Document ID: SEC-2006-0177-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange, Inc.
Posted Date: 2006-02-10T05:00Z

[Federal Register: February 10, 2006 (Volume 71, Number 28)]
[Notices]               
[Page 7103-7106]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10fe06-132]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53213; File No. SR-NYSE-2005-80]

 
Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
and Amendment No. 1 Thereto Relating to NYSE Rule 36, RCMMs' Ability to 
Use Exchange Authorized and Issued Portable Phones on the NYSE Floor

February 2, 2006.
    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 November 22, 2005, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') 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 Exchange. On January 
18, 2006, NYSE filed Amendment No. 1 to the proposed rule change.\3\ 
NYSE filed this proposal pursuant to Section 19(b)(3)(A) of the Act \4\ 
and Rule 19b-4(f)(6) thereunder \5\ as non-controversial, and therefore 
the proposed rule change is effective immediately upon filing. The 
Commission is publishing this notice, as amended, 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.
    \3\ In Amendment No. 1, the Exchange clarified proposed NYSE 
Rule 36.22 and added in the purpose section a new footnote relating 
to surveillance and examination procedures to monitor the activities 
of RCMMs.
    \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

    This filing amends NYSE Rule 36 to permit Registered Competitive 
Market Makers (``RCMMs''), as defined in NYSE Rule 107A, to use 
Exchange authorized and provided portable phones and consists of 
proposed member education bulletins which describe the conditions under 
which Floor brokers and RCMMs may use such phones pursuant to the 
Exchange's portable phone pilot (``Pilot''). The conditions under which 
a Floor broker and a RCMM may use a portable phone pursuant to the 
Pilot are proposed as NYSE Rules 36.21 and 36.22.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
Background
    The Commission approved implementation of the Exchange's amendment 
to NYSE Rule 36 allowing Floor brokers to use Exchange authorized and 
provided portable phones on the Exchange Floor as a six-month pilot \6\ 
beginning no later than June 23, 2003.\7\ Since the inception of the 
Pilot, the Exchange has extended the Pilot five times, with the current 
Pilot expiring on January 31, 2006.\8\ In addition, the Exchange filed 
for permanent approval of this rule.\9\ The Exchange represents that no 
administrative or technical problems, other than routine telephone 
maintenance issues, have resulted from the Pilot over the past few 
months.\10\
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    \6\ See Securities Exchange Act Release No. 47671 (April 11, 
2003), 68 FR 19048 (April 17, 2003) (SR-NYSE-2002-11) (``Original 
Order'').
    \7\ See Securities Exchange Act Release No. 47992 (June 5, 
2003), 68 FR 35047 (June 11, 2003) (SR-NYSE-2003-19) (delaying the 
implementation date for portable phones from on or about May 1, 2003 
to no later than June 23, 2003).
    \8\ See Securities Exchange Act Release Nos. 48919 (December 12, 
2003), 68 FR 70853 (December 19, 2003) (SR-NYSE-2003-38) (extending 
the Pilot for an additional six months ending on June 16, 2004); 
49954 (July 1, 2004), 69 FR 41323 (July 8, 2004) (SR-NYSE-2004-30) 
(extending the Pilot for an additional five months ending on 
November 30, 2004); 50777 (December 1, 2004), 69 FR 71090 (December 
8, 2004) (SR-NYSE-2004-67) (extending the Pilot for an additional 
four months ending March 31, 2005); 51464 (March 31, 2005), 70 FR 
17746 (April 7, 2005) (SR-NYSE-2005-20) (extending the Pilot for 
additional four months ending July 31, 2005); and 52188 (August 1, 
2005), 70 FR 46252 (August 9, 2005) (SR-NYSE-2005-53) (extending the 
Pilot for an additional six months ending January 31, 2006).
    \9\ See SR-NYSE-2004-52, pending with the Commission.
    \10\ The Exchange notes that it began receiving records of 
incoming telephone calls in June 2005 and will continue to receive 
monthly updates. With respect to regulatory actions concerning the 
Pilot, there is an open investigation into possible insider trading 
in an NYSE listed security in which the trading activity of two 
RCMMs has been identified and is under review. With respect to one 
of these RCMMs, the use by the RCMM of an Exchange authorized and 
provided portable phone in or about January 2005 is under review as 
part of the investigation. Telephone conversation between Jeff 
Rosenstrock, Senior Special Counsel, NYSE, and Molly M. Kim, 
Attorney, Division of Market Regulation, Commission, on January 27, 
2006.
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NYSE Rule 36
    NYSE Rule 36 (Communications Between Exchange and Members' Offices) 
governs the establishment of telephone or electronic communications 
between the Exchange Floor and any other location. Today, NYSE Rule 
36.20 permits a Floor broker to use an Exchange authorized and provided 
portable telephone on the Exchange Floor. NYSE Rule 36.20 does not 
apply to specialists who are prohibited under this rule from 
communicating with off-Floor locations from the Exchange Floor.\11\
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    \11\ NYSE Rule 36.30 provides that, with the approval of the 
Exchange, a specialist unit may maintain a telephone line at its 
stock trading post location to the off-Floor offices of the 
specialist unit or the unit's clearing firm. Such telephone 
connection shall not be used for the purpose of transmitting to the 
Floor orders for the purchase or sale of securities but may be used 
to enter options or futures hedging orders through the unit's off-
Floor office or the unit's clearing firm or through a member (on the 
floor) of an options or futures exchange.
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    Currently, under the Pilot, with the approval of the Exchange, a 
Floor broker is permitted to engage in direct voice communication from 
the point of sale to an off-Floor location, such as a member firm's 
trading desk or the office of one of the Floor broker's customers.\12\ 
Such

[[Page 7104]]

communication permit Floor brokers to accept orders consistent with 
Exchange rules and provide status and oral execution reports for orders 
previously received, as well as ``market look'' observations as 
historically have been routinely transmitted from a Floor broker's 
booth location. The use of a portable telephone on the Exchange Floor 
other than one authorized and provided by the Exchange is prohibited.
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    \12\ Floor brokers receiving orders from the public over 
portable phones must be properly qualified to engage in such direct 
access business under NYSE Rules 342 and 345, among others. For more 
information regarding Exchange requirements for conducting a public 
business on the Exchange Floor, see Information Memos 05-37 (May 27, 
2005) and 01-18 (July 11, 2001) (both available on http://www.nyse.com
) and 91-25 (July 8, 1991).

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RCMMs
    The Commission approved the Exchange's proposed rule to permit 
members to register as RCMMs on May 1, 1978.\13\ Under NYSE Rule 107A, 
RCMMs may trade for their own account or the account of their member 
organization and may also serve as Floor brokers executing customer 
orders.\14\ Currently, there are eleven (11) registered RCMMs. RCMMs 
are also subject to being called by a Floor Official or a Floor broker 
holding an unexecuted customer order to improve the market in any 
listed stock by either bidding/offering to narrow the spread by at 
least the minimum trading variation or improving the depth of the 
market by at least one unit of trading (normally 100 shares).\15\ 
Further, a member may not act as a RCMM and a broker representing an 
agency order in the same security on the same day.\16\
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    \13\ See Securities Exchange Act Release No. 14718 (May 1, 
1978), 45 FR 19738 (May 8, 1978) (SR-NYSE-78-24).
    \14\ The Exchange has developed surveillance and examination 
procedures to monitor the activities of RCMMs, including their use 
of Exchange authorized and provided portable phones.
    \15\ These RCMM trades are referred to as ``affirmative 
obligation'' trades or ``call-in notifications.''
    \16\ See NYSE Rule 107A.B(1).
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Proposed Changes to NYSE Rule 36
    Prior approval orders by the Commission concerning the Pilot and 
the current NYSE Rule 36.20 only apply to a Floor broker's ability to 
use an Exchange authorized and provided portable phone. RCMMs are non-
specialist members of the Exchange and do not have the same type of 
information (i.e., access to the Display Book[reg]) that a specialist 
has. As such, the Exchange believes it is appropriate for RCMMs to 
participate in the Pilot so that they could communicate with their 
offices in order to, among other things, enter off-Floor orders and 
better monitor their positions. Therefore, in order to clarify that 
NYSE Rule 36.20 would apply to RCMMs and Floor brokers, the Exchange 
proposes to delete the current reference in NYSE Rule 36.20 to 
``members and member organizations other than a specialist or 
specialist member organization'' and replacing it with the terms 
``Floor brokers and RCMMs.''
    The Exchange believes that providing portable phones to RCMMs would 
increase the efficiency of their trading in accordance with NYSE Rule 
107A, especially given the changes in the speed of trading.\17\ 
However, given their ability to trade for their own account or the 
account of their member organizations without the restrictions that 
apply to other non-specialist members and member organizations, the 
Exchange also believes it appropriate to limit RCMMs' use of portable 
phones in accordance with the Pilot, as follows:
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    \17\ The Exchange believes that, currently, allowing Floor 
brokers to use portable phones enables the Exchange to continue to 
provide more direct, efficient access to its trading crowds and 
customers, increase the speed of transmittal of orders and the 
execution of trades, and provide an enhanced level of service to 
customers in an increasingly competitive environment. See Securities 
Exchange Act Release No. 52188 (August 1, 2005), 70 FR 46252 (August 
9, 2005) (SR-NYSE-2005-53).
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     Limit their use of the portable phone solely to 
communications with their upstairs office's land line and the land line 
of their clearing member organization's upstairs office to enter off-
Floor orders and discuss matters related to the clearance and 
settlement of transactions;
     RCMMs, their off-Floor offices, and their member 
organization's off-Floor offices would not be allowed to use portable 
phones to transmit to the Floor orders for the purchase or sale of 
securities by public customers or any other agency business;
     RCMMs' use of the portable phone pursuant to proposed NYSE 
Rules 36.20 and 36.22 must comply with all other rules, policies, and 
procedures of both the federal securities laws and the Exchange, 
including the record retention requirements, as set forth in NYSE Rule 
440 and Rules 17a-3 and 17a-4 under the Act; \18\
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    \18\ 17 CFR 240.17a-3 and 240.17a-4.
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     Require that RCMMs implement procedures designed to deter 
their upstairs office or their clearing member organization's upstairs 
office calling their portable phone number from using caller ID block 
or other means to conceal the phone number from which a call is being 
made; and
     Call-forwarding or conference calling are prohibited by 
RCMMs, their upstairs office personnel, and their clearing member 
organization's upstairs office.\19\
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    \19\ All Exchange authorized and provided portable phones do not 
have call-forwarding or conference calling capabilities and would 
continue to not have such capabilities.
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    In addition, no other electronic communication devices may be used 
unless approved by the Exchange.\20\ Finally, RCMMs must execute a 
written acknowledgement authorizing the portable phone service provider 
to provide New York Stock Exchange Regulation (``NYSE Regulation'') 
with data and records relating to incoming and outgoing calls.\21\
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    \20\ Currently, only Exchange authorized and provided portable 
phones are approved.
    \21\ This provision is being proposed as a precautionary measure 
to address the privacy concerns by the portable phone service 
provider.
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    A member education bulletin describing the above conditions for the 
use of a portable phone by RCMMs, the acknowledgement procedure, and 
the proposed rule text would be sent to all RCMMs. The Exchange also 
proposes that this filing (including proposed conforming changes to 
NYSE Rule 36) become incorporated into the Pilot.
RCMM Acting as a Floor Broker
    As noted above, RCMMs are permitted to serve as Floor brokers, 
executing customer orders, provided they do not execute RCMM and 
customer orders in the same security on the same day. However, the 
Pilot permits broader portable phone usage for Floor brokers than 
RCMMs. Accordingly, RCMMs would not be allowed to use a portable phone 
to conduct any agency business until issues involving the use of 
portable phones by a RCMM acting in a capacity of an agent have been 
fully reviewed and resolved by NYSE Regulation.\22\
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    \22\ In the future, the Exchange would consider allowing RCMMs 
to notify NYSE Regulation in writing of their intent to conduct such 
agency business, and NYSE Regulation would make a determination 
whether to require that a RCMM amend his or her Form BD with the 
Commission and/or file an amended membership application with NYSE 
Regulation. However, allowing RCMMs acting as Floor brokers to use 
portable phones would involve further discussions with the 
Commission and would be the subject of a separate filing with the 
Commission.
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Use of Portable Phones by Floor Brokers
    As noted above, the Exchange is providing in proposed NYSE Rule 
36.21 the conditions under which Floor brokers can use portable phones 
during the Pilot. In addition, the Exchange has developed an 
acknowledgement for Floor brokers participating in the Pilot to sign. 
Floor brokers must acknowledge the following:
     They authorize the portable phone service provider to 
provide NYSE

[[Page 7105]]

Regulation with data and records relating to incoming and outgoing 
calls;
     Their use of the portable phone pursuant to NYSE Rule 
36.20 complies with all other rules, policies, and procedures of both 
the federal securities laws and the Exchange, including the record 
retention requirements, as set forth in NYSE Rule 440 and Rules 17a-3 
and 17a-4 under the Act; \23\
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    \23\ 17 CFR 240.17a-3 and 240.17a-4.
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     They are required to implement procedures designed to 
deter anyone calling their portable phone number from using caller ID 
block or other means to conceal the phone number from which a call is 
being made; members and member organizations are required to make and 
retain records demonstrating compliance with such procedures; and
     No other electronic communication devices may be used 
unless approved by the Exchange.\24\
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    \24\ Currently, only Exchange authorized and provided portable 
phones are approved.
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    A member education bulletin describing the proposed rule text and 
the acknowledgement procedure would be sent to all Floor brokers 
participating in the Pilot.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \25\ in general, and further the 
objectives of Section 6(b)(5) of the Act \26\ in particular, in that it 
is designed to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest. The Exchange believes that the 
amendment to NYSE Rule 36 would support the mechanism of free and open 
markets by providing for increased means by which communications to and 
from the Floor of the Exchange could take place.
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    \25\ 15 U.S.C. 78f(b).
    \26\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change, as 
amended, 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

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

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

    Because the foregoing proposed rule change, as amended, does not: 
(i) Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \27\ and Rule 19b-
4(f)(6) thereunder.\28\ At any time within 60 days of the filing of the 
proposed rule change, as amended, 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 Act.\29\
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    \27\ 15 U.S.C. 78s(b)(3)(A).
    \28\ 17 CFR 240.19b-4(f)(6).
    \29\ For purposes of calculating the 60-day period within which 
the Commission may summarily abrogate the proposed rule change under 
Section 19(b)(3)(C) of the Act, the Commission considers the period 
to commence on January 18, 2006, the date NYSE filed Amendment No. 1 
to the proposed rule change. See 15 U.S.C. 78s(b)(3)(C).
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    The Exchange has requested that the Commission waive the 30-day 
operative period under Rule 19b-4(f)(6)(iii) of the Act.\30\ The 
Commission believes that it is consistent with the protection of 
investors and the public interest to waive the 30-day operative delay 
and make this proposed rule change, as amended, immediately effective 
upon filing on November 21, 2005. The Commission believes that the 
waiver of the 30-day operative delay may increase the efficiency of the 
Exchange by providing immediate use of Exchange authorized portable 
phones to RCMMs. For this reason, the Commission designates the 
proposal to be effective and operative upon filing with the 
Commission.\31\
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    \30\ 17 CFR 240.19b-4(f)(6)(iii).
    \31\ For purposes only of waiving the operative delay for this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    The Commission notes that proper surveillance is an essential 
component of any telephone access policy to an Exchange Floor. 
Surveillance procedures should help to ensure that Floor brokers and 
RCMMs use portable phones as authorized by NYSE Rule 36 and that orders 
are being handled in compliance with NYSE rules. The Commission expects 
the Exchange to actively review these procedures and address any 
potential concerns that have arisen during the Pilot. In this regard, 
the Commission notes that the Exchange should address whether telephone 
records are adequate for surveillance purposes.
    The Commission also requests that the Exchange report any problems, 
surveillance, or enforcement matters associated with use of an Exchange 
authorized and provided portable telephone by Floor brokers and RCMMs 
on the Exchange Floor. As stated in the Original Order, NYSE should 
also address whether additional surveillance would be needed because of 
the derivative nature of the ETFs. Furthermore, in any future 
additional filings on the Pilot, the Commission would expect that NYSE 
submit information documenting the usage of the phones, any problems 
that have occurred, including, among other things, any regulatory 
actions or concerns, and any advantages or disadvantages that have 
resulted.\32\
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    \32\ The Commission expects the information to distinguish 
between Floor brokers' and RCMMs' usage of the phones.
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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 rule-comments@sec.gov. Please include 

File Number SR-NYSE-2005-80 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NYSE-2005-80. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your

[[Page 7106]]

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. Copies of such filing also will be available for 
inspection and copying at the principal office of NYSE. 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-2005-80 and should be 
submitted on or before March 3, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\33\
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    \33\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-1839 Filed 2-9-06; 8:45 am]

BILLING CODE 8010-01-P