[Federal Register Volume 66, Number 120 (Thursday, June 21, 2001)]
[Notices]
[Pages 33282-33283]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-15622]



[[Page 33282]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44427; File No. SR-NYSE-99-25]


Self-Regulatory Organizations; Notice of Filing of Amendment No. 
2 to Proposed Rule Change by the New York Stock Exchange, Inc. To Amend 
Rule 134, Governing Error Accounts, and Rule 411, Governing Erroneous 
Reports; and To Adopt New Rule 407A

July 14, 2001.
    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 January 8, 2001, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') Amendment No. 2 to the proposed rule change submitted 
as File No. SR-NYSE-99-25.\3\ Amendment No. 2 is described in Items I, 
II and III below, which Items have been prepared by the NYSE. The 
Commission is publishing this notice to solicit comments on Amendment 
No. 2 from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The proposed rule change, as amended by Amendment No. 1, was 
published for comment in the Federal Register on February 10, 2000. 
See Securities Exchange Act Release No. 42381 (February 3, 2000), 65 
FR 6673.
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I. Self--Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Amendment No. 2 proposes an amendment to NYSE Rule 411; an 
additional amendment to NYSE Rule 134 with regard to error accounts; 
and an amendment to proposed NYSE Rule 407A regarding notification by 
members of accounts in which they have an interest.

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 Exchange included statements 
concerning the purpose of and basis for Amendment No. 2 to the proposed 
rule change and discussed any comments it received on the amendment. 
The text of these statements may be examined at the places specified in 
Item IV below. The Exchange 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
    In the initial filing of proposed rule change SR-NYSE-99-25, the 
Exchange proposed initiatives to strengthen the regulation of 
activities of members on the Floor. The initiatives consisted of 
amendments to NYSE Rule 134, regarding error accounts, and a new rule, 
NYSE Rule 407A, regarding Floor member account disclosure. Amendment 
No. 1 to the filing provided more detail as to the application of Rule 
134 and proposed amendments to Rule 134 by adding specific language 
with respect to the Rule's requirements. Amendment No. 2 now proposes 
an amendment to another Exchange rule, NYSE Rule 411, and additional 
amendments to NYSE Rules 134 and 407A.

Amendment of Rule 411

    NYSE Rule 411(a), ``Erroneous Reports,'' provides that the price 
and size of the actual auction market trade are binding, 
notwithstanding the fact that the customer has received an erroneous 
report with respect to the terms of the trade. In today's markets, 
however, some customers may not want to take corrected reports, due to 
processing costs or other difficulties with respect to other trading 
strategies effectuated by the customer in reliance on the erroneous 
report. This has the potential for creating problems in clearing and 
settling trades, because Rule 411(a) does not currently provide a means 
whereby a Floor broker can treat an erroneous report as though it were 
an erroneous trade.
    The Exchange is proposing to amend Rule 411(a) to provide two 
alternative approaches in cases where an order has been executed, but 
the wrong price and/or size has been reported to the customer:
    Alternative One: The first alternative is simply the current rule. 
The actual execution price and size are binding, and the trade clears 
and settles in accordance with the terms of the auction market trade. 
The member and the customer resolve any monetary issues between 
themselves. This alternative must be represented to the customer and 
rejected by a person authorized to accept or reject the erroneous 
report for the customer before a member can rely on new Alternative 
Two.
    Alternative Two. Under this alternative, which is proposed to be 
added to Rule 411(a), a non-member may treat the terms of the execution 
report as though they were the terms of the actual auction market 
trade, provided that:
    (i) The price and size of the erroneous report are within the range 
of prices and sizes reported on the Consolidated Tape; (ii) the member 
reports the nature of the error to the non-member, and whether it 
results in a favorable adjustment to the non-member; (iii) the member 
documents, on a trade-by-trade basis, the name of the individual 
authorized to accept or reject the erroneous report for the non-member, 
where such documentation includes the amount of the error, and whether 
it was in the non-member's or member's favor; (iv) the member treats 
the erroneous report as though ti were an erroneous trade, and, in the 
member's error account, the member takes the opposite side of the 
report and the opposite side of the actual auction market trade; (v) 
the member absorbs any loss as a result of taking the trade into the 
member's error account and any profit is paid to the New York Stock 
Exchange Foundation; and (vi) a specialist may accommodate the member 
by taking the error into the specialist's error account. In the latter 
case, the member would be required to absorb any loss, while any profit 
would go to the New York Stock Exchange Foundation; the member would be 
required to document the specialist's accommodation and non-member 
understandings as per (ii) above; and the specialist would be required 
to document taking in the error to accommodate the member.
    The NYSE is also proposing to amend NYSE Rule 411 to make clear 
that a member may not rely on Alternative Two in situations where a 
member has issued a report but has not actually executed the order.
    The Exchange believes this approach provides a reasonable means for 
handling erroneous reports as between members and non-members, and 
provides sufficient safeguards to prevent abusive practices.

Other Amendments

    The Exchange also proposes to amend NYSE Rule 134 to provide that 
no non-error trading may take place in a member's error account, and to 
amend NYSE Rule 407A, ``Disclosure of All Members Accounts,'' to 
provide that a member must inform the Exchange when any securities 
account in which the member has an interest is closed. The amendment to 
Rule 134 will assist in surveilling members' error account activities 
by limiting transactions to those that are related to errors. The 
amendment to Rule 407A will help the

[[Page 33283]]

Exchange know whether members have active securities accounts.
2. Statutory Basis
    The Exchange believes the proposed rule change, as amended, is 
consistent with Section 6(b)(5) \4\ of the Act, which requires that an 
exchange have rules that are designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest. The Exchange 
believes that the proposed rule change, as amended, will help 
accomplish these ends by strengthening the Exchange's ability to 
surveil the Floor activities of members.
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    \4\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change, as 
amended, will impose any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act.

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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 Exchange consents, the Commission will:
    (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 Amendment No. 2 
to the proposed rule change is consistent with the Act. Persons making 
written submission should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 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 in the Commission's Public Reference Room. Copies of the filing 
will also be available for inspection and copying at the principal 
offices of the NYSE. All submissions should refer to File No. SR-NYSE-
99-25 and should be submitted by July 6, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-15622 Filed 6-20-01; 8:45 am]
BILLING CODE 8010-01-M