[Federal Register Volume 69, Number 139 (Wednesday, July 21, 2004)]
[Notices]
[Pages 43653-43655]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16560]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50021; File No. SR-NYSE-2004-38]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment No. 
1 Thereto by the New York Stock Exchange, Inc. Exempting Bonds from the 
Order Tracking System Requirements (NYSE Rule 132B)

July 14, 2004.
    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 July 7, 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 and 
II below, which Items have been prepared by the Exchange. On July 13, 
2004, the NYSE amended the proposed rule change.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons and to grant accelerated approval 
of the proposed rule change, as amended.
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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, Commission, dated July 13, 
2004 (``Amendment No. 1''). Amendment No. 1 revised the proposed 
rule text. Amendment No. 1 is incorporated into this notice.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    This proposal is to amend NYSE Rule 132B to eliminate the 
requirement to capture order information for listed bonds. The text of 
the proposed rule change is below. Proposed new language is italicized.
Rule 132B Order Tracking Requirements
    1. With respect to any security listed on the New York Stock 
Exchange except bonds, each member and member organization shall:
* * * * *
    (Remainder of rule unchanged.)

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 III below. The Exchange 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
    Background. NYSE Rules 132A, B and C \4\ (``OTS rules'') require 
that members and member organizations record details of every customer 
and proprietary order in any security listed on the Exchange from the 
time of receipt or origination through the time of execution or 
cancellation. The purpose of these requirements is to provide a 
complete audit trail for orders in Exchange-listed securities. Thereby, 
the Exchange is able to provide an accurate, time-sequenced record of 
orders, quotations and transactions beginning with the receipt of an 
order by any NYSE member firm and further documenting the life of the 
order through the process of execution or cancellation of that order.
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    \4\ See Securities Exchange Act Release No. 47689 (April 17, 
2003), 68 FR 20200 (April 24, 2003) (SR-NYSE-99-51) and NYSE 
Information Memo 03-26 (June 10, 2003) for further information on 
NYSE Rules 132A, B, and C.
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    Rule 132A. NYSE Rule 132A requires members and member organizations 
to synchronize the business clocks used to record the date and time of 
any event that the Exchange requires to be recorded. The Exchange 
requires the date and time of orders in Exchange-listed securities to 
be recorded. The Rule also requires members and member organizations to 
maintain the synchronization of this equipment in conformity with 
procedures prescribed by the Exchange.
    Rule 132B. NYSE Rule 132B prescribes requirements and procedures 
with respect to orders in any security listed on the Exchange received 
or originated by a member or member organization. It requires a member 
or member organization to immediately record data elements as detailed 
in the Rule. If an order is transmitted to another member or member 
organization, is transmitted to another department of the same member, 
or is modified or cancelled, information detailed in the Rule must be 
recorded. Additionally, the recipient of the order must record the 
order details as provided in the Rule.
    Orders submitted to the Floor via an exchange or proprietary system 
that comply with existing NYSE Rule 123(e) \5\ (requiring the 
electronic capture of orders on the floor via NYSE's Front End Systemic 
Capture Program) are exempt from recording the order details from the 
point at which the order arrives on the Floor. The transmitting and 
receiving floor members, however, are required to record the unique 
Order ID, the transmitting firm, and the recipient firm.
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    \5\ NYSE Rule 123, Record of Orders, requires that all orders in 
any security traded on the Exchange be entered into a database 
before they can be represented in the Exchange's auction market.
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    Rule 132C. Members and member organizations must record and retain 
the order details as required by the Rule, and upon Exchange request, 
submit such details to the Exchange. The Exchange makes requests for 
order tracking information on an as-needed basis in order for the 
Exchange to carry out its surveillance and regulatory functions. 
Members and member organizations are required to submit the data in an 
automated format.
    Proposed Exemption for Listed Bonds. The Exchange proposes to 
exempt listed bonds from the requirements of the OTS rules. As adopted, 
the OTS rules apply to any security \6\ listed on the Exchange, which 
includes bonds. However, at the time the OTS rules proposal was 
promulgated, the Exchange was focusing its attention on the application 
of the OTS rules to equity securities. The Exchange believes there are 
several reasons why the exclusion of bonds from the OTS rules would not 
be against the public interest and would not diminish the protection of 
investors. These are explained below.
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    \6\ NYSE Rule 3 defines the terms ``security'' and 
``securities'' as having the meaning given those terms in the Act 
and the General Rules and Regulations thereunder. Section 3(a)(10) 
of the Act, in turn, defines ``security'' as any ``note, stock, 
treasury stock, security future, bond, debenture,'' etc. (emphasis 
added).
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    Cost and Effectiveness. The Exchange represents that its member 
organizations would have to make extensive changes

[[Page 43654]]

to their existing systems to capture order details for listed bonds in 
an electronic system as required by the OTS rules. At this time, the 
Exchange understands that member organizations have not established 
automated order tracking mechanisms and protocols for debt securities 
trading. The Exchange represents that such changes would be expensive, 
especially since they would have to be accomplished in a short time 
frame.
    In addition, the Exchange believes that the information that would 
be captured through such systems would not seem to provide a 
commensurate benefit in terms of increased compliance efforts. Trades 
on the Exchange in listed bonds are conducted through the Automated 
Bond System[reg], which electronically captures order and execution 
details of each bond trade, providing an audit trail for these trades 
independent of the requirements of the OTS rules. Thus, for bond 
transactions conducted on the Exchange, the Exchange believes that 
existing procedures provide adequate regulatory information 
substantially comparable to the requirements of the OTS rules.
    In view of the fact that there are a significant number of bonds 
that are not listed and that the vast majority of transactions in bonds 
are conducted away from the Exchange, the Exchange believes that 
requiring member organizations to establish different systems and 
procedures for listed bonds and non-listed bonds would be costly and 
would not provide a significant improvement in regulatory 
capability.\7\
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    \7\ The Exchange understands that the rules of the National 
Association of Securities Dealers (``NASD'') regarding Nasdaq's 
Order Audit Trail System apply only to equity securities. See NASD 
Rule 6951(j) (defining ``order'').
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    Given the reasons set forth above, the Exchange believes that 
exempting listed bonds from the OTS rules should not present any 
significant regulatory issues.
2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with section 6(b) of the Act \8\ in general and furthers the 
objectives of section 6(b)(5) of the Act \9\ in particular in that it 
is designed to prevent fraudulent and manipulative acts and practices, 
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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    \8\ 15 U.S.C. 78f(b).
    \9\ 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, as 
amended, 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. 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. 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 an e-mail to [email protected]. Please include 
File Number SR-NYSE-2004-38 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-2004-38. 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-2004-38 and should be submitted on or before August 11, 2004.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\10\ The Commission finds that the proposed rule change is 
consistent with section 6(b) of the Act \11\ in general and furthers 
the objectives of section 6(b)(5) of the Act \12\ in particular in that 
it is designed to promote just and equitable principles of trade and to 
remove impediments to and perfect the mechanism of a free and open 
market. Specifically, in light of the Exchange's representations that: 
(1) Existing procedures provide regulatory information that is adequate 
and comparable to the information required by the OTS rules, and (2) 
Nasdaq's Order Audit Trail System rules, which serve a similar purpose 
to the OTS rules, do not apply to debt securities,\13\ the Commission 
finds that the proposed rule change is consistent with the Act.\14\
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    \10\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ See note 7 supra.
    \14\ The Commission notes, however, that should the trading 
environment for bonds listed on the NYSE change such that the 
Automated Bond System no longer captures information sufficient to 
create adequate audit trails for bond trades, or such that any of 
the Exchange's representations above under the subheading ``Cost and 
Effectiveness'' are no longer valid, then the Commission's analysis 
and conclusion may change.
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    The Exchange has requested that the Commission find good cause 
pursuant to Section 19(b)(2) of the Act \15\ for approving the proposed 
rule change, as amended, on an accelerated basis prior to the thirtieth 
day after its publication in the Federal Register. The provisions of 
Rule 132B are scheduled to be effective July 16, 2004. The Commission's 
grant of accelerated approval would help ensure that Exchange members 
are able to comply with the provisions of Rule 132B when it becomes 
effective. Further, Exchange

[[Page 43655]]

members would not have to expend valuable resources to establish 
procedures that comply with the OTS rules for mandatory electronic 
capture of order information in listed bonds. As discussed above, the 
Exchange asserts that instituting OTS rules for listed bonds would not 
provide a significant improvement in regulatory capability, would be 
largely duplicative, and would be costly to Exchange members. 
Accordingly, the Commission finds good cause for approving the proposed 
rule change, as amended, on an accelerated basis prior to the thirtieth 
day after publication of notice in the Federal Register.
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    \15\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\16\ that the proposed rule change, as amended (SR-NYSE-2004-38), 
is hereby approved on an accelerated basis.
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    \16\ 15 U.S.C. 78s(b)(2).

    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. 04-16560 Filed 7-20-04; 8:45 am]
BILLING CODE 8010-01-P