Document ID: SEC-2009-0308-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Alternext US LLC
Posted Date: 2009-03-09T04:00Z

[Federal Register: March 9, 2009 (Volume 74, Number 44)]
[Notices]               
[Page 10114-10116]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09mr09-96]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59482; File No. SR-NYSEALTR-2009-13]

 
Self-Regulatory Organizations; NYSE Alternext U.S. LLC; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Amending 
NYSE Alternext Equities Rule 17 To Address Issues Related to Vendor 
Liability and To Make Amendments and Conforming Changes to NYSE 
Alternext Equities Rule 18

March 2, 2009.
    Pursuant to Section 19(b)(1)\1\ of the Securities Exchange Act of 
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that, on February 17, 2009, NYSE Alternext U.S. LLC (``Exchange'' or 
``NYSE Alternext'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the self-regulatory 
organization. The Exchange filed the proposed rule change pursuant to 
Section 19(b)(3)(A) \4\ of the Act and Rule 19b-4(f)(6) thereunder,\5\ 
which renders the proposal effective upon filing with the Commission. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend NYSE Alternext Equities Rule 17 
(``Use of Exchange Facilities'') to address issues related to vendor 
liability. The Exchange also seeks to make amendments and conforming 
changes to NYSE Alternext Equities Rule 18 (``Compensation in Relation 
to Exchange System Failure''). The text of the proposed rule change is 
available at the Exchange, the Commission's Public Reference Room, and 
http://www.nyse.com.

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 and discussed any comments it received on the 
proposed rule change. The text of those 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
    The Exchange proposes to amend NYSE Alternext Equities Rule 17 
(``Use of Exchange Facilities'') to address issues related to vendor 
liability. Specifically, the proposed rule would require that member 
organizations that have trading losses due to malfunctions of third-
party systems provided by the Exchange submit such losses to the 
Exchange's compensation fund prior to pursuing legal remedies against 
the third-party vendors that provided these systems.\6\
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    \6\ See E-mail from Jennifer D. Kim, Counsel, Office of the 
General Counsel, Exchange, to Michou H.M. Nguyen, Special Counsel, 
Division of Trading and Markets, Commission, on March 2, 2009.
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    The Exchange also seeks to make amendments and conforming changes 
to NYSE Alternext Equities Rule 18 (``Compensation in Relation to 
Exchange System Failure''). Specifically, the Exchange seeks to include 
in the definition of ``Exchange system failure'' the malfunction of a 
third-party system or technology provided by the Exchange, i.e., vendor 
and/or subcontractor systems and to codify a net loss requirement for 
members or member organizations that seek compensation for losses 
sustained from an Exchange system failure.
    These amendments are proposed to conform to amendments filed by the 
New York Stock Exchange (``NYSE'').\7\
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    \7\ See SR-NYSE-2009-16 (to be filed on February 17, 2009).
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Background
    As described more fully in a related rule filing,\8\ NYSE Euronext 
acquired The Amex Membership Corporation (``AMC'') pursuant to an 
Agreement and Plan of Merger, dated January 17, 2008 (the ``Merger''). 
In connection with the Merger, the Exchange's predecessor, the American 
Stock Exchange LLC (``Amex''), a subsidiary of AMC, became a subsidiary 
of NYSE Euronext called NYSE Alternext U.S. LLC, and continues to 
operate as a national securities exchange registered under Section 6 of 
the Securities Exchange Act of 1934, as amended (the ``Act'').\9\ The 
effective date of the Merger was October 1, 2008.
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    \8\ See Securities Exchange Act Release No. 58673 (September 29, 
2008), 73 FR 57707 (October 3, 2008) (SR-NYSE-2008-60 and SR-Amex 
2008-62) (approving the Merger).
    \9\ 15 U.S.C. 78f.
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    In connection with the Merger, on December 1, 2008, the Exchange 
relocated all equities trading conducted on the Exchange legacy trading 
systems and facilities located at 86 Trinity Place, New York, New York, 
to trading systems and facilities located at 11 Wall Street, New York, 
New York (the ``Equities Relocation''). The Exchange's equity trading 
systems and facilities at 11 Wall Street (the ``NYSE Alternext Trading 
Systems'') are operated by the NYSE on behalf of the Exchange.\10\
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    \10\ See Securities Exchange Act Release No. 58705 (October 1, 
2008), 73 FR 58995 (October 8, 2008) (SR-Amex 2008-63) (approving 
the Equities Relocation).
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    As part of the Equities Relocation, NYSE Alternext adopted NYSE 
Rules 1-1004, subject to such changes as necessary to apply the Rules 
to the Exchange, as the NYSE Alternext Equities Rules to govern trading 
on the NYSE Alternext Trading Systems.\11\ The NYSE Alternext Equities 
Rules, which became operative on December 1, 2008, are substantially 
identical to the current NYSE Rules 1-1004 and the Exchange continues 
to update the NYSE Alternext Equities Rules as necessary to conform 
with rule changes to corresponding NYSE Rules filed by the NYSE.
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    \11\ See Securities Exchange Act Release No. 58705 (October 1, 
2008), 73 FR 58995 (October 8, 2008) (SR-Amex 2008-63) (approving 
the Equities Relocation); Securities Exchange Act Release No. 58833 
(October 22, 2008), 73 FR 64642 (October 30, 2008) (SR-NYSE-2008-
106) and Securities Exchange Act Release No. 58839 (October 23, 
2008), 73 FR 64645 (October 30, 2008) (SR-NYSEALTR-2008-03) 
(together, approving the Bonds Relocation); Securities Exchange Act 
Release No. 59022 (November 26, 2008), 73 FR 73683 (December 3, 
2008) (SR-NYSEALTR-2008-10) (adopting amendments to NYSE Alternext 
Equities Rules to track changes to corresponding NYSE Rules); 
Securities Exchange Act Release No. 59027 (November 28, 2008), 73 FR 
73681 (December 3, 2008) (SR-NYSEALTR-2008-11) (adopting amendments 
to Rule 62--NYSE Alternext Equities to track changes to 
corresponding NYSE Rule 62).
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Proposed Amendments
    Currently, NYSE Alternext Equities Rule 17 provides that the 
Exchange shall not be liable for any damages sustained by a member or 
member organization growing out of the use or

[[Page 10115]]

enjoyment of the facilities afforded by the Exchange, except as 
provided in NYSE Alternext Equities Rule 18. Currently, NYSE Alternext 
Equities Rule 18 affords members and member organizations the recourse 
to seek compensation for losses sustained by an Exchange system 
failure.\12\
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    \12\ An ``Exchange system failure'' is defined by NYSE Alternext 
Equities Rule 18 as ``a malfunction of the Exchange's physical 
equipment, devices and/or programming which results in an incorrect 
execution or an order or no execution of an order that was received 
in Exchange systems.''
    NYSE Rule 18, Supplemental Material .10 provides that NYSE 
Alternext is permitted to file claims pursuant to NYSE Rule 18. NYSE 
Alternext shall submit claims for payment on behalf of its members 
to the NYSE for compensation for valid claims. NYSE Alternext 
members are not permitted to file claims for payment directly to the 
NYSE. NYSE Alternext will submit a separate claim to the NYSE for 
each claim made by its members.
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    As noted previously, the Exchange increasingly offers member 
organizations access to certain systems and technologies that are 
supplied by third-party vendors and delivered via Exchange systems 
(e.g., the Exchange delivers broker algorithms to brokers on the broker 
handheld device). These third-party products are designed to enhance 
the member organizations' ability to execute trades efficiently. 
Notably, the Exchange is acting primarily as a facilitator between the 
vendor and the Exchange member using the service. Use of these vendor-
supplied services is not required, and Exchange members can perform 
their respective jobs without using these third-party vendor services. 
If a member wishes to use such a service, however, the Exchange works 
with the vendor and the member to connect the member and to deliver the 
service from the vendor to the user. The Exchange also simplifies the 
negotiation process, in that a member does not need to separately 
negotiate with the vendor to receive the service. Because the services 
are supplied and supported by a third-party vendor, however, they are 
not explicitly ``systems or facilities of the Exchange.'' \13\
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    \13\ Exchange services that are outsourced to third-party 
vendors but that are part of the core functionality of Exchange 
systems are considered ``systems and facilities of the Exchange'' 
even though they are not physically provided by the Exchange. By 
contrast, additional services provided to members and member 
organizations by a third-party vendor that are not part of the core 
functionality of the Exchange's systems and not required to function 
as a member or member organization are not considered ``systems and 
facilities'' of the Exchange. As a result, any malfunction of those 
additional services would constitute a third-party vendor system 
malfunction, not an Exchange malfunction.
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    Currently, NYSE Alternext Equities Rules 17 and 18 do not address 
the issue of a member or member organization that sustains a loss 
arising from the malfunction of non-core systems or technology supplied 
by third-party vendors for use by member organizations.\14\ In light of 
the increased availability of third-party technology to provide 
additional facilities or services to the Exchange, the Exchange 
proposes to amend NYSE Alternext Equities Rules 17 and 18 to address 
third-party vendor liability, third-party vendor system malfunction and 
the avenue of recourse for members and member organizations as a result 
of this third-party vendor system malfunction.
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    \14\ The third-party vendors directly provide their services to 
the member or member organization. Therefore, the customers are 
aware that they are using an Exchange system, which is provided 
directly by the Exchange, or a third-party vendor system, that also 
has direct contact with the customer.
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    In connection with member or member organization use of any third-
party vendors provided by the Exchange to members for the conduct of 
their business on the Exchange, the Exchange proposes that NYSE 
Alternext Equities Rule 17 provide that the Exchange shall not be 
liable for any damages sustained by a member, allied member or member 
organization growing out of the use or enjoyment by such member, allied 
member or member organization of a third-party electronic system, 
service, or facility provided by the Exchange, except as provided in 
NYSE Alternext Equities Rule 18.
    The Exchange further proposes that members or member organizations 
that sustain a loss from the use of these third-party vendors provided 
by the Exchange may seek compensation from the Exchange for their 
losses in the same way they seek compensation for an Exchange system 
failure. Specifically, NYSE Alternext Equities Rule 18 would permit 
members or member organizations to file a claim with the Exchange for 
losses caused by the third-party vendor's malfunction. These claims 
would be evaluated and submitted to the NYSE pursuant to the existing 
procedure set out in NYSE Alternext Rule 18 and NYSE Rule 18.\15\
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    \15\ Because NYSE Alternext and NYSE share a common trading 
platform, NYSE Rule 18 provides a mechanism for NYSE Alternext 
itself to seek reimbursement from NYSE for the amounts that NYSE 
Alternext undertakes to pay out to NYSE Alternext members under NYSE 
Alternext Equities Rule 18. Under that procedure, after the NYSE 
Alternext Compensation Review Panel has determined the number and 
amount of claims that NYSE Alternext deems valid, NYSE Alternext 
submits to the NYSE a separate claim for each valid claim made by 
NYSE Alternext members or member organizations. If the combined 
amount of valid claims by NYSE members and NYSE Alternext exceeded 
the available funds in the NYSE Rule 18 compensation fund, NYSE 
Alternext would receive a partial payment of claims pursuant to NYSE 
Rule 18(c), and NYSE Alternext's obligation to compensate its 
members for valid claims would be reduced by a like percentage.
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    In the event that claims arising out of the use of these third-
party vendor systems cannot be fully satisfied because the aggregated 
claims exceed the funds available for such payment as set forth in NYSE 
Alternext Equities Rule 18, the aggrieved member or member organization 
would not be precluded from bringing a claim against the third-party 
vendor directly for the balance of the loss amount.
    The Exchange also seeks to make a conforming amendment to NYSE 
Alternext Equities Rule 18 to include in the definition of an Exchange 
system failure ``any malfunction of any third-party vendor provided by 
the Exchange that results in an incorrect execution of an order or no 
execution of an order that was received in Exchange systems.''
    Finally, the Exchange seeks to codify its existing policy regarding 
the netting of losses prior to submitting claims under NYSE Alternext 
Equities Rule 18. Specifically, the Exchange is codifying its 
understanding that if members and member organizations retain profits 
from a system malfunction, then they are required to net these profits 
against their losses from the same malfunction before submitting any 
claims under NYSE Alternext Rule 18.\16\
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    \16\ Related system malfunctions that occur repeatedly over the 
course of the trading day will constitute one system malfunction for 
purposes of determining the aggregation of customer claims resulting 
from that system malfunction. Distinct and separate malfunctions 
that originate from different system failures are considered 
unrelated malfunctions and are treated as separate system 
malfunctions.
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    For example, a broker enters orders for Customer 1 and 
Customer 2. As a result of a system malfunction, Customer 
1 derives a profit that would have occurred but for the 
malfunction and Customer 2 derives a loss. The broker passes 
along the gain to Customer 1, and files a claim with the 
Exchange with respect to Customer 2's loss. The broker would 
not be required to net the gain against the loss.
    Brokers are required to offer profitable errors to their customers; 
in certain circumstances, however, customers may decline to take the 
error in which case the error position is retained by the brokers.\17\ 
If Customer 1 declines to accept the profit, as is the 
customer's option, then the broker would retain the profit and must net 
is against the loss incurred on behalf of Customer 2.
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    \17\ Customers may decline to take the gains for varied reasons. 
For example, if the cost to the customer of processing the error is 
greater than the amount of the error, the customer will likely tell 
the broker to keep the error.

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[[Page 10116]]

    The Exchange proposes these amendments to conform the rules of NYSE 
Alternext regarding third-party vendor liability, third-party vendor 
system malfunction and the avenue of recourse for members and member 
organizations as a result of this third-party vendor system malfunction 
to the rules of its affiliated Exchange, the New York Stock Exchange 
LLC.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\18\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\19\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and, in general, to protect investors and the public interest. The 
Exchange believes that the proposed rule change promotes just and 
equitable principles of trade and protects investors and the public 
interest because it creates a mechanism that adequately addresses 
issues of liability for all parties concerned.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 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 would 
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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The proposed rule change is effective upon filing pursuant to 
Section 19(b)(3)(A) of the Act.\20\ The Exchange asserts that the 
proposed rule change (i) will not significantly affect the protection 
of investors or the public interest, (ii) will not impose any 
significant burden on competition, and (iii) by its terms, will not 
become operative for 30 days after the date of this filing, or such 
shorter time as the Commission may designate, if consistent with the 
protection of investors and the public interest.\21\
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    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ In addition, Rule 19b-4(f)(6)(iii) requires a self-
regulatory organization to give the Commission written notice of its 
intent to file the proposed rule change at least five business days 
prior to the date of filing of the proposed rule change, or such 
shorter time as designated by the Commission. The Exchange has 
satisfied this requirement. 17 CFR 240.19b-4(f)(6)(iii).
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    The Exchange believes that the instant filing is non-controversial. 
The Commission has approved a third-party vendor liability provision 
that was filed by the American Stock Exchange which required members 
and member organizations to indemnify the Exchange and its vendors and/
or subcontractors and provided that such vendor and its subcontractors 
shall not be liable to the member or member organization for any 
damages sustained by a member or member organization from use of these 
third-party vendor systems.\22\ The Exchange submits that its proposed 
rule change is less expansive that Amex Rule 60--AEMI and affords a 
member or member organization the ability to recover from a loss 
sustained by use of a third-party vendor system. The proposed rule 
change offers its members and member organizations two layers of 
recourse in the event of a third-party vendor system malfunction, i.e., 
filing a claim pursuant to NYSE Alternext Equities Rule 18 and then 
filing a claim directly against the third-party vendor for any 
remaining balance of the loss amount. Therefore, the Exchange submits 
that this proposed rule filing, in light of the more restrictive vendor 
liability disclaimer rules previously approved by the Commission, is 
non-controversial.
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    \22\ Amex Rule 60--AEMI (``Vendor Liability Disclaimer''). AEMI 
(``Auction & Electronic Market Integration'') System was Amex's 
Hybrid Market Structure for equities and exchange-traded funds prior 
to the merger with NYSE.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Exchange Act.

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 rule-comments@sec.gov. Please include 
File Number SR-NYSEALTR-2009-13 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEALTR-2009-13. 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 the Exchange. 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-NYSEALTR-2009-13 and should 
be submitted on or before March 30, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E9-4873 Filed 3-6-09; 8:45 am]

BILLING CODE 8011-01-P