Federal Register / Vol. 74, No. 48 / Friday, March 13, 2009 / Notices 10973 

9 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3Amendment No. 1 to SR–FINRA–2008–024 

replaced and superseded the original rule filing. 

4See Exchange Act Release No. 41833 (Sept. 2, 

1999), 64 FR 49256 (Sept. 10, 1999). 

5On July 26, 2007, the Commission approved a 

proposed rule change filed by NASD to amend 

NASD’s Certificate of Incorporation to reflect its 

name change to FINRA in connection with the 

consolidation of the member firm regulatory 

functions of NASD and NYSE Regulation, Inc. See 

Securities Exchange Act Release No. 56146 (July 26, 

2007). 

6Exchange Act Release No. 55158 (Jan. 24, 2007), 

72 FR 4574 (Jan. 31, 2007) (File No. SR–NASD– 

2003–158). 

7See Rule 12506. 

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 CBOE. 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–CBOE–2009–012 and 

should be submitted on or before April 

3, 2009. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.9

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–5387 Filed 3–12–09; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–59534; File No. SR–FINRA– 

2008–024] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Notice of Filing of 

Proposed Rule Change and 

Amendment No. 1 Thereto Relating to 

Amendments to the Discovery Guide 

To Update the Document Production 

Lists 

March 6, 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 June 11, 

2008, Financial Industry Regulatory 

Authority, Inc. (‘‘FINRA’’) (f/k/a 

National Association of Securities 

Dealers, Inc. (‘‘NASD’’)) filed with the 

Securities and Exchange Commission 

(‘‘SEC’’ or ‘‘Commission’’) and amended 

by Amendment No. 1 on January 21, 

2009,3 the proposed rule change as 

described in Items I, II, and III below, 

which Items substantially have been 

prepared by FINRA. 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 

FINRA proposes to amend the 

Discovery Guide to update the 

Document Production Lists. The text of 

the proposed rule change is available at 

FINRA, at its Web site (http:// 

www.finra.org), 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, 

FINRA 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. FINRA 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 proposed rule change adds 

clarifying and conforming language to 

the introduction in the Discovery Guide 

and updates the Document Production 

Lists. The text of the proposed rule 

change is contained in Exhibit 5 and is 

available on the FINRA Web site at 

www.finra.org. 

Background 

In January 1996, the Arbitration 

Policy Task Force chaired by former 

SEC chairman David Ruder issued a 

document entitled, ‘‘Securities 

Arbitration Reform: Report of the 

Arbitration Policy Task Force to the 

Board of Governors of NASD’’ (the 

‘‘Report’’). The Report made a number 

of broad recommendations to the Board 

of Governors to improve the securities 

arbitration process. One of the 

recommendations states that: 

‘‘Automatic production of essential 

documents should be required for all 

parties, and arbitrators should play a 

much greater role in directing discovery 

and resolving discovery disputes.’’ After 

the work of the Task Force was 

completed, several groups were formed 

to work on discovery issues in response 

to this recommendation. Each group 

was composed of persons offering 

diverse perspectives, including counsel 

for investors and industry parties, and 

all made a substantial contribution to 

the process. The outcome of this process 

was the Discovery Guide, which the 

SEC approved after a public comment 

period,4 and was made available for use 

in arbitration proceedings involving 

customer disputes upon the publication 

of NASD Notice to Members (‘‘NTM’’) 

99–90 (November 1999). 

In March 2004, after more than four 

years of use, FINRA 5 determined to 

review the Discovery Guide and 

consider whether it should be updated. 

This review was undertaken by FINRA’s 

National Arbitration and Mediation 

Committee (‘‘NAMC’’), a majority public 

committee of the FINRA Board made up 

of attorneys who represent investors, 

attorneys who represent brokerage 

firms, arbitrators, and mediators. In 

addition, FINRA staff met with frequent 

users of the arbitration forum 

representing both the public and the 

industry to listen to concerns regarding 

the Discovery Guide’s document 

production lists, proposals for changes, 

and reactions to other constituents’ 

proposals. Many of the provisions of the 

Discovery Guide were incorporated into 

a major revision of the portion of the 

Code of Arbitration Procedure for 

Customer Disputes (‘‘Customer Code’’), 

which was submitted to the SEC in 2003 

and approved by the SEC in 2007.6 The 

remaining provisions in the Discovery 

Guide consist primarily of lists of 

documents that are presumptively 

discoverable (‘‘Document Production 

Lists’’).7

Summary of Significant Changes 

The proposed rule change adds 

clarifying and conforming language to 

the introduction in the Discovery Guide 

and updates the Document Production 

Lists. 

In the introductory language, FINRA 

proposes to add, ‘‘Where additional 


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8The article would be discussed in the 

Regulatory Notice announcing approval of the 

amendments to the Discovery Guide. The article, 

Arbitrators and Orders of Confidentiality, The 

Neutral Corner, April 2004, is available at: http:// 

www.finra.org/ArbitrationMediation/Neutrals/ 

Education/NeutralCorner/P010040. 

information is relevant in a particular 

case, it can be sought in accordance 

with the time frames provided in the 

12500 series of rules.’’ This is intended 

to clarify that the Document Production 

Lists are not exhaustive, and that other 

documents may be requested. FINRA is 

also proposing to replace the reference 

to ‘‘churning’’ with the term ‘‘excessive 

trading’’ to conform the introduction to 

the language used in the Document 

Production Lists. FINRA also proposes 

to add a reference in the introduction to 

new List 12 relating to documents 

involving particular products or 

securities. Although FINRA is not 

proposing any changes to the paragraph 

on confidentiality, FINRA intends to 

call attention to an article in FINRA’s 

newsletter for arbitrators and mediators, 

the Neutral Corner, that provides 

additional background on the subject.8

Non-substantive, stylistic changes are 

proposed in some Document Production 

Lists; for example, the term ‘‘Associated 

Person’’ would be changed to lower case 

to conform to usage in the Customer 

Code. 

Document Production Lists 1 and 2 

apply to all types of disputes. The 

remainder of the Document Production 

Lists are categorized by the type of 

dispute, and within each type, they list 

first what the industry party must 

produce, and then what the customer 

must produce. The discussion below 

addresses each list by its current 

number. It should be noted, however, 

that some lists would be renumbered 

and/or renamed as part of the proposed 

rule change. 

List 1—Documents To Be Produced in 

All Customer Cases by Firm/Associated 

Person(s) 

List 1 includes documents to be 

produced in all customer cases by firm/ 

associated person(s). 

FINRA proposes to delete the footnote 

in the heading for List 1. This 

information is covered in the Customer 

Code’s subpoena and discovery rules 

(Rules 12505 through 12514). 

List 1, Item 1 requires firms and 

associated persons to produce all 

agreements with the customer, 

including account opening documents, 

cash, margin, and option agreements, 

trading authorizations, powers of 

attorney, or discretionary authorization 

agreements, and new account forms. 

FINRA proposes to amend Item 1 to 

require production of the account record 

information for the customer. The 

account record contains important 

information about the customer, such as 

the customer’s annual income, net 

worth, and account objectives, and it 

indicates whether the record has been 

signed by the associated person 

responsible for the account and 

approved or accepted by a principal of 

the firm. 

FINRA proposes to delete List 1, Items 

2 and 3 in their entirety. In many 

instances, the customer has retained 

account statements and/or 

confirmations, and requiring production 

of these documents in every case adds 

unnecessary delay and cost to the 

discovery process. If necessary, the 

customer may request these documents 

separately under proposed List 1, Item 

2. 

FINRA proposes to move current List 

1, Item 5 into proposed new List 1, Item 

2. Item 5 requires production of all 

correspondence between the customer 

and firm/associated person(s) relating to 

the transaction(s) at issue. Proposed 

Item 2 clarifies that the required 

documents are those that were sent to 

the customer or received by the firm and 

relate to the accounts or transactions at 

issue. A new sentence explains that 

monthly statements and confirmation 

slips need not be produced unless 

separately requested. 

FINRA proposes to adopt new List 1, 

Item 3 to require the production of 

documents pertaining to the customer’s 

employment status, financial status, 

annual income, net worth, investment 

objectives, and risk tolerance. These 

documents would show what the firm/ 

associated person(s) recorded about the 

customer’s financial status and 

investment objectives/risk tolerance. 

List 1, Item 4 requires the production 

of all ‘‘holding (posting) pages’’ for the 

customer’s account(s) at issue or, if not 

available, any electronic equivalent. 

Holding pages are handwritten records 

of transactions made and kept by 

associated persons. FINRA proposes to 

delete Item 4 in its entirety, because 

holding pages generally are no longer in 

use, and transaction information in an 

electronic form would be available to 

the customer on account statements 

and/or confirmations. 

FINRA proposes to adopt new Item 4 

to require the production of documents 

evidencing any investment or trading 

strategies utilized or recommended in a 

customer’s account, including options 

programs, and any supervisory review 

of such strategies. New Item 4 would 

ensure that a customer has access to 

evidence of trading strategies utilized or 

recommended by the firm/associated 

person(s) that may not have been 

publicly disseminated by the firm/ 

associated person(s). The proposal 

would also provide the customer with 

documentation of any management 

supervision over the account. 

As noted above, FINRA has proposed 

to move List 1, Item 5 into Item 2. 

List 1, Item 6 requires the production 

of all notes by the firm/associated 

person(s) or on his/her behalf, including 

entries in any diary or calendar, relating 

to the customer’s account. FINRA 

proposes to modify the Item to clarify 

that notes of telephone calls or 

conversations must be produced and 

that required production is not limited 

to the items specified in the Item. The 

proposed amendment also provides that 

required production relates to the 

customer, in addition to those relating 

to his or her account(s) or transactions 

at issue. Because Item 6 requires 

production of all notes by the firm/ 

associated person(s), the phrase ‘‘or on 

his/her behalf’’ would be deleted as 

unnecessary. This Item would be 

renumbered as Item 5. 

Current List 1, Item 7 requires the 

production of all recordings and notes 

of telephone calls or conversations 

about the customer’s account(s) at issue 

that occurred between the associated 

person(s) and the customer, and/or 

between the firm and the associated 

person(s). FINRA proposes to delete 

Item 7 in its entirety. Notes of telephone 

calls or conversations would continue to 

be discoverable under proposed new 

Item 5, discussed above. FINRA 

proposes to eliminate mandatory 

production of recordings in every case 

because producing recordings is labor 

intensive, expensive, and unnecessary 

in cases where there is no dispute 

relating to conversations between the 

parties. Recordings would continue to 

be subject to discovery on a case by case 

basis, as the arbitrators deem to be 

appropriate under Rule 12507 of the 

Customer Code (Other Discovery 

Requests). 

Current List 1, Item 8 requires 

production of all Forms RE–3, U4 and 

U5 including all amendments, all 

customer complaints identified in such 

forms, and all customer complaints of a 

similar nature against the associated 

person(s) handling the account(s) at 

issue. FINRA proposes to amend this 

item to clarify that Disclosure Reporting 

Pages must be produced. These pages, 

which are part of Forms U4 and U5, 

provide customer claimants with 

valuable, detailed information about 

prior customer complaints. With regard 

to customer complaints alleging conduct 

of a similar nature to that alleged in the 

Statement of Claim, the amendments 


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would allow the firm/associated 

person(s) to redact portions of these 

documents to prevent disclosure of 

nonpublic personal information about 

other customers. Item 8 would be 

renumbered as Item 6. 

Current List 1, Item 9 requires 

production of all sections of the firm’s 

Compliance Manual(s) related to the 

claims alleged in the Statement of 

Claim, including any separate or 

supplemental manuals governing the 

duties and responsibilities of the 

associated person(s) and supervisors, 

any bulletins (or similar notices) issued 

by the compliance department, and the 

table of contents and index to each 

Manual. FINRA proposes to amend this 

Item to replace ‘‘Compliance Manual(s)’’ 

with ‘‘manuals and any updates 

thereto’’ and ‘‘compliance department’’ 

with ‘‘firm.’’ The proposal would clarify 

that manuals must be produced 

regardless of whether the firm 

characterizes them as ‘‘Compliance 

Manuals,’’ and bulletins must be 

produced from any department issuing 

them. FINRA is also proposing to 

require the production of updates to the 

firm’s manuals for the time period 

related to the claims at issue. Updates 

are material to establishing the firm’s 

procedures in place during a specified 

time frame. Item 9 would be 

renumbered as Item 7. 

Current List 1, Item 10 requires the 

production of all analyses and 

reconciliations of the customer’s 

account(s) during the time period and/ 

or relating to the transaction(s) at issue. 

FINRA proposes to amend this Item to 

clarify that production is limited to 

analyses and reconciliations prepared 

during the time period at issue, and 

includes analyses and reconciliations 

prepared as part of a review of the 

customer’s account(s) or transaction(s) 

at issue. These documents are valuable 

because they contain firm findings 

concerning reviews of customer 

accounts. Item 10 would be renumbered 

as Item 8. 

Current List 1, Item 11 requires the 

production of all records of the firm/ 

associated person(s) relating to the 

customer’s account(s) at issue, such as 

internal reviews and exception and 

activity reports, which reference the 

customer’s account(s) at issue. FINRA 

proposes to amend Item 11 to provide 

guidance concerning the types of 

documents that may have been created 

by a firm in the course of its usual 

surveillance and compliance activities. 

The proposed Item would require the 

production of all exception reports, 

supervisory activity reviews, activity 

concentration reports, active account 

runs and similar documents produced 

to review for activity in customer 

accounts in which customer’s account 

or the transaction(s) at issue are 

referenced or listed. Item 11 would be 

renumbered as Item 9. 

Current List 1, Item 12 requires the 

production of records of disciplinary 

action taken against the associated 

person(s) by any regulator or employer 

for all sales practices or conduct similar 

to the conduct alleged to be at issue. 

Item 12 would be renumbered as Item 

10. 

FINRA proposes to adopt new List 1, 

Item 11 to require production of all 

documents related to the case at issue 

that are received by the Respondent by 

subpoena or document request directed 

to third parties. The subpoena rule, Rule 

12512(e) of the Customer Code, requires 

production of subpoenaed documents. 

FINRA proposes to cross-reference that 

rule in the Discovery Guide. Documents 

received by request would be added to 

List 1 to ensure that all parties have 

access to evidence obtained from nonparties. 

List 2—Documents and Information To 

Be Produced in All Customer Cases by 

Customer 

List 2 includes documents and 

information to be produced by the 

customer in all customer cases. 

Current List 2, Item 1 requires the 

production of all customer and 

customer-owned business (including 

partnership or corporate) federal income 

tax returns, limited to pages 1 and 2 of 

Form 1040, Schedules B, D, and E, or 

the equivalent for any other type of 

return, for the three years prior to the 

first transaction at issue in the 

Statement of Claim through the date the 

Statement of Claim was filed. FINRA 

proposes to require the production of 

complete copies of tax returns for the 

five years prior to the first transaction at 

issue in the arbitration, through the year 

in which the statement of claim is filed. 

The expanded production would 

provide parties with a broader 

understanding of a customer’s financial 

status during the relevant period. The 

amendments would provide that the 

income tax returns being provided must 

be identical to those that were filed with 

the Internal Revenue Service. 

Current List 2, Item 2 requires the 

production of financial statements or 

similar statements of the customer’s 

assets, liabilities, and/or net worth for 

the period(s) covering the three years 

prior to the first transaction at issue in 

the Statement of Claim through the date 

the Statement of Claim was filed. To 

provide parties with a broader 

understanding of a customer’s financial 

status during the relevant period, 

FINRA proposes to amend this Item to 

expand the covered period to five years. 

Current List 2, Item 3 requires the 

production of copies of all documents 

the customer received from the firm/ 

associated person(s) and from any 

entities in which the customer invested 

through the firm/associated person(s), 

including monthly statements, opening 

account forms, confirmations, 

prospectuses, annual and periodic 

reports, and correspondence. FINRA 

proposes to amend Item 3 to eliminate 

mandatory production of account 

statements and confirmations if the 

customer stipulates to having received 

them. The amendments would require 

the customer to produce any statements 

or confirmations with handwritten 

notations on them or which are in any 

way non-identical to those sent by the 

firm. The amendments would decrease 

a customer’s discovery costs while 

preserving the requirement to produce 

documents that may have probative 

value. FINRA also proposes to add 

research reports to Item 3. Research 

reports may provide evidence 

concerning the basis for a customer’s 

investment decisions. 

Current List 2, Item 4 requires the 

production of account statements and 

confirmations for accounts maintained 

at securities firms other than the 

respondent firm for the three years prior 

to the first transaction at issue in the 

Statement of Claim through the date the 

Statement of Claim was filed. FINRA 

proposes to amend Item 4 to require the 

customer to identify each securities firm 

where the customer has maintained an 

account and to produce account 

statements for the five year period prior 

to the first transaction at issue in the 

arbitration, through the completion of 

discovery. The proposal would permit 

the customer to provide written 

authorization allowing the respondent 

firm/associated person to obtain account 

statements directly from the securities 

firms in lieu of providing copies of the 

statements. The proposal would ensure 

that other parties to the matter have a 

more complete understanding of the 

customer’s investing history. FINRA 

proposes to eliminate confirmations 

from Item 4 because most of the 

information detailed in confirmations is 

also contained in account statements. 

Current List 2, Item 5 requires the 

production of all agreements, forms, 

information, or documents relating to 

the account(s) at issue signed by or 

provided by the customer to the firm/ 

associated person(s). FINRA proposes to 

expand the scope of this Item by 

requiring production of documents 

relating to accounts or transactions at 

the firm regardless of whether the 


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documents were signed by the 

customer. 

Current List 2, Item 6 requires the 

production of all account analyses and 

reconciliations prepared by or for the 

customer relating to the account(s) at 

issue. FINRA proposes to clarify this 

Item by changing ‘‘the account(s) at 

issue’’ to ‘‘the accounts at the 

respondent firm or transactions with the 

respondent firm during the time period 

at issue.’’ 

Current List 2, Item 7 requires the 

production of all notes, including 

entries in diaries or calendars, relating 

to the account(s) at issue. FINRA 

proposes to amend Item 7 to provide 

clarity by changing ‘‘the account(s) at 

issue’’ to ‘‘the accounts at the 

respondent firm or transactions at issue 

with the respondent firm.’’ 

Current List 2, Item 8 requires the 

production of all recordings and notes 

of telephone calls or conversations 

about the customer’s account(s) at issue 

that occurred between the associated 

person(s) and the customer (and any 

person purporting to act on behalf of the 

customer). FINRA proposes to clarify 

Item 8 by specifying that the required 

recordings and notes relate to the 

customer’s accounts or transactions. 

Current List 2, Item 9 requires the 

production of all correspondence 

between the customer (and any person 

acting on behalf of the customer) and 

the firm/associated person(s) relating to 

the account(s) at issue. FINRA proposes 

to amend this Item to broaden the scope 

of the production by deleting the 

reference to firm/associated person(s). 

The customer may have corresponded 

with persons/entities unrelated to the 

firm concerning the transactions at 

issue. The amendment would also 

clarify that the required correspondence 

relates to the accounts or transactions. 

Current List 2, Item 10 requires the 

production of previously prepared 

written statements by persons with 

knowledge of the facts and 

circumstances related to the account(s) 

at issue, including those by accountants, 

tax advisors, financial planners, other 

associated person(s), and any other third 

party. FINRA proposes to amend this 

Item to clarify that the required written 

statements relate to the accounts or 

transactions at issue. 

Current List 2, Item 11 requires the 

production of all prior complaints by or 

on behalf of the customer involving 

securities matters and the firm’s/ 

associated person’s response(s). FINRA 

proposes to delete this item as 

unnecessary because the respondent 

firm/associated person would be in 

possession of any responsive documents 

and production by the customer would 

be duplicative. 

Current List 2, Item 12 requires the 

production of Complaints/Statements of 

Claim and Answers filed in all civil 

actions involving securities matters and 

securities arbitration proceedings in 

which the customer has been a party, 

and all final decisions and Awards 

entered in these matters. FINRA 

proposes to amend Item 12 to: (1) Add 

‘‘Identify and’’ before ‘‘produce;’’ (2) 

include any non-confidential 

settlements entered in these matters; 

and (3) extend the time period through 

the completion of discovery. The 

proposed change would add that, 

although an agreement is not 

presumptively discoverable, a party to a 

confidential settlement agreement, that 

by its terms does not preclude 

identification of the existence of the 

settlement agreement, must identify the 

underlying documents of the 

confidential settlement agreement. The 

proposed change also would state that 

such a settlement agreement could be 

obtained with an order from the panel. 

By adding the requirement to identify 

the stated documents, the proposal 

would ensure that parties are aware of 

other securities actions even if a 

customer is not in possession of 

documents relating to the actions. The 

amendments would require the 

customer to produce non-confidential 

settlements, because the subject matter 

may be relevant to the pending case. 

Item 12 would be renumbered as Item 

11. 

Current List 2, Item 13 requires the 

production of all documents showing 

action taken by the customer to limit 

losses in the transaction(s) at issue. 

FINRA proposes to delete this item from 

the Discovery Guide because the firm/ 

associated person is in possession of 

any documents that would be 

responsive to this item and production 

by the customer would be duplicative. 

FINRA proposes to adopt new Item 12 

to require the customer to identify loans 

that he or she applied for or guaranteed 

for the five years prior to the first 

transaction at issue in the arbitration 

through the date the Statement of Claim 

was filed. The customer also would be 

required to produce copies of related 

loan applications, or provide a written 

authorization allowing the respondent 

firm/associated person to obtain loan 

applications directly from each lender. 

This information may provide evidence 

relating to the customer’s financial 

status, including, for example, 

information on net worth, assets, and 

liabilities. 

FINRA proposes to move the content 

of Lists 8 (Misrepresentations/ 

Omissions), 10 (Negligence/Breath of 

Fiduciary Duty) and 14 (Unsuitability) 

to List 2 because the Items contained in 

these lists would provide valuable 

information to parties in all customer 

cases. Proposed List 2, Items 13 through 

16, would require the production of: 

• Documents showing the customer’s 

ownership in or control over any 

business entity, including general and 

limited partnerships and closely held 

corporations. 

• Written documents relied upon by 

the customer in making the investment 

decision(s) at issue. 

• Copy of the customer’s resume. 

• Documents showing the customer’s 

complete educational and employment 

background or, in the alternative, a 

description of the customer’s 

educational and employment 

background if not set forth in a resume 

produced under item 15. 

In addition, FINRA proposes to add to 

Item 13 the requirement that a claimant 

Trustee would be required to identify 

accounts over which he or she has 

trading authority. A Trustee’s trading 

activity for other accounts may provide 

relevant evidence of his or her 

sophistication as an investor. 

FINRA proposes to adopt new List 2, 

Item 17 to require the production of all 

documents related to the case at issue 

that are received by the customer by 

subpoena or document request directed 

to third parties at any time during the 

case. Rule 12512(e) of the Customer 

Code requires production of subpoenaed 

documents. FINRA proposes to crossreference the rule in the Discovery 

Guide. Documents received by request 

would be added to ensure that all 

parties have access to evidence obtained 

from non-parties. 

List 3—Churning (Firm/Associated 

Person) 

Current List 3 applies to documents 

required to be produced by firms/ 

associated persons in cases involving 

claims based on churning. As part of its 

plain English initiative, FINRA proposes 

to change the title of List 3 from 

Churning, which is defined as excessive 

activity in a customer’s account, to 

Claims of Excessive Trading. 

Current List 3, Item 1 requires the 

production of all commission runs 

relating to the customer’s account(s) at 

issue or, in the alternative, a 

consolidated commission report relating 

to the account(s). Current List 3, Item 2 

requires the production of all 

documents reflecting compensation of 

any kind, including commissions, from 

all sources generated by the associated 

person(s) assigned to the customer’s 

account(s) for the two months 


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preceding, through the two months 

following, the transaction(s) at issue, or 

up to 12 months, whichever is longer. 

The firm is permitted to redact all 

information identifying customers who 

are not parties to the action except for 

the last four digits of the non-party 

customer account number for each 

transaction. Proposed new Item 1 

combines Items 1 and 2. New Item 1 

would expand the scope of discovery 

concerning the associated person’s(s’) 

compensation and provides specificity 

about the documents that must be 

produced. New Item 1 would require 

production of the record of all 

compensation (monetary and nonmonetary), including a listing of the 

securities traded, dates traded, solicited 

or unsolicited nature, and the gross and 

net commission from each trade, for all 

years in which the conduct alleged in 

the Statement of Claim occurred. The 

firm would be permitted to redact 

nonpublic personal information 

concerning customers who are not 

parties to the claim, but could not redact 

or delete any other information. The 

expanded time frame would ensure that 

the associated person’s compensation is 

produced for the entire period that he or 

she serviced the account. If the firm 

asserts that the client controlled the 

trading in the account, the firm would 

have to produce sufficient information 

to distinguish the associated person’s(s’) 

accounts, and would be required to 

identify whether the associated person 

had related accounts that traded at the 

firm during the period in question. 

Activity in the associated person’s(s’) 

account is relevant because it may 

provide a basis for transactions that took 

place in a customer’s account. 

FINRA proposes to adopt new List 3, 

Item 2 to require production of a 

memorandum of each order or 

instruction given for all transactions at 

issue in the Statement of Claim. Order 

memoranda may contain valuable 

notations made at the time an order was 

received. Proposed Item 2 would also 

require documentation showing the 

associated person’s(s’) compensation for 

each transaction. If a wrap fee or similar 

arrangement applied to the account, the 

firm would be required to produce a 

record showing compensation earned by 

period. Documentation of compensation 

on an order by order basis provides 

parties with a clear understanding of 

how much the associated person was 

paid for the trading at issue. 

Current List 3, Item 3 requires 

production of documents describing the 

basis upon which the associated 

person(s) was compensated during the 

years in which the transaction(s) or 

occurrence(s) in question occurred, 

including any bonus or incentive 

program, and compensation and 

commission schedules. The proposed 

amendments would clarify the Item by 

requiring production of a record of all 

agreements pertaining to the 

relationship between the associated 

person and the firm, summarizing the 

associated person’s compensation 

arrangement or plan with the firm, 

including commission and concession 

schedules, bonus or incentive plans, 

and schedules showing compensation. If 

compensation was based on factors 

other than remuneration per trade, the 

amendments would require a record of 

the method by which compensation was 

determined. 

List 4—Churning (Customer) 

FINRA proposes to delete current List 

4 (Churning—Customer) which does not 

identify any documents or information 

that the customer must produce. 

List 5—Failure To Supervise (Firm/ 

Associated Person(s)) 

Current List 5, requires firms/ 

associated persons to produce 

documents in cases involving claims of 

failure to supervise. 

Current List 5, Item 1 requires the 

production of all commission runs and 

other reports showing compensation of 

any kind relating to the customer’s 

account(s) at issue. The proposed 

amendments would clarify the Item by 

requiring production of commission 

runs and other reports showing 

compensation of any kind relating to the 

customer’s account(s) or transactions at 

issue. The Item would be renumbered as 

List 4, Item 1. 

Current List 5, Item 2 requires the 

production of all exception reports and 

supervisory activity reviews relating to 

the associated person(s) and/or the 

customer’s account(s) generated not 

earlier than one year before or not later 

than one year after the transaction(s) at 

issue, and all other documents reflecting 

supervision of the associated person(s) 

and the customer’s account(s). FINRA 

proposes to amend Item 2 to clarify that 

activity concentration reports and active 

account runs must be produced. List 5, 

Item 2 would be renumbered as List 4, 

Item 2. 

Current List 5, Item 3 requires 

production of the portions of internal 

audit reports at the branch in which the 

customer maintained his/her account(s) 

that focused on the associated person(s) 

or the transaction(s) at issue, and were 

generated not earlier than one year 

before or not later than one year after 

the transaction(s) at issue and discussed 

alleged improper behavior in the branch 

against other individuals similar to the 

improper conduct alleged in the 

Statement of Claim. FINRA is not 

proposing any substantive changes to 

this Item. The proposed amendments 

would simplify the language and 

sentence structure in accordance with 

FINRA’s plain English initiative. List 5, 

Item 3 would be renumbered as List 4, 

Item 3. 

Current List 5, Item 4 requires 

production of the portions of 

examination reports or similar reports 

following an examination or an 

inspection conducted by a state or 

federal agency or a self-regulatory 

organization that focused on the 

associated person(s) or the customer’s 

account(s) or transaction(s) at issue or 

that discussed alleged improper 

behavior in the branch against other 

individuals similar to the improper 

conduct alleged in the Statement of 

Claim. The Item would be moved to 

proposed new Item 6 and the word 

‘‘improper’’ would be deleted, as 

redundant, from the phrase ‘‘improper 

conduct alleged in the Statement of 

Claim.’’ 

FINRA proposes to adopt new List 4, 

Item 4 to require the production of any 

writings reflecting conversations 

between the associated person assigned 

to the customer’s account during the 

time period at issue and members of the 

firm’s compliance department. FINRA 

believes that such writings may provide 

evidence concerning firm supervisory 

activities relating to the associated 

person. 

FINRA proposes to adopt new List 4, 

Item 5 to require the production of 

copies of any inquiries, charges or 

findings by any regulator (state, federal 

or self-regulatory organization) and the 

responses thereto by the firm/associated 

person for alleged improper behavior by 

the associated person similar to that 

alleged in the Statement of Claim. This 

Item is intended to complement 

proposed Item 6 by expanding the scope 

of documents produced that relate to 

supervision of the associated person. 

Proposed new List 4, Item 6 is 

discussed under current List 5, Item 4, 

above. 

FINRA proposes to adopt new List 4, 

Item 7 to require the production of any 

notes or memoranda evidencing 

supervisory or managerial review of the 

customer’s account or trades for the 

period at issue. These documents would 

provide important evidence in a case 

alleging failure to supervise. 

FINRA proposes to adopt new List 4, 

Item 8 to require the production of all 

correspondence between the customer 

and firm/associated person relating to 

the customer’s account(s) or 

transaction(s) at issue bearing 


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indications of managerial or supervisory 

review of such correspondence. This 

Item is intended to complement 

proposed List 1, Items 2 

(correspondence between the customer 

and firm/associated person relating to 

the transactions) and 5 (notes by the 

firm/associated person relating to the 

customer’s account) by requiring 

production of documents indicating 

supervisory review of customer 

correspondence with the firm. 

List 6—Failure To Supervise (Customer) 

FINRA proposes to delete List 6 

(Failure To Supervise—Customer) 

which does not identify any documents 

or information that the customer must 

produce. 

List 7—Misrepresentations/Omissions 

(Firm/Associated Person(s)) 

Current List 7 requires firms/ 

associated person(s) to produce 

documents in cases involving claims of 

misrepresentations or omissions. List 7 

requires the production of all materials 

prepared or used by the firm/associated 

person(s) relating to the transactions or 

products at issue, including research 

reports, prospectuses, and other offering 

documents, including documents 

intended or identified as being ‘‘for 

internal use only,’’ and worksheets or 

notes indicating the associated person(s) 

reviewed or read such documents. As an 

alternative, the firm/associated 

person(s) is permitted to produce a list 

of such documents that contains 

sufficient detail for the claimant to 

identify each document listed. Upon 

request by a party, the firm/associated 

person(s) is required to provide any 

documents identified on the list. FINRA 

proposes to clarify this List by 

specifying that in addition to materials 

prepared or used by the firm/associated 

person(s), materials provided to the 

customer must be produced. The 

amendments would also require 

production of sales literature and 

performance or risk data. In addition, 

FINRA proposes to delete the alternative 

procedure provided in this Item. 

Because this two-step production causes 

delays in the discovery process. 

Disputes about the details contained on 

the lists often arise, resulting in parties 

requesting production of every item on 

the list. Current List 7 would be 

renumbered as proposed List 5. 

List 8—Misrepresentations/Omissions 

(Customer) 

Current List 8 requires customers to 

produce documents in cases involving 

allegations of misrepresentations or 

omissions. FINRA proposes to move 

Items 1 through 3 of current List 8 to 

proposed List 2. This would expand 

required production of these documents 

to all customer cases. 

FINRA proposes adopt new List 6 to 

require the customer to produce copies 

of all materials received or obtained 

from any source relating to the 

transactions or products at issue, and 

other prospective investments, 

including research reports, sales 

literature, performance or risk data, 

prospectuses, and other offering 

documents, including documents 

intended or identified as being ‘‘for 

internal use only,’’ and worksheets or 

notes. Production of these documents 

may provide evidence concerning 

representations made to the customer by 

the firm/associated person. Current List 

8 would be renumbered as List 6. 

List 9—Negligence/Breach of Fiduciary 

Duty (Firm/Associated Person) 

Current List 9 requires production of 

copies of all materials prepared or used 

by the firm/associated person relating to 

the transactions or products at issue, 

including research reports, 

prospectuses, and other offering 

documents, including documents 

intended or identified as being ‘‘for 

internal use only,’’ and worksheets or 

notes indicating that the associated 

person reviewed or read such 

documents. As an alternative, the firm/ 

associated person is permitted to 

produce a list of such documents that 

contains sufficient detail for the 

claimant to identify each document 

listed. Upon further request by a party, 

the firm/associated person is required to 

provide any documents identified on 

the list. In addition, FINRA proposes to 

clarify this List by specifying that in 

addition to materials prepared or used 

by the firm/associated person, materials 

provided to the customer must be 

produced. The amendments would also 

specify that sales literature and 

performance or risk data must be 

produced. FINRA proposes to delete the 

alternative procedure provided in this 

Item because this two-step production 

causes delays in the discovery process. 

Disputes about the details contained on 

the lists often arise, resulting in parties 

requesting production of every item on 

the list. Current List 9 would be 

renumbered as List 7. 

List 10—Negligence/Breach of Fiduciary 

Duty (Customer) 

The contents of current List 10 

(Negligence/Breach of Fiduciary Duty 

(Customer)) are being moved to 

proposed List 2, as described above. 

FINRA proposes to revise List 10 to 

require the customer to produce copies 

of all materials received or obtained 

from any source relating to the 

transactions or products at issue, and 

other prospective investments, 

including research reports, sales 

literature, performance or risk data, 

prospectuses, and other offering 

documents, including documents 

intended or identified as being ‘‘for 

internal use only,’’ and worksheets or 

notes. Current List 10 would be 

renumbered as List 8. 

List 11—Unauthorized Trading (Firm/ 

Associated Person) 

Current List 11, Item 1 requires the 

production of order tickets for the 

customer’s transaction(s) at issue. 

FINRA proposes to amend this Item to 

specify that for all allegedly 

unauthorized transactions at issue in the 

Statement of Claim, the firm/associated 

person is required to produce a 

memorandum of each order or 

instruction given as well as 

documentation showing the 

compensation, gross and net, to the 

associated person for each such 

transaction. The term ‘‘order ticket’’ 

would be replaced with the term 

‘‘memorandum of each order’’ to reflect 

the current use of various order 

management systems by FINRA member 

firms. FINRA would require 

documentation of compensation for 

each transaction because such 

information may provide evidence of 

the Associated person’s motivation for 

executing a particular trade. 

FINRA does not propose to change 

current List 11, Items 2 and 3. 

FINRA proposes to adopt new List 11, 

Item 4 to require the production of 

commission runs or other documents 

showing all trading by the associated 

person in the security at issue from ten 

trading days before until ten trading 

days after each transaction the customer 

alleges was unauthorized. The firm/ 

associated person would be permitted to 

redact customer names but would be 

required to disclose the security traded, 

dates traded, whether trades were 

solicited or unsolicited and gross and 

net commission from each trade. These 

documents may reflect a pattern of 

trading behavior by the association 

persons. List 11 would be renumbered 

as List 9. 

List 12—Unauthorized Trading 

(Customer) 

FINRA does not propose to current 

change List 12, Items 1 and 2. List 12 

would be renumbered as List 10. 

List 13—Unsuitability (Firm/Associated 

Person) 

Current List 13, Item 1 requires 

production of all materials prepared, 


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9 15 U.S.C. 78o–3(b)(6). 

used, or reviewed by the firm/associated 

person related to the transactions or 

products at issue, including but not 

limited to research reports, 

prospectuses, other offering documents, 

including documents intended or 

identified as being ‘‘for internal use 

only,’’ and worksheets or notes 

indicating the associated person 

reviewed or read such documents. As an 

alternative, the firm/associated person is 

permitted to produce a list of such 

documents. Upon further request by a 

party, the firm/associated person is 

required to provide any documents 

identified on the list. FINRA proposes to 

clarify this List by specifying that in 

addition to materials prepared or used 

by the firm/associated person, materials 

provided to the customer must also be 

produced. In addition, the proposal also 

specifies that sales literature and 

performance or risk data must be 

produced. FINRA proposes to delete the 

alternative procedure provided in this 

Item because this two-step production 

causes delays in the discovery process. 

Disputes about the details contained on 

the lists often arise, resulting in parties 

requesting production of every item on 

the list. 

Current List 13, Item 2 requires the 

production of documents sufficient to 

describe the basis upon which the 

associated person was compensated 

during the years in which the 

transaction(s) or occurrence(s) in 

question occurred, including any bonus 

or incentive program and all 

compensation and commission 

schedules showing compensation 

received or to be received. FINRA 

proposes to amend Item 2 to specify that 

documents reflecting agreements 

between the firm and associated person 

relating to compensation (including 

those concerning fee-based accounts) 

must be produced for the relevant time 

period. The proposal would eliminate 

required production of schedules 

showing compensation received or to be 

received. 

FINRA proposes to adopt new List 13, 

Item 3 to require the production of all 

documents between the firm/associated 

person and the customer relating to 

asset allocation, diversification, trading 

strategies and market conditions related 

to the customer’s account(s). These 

documents may provide valuable 

insight into the reasons for particular 

trading decisions and are germane to an 

allegation of unsuitability. List 13 

would be renumbered as List 11. 

List 14—Unsuitability (Customer) 

FINRA proposes to move current List 

14 (Unsuitability-Customer), Items 1 

through 4, to List 2, as discussed above. 

This would expand required production 

of these documents to all customer 

cases. 

FINRA proposes to adopt new List 12, 

Claims Involving Particular Products or 

Securities. The Items on this list are 

designed to provide the parties with 

information about transactions in the 

customer accounts of an associated 

person and the commission earned on 

those transactions. FINRA proposes to 

limit discovery to five securities/ 

products selected by the customer to 

minimize delays in the discovery 

process. 

New List 12, Item 1 would require the 

firm/associated person to produce a 

record concerning trading activity in the 

customer’s account(s) for a maximum of 

five securities and/or products selected 

by the customer claimant. The following 

would be required for each of the 

securities selected: 

• Last four digits of the non-party 

customer account number; 

• Trade activity (i.e., buy, sell); 

• Number of shares, unit price, and 

dollar value of transaction; 

• Date traded; 

• Solicited or unsolicited; and 

• Gross and net commission. 

New List 12, Item 2 would provide 

that, in giving a response to Item 1, the 

firm may redact the names of persons 

other than the customer, but should 

provide sufficient information to 

identify the customer’s account, the 

associated person’s own accounts, and 

the type of account. The proposal would 

require the information to be provided 

for a period of time beginning six 

months before and ending six months 

after the transactions at issue in the 

customer’s account. If the customer 

seeks production of information related 

to more than five products or securities, 

a separate request would have to be 

made; however, the information would 

not be deemed presumptively 

discoverable. In addition, the firm 

would be required to identify related 

accounts of the associated person that 

traded in these securities or products at 

the firm during the relevant time period. 

New List 12, Item 3 would provide 

that, if an insurance product that 

provides a death benefit is included in 

the Statement of Claim, the firm/ 

associated person must produce all 

information concerning the customer’s 

insurance holdings and any 

recommendations made to the customer 

regarding insurance products. 

If the Statement of Claim includes an 

insurance product that provides a death 

benefit, New List 12, Item 4 would 

require the customer to produce all 

insurance information received from an 

insurance sales agent or broker. 

New List 12, Item 5 would require the 

firm/associated person to produce a 

record of all agreements pertaining to 

the relationship between the associated 

person and the firm, summarizing the 

associated person’s compensation 

arrangement or plan with the firm, 

including commission and concession 

schedules, bonus or incentive plans, 

schedules showing compensation 

received or to be received based upon 

volume, type of product, nature of trade, 

(agency v. principal) etc. and, to the 

extent that compensation is based on 

factors other than remuneration per 

trade, the method by which the 

compensation was determined. 

2. Statutory Basis 

FINRA believes that the proposed rule 

change is consistent with the provisions 

of Section 15A(b)(6) of the Act,9 which 

requires, among other things, that 

FINRA 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. FINRA believes that 

these updates to the Discovery Guide 

will reduce the number and limit the 

scope of disputes involving document 

productions and other matters, thereby 

improving the arbitration process for the 

benefit of the public investors, brokerdealer firms, and associated persons 

who use the forum. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

FINRA does not believe that the 

proposed rule change will result in 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 

Written comments were neither 

solicited nor received. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 35 days of the date of 

publication of this notice in the Federal 

Register 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: 


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10980 Federal Register / Vol. 74, No. 48 / Friday, March 13, 2009 / Notices 

10 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3 15 U.S.C. 78s(b)(3)(A). 

4 17 CFR 240.19b–4(f)(2). 

5The Commission notes that while provided in 

Exhibit 5 to the filing, the text of the proposed rule 

change is not attached to this notice but is available 

at NYSE Arca, the Commission’s Public Reference 

Room, and at http://www.nyse.com. 

6Reversals and conversions are transactions that 

employ calls, puts and the underlying stock to lock 

in a nearly risk free profit. Reversals are established 

by combining a short stock position with a short put 

and a long call position that shares the same strike 

and expiration. Conversions employ long positions 

in the underlying stock that accompany long puts 

and short calls sharing the same strike and 

expiration. 

7 Dividend spreads are trades involving deep in 

the money options that exploit pricing differences 

arising around the time a stock goes ex-dividend. 

8Box Spreads is a strategy that synthesizes long 

and short stock positions to create a profit. 

Specifically, a long call and short put at one strike 

is combined with a short call and long put at a 

different strike to create synthetic long and 

synthetic short stock positions, respectively. 

9A short stock interest spread is a spread that 

uses two deep in the money put options of the same 

class followed by the exercise of the resulting long 

position in order to establish a short stock interest 

arbitrage position. 

10A merger spread is a transaction executed 

pursuant to a strategy involving the simultaneous 

purchase and sale of options of the same class and 

expiration date, but with different strike prices 

followed by the exercise of the resulting long option 

position. 

(A) by order approve such proposed 

rule change, or 

(B) institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing, 

including whether the proposed rule 

change 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 rulecomments@sec.gov. Please include File 

Number SR–FINRA–2008–024 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Securities and 

Exchange Commission, 100 F Street, 

NE., Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–FINRA–2008–024. 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 FINRA. 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–FINRA–2008–024 and 

should be submitted on or before April 

3, 2009. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.10

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–5389 Filed 3–12–09; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–59525; File No. SR– 

NYSEArca–2009–16] 

Self-Regulatory Organizations; NYSE 

Arca, Inc.; Notice of Filing and 

Immediate Effectiveness of Proposed 

Rule Change Amending Its Schedule of 

Fees and Charges Applicable to the 

Option Strategy Executions Pilot 

Program 

March 6, 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 February 

27, 2009, NYSE Arca, Inc. (‘‘NYSE 

Arca’’ or ‘‘Exchange’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I, II, and 

III below, which Items have been 

prepared by the self-regulatory 

organization. The Exchange filed the 

proposal pursuant to Section 19(b)(3)(A) 

of the Act 3 and Rule 19b–4(f)(2) 

thereunder.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 

NYSE Arca is proposing to amend its 

Schedule of Fees and Charges in order 

to extend the pilot program that applies 

to Option Strategy Executions (‘‘Pilot 

Program’’) until March 1, 2010. The text 

of the proposed rule change is attached 

as Exhibit 5.5 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. 

The text of these statements may be 

examined at the places specified in Item 

IV below. The self-regulatory 

organization 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 purpose of this proposed rule 

change is to extend the Pilot Program 

that applies to Option Strategy 

Executions until March 1, 2010. The 

transactions included as part of the Pilot 

Program include reversals and 

conversions,6 dividend spreads,7 box 

spreads,8 short stock interest spreads,9

and merger spreads.10 Because the 

referenced Options Strategy 

Transactions are generally executed by 

professionals whose profit margins are 

generally narrow, the Pilot Program caps 

the transaction fees associated with 

such executions at $750 per strategy 

execution that are executed on the same 

trading day in the same option class. In 

addition, there is also a monthly cap of 

$25,000 per initiating firm for all 

strategy executions. The Exchange 

believes that by keeping fees low, the 

Exchange is able to attract liquidity by 


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