Document ID: SEC-2008-0205-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange LLC
Posted Date: 2008-02-07T05:00Z

[Federal Register: February 7, 2008 (Volume 73, Number 26)]
[Notices]               
[Page 7349-7352]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07fe08-108]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34--57251; File No. SR-NYSE-2007-62]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Changes 
to NYSE Rules 104 (Dealings by Specialists); 111 (Reports of 
Executions); 123A (Miscellaneous Reports); 123C (Market on the Close 
Policy and Expiration Procedures); 421(Periodic Reports); 440B (Short 
Sales); 440C (Short Sale Borrowing and Delivery Requirements); 440F 
(Public Short Sale Transactions Effected on the Exchange); 440G 
(Transactions in Stocks and Warrants for the Accounts of Members, 
Allied Members and Member Organizations); 902 (Off-Hours Trading 
Orders); 1000 (Automatic Execution of Limit Orders Against Orders 
Reflected in NYSE Published Quotation); and 1003 (Application of Tick 
Tests) Relating to Recent Amendments to Rule 10a-1 and Regulation SHO

February 1, 2008.
    Pursuant to section 19(b)(1)\1\ of the Securities Exchange Act of 
1934 (``Act'')\2\ and Rule 19b-4\3\ thereunder, notice is hereby given 
that on July 6, 2007, the New York Stock Exchange LLC (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), and on December 5, 2007 amended, the proposed rule 
change as described in Items I and II below, which items have been 
substantially prepared by the Exchange. The Exchange filed the 
proposals as ``non-controversial'' rule changes under Rule 19b-
4(f)(6)\4\ under the Act, which rendered the proposals effective upon 
filing with the Commission. The Commission is publishing this notice to 
solicit comments on the proposed rule changes from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a et seq.
    \3\ 17 CFR 240.19b-4.
    \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 NYSE proposes to make conforming amendments to certain of its 
rules in light of recent changes to short sale provisions in Rule 10a-
1\5\ of the Act and Regulation SHO.\6\ The rules the Exchange proposes 
to amend are the following: Rule 104 (Dealings by Specialists); Rule 
111 (Reports of Executions); Rule 123A (Miscellaneous Reports); Rule 
123C (Market on the Close Policy and Expiration Procedures); Rule 
421(Periodic Reports); Rule 440B (Short Sales); Rule 440C (Short Sale 
Borrowing and Delivery Requirements); Rule 440F (Public Short Sale 
Transactions Effected on the Exchange); Rule 440G (Transactions in 
Stocks and Warrants for the Accounts of Members, Allied Members and 
Member Organizations); Rule 902 (Off-Hours Trading Orders); Rule 1000 
(Automatic Execution of Limit Orders Against Orders Reflected in NYSE 
Published Quotation); and Rule 1003 (Application of Tick Tests).
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    \5\ 17 CFR 240.10a-1.
    \6\ 17 CFR 242.200-203.
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    The text of the proposed rule change is available at the Exchange, 
on the Exchange's Web site at http://www.nyse.com, and in 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

[[Page 7350]]

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
    On June 28, 2007, the Commission approved final rules eliminating 
the price test of Rule 10a-1 and amending Regulation SHO (``Adopting 
Release'').\7\ The amendments prohibit any self-regulatory organization 
(``SRO'') from having a price test and remove the ``short exempt'' 
marking requirement of Rule 200(g). The compliance date for these 
changes was July 6, 2007.
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    \7\ See Securities Exchange Act Release No. 55970 (June 28, 
2007), 72 FR 36348 (July 3, 2007) (``Adopting Release'').
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    Accordingly, NYSE is proposing conforming amendments to the 
following rules: Rule 104 (Dealings by Specialists); Rule 111 (Reports 
of Executions); Rule 123A (Miscellaneous Reports); Rule 123C (Market on 
the Close Policy and Expiration Procedures); Rule 421(Periodic 
Reports); Rule 440B (Short Sales); Rule 440C (Short Sale Borrowing and 
Delivery Requirements); Rule 440F (Public Short Sale Transactions 
Effected on the Exchange); Rule 440G (Transactions in Stocks and 
Warrants for the Accounts of Members, Allied Members and Member 
Organizations); Rule 902 (Off-Hours Trading Orders); Rule 1000 
(Automatic Execution of Limit Orders Against Orders Reflected in NYSE 
Published Quotation); and Rule 1003 (Application of Tick Tests).

Background

    Rule 10a-1 was adopted by the Commission as a means to restrict 
short selling in a declining market.\8\ Rule 10a-1(a) covered short 
sales in listed securities, or admitted to unlisted securities trading 
privileges on a national securities exchange, if trades of the security 
were reported pursuant to an ``effective transaction reporting plan'' 
and information regarding such trades was made available in accordance 
with such plan on a real-time basis to vendors of market transaction 
information.\9\ Rule 10a-1(a)(1) provided that, subject to certain 
exceptions, a listed security could be sold short either at a price 
above the price at which the immediately preceding sale was effected 
(plus tick), or at the last sale price if such price was higher than 
the last different price (zero-plus tick).\10\ This requirement was 
commonly described as the ``tick test.''
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    \8\ See Securities Exchange Act Release No. 1548 (Jan. 24, 
1938), 3 FR 213 (Jan. 26, 1938).
    \9\ Rule 10a-1 used the term ``effective transaction reporting 
plan'' as defined in Rule 600 of Regulation NMS (17 CFR 242.600) 
under the Exchange Act. See 17 CFR 240.10a-1(a)(1)(i).
    \10\ The last sale price was the price reported pursuant to an 
effective transaction reporting plan, i.e., the consolidated tape, 
or to the last sale price reported in a particular marketplace. 
Under Rule 10a-1, the Commission gave market centers the choice of 
measuring the tick of the last trade based on executions solely on 
their own exchange rather than those reported to the consolidated 
tape. See 17 CFR 240.10a-1(a)(2).
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    The Commission periodically added exceptions to Rule 10a-1 and 
granted numerous written requests for relief from the provisions of 
Rule 10a-1.\11\ Requests for exemptive relief increased considerably 
over time in response to significant developments in the securities 
markets, such as the increased use of matching systems that execute 
trades at independently derived prices during random times within 
specific time intervals and the spread of fully automated markets. 
Decimal pricing increments substantially reduced the difficulty of 
short selling on an uptick. In addition, under the then-effective short 
sale regulatory regime, different price tests applied to different 
securities trading in different markets and applied generally only to 
large or more actively-traded securities.
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    \11\ See Securities Exchange Act Release No. 54891 (December 7, 
2006), 71 FR 75071-75072 (December 13, 2006) (``Proposing Release'') 
(discussing exceptions to Rule 10a-1 added by the Commission and 
relief granted by the Commission from the rule's restrictions in 
recent years).
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    In 2004, the Commission adopted Regulation SHO to update short sale 
regulation in light of numerous market developments since short sale 
regulation was first adopted in 1938.\12\ Rule 202T of Regulation SHO 
\13\ established procedures for the Commission to temporarily suspend 
price tests so that the Commission could study their utility and 
effectiveness in connection with short sales. Under the authority of 
Rule 202T, in July 2004, the Commission issued an order to establish a 
pilot program (``Pilot'') for one year to temporarily suspend the 
provisions of Rule 10a-1(a) and any price test of any exchange or 
national securities association for short sales of certain 
securities.\14\ The Pilot was designed to assist the Commission in 
assessing whether changes to current short sale regulation were 
necessary in light of current market practices. The Commission was 
interested in the extent to which price tests were necessary to further 
the objectives of short sale regulation.\15\
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    \12\ See Securities Exchange Act Release No. 50103 (July 28, 
2004), 69 FR 48008, 48012-48013 (Aug. 6, 2004) (``Regulation SHO 
Adopting Release'').
    \13\ 17 CFR 242.202T.
    \14\ See Securities Exchange Act Release No. 50104 (July 28, 
2004), 69 FR 48032 (Aug. 6, 2004).
    \15\ See id. See also Adopting Release, 69 FR 48009.
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    The Pilot commenced on May 2, 2005 and terminated on April 28, 
2006.\16\ The Commission collected and analyzed the data from the Pilot 
to determine whether the short sale rules should be amended. Generally, 
the Pilot results supported removal of price test restrictions.\17\
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    \16\ See Securities Exchange Act Release No. 50747 (Nov. 29, 
2004), 69 FR 70480 (Dec. 6, 2004). See also NYSE Information Memos 
04-64 (Dec. 22, 2004) and 05-30 (April 27, 2005), which explain the 
establishment of the second Pilot Order.
    \17\ See Proposing Release.
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    Accordingly, in December 2006, the Commission, based on a careful 
study of the Pilot results and the status of price test restrictions, 
proposed amendments to remove the price test of Rule 10a-1 and add Rule 
201 of Regulation SHO to provide that no price test, including any 
price test of any SRO, shall apply to short sales in any security.\18\ 
The Commission also proposed to amend Rule 200(g) of Regulation SHO to 
remove the requirement that a broker-dealer mark a sell order of an 
equity security as ``short exempt'' if the seller was relying on an 
exception from a price test. The purpose of the amendments was to 
modernize and simplify short sale regulation and to provide greater 
regulatory consistency by removing restrictions where they no longer 
appeared necessary or effective.\19\ The proposed amendments were 
adopted on June 28, 2007 and became effective upon publication in the 
Federal Register \20\ on July 3, 2007. They had a July 6, 2007 
compliance date.
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    \18\ See Proposing Release.
    \19\ See Adopting Release.
    \20\ See Adopting Release.
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    The Adopting Release removed Rule 10a-1 and added Rule 201 of 
Regulation SHO to provide that no price test, including any price test 
by any SRO, shall apply to short selling in any security. Additionally, 
Rule 200 of Regulation SHO previously required broker-dealers to mark 
sales in all equity securities ``long,'' ``short,'' or ``short 
exempt.'' Under the Rule, an order could be marked ``short exempt'' if 
the seller was entitled to rely on any exception from the tick test, 
under Rule 10a-1 or any SRO price test. The amendments modified Rule 
200(g) of Regulation SHO to remove the requirement that a broker-dealer 
mark a sell order of an equity security as ``short exempt'' if the 
seller is relying on an

[[Page 7351]]

exception from the price test of Rule 10a-1, or any price test of any 
exchange or national securities association, to reflect the rescission 
of the price test requirements.\21\
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    \21\ See Adopting Release.
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    The Exchange notes the Adopting Release statement that ``although 
the current price test restrictions are being removed, today's markets 
are characterized by high levels of transparency and regulatory 
surveillance. These characteristics greatly reduce the risk of 
undetected manipulation and permit regulators to monitor for the types 
of activities that current price test restrictions are designed to 
prevent.'' The Commission also noted that ``the general anti-fraud and 
anti-manipulation provisions of the federal securities laws continue to 
prohibit activity designed to improperly influence the price of a 
security.''\22\
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    \22\ Adopting Release, 69 FR 48013. See also, e.g., Section 
17(a) of Securities Act of 1933, Sections 9(a), 10(b), and 15(c) of 
Exchange Act, and Rule 10b-5 thereunder.
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Proposed NYSE Amendments
    The NYSE is proposing amendments to certain of its rules to conform 
to the Commission's amendments to Rule 10a-1 and Regulation SHO. 
Specifically, the Exchange is proposing amendments to remove short sale 
price test provisions, references to Rule 10a-1 and references to the 
``short exempt'' marking requirement to update its rules in light of 
the amendments.
NYSE Rule 440B (Short Sales)
    NYSE Rule 440B incorporates by reference Exchange Act Rule 10a-1 
and Rules 200 and 203 of Regulation SHO. Rule 440B also includes an 
Explanatory Note, which generally describes changes to short sale 
regulation and implementation dates. Specifically, the Explanatory Note 
incorporates and explains the tick test under Rule 10a-1. In addition, 
the Explanatory Note incorporates the Pilot order, issued under 
Regulation SHO by the SEC, which suspended the NYSE tick test and any 
SRO price test for designated securities.
    The proposed amendments to Rule 440B would delete the Explanatory 
Note as such information is no longer accurate as a result of the 
above-mentioned expiration of Rule 202T and the Commission's amendments 
rescinding Rule 10a-1 and prohibiting any SRO price tests on short 
sales.
    Current Rule 440B(a) provides restrictions on certain short sales 
pursuant to Rule 10a-1. Current Rule 440B(c) suspends subsection (a) 
for such time and as to such securities as are designated under the 
Pilot. Additionally, Rule 440B(b) currently restricts a short sale by a 
specialist in which such specialist is registered for his own account 
or any other person in reliance upon the exemption provided under Rule 
10a-1(e)(5). The Exchange is proposing to delete sections (a)-(c) of 
Rule 440B to reflect the rescission of Rule 10a-1.
    Current Rule 440B.10 generally explains Rule 10a-1 and sets forth 
the application of Rule 440B in connection with Rule 10a-1 and 
Regulation SHO. The Exchange is proposing to delete all references to 
Rule 10a-1 and its requirements in this provision. The Exchange is also 
proposing to amend Rule 440B.11 to delete any reference to Rule 10a-1 
and to delete Rule 440B.12 which sets forth the place of transaction 
requirements in connection with Rule 10a-1. The Exchange also proposes 
to delete Rule 440B.15 as it describes prices at which short sales are 
to be made in accordance with Rule 10a-1.
    Further, the Exchange proposes to amend Rule 440B.13 to delete 
references to the ``short exempt'' marking requirement, and to delete 
Rule 440B.20, which sets forth such marking requirement, in its 
entirety, as the ``short exempt'' marking requirement has been removed 
by the Commission. The Supplementary Material of Rule 440B will be 
renumbered to reflect the proposed amendments.
Rule 440C (Short Sale Borrowing and Delivery Requirements)
    NYSE Rule 440C governs borrowing and deliveries against short sales 
by incorporating by reference the requirements of Rule 203 of 
Regulation SHO and Exchange Act Rule 10a-1. The Exchange is proposing 
to delete reference in Rule 440C to Rule 10a-1.
Rule 421 (Periodic Reports)
    NYSE Rule 421 requires that member organizations submit to the 
Exchange periodic reports with respect to short positions in 
securities, covering such time period as may be designated by the 
Exchange. Also, Rule 421.10 provides that short positions to be 
reported exclude positions resulting from certain provisions of Rule 
10a-1(e).
    The proposed amendment to Rule 421.10 would delete reference to 
Rule 10a-1(e)(1), (6), (7), (8) and (10) based on the rescission of 
Rule 10a-1, and add the language from these specific provisions to the 
rule text. Although the tick test is being eliminated, the substance of 
these provisions will be maintained as it is appropriate to retain an 
exception to the short sale interest reporting requirements. Thus, Rule 
421 will continue to provide the same exception as previously provided 
by Rule 10a-1(e)(1), (6), (7), (8), and (10) to the short sale 
reporting requirements.
Other Rules
    The proposed amendment to NYSE Rules 104, 111, 123A, 123C and 1000 
would delete all references to Rule 10a-1 and short sale tick tests. 
The amendments would delete NYSE Rule 1003 in its entirety as it 
relates solely to tick tests. Further, the proposed amendments would 
delete references to the ``short exempt'' marking requirement in 
current NYSE Rules 440F, 440G and 902.
2. Statutory Basis
    The statutory basis for the proposed rule change is section 6(b)(5) 
\23\ of the Act which requires, among other things, that the rules of 
an Exchange are designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and national market 
system, and in general, to protect investors and the public interest. 
The proposed amendment will serve these interests by conforming the 
subject NYSE rules of this filing with the Commission's recent 
amendments to provisions governing short sales.
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    \23\ 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 will 
impose any burden on competition 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 rule change does not: (A) Significantly 
affect the protection of investors or the public interest; (B) impose 
any significant burden on competition; and (C) become operative for 30 
days after the date of

[[Page 7352]]

this filing, or such shorter time as the Commission may designate, it 
has become effective pursuant to section 19(b)(3)(A) \24\ of the Act 
and Rule 19b-4(f)(6) \25\ thereunder.
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    \24\ 15 U.S.C. 78s(b)(3)(A).
    \25\ 17 CFR 240.19b-4(f)(6).
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    The Exchange has requested that the Commission waive the 5-day pre-
filing notice requirement \26\ and the 30-day operative delay \27\ of 
the proposed rule change. The Commission believes that such waiver is 
consistent with the protection of investors and the public interest 
\28\ given that the compliance date for the Commission's amendments to 
Rule 10a-1 was July 6, 2007.\29\ For this reason, the Commission 
designates the proposal to be effective and operative upon filing with 
the Commission.
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    \26\ See 17 CFR 240.19b-4(f)(6)(iii), which requires that a 
self-regulatory organization submit to the Commission written notice 
of its intent to file a 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.
    \27\ See 17 CFR 240.19b-4(f)(6)(iii).
    \28\ For 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).
    \29\ See Adopting Release.
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    At any time within 60 days of the filing of such 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.

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-2007-62 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.

All submissions should refer to File number SR-NYSE-2007-62. 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. to 3 p.m. 
Copies of such filing will also 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-2007-62 and should be submitted by 
February 28, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-2183 Filed 2-6-08; 8:45 am]

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