[Federal Register Volume 74, Number 172 (Tuesday, September 8, 2009)]
[Notices]
[Pages 46272-46275]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-21641]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60604; File No. SR-NYSEArca-2009-78]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Order Granting Accelerated Approval of a Proposed Rule Change 
Eliminating NYSE Arca Equities Rule 7.26, Adding New NYSE Arca Equities 
Rule 6.7 and Amending NYSE Arca Equities Rule 6.18

September 1, 2009.
    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 25, 2009, NYSE Arca, Inc. (``NYSE Arca'' or the ``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 NYSE Arca. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons and is approving the proposed rule change on an accelerated 
basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to (i) eliminate the requirement of NYSE Arca 
Equities Rule 7.26 that Market Makers establish and maintain certain 
specifically prescribed information barriers, (ii) add new NYSE Arca 
Equities Rule 6.7 regarding trading ahead of research reports, and 
(iii) revising NYSE Arca Equities Rule 6.18 to incorporate compliance 
with NASD Rule 3010. The text of the proposed rule change is attached 
as Exhibit 5 to the 19b-4 form. A copy of this filing is available on 
the Exchange's Web site at http://www.nyse.com, at the Exchange's 
principal office and at the Commission's Public Reference Room.

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 self-regulatory organization 
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 those 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 parts 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 requirement set forth in 
NYSE Arca Equities Rule 7.26 that Market Makers on the Corporation 
maintain certain specifically prescribed information barrier 
procedures. At the same time, the Exchange further proposes new NYSE 
Arca Equities Rule 6.7, which (i) prohibits ETP Holders from trading 
ahead of research reports and (ii) requires each ETP Holder to 
establish, maintain and enforce procedures regarding the flow of 
information between research department personnel and trading 
department personnel. Finally, the Exchange proposes to revise NYSE 
Arca Equities Rule 6.18 to incorporate compliance with NASD Rule 3010.
    All Members Must Maintain Policies Concerning the Misuse of 
Material Non-Public Information
    Presently, NYSE Arca requires that each ETP Holder \3\ establish, 
maintain and enforce written policies and procedures reasonably 
designed to prevent the misuse of material, non-public information by 
the ETP Holder or persons associated with the ETP Holder.\4\ For 
purposes of this requirement, conduct constituting the misuse of 
material, non-public information includes, but is not limited to, the 
following:
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    \3\ See NYSE Arca Equities Rule 1.1(n).
    \4\ See NYSE Arca Equities Rule 6.3.
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    (a) trading in any securities issued by a corporation, or in any 
related securities or related options or other derivative securities, 
while in possession of material, non-public information concerning that 
issuer; or
    (b) trading in a security or related options or other derivative 
securities, while in possession of material, non-public information 
concerning imminent transactions in the security or related securities; 
or
    (c) disclosing to another person or entity any material, non-public 
information involving a corporation whose shares are publicly traded or 
an imminent transaction in an underlying security or related securities 
for the purpose of facilitating the possible misuse of such material, 
non-public information.
    The Exchange also has several rules prohibiting ETP Holders from 
disadvantaging their customers or other market participants by 
improperly capitalizing on the ETP Holders' access to or receipt of 
material, non-public information. For example, NYSE Arca Equities Rule 
6.16 prohibits an ETP Holder from trading ahead of its customer's limit 
orders.\5\ In addition, the Exchange prohibits the practice of ``front-
running'' block transactions.\6\
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    \5\ See NYSE Arca Equities Rule 6.16: ``No ETP Holder may accept 
and hold an unexecuted limit order from its customer * * * and 
continue to trade on the Corporation the subject security for its 
own account at prices that would satisfy the customer's limit order 
without executing that limit order.''
    \6\ See NYSE Arca Equities Rule 6.6: ``An ETP Holder or 
associated person obtaining information of an immediate pending 
transaction or a transaction executed but not yet reported on any 
national securities exchange or association involving 5,000 shares 
or more of a security including an equivalent number of option 
contracts admitted to dealings on the NYSE Arca, Inc., or securities 
underlying the options so admitted, shall not initiate or transmit 
an order in the security involved, or options relating to that 
security, through the facilities of the Corporation for any account 
in which he or she or his or her organization are participants until 
after the transaction appears on the ticker or is otherwise 
disclosed, in the case of orders pertaining to equities, or until 
two minutes after such disclosure, in the case of orders pertaining 
to options. Exceptions will require prior approval from the 
Corporation.''
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    Members Retain Responsibility for Compliance
    In this context, by prohibiting the misuse of material, non-public 
information, the Exchange has appropriately defined the behavior that 
its participants must avoid. In the Exchange's view, prescribing the 
form that these policies and procedures must take is unnecessarily 
burdensome. By defining certain prohibited behavior (e.g., Rules 6.3, 
6.16, and 6.6) the Exchange has placed its participants on notice as to 
their specific compliance

[[Page 46273]]

burdens with respect to preventing the misuse of material, non-public 
information. Further, NYSE Arca Equities Rule 6.18 requires each ETP 
Holder to (i) establish and maintain a system to supervise the 
activities of its associated persons and (ii) establish, maintain, and 
enforce written procedures to supervise the business in which it 
engages and to supervise the activities of its associated persons that 
are reasonably designed to achieve compliance with applicable federal 
securities laws and regulations, and with the NYSE Arca Equities Rules.
    The Exchange, therefore, proposes to eliminate, in their entirety, 
the requirements set forth in NYSE Arca Equities Rule 7.26 that Market 
Makers on the Corporation maintain certain specifically prescribed 
information barrier procedures. This proposal is consistent with the 
approach currently employed by the Nasdaq Stock Market, L.L.C. 
(``Nasdaq''), which does not generally require its members to establish 
or maintain information barriers.
    Comparison to Nasdaq's Framework
    By amending its rules in accordance with this proposal, the 
Exchange reinforces a regulatory structure that clearly identifies 
prohibited conduct (e.g., misuse of material, non-public information) 
without further requiring Market Makers to establish and maintain 
specific compliance mechanisms (e.g., information barriers). For 
example, Nasdaq prohibits the misuse of material, non-public 
information but does not generally require that its members establish 
and maintain information barriers.\7\ Similar to NYSE Arca Equities 
Rule 6.18, however, Nasdaq Rule 3010 requires its members to establish 
and maintain a system to supervise the activities of its associated 
persons that are reasonably designed to achieve compliance with 
applicable federal securities laws and regulations, and with applicable 
Nasdaq Rules. Nasdaq Rule 3010 further incorporates by reference NASD 
Rule 3010, requiring compliance with that rule as if it were part of 
Nasdaq's rules.\8\ The Exchange believes that the approach proposed 
herein is consistent with Nasdaq's structure. First, NYSE Arca has 
similar requirements concerning the maintenance of a supervisory system 
and written supervisory procedures. The Exchange's rules governing 
supervision are similar to Nasdaq's rules (which in-turn incorporate 
compliance with NASD Rule 3010). The Exchange notes that FINRA and NYSE 
Arca have previously acknowledged, pursuant to the provisions of Rule 
17d-2 under the Securities Exchange Act of 1934 (``17d-2 Agreement''), 
that, collectively, NYSE Arca Equities Rules 6.18, 9.1(c), 9.1(d), and 
9.2(b) are substantially similar to NASD Rule 3010. In this context, 
the Exchange proposes to amend NYSE Arca Equities Rule 6.18 in order to 
clarify that the Exchange construes the Supervisory System and Written 
Procedures requirements of this rule in a manner consistent with the 
similar requirements of NASD Rule 3010. Accordingly, the Exchange 
proposes adding the following (in addition to certain definitional 
references) as Commentary .01:
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    \7\ See Nasdaq Rules 2110-2, 2110-3, and 2110-4.
    \8\ In Regulatory Notice 07-59, FINRA recognized that policies 
and procedures may differ among entities depending on their business 
model (e.g., size, structure, customer base and product mix). In 
this context, it is important to note the need for flexibility and 
fluidity--should an entity's business model change or expand, it may 
also be appropriate to revise its supervisory policies and 
procedures so as to better reflect its new business model. Further, 
although NASD Rule 3010 does not specifically require firms to 
establish specific information barriers, NTM 07-59 identifies 
information barrier procedures as a relevant process by which to 
manage conflicts of interest or to prevent communications of 
material non-public information between certain individuals or 
groups.

    ``ETP Holders shall comply with NASD Rule 3010(a)(1), (b)(1), 
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and (c)(1) as if such rule were part of NYSE Arca's Rules.''

    The Exchange further proposes adding new NYSE Arca Equities Rule 
6.7, prohibiting ETP Holders from establishing, increasing, decreasing 
or liquidating an inventory position in a security or a derivative of 
such security based on non-public advance knowledge of the content or 
timing of a research report in that security. Similar to FINRA Rule 
5280, NYSE Arca hereby proposes to require that ETP Holders must 
establish, maintain and enforce procedures reasonably designed to 
restrict or limit the information flow between research department 
personnel and trading department personnel, so as to prevent trading 
department personnel from utilizing non-public advance knowledge of the 
issuance or content of a research report.\9\
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    \9\ The Exchange understands that Nasdaq will similarly amend 
its rules regarding trading ahead of research reports to reflect 
this requirement.
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    Second, like Nasdaq, market makers and Lead Market Makers on NYSE 
Arca do not have any advantages regarding relevant trading information 
provided by the Exchange, either at, or prior to, the point of 
execution vis-[agrave]-vis other market participants. The Exchange 
notes that NYSE Arca ETP Holders, Market Makers, and Lead Market Makers 
have equal access to the relevant trading information coming from or 
provided by the Exchange. Accordingly, it is appropriate for the 
Exchange to establish the same approach with respect to information 
barriers as employed by Nasdaq.\10\
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    \10\ NYSE Arca notes that its current examination procedure 
regarding its review for appropriate supervisory systems and 
procedures will remain in place.
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    Conclusion: Flexibility and Accountability
    Eliminating NYSE Arca Equities Rule 7.26, adding NYSE Arca Equities 
Rule 6.7 and clarifying NYSE Arca Equities Rule 6.18, as proposed 
herein, offers Exchange participants both certainty and flexibility. 
NYSE Arca participants are on notice as to their obligations to 
maintain and enforce written policies and procedures reasonably 
designed to prevent the misuse of material, non-public information. 
Like Nasdaq, NYSE Arca participants will now be afforded the same 
flexibility to maintain compliance mechanisms of their own design. The 
Exchange believes that this approach fosters a fair and orderly 
marketplace without being overly burdensome upon its members.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) \11\ of 
the Securities Exchange Act of 1934 (the ``Act''), in general, and 
furthers the objectives of Section 6(b)(5),\12\ in particular, in that 
it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, and to remove impediments to and perfect 
the mechanisms of a free and open market and a national market system. 
Eliminating NYSE Arca Equities Rule 7.26, while establishing new NYSE 
Arca Equities Rule 6.7 and revising NYSE Arca Equities Rule 6.18, 
should eliminate unnecessary regulatory burdens while at the same time 
retaining an appropriate mechanism designed to ensure that material, 
non-public information continues to be protected.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 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 will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

[[Page 46274]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments were solicited or received with respect to 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-NYSEArca-2009-78 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEArca-2009-78. 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, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of NYSE Arca. 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 publicly available. All 
submissions should refer to File Number SR-NYSEArca-2009-78 and should 
be submitted on or before September 29, 2009.

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

    After careful consideration, 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.\13\ The Commission believes that the proposal is consistent 
with Section 6(b)(5) \14\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in 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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    \13\ In approving this rule change, the Commission notes that it 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f(b)(5).
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    The Exchange is proposing to eliminate NYSE Arca Equities Rule 7.26 
and the specifically prescribed information barriers described therein, 
and to adopt a more principles-based approach that would permit a 
Market Maker to develop and apply its own policies and procedures to, 
among other things, prohibit the misuse of material nonpublic 
information. NYSE Arca Equities Rule 7.26 addresses concerns arising 
from the potential for the sharing of material non-public information 
between a Market Maker's market making activities and Other Business 
Activities of the Market Maker or its affiliates.\15\ For instance, one 
such concern is that the Market Maker or affiliate engaging in Other 
Business Activities might use non-public information that was acquired 
by the Market Maker through its role as a market maker, such as trading 
based on information on the Market Maker's book. Another concern is 
that the Market Maker might use material non-public information 
received from the entity engaging in Other Business Activities, such as 
trading based on a change in the firm's buy or sell recommendation.\16\
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    \15\ Other Business Activities include conducting an investment 
banking or public securities business, making markets in the options 
overlying the security in which the Market Maker makes markets, and, 
subject to certain specified exceptions, functioning as a General 
Authorized Trader. See NYSE Arca Equities Rule 7.26.
    \16\ See Securities Exchange Act Release No. 58328 (August 7, 
2008), 73 FR 48260 (August 18, 2008) (SR-NYSE-2008-45) (articulating 
concerns in the context of approving changes to NYSE Rule 98).
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    While the proposed rules will no longer specify policies and 
procedures a Market Maker must establish, the proposal will require 
that the policies and procedures be reasonably designed to ensure 
compliance with applicable federal securities law and regulations, and 
with Exchange rules. The Commission believes that, with adequate 
oversight by the Exchange of its members, elimination of prescriptive 
information barrier requirements should not reduce the effectiveness of 
NYSE Arca rules requiring ETP Holders to establish and maintain systems 
to supervise the activities of ETP Holders, and written procedures that 
are reasonably designed to comply with applicable securities laws and 
Exchange rules, including the prohibition on misuse of material 
nonpublic information.
    Specifically, NYSE Arca Equities Rule 6.3, which requires ETP 
Holders \17\ to establish, maintain and enforce written policies and 
procedures reasonably designed to prevent the misuse of material non-
public information by the ETP Holder or persons associated with the ETP 
Holder, will continue to apply. The misuse of material non-public 
information includes trading in a security or related options or other 
derivative securities, while in possession of material non-public 
information concerning imminent transactions in the security or related 
securities.\18\ The Exchange also proposes to add NYSE Arca Equities 
Rule 6.7, which will prohibit an ETP Holder from establishing, 
increasing, decreasing or liquidating an inventory position in a 
security or derivative of that security based on advance non-public 
knowledge of the content or timing of a research report concerning that 
security. Further, NYSE Arca Equities Rule 6.18, which sets forth an 
ETP Holder's responsibilities or obligations related to conduct or 
supervision, will continue to apply and will be strengthened and 
clarified by explicitly requiring ETP Holders to comply with NASD Rule 
3010(a)(1), (b)(1), and (c)(1) as if such rules were part of NYSE 
Arca's Rules. As incorporated by the Exchange, NASD

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Rule 3010(a)(1), (b)(1), and (c)(1) provide additional clarification 
that the supervisory systems and internal inspections of ETP Holders 
must be reasonably designed to achieve compliance with applicable 
securities laws and regulations and with applicable NYSE Arca rules, 
including those relating to the misuse of material non-public 
information.
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    \17\ Market Makers are a type of ETP Holder. See NYSE Arca 
Equities Rule 7.20. The Commission believes that the information-
sharing concerns regarding Market Makers applies equally to ETP 
Holders.
    \18\ See NYSE Arca Equities Rule 6.3, Commentary .01.
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    Pursuant to this proposal rule change, ETP Holders may utilize the 
flexible, principles-based approach to modify their policies and 
procedures as appropriate to reflect changes to their business model, 
business activities, or to the securities market itself. An ETP Holder 
should be proactive in assuring that its policies and procedures 
reflect the current state of its business and continue to be reasonably 
designed to achieve compliance with applicable federal securities law 
and regulations, and with applicable Exchange rules. In addition, the 
Commission notes that, while information barriers are not specifically 
required under the proposal, an ETP Holder's business model or business 
activities may dictate that an information barrier or a functional 
separation be part of the appropriate set of policies and procedures 
that would be reasonably designed to achieve compliance with applicable 
securities law and regulations, and with applicable Exchange rules.
    The Commission believes that the regulatory approach in this 
proposed rule change is substantially similar to the regulatory 
approach of Nasdaq. In particular, the NYSE Arca approach, like the 
Nasdaq approach, (i) enumerates the conduct that is prohibited by its 
members, including the potential misuse of material non-public 
information and (ii) provides for the policies and procedures that must 
be reasonably designed to ensure compliance with the same. In addition, 
the Commission notes that the Exchange has represented that its current 
examination procedure for the review of appropriate supervisory systems 
and procedures will remain in place.
    The Commission also finds good cause, pursuant to Section 19(b)(2) 
of the Act,\19\ for approving the proposed rule change prior to the 
30th day after the date of publication of notice in the Federal 
Register. Although this proposed rule change does not require that 
members maintain specifically-prescribed information barriers, it will 
continue to mandate that members establish and maintain a set of 
policies and procedures reasonably designed to achieve compliance with 
applicable securities law and regulations, and with applicable Exchange 
rules. As such, the Exchange is adopting an approach that is 
substantially similar to the approach currently employed by Nasdaq.\20\
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    \19\ 15 U.S.C. 78s(b)(2).
    \20\ See Securities Exchange Act Release No. 53128 (Jan. 13, 
2006), 71 FR 3550 (January 23, 2006) (adopting Nasdaq IM-2110-2; IM-
2110-3; IM-2110-4, and Rule 3010).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule change (SR-NYSEArca-2009-78) be, and it 
hereby is, approved on an accelerated basis.
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    \21\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-21641 Filed 9-4-09; 8:45 am]
BILLING CODE 8010-01-P