[Federal Register Volume 68, Number 74 (Thursday, April 17, 2003)]
[Notices]
[Pages 19048-19051]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-9472]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47671; File No. SR-NYSE-2002-11]


Self-Regulatory Organizations; Order Granting Approval to 
Proposed Rule Change and Amendment No. 1 and Notice of Filing And Order 
Granting Accelerated Approval to Amendment No. 2 Thereto by the New 
York Stock Exchange, Inc. to Establish a Six-Month Pilot Program 
Permitting a Floor Broker to Use an Exchange Authorized and Issued 
Portable Telephone on the Exchange Floor

April 11, 2003.
    On February 28, 2002, the New York Stock Exchange, Inc. (``NYSE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC''), 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 to implement a six-month pilot 
program that would amend NYSE Rule 36 (Communication Between Exchange 
and Members' Offices) to allow a Floor broker's use of an Exchange 
authorized and provided portable telephone on the Exchange Floor upon 
approval by the

[[Page 19049]]

Exchange. On December 30, 2002, the Exchange submitted Amendment No. 1 
to the proposed rule change.\3\ The proposed rule change, as amended by 
Amendment No. 1, was published in the Federal Register on January 28, 
2003.\4\ One comment was received on the published proposed rule 
change, as amended by Amendment No. 1.\5\ On March 24, 2003, the 
Exchange filed Amendment No. 2 to the proposed rule change.\6\ This 
order approves the proposed rule change, as amended by Amendment Nos. 1 
and 2. Amendment No. 2 is being approved on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy J. Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated December 30, 2002 (``Amendment No. 
1''). Amendment No. 1 replaces the filing in its entirety and 
provides, in the proposed rule text and the purpose section of the 
filing, clarification and further details on the use of Exchange 
authorized and issued portable telephones on the Exchange Floor, and 
also proposes, among others, a pilot program for six months.
    \4\ See Securities Exchange Act Release No. 47221 (January 21, 
2003), 68 FR 4261.
    \5\ See letter from Thomas N. McManus, Executive Director and 
Counsel, Morgan Stanley & Co. Incorporated, to Jonathan G. Katz, 
Secretary, Commission, dated March 6, 2003 (``Morgan Stanley 
Letter'').
    \6\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy J. Sanow, Assistant Director, Division, Commission, dated 
March 21, 2003 (``Amendment No. 2''). Amendment No. 2 specifies the 
timing for the notification and implementation of the six-month 
pilot program as well as for the completion of a study, and 
eliminates the proposed prohibition against using Exchange 
authorized and provided portable telephones for orders in Investment 
Company Units (as defined in Section 703.16 of the Listed Company 
Manual), also known as Exchange-Traded Funds (``ETFs''). See notes 
11 through 15, and accompanying text. Amendment No. 2 also extends 
the statutory time for the Commission to take action on the filing 
for a period of forty-five days.
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I. Description of the Proposal

    NYSE Rule 36 governs the establishment of telephone or electronic 
communications between the Exchange's Trading Floor and any other 
location. Rule 36.20 prohibits the use of portable telephone 
communications between the Trading Floor and any off-Floor location. 
According to the Exchange, the only way that voice communication can be 
conducted today by Floor brokers between the Trading Floor and an off-
Floor location is by means of a telephone located at a broker's booth. 
Communications often involve a customer calling a broker at the booth 
for ``market look'' information. A broker may not use a portable phone 
currently in a trading crowd at the point of sale to speak with a 
person located off the Floor.
    The Exchange proposes to amend NYSE Rule 36 to permit a Floor 
broker to use an Exchange authorized and issued portable telephone on 
the Floor with the approval of the Exchange. As noted above, the 
Exchange currently does not permit the use of portable telephones on 
its Floor. Thus, a Floor broker would be permitted to engage in direct 
voice communication from the point of sale to an off-Floor location, 
such as a member firm's trading desk or the office of one of the 
broker's customers. Such communications would permit the broker to 
accept orders consistent with Exchange rules, provide status and oral 
execution reports as to orders previously received, as well as provide 
``market look'' observations as are routinely transmitted from a 
broker's booth location today. Only portable telephones authorized and 
issued by the Exchange would be permitted on the Exchange Floor. Any 
other type of portable telephone would continue to be prohibited.
    Under the proposal, both incoming and outgoing calls, and orders on 
such calls, would be allowed, provided the requirements of all other 
Exchange rules have been met. A broker would not be permitted to 
represent and execute any order received as a result of such voice 
communication unless the order was first properly recorded by the 
member and entered into the Exchange's Front End Systemic Capture 
(``FESC'').\7\ In addition, Exchange rules require that any Floor 
broker receiving orders from the public over portable phones must be 
properly qualified to do direct access business under Exchange Rules 
342 and 345, among others.\8\ As a result, NYSE Rule 36 would be 
amended to specifically state that any Floor broker receiving orders 
from the public over portable phones must be properly qualified to do a 
public customer business.
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    \7\ See Securities Exchange Act Release No. 43689 (December 7, 
2000), 65 FR 79145 (December 18, 2000) (SR-NYSE-98-25). See also 
Securities Exchange Act Release No. 44943 (October 16, 2001), 66 FR 
53820 (October 24, 2001) (SR-NYSE-2001-39) (discussing certain 
exceptions to FESC, such as orders to offset an error, or a bona 
fide arbitrage, which may be entered within 60 seconds after a trade 
is executed). The Exchange believes that the exceptions to FESC for 
bona fide arbitrage and orders to offset transactions made in error 
do not raise unique issues with respect to the use of portable 
telephones on the Floor. The NYSE believes that the purpose of the 
FESC requirement is to ensure that orders are entered into an 
Exchange data base before they are executed, thereby minimizing the 
possibility that orders are being initiated on the Floor in 
contravention of NYSE and SEC rules. Members may, however, initiate 
bona fide arbitrage and error offset orders on the Floor, as 
expressly permitted by NYSE Rule 112 and SEC Rule 11a-1. The 
Exchange believes that the use of portable telephones, therefore, 
does not raise on-Floor trading concerns as to these types of orders 
because these orders are not normally transmitted by phone. 
Telephone conversation between Jeff Rosenstrock, Senior Special 
Counsel, NYSE, and Cyndi Rodriguez, Special Counsel, Division, 
Commission, on April 11, 2003.
    \8\ For more information regarding Exchange requirements for 
conducting a public business on the Exchange Floor, see Information 
Memo 01-41 (November 21, 2001), Information Memo 01-18 (July 11, 
2001) (available on www.nyse.com/regulation/regulation.html), and 
Information Memo 91-25 (July 8, 1991).
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    Furthermore, the Exchange originally proposed in Amendment No. 1 
that it would not permit portable communications at the point of sale 
for orders in ETFs, because there was an exception to NYSE Rule 123(e) 
that permitted orders in ETFs to first be executed and then entered 
into FESC.\9\ In its original filing, the NYSE stated that technical 
restraints would be developed to implement this policy, thus preventing 
the use of portable phones where ETFs currently trade. The NYSE, 
however, determined that technical restraints could not be developed to 
prevent the use of portable phones in the Expanded Blue Room of the 
NYSE where ETFs currently trade. As a result, in Amendment No. 2, the 
Exchange proposed to eliminate the exception to NYSE Rule 123(e) for 
ETFs \10\ and allow the use of portable phones for orders in ETFs.\11\ 
Orders in ETFs would thus be subject to the same FESC requirements as 
orders in any other security listed on the Exchange. The Exchange 
states that requiring orders in ETFs to be first entered into FESC 
before execution or representation on the Floor would place them on an 
equal footing with orders in other securities with respect to order 
entry and recording procedures. As a result, the Exchange believes that 
allowing portable phones for orders in ETFs should be permitted. The 
Exchange also notes that the same surveillance procedures applicable to 
trading in all other equities would also apply to ETFs.
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    \9\ See Securities Exchange Act Release No. 45246 (January 7, 
2002), 67 FR 1527 (January 11, 2002) (SR-NYSE-2001-52) (discussing 
an exception to FESC that allowed orders in ETFs to be entered 
within 90 seconds of execution for a one-year pilot period). See 
also Securities Exchange Act Release No. 46713 (October 23, 2002), 
67 FR 66033 (October 29, 2002) (SR-NYSE-2002-48) (extending the 
exception until January 5, 2004), and note 7 and accompanying text.
    \10\ The Exchange stated in Amendment No. 2 that a separate 
proposed rule change would be filed with the Commission to eliminate 
the exception in Supplementary Material .23 of NYSE Rule 123(e) for 
ETF orders. See SR-NYSE-2003-09 which discusses in more detail the 
rational for eliminating the exception.
    \11\ See Amendment No. 2, supra note .
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    Although the Exchange originally stated in Amendment No. 1 that the 
proposal would be implemented on a six-month pilot basis from the date 
of Commission approval, and contained a

[[Page 19050]]

commitment to complete, within three months of Commission approval, a 
study of communications on the Exchange Floor pursuant to the 
recommendation of an Independent Consultant retained by the 
Exchange,\12\ the Exchange now proposes in Amendment No. 2 to provide 
for Exchange authorized and provided portable phones on the Exchange 
Floor as a six-month pilot beginning on or about May 1, 2003.\13\ 
Furthermore, the Exchange has committed to complete the study within 
three months of implementation of the pilot program, which would be on 
or about August 1, 2003.\14\ The Exchange has also committed to notify 
the Division, OCIE, and the Exchange's membership within one week prior 
to the actual implementation date of this proposal.\15\
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    \12\ See In the Matter of New York Stock Exchange, 70 S.E.C. 
Docket 106, Release No. 41574, 1999 WL 430863 (June 29, 1999).
    \13\ See Amendment No. 2, supra note 6.
    \14\ See Amendment No. 2, supra note 6.
    \15\ See Amendment No. 2, supra note 6. The Commission notes 
that should the NYSE be unable to implement the filing on or about 
May 1st, it would have to submit a rule proposal under Section 19(b) 
of the Act to change the date.
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    In its filing, the Exchange also noted that specialists are subject 
to separate restrictions in NYSE Rule 36 on their ability to engage in 
voice communications from the specialist post to an off-Floor 
location.\16\ The Exchange's proposed amendment to NYSE Rule 36 would 
not apply to specialists, who would continue to be prohibited from 
speaking from the post to upstairs trading desks or customers.
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    \16\ See Securities Exchange Act Release No. 46560 (September 
26, 2002), 67 FR 62088 (October 3, 2002) (SR-NYSE-00-31) (discussing 
restrictions on specialists' communications from the post).
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II. Discussion

    After careful review, the Commission finds that the proposed rule 
change and Amendment Nos. 1 and 2 are consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to a 
national securities exchange.\17\ In particular, the Commission finds 
that the proposal, as amended, is consistent with section 6(b)(5) of 
the Act,\18\ which requires, among other things, that the Exchange's 
rules be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, 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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    \17\ In approving this proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \18\ 15 U.S.C. 78f(b)(5).
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    Specifically, the proposal, as amended, would eliminate the 
requirement that an off-Floor customer must communicate with the 
Exchange Floor by calling a broker's booth and using the booth clerk as 
an intermediary to access the trading crowd, which may help to 
facilitate transactions in securities consistent with section 6(b)(5) 
of the Act.\19\ While the Commission believes that the proposal to 
permit a Floor broker to use an Exchange authorized and issued portable 
telephone on the Floor on a six-month pilot basis could provide certain 
benefits, as stated by the NYSE in its filing, such as more direct 
access to the Exchange's trading crowds, and increased speed in the 
transmittal, and execution, of orders, it believes there are certain 
concerns.
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    \19\ 15 U.S.C. 78f(b)(5).
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    The prohibition on the use of portable telephones in trading crowds 
on the NYSE was adopted in 1988.\20\ In approving the prohibition, the 
Commission noted that the use of portable telephones in the trading 
crowd was different from such access at a booth phone. In particular, 
the Commission stated that the ability of a customer to communicate 
directly with a broker in the trading crowd could provide a significant 
time and place advantage to the customer, who invariably would be a 
large or institutional customer. The Commission also noted certain 
concerns that could result from such advantage.
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    \20\ The proposal resulting in the adoption of the prohibition 
was in response to a Commission order setting aside actions by the 
Exchange denying two of its members permission to install telephone 
connections to communicate from the Exchange Floor with non-member 
customers located off-Floor. See Securities Exchange Act Release No. 
24429, May 6, 1987, 38 SEC Doc. 432. The NYSE's proposal that was 
ultimately approved by the Commission permitted access to non-member 
customers at the Floor booth, but prohibited such access through 
portable phones that could be used in the trading crowd.
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    While the Commission recognized that the NYSE had reasonable 
concerns for imposing the portable phone prohibition, the Commission 
noted that the NYSE's decision to prohibit the use of portable 
telephones on the Floor was not the only approach that could be 
consistent with the Act. The Commission further stated that its order 
did not foreclose an exchange from devising a program that would permit 
the use of portable telephones.
    Under NYSE rules, a broker would not be permitted to represent and 
execute an order unless it was inputted into FESC. In addition, the 
filing has been amended so that only Exchange authorized and issued 
portable telephones would be permitted on the Floor. The benefit of 
this requirement is that the Exchange would have access to all phone 
records. This ability to track phone calls, along with the data 
captured in FESC, should aid the Exchange in surveilling for compliance 
with Exchange rules and address concerns identified in the adoption of 
the original prohibition. In this regard, the Commission notes that 
proper surveillance is an essential component of any telephone access 
policy to an Exchange Trading Floor. Surveillance procedures should 
help to ensure that Floor brokers who are interacting with the public 
on portable phones are authorized to do so, as NYSE Rule 36 will 
require,\21\ and that orders are being handled in compliance with NYSE 
rules. The six-month pilot approval should provide the NYSE with an 
opportunity to review these procedures and address any potential 
concerns that have arisen during the pilot.
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    \21\ See note 8 and accompanying text for other NYSE requirement 
that Floor brokers be properly qualified before doing a public 
customer business.
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    The Commission notes that the NYSE is expected to complete within 
three months of implementation of the portable phones a study of 
communications on the Exchange Floor, pursuant to a recommendation of 
an Independent Consultant retained by the Exchange.\22\ In addition to 
this study, the Commission requests that the Exchange report any 
problems, surveillance or enforcement matters associated with the Floor 
brokers use of an Exchange authorized and issued portable telephone on 
the Floor. If the NYSE decides to request permanent approval or an 
extension of the pilot, we would expect, in addition to the report due 
in three months, that the NYSE submit information documenting the usage 
of the phones, any problems that have occurred, and any advantages or 
disadvantages that have resulted.\23\
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    \22\ See supra note 12.
    \23\ This information along with any proposal to extend, or 
permanently approve, the pilot should be submitted at least two to 
three months prior to the expiration of the six-month pilot.
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    In summary, the Commission notes that the proposal, by enabling 
customers to speak directly to a Floor broker in a trading crowd on 
Exchange authorized and issued portable phones, rather than being 
routed through the Floor broker booth, may help to expedite orders and 
make more direct the flow of

[[Page 19051]]

information. The six-month pilot should help the Exchange to provide 
information to the Commission to ensure that these benefits exist, and 
provide for fair access with adequate monitoring of the orders being 
taken, and information being provided, over the portable phones.\24\
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    \24\ In addition, as noted above, the Commission received one 
comment letter in support of the proposed rule change and Amendment 
No. 1. This commenter stated that the proposal would improve the 
overall quality of the flow of information and the efficiency of the 
communication process between the Exchange Floor and off-Floor 
participants, including both ``direct access'' investors and 
``upstairs'' trading desks of NYSE member organizations. 
Furthermore, the commenter considered the use of portable phones to 
communicate directly to and from the Floor as enabling vigorous 
competition, innovative trading services, and faster executions on 
the Floor. See Morgan Stanley Letter, supra note 5. The commenter 
also suggested that the Exchange should aim to implement the rule 
change as fully contemplated and not make calls on portable phones 
linked through the booth, as some market participants might desire. 
In response, the Exchange stated that they were aware of certain 
market participants who preferred that phone calls between Floor 
brokers and off-Floor participants be connected through a Floor 
booth intermediary, and that, while technologically Floor brokers 
would have the ability on their portable phones to conference in 
Floor booth intermediaries on calls, such action is not required by 
this proposal. Telephone conversation between Jeff Rosenstrock, 
Attorney, NYSE, and Cyndi Rodriguez, Special Counsel, Division, 
Commission, on April 11, 2003.
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    Finally, the Commission finds good cause for approving Amendment 
No. 2 prior to the thirtieth day after the date of publication of the 
notice of filing thereof in the Federal Register.\25\ Since the NYSE is 
also proposing in a separate rule filing to eliminate the exception to 
NYSE Rule 123(e), which provided that orders in ETFs must be entered 
into FESC within 90 seconds of execution,\26\ the Commission believes 
that good cause exists to approve the portion of Amendment No. 2 that 
would allow the use of Exchange-provided and authorized portable phones 
for orders in ETFs on the Floor. As noted above, the prohibition of 
using portable phones for ETF orders was based on the 90-second delay 
for inputting ETF orders in FESC. Because this exception to FESC has 
been eliminated, the Commission believes that portable phones can be 
used for ETF orders as with other equity securities.\27\ In addition, 
the Commission believes that it is beneficial to investors and Exchange 
members that the NYSE specified, in Amendment No. 2, a general time 
frame of approximately May 1, 2003 to implement the pilot program and 
of August 1, 2003 to complete the study of communications on the 
Exchange Floor. This should help firms and brokers in planning for the 
upcoming changes. Finally, we believe notice for NYSE members, the 
Division, and OCIE one week prior to the pilot program's implementation 
will be beneficial to market participants and the Commission. Based on 
the above, we believe good cause exists to grant accelerated approval 
to Amendment No. 2, consistent with sections 19 and 6(b) of the 
Act.\28\
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    \25\ 15 U.S.C. 78s(b)(2).
    \26\ See notes 9 and 10, and accompanying text.
    \27\ During the pilot, the NYSE should address whether 
additional surveillance would be needed because of the derivative 
nature of the ETFs.
    \28\ 15 U.S.C. 78s and 15 U.S.C. 78f(b).
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III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 2, including whether Amendment No. 2 
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 Amendment No. 2 that are filed with the Commission, and all 
written communications relating to Amendment No. 2 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 filing will also be available for 
inspection and copying at the principal office of the NYSE. All 
submissions should refer to File No. SR-NYSE-2002-11 and should be 
submitted by May 8, 2003.

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\29\ that the proposed rule change and Amendment No. 1 (SR-NYSE-
2002-11) be, and it hereby is, approved, and that Amendment No. 2 be, 
and it hereby is, approved on an accelerated basis, as a pilot program 
for six months beginning on or about May 1, 2003.
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    \29\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-9472 Filed 4-16-03; 8:45 am]
BILLING CODE 8010-01-P