[Federal Register Volume 65, Number 28 (Thursday, February 10, 2000)]
[Notices]
[Pages 6673-6675]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-3035]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42381; File No. SR-NYSE-99-25]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the New York Stock Exchange, Inc. Relating to Amendments to 
Exchange Rule 134, Governing Error Accounts, and New Rule 407A, 
Concerning Floor Member Account Disclosure

February 3, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 15, 1999, 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, 
III below, which Items have been prepared by the Exchange. On December 
13, 1999, the NYSE filed Amendment No. 1 to the proposed rule change 
with the Commission.\3\ The Commission is publishing this notice to 
solicit comments on the proposed rule change as amended from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The substance of Amendment No. 1 is incorporated into this 
notice.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The proposed rule change consists of amendments to existing rules 
governing error accounts (Rule 134) and a new rule regarding Floor 
member account disclosure (Rule 407A).

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 these 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 aspects of such 
statements.

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

1. Purpose
    The Exchange is proposing a series of initiatives to strengthen the 
regulation of activities of members on the Floor. The initiatives 
proposed herein consist of amendments to existing rules governing error 
accounts and a new rule regarding Floor member account disclosure.\4\
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    \4\ See Exchange Act Release No. 41706 (August 4, 1999), 64 FR 
44069 (August 12, 1999) (File No. SR-NYSE-98-25) relating to 
proposed adoption by the NYSE of new provisions for recording the 
details of an order in an electronic system prior to representing or 
executing an order on the Floor. The two rule changes proposed in 
this filing replace the equivalent proposals that were deleted by 
amendment from SR-NYSE-98-25. See note 4, id.
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    Error Accounts. The Exchange is proposing to revise NYSE Rule 
134(d) to require that each member maintain an error account. Under the 
proposed rule change, if a member does not maintain an error account, 
he or she will not be permitted to transact business on the Floor. Only 
one error account will be permitted for each member. The error account 
may be maintained in the member's name or in the name of his or her 
member organization, or the member may participate in an error account 
established for a group of members.
    At present there is no requirement that a member maintain an error 
account. The Exchange believes that the amendment to Rule 134 will 
enhance its ability to monitor and detect potential abuses such as on-
Floor trading by members. Error account transaction information will be 
localized to one place for each member, and not scattered among several 
accounts which, at present, could be held in the name of another member 
or member organization.
    Housing Error Accounts. The proposed rule change, as amended, would 
require that a member's error account be maintained at a broker or 
dealer registered in accordance with Section 15(b) \5\ of the Act. The 
Exchange believes that this provision would enable it to use its 
oversight authority to review error records for the brokers or dealers 
which are members or member organizations of the Exchange. If the error 
account is maintained at a non-member broker or dealer, the Exchange 
represents that it will work through the Intermarket Surveillance Group 
(``ISG'') to obtain information on errors. The Exchange believes this 
requirement is necessary to enable review of situations involving 
errors in an expedited fashion.
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    \5\ 15 U.S.C. 78o(b).
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    Error Transaction Procedures. The proposed rule change would 
require that if a member or member organization acquires or assumes a 
security position resulting from an error transaction, or initiates a 
transaction to offset an error transaction, such transaction must be 
recorded and cleared in the member's or his or her member 
organization's error account, or in an error account established for a 
group of members.
    This would include situations where the execution was wrong (e.g., 
wrong side of the market, wrong stock) and where the member ``missed 
the market'' by failing to execute the order in the prevailing market. 
If the error can be corrected at a better price at the time the error 
is discovered, the better price must be offered to the customer. If the 
customer refuses the superior execution, a record of this must be 
maintained by the member.
    Alternatively, a customer could accept the error, in which case the 
transaction would be placed in the customer's account. An error 
transaction could also be accepted by the specialist in the security 
into his or her organization's account as a trade ``on account of 
error.''
    When a customer accepts an error transaction, a monetary settlement 
(a ``difference check'') may be made by the member or member 
organization. If the difference check is for more than $500, the member 
or member organization involved would be required under the proposal to 
maintain records detailing the transaction. In some instances, a 
customer may accept an error, but not wish to receive a difference 
check for bookkeeping or other reasons. The member or member 
organization involved would be required to maintain records in these 
situations, as well.
    The proposal further prescribes the way a member would be required 
to

[[Page 6674]]

handle an error that is not accepted by a customer. Where the member is 
representing an order that cannot be executed pursuant to its term,\6\ 
the member would be required to issue an execution report covering the 
customer's order at the missed market price from his or her error 
account, the member organization's error account or the specialist's 
account if the specialist agreed to take in the error. The member would 
be permitted to confirm such report as an Exchange transaction as long 
as the position in the error account or specialist's account is 
liquidated.
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    \6\ An example of such an order is a ``held'' order to buy with 
a limit of 20, which cannot be executed pursuant to its terms if the 
member missed the market and the stock is now trading above 20.
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    The Exchange stipulates that if the order can be executed on its 
original terms or on better terms, the member or member organization is 
expected to execute the order pursuant to its terms, as would typically 
be the case with a ``not held'' order. A member representing a ``not 
held'' order is not permitted to ``miss the market.'' and must execute 
the order pursuant to its terms. The member would not be permitted to 
simply issue a report out of his or her error account.
    Recordkeeping. The proposed rule change would require the member of 
his or her member organization to maintain records with respect to all 
errors. These records would include the audit trail data elements 
prescribed in NYSE Rule 132, as well as the nature and amount of error, 
how the member resolved the error with the member or member 
organization, including a specialist, which cleared the error trade on 
the member's behalf, and the aggregate amount of liability that the 
member has incurred and has outstanding as of the time the error is 
recorded. The Exchange could also require that additional data elements 
be recorded in circumstances where the Exchange believe that such 
additional information is necessary for all error transactions, or in 
particular situations. The Exchange believes that the recordkeeping 
requirement would enable the Exchange to review and analyze error 
transactions on a current and consistent basis.
    Profitable Errors. The Proposal would also establish reporting 
requirements with respect to certain ``profitable'' errors. These are 
errors which can be liquidated at a price that is favorable to the 
position acquired in the member or member organization's error account. 
Under the proposal, every member not associated with a member 
organization and every member associated with a member organization 
that derives at least 75% of its revenue from floor brokerage would be 
required to report to the Exchange error transactions that result in a 
profit of more than $500 for any transaction or more than $3,000 in any 
calendar week. The Exchange believes this will enable it to quickly 
review these situations for possible violations of Floor Trading rules 
or procedures.
    The Exchange notes that all members and member organizations would 
be required under the proposal to maintain details of all errors, 
profitable or not. For members and member organizations that do not act 
primarily as a Floor broker, these records would be reviewed in 
connection with the normal oversight activities of the Exchange.
    Reports of Closed Error Accounts. The proposed rule change would 
also require each clearing member organization to report to the 
Exchange whenever it ceases to carry an error account. The notice would 
be requried in writing immediately, but no later than the opening of 
the Exchange on the following business day.
    Member Account Disclosure. Proposed new Rule 407A would provide the 
Exchange with information on accounts of members. The provision would 
require a member to report to the Exchange any securities account in 
which the member has a direct or indirect financial interest or over 
which the member has discretionary authority. This would include any 
account at a non-member broker-dealer, investment adviser, bank or 
other financial institution. In addition, the member would be required 
to notify the financial institution that carries or services his or her 
account or an account over which the member has discretionary authority 
that he or she is a member of the Exchange.
    Purchases of securities of a publicly-traded registered investment 
company directly from the issuer or principal underwriter would not be 
considered a reportable securities account. However, interests in a 
non-publicly-traded investment vehicle, including hedge funds, would be 
reportable.
    The Exchange believes that these reporting requirements would 
provide it with current information on where members carry securities 
accounts and enhance its ability to investigate quickly the trading of 
securities by members of the Exchange.
2. Statutory Basis
    The Exchange bases the proposed rule change on Section 6(b)(5) \7\ 
of the Act, which requires 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 
a national market system, and, in general, to protect investors and the 
public interest. The Exchange believes that the proposed rule change 
will help accomplish these ends by strengthening the Exchange's ability 
to surveil the Floor activities of members.
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    \7\ 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.

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 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 Exchange consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
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 in

[[Page 6675]]

the Commission's Public Reference Room. Copies of the filing will also 
be available for inspection and copying at the principal offices of the 
Exchange. All submissions should refer to File No. SR-NYSE-99-25 and 
should be submitted by March 2, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.3-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-3035 Filed 2-9-00; 8:45 am]
BILLING CODE 8010-01-M