Document ID: SEC-2011-0651-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2011-05-10T04:00Z

[Federal Register Volume 76, Number 90 (Tuesday, May 10, 2011)]
[Notices]
[Pages 27114-27117]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-11314]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64399; File No. SR-NYSEArca-2011-20]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Amending Its Fee 
Schedule To Eliminate Registered Representative Fees for Options 
Trading Permit (``OTP'') Holders and To Institute a New Transaction-
Based ``Options Regulatory Fee''

May 4, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on April 28, 2011, NYSE Arca, Inc. (``NYSE Arca'' or the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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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 its Fee Schedule to eliminate 
registered representative fees for Options Trading Permit (``OTP'') 
Holders and institute a new transaction-based ``Options Regulatory 
Fee.'' The text of the proposed rule change is available at the 
Exchange, at the Commission's Public Reference Room, on the 
Commission's Web site at http://www.sec.gov, 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 parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    This proposed rule change is based on a rule change previously 
submitted by NASDAQ OMX BX, Inc. on behalf of the Boston Options 
Exchange Group, LLC (``BOX'') that was effective upon filing.\3\ The 
Exchange proposes to amend the NYSE Arca Fee Schedule to institute a 
new transaction-based ``Options Regulatory Fee'' and eliminate 
registered representative fees. Each OTP Holder or OTP Firm that 
registers an options principal and/or representative who is conducting 
business on NYSE Arca currently is assessed a registered representative 
fee (``RR Fee'') based on the action(s) associated with the 
registration. There are annual fees as well as initial, transfer and 
termination fees.\4\ RR Fees and other regulatory fees collected by the 
Exchange were intended to cover only a portion of the cost of the 
Exchange's regulatory programs. Prior to rule changes by other options 
exchanges, such as the Chicago Board Options Exchange (``CBOE''), BOX, 
NASDAQ OMX PHLX (``PHLX'') and the International Securities Exchange 
(``ISE''), all options exchanges, regardless of size, charged 
registered representative fees.
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    \3\ See Securities Exchange Act Release No. 61388 (January 20, 
2010), 75 FR 4431 (January 27, 2010) (SR-BX-2010-001) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating 
to the Registered Representative Fee and Options Regulatory Fee).
    \4\ In this regard, the Exchange proposes to eliminate from its 
options fee schedule any reference to fees the Exchange no longer 
asks FINRA to collect on its behalf relating to the processing of 
registered representatives. In particular, the following 
``Registration Fees'' will be eliminated from the options fee 
schedule: The annual fee for new applications, maintenance, or 
transfer of registration status for each Registered Representative 
and each Registered Options Principal (collected by the NASD), the 
fee for termination of such individuals, the NASD CRD Processing 
Fee, the NASD Annual System Processing Fee, and the NYSE Arca 
Transfer/Re-license Individual Fee. Fees relating to the processing 
of registered representatives that FINRA collects and retains will 
remain in the Exchange's options fee schedule. In particular, the 
following ``Registration Fees'' will remain in the options fee 
schedule: The NASD Disclosure Processing Fee and the NASD Manual 
Processing Fee for Fingerprint results submitted by other SROs.
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    The Exchange believes that the current RR Fee is no longer 
equitable. The options industry has evolved to a structure with many 
more Internet-based and discount brokerage firms. These firms have few 
registered representatives and thus pay very little in RR Fees compared 
to full service brokerage firms that have many registered 
representatives. Further, due to the manner in which RR Fees are 
charged, it is possible for an NYSE Arca OTP Holder or OTP Firm to 
restructure its business to avoid paying these fees altogether. For 
example, a firm can avoid RR Fees by terminating its OTP status and 
sending its business to NYSE Arca through another separate NYSE Arca 
OTP Holder or OTP Firm, even an affiliated firm that has many fewer 
registered representatives. If firms terminated their OTP status to 
avoid RR Fees, the Exchange would suffer the loss of a source of 
funding for its regulatory programs. More importantly, the regulatory 
effort the Exchange expends to review the transactions of each type of 
firm is not commensurate with the number of registered representatives 
that each firm employs.
    In order to address the inequity of the current regulatory fee 
structure and to offset more fully the cost of the Exchange's 
regulatory programs, the Exchange proposes to eliminate the current RR 
Fee for NYSE Arca OTP Holders and OTP Firms and adopt an Options 
Regulatory Fee (``ORF'') of $0.004 per contract.\5\ As described below, 
this fee would be assessed by the Exchange on each OTP Holder or OTP 
Firm for all options transactions executed or cleared by the OTP Holder 
or OTP Firm that are cleared by OCC in the customer range, regardless 
of the marketplace of execution. In particular, the Exchange would 
impose the ORF on

[[Page 27115]]

all options transactions executed in the customer range by an OTP 
Holder or OTP Firm,\6\ even if the transactions do not take place on 
NYSE Arca. The ORF would also be charged for transactions that are not 
executed by an OTP Holder or OTP Firm but are ultimately cleared by an 
OTP Holder. In the case where an OTP Holder or OTP Firm executes a 
transaction and a different OTP Holder or OTP Firm clears the 
transaction, the ORF would be assessed to the OTP Holder or OTP Firm 
who executes the transaction. In the case where a non-OTP Holder 
executes a transaction and an OTP Holder or OTP Firm clears the 
transaction, the ORF would be assessed to the OTP Holder or OTP Firm 
who clears the transaction.
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    \5\ Because the annual component of the RR Fee has already been 
assessed for 2011, the Exchange will make a pro rata refund for the 
remaining portion of the year following elimination of the RR Fee. 
In addition, the Exchange notes that permit holders who conduct only 
equities business will no longer be subject to the RR Fee as a 
result of the elimination of this fee. Consequently, the Exchange 
proposes to eliminate from its NYSE Arca Equities fee schedule any 
reference to fees the Exchange no longer asks FINRA to collect on 
its behalf relating to the processing of Registered Representatives. 
In particular, the following ``Registration Fees'' will be 
eliminated from the equities fee schedule: The annual fee for new 
applications, maintenance, or transfer of registration status for 
each Registered Representative and each Registered Principal 
(collected by the NASD), the two NASD CRD Processing Fees, the NASD 
Annual System Processing Fee, and the NYSE Arca Transfer/Re-license 
Individual Fee. Fees relating to the processing of registered 
representatives that FINRA collects and retains will remain in the 
Exchange's equities fee schedule. In particular, the following 
``Registration Fees'' will remain in the equities fee schedule: The 
NASD Disclosure Processing Fee and the NASD Manual Processing Fee 
for Fingerprint Results submitted by Other SROs. The Exchange will 
separately submit a rule filing to address funding for equities 
regulation.
    \6\ Such transactions must be cleared by an OTP Holder or OTP 
Firm in the customer range for the ORF to apply. Subject to the 
foregoing, the ORF would apply to all customer orders executed by an 
OTP Holder or OTP Firm on NYSE Arca. Exchange rules require each OTP 
Holder or OTP Firm to submit trade information in order to allow the 
Exchange to properly prioritize and match orders and quotations and 
report resulting transactions to the OCC. See NYSE Arca Rule 6.68. 
The Exchange represents that it has surveillances in place to verify 
that OTP Holders comply with the rule.
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    As noted, the ORF would replace RR Fees, which relate to an OTP 
Holder or OTP Firm's options customer business. Further, RR Fees 
constituted the single-largest fee assessed that is related to 
regulation of customer trading activity, and the Exchange believes it 
is appropriate to charge the ORF only to transactions that clear as 
customer at the OCC. The Exchange believes that its broad regulatory 
responsibilities with respect to an OTP Holder or OTP Firms' activities 
supports applying the ORF to transactions cleared but not executed by 
an OTP Holder or OTP Firm. The Exchange's regulatory responsibilities 
are the same regardless of whether an OTP Holder or OTP Firm executes a 
transaction or clears a transaction executed on its behalf. The 
Exchange regularly reviews all such activities, including performing 
surveillance for position limit violations, manipulation, front-
running, contrary exercise advice violations and insider trading.\7\ 
These activities span across multiple exchanges.
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    \7\ The Exchange also participates in The Options Regulatory 
Surveillance Authority (``ORSA'') national market system plan and in 
doing so shares information and coordinates with other exchanges 
designed to detect the unlawful use of undisclosed material 
information in the trading of securities options. ORSA is a national 
market system comprised of several self-regulatory organizations 
whose functions and objectives include the joint development, 
administration, operation and maintenance of systems and facilities 
utilized in the regulation, surveillance, investigation and 
detection of the unlawful use of undisclosed material information in 
the trading of securities options. The Exchange compensates ORSA for 
the Exchange's portion of the cost to perform insider trading 
surveillance on behalf of the Exchange. The ORF will cover the costs 
associated with the Exchange's arrangement with ORSA.
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    The Exchange believes the initial level of the fee is reasonable 
because it relates to the recovery of the costs of supervising and 
regulating an OTP Holder or OTP Firm's customer options business. The 
Exchange believes the amount of the ORF is fair and reasonably 
allocated because it is a closer approximation to the Exchange's actual 
costs in administering its regulatory program with respect to customer 
options activity.
    The ORF would be collected indirectly from OTP Holder or OTP Firms 
through their clearing firms by OCC on behalf of the Exchange. The 
Exchange expects that OTP Holders and OTP Firms will pass-through the 
ORF to their customers in the same manner that firms pass-through to 
their customers the fees charged by Self Regulatory Organizations 
(``SROs'') to help the SROs meet their obligations under Section 31 of 
the Exchange Act.
    The ORF is designed to recover a material portion of the costs to 
the Exchange of the supervision and regulation of OTP Holders and OTP 
Firms, including performing routine surveillances, investigations, as 
well as policy, rulemaking, interpretive and enforcement activities.\8\ 
The Exchange believes that revenue generated from the ORF will cover 
the substantial majority of the Exchange's regulatory costs related to 
the NYSE Arca options market. At present, RR Fees make up the largest 
part of the Exchange's total options regulatory fee revenue, however, 
the total amount of NYSE Arca specific regulatory fees collected by the 
Exchange is significantly less than the regulatory costs incurred by 
NYSE Arca on an annual basis. The Exchange notes that its regulatory 
responsibilities with respect to an OTP Holder or OTP Firm's compliance 
with options sales practice rules have been allocated to FINRA under a 
17d-2 agreement. The ORF is not designed to cover the cost of options 
sales practice regulation.
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    \8\ As stated above, the RR Fees collected by the Exchange were 
originally intended to cover only a portion of the cost of the 
Exchange's regulatory programs.
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    The Exchange would monitor the amount of revenue collected from the 
ORF to ensure that it, in combination with its other NYSE Arca 
regulatory fees and fines, does not exceed the Exchange's total 
regulatory costs. The Exchange expects to monitor NYSE Arca regulatory 
costs and revenues at a minimum on an annual basis. If the Exchange 
determines NYSE Arca regulatory revenues exceed regulatory costs, the 
Exchange would adjust the ORF by submitting a fee change filing to the 
Commission. The Exchange would notify OTP Holders and OTP Firms of 
adjustments to the ORF via a Regulatory Bulletin.
    The Exchange believes the proposed ORF is equitably allocated 
because it would be charged to all OTP Holders and OTP Firms on all 
their customer options business. The Exchange believes the proposed ORF 
is reasonable because it will raise revenue related to the amount of 
customer options business conducted by an OTP Holder or OTP Firm, and 
thus the amount of Exchange regulatory services those OTP Holders or 
OTP Firms will require with respect to that activity, instead of how 
many registered representatives a particular OTP Holder or OTP Firm 
employs.\9\
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    \9\ The Exchange expects that implementation of the proposed ORF 
will result generally in many traditional brokerage firms paying 
less regulatory fees while Internet and discount brokerage firms 
will pay more.
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    With almost all transactions on the Exchange conducted 
electronically, the amount of resources required by the Exchange to 
surveil non-customer trading activity is significantly less than the 
amount of resources the Exchange must dedicate to surveil customer 
trading activity. This is because surveilling customer trading activity 
is much more labor-intensive and requires greater expenditure of human 
and technical resources than surveilling non-customer trading activity, 
which tends to be more automated and less labor-intensive. As a result, 
the costs associated with administering the customer component of the 
Exchange's overall regulatory program are materially higher than the 
costs associated with administering the non-customer component (e.g., 
market maker) of its regulatory program.
    The Exchange believes it is reasonable and appropriate for the 
Exchange to charge the ORF for options transactions regardless of the 
exchange on which the transactions occur. The Exchange has a statutory 
obligation to enforce compliance by OTP Holders and OTP Firms and their 
associated persons under the Exchange Act and the rules of the Exchange 
and to surveil for other manipulative conduct by market participants 
(including non-OTP Holders) trading on the Exchange. The Exchange 
cannot effectively surveil for such conduct without looking at and 
evaluating activity across all options markets. Many of the Exchange's 
market surveillance programs require the Exchange to look at and 
evaluate activity across all options markets, such

[[Page 27116]]

as surveillance for position limit violations, manipulation, front-
running and contrary exercise advice violations/expiring exercise 
declarations.\10\ Also, the Exchange and the other options exchanges 
are required to populate a consolidated options audit trail (``COATS'') 
system in order to surveil an OTP Holder or OTP Firm's activities 
across markets.\11\
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    \10\ The Exchange and other options SROs are parties to a 17d-2 
agreement allocating among the SROs regulatory responsibilities 
relating to compliance by the common members with rules for expiring 
exercise declarations, position limits, OCC trade adjustments, and 
Large Option Position Report reviews. See, e.g. Securities Exchange 
Act Release No. 61588 (February 25, 2010).
    \11\ COATS effectively enhances intermarket options surveillance 
by enabling the options exchanges to reconstruct the market promptly 
to effectively surveil certain rules.
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    In addition to its own surveillance programs, the Exchange works 
with other SROs and exchanges on intermarket surveillance related 
issues. Through its participation in the Intermarket Surveillance Group 
(``ISG''),\12\ the Exchange shares information and coordinates 
inquiries and investigations with other exchanges designed to address 
potential intermarket manipulation and trading abuses. The Exchange's 
participation in ISG helps it to satisfy the Exchange Act requirement 
that it have coordinated surveillance with markets on which security 
futures are traded and markets on which any security underlying 
security futures are traded to detect manipulation and insider 
trading.\13\
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    \12\ ISG is an industry organization formed in 1983 to 
coordinate intermarket surveillance among the SROs by cooperatively 
sharing regulatory information pursuant to a written agreement 
between the parties. The goal of the ISG's information sharing is to 
coordinate regulatory efforts to address potential intermarket 
trading abuses and manipulations.
    \13\ See Exchange Act Section 6(h)(3)(I).
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    The Exchange believes that charging the ORF across markets will 
avoid having OTP Holders and OTP Firms direct their trades to other 
markets in order to avoid the fee and to thereby avoid paying for their 
fair share of regulation. If the ORF did not apply to activity across 
markets then an OTP Holder or OTP Firm would send their orders to the 
least cost, least regulated exchange. Other exchanges do impose a 
similar fee on their member's activity, including the activity of those 
members on NYSE Arca.\14\
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    \14\ The Exchange notes that CBOE currently assesses an options 
regulatory fee similar to the one proposed herein, which fee is also 
assessed on the trading activity of a CBOE member on NYSE Arca. See 
Securities Exchange Act Release No. 58817 (October 20, 2008), 73 FR 
63744 (October 27, 2008). Similar regulatory fees have also been 
instituted by PHLX (See Securities Exchange Act Release No. 61133 
(December 9, 2009), 74 FR 66715 (December 16, 2009) (SR-Phlx-2009-
100)); and ISE (See Securities Exchange Act Release No. 61154 
(December 11, 2009), 74 FR 67278 (December 18, 2009) (SR-ISE-2009-
105)).
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    The Exchange notes that there is established precedent for an SRO 
charging a fee across markets, namely, FINRA's Trading Activity Fee 
\15\ and the CBOE's, PHLX's, ISE's and BOX's ORF. While the Exchange 
does not have all the same regulatory responsibilities as FINRA, the 
Exchange believes that, like other exchanges that have adopted an ORF, 
its broad regulatory responsibilities with respect to an OTP Holder or 
OTP Firms' activities, irrespective of where their transactions take 
place, supports a regulatory fee applicable to transactions on other 
markets. Unlike FINRA's Trading Activity Fee, the ORF would apply only 
to an OTP Holder or OTP Firm's customer options transactions.
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    \15\ See Securities Exchange Act Release No. 47946 (May 30, 
2003), 68 FR 3402 (June 6, 2003).
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    The Exchange has designated this proposal to be operative on May 1, 
2011.
2. Statutory Basis
    Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \16\ in general, and furthers the objectives of 
Section 6(b)(4) \17\ of the Act in particular, in that it is designed 
to provide for the equitable allocation of reasonable dues, fees, and 
other charges among its OTP Holders and OTP Firms and other persons 
using its facilities. The Exchange believes that the ORF is objectively 
allocated because it would be charged to all OTP Holders and OTP Firms 
for all their transactions that clear as customer at the OCC through an 
OTP Holder or OTP Firm. Moreover, the Exchange believes the ORF ensures 
fairness by assessing higher fees to those participants that require 
more Exchange regulatory services based on the amount of customer 
options business they conduct.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(4).
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    The Exchange notes that the Commission has addressed the funding of 
an SRO's regulatory operations in the Concept Release Concerning Self-
Regulation \18\ and the release on the Fair Administration and 
Governance of Self-Regulatory Organizations.\19\ In the Concept 
Release, the Commission states that: ``Given the inherent tension 
between an SRO's role as a business and as a regulator, there 
undoubtedly is a temptation for an SRO to fund the business side of its 
operations at the expense of regulation.'' \20\ In order to address 
this potential conflict, the Commission proposed in the Governance 
Release rules that would require an SRO to direct monies collected from 
regulatory fees, fines, or penalties exclusively to fund the regulatory 
operations and other programs of the SRO related to its regulatory 
responsibilities.\21\ The Exchange has designed the ORF to generate 
revenues that, when combined with all of the Exchange's other 
regulatory fees, will be less than or equal to the Exchange's 
regulatory costs, which is consistent with the Commission's view that 
regulatory fees be used for regulatory purposes and not to support the 
Exchange's business side. In this regard, the Exchange believes that 
the initial level of the fee is reasonable.
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    \18\ See Securities Exchange Act Release No. 50700 (November 18, 
2004), 69 FR 71256 (December 8, 2004) (``Concept Release'').
    \19\ See Securities Exchange Act Release No. 50699 (November 18, 
2004), 69 FR 71126 (December 8, 2004) (``Governance Release'').
    \20\ Concept Release at 71268.
    \21\ Governance Release at 71142.
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    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 foregoing rule change is effective upon filing pursuant to 
Section 19(b)(3)(A) \22\ of the Act and subparagraph (f)(2) of Rule 
19b-4 \23\ thereunder, because it establishes a due, fee, or other 
charge imposed by the NYSE Arca.
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    \22\ 15 U.S.C. 78s(b)(3)(A).
    \23\ 17 CFR 240.19b-4(f)(2).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend 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 Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing,

[[Page 27117]]

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-NYSEArca-2011-20 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-NYSEArca-2011-20. 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 Web site 
viewing and printing 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 the 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-
NYSEArca-2011-20 and should be submitted on or before May 31, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-11314 Filed 5-9-11; 8:45 am]
BILLING CODE 8011-01-P