[Federal Register Volume 70, Number 92 (Friday, May 13, 2005)]
[Notices]
[Pages 25637-25639]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-2383]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51665; File No. SR-NYSE-2005-23]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Seek Permanent Approval of the Pilot Relating to the Allocation 
Policy for Trading of Exchange-Traded Funds on an Unlisted Trading 
Privileges Basis (NYSE Rule 103B)

May 6, 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 March 29, 2005, 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 NYSE. The proposed rule 
change has been filed by the NYSE as a ``non-controversial'' rule 
change under Rule 19b-4(f)(6) under the Act,\3\ which renders the 
proposal effective upon filing with the Commission.\4\ 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\ 17 CFR 240.19b-4(f)(6).
    \4\ Rule 19b-4(f)(6) under the Act requires the NYSE to provide 
the Commission with five business days notice of its intention to 
file a non-controversial proposed rule change. The NYSE did not 
provide such notice but requested that the Commission waive the 
notice requirement. The NYSE also requested that the Commission 
waive the 30-day operative delay. See Rule 19b-4(f)(6)(iii) under 
the Act. 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 proposed rule change seeks to adopt on a permanent basis the 
pilot program relating to the allocation policy for trading certain 
Exchange-Traded Funds (``ETFs''), which has been codified in NYSE Rule 
103B, section VIII. This policy applies to ETFs which are traded on an 
Unlisted Trading Privileges Basis (``UTP''). The pilot is set to expire 
on May 8, 2005. 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). The text of the proposed rule change is below. Proposed new 
language is italicized.
* * * * *

Rule 103B Specialist Stock Allocation

I-VII. No Changes

* * * * *

VIII. Policy for Allocation of Exchange Traded Funds Admitted To 
Trading on the Exchange on an Unlisted Trading Privileges Basis

    Investment Company Units (as defined in paragraph 703.16 of the 
Listed Company Manual) and Trust Issued Receipts (as defined in 
Exchange Rule 1200) (collectively known as Exchange-Traded Funds) 
(``ETFs'') admitted to trading on the Exchange on an unlisted trading 
privileges basis shall be allocated pursuant to this Policy rather than 
the Exchange's policy for allocating securities to be listed on the 
Exchange.
    ETFs shall be allocated by a special committee consisting of the 
Chairman of the Allocation Committee, the three most senior Floor 
broker members of the Allocation Committee, and four members of the 
Exchange's senior management as designated by the Chief Executive 
Officer of the Exchange. This committee shall solicit allocation 
applications from interested specialist units, and shall review the 
same performance and disciplinary material with respect to specialist 
unit applicants as would be reviewed by the Allocation Committee in 
allocating listed stocks. The committee shall reach its decisions by 
majority vote with any tie votes being decided by the Chief Executive 
Officer of the Exchange. Specialist unit applicants may appear before 
the committee.
Special Criteria
    In their allocation applications, specialist units must 
demonstrate:
    (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 to be allocated 
trades;
    (e) Willingness to provide financial and other support to Exchange 
marketing and educational initiatives with respect to the ETF to be 
allocated.

[[Page 25638]]

Allocation Freeze Policy
    The Allocation Freeze Policy as stated in the Allocation Policy for 
listed stocks shall apply.
Prohibition on Functioning as Specialist in ETF and Specialist in any 
Component Security of the ETF
    No specialist member organization may apply to be allocated an ETF 
if it is registered as specialist in any security which is a component 
of the ETF. A specialist member organization which is registered as 
specialist in a component stock of an ETF may establish a separate 
member organization which may apply to be the specialist in an ETF. The 
approved persons of such ETF specialist member organization must obtain 
an exemption from specified specialist rules pursuant to Rule 98.
    If, subsequent to an ETF being allocated to a specialist member 
organization, a security in which the specialist member organization is 
registered as specialist becomes a component security of such ETF, the 
specialist organization must (i) withdraw its registration as 
specialist in the security which is a component of the ETF; (ii) 
withdraw its registration as specialist in the ETF; or (iii) establish 
a separate specialist member organization, which will be registered as 
specialist in the ETF and whose approved persons have received an 
exemption from specified specialist rules pursuant to Rule 98.
* * * * *

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 proposal. The text of these 
statements may be examined at the places specified in item IV below. 
The NYSE 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 seeks permanent approval for the pilot relating to the 
allocation policy for trading ETFs on a UTP basis, 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 Amendment No. 1 
thereto, and subsequently amended by SR-NYSE-2001-10 \7\ and SR-NYSE-
2002-07 \8\. The pilot was subsequently extended for an additional 
three years and is due to expire on May 8, 2005.\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 Nos. 45884 (May 6, 
2002), 67 FR 32073 (May 13, 2002) (SR-NYSE-2002-17); 47690, 68 FR 
20205 (April 24, 2003) (SR-NYSE-2003-07); and 49649 (May 4, 2004), 
69 FR 26200 (May 11, 2004) (SR-NYSE-2004-21).
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Allocation Policy for ETFs Trading Under UTP
    The purpose of the Exchange's current Allocation Policy and 
Procedures (the ``Policy'') is: (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. The Allocation Committee 
renders decisions based on the allocation criteria specified in this 
policy.\10\
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    \10\ See Securities Exchange Act Release No. 42746 (May 2, 
2000), 65 FR 30171 (May 10, 2000) (SR-NYSE-99-34).
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    In deciding to trade ETFs on a UTP basis, the Exchange considered 
it appropriate to modify the listed equities allocation process to 
provide that such ETFs 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 Chief Executive 
Officer of the Exchange. This permitted 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 for ETFs trading on a UTP basis are 
solicited by the Exchange, and this special committee reviews the same 
performance and disciplinary material as is reviewed by the Allocation 
Committee.\11\ In addition, specialist unit applicants are required to 
demonstrate:
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    \11\ See NYSE Rule 103B, 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.
Proposal To Make the Policy Permanent
    The Exchange believes that the ETF allocation process has worked 
well and should be made permanent.\12\
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    \12\ Neither the Exchange, nor the Commission received any 
comment letters in response to the solicitation of comments in SR-
NYSE 2001-07, SR-NYSE 2002-17, SR-NYSE 2003-07, and NYSE 2004-21. 
Telephone conversation between Jeffrey Rosenstrock, Principal Rule 
Counsel, NYSE, and Florence E. Harmon, Senior Special Counsel, 
Division of Market Regulation (``Division''), SEC, dated May 6, 
2005.
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    In this regard, since the inception of the Allocation Policy, 59 
\13\ ETFs have been allocated and are trading on the Exchange. 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, 29 types of 
iShares, one Vanguard Index Participation Equity Recipient (VIPER) 
Shares, the Standard & Poor's 500 Index (symbol SPY), and the Dow 
Industrials DIAMONDS (symbol DIA).
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    \13\ The NASDAQ 100 Trust (symbol QQQ) was allocated and began 
trading on the Exchange on July 31, 2001, but as of December 1, 
2004, no longer trades on the Exchange. The iShares MSCI Emerging 
Markets Free (EEM) was allocated, but never traded on the Exchange.
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    Currently, the special committee reviews specialist unit 
applications and reaches its allocation decisions by majority vote. Any 
tie vote is decided by

[[Page 25639]]

the Chief Executive Officer 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 Exchange believes that its proposed rule change is consistent 
with section 6(b) of the Act,\14\ in general, and furthers the 
objectives of section 6(b)(5) of the Act,\15\ in particular, in that it 
is designed to remove impediments to and perfect the mechanism for a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The NYSE 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 not solicited, and does not intend to solicit, 
comments on this 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

    The proposed rule change has been filed by the Exchange as a ``non-
controversial'' rule change pursuant to section 19(b)(3)(A) of the Act 
\16\ and Rule 19b-4(f)(6), thereunder.\17\ Because the forgoing 
proposed rule change does not: (i) Significantly affect the protection 
of investors or the public interest; (ii) impose any significant burden 
on competition; (iii) become operative for 30 days after the date of 
its filing, or such shorter time as the Commission may designate, if 
consistent with the protection of investors and the public interest, 
provided that the Exchange has given the Commission written notice of 
its intent to file the proposed rule change, along with a brief 
description and text of the proposed rule change, at least five 
business days prior to the date of filing of the proposed rule change, 
or shorter time as the Commission may designate, it has become 
effective pursuant to section 19(b)(3)(A) of the Act \18\ and Rule 19b-
4(f)(6), thereunder.\19\
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6).
    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4(f)(6).
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    The Exchange requests that the Commission waive the five-day pre-
filing notice requirement and the 30-day delayed operative date of Rule 
19b-4(f)(6)(iii). Under Rule 19b-4(f)(6)(iii), a proposed ``non-
controversial'' rule change does not become operative for 30 days after 
the date of filing, unless the Commission designates a shorter time.
    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
Acceleration of the operative date will allow for the continued 
operation of the Exchange's Policy for Allocation of Exchange-Traded 
Funds Admitted to Trading on the Exchange on an Unlisted Trading 
Privileges Basis, now codified in NYSE Rule 103B, Section VIII on the 
permanent basis without interruption.\20\
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    \20\ For the purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rules 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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    The Commission notes that it has not received any comments on 
previous proposed rule changes filed by NYSE for this pilot. For this 
reason, the Commission designates the proposed rule change to be 
effective and operative upon its filing with the Commission. The 
Commission also waives the five-business day pre-filing requirement. As 
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.

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-NYSE-2005-23 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-2005-23. 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 at 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 Exchange. 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-2005-23 and should be submitted on or before June 
6, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-2383 Filed 5-12-05; 8:45 am]
BILLING CODE 8010-01-P