[Federal Register Volume 67, Number 139 (Friday, July 19, 2002)]
[Notices]
[Pages 47588-47590]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-18223]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46191; File No. SR-NYSE-2001-24]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendments Nos. 1 and 2 Thereto by the New York Stock 
Exchange, Inc. Amending Exchange Rule 97 Which Limits Member Trading 
Because of Block Positioning

July 12, 2002.
    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 August 17, 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 April 17, 2002.\3\ The Exchange filed Amendment No. 2 to the 
proposed rule change on June 28, 2002.\4\ The Commission is publishing 
this notice, as amended by Amendment Nos. 1 and 2, 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 Richard P. Bernard, Executive Vice President 
and General Counsel, NYSE, to Nancy J. Sanow, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated 
April 16, 2002 (``Amendment No. 1''). In Amendment No. 1, the 
Exchange amended the proposed rule text to clarify which types of 
hedging transactions it would exclude from the restrictions of NYSE 
Rule 97.
    \4\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy J. Sanow, Assistant Director, Division, Commission, dated 
June 27, 2002 (``Amendment No. 2''). In Amendment No. 2, the 
Exchange amended the example in the Purpose section of the proposal 
to clarify the types of hedging transactions that would fall under 
the proposed exemption to NYSE Rule 97.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend NYSE Rule 97 (Limitation on Member 
Trading Because of Block Positioning) so that it applies only to 
transactions executed at or near the end of the trading day, and to 
provide exceptions to the rule for member organizations that establish 
the requisite internal information barriers and for certain hedging 
transactions.
    The text of the proposed rule change appears below. New text is in 
italics; deletions are in brackets.
* * * * *

Limitation on Members' Trading Because of Block Positioning

    Rule 97
    (a) When a member organization holds any part of a long position in 
a stock in [its trading] a proprietary account resulting from a block 
transaction it effected with a customer, such member organization may 
not effect within twenty minutes of the close of trading on the 
Exchange a purchase on a ``plus'' tick in such stock at a price higher 
than the lowest price at which any block was acquired in a previous 
transaction on that day [the following transactions] for any account in 
which it has a direct or indirect interest [for the remainder of the 
trading day on which it acquired such position,] if the person 
responsible for the entry of such order to purchase such stock has 
knowledge of such block position.[:]
    A member, allied member, or an employee of a member organization 
responsible for entering proprietary orders shall be presumed to have 
knowledge of a particular block position unless the member organization 
has implemented a reasonable system of internal policies and procedures 
to prevent the misuse of information about block positions by those 
responsible for entering such proprietary orders.
    [(i) A purchase on a ``plus'' tick if such purchase would result in 
a new daily high;
    (ii) A purchase on a ``plus'' tick within one-half hour of the 
close;
    (iii) A purchase on a ``plus'' tick at a price higher than the 
lowest price at which any block was acquired in a previous transaction 
on that day; or
    (iv) A purchase on a ``zero plus'' tick of more than 50% of the 
stock offered at a price higher than the lowest price at which any 
block was acquired in a previous transaction on that day.]
For purposes of [the restrictions in subparagraphs (iii) and (iv) 
above] this rule, in the case where more than one block was acquired 
during the day, the lowest price of any such block will be the 
governing price.
    (b) The provisions of paragraph (a) shall not apply to transactions 
made:
    (1) For bona fide arbitrage or to engage in the purchase and sale, 
or sale and purchase of securities of companies involved in publicly 
announced merger, acquisition, consolidation, tender, etc.;
    (2) To offset a transaction made in error;
    (3) To facilitate the conversion of options;
    (4) By specialists in the stocks in which they are registered;
    (5) To facilitate the sale of a block of stock or a basket of 
stocks by a customer;
    (6) To facilitate an existing customer's order for the purchase of 
a block of stock, or a specific stock within a basket of stocks, or a 
stock which is being added to or reweighted in an index, at or after 
the close of trading on the Exchange, provided that the facilitating 
transactions are recorded as such and the transactions in the aggregate 
do not exceed the number of shares required to facilitate the 
customer's order for such stock; [or]
    (7) Due to a stock's addition to an index or an increase in a 
stock's weight in an index, provided that the transactions in the 
aggregate do not exceed the number of shares required to rebalance the 
index portfolio[.] or;
    (8) To hedge a position that is economically equivalent to a short 
stock position, provided that (i) the creation of the hedge, whether 
through one or more transactions, occurs so close in time to the 
completion of the transaction precipitating such hedge that the hedge 
is clearly related; (ii) the risk to be offset is the result of a 
position acquired in the course of facilitating a customer's order, and 
(iii) the size of the hedge is commensurate with the number of shares 
required to hedge such position when netted with any long position in 
the stock.
    Supplementary Material: No change.

[[Page 47589]]

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
    NYSE Rule 97 prohibits a member organization that holds any part of 
a long position in a stock in its trading account resulting from a 
block transaction it effected with a customer from purchasing, for an 
account in which it (i.e., the block positioning firm) has a direct or 
indirect interest, additional shares of such stock on a ``plus'' or 
``zero plus'' tick under certain conditions for the remainder of the 
trading day. NYSE Rule 97 defines a ``block'' as a quantity of stock 
having a market value of $500,000 or more. Exceptions to the rule exist 
for transactions involving bona fide arbitrage or trading in companies 
involved in a publicly announced merger, acquisition, consolidation or 
tender offer; to offset error transactions; to facilitate the 
conversion of options; to allow specialty stock transactions by 
specialists; or to facilitate the sale of a block of stock to a 
customer.
    The Exchange now proposes to amend NYSE Rule 97 in three 
significant respects. First, the Exchange proposes to amend NYSE Rule 
97 to focus on transactions executed at or near the end of the trading 
day that could advantage a position acquired by a block positioner by 
being executed at a higher price than the lowest price at which a block 
was acquired during that day. As amended, NYSE Rule 97 would apply only 
during the last twenty minutes of the trading day, rather than, as 
under the current rule, the remainder of the trading day following 
acquisition of the block position. The Exchange believes that this 
approach is the same the Exchange applied, and the Commission approved, 
in other customer facilitation situations when a member organization 
may be positioning stock for its own account.\5\ The Exchange notes 
that while the proposed amendments to NYSE Rule 97 would limit the 
strict ``tick'' restriction to the most sensitive part of the trading 
day, members and member organizations remain subject to the anti-
manipulative provisions of the Act at all times during the trading day.
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    \5\ See Securities Exchange Act Release No. 35837 (June 12, 
1995), 60 FR 31749 (June 16, 1995).
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    Secondly, the Exchange proposes to provide that if a member 
organization establishes internal information barriers to shield a 
person entering proprietary orders in a stock from the knowledge that 
the firm has a block position in that stock, the restrictions in NYSE 
Rule 97 shall not apply to proprietary orders entered by such person. 
The Exchange believes that this is similar to the approach taken with 
respect to NYSE Rule 92, which provides that the proscriptions against 
trading ahead of customer orders shall not apply if internal 
information barriers shield a person entering a proprietary order from 
knowledge of any particular customer order executable at the same 
price.
    Paragraph (b) of NYSE Rule 97 provides exceptions to the rule for 
purchases involving bona fide arbitrage or trading in companies 
involved in a publicly announced merger, acquisition, consolidation or 
tender offer; to offset error transactions; to facilitate the 
conversion of options; for transactions by specialists in their 
specialty stocks; to facilitate the sale of a block of stock or a 
basket of stocks by a customer; to facilitate an existing customer 
order for the purchase of a block of stock or a stock in a basket of 
stocks or a stock being added to or reweighted in an index at or after 
the close of trading on the Exchange provided certain conditions are 
met; or to increase a proprietary position in a stock which is being 
added to, or being increased in the weight of, a publicly disseminated 
index, provided that the transactions in the aggregate do not exceed 
the number of shares required to rebalance the portfolios.
    The Exchange also proposes an additional exception for purchases 
which offset all or part of the market risk of a position that is 
economically equivalent to a short position in the stock, provided that 
such position was established as the result of facilitating a 
customer's order and the creation of the hedge, whether through one or 
more transactions, occurs so close in time to the completion of the 
transaction precipitating such hedge that the hedge is clearly related. 
Examples of positions that, according to the Exchange, would be deemed 
to be economically equivalent to a short position in the stock include 
a long put option or a short position in a call option, warrant, right 
or convertible or exchangeable securities. The number of shares 
purchased to hedge the short position must be commensurate with the 
number of shares required to hedge such position when it is netted with 
any long position in the stock.
    For example, on July 1, a member organization, in order to 
facilitate a customer,\6\ sold short to that customer a security which 
is convertible into 100,000 shares of common stock. Thereafter, it 
facilitates a block transaction for another customer by buying 40,000 
shares of the same common stock for the member organization's 
proprietary account. Within 20 minutes of the close on the same day, it 
seeks to hedge its remaining short exposure in the convertible security 
by buying 60,000 shares of the common stock. Since the member 
organization has acquired a long facilitation position (i.e., the 
40,000 share purchase), it must now calculate whether it is long for 
purposes of NYSE Rule 97, as amended. If it determines that it is not 
long, but rather short, it would fall within the proposed exception to 
NYSE Rule 97, as amended, for hedging a short position since the hedge 
being created offsets the risk of a position acquired in the course of 
facilitating a customer's order and the hedge is ``clearly related'' to 
the completion of the transaction precipitating the hedge \7\ (the 
short position).
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    \6\ Telephone conversation between Jeff Rosenstrock, Senior 
Special Counsel, NYSE, and Ira Brandriss, Special Counsel, Division, 
Commission, and Christopher Solgan, Law Clerk, Division, Commission, 
on July 2, 2002.
    \7\ A hedge is deemed to be ``clearly related'' to the 
transaction precipitating the hedge if either the first or last 
transaction comprising the hedge is executed on the same trade date 
as the transaction that precipitates such hedge. Thus, the 
initiation of the hedge should be reasonably proximate to the 
transaction precipitating the hedge, but the member organization is 
not strictly required to complete the hedge on the same date as the 
precipitating transaction. The Exchange intends the hedge exemption 
to be construed narrowly and that the hedge transaction will be 
proximate in time to the precipitating transaction. See SR-NYSE-94-
34, Amendment No. 6 (March 9, 2001), approved in Securities Exchange 
Act Release No. 44139 (March 30, 2001), 66 FR 18339 (April 6, 2001). 
For a more complete discussion, see Amendment No. 6 to SR-NYSE-94-
34, which also described several interpretive issues which had 
arisen with respect to the amendment of NYSE Rule 92.
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    If, on the other hand, the firm determines it is long for purposes 
of NYSE Rule 97, the firm would not be able to effect within twenty 
minutes of the close of trading on the Exchange a purchase on a 
``plus'' tick in the security

[[Page 47590]]

at a price higher than the lowest price at which any block was acquired 
in a previous transaction on July 1, provided that the person 
responsible for the entry of such order to purchase the security had 
knowledge of the block position.\8\
    The Exchange also proposes to replace the term ``trading account'' 
in paragraph (a) of NYSE Rule 97 with ``proprietary account'' so as to 
clarify that NYSE Rule 97's restrictions may apply regardless of where 
the long facilitation position is placed, e.g., a facilitation account 
or a trading account.
(2) Statutory Basis
    The Exchange believes that the basis for the proposed rule change 
is the requirement under Section 6(b)(5) of the Act \9\ 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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    \8\ Under the proposed language to NYSE Rule 97, ``a member, 
allied member, or an employee of a member organization responsible 
for entering proprietary orders shall be presumed to have knowledge 
of a particular block position unless the member organization has 
implemented a reasonable system of internal policies and procedures 
to prevent the misuse of information about block positions by those 
responsible for entering such proprietary orders.''
    \9\ 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, 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-2001-24 and should be submitted by August 9, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-18223 Filed 7-18-02; 8:45 am]
BILLING CODE 8010-01-P