[Federal Register Volume 69, Number 91 (Tuesday, May 11, 2004)]
[Notices]
[Pages 26200-26202]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-10603]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49649; File No. SR-NYSE-2004-21]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 thereto by 
the New York Stock Exchange, Inc. to Extend for an Additional Year the 
Pilot Relating to the Allocation Policy for Trading of Exchange-Traded 
Funds on an Unlisted Trading Privileges Basis (NYSE Rule 103B)

May 4, 2004.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on April 13, 2004, 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 NYSE. On April 23, 
2004, NYSE filed Amendment No. 1 to the proposal.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, 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 Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy J. Sanow, Assistant Director, Division of Market 
Regulation, Commission, dated April 22, 2004 (``Amendment No. 1''). 
In Amendment No. 1, NYSE amended the filing to request that the 
Commission waive the 30-day delayed operative date to ensure that 
the pilot relating to the allocation policy for trading certain 
Exchange-Traded Funds (``ETFs'') continued without interruption.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change seeks to extend for an additional year \4\ 
the pilot relating to the allocation policy for trading certain ETFs 
(``Pilot''), which has been codified in NYSE Rule 103B (``Rule 103B''), 
Section VIII. The Pilot is set to expire on May 8, 2004. In addition, 
the Exchange proposes to substitute the term ``Chief Executive 
Officer'' for ``Chairman'' in NYSE Rule 103B, Section VIII as a result 
of changes to the governance structure of the NYSE, which 
differentiated the authority and responsibilities of the Chairman of 
the Board of Directors and the Chief Executive Officer (CEO). 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 Basis (``UTP''). The text of the proposed 
rule change is available at the NYSE and at the Commission.
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    \4\ The Exchange is continuing to develop its market in ETFs and 
is reviewing the results of utilizing the allocation procedures 
adopted in the pilot. As greater experience is gained, the Exchange 
will evaluate the continued usefulness of these procedures and 
consider whether to make the procedures permanent.
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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 NYSE 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.

[[Page 26201]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange seeks to extend for an additional year the allocation 
policy for trading certain ETFs, as codified in NYSE Rule 103B,\5\ 
Section VIII. This proposed rule change was originally filed as a one-
year pilot in SR-NYSE-2001-07,\6\ and subsequently amended by SR-NYSE-
2001-10 \7\ and SR-NYSE-2002-07.\8\ The pilot was subsequently extended 
for an additional two years, and is due to expire on May 8, 2004.\9\
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    \5\ See Securities Exchange Act Release No. 46579 (October 1, 
2002), 67 FR 63004 (October 9, 2002) (SR-NYSE-2002-31).
    \6\ See Securities Exchange Act Release No. 44272 (May 7, 2001), 
66 FR 26898 (May 15, 2001) (SR-NYSE-2001-07).
    \7\ See Securities Exchange Act Release No. 44306 (May 15, 
2001), 66 FR 28008 (May 21, 2001) (SR-NYSE-2001-10).
    \8\ See Securities Exchange Act Release No. 45729 (April 10, 
2002), 67 FR 18970 (April 17, 2002) (SR-NYSE-2002-07).
    \9\ See Securities Exchange Act Release No. 45884 (May 6, 2002), 
67 FR 32073 (May 13, 2002) (SR-NYSE-2002-17). See also Securities 
Exchange Act Release No. 47690, 68 FR 20205 (April 24, 2003) (SR-
NYSE-2003-07).
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    The Exchange also proposes to make one change to NYSE Rule 103B. 
The Exchange proposes to replace the term ``Chairman'' with ``Chief 
Executive Officer'' in NYSE Rule 103B, Section VIII (the Allocation 
policy for trading certain ETFs). This change is being made as a result 
of amendments to the governance structure of the Exchange, which 
differentiated the authority and responsibilities of the Chairman and 
CEO.\10\
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    \10\ See Securities Exchange Act Release No.48946 (December 17, 
2003), 68 FR 74678 (December 24, 2003) (SR-NYSE-2003-34). See 
Securities Exchange Act Release No. 49345 (March 1, 2004), 69 FR 
10791 (March 8, 2004) (SR-NYSE-2004-02).
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    Since the inception of the Allocation Policy, 36 ETFs have been 
allocated. This includes 17 Merrill Lynch Holding Company Depositary 
Receipts (HOLDRs), a type of Trust Issued Receipt, nine types of Select 
Sector Standard & Poor's Depositary Receipts (SPDRs), one MidCap SPDR, 
five types of iShares, one Vanguard Index Participation Equity 
Recipient (VIPER) Shares, the Nasdaq-100 Index Tracking Stock (symbol 
QQQ), the Standard & Poor's 500 Index (symbol SPY), and The Dow 
Industrials DIAMONDS (symbol DIA).
    Allocation Policy for ETFs Trading Under UTP. The purposes of the 
Exchange's current Allocation Policy and Procedures (the ``Policy'') is 
to: (1) 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) provide 
an incentive for ongoing enhancement of performance by specialist 
units; (3) provide the best possible match between specialist unit and 
security; and (4) 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.\11\
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    \11\ 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 modify the 
listed equities 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 
on the Allocation Committee, and four members of the Exchange's senior 
management as designated by the CEO of the Exchange. This will permit 
Exchange management, acting with designated 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 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.\12\ 
In addition, specialist unit applicants would be required to 
demonstrate:
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    \12\ 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.
    A specialist organization cannot be both the specialist in the ETF 
and the specialist in any security that 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.
    The special committee would review specialist unit applications and 
reach its allocation decision by majority vote. Any tie vote would be 
decided by the CEO 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.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under section 6(b)(5) \13\ 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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    \13\ 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 foregoing rule change has become effective pursuant to section 
19(b)(3)(A) of the Act,\14\ and subparagraph (f)(6) of Rule 19b-4,\15\ 
thereunder because it does not: (i) Significantly affect the protection 
of investors or the public interest; (ii) impose any significant

[[Page 26202]]

burden on competition; (iii) become operative for 30 days from the date 
on which it was filed, or such shorter time as the Commission may 
designate. 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. \16\
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6).
    \16\ For the purposes of calculating the 60-day abrogation 
period, the Commission considers the proposed rule change to have 
been filed on April 23, 2004, the date NYSE filed Amendment No. 1.
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    The Exchange requests that the Commission waive the 30-day delayed 
operative date of Rule 19b-4(f)(6)(iii). Waiver of this period will 
allow the Exchange to continue the pilot without interruption. The 
Exchange believes that this is in the public interest. The Commission 
also believes that it is consistent with the protection of investors 
and the public interest to waive the 30-day operative delay and make 
this proposed rule change immediately effective as of April 23, 
2004.\17\
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    \17\ For purposes of only accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
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, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:
    Electronic comments:
     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send E-mail to [email protected]. Please include File 
Number SR-NYSE-2004-21 on the subject line.
    Paper comments:
     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-NYSE-2004-21. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
NYSE. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NYSE-2004-21 and should be submitted on or before June 1, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-10603 Filed 5-10-04; 8:45 am]
BILLING CODE 8010-01-P