[Federal Register Volume 66, Number 239 (Wednesday, December 12, 2001)]
[Notices]
[Pages 64328-64330]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-30653]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45136; File No. SR-NYSE-2001-43]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the New York Stock Exchange, Inc. 
Amending Paragraph (1) of the Guidelines to Exchange Rule 105 To Permit 
Approved Persons of Specialists to Act as a Specialist With Respect to 
an Option on a Specialty Stock

December 6, 2001.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
and (``Act''),\1\ Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 18, 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, II, and III below, which Items have been prepared by the 
Exchange. The Exchange filed Amendment No. 1 to the proposed rule 
change on December 4, 2001.\3\ The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons.
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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 Nancy Sanow, Assistant Director, Division of 
Market Regulation, Commission, dated December 3, 2001 (``Amendment 
No. 1''). In Amendment No. 1, the NYSE decided to keep the portion 
of paragraph (l)(ii) of the Guidelines to NYSE Rule 105, which 
prohibits an approved person affiliated with an NYSE specialist that 
acts as an options market maker and any other approved person of the 
specialist from acting as a market maker in any equity security in 
which the associated specialist is registered as such and which 
underlies an option to which the approved person acts as an options 
market maker.

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[[Page 64329]]

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The NYSE proposes to amend paragraph (1) of the Guidelines to NYSE 
Rule 105 to permit an approved person of a specialist to act as a 
specialist or primary market maker with respect to an option on a stock 
in which the specialist acts as a market maker on the Exchange 
(``specialty stock''), provided that all of the requirements of the 
NYSE Rule 98 exemptive program are met.
    The text of the proposed rule change appears below. New text is in 
italics; deletions are in brackets.

Guidelines for Specialists' Specialty Stock Option Transactions 
Pursuant to Rule 105

(a) through (k)--No change
* * * * *
    (l) Specialist Shall Not Be Options Market-Maker
* * * * *
    (ii) Notwithstanding the above, an approved person of an equity 
specialist entitled to an exemption from this rule under Rule 98 may 
act as a competitive market-maker, competitive options trader, 
registered options trader, or as a specialist or market-maker [in a 
similar non-primary market-making capacity] in any option as to which 
the underlying security is a stock in which the associated specialist 
is registered as such; provided, however, that if an approved person is 
so acting as an options market maker pursuant to this paragraph, 
neither that approved person, nor any other approved person of the 
specialist, may act as a market maker in any equity security in which 
the associated specialist is registered as such and which underlies an 
option as to which the approved person acts as an options market maker.
* * * * *

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 
next 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, Proposed Rule Change

(1) Purpose
    NYSE Rule 105 provides that an ``approved person'' (i.e., an 
affiliate in a control relationship) of a specialist organization may 
trade options on a specialty stock only for hedging purposes. If the 
approved person establishes a system of internal controls and 
information barriers pursuant to Exchange Rule 98, however, the 
approved person may engage in proprietary trading of specialty stock 
options without being restricted solely to hedging transactions.
    Currently, even with an NYSE Rule 98 exemption, an approved person 
of a specialist may not act as a specialist or primary market maker 
with respect to an option on a specialty stock. Such approved person of 
a specialist may, however, act as a competitive or non-primary market 
maker in a specialty stock option. According to the Exchange, the 
prohibition on acting as an options specialist or primary market maker 
has been rooted, historically, in concerns about the perception of an 
inherent conflict of interest, as there is a direct pricing 
relationship between a stock and its associated option.
    The Exchange believes that on-going consolidation within the 
securities industry makes it likely that large, well-capitalized, well-
regulated organizations may seek to conduct distinct business 
operations among several affiliated entities. The concerns about 
possible conflicts of interest as between stock and option market 
making continue to exist, but the Exchange believes that they can be 
effectively addressed pursuant to the NYSE Rule 98 exemptive program. 
The Exchange believes that its experience with this program has 
demonstrated the viability of ``functional regulation'' whereby 
affiliated entities conduct distinct lines of business with strict 
information barriers between them. Under the NYSE Rule 98 program, 
specialists and their affiliates must present their proposed operating 
model to the Exchange for prior approval, and are thereafter, subject 
to annual NYSE examination. The Exchange states that the NYSE Rule 98 
program has been in effect for more than 15 years, and forwards that 
there have been no instances of a material breach of information 
barriers.
    The Exchange now proposes to amend paragraph (1) of the Guidelines 
to NYSE Rule 105 to permit an approved person of a specialist to act as 
a specialist or primary market maker with respect to an option on a 
specialty stock, provided all requirements of the NYSE Rule 98 
exemptive program are met. Thus, among other matters, the approved 
person must (i) conduct its operations in a legal entity that is 
separate and distinct from the Exchange equity specialist; (ii) 
maintain separate and distinct books and records and its own, 
separately dedicated capital; (iii) maintain strict information 
barriers between itself and the affiliated Exchange equity specialist 
regarding trading and position information; (iv) conduct its day to day 
business with its own staff; and (v) make all trading decisions 
independent of the Exchange equity specialist.
    The Exchange believes that these safeguards are sufficient to 
address potential conflict of interest problems, while ensuring that 
the separate entities remain subject to meaningful functional 
regulation.
(2) Statutory Basis
    The Exchange believes the basis for the proposed rule change, as 
amended, is the requirement under section 6(b)(5) of the Act\4\ 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.
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    \4\ 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, as 
amended, will impose any burden on competition that is not necessary or 
appropriate in furtherance of the purpose 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 Time 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 reason for so finding, or (ii) as to 
which the Exchange consents, the Commission will:

[[Page 64330]]

    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, as amended, 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 
filings will also be available for inspection and copying at the 
principal office of the Exchange. All submissions should refer to File 
No. SR-NYSE-2001-43 and should be submitted by January 2, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-30653 Filed 12-11-01; 8:45 am]
BILLING CODE 8010-01-M