[Federal Register Volume 66, Number 94 (Tuesday, May 15, 2001)]
[Notices]
[Pages 26898-26901]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-12137]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44272; File No. SR-NYSE-2001-07]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change and Amendment 
No. 1 Thereto by the New York Stock Exchange, Inc. To Provide for an 
Allocation Policy for Exchange-Traded Funds Trading on an Unlisted 
Trading Privileges Basis

May 7, 2001.
    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 April 25, 2001, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
On May 7, 2001, the NYSE field

[[Page 26899]]

Amendment No. 1 to the proposed rule change.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons and, for the reasons discussed below, the 
Commission is granting accelerated approval to the proposed rule 
change, as amended, on a pilot basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Sapna Patel, Attorney, Division of Market 
Regulation, Commission, dated May 4, 2001 (``Amendment No. 1''). In 
Amendment No. 1, the NYSE made a minor technical change to the 
proposed rule text clarifying that an approved person of a separate 
specialist organization must have received an exemption from 
specified specialists rules pursuant to NYSE Rule 98.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NYSE proposes to amend its Allocation Policy and Procedures 
(``Policy) \4\ to provide for the allocation of exchange-traded funds 
(``ETFs'') listed and traded on the Exchange pursuant to unlisted 
trading privileges (``UTP'').
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    \4\ NYSE's current Policy was amended in Securities Exchange Act 
Release No. 42746 (May 2, 2000), 65 FR 30171 (May 10, 2001) (File 
No. SR-NYSE-99-34). See Exhibit A to File No. SR-NYSE-99-34 for a 
copy of NYSE's Policy.
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    Below is the text of the proposed rule change. Proposed new 
language is italicized.
* * * * *

Policy for Allocation of Exchange-Traded Funds Admitted to Trading on 
the Exchange on an Unlisted Trading Privileges Basis

    Exchange-traded funds (``ETFs'') (as defined in paragraph 703.16 of 
the Listed Company Manual) admitted to trading on the Exchange on an 
unlisted trading privileges basis shall be allocated pursuant to this 
Policy rather than the Exchange's policy for allocating securities to 
be listed on the Exchange.
    ETFs shall be allocated by a special committee consisting of the 
Chairman of the Allocation Committee, the three most senior Floor 
broker members of the Allocation Committee, and four members of the 
Exchange's senior management as designated by the Chairman of the 
Exchange. This committee shall solicit allocation applications from 
interested specialist units, and shall review the same performance and 
disciplinary material with respect to specialist unit applicants as 
would be reviewed by the Allocation Committee in allocating listed 
stocks. The committee shall reach its decisions by majority vote with 
any tie votes being decided by the Chairman of the Exchange. Specialist 
unit applicants shall not appear before the committee.
    Special Criteria
    In their allocation applications, specialist units must 
demonstrate:
    (a) an understanding of the trading characteristics of ETFs;
    (b) expertise in the trading of derivatively-priced instruments;
    (c) ability and willingness to engage in hedging activity as 
appropriate;
    (d) knowledge of other markets in which the ETF to be allocated 
trades;
    (e) willingness to provide financial and other support to Exchange 
marketing and educational initiatives with respect to the ETF to be 
allocated.
    Allocation Freeze Policy
    The Allocation Freeze Policy as stated in the Allocation Policy for 
listed stocks shall apply.

Prohibition on Functioning as Specialist in ETF and Specialist in any 
Component Security of the ETF

    No specialist member organization may apply to be allocated an ETF 
if it is registered as specialist in any security which is a component 
of the ETF. A specialist member organization which is registered as 
specialist in a component stock of an ETF may establish a separate 
member organization which may apply to be the specialist in an ETF. The 
approved persons of such ETF specialist member organization must obtain 
an exemption from specified specialist rules pursuant to Rule 98.
    If, subsequent to an ETF being allocated to a specialist member 
organization, a security in which the specialist member organization is 
registered as specialist becomes component security of such ETF, the 
specialist organization must (i) withdraw its registration as 
specialist in the security which is a component of the ETF; (ii) 
withdraw its registration as specialist in the ETF; or (iii) establish 
a separate specialist member organization, which will be registered as 
specialist in the ETF and whose approved persons have received an 
exemption from specified specialist rules pursuant to Rule 98.
* * * * *

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 III 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
    As part of its overall business strategy, the Exchange believes 
that it is appropriate to trade ETFs on the NYSE Floor. In December 
2000, the Exchange began trading an ETF on the S&S Global 100 (symbol 
IOO).\5\ The Exchange intends to trade additional ETFs listed by other 
ETF sponsors.
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    \5\ See Securities Exchange Act Release No. 43658 (December 1, 
2000), 65 FR 77408 (December 11, 2000) (notice of filing and order 
granting accelerated approval to File No. SR-NYSE-00-53).
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    The Exchange believes it would be appropriate to trade on the NYSE, 
on a UTP basis, certain other ETFs currently listed and trading on 
other markets. These ETFs may include the NASDAQ 100 Trust (symbol 
QQQ), Standard and Poor's Depository Receipts (symbol SPY) and the DOW 
Industrials DIAMONDS (symbol DIA).
    It should be noted that UTP ETFs will trade at a post separate from 
ay other type of security trading on the Exchange.
    Allocation Policy for ETFs Trading Pursuant to UTP. The intent of 
the Exchange's current Policy is: (1) to ensure that the allocation 
process is based on fairness and consistency and that all specialist 
units have a fair opportunity for allocations based on established 
criteria and procedures; (2) to provide an incentive for ongoing 
enhancement of performance by specialist units; (3) to provide the best 
possible match between specialist unit and security; and (4) to 
contribute to the strength of the specialist system.
    The Allocation Committee has sole responsibility for the allocation 
of securities to specialist units under this Policy pursuant to 
authority delegated by the Board of Directors, and is overseen by the 
Quality of Markets Committee of the Board. The Allocation Committee 
renders decisions based on the allocation criteria specified in this 
Policy.
    The Exchange believes that it would be appropriate to modify the 
conventional allocation process to provide that ETFs traded on a UTP 
basis be allocated by a special committee, consisting of the Chairman 
of the Allocation Committee, the three most senior floor broker members 
of the

[[Page 26900]]

Allocation Committee, and four members of the Exchange's senior 
management as designated by the Chairman of the Exchange. This will 
permit Exchange management, acting with key members of the Allocation 
Committee, to oversee directly the introduction of the UTP concept to 
the NYSE.
    Allocation applications would be solicited by the Exchange and this 
special committee would review the same performance and disciplinary 
material as is reviewed by the Allocation Committee.\6\ In addition, 
specialist unit applicants would be required to demonstrate:
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    \6\ See Section IV, Allocation Criteria, of the Policy. See 
supra note 4.

    (a) An understanding of the trading characteristics of ETFs;
    (b) Expertise in the trading of derivatively-priced instruments;
    (c) Ability and willingness to engage in hedging activity as 
appropriate;
    (d) Knowledge of other markets in which the ETF which is to be 
allocated trades;
    (e) Willingness to provide financial and other support to 
relevant Exchange publicity and educational initiatives.

    The special committee would review specialist unit applications and 
reach its allocation decision by majority vote. Any tie vote would be 
decided by the Chairman of the Exchange. Specialist units would not 
appear before the special committee.
    Restriction on a Specialist Member Organization Acting as a 
Specialist in the ETF and in a Component Security of the ETF. Under the 
proposed rule change, specialist member organization cannot be both the 
specialist in the ETF and the specialist in any security that is a 
component of the ETF. This restriction is necessary to avoid the 
possibility of ``wash sales'' in a situation where the specialist in 
the ETF needs to hedge by buying or selling component stocks of the 
ETF, and could inadvertently be trading with a proprietary bid or offer 
made by a specialist in the same member organization who is making a 
market in the component security. A specialist member organization 
registered in a component security of the ETF may use a separate 
affiliated member organization to function as the ETF specialist, and 
thereby avoid the ``wash sale'' issue. The affiliated member 
organization that acts as the ETF specialist would be required to 
establish information barriers between itself and the specialist member 
organization, pursuant to NYSE Rule 98.\7\
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    \7\ With respect to ETFs, NYSE has proposed to amend its Rule 98 
information barriers to eliminate the requirement that approved 
persons of specialist member organizations be capitalized separately 
from the specialist member organization. However, a specialist 
member organization that is registered only in ETFs will remain 
subject to the minimum capital requirements as specified in Exchange 
Rules. In addition, NYSE has proposed to amend NYSE Rules 36, 
105(1), 111, 13, 104.21, as well as the NYSE's Market-On-Close/
Limit-At-The-Close and Pre-Opening Price Indications Policies to 
accommodate the trading of ETFs on a UTP basis. See File No. SR-
NYSE-2-001-08, filed by the NYSE with the Commission on April 25, 
2001.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \8\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act \9\ in particular, because it is 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.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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    More specifically, the Exchange believes that trading ETFs on a UTP 
basis will provide investors with increased flexibility in satisfying 
their investment needs because they will be able to purchase and sell a 
security that replicates the performance of a broad portfolio of stocks 
at negotiated prices throughout the business day.

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 the 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. 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, NW., Washington, DC 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 the 
Commission's Public Reference Room. 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-2001-07 and 
should be submitted by June 5, 2001.

IV. Commission's Findings and Order Granting Accelerated Approval 
of the Proposed Rule Change

    After careful review, the Commission finds that the proposed rule 
change is consistent with the Act and the rules and regulations 
promulgated thereunder applicable to a national securities exchange 
and, in particular, with the requirements of Section 6(b).\10\ 
Specifically, the Commission finds that approval of the proposed rule 
change is consistent with Section 6(b)(5) \11\ of the Act in that it is 
designed to promote just and equitable principles of trade, to remove 
impediments and to perfect the mechanism of a free and open market and 
a national market system, and in general, to protect investors and the 
public interest.
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    \10\ 15 U.S.C. 78f(b). In approving this proposal on an 
accelerated basis, the Commission has considered the proposed rule's 
impact on efficiency, competition and capital formation. 15 U.S.C. 
78c(f).
    \11\ 15 U.S.C. 78f(b)(5).
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    Specialists play a crucial role in providing stability, liquidity, 
and continuity to the trading of securities. Among the obligations 
imposed upon specialists by the Exchange, and by the Act and the rules 
thereunder, is the maintenance of fair and orderly markets in their 
designated securities.\12\ To ensure that specialists fulfill these 
obligations, it is important that the Exchange develop and maintain 
stock allocation procedures and policies that provide specialists with 
an initiative to strive for optimal performance. The Exchange now 
proposes to amend its Policy to account for the allocation of ETFs 
listed and traded on the Exchange on a UTP basis.
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    \12\ See 17 CFR 240.11b-1; NYSE Rule 104.
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    The Commission notes that the Exchange proposes to establish a 
special committee to allocate ETFs listed and traded on a UTP basis. 
The special committee will consist of the Chairman of the Allocation 
Committee, the three most senior floor broker members of the Allocation 
Committee, and four members of the Exchange's senior management as 
designated by the

[[Page 26901]]

Chairman of the Exchange. The Exchange believes that this will permit 
its management, acting with key members of the Allocation Committee, to 
oversee directly the introduction of the UTP concept to the NYSE. The 
Commission believes that it is appropriate to establish a new 
allocation committee for ETFs because of the unique characteristics of 
ETFs, which should be considered in the allocation process.
    The Exchange proposes that member organizations applying to trade 
ETFs on a UTP basis be able to demonstrate certain abilities in 
addition to the current performance and disciplinary requirements of 
the allocation application. For example, the applicant must have: (a) 
an understanding of the trading characteristics of ETFs; (b) expertise 
in the trading of derivatively-priced instruments; (c) the ability and 
willingness to engage in hedging activity as appropriate; (d) the 
knowledge of other markets in which the ETF which is to be allocated 
trades; and (e) the willingness to provide financial and other support 
to relevant Exchange publicity and educational initiatives. The 
Commission finds that these criteria are suitable for the Committee to 
rely on when allocating an ETF to a particular specialist unit.
    In addition, the Exchange proposes to prohibit a specialist in any 
component security of the ETF to function as a specialist in the ETF in 
order to avoid ``wash sales.'' The Exchange, however, proposes to allow 
specialists in a component security of an ETF to use a separate member 
organization to function as an ETF specialist so long as NYSE Rule 98 
information barriers are established and approved by the Exchange. The 
Commission believes that NYSE Rule 98 information barriers should 
prevent the flow of any privileged and/or nonpublic information between 
the related entities and should reduce the potential for any concerns 
regarding ``wash sales'' in this context.
    Because the proposed rule change, as amended, institutes a new 
process for allocating ETFs to NYSE specialist units and because the 
Commission is adopting the proposal on an accelerated basis, the 
Commission believes that the proposal should be approved on a pilot 
basis, for a one-year period ending on May 7, 2002, to ensure that the 
process is effective and fair. The Commission expects the NYSE to 
report to the Commission about its experience with the new allocation 
process in any future proposal it files to extend the amendment to the 
Policy or approve it on a permanent basis.
    The Commission, pursuant to Section 19(b)(2) of the Act,\13\ finds 
good cause for approving the proposed rule change and Amendment No. 1 
thereto, on a one-year pilot basis through May 7, 2002, prior to the 
thirtieth day after the date of publication of notice thereof in the 
Federal Register. The Commission notes that granting accelerated 
approval to this proposal will allow the NYSE to immediately implement 
a process for allocating ETFs to be traded on the Exchange on a UTP 
basis to specialist units. It is necessary to allocate the ETFs to 
specialist units as soon as possible so that the specialists so 
appointed will have ample time to prepare for NYSE's upcoming listing 
and trading of ETFs on a UTP basis. Amendment No. 1 simply makes minor 
technical corrections to the proposed rule text and clarifies that 
approved persons of a specialist must be granted an exemption from 
specified specialist rules pursuant to NYSE Rule 98.
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    \13\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-NYSE-2001-07), as amended, 
is hereby approved on an accelerated basis through May 7, 2002.
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    \14\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-2(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-12137 Filed 5-14-01; 8:45 am]
BILLING CODE 8010-01-M