[Federal Register Volume 69, Number 189 (Thursday, September 30, 2004)]
[Notices]
[Pages 58563-58564]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-21885]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50433; File No. SR-ISE-2004-18]


Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Order Approving Proposed Rule Change and Amendments No. 1 and 2 
Thereto To Amend the Market Maker Information Barrier Requirements 
Under ISE Rule 810

September 23, 2004.
    On May 26, 2004, the International Securities Exchange, Inc. 
(``ISE'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant

[[Page 58564]]

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 
amend ISE Rule 810 by replacing the term ``Chinese Wall'' with the 
term, ``Information Barrier;'' and eliminating the requirement that a 
market maker maintain an Information Barrier in the limited 
circumstances where the sole extent to which such market maker or 
affiliated broker-dealer handles listed options orders as agent on 
behalf of Public Customers \3\ or broker-dealers consists of handling 
such orders pursuant to an exchange sponsored Directed Order Program. 
The proposal would also exempt a market maker from the Information 
Barrier requirements of ISE Rule 810 to the extent that the market 
maker or affiliated broker-dealer engages solely in proprietary trading 
and does not, under any circumstances, maintain customer accounts or 
solicit orders or funds from or on behalf of Public Customers or 
broker-dealers. The ISE also proposed a non-substantive clarification 
and certain non-substantive technical changes to ISE Rule 810(a). The 
ISE amended the proposal on August 6, 2004\4\ and August 13, 2004.\5\ 
The proposed rule change, as amended, was published for comment in the 
Federal Register on August 20, 2004.\6\ The Commission received no 
comments on the proposed rule change, as amended. This order approves 
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\ ISE Rule 100(a)(32) defines ``Public Customer'' as ``a 
person that is not a broker-dealer in securities.'' ISE Rule 
100(a)(33) defines ``Public Customer Order'' as ``an order for the 
account of a Public Customer.''
    \4\ On August 6, 2004, the ISE filed a Form 19b-4, which 
replaced the original filing in its entirety (``Amendment No. 1'').
    \5\ On August 13, 2004, the ISE filed a Form 19b-4, which 
replaced the original filing and Amendment No. 1 in their entirety 
(``Amendment No. 2'').
    \6\ See Securities Exchange Act Release No. 50197 (August 13, 
2004), 69 FR 51735.
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    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\7\ In 
particular, the Commission believes that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\8\ which requires, among 
other things, that the ISE's rules be 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. 
Specifically, the Commission believes that the ISE's proposal to 
provide two additional exceptions from the Information Barrier 
requirements of ISE Rule 810 is consistent with the Act.
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    \7\ In approving the proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5).
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    One exception would eliminate the requirement that a market maker 
maintain an Information Barrier in the limited circumstances where a 
market maker or affiliated broker-dealer engages solely in proprietary 
trading.\9\ The Commission believes it is reasonable to remove this 
requirement, since the market maker, or its affiliated broker-dealer, 
is not engaged in activities that would inappropriately benefit other 
business activities within the firm. However, the Commission notes that 
if in the future these market makers, or their affiliated broker-
dealers, engage in other business activities, such as investment 
banking or market making in the stocks underlying the options in which 
it makes markets, or maintain customer accounts, or solicit or accept 
Public Customer orders, the Commission expects that the ISE will 
require compliance with the Information Barrier requirements of ISE 
Rule 810.
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    \9\ The Commission notes that this section of the proposal is 
similar to Pacific Exchange, Inc. Rule 7.26. See Securities Exchange 
Act Release No. 49264 (February 17, 2004), 69 FR 8510 (February 24, 
2004)(SR-PCX-2003-49).
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    The second exception from ISE Rule 810 would not require an 
Information Barrier between an ISE Member's ISE market making 
operations and options market making operations on other exchanges 
where that Member handles orders as agent only for the accounts of 
affiliated entities or solely in an eligible Directed Order Program. 
Eligible Directed Order Programs must contain rules designed to ensure 
that market makers do not gain an advantage in handling Directed Orders 
because the information they possess may be used inappropriately for 
the benefit of the market maker receiving the Directed Order. For 
example, a market maker that chooses to accept Directed Orders must 
accept all orders directed to it, may not accept orders directly, other 
than through an exchange system, and the market maker may not handle 
such orders on a disclosed or discretionary basis. Therefore, the 
Commission believes that it is reasonable to not require an Information 
Barrier in such cases, since the rules of such Directed Order Programs 
should provide safeguards that should limit the misuse of information 
with regard to the terms of orders that affiliates of ISE members are 
handling as agent.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-ISE-2004-18), as amended, is 
approved.
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    \10\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-21885 Filed 9-29-04; 8:45 am]
BILLING CODE 8010-01-P