine examination
process, as well as on a for cause basis, for compliance with Section
11(a) of the Act \15\ in terms of whether any such arrangement
constitutes a member or member organization having an interest in an
account. The Commission also finds that enhancing the recordkeeping
requirement of this limited group of Exchange members with respect to
compensation arrangements is consistent with the Exchange's
responsibility, under Section 6(b)(5) of the Act, to prevent fraudulent
and manipulative acts and practices.
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\15\ Subject to certain exemptions, Section 11(a) prohibits a
member or member organization from executing on the Exchange an
order for that member's or member organization's ``own account'' or
any account in which the member or member organization has an
interest. 15 U.S.C. 78k(a).
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The Exchange clarifies that the scope of the proposal encompasses
``$2 brokers'' or ``independent brokers'' but excludes ``upstairs''
members and member organizations. The proposal explains that
independent brokers do not generally have independent supervisory
structures nor are they subject to the same formalized internal
supervisory oversight as ``upstairs'' organizations because many
independent brokers act as sole proprietors with a limited customer and
product base. Requiring independent floor brokers to maintain records
of
[[Page 56562]]
compensation arrangements will facilitate the Exchange's ability to
monitor independent floor broker activities, which may lack the
internal safeguards in place at upstairs firms.
The Commission finds good cause for approving Amendment No. 2 to
proposed rule change prior to the thirtieth day after the date of
publication of notice of filing thereof in the Federal Register.
Amendment No. 2 revises the proposed rule text in Supplementary
Material .10(a) to exclude compensation arrangements involving gross
compensation of less than $5,000, rather than the originally proposed
level of $10,000. The Commission believes that the change in the
compensation threshold is consistent with proposed Rule 440 I's intent
to help the Exchange surveil for potentially abusive compensation
arrangements without adding an undue burden of those firms required to
keep records under the proposed rule. Accordingly, the Commission finds
that good cause exists, consistent with Section 6(b)(5) \16\ and
Section 19b(b)(2) of the Act,\17\ to grant accelerated approval of
Amendment No. 2.
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\16\ 15 U.S.C. 78f(b)(5).
\17\ 15 U.S.C. 78f(b)(1).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 2, including whether Amendment No. 2
is consistent with the Act. Persons making written submission should
file six copies thereof with the Secretary, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0609. 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 Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
above-mentioned self-regulatory organization. All submissions should
refer to File No. SR-NYSE-98-47 and should be submitted by November 10,
1999.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\18\ that the proposed change (SR-NYSE-98-47), as amended, is
approved.
\18\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-27369 Filed 10-19-99; 8:45 am]
BILLING CODE 8010-01-M