4002 Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Notices

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3See letter from John F. Malitzis, Esq., Assistant

General Counsel, Nasdaq to Nancy Sanow, Senior

Special Counsel, Division of Market Regulation,

SEC dated November 12, 1999. (Amendment No. 1

added language to proposed NASD Rule 6545(a)(2)

giving the NASD the authority to halt the trading

of a derivative or component of a security listed on

a foreign market or exchange if the foreign

securities exchange or market imposes a trading

halt in the listed securities.)

4See letter from John F. Malitzis, Esq., Assistant

General Counsel, Nasdaq to Nancy Sanow, Senior

Special Counsel, Division of Market Regulation,

SEC dated December 3, 1999. (Amendment No. 2

revised the definition of ‘‘quotation medium’’ in

Rule 6545(c)(ii) and conformed the language in

footnote 12 to reflect the requirements of NASD

Rule 6740 and SEC Rule 15c2–11.) 5See Amendment No. 1, supra note 3. 6See Amendment No. 2, supra note 4.

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42345; File No. SR–NASD–

99–33]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change and

Amendment Nos. 1 and 2 to the

Proposed Rule Change by the National

Association of Securities Dealers, Inc.

Relating to the Establishment of Trade

and Quote Halt Authority for the

NASD’s OTCBB Service

January 18, 2000.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934 (‘‘Act’’

or ‘‘Exchange Act’’),1 and Rule 19b–4

thereunder,2 notice is hereby given that

on July 14, 1999, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’), through its

wholly-owned subsidiary, Nasdaq Stock

Market, Inc. (‘‘Nasdaq’’) filed with the

Securities and Exchange Commission

(‘‘SEC’’ or ‘‘Commission’’) the proposed

rule change as described in Items I, II,

and III below, which Items have been

prepared by Nasdaq. On November 16,

1999, Nasdaq filed Amendment No. 1 to

the proposed rule change.3 On

December 3, 1999, Nasdaq filed

Amendment No. 2 to the proposed rule

change.4 The Commission is publishing

this notice to solicit comments on the

proposed rule change from interested

persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The NASD and Nasdaq are proposing

to amend the rules of the NASD to

establish authority to halt trading in

certain specific circumstances in

securities included in the OTC Bulletin

Board Service (‘‘OTCBB’’). The NASD

and Nasdaq are also proposing to make

changes to the Plan Of Allocation And

Delegation Of Functions By NASD To

Subsidiaries to clarify that the

Stockwatch section of Nasdaq would

have authority to effectuate OTCBB

halts. Below is the text of the proposed

rule change. Proposed new language is

in italics; proposed deletions are in

[brackets].

Rule 6545. Trading and Quotation Halt in

OTCBB-Eligible Securities

(a) Authority for Initiating a Trading and

Quotation Halt

In circumstances in which it is necessary

to protect investors and the public interest,

Nasdaq may direct members, pursuant to the

procedures set forth in paragraph (b), to halt

trading and quotations in the over-thecounter (‘‘OTC’’) market of a security or an

American Depository Receipt (‘‘ADR’’) that is

included in the OTC Bulletin Board

(‘‘OTCBB’’) if:

(1) The OTCBB security or the security

underlying the OTCBB ADR is listed on or

registered with a foreign securities exchange

or market, and the foreign securities

exchange, market, or regulatory authority

overseeing such issuer, exchange, or market,

halts trading in such security for regulatory

reasons because of public interest concerns

(‘‘Foreign Regulatory Halt’’); provided,

however, that Nasdaq will not impose a

trading and quotation halt if the Foreign

Regulatory Halt was imposed solely for

material news, a regulatory filing deficiency,

or operational reasons; or

(2) The OTCBB security or the security

underlying the OTCBB ADR is a derivative or

component of a security listed on or

registered with a national securities

exchange, The Nasdaq Stock Market, or

foreign securities exchange or market (‘‘listed

security’’) and the national securities

exchange, The Nasdaq Stock Market or

foreign securities exchange or market,

imposes a trading halt in the listed

security 5or

(3) The issuer of the OTCBB security or the

security underlying the OTCBB ADR fails to

comply with the requirements of SEC Rule

10b–17 regarding untimely Announcements

of Record Dates.

(b) Procedure for Initiating a Trading and

Quotation Halt

(1) When a halt is initiated under

subparagraph (a)(1) of this rule, upon receipt

of information from a foreign securities

exchange or market on which the OTCBB

security or the security underlying the

OTCBB ADR is listed or registered, or from

a regulatory authority overseeing such issuer,

exchange, or market, Nasdaq will promptly

evaluate the information and determine

whether a trading and quotation halt in the

OTCBB security is appropriate.

(2) Should Nasdaq determine that a basis

exists under this rule for initiating a trading

and quotation halt, the commencement of the

trading and quotation halt will be effective

simultaneous with the issuance of

appropriate public notice.

(3) Trading and quotations in the OTC

market may resume when Nasdaq determines

that the basis for the halt no longer exists, or

when five business days have elapsed from

the date Nasdaq initiated the trading and

quotation halt in the security, whichever

occurs first. Nasdaq shall disseminate

appropriate public notice that the trading

and quotation halt is no longer in effect.

(c) Violation of OTCBB Trading and

Quotation Halt Rule

If a security is subject to a trading and

quotation halt initiated pursuant to this rule,

it shall be deemed conduct inconsistent with

just and equitable principles of trade and a

violation of Rule 2110 for a member:

(i) To effect, directly or indirectly, a trade

in such security; or

(ii) To publish a quotation, a priced bid

and/or offer, an unpriced indication of

interest (including ‘‘bid wanted’’ and ‘‘offer

wanted’’ indications), or a bid or offer

accompanied by a modifier to reflect

unsolicited customer interest, in any

quotation medium. For purposes of this Rule,

‘‘quotation medium’’ shall mean any: system

of general circulation to brokers or dealers

that regularly disseminates quotations of

identified brokers or dealers; or publication,

alternative trading system or other device

that is used by brokers or dealers to

disseminate quotations to others.6

Plan Of Allocation And Delegation Of

Functions By NASD To Subsidiaries

I–III. No Change

IV. Stockwatch

The Stockwatch section handles the

trading halt functions for The Nasdaq Stock

market securities [and], exchange-listed

securities traded in the over-the-counter

market (i.e., the Third Market), and securities

quoted in the Over-the-Counter Bulletin

Board. Review of all questionable market

activity, possible rule infractions or any other

matters that require any type of investigative

or regulatory follow-up will be referred to

and conducted by NASD Regulation, which

will assume sole responsibility for the matter

until resolution. This responsibility will

include examinations, investigations,

document requests, and any enforcement

actions that NASD Regulation may deem

necessary. NASD Regulation staff at all times

will have access to all records and files of the

stockwatch function.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

Nasdaq 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 these statements

may be examined at the places specified

in item IV below. Nasdaq has prepared

summaries, set forth in Sections A, B,

and C below, of the most significant

aspects of such statements.

Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Notices 4003

7See NASD Rule 4120. NASD Rule 4120 provides

that Nasdaq may halt trading: (1) In the over-thecounter market of a security listed on Nasdaq to

permit the dissemination of material news; (2) in

the over-the-counter market of a security listed on

a national securities exchange during a trading halt

imposed by such exchange to permit the

dissemination of material news; (3) by: (i)

Consolidated Quotation System (‘‘CQS’’) market

makers in a CQS security when a national securities

exchange imposes a trading halt in that CQS

security because of an order imbalance or influx

(‘‘operational trading halt’’); or (ii) Nasdaq market

makers in a security listed on Nasdaq, when the

security is a derivative or component of a CQS

security and a national securities exchange imposes

an operational trading halt in that CQS security; (4)

in an American Depository Receipt (‘‘ADR’’) or

other security listed on Nasdaq, when the Nasdaqlisted security or the security underlying the ADR

is listed on or registered with a national or foreign

securities exchange or market, and the national or

foreign securities exchange or market, or regulatory

authority overseeing such exchange or market, halts

trading in such security for regulatory reasons; or

(5) in a security listed on Nasdaq when Nasdaq

requests from the issuer information relating to (i)

material news; (ii) the issuer’s ability to meet

Nasdaq listing qualification requirements, as set

forth in NASD Rule 4300 and 4400 Series; or (iii)

or any other information which is necessary to

protect investors and the public interest.

8See Amendment No. 1, supra note 3.

9Separately, NASD Regulation focused on

establishing authority to impose trading and

quotation halts in non-Nasdaq, non-OTCBB, OTC

securities. Based on its review, NASD Regulation is

issuing Notice to Members 99–69, in which it is

soliciting comments on whether NASD Regualtion

should have authority to halt trading in nonNasdaq, non-OTCBB, OTC securities: (1) When the

security is dually listed and a foreign regulatory

authority or market halts trading; or (2) when the

security is a derivative of a Nasdaq or exchangelisted security and Nasdaq or a national securities

exchange halts trading in the underlying security.

NASD Regulation is seeking comments from its

membership prior to filing a rule proposal with the

Commission because NASD Regulation’s proposal

is broader than that proposed in this filing. See

Amendment No. 1, supra note 3.

10Under section 12(k) of the Act, the Commission

may impose trading suspensions in the U.S.

securities markets. See 15 U.S.C. 781–12(k).

Additionally, NASD Rule 3340 prohibits members

from trading any security as to which a trading halt

is in effect. When the Commission suspends trading

in an OTCBB security, Nasdaq announces the halt

via the NEWS frame on the Nasdaq Workstation II

and prohibits trading and quotations on the OTCBB.

11See NASD Rule 4210(a)(4).

12The NASD and Nasdaq do not propose to halt

for material news because Nasdaq does not have a

formal listing agreement with OTCBB issuers, and

thus cannot compel the full disclosure and

dissemination of material news. The NASD and

Nasdaq do not propose to halt trading if an issuer

fails to meet filing/disclosure requirements imposed

by a foreign regulatory authority or market, because

Nasdaq would, in essence, be importing filing

obligations of a foreign regulatory authority on

OTCBB issuers when such requirements may not

currently exist in the United States for such issuers.

Lastly, the NASD and Nasdaq are not proposing to

halt trading based on a foreign exchange’s

operational halt, such as an order imbalance,

because Nasdaq generally does not halt for

operational reasons.

13Of course, if an issuer failed to meet the

eligibility requirements contained in NASD rules

6530 and 6540, which impose certain regulatory

filing requirements for securities to be included in

the OTCBB, the security would be removed from

the OTCBB.

14That is, if Nasdaq directs all members to cease

quoting a security for five or more business days,

pursuant to NASD Rule 6740 and Exchange Act

Rule 15c2–11, members will be required to file a

Form 211 prior to the resumption of quotations in

the OTCBB. See 17 CFR 240.15c2–11, The NASD

and Nasdaq note that the Commission recently

issued for comment a reproposal of amendments to

Exchange Act Rule 15c2–11. See Securities

Exchange Act Release No. 41110 (February 25,

Continued

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

Background. As part of the NASD’s

ongoing effort to address abuses in

thinly traded, thinly capitalized

securities and to increase investor

protection in the trading of over-thecounter (‘‘OTC’’) market, the NASD,

Nasdaq, and NASD Regulation have

been reviewing whether to establish

trading and quotation halt authority for

securities that are not listed on an

exchange or on Nasdaq, but are traded

by NASD members in the OTC market.

Nasdaq specifically focused on

expanding its current trading halt

authority, which generally extends to

Nasdaq-listed securities and exchangelisted securities traded off an exchange 7

(i.e., third market), to those securities

quoted on the OTCBB. The OTCBB is an

NASD system which, pursuant to

delegated authority. the Nasdaq Stock

Market, Inc. is responsible for operating.

Based on this review, the NASD and

Nasdaq are proposing to expand

Nasdaq’s authority so that Nasdaq may

impose quotation and trading halts in

OTCBB securities when: (1) The OTCBB

security is dually listed or registered

and a foreign regulatory authority or

market halts trading in the security; (2)

the OTCBB security is a derivative or

component of a security listed on

Nasdaq, a domestic exchange, or foreign

exchange/market (e.g., a convertible

security or warrant) and Nasdaq, the

exchange, or foreign exchange/market

halts trading in the underlying

security; 8 or (3) the OTCBB issuer does

not timely provide the NASD with

information required by Exchange Act

Rule 10b–17.9

Currently, NASD Rule 4120

authorizes Nasdaq to impose trading

halts in Nasdaq-listed securities and

securities listed on a national securities

exchange and traded in the third

market. There are, however, no rules

that grant Nasdaq authority to impose

trading or quotation halts in OTCBB

securities. Additionally, unlike the

Nasdaq market, there is no listing

agreement between Nasdaq and OTCBB

issuers, and thus Nasdaq does not have

the ability to compel such issuers to

disclose information to Nasdaq.

Accordingly, it is difficult for Nasdaq to

unilaterally imposes halts in the OTCBB

because, in most cases, information

from the issuer is necessary to assess the

situation and determine if a a halt and/

or resumption of trading is

appropriate.10 In light of the foregoing

the NASD and Nasdaq are proposing to

vest Nasdaq with proscribed tradinghalt authority.

Foreign Regulatory Authority Halts.

First, the NASD and Nasdaq are

proposing to impose trading and

quotation halts in OTCBB eligible

securities when a foreign market or

regulatory authority has imposed a halt

in the security in their market for

regulatory reasons. This authority

would permit Nasdaq to halt an OTCBB

security or OTCBB ADRs when a foreign

market on which the OTCBB issue is

also traded, or a regulatory authority

which has oversight authority for the

OTCBB security, halts trading in the

security or the security underlying the

ADR for ‘‘regulatory’’ reasons. (Nasdaq

currently has similar trading-halt

authority for Nasdaq-listed securities.) 11

Under the proposal, upon receipt of

information from a foreign securities

market on which the OTCBB security or

the security underlying the OTCBB ADR

is listed or registered or from a

regulatory authority overseeing such

issuer, exchange, or market, Nasdaq’s

Stockwatch section will evaluate the

information (generally, a trade-halt

order issued by the foreign market or

regulatory authority) and determine

whether a halt in the OTCBB security is

appropriate. Nasdaq will impose such a

halt only when the foreign market or

regulatory authority has imposed its halt

because of potential fraudulent conduct

or other public interest concerns.

Nasdaq will not impose a halt if the

foreign entity’s halt is based on the

dissemination of material news, an

issuer’s failure to meet regulatory filing

requirements imposed by a foreign

market or regulatory authority, or for

operational reasons (e.g. order

imbalance in the foreign market).12

For this and the proposed halts

described below, an OTCBB halt would

be lifted if Nasdaq determines that the

basis of the halt no longer exists or upon

the passage of five trading days, which

ever occurs first.13 If a stock is halted for

five days and then the halt is lifted, at

the time the halt is lifted, market makers

will be required to fulfill their

obligations under Exchange Act Rule

15c2–11 prior to initiating a priced or

unpriced quotation in the security.14

4004 Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Notices

1999), 64 FR 11124 (March 8, 1999). The NASD and

Nasdaq will monitor developments regarding

Exchange Act Rule 25c2–11 and plan to make any

necessary changes to conform the rules proposed in

this filing with any changes to Exchange Act Rule

15c2–11.

15See NASD Rule 4120(a)(3)(ii).

16See Amendment No. 1, supra note 3.

17See 17 CFR 240.10b–17.

18 Id.

19See NASD Rule 4210(a)(5).

20 15 U.S.C. 78o–3(b)(6).

21 15 U.S.C. 78o–3(b)(11).

Nasdaq will notify market participants

and the public of halts through the

NASD Regulation and Nasdaq Websites

(e.g., OTCBB.com, Nasdaqtrader.com,

NASDR.com), as well as the Nasdaq

NEWS frame on the Nasdaq Workstation

II.

Halts in Derivative Securities. Nasdaq

currently has the authority to halt

trading in a Nasdaq-listed derivative

security when a national securities

exchange or Nasdaq halts trading in the

underlying equity security that is listed

on the exchange or Nasdaq.15 Halt

authority only extends to derivatives

listed on Nasdaq, and does not extend

to derivatives quoted in the OTCBB.

Thus, for example, Nasdaq or an

exchange may halt trading in a security,

but trading may continue in the OTCBB

derivative security. Since the trading

price of the OTCBB derivative is

dependent on the price of the

underlying listed security, it is difficult

to accurately price the derivative

security when there is no current

pricing information on the underlying

security. Such difficulty in pricing may

lead to disorderly markets and investor

confusion. According, the NASD and

Nasdaq are proposing to halt trading

and quotations in OTCBB securities

when the OTCBB security is a derivative

or component of a security listed on

Nasdaq, a domestic exchange, or

Nasdaq, foreign market/exchange, and

the exchange, or foreign market/

exchange imposes a trading halt in the

underlying listed security.16

OTCBB Halts for Failure to Comply

With Exchange Act Rule 10b–17.

Finally, the NASD and Nasdaq are

proposing to halt quotations and trading

in an OTCBB security if the issuer fails

to comply with the requirements of

Exchange Act Rule 10b–17 regarding

Untimely Announcements of Record

Dates.17 Exchange Act Rule 10b–17

requires issuers to give, in a timely

fashion, the NASD information relating

to: (1) A dividend or other distribution

in cash or in kind; (2) a stock split or

reverse split; and (3) a rights or other

subscription offering. Under Exchange

Act Rule 10b–17, the issuer is required

to provide this information to the NASD

no later than 10 days prior to the record

date or, in case of a rights subscription

or other offering if such 10 days advance

notice is not practical, on or before the

record date.18

For both Nasdaq-listed and OTCBB

securities, Nasdaq publishes the record

date of the action and the ex-date in its

‘‘Daily List’’ on the Nasdaq Websites.

This provides information to brokerdealers, clearing agencies, and the

public regarding the record date and

settlement of such trades. For Nasdaqlisted securities, if an issuer does not

provide the information in a timely

manner, Nasdaq may request the Rule

10b–17 information from the issuer and

halt trading pending receipt of such

information.19 Nasdaq may then issue a

Uniform Practice Code (‘‘UPC’’) notice

informing members of the status of the

record date and underlying event in

order to clarify any confusion in the

marketplace regarding the pricing or

settlement of these trades.

While OTCBB issuers are also

required to give the NASD information

proscribed by Exchange Act Rule 10b–

17 in a timely manner, Nasdaq does not

currently have authority to institute

trading halts in an OTCBB security

when such information has not been

timely provided. In the past, OTCBB

issuers have failed to provide the NASD

with the information required by

Exchange Act Rule 10b–17, such as a

stock split or the payment of a cash

dividend, which has caused confusion

in the marketplace because the

information has been disseminated

unevenly. When this has occurred, some

market participants had become aware

of the information (which impacts the

pricing of the security) and had adjusted

their quotes and/or trading activity

accordingly. Others, however, had been

unaware of this information and did not

adjust their quotes and/or trading

activity, thus resulting in anomalous

pricing. In these situations, unlike

Nasdaq-listed stocks, Nasdaq was not

able to halt trading, gather information

and issue a clarifying UPC notice.

Rather, trading continued despite the

uneven distribution of information or

the distribution of misinformation,

while Nasdaq staff attempted to gather

information to clarify the situation. To

minimize the potential for disorderly

markets and investor confusion, the

NASD and Nasdaq are proposing to halt

trading and quotations in an OTCBB

security when the issuer fails to give the

NASD notice of the information

specified in Exchange Act Rule 10b–17.

Finally, the NASD and Nasdaq are

proposing to amend the Plan Of

Allocation And Delegation Of Functions

By NASD To Subsidiaries to clarify that

the Stockwatch section of Nasdaq would

have authority to effectuate OTCBB

halts

2. Statutory Basis

The NASD and Nasdaq believe that

the proposed rule change is consistent

with the provisions of Section 15A(b)(6)

of the Act,20 which requires, among

other things, that the Association’s rules

must be designed to prevent fraudulent

and manipulative acts and practices, to

promote just and equitable principles of

trade, and, in general, to protect

investors and the public interest. In

addition, the NASD and Nasdaq believe

that the proposal is consistent with the

provisions of Section 15A(b)(11) of the

Act.21 Section 15A(b)(11) of the Act

requires that the rules of a registered

national securities association be

designed to produce fair and

informative quotations, prevent

fictitious or misleading quotations and

to promote orderly procedures for

collecting, distributing, and publishing

quotations. As noted above, because the

proposed rule change will expand

Nasdaq’s authority to initiate trading

halts in OTCBB issues based on

regulatory halts imposed by other

markets or regulatory authorities, the

proposed rule will prevent fraudulent

practices and protect investors.

Moreover, the proposal will authorize

Nasdaq to halt trading when there is a

failure to timely provide the NASD with

information mandated by Exchange Act

Rule 10b–17, which if not timely and

evenly disseminated could have a

dramatic impact on the pricing and

trading of OTCBB issues. Thus, the

proposal is designed to protect investors

and to produce fair and informative

quotations, prevent fictitious or

misleading quotations and to promote

orderly procedures for collecting,

distributing, and publishing quotations.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The NASD and Nasdaq do not believe

that the proposed rule change will

impose any inappropriate burden on

competition.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

Written comments were neither

solicited nor received.

Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Notices 4005

22 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the publication of

this notice in the Federal Register or

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 self-regulatory organization

consents, the Commission will:

(A) By order approve the 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 proposal is

consistent with the Act. Persons making

written submissions should file six

copies thereof the the Secretary,

Securities and Exchange Commission,

450 Fifth Street, N.W., Washington, D.C.

20549–0609. 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 at

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the NASD.

All submissions should refer to File

No. SR–NASD–99–33 and schould be

submitted by February 15, 2000.

For the Commission, by the Division

of Market Regulation, pursuant to

delegated authority. 22

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–1698 Filed 1–24–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42343; File No. SR–NYSE–

99–47]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the New York Stock Exchange, Inc. To

Amend NYSE Rule 431 (‘‘Margin

Requirements’’)

January 14, 2000.

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

13, 1999, the New York Stock Exchange,

Inc. (‘‘NYSE’’ or ‘‘Exchange’’) filed with

the Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’)

the proposed rule change as described

in Items I, II and III below, which Items

have been prepared by the Exchange.

The Commission is publishing this

notice to solicit comments on the

proposed rule change from interested

persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The NYSE proposes to amend NYSE

Rule 431, ‘‘Margin Requirements,’’ to

establish margin requirements for day

trading in customer accounts of member

organizations. The text of the proposal

is below. Deletions are in brackets, and

additions are in italics.

Rule 431—Margin Requirements

No change to 431(a) through (b)(3).

(b)(4) equity of at least $2,000 except that

cash need not be deposited in excess of the

cost of any security purchased (this equity

and cost of purchase provision shall not

apply to ‘‘when distributed’’ securities in a

cash account). The minimum equity

requirement for a ‘‘pattern day trader’’ is

$25,000 pursuant to paragraph (f)(8)(B)(iv)(1)

of this Rule.

Withdrawals of cash or securities may be

made from any account which has a debit

balance, ‘‘short’’ position or commitments,

provided it is in compliance with Regulation

T of the Board of Governors of the Federal

Reserve System and after such withdrawal

the equity in the account is at least the

greater of $2,000 ($25,000 in the case of

‘‘pattern day traders’’) or an amount

sufficient to meet the maintenance margin

requirements of this Rule.

No change to 431(c) through (f)(8)(A)(iii).

(f)(8)(B) Day Trading.

(i) The term ‘‘day trading’’ means the

purchasing and selling or the selling and

purchasing of the same security on the same

day in a margin account except for:

(a) a long security position held overnight

and sold the next day prior to any new

purchases of the same security, or

(b) a short security position held overnight

and purchased the next day prior to any new

sales of the same security.

(ii) [A ‘‘day trader’’ is any customer whose

trading shows a pattern of day trading.] The

term ‘‘pattern day trader’’ means any

customer who executes four (4) or more day

trades within five (5) business days. However,

if the number of day trades is 6% or less of

total trades for the five (5) business day

period, the customer will no longer be

considered a pattern day trader and the

special requirements under paragraph

(f)(8)(B)(iv) of this Rule will not apply.

(iii) The term ‘‘day trading buying power’’

means the equity in a customer’s account at

the close of business of the previous day, less

any maintenance margin requirement as

prescribed in paragraph (c) of this Rule,

multiplied by four, for equity securities.

Whenever day trading occurs in a

customer’s margin account the [margin to be

maintained] special maintenance margin

required for the day trades in equity

securities shall be [the margin on the ‘‘long’’

or ‘‘short’’ transaction, whichever occurred

first, as required pursuant to the other

provisions of this Rule. When day trading

occurs in the account of a ‘‘day trader’’ the

margin to be maintained shall be the margin

on the ‘‘long’’ or ‘‘short’’ transaction,

whichever occurred first, as required by

Regulation T of the Board of Governors of the

Federal Reserve System or as required

pursuant to the other provisions of this Rule,

whichever amount is greater.] 25% of the

cost of all the day trades made during the

day. For non-equity securities, the special

maintenance margin shall be as required

pursuant to the other provisions of this Rule.

Alternatively, when two or more day trades

occur on the same day in the same

customer’s account, the margin required may

be computed utilizing the highest (dollar

amount) open position during that day. To

utilize the highest open position computation

method, a record showing the ‘‘time and

tick’’ of each trade must be maintained to

document the sequence in which each day

trade was completed.

(iv) Special Requirements for Pattern Day

Traders

(1) Minimum Equity Requirement for

Pattern Day Traders—The minimum equity

required for the accounts of customers

deemed to be pattern day traders shall be

$25,000. This minimum equity must be

maintained in the customer’s account at all

times (see Supplementary Material .40 of this

Rule).

(2) Pattern day traders cannot trade in

excess of their day trading buying power as

defined in paragraph (f)(8)(B)(iii) above. In

the event a pattern day trader exceeds its day

trading buying power which creates a special

maintenance margin deficiency, the

following actions will be taken by the

member organization.

(a) The account will be margined based on

the cost of all the day trades made during the

day, and

(b) The customer’s day trading buying

power will be limited to the equity in the

customer’s account at the close of business

of the previous day, less the maintenance

margin required in paragraph (c) of this Rule,

multiplied by two, for equity securities.