Document ID: SEC-2008-1228-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange LLC
Posted Date: 2008-09-09T04:00Z

[Federal Register: September 9, 2008 (Volume 73, Number 175)]
[Notices]               
[Page 52439-52441]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09se08-147]                         

[[Page 52439]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58450; File No. SR-NYSE-2008-78]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change Amending NYSE Rule 18 To Allow 
NYSE Alternext US LLC To Participate in the Compensation Fund 
Established by the NYSE To Reimburse Claimants for Losses Associated 
With NYSE-Operated System Failures

September 2, 2008.
    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 August 26, 2008, the New York Stock Exchange LLC (``NYSE'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 18 (Compensation in Relation to 
Exchange System Failure) to provide, as part of the migration of NYSE 
Alternext US LLC (``NYSE Alternext'') trading onto systems and 
facilities operated by NYSE for the benefit of NYSE Alternext, that 
NYSE Alternext may participate in the compensation fund established by 
the Exchange to reimburse claimants for losses associated with 
Exchange-operated system failures. The text of the proposed rule change 
is available at NYSE's principal office, 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 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 proposal is to amend NYSE Rule 18 to provide that NYSE 
Alternext will be permitted to participate in the compensation fund 
established by the Exchange to reimburse claimants for Exchange-
operated system failures.
Background
    As described more fully in a related rule filing, NYSE Euronext is 
expected to acquire The Amex Membership Corporation through a series of 
mergers (the ``Mergers'') pursuant to an Agreement and Plan of Merger, 
dated January 17, 2008 (the ``Merger Agreement'').\4\ Upon completion 
of the Mergers, the American Stock Exchange LLC (``Amex''), currently a 
subsidiary of The Amex Membership Corporation, will become a subsidiary 
of NYSE Euronext and will continue to operate as a national securities 
exchange registered under the Act.\5\ Following the Mergers, the name 
of the new exchange will be NYSE Alternext US LLC.\6\
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 58284 (August 1, 
2008), 73 FR 46086 (August 7, 2008) (SR-Amex-2008-62).
    \5\ 15 U.S.C. 78f.
    \6\ As noted, Amex will be renamed NYSE Alternext US LLC. For 
the avoidance of doubt, NYSE Alternext US LLC will be a self-
regulatory organization distinct from NYSE Euronext's European-
market subsidiary, NYSE Alternext. See SR-Amex-2008-62.
---------------------------------------------------------------------------

    In connection with the Mergers, NYSE Alternext will relocate all 
equities trading currently conducted on or through the Amex legacy 
trading systems and facilities located at 86 Trinity Place, New York, 
New York, to the NYSE trading systems and facilities located at 11 Wall 
Street, New York, New York (the ``NYSE Alternext Trading Systems''), 
which will be operated by the NYSE on behalf of NYSE Alternext (the 
``Equities Relocation''). NYSE Euronext has determined that extending 
its existing trading systems and facilities to NYSE Alternext will be 
more efficient than maintaining two separate trading platforms for 
trading equities. At the same time, because NYSE Euronext reports its 
financial results on a consolidated basis, it does not plan to break 
out and allocate technology costs between New York Stock Exchange LLC 
(the registered self-regulatory organization that owns and operates the 
NYSE market) and NYSE Alternext US LLC (the registered self-regulatory 
organization that will own and operate the NYSE Alternext equities 
market after the merger is complete).
    In connection with the Equities Relocation, NYSE Alternext will 
adopt NYSE Rules 1-1004 in substantially their existing form as the 
``NYSE Alternext Equities Rules.'' \7\ Because the NYSE Alternext 
Trading Systems will be operated by the NYSE for the benefit of NYSE 
Alternext, the NYSE Alternext Equities Rules will be substantively 
identical to the existing NYSE Rules, subject to certain changes 
necessary to apply such rules to NYSE Alternext.
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release No. 58265 (July 30, 
2008), 73 FR 46075 (August 7, 2008) (SR-Amex-2008-63).
---------------------------------------------------------------------------

    Among the rules that NYSE Alternext is adopting is a version of 
NYSE's Rule 18, which establishes that NYSE Alternext members may be 
compensated for losses incurred as a result of an NYSE Alternext system 
malfunction (NYSE Alternext rules elsewhere provide that the exchange 
is not liable for losses resulting from the use of its systems or 
facilities), and prescribes the procedures for submitting claims to the 
fund. If there is a system malfunction, NYSE Alternext members will be 
able to submit claims to NYSE Alternext pursuant to that rule.
    Under NYSE's Rule 18, the Exchange has established a monthly fund, 
described in more detail below, from which valid compensation claims 
are paid. Because of the consolidated accounting referenced above, 
however, NYSE Euronext does not intend to establish a separate 
compensation fund for NYSE Alternext members under NYSE Alternext's 
Rule 18. Instead, NYSE Alternext members who submit claims will be paid 
directly by NYSE Alternext. Through this filing, the Exchange is 
providing a mechanism for NYSE Alternext itself to seek reimbursement 
for the amounts that it undertakes to pay out to its members under its 
Rule 18 as a result of an NYSE system malfunction.
Current NYSE Rule 18 and Proposed NYSE Alternext Rule 18
    NYSE Rule 18, adopted by the Exchange in 2007, provides a procedure 
for compensating claimants in the event of an Exchange system 
failure.\8\ In its

[[Page 52440]]

filing to amend its rules, Amex has proposed to adopt substantially the 
same rule. Accordingly, the process described below will be the same 
process for members of both NYSE and NYSE Alternext.
---------------------------------------------------------------------------

    \8\ See Securities Exchange Act Release Nos. 56085 (July 17, 
2007), 72 FR 40348 (July 24, 2007) (SR-NYSE-2007-09) (adopting NYSE 
Rule 18); 56718 (October 29, 2007), 72 FR 62506 (November 5, 2007) 
(SR-NYSE-2007-95) (approving certain amendments to NYSE Rule 18). 
NYSE Rule 18 defines an Exchange system failure as a ``malfunction 
of the Exchange's physical equipment, devices, and/or programming 
which results in an incorrect execution or no execution of an order 
that was received in Exchange systems.'' However, misuse of Exchange 
systems is not considered such a system failure. See NYSE Rule 
18(b). As proposed by Amex, upon the Equities Relocation, those 
systems and facilities will be deemed systems and facilities of NYSE 
Alternext for the purposes of administering NYSE Alternext's 
compensation plan.
---------------------------------------------------------------------------

    Both rules require claimants to informally notify their respective 
Exchanges of a suspected Exchange system failure by the opening of the 
next business day following an incident, followed by formal written 
notice no later than end of the third business day after the 
incident.\9\ Net losses less than $500 are not eligible for 
compensation. Upon receipt of a claim, Exchange staff from the Division 
of Floor Operations verify that (i) a valid order was accepted into the 
Exchange's systems, and (ii) an Exchange system failure occurred during 
the execution or handling of that order. If all of the criteria for 
submitting a claim have been met, the claim will be qualified for 
processing with all other eligible claims at the end of the calendar 
month in which the incident occurred.\10\
---------------------------------------------------------------------------

    \9\ Because NYSE will operate the systems and facilities for 
NYSE Alternext, there may not be a separate ``Division of Floor 
Operations'' for NYSE Alternext. A member of the NYSE's Floor 
Operations staff will be cross-designated as the Floor Operations 
representative for NYSE Alternext for purposes of the NYSE Alternext 
rules that require interfacing with the Division of Floor 
Operations. NYSE Alternext members would submit their claims to this 
representative.
    \10\ See NYSE Rule 18(a).
---------------------------------------------------------------------------

    Each Exchange will appoint a Compensation Review Panel consisting 
of three Floor Governors and three Exchange employees, who will meet 
and review all qualified claims submitted for each calendar month and 
administer any payments to be made thereon. As part of their 
determinations, the respective Compensation Review Panels review the 
actions of the claimant before and after the error occurred in order to 
determine if any of the claimant's actions contributed to the loss 
sustained. The Compensation Review Panels may increase or reduce the 
amount deemed eligible for payment as a result of their review. All 
decisions by the respective Compensation Review Panel are final, except 
that where there is a deadlock, the final determination will be made by 
the Exchange CEO or a designee.\11\
---------------------------------------------------------------------------

    \11\ See NYSE Rule 18(d)-(f).
---------------------------------------------------------------------------

Payment of Valid Claims
    Currently, claims by NYSE members are paid from a compensation fund 
established by the Exchange. Each month the Exchange allots $500,000 
(``Monthly Allotment'') to be used for payments to NYSE member 
claimants who qualify for compensation under NYSE Rule 18. The Monthly 
Allotments do not aggregate and, in the event that less than $250,000 
of the Monthly Allotment is paid out in any given month, $50,000 of the 
remaining Monthly Allotment (``Supplemental Allotment'') is added to a 
supplemental fund available for payment in subsequent calendar months. 
The Supplemental Allotment is used to pay NYSE member claims only after 
the Monthly Allotment is exhausted. If NYSE member claims are satisfied 
by the Monthly Allotment, the Supplemental Allotment, or any unused 
portion thereof, is carried forward.\12\
---------------------------------------------------------------------------

    \12\ See NYSE Rule 18(c).
---------------------------------------------------------------------------

    If the total dollar amount of approved NYSE member claims is less 
than the Monthly Allotment, then all claims will be paid in full. If 
the total amount of approved NYSE member claims exceeds the Monthly 
Allotment, then any Supplemental Allotment will be added to the Monthly 
Allotment in order to satisfy approved claims. In the event that the 
approved claims for a given month exceed the sum of the Monthly 
Allotment and any Supplemental Allotment, the approved claims will be 
paid out to claimants based on the proportion that each eligible claim 
bears to the total amount of all approved claims.\13\
---------------------------------------------------------------------------

    \13\ See NYSE Rule 18(c).
---------------------------------------------------------------------------

Proposed Amendments
    The Exchange proposes to amend NYSE Rule 18 to add supplemental 
material permitting NYSE Alternext to participate alongside NYSE 
members in the compensation fund established by the Exchange to 
reimburse claimants for Exchange-operated system failures.
    As described above, upon the Equities Relocation, all equities 
trading currently conducted on Amex legacy trading systems will take 
place on the NYSE Alternext Trading Systems, which are the same trading 
systems as those of the Exchange. As a result, any system failure on 
the Exchange will affect equally both NYSE members and member 
organizations and NYSE Alternext members and member organizations. 
Through the proposed amendments, the Exchange wants to ensure that 
members and member organizations of both SROs are treated fairly and 
equitably in the event of such a system failure, while maintaining and 
respecting the distinctions between them.
    Under the proposed amendments, NYSE Alternext members and member 
organizations affected by the failure of the NYSE Alternext Trading 
Systems would submit claims for compensation to NYSE Alternext pursuant 
to the proposed NYSE Alternext Equities Rule 18.\14\ NYSE Alternext 
members and member organizations would not be able to submit their 
claims directly to the NYSE. NYSE Alternext's Compensation Review Panel 
will then decide the validity of NYSE Alternext claims.
---------------------------------------------------------------------------

    \14\ See SR-Amex-2008-63.
---------------------------------------------------------------------------

    After its Compensation Review Panel has determined the number and 
amount of claims that NYSE Alternext deems valid, NYSE Alternext would 
submit to the NYSE a separate claim for each valid claim made by NYSE 
Alternext members or member organizations, subject to the same 
requirements under NYSE Rule 18 as any other NYSE claimant. NYSE 
Alternext will not, however, be required to provide verbal notice of 
its claims to the Exchange's Division of Floor Operations.
    In the event that the total amount of valid claims by NYSE members 
and NYSE Alternext exceeds the available funds, 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. In view of (i) The probable 
volume of trading on NYSE Alternext; (ii) the fact that to date, the 
existing compensation fund has been sufficient to pay all valid claims 
in full; and (iii) the current amount available in the supplemental 
fund, the Exchange does not anticipate that the additional claims by 
NYSE Alternext would create a substantial burden on the fund in the 
event of a system malfunction
    In the event that a reduction is required, in calculating any such 
reduction, NYSE officials would consider each claim submitted by NYSE 
Alternext as a separate claim, so that all claimants from both the 
Exchange and NYSE Alternext will share equitably from the Compensation 
Fund. As described more fully in the related filing by Amex, payments 
against valid claims submitted by NYSE Alternext members are subject to 
being reduced by the amount that NYSE Alternext's claims against the 
NYSE fund are reduced.
    The Exchange also proposes technical changes to NYSE Rule 18, 
including renumbering subparagraphs (c)(iv)-(c)(vi), accordingly.

[[Page 52441]]

2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
and furthers the objectives of Section 6(b)(5) of the Act,\15\ 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.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed amendments to NYSE Rule 18 
will enhance the efficient execution of transactions and fair 
competition among broker-dealers and markets and provide a fair and 
reasonable process by which both NYSE members and member organizations 
and NYSE Alternext members and member organizations may petition for 
compensation when they suffer a loss due to a failure of Exchange-
operated systems.\16\
---------------------------------------------------------------------------

    \16\ The second paragraph of the Statutory Basis section appears 
in the Form 19b-4 portion of SR-NYSE-2008-78 filing, but not in 
Exhibit 1. In a phone call with Jason Harman, Consultant, NYSE 
Regulation on September 2, 2008, Sarah Albertson, Attorney, Division 
of Trading and Markets, SEC, confirmed that NYSE inadvertently 
omitted this paragraph of the Statutory Basis section in Exhibit 1. 
Mr. Harman asked that the paragraph be included as the second 
paragraph under the Statutory Basis heading in this Notice.
---------------------------------------------------------------------------

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the NYSE 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 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-NYSE-2008-78 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-NYSE-2008-78. 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, 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-
NYSE-2008-78 and should be submitted on or before September 30, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

    \17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-20808 Filed 9-8-08; 8:45 am]

BILLING CODE 8010-01-P