[Federal Register Volume 69, Number 161 (Friday, August 20, 2004)]
[Notices]
[Pages 51734-51735]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-19066]



[[Page 51734]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50193; File No. SR-BSE-2004-35]


Self-Regulatory Organizations; Boston Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Eliminate the Requirement That Certain Market Makers on the Boston 
Options Exchange Facility With No Public Accounts and Who Do Not 
Solicit Public Accounts, Maintain Certain Information Barriers

    August 13, 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 August 12, 2004, the Boston Stock Exchange, Inc. (``BSE'' 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 BSE. The Exchange 
filed this proposal pursuant to Section 19(b)(3)(A) of the Act \3\ and 
Rule 19b-4(f)(6) thereunder,\4\ which renders the proposal effective 
upon filing with the Commission.\5\ 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\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-(f)(6).
    \5\ The BSE provided the Commission with notice of its intention 
to file the proposed rule change on July 6, 2004. See Rule 19b-
4(f)(6)(iii). 17 CFR 240.19b-4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The BSE proposes to eliminate the Information Barrier requirement 
set forth in the Boston Options Exchange Facility (``BOX'') Rules 
Chapter VI, Section 10 in the limited circumstances where a Market 
Maker, which also functions as an Order Flow Provider,\6\ engages 
solely in proprietary trading and does not, under any circumstance, 
maintain customer accounts or solicit or accept orders from or on 
behalf of public customers. The text of the proposed rule change is 
below. Proposed additions are in italics.
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    \6\ See Chapter I, Section 1(a)(46) of the BOX Rules (definition 
of ``Order Flow Provider'').
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* * * * *
Chapter VI Market Makers
Sec. 10 Limitations on Dealings
    (a) General Rule. A Market Maker on BOX may engage in Other 
Business Activities, or it may be affiliated with a broker-dealer that 
engages in Other Business Activities, only if there is an Information 
Barrier between the market making activities and the Other Business 
Activities. ``Other Business Activities'' means:
    i. Conducting an investment banking or public securities business;
    ii. Making markets in the stocks underlying the options in which it 
makes markets; or
    iii. Functioning as an Order Flow Provider, except where such 
Market Maker, or a broker-dealer with which such Market Maker is 
affiliated: (A) engages solely in proprietary trading and does not, 
under any circumstance, maintain customer accounts or solicit or accept 
orders or funds from or on behalf of public customers, including 
broker-dealers and other securities firms, and (B) does not place or 
accept directed orders or utilize any other order types which call for 
the participation of, or interaction with, public customers, including 
broker-dealers and other securities firms.
* * * * *

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 BSE 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 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
    The Information Barrier requirements set forth in Chapter VI, 
Section 10 of the BOX Rules, provide critical safeguards to prevent the 
use or communication of material non-public information by market 
making firms (and affiliated broker-dealers) to inappropriately benefit 
other business activities in which they may engage, such as investment 
banking or equities market making. Such information could relate to, 
for example, the Market Maker's customer and directed order flow or 
other information obtained by the Market Maker in the course of its 
business. Such barriers help to ensure that market making firms do not 
illegally take advantage of or communicate such information to benefit 
their other business activities, to the detriment of investors, 
customers, issuers and the integrity of the market.
    For business reasons, certain registered Market Makers, or broker-
dealers with which such Market Makers are affiliated, engage solely in 
proprietary trading. Accordingly, such firms do not maintain public 
customer accounts or solicit or accept orders or funds (and hence, 
would not accept directed order flow) from or on behalf of public 
customers, including broker-dealers and other securities firms. Under 
such circumstances, because the market making firm does not engage in 
any other business activities that may benefit from information 
obtained by the Market Maker in the course of the firm's market making 
activities, the Exchange believes that the concerns noted above which 
form the basis for the Information Barrier requirements set forth in 
Chapter VI, Section 10 of the BOX Rules do not apply.\7\ Nevertheless, 
Chapter VI, Section 10 of the BOX Rules would require such a firm to 
develop and implement Information Barriers.
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    \7\ The proposed rule change is designed to accommodate the 
needs of these Market Makers. The current rule did not foresee the 
business conditions that currently exist which necessitate this 
change.
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    Under such circumstances, the Exchange believes that an Information 
Barrier requirement is unnecessary and would impose an undue burden on 
the market making firm. Accordingly, this proposed rule change 
eliminates this requirement in the limited circumstances where a market 
making firm and its affiliated broker-dealer do not maintain public 
customer accounts, nor solicit or accept public customer orders, 
including from broker-dealers and other securities firms (and does not 
accept directed order flow or utilize any order type which presupposes 
the participation of public customers), and engage solely in 
proprietary trading. The Exchange believes that this limited 
modification is consistent with the purposes of the rule. However, if 
the market making firm or its affiliated broker-dealer subsequently 
decides to maintain public customer accounts or solicit public customer 
accounts (and directed order flow or order types which presuppose the 
participation of public customers), then the requirements of Chapter 
VI, Section 10 of the BOX Rules would apply. Further, this limited

[[Page 51735]]

modification would not alter or adjust any other obligation imposed on 
Market Makers, including those set forth in Chapter VI, Section 5 of 
the BOX Rules (Obligations of Market Makers).
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6(b) of the Act,\8\ in general, and 
Section 6(b)(5) of the Act,\9\ in particular, in that it is 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 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 BSE 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 comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not:
    (i) Significantly affect the protection of investors or the public 
interest;
    (ii) Impose any significant burden on competition; and
    (iii) Become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \10\ and 
Rule 19b-4(f)(6) thereunder.\11\ 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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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
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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. 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-BSE-2004-35 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-BSE-2004-35. 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 20549-0609. Copies of such filing also will 
be available for inspection and copying at the principal office of the 
BSE. 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-BSE-
2004-35 and should be submitted on or before September 10, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-19066 Filed 8-19-04; 8:45 am]
BILLING CODE 8010-01-P