Document ID: SEC-2009-0304-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange LLC
Posted Date: 2009-03-09T04:00Z

[Federal Register: March 9, 2009 (Volume 74, Number 44)]
[Notices]               
[Page 10104-10107]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09mr09-92]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59486; File No. SR-NYSE-2009-16]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Amend NYSE Rule 17 To Address Issues Related to Vendor Liability and 
To Make Amendments and Conforming Changes to NYSE Rule 18

March 2, 2009.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that, on February 17, 2009, New York Stock Exchange LLC (``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 self-regulatory 
organization. The Exchange filed the proposed rule change pursuant to 
Section 19(b)(3)(A) \4\ of the Act and Rule 19b-4(f)(6) thereunder,\5\ 
which renders the proposal effective upon filing with the Commission. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(6).

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[[Page 10105]]

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

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

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

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in Sections A, B, and C below, of the most 
significant aspects of such statements.

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

1. Purpose
    The Exchange proposes to amend NYSE Rule 17 (``Use of Exchange 
Facilities'') to address issues related to vendor liability. 
Specifically, the proposed rule would require that member organizations 
that have trading losses due to malfunctions of third-party systems 
provided by the Exchange submit such losses to the Exchange's 
compensation fund prior to pursuing legal remedies against the vendors 
that provided these third-party systems.\6\
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    \6\ See E-mail from Jennifer D. Kim, Counsel, Office of the 
General Counsel, Exchange, to Michou H.M. Nguyen, Special Counsel, 
Division of Trading and Markets, Commission, on March 2, 2009 
(``March 2nd E-mail'').
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    The Exchange also seeks to make amendments and conforming changes 
to NYSE Rule 18 (``Compensation in Relation to Exchange System 
Failure''). Specifically, the Exchange seeks to include in the 
definition of ``Exchange system failure'' the malfunction of a third-
party system or technology provided by the Exchange, i.e., vendor and/
or subcontractor systems and to codify a net loss requirement for 
members or member organizations that seek compensation for losses 
sustained from an Exchange system failure.
    The Exchange notes that parallel changes are proposed to be made to 
the rules of the NYSE Alternext Exchange (formerly the American Stock 
Exchange).\7\
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    \7\ See SR-NYSEALTR-2009-13 (filed February 17, 2009).
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Background
    On July 10, 2008, the Exchange amended NYSE Rule 17 (``Rule 
Amendment'') to provide, among other things, that its vendors and/or 
its subcontractors of electronic systems, services or facilities 
(``third-party vendors'') would not be liable for any loss sustained by 
a member or member organization arising from use of the third-party 
vendors.\8\ The amended rule further required members and member 
organizations to indemnify the Exchange and its vendors and/or 
subcontractors and set forth certain provisions that the Exchange could 
include in contracts connected to a member or member organization's use 
of any electronic systems, services or facilities provided by the 
third-party vendors.
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    \8\ See Securities Exchange Act Release No. 58137 (July 10, 
2008), 73 FR 41145 (July 17, 2008) (SR-NYSE-2008-55). The amendments 
to NYSE Rule 17 were based on American Stock Exchange (``Amex'') 
Rule 60.
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    The impetus behind this amendment stemmed from exchanges' increased 
reliance on third-party vendors to provide additional systems or 
services. The use of third-party vendors enables exchanges to increase 
their capacity to deliver faster and more efficient trading tools to 
market, with the ultimate beneficiaries being the investing public. In 
order for the Exchange to remain competitive and remove impediments to, 
and perfect the mechanism of, a free and open market, the Exchange 
relies on third-party vendor services to play a significant role in 
timely providing systems and tools to Exchange members that assist the 
Exchange in achieving its goals and remain competitive.
    In recognition of the fact that Exchange-maintained systems co-
exist with, and are often indistinguishable from, vendor-maintained 
systems that the Exchange provides access to as a conduit, the Exchange 
filed the Rule Amendment, implementing a vendor liability disclaimer 
that indemnified the Exchange and third-party vendors from any damages 
sustained by a member or member organization growing out of the use or 
enjoyment thereof by the member or member organization, as well as from 
any and all judgments, damages, costs, or losses of any kind (including 
reasonable attorneys' fees and expenses), as a result of any claim, 
action, or proceeding that arose out of or relates to the member or 
member organization's use of such electronic system, service, or 
facility.
    After the immediately effectiveness filing, the Exchange received 
feedback on the rule from its members and customer constituencies. 
Based on that feedback, the Exchange recognized the risk presented to 
members and member organizations with regard to requiring members and 
member organizations to indemnify the Exchange vendors and its 
subcontractors. The Exchange therefore rescinded the vendor liability 
provisions of NYSE Rule 17 (in particular, paragraph (b) of the amended 
rule), thereby reverting the rule to its original content prior to the 
effectiveness of SR-NYSE-2008-55 [sic].\9\
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    \9\ See Securities Exchange Act No. 58850 (October 24, 2008), 73 
FR 64998 (October 31, 2008) (SR-NYSE-2008-107).
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    The Exchange now re-proposes to amend NYSE Rule 17 and 18 to create 
a proposed rule that addresses issues of liability for all parties 
concerned.
Proposed Amendments
    Currently, NYSE Rule 17 provides that the Exchange shall not be 
liable for any damages sustained by a member or member organization 
growing out of the use or enjoyment of the facilities afforded by the 
Exchange, except as provided in NYSE Rule 18. Currently, NYSE Rule 18 
affords members and member organizations the recourse to seek 
compensation for losses sustained by an Exchange system failure.\10\
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    \10\ An ``Exchange system failure'' is defined by NYSE Rule 18 
as ``a malfunction of the Exchange's physical equipment, devices 
and/or programming which results in an incorrect execution or an 
order or no execution of an order that was received in Exchange 
systems.''
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    As noted previously, the Exchange increasingly offers member 
organizations access to certain systems and technologies that are 
supplied by third-party vendors and delivered via Exchange systems 
(e.g., the Exchange delivers broker algorithms to brokers on the broker 
handheld device). These third-party products are designed to enhance 
the member organizations' ability to execute trades efficiently. 
Notably, the Exchange is acting primarily as a facilitator between the 
vendor and the Exchange member using the service. Use of these vendor-
supplied services is not required, and Exchange members can perform 
their respective jobs without using these third-party vendor services. 
If a member wishes to use such a service, however,

[[Page 10106]]

the Exchange works with the vendor and the member to connect the member 
and to deliver the service from the vendor to the user. The Exchange 
also simplifies the negotiation process, in that a member does not need 
to separately negotiate with the vendor to receive the service. Because 
the services are supplied and supported by a third-party vendor, 
however, they are not explicitly ``systems or facilities of the 
Exchange.'' \11\
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    \11\ Exchange services that are outsourced to third-party 
vendors but that are part of the sore functionality of NYSE systems 
are considered ``systems and facilities of the Exchange'' even 
though they are not physically provided by the Exchange. By 
contrast, additional services provided to members and member 
organizations by a third-party vendor that aren ot part of the core 
functionality of the NYSE's systems and not required to function as 
a member or member organization are not considered ``systems and 
facilities of the Exchange.'' As a result, any malfunction of those 
additional services would constitute a third-party vendor system 
malfunction, not an Exchange malfunction.
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    Currently, NYSE Rules 17 and 18 do not address the issue of a 
member or member organization that sustains a loss arising from the 
malfunction of non-core systems or technology supplied by third-party 
vendors for use by member organizations.\12\ In light of the increased 
availability of third-party technology to provide additional facilities 
or services to the Exchange, the Exchange proposes to amend NYSE Rules 
17 and 18 to address third-party vendor liability, third-party vendor 
system malfunction and the avenue of recourse for members and member 
organizations as a result of this third-party vendor system 
malfunction.
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    \12\ The third-party vendors directly provide their services to 
the member or member organization. Therefore, the customers are 
aware that they are using an Exchange system, which is provided 
directly by the Exchange, or a third-party vendor system, that also 
has direct contact with the customer.
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    In connection with member or member organization use of any third-
party vendors provided by the Exchange to members for the conduct of 
their business on the Exchange, the Exchange proposes that NYSE Rule 17 
provide that the Exchange shall not be liable for any damages sustained 
by a member, allied member or member organization growing out of the 
use or enjoyment by such member, allied member or member organization 
of a third-party electronic system, service, or facility provided by 
the Exchange, except as provided in NYSE Rule 18.
    The Exchange further proposes that members or member organizations 
that sustain a loss from the use of these third-party vendors provided 
by the Exchange may seek compensation from the Exchange for their 
losses in the same way they seek compensation for an Exchange system 
failure. Specifically, NYSE Rule 18 would permit members or member 
organizations to file a claim with the Exchange for losses caused by 
the third-party vendor's malfunction.
    In the event that claims arising out of the use of these third-
party vendor systems cannot be fully satisfied because the aggregated 
claims exceed the funds available for such payment as set forth in NYSE 
Rule 18, the aggrieved member or member organization would not be 
precluded from bringing a claim against the third-party vendor directly 
for the balance of the loss amount.
    The Exchange also seeks to make a conforming amendment to NYSE Rule 
18 to include in the definition of an Exchange system failure ``any 
malfunction of any third-party vendor provided by the Exchange that 
result in an incorrect execution of an order or no execution of an 
order that was received in Exchange systems.''
    Finally, the Exchange seeks to codify its existing policy regarding 
the netting of losses prior to submitting claims under NYSE Rule 18. 
Specifically, the Exchange is codifying its understanding that if 
members and member organizations retain profits from a system 
malfunction, then they are required to net these profits against their 
losses from the same malfunction before submitting any claims under 
NYSE Rule 18.\13\
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    \13\ Related system malfunctions that occur repeatedly over the 
course of the trading day will constitute one system malfunction for 
purposes of determining the aggregation of customer claims resulting 
from that system malfunction. Distinct and separate malfunctions 
that originate from different system failures are considered 
unrelated malfunctions and are treated as separate system 
malfunctions.
    A member organization that sustains such loss is required to 
give oral notice by the market opening on the next business day 
following the system failure and written notice by the end of the 
third business day following the system failure (T+3).
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    For example, a broker enters orders for Customer 1 and 
Customer 2. As a result of a system malfunction, Customer 
1 derives a profit that would have occurred but for the 
malfunction and Customer 2 derives a loss. The broker passes 
along the gain to Customer 1, and files a claim with the 
Exchange with respect to Customer 2's loss. The broker would 
not be required to net the gain against the loss.
    Brokers are required to offer profitable errors to their customers; 
in certain circumstances, however, customers may decline to take the 
error in which case the error position is retained by the brokers.\14\ 
If Customer 1 declines to accept the profit, as is the 
customer's option, then the broker would retain the profit and must net 
is against the loss incurred on behalf of Customer 2.
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    \14\ Customers may decline to take the gains for varied reasons. 
For example, if the cost to the customer of processing the error is 
greater than the amount of the error, the customer will likely tell 
the broker to keep the error.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\15\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\16\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and, in general, to protect investors and the public interest. The 
Exchange believes that the proposed rule change promotes just and 
equitable principles of trade and protects investors and the public 
interest because it creates a mechanism that adequately addresses 
issues of liability for all parties concerned.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    The Exchange received feedback from its constituents raising 
concerns about the possible risk presented to members and member 
organizations with regard to the provisions of NYSE Rule 17 that 
require members and member organizations to indemnify Exchange vendors 
and the subcontractors of vendors. Specifically, constituents expressed 
concern that the NYSE rule could have an adverse effect on their 
businesses in the event of a system malfunction that resulted in 
financial losses, since the prior rule not only limited their abilities 
to pursue legal action against the vendors, but also required the 
member organizations themselves to indemnify vendors for losses. They 
noted in addition that, as filed, the prior rule did not permit member 
organizations to seek compensation through the NYSE's Rule 18 process 
for losses caused by vendors and therefore felt that the limitation on 
liability was unduly burdensome. This rule proposal is submitted in 
light of

[[Page 10107]]

these comments received in response to NYSE's filing, SR-NYSE-2008-
55.\17\
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    \17\ See March 2nd E-mail, supra note 6.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

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

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NYSE-2009-16 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-NYSE-2009-16. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSE-2009-16 and should be 
submitted on or before March 30, 2009. 

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E9-4874 Filed 3-6-09; 8:45 am]

BILLING CODE 8011-01-P