48260 Federal Register / Vol. 73, No. 160 / Monday, August 18, 2008 / Notices 

5The end-of-day net-net figure is the net of all 

participants’ net balances after cross endorsement 

with the National Securities Clearing Corporation 

for which a Settling Bank settles, including its own 

accounts. 

6 15 U.S.C. 78q–1. 

7 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 58052 

(June 27, 2008), 73 FR 38274 (‘‘Notice’’). 

4 In Amendment No. 1, the NYSE revises the text 

of proposed NYSE Rule 460.10 to conform it to the 

description of proposed NYSE Rule 460.10 as set 

forth in the Notice. Because Amendment No. 1 is 

available by DTC.5 Any Participant for 

which a Settling Bank has refused to 

settle must make arrangement for any 

payment due DTC. 

Once the Settling Bank 

acknowledgement process has been 

completed, DTC utilizes the Federal 

Reserve Bank’s National Settlement 

Service (‘‘NSS’’) to effect end-of-day 

cash settlement. 

DTC is proposing that the cut-off time 

for Settling Banks to acknowledge their 

settlement balance be the later of 4:15 

pm or 30 minutes after DTC has posted 

final net-net settlement balances. DTC is 

proposing this change to enable DTC to 

be in a position to release the credit 

amount due Participants at an earlier 

time. Since DTC provides each Settling 

Bank with online reports throughout the 

processing day, which reflect gross 

debits, gross credits, and the net debit 

or credit for each Participant and a netnet figure for the Settling Bank, DTC 

believes that this earlier cut-off time 

should not cause any undo burden. In 

the event that a Settling Bank is 

experiencing difficulty in identifying 

customer cash flows or has another 

extenuating circumstance and as a result 

needs more time to acknowledge 

settlement, that Settling Bank would 

have to notify the Settlement 

department of its request for additional 

time prior to 4:15 pm. 

DTC believes that the proposed rule 

change is consistent with the 

requirements of Section 17A of the Act 6

and the rules and regulations 

thereunder applicable to DTC because it 

should promote the prompt and 

accurate clearance and settlement of 

securities transactions by enabling DTC 

to send the NSS file to the Federal 

Reserve Bank of New York earlier in the 

day thus completing settlement earlier. 

(B) Self-Regulatory Organization’s 

Statement on Burden on Competition 

DTC does not believe that the 

proposed rule change would have any 

impact or impose any burden on 

competition. 

(C) Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants or Others 

Written comments relating to the 

proposed rule change have been 

received and addressed by amendment 

to the proposed rule change. DTC will 

notify the Commission if it receives 

additional comments. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within thirty-five 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 

ninety 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 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, as amended, 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–DTC–2008–06 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street, NE., 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–DTC–2008–06. 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 

Section, 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 DTC and on 

DTC’s Web site at http://www.dtcc.com/ 

downloads/legal/rule_filings/2008/dtc/ 

2008-06.pdf. 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–DTC–

2008–06 and should be submitted on or 

before September 8, 2008. 

For the Commission by the Division of 

Trading and Markets, pursuant to delegated 

authority.7

Florence E. Harmon, 

Acting Secretary. 

[FR Doc. E8–19028 Filed 8–15–08; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–58328; File No. SR–NYSE–

2008–45] 

Self-Regulatory Organizations; New 

York Stock Exchange LLC; Order 

Approving Proposed Rule Change, as 

Modified by Amendment No. 1 Thereto, 

Amending NYSE Rule 98 and Related 

Rules To Redefine Specialist 

Operations at the NYSE 

August 7, 2008. 

I. Introduction 

On June 11, 2008, the New York Stock 

Exchange LLC (‘‘NYSE’’ or ‘‘Exchange’’) 

filed with the Securities and Exchange 

Commission (‘‘Commission’’) pursuant 

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

Exchange Act of 1934 (‘‘Act’’) 1 and Rule 

19b–4 thereunder,2 a proposed rule 

change to amend NYSE Rule 98 and 

related rules to allow its member 

organizations greater flexibility in 

structuring their specialist operations 

and managing their risk. The proposed 

rule change was published for comment 

in the Federal Register on July 3, 2008.3

On August 7, 2008, the NYSE filed 

Amendment No. 1 to the proposed rule 

change.4 The Commission received no 


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technical in nature, the Commission is not 

publishing it for comment. 

5See Securities Exchange Act Release No. 23768 

(November 3, 1986), 51 FR 41183 (November 13, 

1986) (SR–NYSE–85–25). 

6See NYSE Rules 2(d) and 304(e). 

7 In approving this proposed rule change, the 

Commission has considered the proposed rule’s 

impact on efficiency, competition, and capital 

formation. See 15 U.S.C. 78c(f). 

8 15 U.S.C. 78f(b)(5). 

comments on the proposal. This order 

approves the proposed rule change, as 

amended. 

II. Background and Introduction 

The NYSE adopted NYSE Rule 98 in 

1986 when NYSE specialist firms, 

which had been independent memberowned entities, were increasingly 

becoming affiliates of larger member 

organizations.5 Because of the 

specialists’ unique position in the 

market, NYSE Rule 98 requires an 

organizational separation between the 

specialist and any affiliates. The 

purpose of that separation is to 

eliminate or control conflicts of interest 

between the specialist’s responsibilities 

to the market and to any customer 

orders the specialist may represent as 

agent, and the business activities of the 

specialist’s affiliates. 

NYSE Rule 98 currently applies to 

specialist organizations and ‘‘approved 

persons’’ of specialist organizations. 

‘‘Approved persons’’ are entities that are 

in a control relationship with a 

specialist organization, or share a 

common corporate parent with the 

specialist organization and are engaged 

in a kindred business.6 NYSE Rule 98 

subjects all approved persons of a 

specialist organization to the NYSE 

specialist rules. Among other things, 

approved persons are subject to 

restrictions on their ability to trade in 

specialty stock options, restrictions on 

certain of their business transactions 

with issuers for whom the specialist 

organization is the registered specialist, 

and limits on the amount of securities 

of such issuers that the specialist and 

approved persons may own in the 

aggregate. 

To avoid unnecessarily restricting a 

member organization’s overall 

operations, however, the current rules 

provide that each approved person may 

separately seek NYSE approval to be 

exempted from most of these 

restrictions. To obtain such an 

exemption, an approved person and the 

specialist member organization with 

which such approved person is to be 

associated must obtain the written 

agreement of NYSE Regulation, Inc. 

(‘‘NYSE Regulation’’) that the approved 

person and such member organization 

have established policies and 

procedures that are consistent with the 

guidelines prescribed by NYSE Rule 98. 

These guidelines set out in detail how 

approved persons and their associated 

specialist organizations should structure 

and conduct their respective businesses 

in order to ensure complete separation 

between the specialist organization and 

the rest of the member organization. For 

example, these guidelines require (1) the 

specialist unit to be housed in a separate 

corporate entity and broker-dealer from 

its approved persons; (2) the 

maintenance of separate books and 

records, financial accounting, and 

required capital by the specialist unit; 

and (3) procedures to safeguard 

confidential information derived from 

business interactions with the issuer or 

contained in draft research reports 

prepared by the approved person. 

NYSE Rule 98 currently limits the 

ability of a specialist member 

organization and its approved persons 

to share operational support personnel, 

and permits dual affiliation only if the 

specialist member organization and 

approved person provide the Exchange 

with a written statement of the duties of 

such person and why it is necessary for 

the individual to have a dual affiliation. 

Any changes to dual affiliations must be 

submitted to the Exchange for approval 

in advance of making such change. 

The current NYSE rules also limit the 

ability of a specialist, its member 

organization, and approved persons to 

manage the specialist member 

organization’s trading risks. 

Specifically, NYSE Rule 98 restricts an 

approved person from being involved in 

any trading decisions of an associated 

specialist member organization and 

NYSE Rule 105 restricts the specialist 

member organization’s ability to trade in 

options and security futures on 

securities allocated to the specialist 

member organization. 

The NYSE believes that NYSE Rule 98 

creates an administrative burden on 

specialist organizations and their 

approved persons because each 

approved person must continually 

update a separate exemption for each 

activity that would otherwise be 

restricted. The NYSE also believes that 

its current rule unnecessarily constrains 

the ability of specialist organizations 

and their approved persons to manage 

the specialist organization’s risks and 

places them at a competitive 

disadvantage vis-a-vis other market 

making or trading firms. Accordingly, 

the NYSE proposes to amend NYSE 

Rule 98 to provide member 

organizations with more flexibility with 

regard to how they structure their 

specialist operations and manage risk. 

NYSE also proposes to make conforming 

changes to other NYSE rules that rely on 

the NYSE Rule 98 exemptions for 

approved persons. 

As discussed in further detail below, 

the revisions to NYSE Rule 98 would 

include: (1) Redefining the persons to 

whom NYSE Rule 98 would apply; (2) 

allowing specialist operations to be 

integrated into a member organization; 

(3) permitting a specialist unit to share 

non-trading related services with its 

member organization or approved 

persons; and (4) providing flexibility to 

member organizations and their 

approved persons in how to conduct 

risk management of specialist 

operations. 

After careful review, and as discussed 

below, the Commission finds that the 

proposed rule change, as amended, is 

consistent with the requirements of the 

Act and the rules and regulations 

thereunder applicable to a national 

securities exchange.7 In particular, the 

Commission finds that the proposed 

rule change, as amended, is consistent 

with Section 6(b)(5) of the Act,8 which 

requires that the rules of the an 

exchange be 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 securities system, and, in 

general, to protect investors and the 

public interest. 

The restrictions in current NYSE Rule 

98 and related rules are intended to 

address two primary concerns. The first 

concern is the potential that an affiliate 

could unfairly use non-public 

information, such as information on a 

specialist’s book or information 

regularly provided to him by other 

market participants because of his 

central role as a primary market 

specialist. If a specialist’s affiliates had 

access to such information, it would 

have a perceived advantage over 

competing firms and the public at large 

in trading stocks assigned to the 

affiliated specialist. The same concern 

about the potential for unfair use of nonpublic information would arise if the 

specialist had advance information 

about the activities of its affiliates (e.g., 

a change in the firm’s buy or sell 

recommendation or an imminent block 

transaction away from the market). 

Access to such information would allow 

the specialist to position itself to benefit 

from price changes that might result 

once that information became publicly 

available. The second concern is that a 

specialist unit could favor its affiliates 

by providing orders placed by the 

affiliate with more favorable executions 


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9 ‘‘Specialist confidential information’’ means any 

non-public information relating to a specialist unit’s 

trading or quoting in its specialty securities, 

including positions or any other indication of a 

specialist’s trading or quoting interest, the specialist 

algorithm, or any other public information relating 

to a specialist’s interactions with its specialist 

security, but not including non-public order 

information. See proposed NYSE Rule 98(b)(6). 

10A ‘‘Non-public order’’ is an order, whether 

expressed electronically or verbally, or any 

information regarding a reasonably imminent nonpublic transaction or series of transactions entered 

or intended for entry or execution on the NYSE and 

which is not publicly available on a real-time basis 

via an NYSE-provided data-feed. See proposed 

NYSE Rule 98(b)(7). 

11See, e.g., NYSE Rules 70.20(h)(ii), 104(b), 115, 

and 115A. 

12However, a specialist may make available to a 

Floor broker associated or affiliated with an 

approved person or member organization any 

information that the specialist would be permitted 

to provide under Exchange rules to an unaffiliated 

Floor broker. See proposed NYSE Rule 

98(c)(2)(A)(ii). 

13See proposed NYSE Rules 98(c)(1) and (c)(2). 

14See proposed NYSE Rules 98(b)(11) and 

98(c)(2)(B). 

15See 17 CFR 242.200(f). To be exempt from the 

restrictions in NYSE Rule 105 pursuant to proposed 

Rule 98(f)(1), the written plan of organization 

required by Rule 200(f) of Regulation SHO would 

need to specify the specialist unit’s trading 

objectives for trading in related products. 

16See proposed NYSE Rule 98(c)(2)(E). See 

Notice, supra note 3, at 73 FR at 38278. 

17See proposed NYSE Rule 98(c)(2)(C). 

and by providing useful market 

information to the affiliated firm (or to 

its broker on the exchange trading floor) 

but not to others. In some cases, such 

conflicts of interest could result in the 

specialist neglecting his duty to make a 

fair and orderly market by giving an 

affiliate’s principal or agency orders a 

more favorable execution. 

The potential for misuse of nonpublic information and conflicts of 

interest, if not addressed by appropriate 

procedures and the monitoring and 

surveillance of the continuing adequacy 

of such procedures, could result in 

potential manipulative market activity 

and informational advantages benefiting 

the approved person, the specialist unit, 

or the customers of either. As discussed 

in more detail below, the Commission 

believes that the changes NYSE 

proposes to make to NYSE Rule 98 and 

related rules address these concerns. 

III. Proposed Amendments to NYSE 

Rule 98 

In response to concerns described 

above with current NYSE Rule 98, 

NYSE proposes a wholesale change to 

NYSE Rule 98 that would apply a more 

principles-based approach. In addition, 

under the proposed rule, instead of 

reviewing whether to grant each 

approved person an exemption from 

NYSE Rule 98, NYSE Regulation would 

review whether the specialist unit itself 

has adequate policies, procedures, 

controls, and surveillance designed to 

prevent the misuse of specialist 

confidential information 9 and nonpublic order 10 information. If the 

specialist unit has such policies, 

procedures, controls, and surveillance, 

the specialist rules would generally only 

be applicable to the specialist unit and 

not to affiliates of the specialist. In 

addition to the information barriers and 

other NYSE Regulation approved 

controls, specialists would continue to 

be subject to Exchange rules that govern 

their access to and use of non-public 

order information.11

A. Operating a Specialist Unit 

Under proposed NYSE Rule 98(c), a 

member organization must obtain prior 

written approval from NYSE Regulation 

to operate a specialist unit. To obtain 

such approval, NYSE Regulation would 

have to determine that the specialist 

unit has: (i) Adopted and implemented 

comprehensive written procedures and 

guidelines governing the conduct and 

supervision of business handled by the 

specialist unit; (ii) established a process 

for regular review of such written 

policies and procedures; and (iii) 

implemented controls and surveillances 

reasonably designed to prevent and 

detect violations of these procedures 

and guidelines. These policies and 

procedures would have to be reasonably 

designed to maintain the confidentiality 

of specialist confidential information 

and non-public order information. In 

this regard, proposed NYSE Rule 98(c) 

would require a member organization’s 

policies and procedures to prohibit 

approved persons and the member 

organization’s departments, divisions, 

or aggregation units that are not part of 

the specialist unit from having access to 

specialist confidential information and 

non-public order information.12 In 

addition, such policies and procedures 

would have to prohibit a specialist unit 

from having access to material nonpublic order information in the 

possession of other aggregation units of 

the member organization related to the 

securities allocated to that specialist 

unit.13

Further, a specialist unit that is not 

operated as part of an integrated 

proprietary aggregation unit would have 

to comply with all the requirements of 

an aggregation unit.14 Accordingly, as 

required by Rule 200(f) of Regulation 

SHO, such a specialist unit would have 

to have a written plan of organization 

that specifies its trading objectives and 

meets all the other requirements of an 

independent trading unit under 

Regulation SHO.15

The proposed rule would permit 

senior managers who are not dedicated 

to the specialist unit and are associated 

with either an approved person or a 

member organization that runs a 

specialist unit to provide management 

oversight to the specialist unit. A 

member organization’s policies and 

procedures would need to be reasonably 

designed to ensure that such 

management oversight does not conflict 

with or compromise the specialist unit’s 

compliance with the specialist rules. 

The proposed rule would also provide 

specific guidelines for access by the 

senior managers not assigned to the 

specialist unit to specialist confidential 

information or non-public order 

information, which are designed to 

prevent the misuse of such information. 

For example, proposed NYSE Rule 

98(c)(2)(E) would provide that if a 

senior manager is called upon for risk 

management purposes and gains access 

to specialist confidential information or 

non-public order information in 

connection with that role, the senior 

manager must not make (directly or 

indirectly) specialist confidential 

information or non-public order 

information available to the persons or 

systems responsible for making trading 

decisions in aggregation units, 

departments, divisions, or trading desks 

that are not part of the specialist unit, 

including the customer-facing 

departments. The senior manager also 

must not use such information to 

directly or indirectly influence the dayto-day trading decisions of the other 

aggregation units of the member 

organization or approved person with 

respect to the securities allocated to the 

specialist unit.16

Proposed NYSE Rule 98(c) would 

enumerate certain bright line divisions 

that the specialist unit must maintain, 

including information barriers between 

the specialist unit and investment 

banking, research, and customer-facing 

departments and approved persons. 

These divisions are designed to ensure 

that the specialist unit cannot access 

material non-public information about 

securities allocated to that unit from 

either its approved persons or nonspecialist operations of a parent member 

organization.17 In addition, as discussed 

above, these divisions are designed to 

ensure that a member organization’s 

departments, divisions, or aggregation 

units not part of the specialist unit, 

including investment banking, research, 

and customer-facing departments, 

cannot access specialist confidential 

information or non-public order 


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18See proposed NYSE Rule 98(c)(2)(A)(i) and 

supra notes 12 and 13 and accompanying text. 

19See proposed NYSE Rule 98(c)(2)(D). 

20See Notice, supra note 3, at 73 FR at 38278. 

21See Notice, supra note 3, at 73 FR at 38279. In 

the Notice, the Exchange stated that ‘‘[w]here 

feasible, NYSE Regulation will expect specialist 

units to use automated surveillances to check for 

breaches of the information barriers required by the 

proposed rule.’’ Id. 

22 Id. 

23 Id. 

24See proposed NYSE Rule 98(b)(11) and (14); 17 

CFR 242.200(f). 

25See proposed NYSE Rule 98(b)(14). 

26See proposed NYSE Rule 98(d)(1) and (2). 

27See proposed NYSE Rules 98(d)(2)(A) and 

98(c)(2)(A), (C), (D), and (E). 

28See supra note 24 and accompanying text. The 

Exchange states that there may be some Regulation 

SHO issues in connection with how a member 

organization may choose to structure its specialist 

unit within an integrated proprietary aggregation 

unit or provide risk management to the specialist 

unit pursuant to proposed NYSE Rule 98(f). 

Accordingly, the Exchange represents that it would 

not approve a specialist unit to operate under 

proposed NYSE Rule 98 until all Regulation SHO 

issues that may arise have been resolved. See 

Notice, supra note 3, at 73 FR at 38279. 

29See proposed NYSE Rule 98(d)(2)(B)(i) and (ii). 

30See Notice, supra note 3, at 73 FR 38279. 

31NYSE rules define being on the Floor to 

include the trading Floor of the Exchange, and the 

premises immediately adjacent thereto, such as the 

various entrances and lobbies of 11 Wall Street, 18 

New Street, 12 Broad Street, and 18 Broad Street, 

as well as the telephone lobby in the first basement 

of 11 Wall Street. See NYSE Rule 112(b). 

32See proposed NYSE Rule 98(d)(2)(B)(iii). 

33See proposed NYSE Rule 98(d)(2)(B)(iv). 

information.18 Finally, a specialist unit 

would be required to maintain or have 

allocated to it net capital sufficient to 

meet the requirements of NYSE Rule 

104.21.19

NYSE Regulation would review a 

member organization’s surveillance 

plans and internal controls to ensure 

that they are reasonably designed to 

protect information as required under 

the proposed rule. As with the current 

rule, NYSE Regulation would also 

review whether a member organization 

has implemented internal audit 

procedures to ensure compliance with 

such organization’s NYSE Rule 98 

policies and procedures. The Exchange 

represents that the NYSE Regulation 

review for approving a specialist unit 

would be as rigorous as the current 

review for obtaining an exemption from 

current NYSE Rule 98.20 As with the 

current NYSE Rule 98 exemption 

process, staff from both the Market 

Surveillance Division of NYSE 

Regulation, as well as staff from the 

Financial Industry Regulatory 

Authority, Inc. (‘‘FINRA’’) who are 

responsible for the routine examinations 

of specialist units, would be involved in 

reviewing a specialist unit’s written 

policies and procedures and proposed 

automated surveillances and controls.21

After a member organization has been 

approved to operate a specialist unit, 

NYSE Regulation and FINRA would 

conduct examinations to determine 

whether a specialist unit’s policies and 

procedures continue to meet the rule 

requirements and whether the controls 

and automated surveillances are 

functioning as designed. As part of the 

examinations, NYSE Regulation and 

FINRA would conduct on-site reviews 

of a specialist unit to review for 

breaches of the controls or 

surveillances.22 In addition, NYSE 

states that a specialist unit would need 

to seek approval from NYSE Regulation, 

before making any material changes to 

its operations.23

The Commission finds that the 

requirements in proposed Rule 98(c) are 

consistent with the Act. The 

Commission believes that the proposed 

rule change, as amended, establishes 

guidelines for a member organization’s 

policies and procedures that will protect 

against the improper disclosure and 

sharing of specialist confidential 

information and non-public order 

information. 

B. Operating a Specialist Unit Within an 

Integrated Proprietary Aggregation Unit 

Proposed NYSE Rule 98 would permit 

a member organization to seek approval 

to operate a specialist unit within an 

integrated proprietary aggregation unit. 

An ‘‘integrated proprietary aggregation 

unit’’ is proposed to be defined to mean 

a department, division, or desk that 

meets the requirements of the definition 

of an ‘‘independent trading unit’’ under 

Rule 200 of Regulation SHO with a 

trading objective to engage in 

proprietary trading, including marketmaking activities.24 An integrated 

proprietary aggregation unit must be 

separate from any investment banking, 

research, or customer-facing 

department.25

To protect specialist confidential 

information and non-public order 

information, a member organization 

would be permitted to operate a 

specialist unit within an integrated 

proprietary aggregation unit, if NYSE 

Regulation approves such operations 

and the member organization: (i) Adopts 

and implements comprehensive written 

procedures and guidelines governing 

the conduct and supervision of business 

handled by the unit; (ii) establishes a 

process for regular review of such 

written policies and procedures; and 

(iii) implements controls and 

surveillances reasonably designed to 

prevent and detect violations of these 

procedures and guidelines.26

In addition, to operate a specialist 

unit within an integrated proprietary 

aggregation unit, the specialist unit’s 

policies and procedures would have to 

meet those requirements for operating a 

specialist unit pertaining to information 

barriers associated with the specialist 

unit and non-specialist unit operations, 

net capital requirements, and senior 

management oversight.27 A specialist 

unit operating within an integrated 

proprietary aggregation unit would not 

be required to separately comply with 

all requirements of a Regulation SHO 

independent trading unit because the 

integrated proprietary aggregation unit 

of which it is a part would be required 

to comply with Rule 200(f) of 

Regulation SHO.28

The member organization’s policies 

and procedures would also need to 

restrict access within the integrated 

proprietary aggregation unit to nonpublic order information. Specifically, 

except for senior managers pursuant to 

policies and procedures adopted under 

proposed NYSE Rule 98(c)(2)(E), the 

specialist unit must not permit systems 

and individuals not assigned to the 

specialist unit to have access to nonpublic order information.29 For 

example, because the specialist 

application protocol interface 

(‘‘specialist API’’) currently has access 

to non-public order information, 

systems not dedicated to the specialist 

unit could not be integrated with the 

specialist API. Accordingly, the trading 

algorithms of the integrated proprietary 

aggregation unit that are not dedicated 

to the specialist unit must not have 

access to any non-public order 

information via the specialist API, or 

any other system.30

A member organization’s policies and 

procedures would have to prohibit 

individuals assigned to the specialist 

unit, while on the Exchange floor,31

from communicating with individuals 

or systems responsible for making 

trading decisions for the integrated 

proprietary aggregation unit.32 However, 

such policies and procedures could 

permit a specialist unit employee to 

move, on an intra-day basis, to an offFloor location and engage in a nonspecialist related role within the 

integrated proprietary aggregation 

unit.33 The policies and procedures of a 

member organization that chooses to 

allow individuals to so move must be 

reasonably designed to prohibit such 

individual from (1) making any nonpublic order information or specialist 

confidential information available to 

individuals or systems responsible for 


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34See Section III(D) infra. 35See proposed NYSE Rule 98(d)(2)(B)(iv). 36See NYSE Rule 98(d)(2)(C). 37The order tracking provisions in NYSE Rule 

132B currently do not apply to members effecting 

on the Floor proprietary transactions when they are 

acting in the capacity of a specialist, a Registered 

Competitive Market Maker, or a Competitive 

Trader. The proposed amendments in NYSE Rule 

132B would apply the order tracking provisions in 

the rule to those persons. 38See proposed NYSE Rule 98(d)(4). 

39See proposed NYSE Rule 98(d)(3). 

40See Notice, supra note 3, at 73 FR at 38280. 

41See NYSE Rule 98(e)(2). 

42See Notice, supra note 3, at 73 FR 38281. 

43NYSE Rule 105(a), which prohibits specialists, 

their member organization and their approved 

persons (or officer or employee thereof) from being 

directly or indirectly interested in a pool dealing or 

trading in a stock in which such member is 

registered as a specialist, would continue to apply 

to approved persons. 

making trading decisions for the 

integrated proprietary aggregation unit 

and (2) using any non-public order 

information or, except for certain risk 

management activities as described 

below,34 specialist confidential 

information in connection with making 

trading decisions for the integrated 

proprietary aggregation unit.35

Proposed NYSE Rule 98 would no 

longer require separate books and 

records for a specialist unit operating 

within an integrated proprietary 

aggregation unit. However, to allow 

NYSE Regulation to review the trading 

activity by the specialist unit at the 

Exchange without having to parse 

through commingled records, under 

proposed NYSE Rule 98(d)(2)(C), an 

integrated proprietary aggregation unit 

would have to maintain records of its 

specialist’s accounts in a manner that is 

separate from the accounts of the 

integrated proprietary aggregation 

unit.36 Similarly, to ensure that NYSE 

Regulation can review the trading 

activities of the integrated proprietary 

aggregation unit, proposed NYSE Rule 

98(d)(4) would require an integrated 

proprietary aggregation unit to maintain 

audit trail information for any trading 

by such unit, including trading at the 

Exchange and at other market centers. 

Further, the proposed amendments to 

NYSE Rule 132B would apply the Order 

Tracking System (‘‘OTS’’) requirements 

to trading by a specialist unit, and if 

applicable, an integrated proprietary 

aggregation unit.37 A member 

organization would be required to 

maintain sufficient records to 

reconstruct in a time-sequenced manner 

its trading in securities allocated to the 

specialist unit and any trading by the 

integrated proprietary aggregation unit 

in those securities in other market 

centers or trading in related products.38

The Commission finds that the 

NYSE’s proposal to permit a member 

organization to operate a specialist unit 

within an integrated proprietary 

aggregation unit is consistent with the 

Act. The Commission believes that the 

guidelines established for member 

organization policies and procedures 

and NYSE Regulation review are 

designed to protect specialist 

confidential information and non-public 

order information and mitigate the 

potential for conflicts of interest in a 

member organization. The Commission 

also believes that operation of a 

specialist unit within an integrated 

proprietary aggregation unit need not 

interfere with the specialist’s obligations 

under Exchange Rules. In particular, 

proposed NYSE Rule 98(d) would 

establish that the specialist rules would 

apply to any trading on or through the 

systems and facilities of the Exchange 

by the integrated proprietary aggregation 

unit through the specialist unit in the 

securities that are allocated to the 

specialist unit and to the integrated 

proprietary aggregation unit if the 

integrated proprietary aggregation unit 

causes the specialist unit to violate the 

specialist rules.39 In this regard, NYSE 

states that if there is a conflict between 

the specialist unit’s market making 

obligations and the integrated 

proprietary aggregation unit’s trading, 

the presumption would be in favor of 

the specialist unit’s market making 

obligations.40

C. Sharing Non-Trading Related 

Services 

Proposed NYSE Rule 98(e) would 

allow a specialist member organization 

and its approved persons to share nontrading related services, subject to the 

approval of NYSE Regulation. To obtain 

approval to share non-trading related 

services, the specialist unit would be 

required to: (i) Adopt written policies 

and procedures governing the sharing of 

non-trading related services; (ii) 

establish a process for regular review of 

such written policies and procedures; 

and (iii) implement controls and 

surveillances reasonably designed to 

prevent and detect violations of those 

policies and procedures. At a minimum, 

the specialist unit’s policies and 

procedures would have to be reasonably 

designed to provide that the specialist 

unit and the member organization or 

approved person must maintain the 

confidentiality of specialist confidential 

information and non-public order 

information. Under no circumstances 

may non-public order information or 

specialist confidential information be 

made available to a member’s 

organizations investment banking, 

research, or customer-facing 

departments.41

The Commission finds that NYSE’s 

proposal to allow a specialist unit to 

share certain non-trading related 

services with its member organization or 

approved person is consistent with the 

Act because such sharing would be 

conducted pursuant to policies and 

procedures designed to protect 

specialist confidential information and 

non-public order information. 

Moreover, such policies and procedures 

would be reviewed by NYSE Regulation 

prior to a member organization being 

approved to share non-trading related 

services and NYSE Regulation and 

FINRA would examine on an ongoing 

basis whether the specialist unit’s 

policies and procedures and controls 

comply with the requirements of the 

rule.42

D. Risk Management 

1. Changes to NYSE Rule 105 

NYSE Rule 105 currently limits the 

ability of specialists, specialist 

organizations and approved persons 

(and any officer or employee thereof) to 

conduct risk management trading in 

options and single stock futures on 

stock in which the specialist is 

registered. The Guidelines for 

Specialists’ Specialty Stock Option and 

Single Stock Futures Transactions 

Pursuant to Rule 105 (‘‘Rule 105 

Guidelines’’) currently sets forth the 

permissible options positions that a 

specialist may establish and maintain 

for the purpose of hedging risks 

associated with holding specialty 

stocks. The proposed amendments to 

NYSE Rule 105 would limit the 

applicability of the rule to the specialist 

unit itself (and any officer or employee 

thereof); approved persons would no 

longer be subject to NYSE Rule 105.43

Paragraph (m)(i) of the Rule 105 

Guidelines currently prohibits 

specialists, their member organization 

and their approved persons (or officer or 

employee thereof) from acting in any 

market-making capacity in an option or 

security future overlying a security in 

which the specialist is registered. An 

approved person may seek an exception 

from these restrictions under NYSE Rule 

98 and paragraphs (m)(ii) and (iii) of the 

Rule 105 Guidelines exempt such 

approved person to engage in such 

market making activities. Such 

approved person, however, may not also 

act as a market maker in any equity 

security in which the associated 

specialist is registered and which 

underlies an option or security future in 


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44Paragraph (m)(ii) of the Rule 105 Guidelines. 

45 See proposed NYSE Rule 98(f)(1). 

46See proposed NYSE Rule 98(f)(2). 

47See proposed NYSE Rule 98(f)(3). 

48See Notice, supra note 3, at 73 FR at 38281; see 

also proposed NYSE Rules 98(f)(2)(A)(i) and 

98(f)(3)(C)(iv). 

49See infra notes 55–56 and accompanying text. 

50The proposed rule change would permit a 

specialist unit to transfer a specialist back and forth 

from the Floor of the Exchange to a specialist unit 

desk upstairs that trades in related products, so long 

as that specialist is registered and qualified to trade 

in related products and non-public order 

information is not used when trading in related 

products. In such case, however, a specialist unit 

must have policies and procedures reasonably 

designed to ensure that a specialist who moves off 

the Floor of the Exchange does not make available 

or use any non-public information or, unless 

otherwise specified, specialist confidential 

information, to which the specialist may have had 

access while on the Floor of the Exchange. See 

proposed NYSE Rule 98(f)(1)(A)(iii). 

51See proposed NYSE Rule 98(f)(1)(A)(ii); Notice, 

supra note 3, at 73 FR at 38281. 

52See proposed NYSE Rule 98(f)(1)(A)(iv). Under 

the proposal, a specialist unit that has not been 

approved for an exemption from NYSE Rule 105 

would still be permitted to enter orders in options 

or single-stock futures from the Floor, subject to the 

requirements of NYSE Rule 105; see also Notice, 

supra note 3, at 73 FR at 38281. 

53The Exchange notes that the member 

organization with the specialist unit would have to 

be a member of FINRA or another self-regulatory 

organization, as required by each marketplace 

where the specialist unit proposes to trade. See 

Notice, supra note 3, at 73 FR at 38281. 

54See proposed NYSE Rule 98(f)(1)(A)(v). 

55See proposed NYSE Rule 98(f)(1)(A)(vi). 

56 Id. 

57See proposed NYSE Rule 98(f)(1)(ii). 

which the approved person is acting as 

market maker.44

Consistent with the proposal to 

amend NYSE Rule 105 so that approved 

persons are no longer subject to the 

Rule, the proposed rule change would 

eliminate the reference to ‘‘approved 

persons’’ in paragraph (m)(i) of the Rule 

105 Guidelines. Thus, an approved 

person and an integrated proprietary 

aggregation unit would not be 

prohibited by NYSE Rules from 

engaging in options or security futures 

market-making activities. In addition, 

the proposed rule change would delete 

paragraphs (m)(ii) and (m)(iii), which 

apply only to approved persons, from 

the Rule 105 Guidelines. 

The Commission believes that these 

proposed changes to NYSE Rule 105 

and the Rule 105 Guidelines are 

consistent with the Act. Under proposed 

NYSE Rule 98, the specialist unit would 

be walled-off from approved persons 

pursuant to a member organization’s 

policies and procedures reviewed by 

NYSE Regulation that must be 

reasonably designed to protect against 

the improper disclosure and sharing of 

specialist confidential information and 

non-public order information. The 

Commission believes that these barriers 

between the specialist unit and other 

business activities of a member 

organization, including market making 

in securities in which a specialist is 

registered and related securities, will 

limit the potential for unfair use of nonpublic order information, manipulation 

and other improper trading practices, 

and conflicts of interest. 

2. Proposed Risk Management Models 

Proposed NYSE Rule 98(f) would 

broaden the ability of specialist units to 

trade in related products and expand 

the universe of who may be involved in 

managing the risk of the specialist unit. 

In this regard, the NYSE proposes three 

models for a specialist unit to set up its 

risk management operation. 

Specifically, under the first model, risk 

management may be conducted within 

the specialist unit itself.45 Under the 

second model, risk management may be 

conducted within an integrated 

proprietary aggregation unit.46 Under 

the third model, risk management may 

be conducted within another affiliate of 

the specialist unit.47 Regardless of the 

risk management model, the specialist 

unit would be responsible for its 

quoting or trading decisions at the 

Exchange.48

a. Specialist Unit Risk Management 

NYSE Rule 105 limits a specialist 

unit’s trading in options and single 

stock futures on stock in which the 

specialist is registered. Proposed NYSE 

Rule 98(f)(1) would allow a specialist 

unit to seek an exemption from NYSE 

Rule 105 for the purpose of conducting 

risk management trading. A specialist 

unit and its officers and employees 

would continue to be prohibited from 

engaging in any capacity as a market 

maker in options or security futures 

overlying securities in which the 

specialist is registered. To obtain an 

exemption from the NYSE Rule 105 

restrictions, the specialist unit would 

have to: (i) Adopt and implement 

comprehensive written procedures and 

guidelines governing the conduct of 

trading in related products; (ii) establish 

a process for regular review of such 

written procedures and guidelines; and 

(iii) implement controls and 

surveillances reasonably designed to 

prevent and detect violations of these 

procedures and guidelines. These 

policies and procedures would have to 

be reasonably designed to ensure that 

the individuals or systems responsible 

for trading related products do not have 

access to non-public order information 

or except as described below,49

specialist confidential information.50

Individuals who work on the Exchange 

Floor would not be permitted to trade or 

direct trading in related products,51 nor 

would the specialist API be permitted to 

make any trading decisions in related 

products.52 Accordingly, any trading in 

related products by the specialist unit 

would have to be conducted by an offFloor, i.e., ‘‘upstairs’’ office, by 

individuals who are qualified and 

registered to trade in the marketplaces 

where such trading occurs.53

The NYSE proposes to allow 

individuals or systems responsible for 

trading related products to have limited 

access to specialist confidential 

information. Specifically, individuals or 

systems, including computer 

algorithms, responsible for making 

trading decisions in related products 

may have electronic access to the 

specialist unit’s trades at the Exchange 

in securities allocated to the specialist 

unit, provided that such trades have 

been printed to the Consolidated 

Tape.54

In addition, a senior manager of the 

specialist unit would be permitted to 

provide risk management oversight of 

both Floor specialist operations and any 

specialist unit upstairs trading in related 

products.55 Such oversight, however, 

would have to be done pursuant to 

policies and procedures reasonably 

designed to prevent the specialist unit 

senior managers who have access to 

non-public order information or 

specialist confidential information from 

making such information available to 

the individuals or systems on the 

upstairs trading desk responsible for 

trading related products within the 

specialist unit or using such information 

to directly or indirectly influence 

trading in related products by that 

upstairs desk.56 The proposed rule also 

would bar specialists from directly 

entering or executing trades in related 

products while on the Floor of the 

Exchange.57

The Commission believes that the 

proposal to permit a specialist unit to 

conduct risk management within the 

specialist unit itself is consistent with 

the Act. The Commission notes that the 

proposed rule would require a specialist 

unit’s policies and procedures to be 

reasonably designed to ensure that the 

individuals or systems responsible for 

trading related products do not have 

access to non-public order information 

or, except under limited conditions, 

specialist confidential information. 

The Commission believes that those 

limited circumstances in which 

specialist confidential information may 


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58Once trades are disseminated publicly, the 

individuals or systems, including computer 

algorithms, responsible for trading in related 

products may have access to the specialist unit’s 

aggregate net long or short position that includes 

the printed trades. 

59An integrated proprietary aggregation unit 

conducting risk management trading outside of its 

specialist unit pursuant to proposed NYSE Rule 

98(f)(2) would not require an exemption from the 

requirements of NYSE Rule 105(b)–(d) and the Rule 

105 Guidelines because, under the proposed 

changes to NYSE Rule 105, the prohibitions on risk 

management trading would apply only to the 

specialist unit itself and not to approved persons. 

See supra Section III(D)(1). 

60See proposed NYSE Rule 98(f)(2)(A). An 

integrated proprietary aggregation units would have 

to meet the requirements of proposed NYSE Rule 

98(f)(1)(A)(i)–(v), see supra notes 49–54 and 

accompanying text. 

61See Notice, supra note 3, at 73 FR at 38282; see 

also proposed Rule 98(f)(2)(A)(i). 

62An affiliate of a specialist unit conducting risk 

management trading pursuant to proposed NYSE 

Rule 98(f)(3) would not require an exemption from 

the requirements of NYSE Rule 105(b)–(d) and the 

Rule 105 Guidelines because, under the proposed 

changes to NYSE Rule 105, the prohibitions on risk 

management trading would apply only to the 

specialist unit itself and not to approved persons. 

See supra Section III(D)(1). 

63See proposed Rule 98(f)(3)(C). 

64See proposed Rule 98(f)(3)(C)(ii). 

65See supra note 54 and accompanying text. 

be used to manage a specialist unit’s 

risks would not be a misuse of 

information. The Commission does not 

believe that information about trades 

that have been printed to the 

Consolidated Tape would provide the 

member organization with an unfair 

advantage because such trades would be 

publicly available.58

b. Integrated Proprietary Aggregation 

Unit Risk Management 

Proposed NYSE Rule 98(f)(2) would 

permit an integrated proprietary 

aggregation unit to conduct risk 

management trading related to the 

specialist unit’s trading.59 NYSE 

Regulation would need to approve the 

integrated proprietary aggregation unit 

to conduct such risk management 

trading. 

Proposed NYSE Rule 98(f)(2) 

incorporates the requirements described 

above for conducting risk management 

trading within the specialist unit itself, 

except for the requirement in proposed 

NYSE Rule 98(f)(1)(A)(vi) relating to 

senior managers of the specialist unit.60

The requirement in proposed NYSE 

Rule 98(f)(1)(A)(vi) is not applicable 

where risk management is being 

conducted by an integrated proprietary 

aggregation unit, because senior 

managers of the specialist unit would 

not be providing risk management 

oversight. In addition, an integrated 

proprietary aggregation unit would be 

required to: (i) Adopt and implement 

comprehensive written procedures and 

guidelines governing the conduct of risk 

management of the specialist unit; (ii) 

establish a process for regular review of 

such written procedures and guidelines; 

and (iii) implement controls and 

surveillances reasonably designed to 

prevent and detect violations of these 

procedures and guidelines. 

Rule 98 (f)(2)(A)(i) would permit the 

‘‘upstairs’’ risk management desk to 

electronically direct the specialist unit’s 

trading or quoting, subject to the 

specialist unit’s market making 

obligations. To provide the 

recommendations to the specialist unit, 

the ‘‘upstairs’’ risk management desk 

would be permitted to have real-time 

access both to the integrated proprietary 

aggregation unit’s positions in related 

products and other securities and to the 

specialist unit’s positions in securities 

allocated to it, provided that such 

specialist unit’s positions comprise only 

trades that have been printed to the 

Consolidated Tape.61

The Commission finds that the 

proposal to permit a specialist unit’s 

risk management operations to be 

performed by an integrated proprietary 

aggregation unit of which it is part is 

consistent with the Act. The 

Commission believes that the policies 

and procedures an integrated 

proprietary aggregation unit would be 

required to establish and that NYSE 

Regulation would need to review would 

protect specialist confidential 

information and non-public order 

information. 

The Commission also believes that the 

proposed NYSE Rule 98 would continue 

to mitigate conflicts of interest between 

the specialist’s responsibilities to the 

market and the business activities of 

specialist affiliates. In this regard, the 

proposed rule would require the 

specialist unit to determine whether any 

recommendations provided to it by an 

‘‘upstairs’’ risk management desk are 

consistent with its market making 

obligations, including Exchange 

specialist rules. Thus, the Commission 

expects that the specialist unit would 

accept or reject such recommendations 

in a manner that is consistent with its 

market making obligations. 

c. Approved Person or Member 

Organization Risk Management 

Finally, under proposed NYSE Rule 

98(f)(3) an approved person or a 

member organization that runs a 

specialist unit could seek approval of 

NYSE Regulation to conduct risk 

management trading related to the 

specialist unit’s trading.62 This 

alternative would provide brokerdealers the flexibility to keep the 

specialist unit as a separate member 

organization or aggregation unit, yet 

have an approved person or separate 

aggregation unit provide risk 

management services for the specialist 

unit. Under this option, the approved 

person or member organization would 

provide the same type of risk 

management as an integrated 

proprietary aggregation unit that 

includes that the specialist unit under 

proposed NYSE Rule 98(f)(2). Thus, as 

required for an integrated proprietary 

aggregation unit under proposed NYSE 

Rule 98(f)(2) described above, proposed 

NYSE Rule 98(f)(3) would require an 

approved person or member 

organization conducting such risk 

management to: (i) Adopt and 

implement comprehensive written 

procedures and guidelines governing 

the conduct of risk management of the 

specialist unit; (ii) establish a process 

for regular review of such written 

procedures and guidelines; and (iii) 

implement controls and surveillances 

reasonably designed to prevent and 

detect violations of these procedures 

and guidelines.63 These policies and 

procedures must be reasonably designed 

to satisfy the requirements in the rule, 

including that individuals and systems 

responsible for managing the risk of the 

specialist unit could not have access to 

non-public order information, or with 

certain exceptions, specialist 

confidential information.64 These 

exceptions are limited to allowing 

individuals and systems responsible for 

managing the risk of the specialist unit 

to have electronic access to the 

specialist unit’s trades once they are 

printed to the Consolidated Tape.65 In 

addition, an approved person or 

member organization could 

electronically direct the specialist unit’s 

trading or quoting, subject to the 

specialist unit’s market making 

obligations. 

The Commission finds that the 

proposed rule change to permit an 

approved person or a member 

organization associated with a specialist 

unit to conduct its risk management 

trading related to the specialist unit’s 

trading is consistent with the Act. The 

Commission believes that the policies 

and procedures an approved person or 

member organization would be required 

to establish and that NYSE Regulation 

would need to revise would protect 

specialist confidential information and 

non-public order information. 

The Commission also believes that 

proposed NYSE Rule 98 would continue 

to mitigate conflicts of interest between 

the specialist’s responsibilities to the 

market and the business activities of 


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66See current NYSE Rule 98, Guidelines (i) and 

(k). 

67See current NYSE Rule 98, Guidelines (j). 

68See proposed NYSE Rule 98(h)(4). 

69See NYSE Rules 351(e) and 342.21. 

70See proposed NYSE Rule 98 (Former). 

71See Notice, supra note 3, at 73 FR at 38276. 

72See NYSE Rule 98 (Former), Guidelines(c). 

73See supra notes 41–42 and accompanying text 

for a discussion of these rules. 

specialist affiliates. In this regard, the 

proposed rule would require the 

specialist unit to determine whether any 

recommendations provided to it by an 

‘‘upstairs’’ risk management desk are 

consistent with its market making 

obligations, including Exchange 

specialist rules. Thus, the Commission 

expects that the specialist unit would 

accept or reject such recommendations 

in a manner that is consistent with its 

market making obligations. 

E. Failure To Maintain Confidentiality, 

Reporting Obligations, and Breaches 

Proposed NYSE Rule 98(g) would 

provide that, if a specialist becomes 

aware of non-public material 

information from its approved person or 

parent member organization, the 

specialist may have to cease acting as a 

specialist temporarily in the security 

involved. Proposed NYSE Rule 98(i) 

would provide that any breach of the 

proposed NYSE Rule 98 could result in 

disciplinary action, including the 

withdrawal of one or more securities 

allocated to the specialist unit or 

withdrawal of approval to operate a 

specialist unit. Both rules are 

substantially similar to provisions in 

current NYSE Rule 98 66 and the 

Commission believes they are consistent 

with the Act. 

Paragraphs (1) and (2) of proposed 

NYSE Rule 98(h) are substantially 

similar to the current reporting 

obligations in current NYSE Rule 98.67

Proposed NYSE Rule 98(h)(1) would 

require ‘‘after the fact’’ reporting of 

information regarding material 

investment banking activities in which 

the member organization or approved 

person has been engaged and material 

research reports, recommendations, etc. 

pertaining to any security that has been 

allocated to the specialist unit. Proposed 

NYSE Rule 98(h)(2) would require ‘‘after 

the fact’’ reporting of information about 

determinations regarding whether the 

specialist should cease acting as 

specialist in the event the specialist unit 

receives non-public information. 

Paragraphs (3) and (4) of proposed 

NYSE Rule 98(h) would add a new 

requirement for specialist units to report 

any actual breaches, or internal 

investigations of possible breaches, of 

the information barriers required by the 

rule. In particular, a specialist unit 

would be required to conduct an 

internal investigation into any trading 

activity that may be a result of a breach 

of information barriers required by 

proposed NYSE Rule 98. In addition, on 

a quarterly basis, a specialist unit would 

have to report in writing to NYSE 

Regulation whether it has commenced 

such an internal investigation, the 

quarterly progress of any open 

investigations, what remedial measures, 

if any, were taken, and the completion 

of any internal investigation, including 

the methodology and results of such 

investigation, any internal disciplinary 

action taken, and any referral of the 

matter to the NYSE, another selfregulatory organization, or the 

Commission.68

The Commission finds that proposed 

NYSE Rule 98(h) is consistent with the 

Act and would provide NYSE 

Regulation with an additional tool to 

monitor compliance with NYSE Rule 

98. The Commission notes that NYSE 

designed the reporting obligation for 

internal investigations in the proposed 

rule to be effectively similar to the 

reporting obligation in other NYSE 

rules.69

F. Existing Specialists 

1. NYSE Rule 98 (Former) 

Because a current specialist may 

decide to keep its current operational 

structure or delay implementation of a 

new operational structure, the NYSE 

proposes to retain current NYSE Rule 98 

but limit its applicability to specialist 

organizations and their associated 

approved persons operating as of the 

date of this Order. Specifically, current 

NYSE Rule 98 would be re-designated 

as ‘‘Rule 98 (Former)’’ in the NYSE 

Rules until all specialist units are 

approved for operation pursuant to the 

proposed rule.70 Except for the sharing 

of non-trading related services, as 

discussed below, such member 

organization and its approved persons 

would continue to be subject to NYSE 

Rule 98 (Former) as well as the 

‘‘(Former)’’ versions of NYSE Rules that 

reference exemptions from Rule 98 

(Former) for approved persons. Any 

new specialist units would be required 

to comply with proposed NYSE Rule 98. 

Any significant changes to the status 

quo after the effective date of the 

proposed rule would require the 

member organization to apply for 

approval pursuant to the procedures of 

proposed NYSE Rule 98.71

The Commission finds that the 

NYSE’s proposal to continue to permit 

current specialist units to operate under 

current NYSE Rule 98, redesignated as 

NYSE Rule 98 (Former), is consistent 

with the Act. Allowing specialist units 

to continue to operate under current 

NYSE Rule 98 would provide specialist 

units time to develop or modify their 

policies and procedures and avoid any 

unnecessary disruption in their 

businesses. 

2. Sharing of Non-Trading Related 

Services 

The proposed rule change would 

provide that a member organization 

operating pursuant to NYSE Rule 98 

(Former) could apply for approval from 

NYSE Regulation to share non-trading 

related services.72 Any such sharing of 

non-trading related services would be 

pursuant to proposed NYSE Rule 

98(e).73

The Commission finds that the NYSE 

proposal to permit specialist units 

operating under NYSE Rule 98 (Former) 

to seek approval under proposed NYSE 

Rule 98 to share non-trading related 

services is consistent with the Act. 

Specialist units operating under NYSE 

Rule 98 (Former) and their approved 

persons would be required to maintain 

informational barriers prescribed by the 

current NYSE Rule 98 Guidelines. The 

Commission believes that those 

Guidelines, combined with the 

requirements under proposed NYSE 

Rule 98(e) regarding the sharing of nontrading related services would protect 

against the misuse of non-public 

information. 

G. Additional Rule Changes 

As described above, under the 

proposed rule, instead of reviewing 

whether to grant each approved person 

an exemption from NYSE Rule 98, 

NYSE Regulation would review the 

specialist unit’s policies, procedures, 

controls, and surveillance. For this 

reason, the NYSE proposes to amend the 

NYSE rules that refer to approved 

persons and to the need for an 

exemption from NYSE Rule 98. 

1. Proposed Amendments to NYSE Rule 

98A 

NYSE Rule 98A currently requires 

approved persons to agree in writing not 

to cause a specialist or odd-lot dealer to 

violate rules applicable to the specialist 

or odd-lot dealer. The rule further 

requires that approved persons report to 

the Exchange any off-Floor orders for 

securities in which an associated 

specialist member organization 

specializes for any account in which the 

approved person has a direct or indirect 

interest. 


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74For the period of time that the current NYSE 

Rule 98 stays in the NYSE Rules as ‘‘NYSE Rule 98 

(Former),’’ each of NYSE Rules 99, 103B, 104, and 

113 will have two forms: One to meet the 

requirements of NYSE Rule 98 (Former) and one to 

meet the requirements of proposed NYSE Rule 98. 

The version of the rules that relate to NYSE Rule 

98 (Former) will be similarly designated with the 

‘‘(Former)’’ title either for the entire rule, or for a 

section of a rule, as appropriate. 

75The prohibitions in current NYSE Rule 460.10 

do not apply if the security is a convertible security, 

American Depositary Receipt, Global Depositary 

Receipt or exchange-traded funds tied to the equity 

securities, current or index warrants. 

76See Amendment No. 1, supra note 4. 

77 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3Amendment No. 2 replaced and superseded the 

original filing and Amendment No. 1 in their 

entirety. 

4Exchange Act Release No. 58045 (June 26, 2008), 

73 FR 38487. 

Under the proposed amendments to 

NYSE Rule 98A, approved persons 

would no longer be required to agree in 

writing not to cause a specialist or oddlot dealer to violate rules applicable to 

the specialist or odd-lot dealer. 

Approved persons also would no longer 

be required to report any off-Floor 

orders for securities in which an 

associated specialist member 

organization specializes for any account 

in which the approved person has a 

direct or indirect interest to the 

Exchange. The Commission believes 

that the elimination of these 

requirements is consistent with the Act 

because, under proposed NYSE Rule 98, 

the specialist unit would be walled-off 

from approved persons. 

2. Proposed Amendments to NYSE 

Rules 99, 102, 103B, 104, and 113 

NYSE Rules 99, 103B, 104, and 113 

currently specifically apply to approved 

persons, unless such approved person 

has obtained an exemption under Rule 

98. Under the proposed rule change, 

current NYSE Rules 99, 103B, 104, and 

113 would be amended to remove 

references to approved persons.74 The 

Commission believes that the 

elimination of the references to 

approved persons in these rules is 

consistent with the Act because, under 

proposed NYSE Rule 98, the specialist 

unit would be walled-off from approved 

persons. 

NYSE Rule 102 currently governs 

trading in related products by an oddlot dealer. The Commission believes 

that the deletion of current NYSE Rule 

102 is consistent with the Act. The 

Commission notes that the Exchange no 

longer has separate odd-lot dealers and 

all specialists are also responsible for 

odd-lot trading in securities in which 

they are registered. The Commission 

also notes that specialists would be 

subject to the standards set forth in 

proposed Rules NYSE 98 and 105. 

3. Proposed Amendments to NYSE Rule 

460 

Current NYSE Rule 460.10 prohibits a 

specialist, its member organization or 

approved person (or officer or employee 

thereof) from, individually or in the 

aggregate, owning more than 10% of the 

outstanding shares of any equity 

security in which the specialist is 

registered.75 Current NYSE Rule 460.10 

also requires such person to report to 

the NYSE when it, directly or indirectly, 

acquires more than 5% of the 

outstanding shares of such equity 

security and promptly dispose or reduce 

such interest if advised to do so by the 

Exchange. A specialist, its member 

organization or approved person (or 

officer or employee thereof) may exceed 

the 10% ownership threshold for 

derivative securities whose values are 

based on an underlying currency or 

index only with the approval of the 

NYSE; however, in no event may such 

person directly or indirectly own more 

than 25% of such derivative securities. 

The proposed amendments to NYSE 

Rule 460 would make changes so that it 

would apply only to the specialist 

member and his specialist unit and not 

to his member organization or approved 

persons. In addition, the proposed 

amendments would replace the 10% 

ownership limitation set forth in NYSE 

Rule 460.10 with a requirement that the 

specialist unit report to the Exchange 

the beneficial ownership of more than 

5% of an equity security that is 

allocated to it. The specialist unit would 

be required to update such reports if its 

beneficial ownership exceeds 10% or 

falls below 5%. In addition, the 

specialist unit would be prohibited from 

acquiring, directly or indirectly, more 

than 25% of the outstanding shares in 

any security allocated to the specialist 

unit. 76 The proposed amendments to 

NYSE Rule 460 would apply to 

specialist units operating under 

proposed NYSE Rule 98, as well as to 

specialist member organizations that 

continue to operate under NYSE Rule 98 

(Former). 

The Commission believes that the 

proposed changes to NYSE Rule 460.10 

are consistent with the Act. Consistent 

with the NYSE’s proposed changes to 

Rule 98, the changes to Rule 460 would 

apply the restrictions in the rule only to 

the specialist. The Commission believes 

that, because of the policies and 

procedures a specialist unit or any 

integrated proprietary aggregation unit 

in which it is a part would be required 

to implement, these changes to Rule 460 

are consistent with the Act. Further, the 

Commission believes that, because of 

the increased competition among 

markets in NYSE listed securities, the 

elimination of the restrictions in Rule 

460.10 are consistent with the Act. 

IV. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act, that the 

proposed rule change (SR–NYSE–2008–

45), as modified by Amendment No. 1, 

be, and it hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.77

Florence E. Harmon, 

Acting Secretary. 

[FR Doc. E8–18964 Filed 8–15–08; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–58340; File No. SR–Phlx–

2007–33] 

Self-Regulatory Organizations; 

Philadelphia Stock Exchange, Inc.; 

Order Granting Approval of a 

Proposed Rule Change, as Modified by 

Amendment Nos. 1 and 2 Thereto, 

Relating to Margining 

August 11, 2008. 

On April 5, 2007, the Philadelphia 

Stock Exchange, Inc. (‘‘Phlx’’ or 

‘‘Exchange’’) filed with the Securities 

and Exchange Commission 

(‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Act’’ or ‘‘Exchange Act’’),1 and 

Rule 19b–4 2 thereunder, a proposed 

rule change to amend its margin rules. 

On July 31, 2007, Phlx filed 

Amendment No. 1 to the proposed rule 

change. On May 19, 2008, Phlx filed 

Amendment No. 2 to the proposed rule 

change.3 The proposal was published in 

the Federal Register on July 7, 2008.4

The Commission received no comments 

on the proposal. This order approves the 

proposed rule change, as modified by 

Amendment Nos. 1 and 2. 

The Exchange proposed to streamline 

and make more efficient its margin rules 

and procedures by: (1) Adding a new 

section to Rule 721 (Proper and 

Adequate Margin) requiring each 

member to indicate in writing to the 

Exchange that such member shall be 

bound by the initial and maintenance 

margin requirements of either the 

Chicago Board Options Exchange 

(‘‘CBOE’’) or New York Stock Exchange 

(‘‘NYSE’’); and (2) eliminating Rules 724 

(Guaranteed Accounts) and 725 (Daily 


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