Document ID: SEC-2008-0735-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2008-05-23T04:00Z

[Federal Register: May 23, 2008 (Volume 73, Number 101)]
[Notices]               
[Page 30179-30182]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23my08-126]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57827; File No. SR-NYSEArca-2008-49]

 
 Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of a Proposed Rule Change Relating to Rule 10.12 (Minor Rule Plan) and 
Underlying Rules

May 15, 2008.
    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 May 14, 2008, NYSE Arca, Inc. (``NYSE Arca'' 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 substantially 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 Rule 10.12 (Minor Rule Plan) 
(``MRP'') and other related rules that underlie the minor rules 
violations, including Rules 9.2(c) (Customer Records), 11.1 (Adherence 
to Law), and 11.18 (Supervision).
    The text of the proposed rule change is available at NYSE Arca's 
principal office, the Commission's Public Reference Room, and http://
www.nyse.com.

[[Page 30180]]

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

    In its filing with the Commission, NYSE Arca 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 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
    The Minor Rule Plan fosters compliance with applicable rules and 
also helps to reduce the number and extent of rule violations committed 
by Options Trading Permit (``OTP'') Holders, OTP Firms, and associated 
persons. The Exchange's enforcement staff has found that the MRP is 
particularly useful in reducing both the number and extent of rule 
violations because Rule 10.12 enables staff to promptly impose a 
limited but meaningful financial penalty soon after the violations are 
detected. The prompt imposition of a financial penalty helps to quickly 
educate and improve the conduct of OTP Holders, OTP Firms, and 
associated persons that have engaged in inadvertent or otherwise minor 
violations of the Exchange's rules, particularly those parties who may 
not pay attention to mere warnings that they are violating Exchange 
rules. By promptly imposing a meaningful financial penalty for such 
violations, the MRP focuses on correcting conduct before it gives rise 
to more serious enforcement action.
    The Exchange has observed that new and altered patterns of activity 
by OTP Holders and Firms as well as numerous additions and amendments 
to other Exchange rules have created the need for revisions to the MRP 
as well as the underlying rules, which are described in greater detail 
below. The changes are designed to update Rule 10.12 to encompass new 
types of violations as well as update or otherwise correct existing MRP 
provisions and further clarify the circumstances when use of the MRP is 
appropriate.
    The MRP will continue to be used for inadvertent and occasional 
rule violations. Serious violations of Exchange rules will continue to 
be addressed through formal enforcement action.

Rule 10.12--Minor Rule Plan

Rule 10.12(e)--Minor Rule Plan

    The Exchange proposes to clarify that any person or organization 
found in violation of a minor rule under Rule 10.12 is not required to 
report such violation on SEC Form BD or Form U-4.

Rule 10.12(h)--Minor Rule Plan: Options Floor Decorum and Minor Trading 
Rule Violations

    The Exchange proposes to amend Rule 10.12(h) to reflect recent 
changes in options trading requirements, remove obsolete rule 
references, and create consistency with other exchanges in the 
imposition of fines.
    In particular, the proposals include:
     (h)(2)--Amended to reflect that the violation includes all 
of Rule 6.67.
     (h)(9)--Amended to reflect that OTP Holders and Firms are 
no longer required to be physically present on the trading floor.
     (h)(12)--Amended to reflect that Rule 6.2 Commentary .02 
is not related to the use of hand signals and also to remove an 
obsolete reference to Rule 6.67.
     (h)(13)--Amended to reflect reference to Rule 6.2(h) 
relating to registration of telephones on the trading floor.
     (h)(14)--Amended to remove the reference to Rule 6.69 
because it is no longer relevant to the violation.
     (h)(15)--Removed because the provision is redundant with 
subsection (16).
     (h)(16)--Amended to consolidate certain violations of Rule 
6.2.
     (h)(18)--Removed because the provision is redundant with 
subsection (16).
     (h)(20)--Amended to remove an obsolete rule reference due 
to all orders being electronically stamped.
     (h)(21)--Amended to include position and exercise limit 
violations.
     (h)(22)--Amended to remove the violation because it is 
incorporated in subsection (21).
     (h)(23)--Amended to remove reference to Rule 6.38(c) 
because the rule no longer exists.
     (h)(28)--Amended to remove reference to Rule 6.37(d) 
because the rule no longer relates to Market Makers' obligations to 
trade or update an existing market.
     (h)(29)--Amended to include failure to comply with certain 
trade-through provisions.
     (h)(30)--Amended (i) to delete a reference to the Trading 
Crowd/LMM Questionnaire, which is no longer administered by the 
Exchange and (ii) to include violations of Authorized Trader Rules as 
contained in Rules 6.34 and 6.34A.
     (h)(34)--Amended to include order exposure requirement 
violations.
     (h)(35)--Amended to include unlocking or uncrossing a 
market violations.
     (h)(36)--Amended to clarify present rule and reflect 
correct rule reference.
     (h)(37)--Amended to reflect that Market Makers no longer 
have a one-month grace period prior to applying for a primary 
appointment and reflect current rule.
     (h)(38)--Amended to reflect correct rule text and expand 
scope of violation.
     (h)(39)--Amended to reflect correct rule text.
     (h)(40)--Amended to reflect correct rule reference.
     (h)(42)--Amended to reflect correct rule reference.
     (h)(43)--Amended to remove obsolete rule.
    Exchange systems now have a filter that electronically prevents 
Market Makers from entering quotes in issues outside their primary 
appointment.
     (h)(45)--Amended to reflect the addition of proposed Rule 
11.1(b) and to remove obsolete rule text.
     (h)(46)--Amended to reflect correct rule reference.

Rule 10.12(j)--Minor Rule Plan: Record Keeping and Other Minor Rule 
Violations

    The Exchange proposes to amend Rule 10.12(j) to add several minor 
violations related to record keeping and other violations. Exchange 
staff frequently encounters inadvertent or otherwise minor violations 
of Rules 2.17, 2.23, 2.25, 9.2(a)-(c), 9.17, 11.3, 11.18(a)-(c), and 
11.19. Such minor violations do not give rise to formal enforcement 
action. However, staff believes that it can further enhance compliance 
with these rules by imposing MRP fines, which will draw OTP Holders' 
and Firms' attention to the need for improved compliance by promptly 
imposing meaningful, but limited financial penalties for violations.

10.12(k)--Minor Rule Plan: Recommended Fine Schedule

    The Exchange proposes to change the procedure set forth in the MRP 
fine schedules to escalate MRP fine levels in cases involving multiple 
instances of the same offense.
    This change will enhance the fair administration of the MRP in the 
context of higher speed and volume of

[[Page 30181]]

electronic trading on the NYSE Arca Marketplace.
    Currently, the MRP Recommended Fine Schedule sets forth an initial 
MRP fine for a ``First Violation,'' as well as a higher level for a 
``Second Violation'' and a still higher level for a ``Third 
Violation.''
    This escalation plan, which predates the widespread use of 
electronic trading on the Exchange, has led to several difficulties 
when applied to the much greater speed and volume of electronic 
trading.
    While the fine escalation is meant to deter repeat offenses, it 
often fails to deliver this effect, because OTP Holders and Firms 
engaged in the high speed and volume of electronic trading can 
frequently incur ``second'' and ``third'' offenses before they are 
sanctioned or even notified of the initial violation.
    For the same reason, these OTP Holders and Firms complain that it 
is unfair for them to incur escalated fine levels for second and third 
violations before they learn of their first violations.
    Additionally, the current fine schedule does not allow an MRP 
sanction for any more than three violations. In some cases, this is 
appropriate, but in other cases, it makes sense to impose an MRP fine 
for the fourth violation as for the first three.
    The MRP can best assist the Exchange's regulatory and enforcement 
efforts if it provides Exchange officials with discretion to determine 
how to address particular instances of multiple violations, rather than 
implicitly requiring formal enforcement action whenever there are more 
than three violations.
    To address these concerns, the Exchange proposes to modify the 
Recommended Fine Schedules in NYSE Arca Rule 10.12(k) so that MRP fines 
are escalated based not on the number of ``violations,'' but upon the 
number of times the Exchange has imposed one or more MRP fines upon a 
Permit Holder for the violation of a particular rule. The three current 
column headers in the Fine Schedules that specify different fine levels 
for first, second, and third ``violations'' will be replaced with 
``First Level,'' ``Second Level,'' and ``Third Level.''
    With this change, the Fine Schedule will continue to specify the 
fine to be imposed for each violation, but the first time a Permit 
Holder is fined under the MRP for the violation of a given rule, the 
fine for each violation will be imposed at the ``First Level,'' whether 
there is one or more than one such violation.
    Example:
    Due to a newly-employed floor broker's misunderstanding the 
requirements of NYSE Arca Rule 6.47 and not being corrected for an 
entire afternoon, the employing OTP Holder, which has no previous rules 
violations, executes three cross transactions that afternoon on the 
Exchange that do not satisfy all the requirements of NYSE Arca Rule 
6.47. Under the current MRP Fine Schedule in NYSE Arca Rule 
10.12(i)(3), the OTP Holder would be charged under the MRP with a first 
violation fine of $1,000, a second violation fine of $2,500, and a 
third violation fine of $3,500, for a total MRP fine of $7,000. The 
escalation for the second and third offenses would be imposed under the 
current Fine Schedule even though all the violations occurred in the 
same afternoon, and the second and third violations occurred before the 
OTP Holder became aware of the first violation.
    By contrast, under the change in the Fine Schedule proposed here, 
the fines no longer escalate based upon the number of offenses, but 
instead based on the number of times the OTP Holder has been fined for 
the same offense. Because the OTP Holder here had not previously been 
fined for violations of Rule 6.47, the OTP Holder would receive the 
``First Level'' of $1,000 per violation for each of the three 
violations, for a total MRP fine of $3,000.
    If the OTP Holders and Firms were later fined again under the MRP 
for more such violations, the fine for each violation would then be 
$2,500. This proposed new procedure for escalating MRP fines is largely 
the same as the escalation procedure specified by the New York Stock 
Exchange LLC (``NYSE'') in its ``List of Exchange Rule Violations and 
Fines'' for imposing summary fines pursuant to NYSE Rule 476A.
    It will continue to be the case that nothing in the MRP will 
require the imposition of a MRP fine when Exchange enforcement 
officials believe that repeat violations or other aggravating factors 
warrant formal enforcement action.

Other Changes to Rule 10.12(k)

    The fines for the current and proposed minor rule violations in 
subsections (h) and (j) are reflected in the Recommend Fine Schedule in 
Rule 10.12(k). The Exchange staff believes that the proposed fines are 
fair in relation to the scope and occurrence of the MRP violation by 
OTP Holders and Firms.
    The Exchange has also proposed to amend Rules 10.12(k)(i) and 
10.12(k)(iii) to include new footnotes 1 and 3 respectively. Rules 
6.94(a) and (c) require OTP Holders to avoid violations of the trade-
through rules and, where such violation is unavoidable, to provide 
satisfaction orders. Proposed footnote 1 enables the Exchange to 
require that violators of these rules not only pay the specified MRP 
fine amounts for such violations, but also disgorge any quantifiable 
monetary gains attributable to these violations. The Exchange has based 
this proposed amendment on a very similar provision of the Boston Stock 
Exchange's MRP for violation of trade-through rules, which was recently 
approved by the Commission.\3\
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    \3\ See Securities Exchange Act Release No. 55606 (April 10, 
2007), 72 FR 19221 (April 17, 2007) (approving SR-BSE-2006-11).
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    NYSE Arca Rule 2.23 (employee registration) requires OTP Holders 
and Firms to continually disclose to the Exchange through the 
registration process personnel who are responsible for trading 
decisions on behalf of the OTP Holders or Firms. By requiring such 
disclosure, Rule 2.23, like the trade-through rules, substantially 
protects the Exchange's ability to regulate its marketplace and help 
ensure marketplace integrity. Exchange staff proposes to include the 
back-payment of registration fees in addition to a MRP fine so that the 
MRP can effectively deter OTP Holders and Firms from trying to save 
money and effort by not registering their appropriate personnel, in the 
same way that the Boston Stock Exchange's MRP revision in SR-BSE-2006-
11 \4\ deters trade-through violations by requiring the violator to pay 
not only the specified fine amount, but also any quantifiable monetary 
gain resulting from the violation. Specifically, the Exchange proposes 
footnote 3 to enable the Exchange to require violators of Rule 2.23 to 
pay not only the specified MRP fine amount, but also to remit all fees 
that should have been paid to the Exchange pursuant to compliance with 
Rule 2.23.
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    \4\ See id.
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    In addition to the changes proposed to the MRP, the Exchange also 
proposes the following related changes.

Rule 9.2(c)--Customer Records

    The Exchange proposes to change Rule 9.2(c) by adding the single 
word ``current,'' to clarify and reiterate the obligation that firms 
with customer accounts must not only keep records of their customer 
accounts, but also keep them current.

[[Page 30182]]

Rule 11.1--Adherence to Law and Good Business Practices

    The Exchange proposes to clarify the language of the newly 
designated Rule 11.1(a) by substituting the word ``just'' for ``fair.''
    The Exchange also proposes to add a new Rule 11.1(b) that will 
require all OTP Holders and Firms, their associated persons, and other 
participants to adhere to the principles of good business practice in 
the conduct of their business operations. This filing also proposes to 
make violations of Rule 11.1(b) eligible for MRP disposition.
    The proposed new Rule 11.1(b) is patterned on the current NYSE Rule 
401(a). Like NYSE Rule 401(a), it encompasses miscellaneous conduct 
that is inconsistent with the maintenance of a fair and orderly 
marketplace or that otherwise violates good business practices without 
also showing the bad faith or unethical conduct that have been found to 
be essential elements of ``conduct inconsistent with just and equitable 
principles of trade,'' as that standard has been clarified in decisions 
such as In re. Calvin David Fox.\5\
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    \5\ See Securities Exchange Act Release No. 48731, 81 SEC Docket 
1511-31 (October 31, 2003).
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Rule 11.18--Supervision

    The Exchange proposes to amend Rule 11.18 to remove language that 
limits the reach of its supervisory rules. The current language of Rule 
11.18(b) provides that only OTP Holders and Firms for whom the Exchange 
is the Designated Examining Authority (``DEA'') are subject to its 
supervisory requirements. The amendment removes the language limiting 
the scope of the rule so that all OTP Holders and Firms, regardless of 
DEA, are subject to maintaining systems to supervise activities of 
their associated persons and the operations of their business.
    As noted above, this filing also proposes to make minor violations 
of Rule 11.18 eligible for disposition through an MRP fine. Exchange 
Market Regulation frequently encounters ``minor'' supervisory failures 
by OTP Holders and Firms, i.e., supervisory failures whose consequences 
have not yet risen to a level justifying formal enforcement action, but 
which could have serious consequences if not remedied. By making such 
failures eligible for MRP fines, Exchange Market Regulation and 
Enforcement will have a greater ability to encourage OTP Holders and 
Firms to correct their supervisory problems before they lead to more 
serious violations.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\6\ in general, and with 
Section 6(b)(5) of the Act,\7\ 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 a free and 
open market and a national market system, and, in general, to protect 
investors and the public interest.
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    \6\ 15 U.S.C. 78f.
    \7\ 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 
result in 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

    Written comments were neither solicited nor received.

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 NYSE Arca 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-NYSEArca-2008-49 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-NYSEArca-2008-49. 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 NYSE Arca. 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-2008-49 and should 
be submitted on or before June 13, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-11530 Filed 5-22-08; 8:45 am]

BILLING CODE 8010-01-P