[Federal Register Volume 67, Number 249 (Friday, December 27, 2002)]
[Rules and Regulations]
[Pages 79454-79458]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-32469]



[[Page 79453]]

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Part V





Securities and Exchange Commission





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17 CFR Part 240



Repeal of the Trade-Through Disclosure Rules for Options; Final Rule

  Federal Register / Vol. 67, No. 249 / Friday, December 27, 2002 / 
Rules and Regulations  

[[Page 79454]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-47013; File No. S7-18-02]
RIN 3235-AI52


Repeal of the Trade-Through Disclosure Rules for Options

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
repealing its options trade-through disclosure rule under the 
Securities Exchange Act of 1934, which requires a broker-dealer to 
disclose to a customer when the customer's order for listed options has 
been executed at a price inferior to a better published quote, unless 
the order was executed as part of a block trade or the transaction was 
affected on a market that participates in an intermarket options 
linkage plan featuring adequate trade-through protections. The 
Commission has determined that recent amendments to the Options 
Intermarket Linkage Plan have satisfied the regulatory goals that the 
options trade-through disclosure rule was designed to address, and is 
therefore repealing the rule as unnecessary.

EFFECTIVE DATE: December 27, 2002.

FOR FURTHER INFORMATION CONTACT: Deborah Flynn, Assistant Director, at 
(202) 942-0075, Patrick Joyce, Special Counsel, at (202) 942-0779, and 
Jennifer Lewis, Attorney, at (202) 942-7951, Division of Market 
Regulation, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-1001.

SUPPLEMENTARY INFORMATION: We are proposing to repeal rule 11Ac1-7 
under the Securities Exchange Act of 1934, the ``Trade-Through 
Disclosure Rule.''

Table of Contents

I. Repeal of the Trade-Through Disclosure Rule
    A. Background
    B. The Trade-Through Disclosure Rule
    C. Amendments to the Linkage Plan
II. Discussion
III. Paperwork Reduction Act
IV. Administrative Procedure Act
V. Costs and Benefits of the Repeal of the Trade-Through Disclosure 
Rule
VI. Promotion of Efficiency, Competition and Capital Formation, and 
Consideration of the Burden on Competition
VII. Final Regulatory Flexibility Analysis
VIII. Statutory Authority

I. Repeal of the Trade-Through Disclosure Rule

A. Background

    Section 11A of the Securities Exchange Act of 1934 (``Exchange 
Act'') \1\ sets forth the findings of Congress with respect to the 
establishment of a national market system. Congress believed that 
linking all of the markets for qualified securities would improve 
efficiency, enhance competition, increase the information available to 
broker-dealers and investors, and contribute to the ``best execution'' 
of orders.\2\ Recognizing that there were significant differences among 
the markets for various types of securities, Congress granted the 
Commission broad powers to implement a national market system without 
forcing all of the securities markets into a single mold.\3\
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    \1\ 15 U.S.C. 78k-1.
    \2\ Section 11A(a)(1)(D) of the Exchange Act, 15 U.S.C. 78k-
1(a)(1)(D).
    \3\ See Senate Committee on Banking, Housing, and Urban Affairs, 
Report to Accompany S. 249, S. Rep. 94-75, 94th Cong., 1st Sess. 7 
(1975); see also Committee of Conference, Report to Accompany S. 
249, H.R. Rep. No. 94-229, 94th Cong., 1st Sess. 2 (1975).
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    Many national market system initiatives were implemented in the 
equities markets at a time when standardized options trading was 
relatively new.\4\ Therefore, the Commission deferred applying many of 
the national market system initiatives to options to give options 
trading an opportunity to develop. With the onset of widespread 
multiple trading in options, beginning in August 1999, the Commission 
became increasingly concerned about customer orders that are sent to 
one exchange being executed at prices inferior to quotes published by 
another market.
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    \4\ The trading of standardized options on securities exchanges 
began in 1973 with the organization of the Chicago Board Options 
Exchange (``CBOE'') as a national securities exchange. See 
Securities Exchange Act Release No. 9985 (February 1, 1973), 1 
S.E.C. Doc. 11 (February 13, 1973). Currently, the CBOE, the 
American Stock Exchange (``Amex''), the International Securities 
Exchange (``ISE''), the Pacific Exchange (``PCX''), and the 
Philadelphia Stock Exchange (``Phlx'') (collectively, ``Options 
Exchanges'') are the only national securities exchanges that trade 
standardized options.
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    In October 1999, the Commission ordered the Options Exchanges to 
collaborate on a national market system plan for linking the options 
markets.\5\ In July 2000, the Commission approved an Options 
Intermarket Linkage Plan (``Linkage Plan'') that the Amex, the CBOE, 
and the ISE had proposed.\6\ The Commission did not mandate, however, 
that all of the Options Exchanges participate in the Linkage Plan. As 
discussed in the order approving the Linkage Plan, the Plan did not 
adequately address ``intermarket trade-throughs,'' which occur when 
broker-dealers execute customer orders at prices inferior to the quotes 
for the same options disseminated by other exchanges.\7\
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    \5\ Securities Exchange Act Release No. 42029 (October 19, 
1999), 64 FR 57674 (October 26, 1999).
    \6\ Securities Exchange Act Release No. 43086 (July 28, 2000), 
65 FR 48023 (August 4, 2000). The PCX and the Phlx later joined the 
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).
    \7\ See Securities Exchange Act Release No. 44482 (June 27, 
2001), 66 FR 35470 (July 5, 2001).
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B. The Trade-Through Disclosure Rule

    In November 2000, in an effort to reduce intermarket trade-throughs 
in the options markets without mandating linkage, the Commission 
promulgated the Trade-Through Disclosure Rule, rule 11Ac1-7 under the 
Exchange Act.\8\ The Trade-Through Disclosure Rule requires a broker-
dealer to disclose to its customer when the customer's order for listed 
options has been executed at a price inferior to a better published 
quote, and to disclose the better published quote that was available at 
the time.\9\ Significantly, however, a broker-dealer is not required to 
disclose this information to its customer if the transaction was 
effected on an exchange that participates in a Commission-approved 
linkage plan that includes provisions reasonably designed to limit 
trade-throughs of customer orders.\10\
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    \8\ 17 CFR 240.11Ac1-7; see Securities Exchange Act Release No. 
43085 (July 28, 2000), 65 FR 47918 (August 4, 2000) (``Proposing 
Release''); Securities Exchange Act Release No. 43591 (November 17, 
2000), 65 FR 75439 (December 1, 2000) (``Adopting Release'').
    \9\ The broker-dealer must make this disclosure to the customer 
in writing, and may do so on the customer's confirmation statement. 
See Rule 11Ac1-7(b)(1) under the Exchange Act, 17 CFR 240.11Ac1-
7(b)(1).
    \10\ Rule Ac1-7(b)(2)(i) under the Exchange Act, 17 CFR 
240.11Ac1-7(b)(2)(i). The Linkage Plan that the Commission approved 
in July 2000 was not reasonably designed to limit trade-throughs of 
customer orders. In the Adopting Release, the Commission noted that 
to reasonably limit trade-throughs of customer orders, a linkage 
plan must, at a minimum: (1) Limit participants from trading through 
the quotes of all exchanges, including exchanges that are not 
participants in such plan; (2) require plan participants to conduct 
active surveillance of their markets for trades executed at prices 
inferior to those publicly quoted on other exchanges; and (3) make 
clear that the failure of a market with a better quote to complain 
within a specified period of time that its quote was traded through 
may affect potential liability, but does not signify that a trade 
through has not occurred. See Adopting Release, supra note 8. The 
Options Exchanges thereafter proposed an amendment to the Linkage 
Plan that incorporated improvements consistent with the Commission's 
guidance, and the Commission approved the amended Linkage Plan in 
June 20001. See Securities Exchange Act Release No. 44482 (June 27, 
2001), 66 FR 35470 (July 5, 2001).

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    The Commission recognized that the Linkage Plan would reasonably 
limit intermarket trade-throughs on each of the options markets only if 
the Options Exchanges remained participants in the Linkage Plan. If an 
exchange were to withdraw from the Linkage Plan, and did not 
participate in another linkage plan with provisions reasonably designed 
to limit intermarket trade-throughs on all exchanges, the Trade-Through 
Disclosure Rule would require broker-dealers effecting transactions on 
that exchange to provide their customers with information about 
intermarket trade-throughs.

C. Amendments to the Linkage Plan

    The Options Exchanges proposed amendments to the Linkage Plan that 
would require any exchange wishing to withdraw from the Linkage Plan to 
first satisfy the Commission that it could achieve, by alternative 
means, the Linkage Plan's stated goal of limiting intermarket trade-
throughs. The Commission approved the proposed amendments in May 
2002.\11\ At the same time, the Commission proposed to repeal the 
Trade-Through Disclosure Rule because it believed that, once the 
linkage is fully implemented, the amendments to the Linkage Plan will 
ensure that all options transactions are executed in markets that 
reasonably limit intermarket trade-throughs of customer orders.\12\ 
Pending its consideration of the proposed repeal of the Trade-Through 
Disclosure Rule, the Commission also issued an Order exempting broker-
dealers from compliance with the rule until January 1, 2003.\13\
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    \11\ See Securities Exchange Act Release No. 46001 (May 30, 
2002), 67 FR 38687 (June 5, 2002) (Order approving Amendments Nos. 2 
and 3).
    \12\ Securities Exchange Act Release 46002 (May 30, 2002), 67 FR 
38610 (June 5, 2002) (``Release Proposing Repeal''). The Linkage 
Plan is being implemented in two phases. The first phase, which 
includes the elements of linkage that are necessary for automatic 
execution, will be implemented by February 1, 2003. The second 
phase, which includes all other elements of the linkage, will be 
implemented by no later than April 30, 2003. See Securities Exchange 
Act Release No. 46001 (May 30, 2002), 67 FR 38687 (June 5, 2002).
    \13\ Securities Exchange Act Release No. 46003 (May 30, 2002), 
67 FR 38689 (June 5, 2002).
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II. Discussion

    In proposing the Trade-Through Disclosure Rule in 2000, the 
Commission expressed the view that the rule's contingent disclosure 
requirement would create an incentive for the options markets to 
develop effective means to access other markets, remove barriers to 
better prices, and limit the incidence of intermarket trade-
throughs.\14\ Several interested parties commented on the merits of the 
proposal. Notably, the Securities Industry Association (``SIA'') argued 
that the Commission and the options industry should focus not on the 
after-the-fact disclosure of trade-throughs to investors, but on 
preventing intermarket trade-throughs by the implementation of an 
effective Linkage Plan.\15\ In the Adopting Release, the Commission 
noted that it intended the Trade-Through Disclosure Rule to encourage 
the options markets to participate in a Commission-approved intermarket 
linkage plan, but also expressed the belief that broker-dealers would 
develop effective means of accessing the better-published quotes of 
other markets and thereby avoid intermarket trade throughs.\16\
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    \14\ See Proposing Release, 65 FR at 47919-20.
    \15\ See letter from William McGowen, Chairman, Options 
Committee, SIA, to Jonathan G. Katz, Secretary, Commission, dated 
October 31, 2000.
    \16\ See Adopting Release, 65 FR at 75443-45.
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    After the Trade-Through Disclosure Rule became effective in 
February 2001, the SIA and other market participants requested that the 
Commission extend the Trade-Through Disclosure Rule's compliance date 
beyond the original deadline of April 2001.\17\ In particular, the SIA 
argued that the Trade-Through Disclosure Rule would impose on broker-
dealers a costly regulatory burden of disclosure that would become 
obsolete once the Options Exchanges became linked by the Linkage 
Plan.\18\ In response to the industry's concerns, and pending the 
Options Exchanges' full implementation of an adequate Linkage Plan, the 
Commission extended the rule's compliance date and later temporarily 
exempted broker-dealers from compliance with the rule.\19\
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    \17\ See letter from Mark E. Lackritz, President, SIA, to 
Annette Nazareth, Director, Division of Market Regulation, 
Commission, dated February 20, 2001.
    \18\ Id.
    \19\ At the request of broker-dealers and others, the Commission 
extended the compliance date from April 1, 2001, to April 1, 2002. 
See Securities Exchange Act Release Nos. 44078 (March 15, 2001), 66 
FR 15792 (March 21, 2001) (extending compliance date to October 1, 
2001) and 44852 (September 26, 2001), 66 FR 50103 (October 2, 2001) 
(extending compliance date to April 1, 2002). The Commission 
thereafter temporarily exempted broker-dealers from compliance with 
the trade-Through Disclosure Rule until January 1, 2003. See 
Securities Exchange Act Release Nos. 45654 (March 27, 2002), 67 FR 
15637 (April 2, 2002) (Order granting exemption for broker-dealers 
until July 1, 2002) and 46003 (May 30, 2002), 67 FR 38689 (June 5, 
2002) (Order granting exemption for broker-dealers until January 1, 
2003).
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    The Commission solicited comment from the public with respect to 
the proposal to repeal the Trade-Through Disclosure Rule. In 
particular, the Commission sought public comment on: (1) Whether the 
amended Linkage Plan \20\ adequately addresses concerns with respect to 
intermarket trade-throughs; (2) whether repeal of the Trade-Through 
Disclosure Rule was appropriate in the light of the amended Linkage 
Plan; and (3) whether an approach other than the repeal of the Trade-
Through Disclosure Rule would be more appropriate.
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    \20\ As noted above, the Linkage Plan was amended to ensure that 
any exchange wishing to withdraw from the Plan must satisfy the 
Commission that it will otherwise achieve the Plan's stated goal of 
limiting intermarket trade-throughs. See supra note 11.
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    Two market participants opposed the proposal.\21\ One, a market 
maker on the PCX, expressed the view that the proposed repeal of the 
Trade-through Disclosure Rule would serve only to help large investment 
houses and broker-dealers justify trade-throughs.\22\ In particular, 
the market maker argued that internalization of order flow, ``front 
running,'' and other conflicts of interest allow orders to circumvent 
the competitive trading environment, thereby compromising order 
executions to the detriment of the public interest. This commenter was 
concerned that the proposed repeal of the Trade-Through Disclosure Rule 
would allow ``more gaming'' by brokerages and order flow providers and 
give those firms ``a means to justify their actions.'' \23\
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    \21\ A third comment letter, misaddressed to File No. S7-18-02, 
raised concerns about executive compensation and other matters that 
are not relevant to the proposed repeal of the Trade-Through 
Disclosure Rule. See e-mail from [email protected] to Rule-
comments@SEC. gov dated July 9, 2002.
    \22\ Letter from Mark A. Buffington of Phoenix Capital, LLC, to 
Jonathan G. Katz, Secretary, Commission, dated June 26, 2002.
    \23\ Id.
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    Another market participant described his concerns about trade-
throughs in the context of current automatic execution practices in the 
options industry.\24\ This commenter argued that several of the Options 
Exchanges do not honor their own posted quotes with automatic 
executions, which causes trade-throughs to occur on a regular basis. In 
his view, many trade-throughs would be eliminated if the five Options 
Exchanges were ``forced to honor their posed quotes with auto 
executions.'' \25\
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    \24\ Letter from Mike Ianni to Jonathan G. Katz, Secretary, 
Commission, dated July 21, 2002.
    \25\ Id.
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    The Commission has carefully considered the concerns raised in the 
comment letters. In the Commission's

[[Page 79456]]

view, retention of the Trade-Through Disclosure Rule would not address 
the concerns with respect to the operation of the options markets 
expressed in both comment letters. The Commission notes that the 
Linkage Plan, and not the Trade-Through Disclosure Rule, imposes trade-
through restrictions with respect to the trading of options on the five 
Options Exchanges. Significantly, the Linkage Plan's trade-through 
protections would not be affected if the Trade-Through Disclosure Rule 
were repealed. Therefore, the Commission believes that useful comments 
on the topics of internalization and auto execution would be more 
properly directed to other marketplace initiatives related to order 
execution quality.
    Accordingly, the Commission believes that, because the amended 
Linkage Plan \26\ now contains provisions designed to reasonably limit 
intermarket trade-throughs on each of the Options Exchanges, and an 
exchange cannot withdraw from the Linkage Plan unless it can 
accomplish, by alternative means, the same goals as the Linkage Plan of 
limiting intermarket trade-throughs, the Trade-Through Disclosure Rule 
is no longer necessary and should be repealed. Therefore, the 
Commission hereby repeals the Trade-Through Disclosure Rule, Rule 
11Ac1-7 under the Exchange Act.\27\
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    \26\ Each self-regulatory organization that is a participant in 
an effective national market system plan is required to, ``absent 
reasonable justification or excuse, enforce compliance with any such 
plan by its members and persons associated with its members.'' See 
Exchange Act Rule 11 Ac3-2(d).
    \27\ 15 U.S.C. 78k-1.
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III. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \28\ requires the 
agency to obtain approval from the Office of Management and Budget 
(``OMG'') if an agency's rule would require a ``collection of 
information,'' as defined by the PRA.\29\ The PRA does not apply in 
this instance because the repeal of the Trade-Through Disclosure Rule 
would not impose recordkeeping or information collection requirements, 
or other collections of information that require the approval of OMB 
under the PRA. When the Commission adopted the Trade-Through Disclosure 
Rule, it estimated that broker-dealers complying with the Trade-Through 
Disclosure Rule would incur one-time paperwork costs of between 
$8,250,000 and $16,500,000, and that the total continuing paperwork 
burden of the disclosures required to be made by brokers would be 
``nominal'' because it would merely require a small amount of 
additional information on customer confirmation statements. At the 
request of broker-dealers, the Commission extended the initial 
compliance date of the Trade-Through Disclosure Rule form April 1, 
2001, to April 1, 2002, and thereafter temporarily exempted broker-
dealers from compliance with the rule until January 1, 2003.\30\ As a 
result, the Commission understands that no broker-dealer has incurred 
any significant costs in connection with the Trade-Through Disclosure 
Rule. Because the Commission is repealing the Trade-Through Disclosure 
Rule, broker-dealers will completely avoid the costs of collecting and 
disseminating information required by the rule.
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    \28\ 44 U.S.C. 3501 et seq.
    \29\ See 44 U.S.C. 3502(3); 5 CFR 1320.3(c).
    \30\ See supra note 19.
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IV. Administrative Procedure Act

    Section 553(d) of the Administrative Procedure Act \31\ generally 
requires that an agency publish an adopted rule in the Federal Register 
30 days before it becomes effective. However, this requirement does not 
apply if the rule grants or recognizes an exemption or relieves a 
restriction.\32\ The Commission finds that the repeal of rule 11 Ac1-7, 
the Trade-Through Disclosure Rule, relieves a restriction. As discussed 
above, the amendments to the Linkage Plan, recently approved by the 
Commission, require any exchange wishing to withdraw from the Linkage 
Plan to first satisfy the Commission that it would achieve, by 
alternate means, the Linkage Plan's stated goal of limiting intermarket 
trade-throughs. Because the Linkage Plan, as amended, is designed to 
achieve the same goals as the Trade-Through Disclosure Rule, the repeal 
of the Trade-Through Disclosure Rule will eliminate an agency rule 
rendered unnecessary, thereby relieving broker-dealers of the 
requirements of the Rule. Therefore, the Commission finds that the 
Trade-Through Disclosure Rule may be repealed without a delayed 
effective date.
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    \31\ 5 U.S.C. 553(d).
    \32\ 5 U.S.C. 553(d)(1)
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V. Costs and Benefits of the Repeal of the Trade-Through Disclosure 
Rule

    As discussed more fully in part II, above, the Trade-Through 
Disclosure Rule requires a broker-dealer to disclose to its customer 
when the customer's order for listed options has been executed at a 
price inferior to a better published quote, unless the transaction was 
effected on an exchange that participates in a Commission-approved 
linkage plan that includes provisions reasonably designed to limit 
trade-throughs of customer orders. As recently amended, the Linkage 
Plan should now adequately limit intermarket trade-throughs, and the 
Options Exchanges cannot withdraw from the Linkage Plan unless they can 
achieve, by other means, the Linkage Plan's stated goal of limiting 
intermarket trade-throughts. Therefore, once the Options Exchanges have 
fully implemented the Linkage Plan, every transaction in standardized 
option will occur on an exchange that has in place adequate intermarket 
trade-through provisions. The Commissions is therefore repealing the 
Trade-Through Disclosure Rule as unnecessary.
    To assist the Commission in its evaluation of the costs and 
benefits that may result from the repeal of the Trade-Through 
Disclosure Rule, commenters were requested to provide comment on the 
costs and effects on investors of the repeal of the Rule.

A. Costs

    As noted above, a PCX market maker expressed the view that the 
proposed repeal of the Trade-Through Disclosure Rule would help large 
investment houses and broker-dealers justify trade-throughts.\33\ In 
the Commission's view, the retention of the Trade-Through Disclosure 
Rule would not address the PCX market maker's concerns. The Commission 
believes this commenter incorrectly assumed that the Trade-Through 
Disclosure Rule requires broker-dealers to disclose intermarket trade-
throughs in listed options despite the exchange's participation in the 
amended Linkage Plan. On the contrary, as all five national Options 
Exchanges are parties to the amended Linkage Plan, the Trade-Through 
Disclosure Rule would impose no obligations on broker-dealers to 
disclose an intermarket trade-through if the transaction if effected on 
any Options Exchange.
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    \33\ See supra note 22.
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    The Commission notes that, by operation of four Commission Orders, 
broker-dealers have never been required to comply with the Trade-
Through Disclosure Rule.\34\ Moreover, as all broker-dealer trading 
listed options would qualify for the Trade-Through Disclosure Rule's 
exemption from the disclosure requirement once the Linkage Plan is 
fully implemented, the Trade-Through Disclosure Rule would not impose 
any disclosure obligation on broker-dealers even if the rule were 
retained. Accordingly, the Commission believes that the Linkage Plan 
adequately ensures trade-through protections, and that repealing the

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Trade-Through Disclosure Rule does not impose any costs on investors.
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    \34\ See supra note 19.
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B. Benefits

    As noted above, the SIA has commented that the Trade-Through 
Disclosure Rule would impose on broker-dealers a contingent, but 
costly, regulatory burden of the disclosure that would effectively be 
lifted once the Options Exchanges became linked through the Linkage 
Plan.\35\ The repeal of the Trade-Through Disclosure Rule eliminates 
the possibility that broker-dealers will incur the initial costs of 
compliance, such as the one-time cost of modifying their existing 
systems to determine when trade-through have occurred. The repeal of 
the Trade-Through Disclosure Rule eliminates the potential costs of 
compliance with the rule and ensures that those costs will not be 
imposed in the future. Furthermore, when the rule was adopted to reduce 
the incidence of intermarket trade-throughs and the costs to investors 
associated with such trade-throughs, the repeal of the Rule should have 
no effect on investors because the amended Linkage Plan, when fully 
implemented, should limit intermarket trade-throughs, thereby achieving 
the same goal as the rule.
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    \35\ See supra note 17.
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VI. Promotion of Efficiency, Competition and Capital Formation, and 
Consideration of the Burden on Competition

    Section 3(f) of the Exchange Act provides that the Commission, when 
engaging in rulemaking that requires it to consider or determine 
whether an action is necessary or appropriate in the public interest, 
must consider whether the action will promote efficiency, competition, 
and capital formation.\36\ In the Proposing Release, the Commission 
noted that the Trade-Through Disclosure Rule was adopted to encourage 
the Options Exchanges to develop mechanisms to reduce trade-
throughs.\37\ The Commission has approved an amendment to the Linkage 
Plan that requires any exchange wishing to withdraw from the Linkage 
Plan to first satisfy the Commission that it would achieve, by 
alternative means, the Linkage Plan's stated goal of limiting 
intermarket trade-throughs.\38\ The Linkage Plan, as amended, is 
designed to achieve the same goals as the Trade-Through Disclosure 
Rule, and therefore the Commission is repealing the Trade-Through 
Disclosure Rule as unnecessary. The Commission has considered whether 
the repeal of the Trade-Through Disclosure Rule will promote 
efficiency, competition, and capital formation and does not believe 
that repeal of the Trade-Through Disclosure Rule will have a 
detrimental effect on efficiency, competition, and capital formation. 
We reach this conclusion because the repeal of the Trade-Through 
Disclosure Rule will apply equally to all market participants. 
Furthermore, because the Linkage Plan is designed to achieve the same 
goals as the Trade-Through Disclosure Rule, another mechanism will be 
in place to limit intermarket trade-throughs.
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    \36\ 15 U.S.C. 78c(f).
    \37\ See Release Proposing Repeal, supra note 12.
    \38\ See Amendments Nos. 2 and 3, supra note 11.
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    In addition, Section 23(a) of the Exchange Act requires the 
Commission, when adopting rules under the Exchange Act, to consider the 
anti-competitive effects of any rule it adopted.\39\ In the Proposing 
Release, the Commission noted that because the repeal of the Trade-
Through Disclosure Rule would apply equally to all relevant market 
participants, the Commission preliminarily believed that the proposal 
would not have any anti-competition effects.\40\ The Commission did, 
however, request comment on any anti-competitive effects on the 
proposal.\41\ The Commission did not receive any comments regarding the 
competitive impact of the repeal of the Trade-Through Disclosure Rule.
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    \39\ 15 U.S.C. 78w(a).
    \40\ See Release Proposing Repeal, supra note 12.
    \41\ Id.
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    The repeal of the Trade-Through Disclosure Rule applies equally to 
each options market and other relevant option market participants. 
Thus, the Commission believes that the repeal of the Trade-Through 
Disclosure Rule will not have an anti-competitive impact on the options 
markets.

VII. Final Regulatory Flexibility Analysis

    This Final Regulatory Flexibility Analysis (``FRFA'') has been 
prepared in accordance with the Regulatory Flexibility Act.\42\ It 
relates to the repeal of rule 11Ac1-7 under the Exchange Act. An 
Initial Regulatory Analysis (``IRFA'') was prepared in accordance with 
5 U.S.C. 603 and was made available to the public.\43\ The Commission 
is repealing the Trade-Through Disclosure Rule as proposed.
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    \42\ 5 U.S.C. 601.
    \43\ See Release Proposing Repeal, supra note 12.
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    The repeal of the Trade-Through Disclosure Rile, rule 11Acl-7, will 
eliminate the requirement that a broker-dealer disclose to its customer 
when a trade-through has occurred unless the trade was effected on a 
market that participates in an approved linkage plan that includes 
provisions reasonably designed to limit intermarket trade-throughs.

A. Reasons for the Action

    The Trade-Through Disclosure Rule was implemented to provide an 
incentive to the Options Exchanges and their members to develop 
mechanisms to reduce the frequency of intermarket trade-throughs. 
Because the Options Exchanges have amended the Linkage Plan to restrict 
the ability of exchanges to withdraw from the Linkage Plan, absent an 
alternative means acceptable to the Commission by which the exchange 
can achieve the same goals as the Linkage Plan of limiting intermarket 
trade-throughs, the Commission believes that the Trade-Through 
Disclosure Rule is no longer necessary.

B. Objectives and Legal Basis

    As noted above the repeal of the Trade-Through Disclosure Rule is 
intended to eliminate the requirement that broker-dealers disclose to a 
customer when the customer's order for listed options has been executed 
on an exchange without adequate trade-through protection mechanisms at 
a price inferior to a better published quote on other exchanges.
    The Commission is repealing the Trade-Through Disclosure Rule under 
the authority set forth in Section 3(b), 15, 11A, 17, and 23(a) of the 
Exchange Act

C. Significant Issues Raised by Public Comment

    As required by the Regulatory Flexibility Act,this section (i) 
summarizes the significant issues raised by public comments in response 
to the IRGA, (ii) summarizes the Commission's assessment of such 
issues, and (iii) states any changes made in the proposed rules as 
result of such comments.\44\
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    \44\ See 5 U.S.C. 604(a)(2).
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    The Commission received no comments in response to the IRFA.

D. Small Entities Subject to the Rules

    Commission rules generally define a broker-dealer as a small entity 
for purposes of the Exchange Act and the Regulatory Flexibility Act if 
the broker-dealer had a total capital (net worth plus subordinated 
liabilities) of less than $500,000 on the date in the prior fiscal year 
as of which its audited financial statements were prepared, and it is 
not affiliated with any person (other than a

[[Page 79458]]

natural person) that is not a small entity.\45\
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    \45\ 17 CFR 240.0-10(c)
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    Once the Trade-Through Disclosure Rule is repealed, no small 
entities will be subject to the Rule.

E. Reporting, Recordkeeping, and other Compliance Requirements

    The Trade-Through Disclosure Rule requires a broker-dealer to 
disclose to its customer when its order has been executed at a price 
inferior to a published price on another exchange, unless the options 
trade is executed on an exchange that participates in an approved 
linkage plan that has rules reasonable designed to limit intermarket 
trade-throughs. The repeal of the Trade-Through Disclosure Rule 
eliminates this requirement

F. Duplicative, Overlapping, or Conflicting Federal Rules

    The Commission believes there are no rules that duplicate, overlap, 
or conflict with the repeal of the Trade-Through Disclosure Rule

G. Significant Alternatives

    The Regulatory Flexibility Act directs the Commission to consider 
significant alternatives that would accomplish the stated objective, 
while minimizing any significant adverse impact on small entity 
issuers.
    As discussed above, the repeal of the Trade-Through Disclosure Rule 
has no impact on small entities. The Commission has considered other 
alternatives and has decided that the repeal of the Trade-Through 
Disclosure Rule is the best alternative.

VIII. Statutory Authority

    The Commission is repealing the Trade-Through Disclosure Rule 
pursuant to the Exchange Act, and specifically our authority under 
sections 3(b), 15, 11A, 17, and 23(a).

List of Subject in 17 CFR Part 240

    Brokers, Dealers, Fraud, Issuers, Reporting and recordkeeping 
requirements, Securities.

    For the reasons set out in the preamble, title 17, chapter II of 
the Code of Federal Regulations is amended as set forth below.

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1934

    1. The authority citation for part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4 and 80b-11, unless otherwise noted.


Sec.  240.11  [Removed]

    2. Section 240.11aC1-7 is removed.

    Dated: December 17, 2002.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-32469 Filed 12-26-02; 8:45 am]
BILLING CODE 8010-01-M