Document ID: SEC-2007-1678-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange LLC
Posted Date: 2007-12-11T05:00Z

[Federal Register: December 11, 2007 (Volume 72, Number 237)]
[Notices]               
[Page 70363-70366]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11de07-85]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56895; File No. SR-NYSE-2007-109]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to the NYSE Rule 98 Guidelines for Approved Persons Associated 
With a Specialist's Member Organization

December 4, 2007.
    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 28, 2007, the 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 substantially by the Exchange. 
The Exchange has filed the proposal pursuant to section 19(b)(3)(A) of 
the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ 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\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 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

    The Exchange is proposing to amend the NYSE Rule 98 Guidelines for 
Approved Persons Associated with a Specialist's Member Organization 
(``Rule 98 Guidelines'') to provide NYSE Regulation, Inc. (``NYSE 
Regulation'') with the authority to grant a prospective specialist 
member organization a temporary exemption from section (b)(i) of the 
NYSE Rule 98 Guidelines. The text of the proposed rule change is 
available at http://www/nyse.com, NYSE and the Commission's Public 

Reference Room.

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
    For purposes of seeking NYSE Rule 98 exemptive relief, the NYSE is 
proposing to amend the Rule 98 Guidelines to allow NYSE Regulation \5\ 
to grant prospective specialist firms with a temporary exemption from 
section (b)(i) of such guidelines, which currently require a specialist 
member organization and its approved person be separate and distinct 
organizations. The Exchange has consistently interpreted this provision 
to require that the specialist and the approved person be in separate, 
registered broker-dealer organizations. Pursuant to the proposed rule 
change, while NYSE Regulation would be permitted to grant a temporary 
exemption from section (b)(i), specialist firms and their approved 
persons would still be required to comply with sections (b)(ii) through 
(b)(x) of the Rule 98 Guidelines and thus maintain the functional 
separation contemplated by the rule.
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    \5\ Rule 98(b) requires an approved person seeking a Rule 98 
exemption to obtain the prior written agreement of the Exchange. 
Pursuant to a Delegation Agreement, the Exchange has delegated to 
NYSE Regulation the authority to review and approve such Rule 98 
exemption requests.
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    Recent changes among the specialist firms, including the recent 
decisions by Van der Moolen Specialists USA, LLC and SIG Specialists, 
Inc. to close their respective specialist businesses at the 
Exchange,\6\ have warranted the need for greater flexibility to permit 
new firms to qualify as specialist member organizations. NYSE Rule 98, 
which requires certain barriers between a specialist member 
organization and an approved person, has the potential to impede the 
approval process for a prospective specialist firm. In particular, 
because of the time delay necessary for an NYSE member organization to 
form a separate NYSE member organization from which to run a specialist 
business, the requirement to maintain a separate and distinct 
organization could impact the ability of a current member organization 
to expeditiously begin operating as a specialist organization.
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    \6\ See Press Release, NYSE, NYSE to Reallocate Certain 
Specialist Rights to Kellogg Specialist Group (Nov. 14, 2007), 
available at http://www.nyse.com/press/1195039877990.html; Press 

Release, Van der Moolen, Van der Moolen to terminate U.S. specialist 
activities (Nov. 15, 2007), available at http://www.vandermoolen.com/?sid=17&press=151
.

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    The NYSE is in the process of reviewing Rule 98 and, in particular, 
whether revising the Rule 98 Guidelines would provide sufficient 
protection to meet the stated goals of Rule 98. Nevertheless, the NYSE 
is not seeking to amend Rule 98 comprehensively at this time. Rather, 
pending further review by the NYSE of the continued applicability of 
Rule 98 in its current form, the NYSE proposes to grant NYSE Regulation 
exemptive authority to allow prospective specialist firms and their 
approved persons to temporarily operate without having to be separate 
and distinct organizations. The NYSE proposes granting this exemptive 
authority to expedite the process for new entrants to apply for and be 
approved as specialist organizations at the NYSE.
    The NYSE notes that prospective specialist organizations and their 
approved persons would continue to be subject to sections (b)(ii) 
through (b)(x) of the Rule 98 Guidelines, which set

[[Page 70364]]

forth the information barriers that a specialist firm and approved 
person must implement in order to meet the ``functional regulation'' 
requirements contemplated by the rule. The NYSE believes that a firm 
that meets those Rule 98 Guidelines would meet the stated goals of NYSE 
Rule 98 to ensure that an approved person does not have undue control 
over or access to privileged information of the specialist 
organization, and vice versa.

A. Background

    Approved persons of specialist organizations generally are subject 
to the same trading restrictions that govern specialist organizations, 
including, among others, restrictions on the ability to engage in 
transactions for their own accounts in such specialty stocks, 
prohibitions on trading in specialty stock options, and prohibitions on 
engaging in business transactions with the issuer of the specialty 
stock. As defined by NYSE Rule 2, an ``approved person'' is a person 
(other than a member, allied member, or employee of a member 
organization), who (i) controls a member organization, or (ii) is 
engaged in a securities or kindred business and is controlled by or 
under common control with a member organization.\7\
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    \7\ See section (a) of Rule 98 Guidelines.
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    NYSE Rule 98 and the related Rule 98 Guidelines provide a mechanism 
for approved persons of specialist organizations to seek an exemption 
from certain specialist trading restrictions. Under NYSE Rule 98(b), to 
obtain such an exemption, an approved person must obtain the prior 
written agreement of the NYSE that the approved person and the 
associated specialist organization are in compliance with the Rule 98 
Guidelines.
    Rule 98 sets forth a ``functional regulation'' concept that permits 
an approved person to obtain a Rule 98 exemption so long as such 
approved person and associated specialist organization maintain an 
arms-length relationship. To obtain such approval, the two entities 
must establish procedures sufficient to restrict the flow of privileged 
information between them. Such procedures should be designed to 
preclude the possibility that privileged information will be used by 
either the approved person or the associated specialist organization to 
influence a particular trading decision. Once approved, an approved 
person of a specialist member organization would not be subject to 
certain trading restrictions that govern a specialist member 
organization.
    The Rule 98 Guidelines provide guidance regarding how approved 
persons and associated specialist organizations should establish their 
respective operational structures. As enumerated in section (b)(i) of 
the Rule 98 Guidelines, an approved person and the associated 
specialist member organization should be organized as separate and 
distinct organizations. In particular, the specialist member 
organization should not in any manner function as a ``downstairs'' 
extension of an ``upstairs'' trading desk.
    Sections (b)(ii) through (b)(x) of the Rule 98 Guidelines enumerate 
further operational structures that an approved person and its 
associated specialist firm should implement, including a management 
structure designed to prevent the influence of approved persons on 
specialists, and vice versa, and various information barriers 
concerning confidentiality of information, separate books and records, 
separate financial accounting, separate capital requirements, 
confidentiality of the specialist's Book, confidentiality of 
information derived from business activities with the issuer, and 
confidentiality of draft research reports.

B. Proposed Temporary Exemption From Rule 98 Guidelines

    As noted above, within the space of two days, two of the NYSE's 
seven specialist organizations announced their intent to close their 
Floor-based specialist business. In order to ensure the continuity of a 
fair and orderly market, the NYSE is committed to working with firms 
that are interested in seeking approval to become a specialist member 
organization and be eligible for allocations of stocks listed at the 
NYSE. In the event that an existing NYSE member organization is 
interested in qualifying as a specialist firm, the NYSE is committed to 
working with such a prospective specialist organization to meet the 
requisite operational and regulatory requirements.
    For the most part, assuming a current NYSE member organization 
takes over the book of business of a departing specialist organization, 
including the algorithms and Specialist Application Program Interface 
(``SAPI'') \8\ of the departing specialist organization, the transfer 
of the Book can be seamless and expedited. However, if in addition to 
acting as a specialist firm, such member organization is interested in 
maintaining its ``upstairs'' or floor brokerage business, that member 
organization would be considered an approved person of the specialist 
organization, i.e., it is in the securities business and under common 
control with the specialist organization. If such approved person does 
not have an existing separate broker-dealer that is already an NYSE 
member organization from which to operate its associated specialist 
operations, the Rule 98 Guideline requirement that an approved person 
be a separate and distinct organization from an associated specialist 
member organization acts as a gating item to the speedy transfer of a 
specialist's book to another member organization.
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    \8\ The SAPI is the electronic link between specialist trading 
algorithms and the NYSE Display Book. Via this interface, specialist 
organization trading algorithms send quoting and trading messages to 
the Exchange for implementation in the Display Book, and the 
Exchange transmits information necessary to acting as a specialist 
to specialist organizations.
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    Accordingly, to enable the NYSE to respond to the dynamic changes 
in the marketplace and expeditiously approve, where appropriate, a 
current NYSE member organization as a new specialist organization, the 
NYSE proposes that NYSE Regulation have exemptive authority to grant 
prospective specialist firms with a temporary exemption from the 
requirement in section (b)(i) of the Rule 98 Guidelines that a 
specialist member organization and its approved person be separate and 
distinct organizations, i.e., maintain separate NYSE member 
organizations. Obtaining such a temporary exemption would be subject to 
the specialist organization and the approved person both maintaining 
the functional divisions and information barriers as enumerated in 
sections (b)(ii) through (b)(x) of the Rule 98 Guidelines, and promptly 
seeking to form a separate member organization. The NYSE believes that 
by meeting these conditions there will be sufficient functional 
regulation during the period while the prospective specialist firm is 
exempt from section (b)(i) of the Rule 98 Guidelines.
    The NYSE notes that the Commission recently approved an amendment 
to NYSE Rule 103B that implemented the same type of change as proposed 
by this filing.\9\ NYSE Rule 103B previously prohibited specialist 
organizations from being registered in a specialist capacity in both an 
Exchange Traded Fund (``ETF'') and in a component security of such ETF. 
To avoid this prohibition, firms were required to have separate member 
organizations for its specialty stocks and for its ETF securities. As 
amended, NYSE Rule 103B now permits a member organization to register 
as a specialist in both an ETF and a

[[Page 70365]]

component security of such ETF without having to form a separate member 
organization.
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    \9\ See Securities Exchange Act Release No. 56392 (Sept. 12, 
2007), 72 FR 53615 (Sept. 19, 2007) (SR-NYSE-2007-42) (``Rule 103B 
Rule Filing'').
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    Under NYSE Rule 103B, a specialist member organization must have 
policies and procedures to separate the activities of such member 
organization in the trading of ETFs and any component securities in 
which the member organization is also registered as specialist. At a 
minimum, such policies and procedures must include information barriers 
that prevent the flow of non-public information between a member 
organization's ETF specialist and the member organization's specialist 
in an associated component security. As with the Rule 98 Guidelines, a 
specialist firm must submit its policies and procedures relating to 
such information barriers before being approved for an allocation of an 
ETF for which the specialist is already registered for a component 
security. As noted in the Rule 103B Rule Filing, after an ETF has been 
allocated to a specialist member organization, the Exchange will 
continue to examine for compliance with these Rule 103B requirements, 
including testing and reviewing on-site for breaches and weaknesses.
    The NYSE believes that the same rationale for amending Rule 103B is 
applicable here; namely, so long as the firm meets the other 
requirements of Rule 98, there should be sufficient functional 
regulation to create information barriers to restrict the flow of 
information while the firm is working toward a formal structural 
separation. In the context of Rule 98, because firms would still be 
required to comply with sections (b)(ii) through (b)(x) of the Rule 98 
Guidelines, which set forth the information barriers required between a 
specialist firm and its approved person, the functional regulation 
contemplated by the current rule would be met, even in the temporary 
absence of a formal separation between two operating divisions.
    The Exchange proposes that a temporary exemption from section 
(b)(i) of the Rule 98 Guidelines may be granted only to those current 
NYSE member organizations that are not already approved persons of a 
specialist organization and are seeking to both become a specialist 
organization and apply to be a Rule 98-exempt approved person. The 
Exchange further proposes that the temporary exemption is contingent 
upon (i) the Exchange approving the member organization as a specialist 
organization and that the non-specialist division of the firm qualifies 
both as an approved person and for an exemption under Rule 98, as set 
forth in the Rule 98 Guidelines and other applicable NYSE rules, and 
(ii) the member organization promptly seeks to create, in a time frame 
acceptable to NYSE Regulation, a separate NYSE member organization from 
which the specialist organization would eventually be run.
    The NYSE will closely monitor the application process of any 
prospective member organization and will require a broker-dealer 
seeking such approval to be diligent in working through the application 
process. In addition, before operating as a specialist firm, 
prospective specialist firms must provide NYSE Regulation with its Rule 
98 policies and procedures so that NYSE Regulation can assess whether 
the firm's information barriers meet requirements of the Rule 98 
Guidelines. As it does for other specialist firms and their approved 
persons, NYSE Regulation will examine such prospective specialist 
organizations for compliance with these Rule 98 Guidelines.
2. Statutory Basis
    The basis for this proposed rule change is the requirement under 
Section 6(b)(5) of the Act \10\ that an Exchange have rules that are 
designed to promote the 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.
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    \10\ 15 U.S.C. 78(f)(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 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

    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 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, the proposed rule 
change has become effective pursuant to Section 19(b)(3)(A) of the Act 
\11\ and Rule 19b-4(f)(6) thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
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    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 Act.
    NYSE has asked that the Commission waive the 30-day operative 
delay.\13\ The proposal is similar to recent amendments to NYSE Rule 
103B that were approved by the Commission, which removed the 
requirement that an ETF specialist be a separate member organization 
from a specialist registered in component securities of the ETF.\14\ 
The Commission notes that the proposed rule change would only permit on 
a temporary basis an exemption for prospective specialist organizations 
from the NYSE Rule 98 Guidelines requirement that a specialist and its 
approved person maintain a formal structural separation. The Commission 
also notes that, pursuant to the proposed rule change, prospective 
specialist organizations seeking such an exemption would be required to 
satisfy the other requirements of the Rule 98 Guidelines, including 
specifically satisfying the Exchange that adequate information barriers 
will be maintained notwithstanding the fact that separate entities are 
not employed,\15\ and must promptly seek to create a separate NYSE 
member organization from which the specialist organization would 
eventually be run. The Commission believes that waiver of the 30-day 
operative delay is consistent with the protection of investors and the 
public interest because it will enable the Exchange to immediately 
implement the proposal so that prospective specialist member 
organizations may be approved on a timely basis. For this reason, the 
Commission designates the proposed

[[Page 70366]]

rule change to be effective and operative upon filing with the 
Commission.\16\
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    \13\ Rule 19b-4(f)(6) also requires the self-regulatory 
organization to give the Commission notice of its intent to file the 
proposed rule change, along with a brief description and text of 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 the five-
day pre-filing requirement.
    \14\ See supra note 9 and accompanying text.
    \15\ See section (b)(i) of proposed NYSE Rule 98 Guidelines.
    \16\ For the purposes only of waiving the 30-day operative 
delay, the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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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 e-mail to rule-comments@sec.gov. Please include File 

Number SR-NYSE-2007-109 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-2007-109. 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 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-2007-109 and should be 
submitted on or before January 2, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-23922 Filed 12-10-07; 8:45 am]

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