Document ID: SEC-2007-1080-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange LLC
Posted Date: 2007-08-08T04:00Z

[Federal Register: August 8, 2007 (Volume 72, Number 152)]
[Notices]               
[Page 44601-44603]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08au07-118]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56183; File No. SR-NYSE-2007-42]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change as Modified by Amendment No. 1 
Thereto Relating to Rule 103B (``Specialist Stock Allocation'')

    August 2, 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 April 20, 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, II, 
and III below, which Items have been substantially prepared by NYSE. 
NYSE filed Amendment No. 1 to the proposed rule change on July 20,

[[Page 44602]]

2007. The Commission is publishing this notice to solicit comments on 
the proposed rule change, as amended, 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 is filing with the Commission an amendment to Rule 
103B (``Specialist Stock Allocation'') to permit specialist member 
organizations to trade Exchange-Traded Funds (``ETFs'') in a specialist 
capacity while at the same time registered as a specialist in 
securities which are a component thereof, subject to Exchange approval 
of policies and procedures demonstrably isolating information regarding 
the respective issues. The text of the proposed rule change is 
available on the Exchange's Web site (http://www.nyse.com), at the 

principal office of the Exchange, and at 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 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
    When approved by the Commission on May 7, 2001,\3\ section VIII of 
Rule 103B prohibited member organizations from applying for allocation 
of an ETF where such member organization was already registered as a 
specialist in any component security of such ETF, and conversely that 
where a member organization is already registered as a specialist in an 
ETF and a security in which it is also registered as a specialist 
becomes a component security of such ETF, the member organization must 
withdraw one or the other of such registrations or establish a separate 
member organization for the ETF. The Exchange explained the reason for 
this separation:
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    \3\ See Securities Exchange Act Release No. 44272 (May 7, 2001), 
66 FR 26898 (May 15, 2001) (SR-NYSE-2001-07).

    This restriction is necessary to avoid the possibility of ``wash 
sales'' in a situation where the specialist in the ETF needs to 
hedge by buying or selling component stock of the ETF, and could 
inadvertently be trading with a proprietary bid or offer made by a 
specialist in the same member organization who is making a market in 
the component security.\4\
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    \4\ Id. at 26900.

    The rule amendment proposed a solution to the problem by providing 
that member organizations could conduct the ETF activities in a 
separate member organization. The Exchange states that, while concerns 
regarding wash sales in the context of ETF and component security 
trading remain real, the costs and expenses of maintaining two separate 
member organizations, both to the member organization \5\ and to the 
Exchange,\6\ are seen to strongly recommend a second resolution of this 
problem.
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    \5\ Because of the requirement for two separate organizations, 
firms are required to have two broker-dealer registrations, file 
separate monthly financial reports, support two accounting and 
compliance departments, and maintain separate management and 
reporting structures.
    \6\ In 2005, the Exchange estimated that approximately 2,100 
examiner hours were devoted to the examination of ETF specialists. 
Such numbers would be sharply reduced if member organizations were 
allowed, as proposed, to include such functions within the same 
organization, as the combination of activities in one entity instead 
of two would, by its nature, reduce the member organizations 
examined and eliminate review of duplicative functions.
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    Accordingly, the Exchange is proposing to permit member 
organizations, subject to Exchange approval, to establish policies and 
procedures to isolate \7\ the activities of such member organization in 
the trading of ETFs and any component securities in which it may be 
registered, thus eliminating the required redundancies and attendant 
expense inherent in the current rule requirement for separate firms. 
Such policies and procedures must, at a minimum, include information 
barriers that prevent the flow of non-public information between a 
member organization's ETF specialist on the one hand and the member 
organization's specialist in an associated component security on the 
other hand.
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    \7\ See, for example, comparable provisions of NYSE Information 
Memo 91-22 (June 21, 1991), the NASD/NYSE Joint Memo on Chinese Wall 
Policies and Procedures for procedural structures to assure the 
effective containment of trading information.
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    The Exchange states that its Division of Member Firm Regulation has 
a Chinese Wall examination program to evaluate the integrity of 
information barriers to ensure confidentiality of trading information 
among the various trading departments at its member firms and their 
approved persons and will adapt it to the review of specialist firms 
also trading ETFs along with component securities. These information 
barriers are, and will continue to be, tested and reviewed on site for 
breaches and weaknesses by Exchange examination staff on an annual 
basis and for cause, when warranted. To determine whether the firm has 
developed and implemented adequate information barriers between its 
Specialist Equity and ETF Trading Operations, examiners will review, 
on-site, the combined specialist firm's written policies and procedures 
and physical layout for adequacy. In addition, appropriate individuals 
both within the affected departments as well as other areas of the 
specialist firm will be interviewed to determine whether firm policies 
have been appropriately disseminated and implemented. Also, the 
examiners will test member organization controls and will determine, 
based upon their review, whether the firm's relevant information 
barriers and related policies and procedures are adequate to preclude 
the improper sharing of trading information (both equity and ETF) and 
whether there have been any apparent breaches of those barriers. In 
addition, the Exchange will periodically assess its surveillance and 
examination procedures to determine whether they are adequate to assure 
that member organizations and market participants do not engage in 
manipulative or improper trading. The Exchange believes that these 
measures will assure the adequate and appropriate surveillance of the 
single member organization permitted by the proposed amendments.
    The isolation of trading activities acts to address the issue of 
``wash sales'' in the context of ETF and component securities. The rule 
does not, however, prohibit usual and customary sharing of information 
regarding trades after the fact, and so allows appropriate risk and 
hedging activity, treasury management and other such similar 
activities.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of section 6(b)(5) of the Act \8\ because it is 
designed to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest.
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    \8\ 15 U.S.C. 78f(b)(5).

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[[Page 44603]]

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

    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 the self-regulatory organization 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-NYSE-2007-42 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSE-2007-42. 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-2007-42 and should be 
submitted on or before August 29, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
Florence E. Harmon,
Deputy Secretary.
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    \9\ 17 CFR 200.30-3(a)(12).
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 [FR Doc. E7-15432 Filed 8-7-07; 8:45 am]

BILLING CODE 8010-01-P