[Federal Register Volume 67, Number 192 (Thursday, October 3, 2002)]
[Notices]
[Pages 62088-62090]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-25165]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46560; File No. SR-NYSE-00-31]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Amendment No. 1 Thereto and 
Notice of Filing and Order Granting Accelerated Approval of Amendment 
Nos. 2 and 3 Thereto by the New York Stock Exchange, Inc. To Amend 
Exchange Rules 36.30 and 104A.50

September 26, 2002.

I. Introduction

    On July 3, 2000, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change amending NYSE Rules 36.30 and 104A.50. The 
Exchange submitted Amendment No. 1 to the proposed rule change on May 
21, 2001.\3\ The proposed rule change was published for public comment 
in the Federal Register on June 16, 2001.\4\ The Exchange submitted 
Amendment Nos. 2 and 3 to the proposed rule change on February 6, 2002 
\5\ and September 20, 2002,\6\ respectively. The Commission received no 
comments on the proposed rule change. This order approves the proposed 
rule change, as amended by Amendments Nos. 1, 2 and 3.\7\ This order 
also issues notice of filing of, and grants accelerated approval to, 
Amendment Nos. 2 and 3 thereto.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Exchange submitted a new Form 19b-4, which replaces and 
supersedes the original filing in its entirety (``Amendment No. 
1''). Amendment No. 1 withdraws the proposed amendments to NYSE Rule 
36.20 in the original filing that would have permitted certain off-
floor communications by members on the floor. The NYSE has stated 
that these amendments will be subject to a separate filing. 
Amendment No. 1 also amends proposed NYSE Rule 36.30A to clarify the 
manner in which Exchange specialists may communicate proprietary 
orders in foreign specialty stock from their post to off-floor 
broker-dealers. Finally, Amendment No. 1 amends proposed NYSE Rule 
36.30C to include in the definition of foreign security depositary 
shares that represent a foreign company's publicly traded security.
    \4\ Securities Exchange Act Release No. 44368 (May 30, 2001), 66 
FR 30494.
    \5\ See Letter from Darla Stuckey, Corporate Secretary, NYSE, to 
Nancy Sanow, Assistant Director, Division of Market Regulation, 
Commission, dated January 31, 2002 (``Amendment No. 2''). Amendment 
No. 2 amends proposed Commentary .30 to NYSE Rule 36 to: (i) Add 
language stating that specialists relying on the rule must have an 
objective of facilitating the maintenance of a fair and orderly 
market on the Exchange; (ii) delete proposed subsection A.3; (iii) 
define ``communication link;'' (iv) clarify that NYSE Rule 92, on 
trading ahead, would apply to specialists entering proprietary 
orders in foreign securities; and (v) clarify that specialists are 
prohibited from using the communication links to receive material 
nonpublic information, and that if such information is received, the 
specialist must contact his firm's compliance officer, who must 
determine whether the specialist is permitted to continue to trade 
the stock.
    \6\ See Letter from Darla Stuckey, Corporate Secretary, NYSE, to 
Nancy Sanow, Assistant Director, Division of Market Regulation, 
Commission, dated September 19, 2002 (``Amendment No. 3''). 
Amendment No. 3 deletes the phrase ``among other means'' from the 
definition of ``communication link'' in proposed NYSE Rule 36.30D.
    \7\ The Commission has requested from the Exchange an 
explanation of the surveillance procedures it intends to implement 
to ensure that specialists comply with the proposed rule, as 
amended. This approval order is contingent upon the submission of 
these surveillance procedures as well as the Commission's finding 
that such surveillance procedures are adequate.
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II. Description of the Proposed Rule Change

    NYSE Rule 36.30 governs the use of telephone lines at a specialist 
unit's post. The rule currently permits telephone lines from the post 
to the unit's off-floor offices and to the unit's clearing firm. The 
rule also permits specialists to have telephone lines to the floor of 
an options or futures exchange for the purpose of entering hedging 
orders on the floors of those exchanges.
    The Exchange proposes to amend NYSE Rule 36.30 to more clearly

[[Page 62089]]

identify the types of communications that may emanate from the post. 
The words ``communication link'' would replace ``telephone'' to 
encompass a wider range of communication methods, and would include a 
post telephone or terminal of an automated trading system, or similar 
device whereby information relating to the transmission of an order 
from the Exchange may be communicated.\8\ The definition of 
communication link in the NYSE's proposal further states that the 
specialist may not maintain a communication link to a foreign exchange 
or market. In addition, in no instance would the specialist be 
permitted to use the link to receive material nonpublic information.
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    \8\ See infra, note 18.
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    Under the new rule, specialists in foreign securities would be 
allowed to enter orders in their foreign specialty or related stocks 
directly from the post using a communication link. In that regard, the 
rule would permit a specialist to enter orders only to purchase or sell 
specialty or related foreign securities through a broker-dealer 
registered with the Commission or directly with a foreign broker-dealer 
pursuant to Rule 15a-6 under the Act.\9\ The rule also states that in 
making such purchases or sales the specialists relying on the rule must 
have an objective of facilitating the maintenance of a fair and orderly 
market.\10\ The prohibition on receiving orders for the purchase or 
sale of securities at the post would be retained. The term ``foreign 
security'' would be defined to include a foreign ordinary security, a 
depositary receipt or a depositary share representing a foreign 
security.\11\
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    \9\ 17 CFR 240.15a-6.
    \10\ See e.g. NYSE Rule 104.
    \11\ Under proposed Rule 36.30C, a specialist could only make 
such purchases or sales in foreign securities in which he is 
registered as the specialist, or certain securities that are related 
to the security in which the specialist is registered. The rule 
would permit a specialist registered in the depositary receipt or 
share only to enter orders either in such security or the related 
ordinary security. A specialist registered in the ordinary security 
would be permitted to enter orders in such security, or where 
applicable, a related depositary receipt or share.
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    The proposed rule change would also permit specialists to use the 
communication link to seek public information on the current market for 
a foreign security.\12\ The communication links could be used to 
receive public information on stocks, data for the U.S. or foreign 
markets, vendor services or news. The communication link would not be 
used to give nonmembers market look information.
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    \12\ See Amendment No. 2, supra note 5.
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    The Exchange also proposes to amend NYSE Rule 104A.50 to require 
specialists to record and report to the Exchange the details of all 
proprietary transactions executed by the specialist unit away from the 
Exchange in foreign securities. The Exchange would inform specialists 
that the reports would be required to be submitted on Form 81, the 
electronic reporting mechanism already used by specialists to report 
proprietary transactions in specialty stocks.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange. In particular, 
the Commission finds that the proposed rule change is consistent with 
section 6(b)(5) of the Act \13\ which requires an Exchange to 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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    \13\ 15 U.S.C. 78f(b)(5).
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    In particular, the Commission believes that the proposed rule 
change should help specialists to more easily acquire inventory in 
foreign specialty stocks to meet the needs of the NYSE market and 
respond to changes in the related foreign market. The Commission notes 
that the proposal contains several requirements and prohibitions that 
help to ensure that any orders entered, or public information received, 
by the specialist in foreign specialty or related securities is in 
accordance with the U.S. securities laws and NYSE rules. For instance, 
the rule would prohibit the communication link from being used for the 
purpose of transmitting orders for securities to the NYSE floor. The 
rule also prohibits the specialist from maintaining a communication 
link to a foreign exchange or market. In addition, the rule 
specifically requires that any communication link at the specialist 
post be to a registered broker-dealer or a foreign broker-dealer 
subject to and in accordance with Rule 15a-6 under the Act.
    In addition to the requirements noted above, the Commission also 
believes that certain additional limitations and restrictions in the 
rule should help to minimize any potential for abuse. First, the 
Commission notes that the specialist would be prohibited from using the 
communication link to receive material non-public information.\14\ 
Second, the Commission notes that NYSE Rule 92 would prohibit a 
specialist using the communication link to enter a proprietary order in 
a foreign security from trading ahead of orders for the same security 
that the specialist is representing as agent.\15\ Third, specialists 
would only be permitted to use the communication link to enter orders 
in their foreign specialty or related stocks. Finally, the Commission 
notes that a specialist relying on the rule must have the objective of 
facilitating the maintenance of a fair and orderly market on the 
Exchange.\16\
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    \14\ See Amendment No. 2, supra note 5.
    \15\ Id.
    \16\ Id. The Commission believes that the surveillance 
procedures should include procedures that ensure compliance with 
each of these prohibitions, as well as the other restrictions noted 
above in this order.
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    As noted above, the Commission has requested submission of adequate 
surveillance procedures to assure compliance with the rule, including 
all of the prohibitions and requirements set forth above. This approval 
order is contingent on the submission of such adequate surveillance 
procedures.\17\
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    \17\ See note 7, supra.
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    Finally, the Commissions believes that the other changes to the 
rule are consistent with the requirements of the Act. For example, the 
change from ``telephone line'' to ``communication link'' should allow 
more flexibility in the rule to use other land-based communication 
lines. The surveillance procedures that the Exchange must submit for 
Commission approval should help to ensure that such communication link 
can be adequately monitored for compliance with the rule.\18\ The 
Commission also notes that NYSE 104.50A requires specialists to keep a 
record of all purchases and sales of foreign securities for an account 
in which the specialist has an interest, and to report such 
transactions to the Exchange. The Commission believes that this 
provision is consistent with the Act because it should help the 
Exchange to monitor trades under the new rule.
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    \18\ See Amendment No. 2, supra note 5. The Commission notes 
that the definition of communication link does not permit the NYSE 
specialist to use portable telephones or other private wireless 
communication devices. If the NYSE wanted to permit such devices to 
be used under its Rule 36.30 it would first have to submit for 
Commission approval (i) a proposed rule change under Section 19(b) 
of the Act and (ii) specific surveillance procedures to ensure that 
communications using these types of devices are adequately 
surveilled and monitored for compliance with the rule and other 
regulatory requirements.
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    The Commission finds good cause for accelerating approval of 
Amendment Nos. 2 and 3 to the proposed rule change prior to the 
thirtieth day after publication in the Federal Register. The

[[Page 62090]]

Commission notes that Amendment No. 2 provides useful clarification and 
add certain requirements to the proposal in response to concerns of 
Commission staff.\19\ Amendment No. 3 eliminates language to rule that 
was confusing and helps to narrow and clarify the definition of 
communication link.\20\ The Commission also notes that the substance of 
the proposal was published for comment and no comments were received. 
Accordingly, the Commission finds that good cause exists, consistent 
with sections 6(b)(5) of the Act,\21\ and 19(b)(2) of the Act \22\ to 
accelerate approval of Amendment Nos. 2 and 3 to the proposed rule 
change.
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    \19\ See Amendment No. 2, supra note 5.
    \20\ See Amendment No. 3, supra note 6.
    \21\ 15 U.S.C 78f(b)(5).
    \22\ 15 U.S.C. 78s(b)(2).
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IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-NYSE-00-31), as amended, is 
approved.\24\
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    \23\ 15 U.S.C. 78s(b)(2).
    \24\ See notes 7 and 16 and accompanying text, supra.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-25165 Filed 10-2-02; 8:45 am]
BILLING CODE 8010-01-P