[Federal Register Volume 68, Number 79 (Thursday, April 24, 2003)]
[Notices]
[Pages 20205-20206]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-10104]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47690; File No. SR-NYSE-2003-07]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the New York Stock Exchange, 
Inc. To Extend the Pilot Program Relating to the Allocation Policy for 
Trading of Exchange-Traded Funds on an Unlisted Trading Privileges 
Basis

April 17, 2003.
    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 March 31, 2003, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the self-regulatory 
organization. The proposed rule change has been filed by the NYSE as a 
``non-controversial'' rule change under Rule 19b-4(f)(6) of the Act.\3\ 
The Commission is publishing this notice 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\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NYSE seeks to extend the pilot program relating to the 
allocation policy for trading certain Exchange-Traded Funds (``ETFs''), 
for an additional year. The current pilot program is set to expire on 
May 8, 2003. For purposes of the allocation policy, ETFs include both 
Investment Company Units (as defined in paragraph 703.16 of the Listed 
Company Manual) and Trust Issued Receipts (as defined in Rule 1200), 
which trade on an Unlisted Trading Privileges (``UTP'') basis. The text 
of the proposed rule change is available at the Office of the 
Secretary, NYSE and at the Commission.

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 self-regulatory organization 
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 NYSE 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
    This proposed rule change was originally filed as a one-year pilot 
in SR-NYSE-2001-07 \4\ and Amendment No. 1 thereto, and subsequently 
amended by SR-NYSE-2001-10 \5\ and SR-NYSE-2002-07.\6\ The pilot was 
subsequently extended for another year and is due to expire on May 8, 
2003.\7\ Therefore, the Exchange seeks to extend the pilot relating to 
the allocation policy for trading certain Exchange-Traded Funds, for an 
additional year.
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    \4\ See Securities Exchange Act Release No. 44272 (May 7, 2001), 
66 FR 26898 (May 15, 2001) (SR-NYSE-2001-07).
    \5\ See Securities Exchange Act Release No. 44306 (May 15, 
2001), 66 FR 28008 (May 21, 2001) (SR-NYSE-2001-10).
    \6\ See Securities Exchange Act Release No. 45729 (April 10, 
2002), 67 FR 18970 (April 17, 2002) (SR-NYSE-2002-07).
    \7\ See Securities Exchange Act Release No. 45884 (May 6, 2002), 
67 FR 32073 (May 13, 2002) (SR-NYSE-2002-17).
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    Since the inception of the Allocation Policy, the Exchange states 
that 36 different ETFs have been allocated. This includes 17 Merrill 
Lynch Holding Company Depositary Receipts (HOLDRs), a type of Trust 
Issued Receipt, 9 different types of Select Sector SPDRs, 1 MidCap 
SPDR, 5 different types of iShares, 1 VIPER, the Nasdaq-100 Index 
Tracking Stock (symbol QQQ), the Standard & Poor's Depositary Receipts 
(symbol SPY), and The Dow Industrials DIAMONDS (symbol DIA).
Allocation Policy for ETFs Trading Under UTP
    The Exchange states that the intent of the Exchange's Allocation 
Policy and Procedures (the ``Policy'') is: (1) To ensure that the 
allocation process is based on fairness and consistency and that all 
specialist units have a fair opportunity for allocations based on 
established criteria and procedures; (2) to provide an incentive for 
ongoing enhancement of performance by specialist units; (3) to provide 
the best possible match between specialist unit and security; and (4) 
to contribute to the strength of the specialist system.
    The Allocation Committee has sole responsibility for the allocation 
of securities to specialist units under this policy pursuant to 
authority delegated by the Board of Directors and is overseen by the 
Quality of Markets Committee of the Board (``QOMC''). The Allocation 
Committee renders decisions based on the allocation criteria specified 
in this policy.\8\
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    \8\ See Securities Exchange Act Release No. 42746 (May 2, 2000), 
65 FR 30171 (May 10, 2000) (SR-NYSE-99-34).
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    The Exchange believes that it would be appropriate to extend the 
pilot that modifies the conventional allocation process to provide that 
ETFs traded on a UTP basis be allocated by a special committee, 
consisting of the Chairman of the Allocation Committee, the three most 
senior Floor broker members of the Allocation Committee, and four 
members of the Exchange's senior management as designated by the 
Chairman of the Exchange. This will permit Exchange management, acting 
with key members of the Allocation Committee, to oversee directly the 
introduction of the UTP concept to the NYSE. For purposes of the 
Allocation Policy, ETFs collectively include Investment Company Units 
(as defined in paragraph 703.16 of the Listed Company Manual) and Trust 
Issued

[[Page 20206]]

Receipts (as defined in Exchange Rule 1200).
    Allocation applications would be solicited by the Exchange, and 
this special committee would review the same performance and 
disciplinary material as is reviewed by the Allocation Committee.\9\ In 
addition, specialist unit applicants would be required to demonstrate:
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    \9\ See Section IV (``Allocation Criteria'') of the Allocation 
Policy and Procedures approved in Securities Exchange Act Release 
No. 42746 (May 2, 2000), 65 FR 30171 (May 10, 2000) (SR-NYSE-99-34) 
for details of the performance and disciplinary material available 
to the Allocation Committee.
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    (a) An understanding of the trading characteristics of ETFs;
    (b) expertise in the trading of derivatively-priced instruments;
    (c) ability and willingness to engage in hedging activity as 
appropriate;
    (d) knowledge of other markets in which the ETF which is to be 
allocated trades; and
    (e) willingness to provide financial and other support to relevant 
Exchange publicity and educational initiatives.
    The special committee would review specialist unit applications and 
reach its allocation decision by majority vote. Any tie vote would be 
decided by the Chairman of the Exchange. The Exchange has determined 
that due to the unique aspects of certain ETF products, it may be 
helpful for the special committee to meet with and interview specialist 
units before making an allocation decision.
    A specialist organization cannot be both the specialist in the ETF 
and the specialist in any security which is a component of the ETF. 
This restriction is necessary to avoid the possibility of ``wash 
sales'' in a situation where the specialist in the ETF needs to hedge 
by buying or selling component stocks of the ETF, and could 
inadvertently be trading with a proprietary bid or offer made by a 
specialist in the same member organization who is making a market in 
the component security.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act,\10\ in general, and furthers the 
objectives of section 6(b)(5),\11\ in particular, 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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    \10\ 15 U.S.C. 78f(b).
    \11\ 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

    The proposed rule change has been filed by the Exchange as a ``non-
controversial'' rule change pursuant to section 19(b)(3)(A) of the Act 
\12\ and Rule 19b-4(f)(6) thereunder.\13\ Because the foregoing 
proposed rule change: (1) Does not significantly affect the protection 
of investors or the public interest, (2) does not impose any 
significant burden on competition, and (3) by its terms does not become 
operative for 30 days after the date of this filing, or such shorter 
time as the Commission may designate, if consistent with the protection 
of investors and the public interest, provided that the self-regulatory 
organization has given the Commission written notice of its intent to 
file the proposed rule change, along with a brief description and text 
of the proposed rule change, at least five business days prior to the 
date of filing of the proposed rule change, or such shorter time as the 
Commission may designate, it has become effective pursuant to section 
19(b)(3)(A) of the Act \14\ and Rule 19b-4(f)(6)\15\ thereunder.
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6).
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    The Exchange has requested that the Commission waive the five-day 
pre-notice requirement and the 30-day operative delay requirement, to 
permit the Exchange to implement the proposal immediately. Under Rule 
19b-4(f)(6)(iii), a proposed ``non-controversial'' rule change does not 
become operative for 30 days after the date of filing, unless the 
Commission designates a shorter time.
    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
Acceleration of the operative date will allow for the continued 
operation of the Exchange's Allocation Policy for ETFs trading on a UTP 
basis as a pilot program without interruption.\16\ The Commission notes 
that it has not received any comments on previous proposed rule changes 
filed by the NYSE for this pilot. For this reason, the Commission 
designates the proposed rule change to be effective and operative upon 
its filing with the Commission. The Commission also waives the five-
business day pre-filing requirement. At any time within 60 days of the 
filing of the proposed rule change, the Commission may summarily 
abrogate such rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.
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    \16\ For the purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rules 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change 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 at the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Exchange.
    All submissions should refer to the File No. SR-NYSE-2003-07 and 
should be submitted by May 15, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-10104 Filed 4-23-03; 8:45 am]
BILLING CODE 8010-01-P