[Federal Register Volume 70, Number 49 (Tuesday, March 15, 2005)]
[Notices]
[Pages 12769-12770]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1101]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51329; File No. SR-NYSE-2004-71]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the New York Stock Exchange, Inc. 
To Amend NYSE Rule 104 Regarding the Requirement That Specialists 
Obtain Floor Official Approval for Destabilizing Dealer Account 
Transactions in ETFs

March 8, 2005.
    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 December 15, 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 February 
28, 2005, the NYSE submitted Amendment No. 1 to the proposed rule 
change.\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    \3\ Amendment No. 1 superseded the originally filed proposed 
rule change in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to amend NYSE Rule 104 (Dealings by 
Specialists) to remove the requirement that specialists obtain Floor 
Official approval for destabilizing dealer account transactions in 
investment company units and Trust Issued Receipts (collectively 
referred to as ``Exchange Traded Funds'' or ``ETFs''). Below is the 
text of the proposed rule change, as amended. Proposed new language is 
italicized; proposed deletions are in [brackets].

Dealings by Specialists

Rule 104
    (a) No specialist shall effect on the Exchange purchases or sales 
of any security in which such specialist is registered, for any account 
in which he, his member organization or any other member, allied 
member, or approved person, (unless an exemption with respect to such 
approved person is in effect pursuant to Rule 98) in such organization 
or officer or employee thereof is directly or indirectly interested, 
unless such dealings are reasonably necessary to permit such specialist 
to maintain a fair and orderly market, or to act as an odd-lot dealer 
in such security.
    (b) No change.

Supplementary Material

Functions of Specialists
    .10 Regular specialists.--Any member who expects to act regularly 
as specialist in any listed stock and to solicit orders therein must be 
registered as a regular specialist.
    The function of a member acting as regular specialist on the Floor 
of the Exchange includes, in addition to the effective execution of 
commission orders entrusted to him, the maintenance, in so far as 
reasonably practicable, of a fair and orderly market on the Exchange in 
the stocks in which he is so acting. This is more specifically set 
forth in the following:
    (1)-(6) No change.
    (7) The requirement to obtain Floor Official approval for 
transactions for a specialist's own account contained in subparagraphs 
(5)(i)(A), (B) and (6)(i)(A) above shall not apply to transactions 
effected [for the purpose of bringing the price of] in an investment 
company unit (the ``unit''), as that term is defined in Section 703.16 
of the Listed Company Manual, or a Trust Issued Receipt (the 
``receipt'') as that term is defined in Rule 1200 [into parity with the 
value of the index on which the unit is based, with the net asset value 
of the securities comprising the unit or the receipt, or with a futures 
contract on the value of the index on which the unit is based]. 
Nevertheless such transactions must be effected in a manner that is 
consistent with the maintenance of a fair and orderly market and with 
the other requirements of this rule and the supplementary material 
herein.
    No changes to remainder of rule.

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 Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposal. 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 Exchange proposes to eliminate the current restriction on the 
ability of specialists to buy ETFs on plus ticks or sell ETFs on minus 
ticks without Floor Official approval for the transactions.
    NYSE Rule 104 governs specialists' dealings in their specialty 
stocks. In particular, NYSE Rules 104.10(5) and (6) describe certain 
types of transactions that are not to be effected unless they are 
reasonably necessary to render the specialist's position adequate to 
the needs of the market. The Exchange states that, in effect, these 
restrictions generally require specialists' transactions for their own 
accounts to be ``stabilizing'' (i.e., against the trend of the market) 
and prohibit specialists from making transactions that are 
``destabilizing'' (i.e., with the market trend by buying on plus ticks 
and selling on minus ticks), except with the approval of a Floor 
Official.
    The Exchange is proposing to remove these restrictions in 
connection with destabilizing transactions in ETFs by specialists for 
their own account. These products are based on a portfolio of 
underlying securities and are derivatively priced based upon the value 
of those securities. Therefore, according to the Exchange, specialists 
would be unable to effect ETF transactions for their own accounts in a 
manner that would likely lead the market price in those securities, 
even if the transactions were effected on destabilizing ticks. The 
Exchange notes that the Commission has previously recognized this 
aspect of ETFs.\4\
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    \4\ See Securities Exchange Act Release No. 49087 (January 15, 
2004), 69 FR 3622 (January 26, 2004) (``[T]he Commission believes 
that because ETFs are priced derivatively, an Exchange specialist 
would not be able to manipulate the pricing of an ETF.'').

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[[Page 12770]]

    Specialists are not currently required to obtain Floor Official 
approval for proprietary destabilizing transactions that bring an ETF 
into parity with the value of the index on which the ETF is based. The 
Exchange believes that, in light of the derivative nature of ETFs and 
the Commission's recognition that specialists are generally unable to 
lead the market through proprietary transactions in ETFs, NYSE Rule 
104.10(7) should be amended to delete the need for Floor Official 
approval for any specialist destabilizing dealer account transactions 
in ETFs.
    The Exchange notes that in addition to the diminished benefit of 
Floor Official approval of specialists' proprietary destabilizing tick 
transactions in ETFs, the time required to obtain Floor Official 
approval for such transactions can have the effect of delaying trading 
in these products and could result in inferior execution prices for 
customer orders. Finally, the Exchange believes that removing these 
restrictions should enhance the specialist's ability to make 
competitive markets in ETFs, since other markets where they are traded 
do not have such restrictions.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \5\ that an Exchange have rules that 
are designed to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, 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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    \5\ 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 not solicited, and does not intend to solicit, 
comments regarding the proposed rule change. The Exchange has not 
received any unsolicited written comments from members or other 
interested parties.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 an e-mail to [email protected]. Please include 
File Number SR-NYSE-2004-71 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-2004-71. 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 Room. 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-2004-71 and should be submitted on or before April 
5, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-1101 Filed 3-14-05; 8:45 am]
BILLING CODE 8010-01-P