[Federal Register Volume 69, Number 27 (Tuesday, February 10, 2004)]
[Notices]
[Pages 6354-6356]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-2825]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49183; File No. SR-NYSE-2002-32]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Amendment Nos. 1, 2, 3, and 4 
To Incorporate Interpretive Material to Several NYSE Rules

February 4, 2004.

I. Introduction

    On August 12, 2002, the New York Stock Exchange (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant 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 incorporate interpretive material to several 
existing NYSE Rules. On March 11, 2003, the Exchange filed Amendment 
No. 1 to the proposed rule change.\3\ On May 21, 2003, the Exchange 
filed Amendment No. 2 to the proposed rule change.\4\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Mary Yeager, Assistant Secretary, NYSE, to 
Nancy J. Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated March 10, 2003 (``Amendment No. 
1'').
    \4\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE 
to Nancy J. Sanow, Assistant Director, Division, Commission, dated 
May 20, 2003 (``Amendment No. 2'').
---------------------------------------------------------------------------

    On June 9, 2003, the proposed rule change, as amended by Amendment 
Nos. 1 and 2, was published for comment in the Federal Register.\5\ The 
Commission received no comments on the proposed rule change, as 
amended. On June 11, 2003, the NYSE filed Amendment No. 3 to the 
proposed rule change.\6\ On January 29, 2004, the NYSE filed Amendment 
No. 4 to the proposed rule change.\7\ This order approves the proposed 
rule change, as amended.
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 47961 (June 2, 
2003), 68 FR 34453.
    \6\ See letter from Mary Yeager, Assistant Secretary, NYSE, to 
Nancy J. Sanow, Assistant Director, Division, Commission, dated June 
10, 2003 (``Amendment No. 3''). In Amendment No. 3, the Exchange 
added the phrase ``or rejected'' to a sentence within NYSE Rule 
91.10 to clarify that transactions that are not rejected are deemed 
to be accepted for the purposes of NYSE Rule 91.10. This sentence 
now reads that ``[t]ransactions which are not then confirmed or 
rejected in accordance with the procedures above are deemed to have 
been accepted.'' This is a technical amendment and is not subject to 
notice and comment.
    \7\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy J. Sanow, Assistant Director, Division, Commission, dated 
January 29, 2004 (``Amendment No. 4''). In Amendment No. 4, the 
Exchange provided the Commission with examples of different 
scenarios for confirming principal transactions under NYSE Rule 
91.10. This is a technical amendment and is not subject to notice 
and comment.
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    The NYSE filed the proposed rule change to codify long-standing 
interpretive material to several NYSE rules and to respond to 
recommendations made by an independent consultant retained by the 
NYSE.\8\
---------------------------------------------------------------------------

    \8\ See In the Matter of New York Stock Exchange, Inc., 70 
S.E.C. Docket 106, Securities Exchange Act Release No. 41574 (June 
29, 1999), Administrative Proceeding File No. 3-9925.
---------------------------------------------------------------------------

A. NYSE Rule 72

    NYSE Rule 72 delineates the basic rule governing the priority and 
precedence of bids and offers at the same price on the Exchange. NYSE 
Rule 72(b) provides that certain types of agency cross transactions at 
a given price receive priority over pre-existing bids or offers at that 
price. The Exchange proposes to add a sentence to NYSE Rule 72(b) to 
clarify that a broker whose cross is broken up because another member 
has provided price improvement must follow the crossing procedures of 
NYSE Rule 76 before completing the balance of the cross.
    The Exchange is also proposing to add an example to NYSE Rule 72(b) 
to illustrate its interpretation that a sale ``clears the floor,'' 
meaning all bids and offers not satisfied in a given transaction are 
deemed to be simultaneously re-entered and on parity with each other.

B. NYSE Rule 75

    The Exchange is proposing to codify formally in NYSE Rule 75 its 
long-standing practice that Floor disputes involving $10,000 or more, 
or questioned trades, can be referred for resolution to a panel of 
three Floor Governors, Senior Floor Officials, or

[[Page 6355]]

Executive Floor Officials, or any combination thereof if the parties to 
the dispute so agree. The proposed rule change further provides that 
members may, as an alternative, resolve such disputes through the 
arbitration procedures established under the Exchange's Constitution 
and Rules.

C. NYSE Rule 91

    NYSE Rule 91.10 addresses the procedures a member follows to 
confirm a transaction involving another member who has elected to take 
or supply for his own account the securities named in an order 
entrusted to him. The Exchange is proposing to amend NYSE Rule 91.10 to 
make clear in the rule that only a member may confirm a transaction in 
the situations covered by the rule. The Exchange is also proposing to 
add a sentence to the Rule to clarify that transactions that are not 
confirmed or rejected are deemed to have been accepted.\9\ In addition, 
the Exchange proposes to amend NYSE Rule 91.10 to provide that a member 
receiving a report of execution of a transaction where another member 
acted as principal triggers the member's unconditional right to reject 
the trade as soon as practicable, given the prevailing circumstances. 
Furthermore, the Exchange is amending NYSE Rule 91.10 to clarify that 
disputes as to whether there was sufficient time to reject the trade 
would be resolved under NYSE Rule 75.
---------------------------------------------------------------------------

    \9\ See Amendment No. 3, supra note 6.
---------------------------------------------------------------------------

    The Exchange provided several examples of situations involving 
confirmation of a principal trade by a specialist \10\ and whether the 
member took timely action. Under Rule 91.10, three different scenarios 
can occur in situations involving confirmation of a principal trade by 
a specialist. First, the broker can determine to take no action, in 
which case the transaction with the specialist would be deemed 
confirmed/accepted under NYSE Rule 91.10 since ``transactions which are 
not then confirmed or rejected * * * are deemed to have been 
accepted.'' Second, the broker could determine to go to the 
specialist's post as soon as practicable under the prevailing 
circumstances to confirm the transaction by initialing the memorandum 
record of the specialist which shows the details of the trade and to 
return it to the specialist. Third, the broker could determine to go to 
the specialist's post as soon as practicable under the prevailing 
circumstances to reject the trade.
---------------------------------------------------------------------------

    \10\ See Amendment No. 4, supra note 7. The Exchange also 
confirmed that the scenarios provided by the Exchange regarding 
principal trades by a specialist would also apply to members 
involved in a principal transaction with any Exchange member. 
Telephone conversation between Donald Siemer, Director of Rule 
Development, Market Surveillance Division, NYSE, and Terri Evans, 
Assistant Director, Division, Commission on February 3, 2004.
---------------------------------------------------------------------------

    What is reasonable for a floor broker in taking timely action under 
NYSE Rule 91.10 depends on his location on the trading floor in 
relation to where the specialist's post is located, how busy he is, how 
timely the customer was in relaying his instructions to confirm/reject/
do nothing, as well as prevailing market conditions. Any disagreement 
about whether a member or member organization took timely action in 
rejecting a trade or about whether a transaction was properly deemed to 
have been accepted under NYSE Rule 91.10 would be resolved in 
accordance with NYSE Rule 75, which gives the final determination to a 
Floor Official. If called upon to resolve such a dispute, a Floor 
Official would be expected to weigh the factors noted above. Any 
resolution of the dispute would, of necessity, depend on the unique 
facts of each particular situation. A Floor broker who received a 
report of execution within one minute of a trade, was located in close 
proximity to the trading post, and who took no action upon receiving 
the execution report, might, in the judgment of a Floor Official, be 
precluded from rejecting a trade after a period that could be as brief 
as several minutes, if the Floor Official concluded that the broker had 
not acted as soon as practicable under the circumstances. Conversely, a 
broker who did not receive an execution report until 10 or 15 minutes 
after the trade, and was actively executing orders in another trading 
room, might be deemed to have acted as soon as practicable in rejecting 
a trade after a period of a half hour or more, depending on the Floor 
Official's assessment of the reasonableness of the broker's actions.
    The Exchange is also proposing to amend NYSE Rule 91.20 to replace 
the term ``should'' with ``must,'' to reflect the mandatory nature of 
the procedures outlined, pertaining to principal transactions effected 
against orders in a specialist's possession.
    The Exchange proposes to add NYSE Rule 91.50 regarding the 
rejection of specialist's principal transactions. The proposed rule 
states that if there is a continued pattern of rejections of a 
specialist's principal transactions, a Floor Official may be called 
upon to require the broker to review his actions. If a customer gives a 
continued pattern of rejection instructions to a Floor broker to reject 
any trade where the specialist acted as principal, a Floor Official 
would be able to review the appropriateness of the continued pattern of 
rejections by the broker, to make sure he is representing his customer 
as fiduciary and not giving the specialist, in effect, a kind of 
conditional order that is not recognized under Exchange rules. If a 
continued pattern of rejections does occur because the customer will 
not accept executions with the specialist as contra party, the Floor 
broker should represent the order himself or herself to ensure 
appropriate representation of the order in accordance with the broker's 
fiduciary responsibility to the customer. The proposed NYSE Rule 91.50 
clarifies, however, that neither the Floor Official's review of a 
broker's actions, nor the characterization of an order as a conditional 
order compromises the unconditional right of a broker to reject any 
trade where the specialist trades as principal. The proposed rule 
further provides that a broker's exercise of his right to reject a 
trade will not trigger a disciplinary action against the broker.

D. NYSE Rule 95

    The Exchange is proposing to add material to NYSE Rule 95(a) making 
clear that members may not create an order or a material term of an 
order, but must receive an order from off the Floor which includes all 
the material terms of an order, regardless of how familiar they are 
with a customer's strategy.

E. NYSE Rule 115A

    NYSE Rule 115A provides, among other matters, procedures for 
members to confirm transactions on openings. The Exchange is proposing 
to add to NYSE Rule 115A an intra-rule cross-reference to make clear 
that while a broker should confirm a transaction as promptly as 
possible, the specialist is not responsible for losses 30 minutes after 
the opening.

F. NYSE Rule 116

    The Exchange is proposing three changes to NYSE Rule 116. First, 
the Exchange proposes to amend NYSE Rule 116.20 to state directly a 
prohibition against a Floor broker ``stopping'' stock. Second, the 
Exchange is proposing to amend NYSE Rule 116.30(3)(a) to make clear 
that a specialist should ``stop'' an order in a minimum variation 
market only when there is an imbalance in the quotation suggesting the 
likelihood of price improvement for the ``stopped'' order. And third, 
the Exchange is proposing to add to NYSE Rule 116.40 a cross-reference 
to NYSE Rule 123C, which codifies the Exchange's procedures regarding 
execution of market-on-close and limit-on-close orders.

[[Page 6356]]

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\11\ Specifically, the Commission believes the 
proposed rule change, as amended, is consistent with section 6(b)(5) of 
the Act,\12\ which requires among other things, that the rules of the 
Exchange are designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market, and 
in general to protect investors and the public interest.
---------------------------------------------------------------------------

    \11\ The Commission has considered the proposed rules' impact on 
efficiency, competition and capital formation. 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission believes that the proposed rule change codifies 
current practices on the Exchange and existing interpretations of NYSE 
rules and is responsive to recommendations made by an independent 
consultant retained by the Exchange.\13\ The Commission also believes 
that the proposed rule change should clarify Exchange members' rights 
and obligations under certain rules such as a broker having to recross 
a clean agency cross when there has been price improvement, a member's 
ability to resolve certain disputes involving a monetary difference of 
$10,000 or more by a panel or through arbitration, a member's 
requirement to receive all material terms of an order from the member's 
customer off the floor of the Exchange, a specialist's responsibility 
for losses incurred by other members because of an opening transaction, 
and the conditions for stopping stock.
---------------------------------------------------------------------------

    \13\ See supra note 8.
---------------------------------------------------------------------------

    Moreover, the Commission believes the proposed rule change will 
clarify the process by which a member can confirm or reject a 
transaction involving another member who has elected to take or supply 
for his own account the security named in an order entrusted to 
him.\14\ The Commission notes that several of the changes to NYSE Rule 
91 codify the NYSE's prior interpretation of this rule. As a result, 
the Commission believes that codification of these interpretations will 
add greater transparency to the NYSE's rules. Further, the Commission 
notes that the proposed changes to NYSE Rule 91 aim to maintain a 
degree of flexibility in the rule to accommodate various situations 
occurring during the trading day.
---------------------------------------------------------------------------

    \14\ The Commission notes that Exchange members should assure 
that any agency issues are addressed by their respective customer 
agreements.
---------------------------------------------------------------------------

    With respect to the changes proposed for NYSE Rule 91.50, the 
Commission notes that a Floor Official's review of a broker's continued 
pattern of rejections of a specialist's principal transactions in no 
way compromises the unconditional right of a broker to reject any trade 
where the specialist trades as principal. Furthermore, the Commission 
notes that the proposed rule provides that no disciplinary process 
would be triggered by the broker exercising his or her right to reject 
a trade.

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-NYSE-2002-32), as amended, 
is approved.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
---------------------------------------------------------------------------

    \16\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-2825 Filed 2-9-04; 8:45 am]
BILLING CODE 8010-01-P