[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