[Federal Register Volume 67, Number 63 (Tuesday, April 2, 2002)]
[Notices]
[Pages 15637-15638]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-7902]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45654; File No. S7-17-00]


Order Granting Temporary Exemption for Broken-Dealers from the 
Trade-Through Disclosure Rule

March 27, 2002.
    In July 2000, the Commission approved an intermarket linkage plan, 
in which all five options exchanges \1\ are currently participants 
(``Linkage Plan'').\2\ Also in July 2000, the Commission proposed, and 
in November 2000 adopted, Rule 11Ac1-7 (``Trade-Through Disclosure 
Rule'') under the Securities Exchange Act of 1934 (``Exchange 
Act'').\3\
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    \1\ The exchanges currently trading options are the American 
Stock Exchange (``Amex''), the Chicago Board Options Exchange 
(``CBOE''), the International Securities Exchange (``ISE''), the 
Pacific Exchange (``PCX''), and the Philadelphia Stock Exchange 
(``Phlx'') (collectively, ``Options Exchanges'').
    \2\ See Securities Exchange Act Release No. 43086 (July 28, 
2000), 65 FR 48023 (August 4, 2000). The Linkage Plan approved by 
the Commission in July 2000 is the plan filed by the Amex, CBOE, and 
ISE. Subsequently, the PCX and Phlx joined the Linkage Plan. See 
Securities Exchange Act Release Nos. 43310 (September 20, 2000), 65 
FR 58583 (September 29, 2000) (approving an amendment to the Linkage 
Plan adding the PCX as a participant); and 43311 (September 20, 
2000), 65 FR 58584 (September 29, 2000) (approving an amendment to 
the Linkage Plan adding the Phlx as a participant).
    \3\ 17 CFR 240.11Ac1-7. See also Securities Exchange Act Release 
Nos. 43591 (November 17, 2000), 65 FR 75439 (December 1, 2000); and 
43085 (July 28, 2000), 65 FR 47918 (August 4, 2000).
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    The Trade-Through Disclosure Rule requires a broker-dealer to 
disclose to a customer when the customer's order for a listed option is 
executed at a price inferior to the best-published quote (``intermarket 
trade-through''), and to disclose the better published quote available 
at that time. However, a broker-dealer is not required to disclose to 
its customer an intermarket trade-through if the broker-dealer effects 
the transaction on an exchange that participates in an approved linkage 
plan that includes provisions reasonably designed to limit customers' 
orders from being executed at prices that trade through a better 
published price. In addition, broker-dealers are not required to 
provide the disclosure required by the rule if the customer's order is 
executed as part of a block trade. Once implemented, the Linkage Plan 
would reasonably limit intermarket trade-throughs on each of the 
options markets,\4\ provided that the Options Exchanges remain 
participants in the Linkage Plan.\5\ Under these circumstances, broker-
dealers would be excepted from the disclosure requirements of the 
Trade-Through Disclosure Rule.
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    \4\ The Commission approved an amendment to the previously-
approved Linkage Plan that would permit broker-dealers executing 
orders on participating exchanges to satisfy the exception to the 
disclosure requirements of the Trade-Through Disclosure Rule. 
Securities Exchange Act Release No. 44482 (June 27, 2001), 66 FR 
35470 (July 5, 2001).
    \5\ The Linkage Plan permits an exchange to withdraw from 
participation in the Linkage Plan with 30 days written notice.
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    To date, the options exchanges have taken steps to implement the 
Linkage Plan. Specifically, the options exchanges have selected The 
Options Clearing Corporation (``OCC'') to be the linkage provider and 
have worked closely with OCC to develop the technical requirements 
related to the linkage's central core or ``hub'' to and from which all 
linkage orders would be routed. The Commission understands that the 
options exchanges are completing the process of evaluating their 
internal systems to determine the

[[Page 15638]]

extent of modification necessary to integrate their systems into the 
central hub and beginning to modify those systems.
    The Commission has twice extended the compliance date of the Trade-
Through Disclosure Rule for broker-dealers, most recently until April 
1, 2002, because of its reluctance to impose on broker-dealers the 
costs of complying with the disclosure requirements of the rule while 
the Options Exchanges are working to implement the Linkage Plan, which 
would render such disclosures unnecessary.\6\ Recently the Options 
Exchanges, in a letter dated March 15, 2002 to Chairman Pitt, committed 
to implement the linkage in two phases by specified dates.\7\ The first 
phase would comprise those elements of the linkage that are necessary 
to send and receive orders required under the Linkage Plan to be 
automatically executed by the exchange receiving the order. The Options 
Exchanges committed to begin full intermarket testing of the first 
phase by December 1, 2002, and to implement this phase no later than 
February 1, 2003. The second phase would comprise the remaining 
elements of the linkage. The exchanges commit to begin testing of this 
second phase by March 1, 2003, and to implement this phase no later 
than April 30, 2003. The Options Exchanges also committed to file with 
the Commission an amendment to the Linkage Plan that would incorporate 
this testing and implementation timetable.\8\
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    \6\ See Securities Exchange Act Release Nos. 44078 (March 15, 
2001), 66 FR 15792 (March 21, 2001); and 44852 (September 26, 2001), 
66 FR 50103 (October 2, 2001).
    \7\ See Letter from the Options Exchanges to Harvey L. Pitt, 
Chairman, Securities and Exchange Commission, dated March 15, 2002.
    \8\ See Exchange Act Rule 11Aa3-2(d), 17 CFR 11Aa3-2(d).
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    In addition, the Options Exchanges agreed to file an amendment to 
the Linkage Plan that would permit an exchange to withdraw from 
participation in the Linkage Plan only if it can satisfy the Commission 
that it can accomplish, by alternative means, the same goals as the 
Linkage Plan of limiting intermarket trade-throughs of prices on other 
markets.\9\ The Options Exchanges are currently working on amendments 
to the Linkage Plan that would be approved by each of their boards and 
filed with the Commission by April 15, 2002. If the Commission approves 
the amendments to the Linkage Plan,\10\ the principal purpose of the 
Trade-Through Disclosure Rule `` to require customers'' orders to be 
executed on exchanges that participate in a linkage that limits 
intermarket trade-throughs or, in the alternative, to provide customers 
with additional information about the execution of their orders `` 
would be accomplished.
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    \9\ Id.
    \10\ The Commission must publish any amendment to the Linkage 
Plan filed by the Options Exchanges and provide interested persons 
an opportunity to submit written comments. See Exchange Act Rule 
11Aa3-2(c)(1), 17 CFR 11Aa3-2(c)(1). A proposed amendment may be put 
into effect summarily upon publication of notice, on a temporary 
basis not to exceed 120 days, if the Commission finds that such 
action is necessary or appropriate in the public interest, for the 
protection of investors or the maintenance of fair and orderly 
markets, to remove impediments to, and perfect mechanisms of, a 
national market system or otherwise in furtherance of the purposes 
of the Exchange Act. See Exchange Act Rule 11Aa3-2(c)(4), 17 CFR 
11Aa3-2(c)(4). Within 120 days of publication of notice of filing of 
an amendment to the Linkage Plan, the Commission must approve the 
amendment, with such changes or subject to such conditions as the 
Commission may deem necessary or appropriate, if it finds that such 
amendment is necessary or appropriate in the public interest, for 
the protection of investors and the maintenance of fair and orderly 
markets, to remove impediments to, and perfect the mechanisms of, a 
national market system, or otherwise in furtherance of the purposes 
of the Exchange Act. See Exchange Act Rule 11Aa3-2(c)(2), 17 CFR 
11Aa3-2(c)(2).
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    Accordingly, the Commission believes that it is appropriate in the 
public interest and consistent with the protection of investors at this 
time to temporarily exempt broker-dealers from the requirements of the 
Trade-Through Disclosure Rule. Moreover, in light of the expressed 
intent of the Options Exchanges to file amendments to the Linkage Plan 
so that no exchange may withdraw from its obligations to limit trade-
throughs of prices on other markets without an alternative means to 
achieve this same goal, the Commission has directed the staff to 
develop a proposal so that the Commission may consider repeal of the 
Trade-Through Disclosure Rule. At the time the Commission considers the 
proposal to repeal the Trade-Through Disclosure Rule it has directed 
staff to develop, it will consider a further extension of this 
temporary exemption.
    Accordingly,
    It is ordered, pursuant to section 36 of the Exchange Act,\11\ that 
broker-dealers are exempt from compliance with the Trade-Through 
Disclosure Rule until July 1, 2002.
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    \11\ 15 U.S.C. 78mm.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-7902 Filed 4-1-02; 8:45 am]
BILLING CODE 8010-01-P