Document ID: SEC-2006-0478-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange, Inc.
Posted Date: 2006-04-12T04:00Z

[Federal Register: April 12, 2006 (Volume 71, Number 70)]
[Notices]               
[Page 18791-18797]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12ap06-128]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53602; File No. SR-NYSE-2005-40]

 
Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Notice of Filing of a Proposed Rule Change and Amendment Nos. 1 and 2 
Thereto Relating to Amendments to the Exchange's Allocation Policy and 
Procedures (NYSE Rules 103A, 103B, 123E and 476A)

April 5, 2006.
    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 June 6, 2005, New York Stock Exchange, Inc. (``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 prepared by NYSE. NYSE filed 
Amendment No. 1 to the proposed rule change on October 28, 2005.\3\ 
NYSE filed Amendment No. 2 to the proposed rule change on February 9, 
2006.\4\ 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.
    \3\ In Amendment No. 1, the Exchange clarified certain aspects 
of the purpose section and rule text of the proposed rule change. 
Amendment No. 1 clarified that certain of the proposed amendments to 
NYSE Rules 103A, 103B and 123E are organizational changes that are 
intended to provide clarity with respect to the operation of the 
allocation policy and procedures. Amendment No. 1 also further 
explained the Exchange's decision to move from a subjective standard 
in the allocation process to an objective standard. Amendment No. 1 
supersedes the original filing in its entirety.
    \4\ In Amendment No. 2, the Exchange further clarified certain 
aspects of the purpose section and rule text of the proposed rule 
change. Amendment No. 2 clarified that the proposed amendments to 
NYSE Rule 103B includes a requirement that specialist firms describe 
in their blanket allocation applications any contacts they, or any 
individual acting on their behalf, have had with any employee of the 
listing company, or any individual acting on behalf of that company, 
with regard to its prospective listing on the Exchange. In addition, 
Amendment No. 2 further explained the data that will be provided to 
the Allocation Committee (``Committee''). Amendment No. 2 supersedes 
Amendment No. 1 in its entirety.
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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 NYSE Rules 103A, 103B, 123E and 
476A with respect to the manner in which securities are allocated to 
specialist organizations.
    The text of the proposed rule change is available on the Exchange's 
Web site (http://www.nyse.com), at the Exchange's Office of the 

Secretary, and at the Commission's Public Reference Room. The text of 
the proposed rule change is also available on the Commission's Web site 
(http://www.sec.gov/rules/sro.shtml).

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, as 
amended, and discussed any comments it received on the proposed rule 
change, as amended. 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 Exchange proposes to amend NYSE Rules 103A, 103B, 123E and 476A 
with respect to the manner in which securities are allocated to 
specialist organizations on the Exchange.
    The Exchange proposes to amend its allocation policy and procedures 
by placing greater emphasis on performance measures that objectively 
assess specialist market-making in order to provide more meaningful 
information for the Committee's consideration. The Exchange represents 
that this would be accomplished by eliminating the Specialist 
Performance Evaluation Questionnaire (``SPEQ''), a subjective tool that 
has become less meaningful as a result of the sharp reduction in the 
number of specialist firms, and replacing it with a series of objective 
measures that compare specialist performance against defined standards 
based on actual trading data. Unlike the SPEQ, which provided tier 
rankings for firms only, the objective performance measures will permit 
comparisons by stock, panel, and post, as well as by firm, and thus, 
will more clearly distinguish between strong and weak performance. In 
addition, the objective performance measures will evaluate individual 
specialist performance as well as performance of the entire firm. The 
SPEQ is limited to an evaluation of firm-wide performance. The use of 
these measures will also enable specialist

[[Page 18792]]

firms to better manage and more easily improve performance.
    The objective performance measures will improve the allocation 
process by preventing specialist firms from proposing sub-par 
performers as the designated specialist for new listings and may serve 
to disqualify entire specialist firms from the allocation process for a 
period of time based on continued poor performance. In this way, the 
new measures will serve as a potent incentive to improved market-making 
and encourage superior specialist performance.
    The Exchange is also proposing additional changes to the allocation 
policy (NYSE Rule 103B) and related changes to the rules governing 
performance improvement actions (NYSE Rule 103A), the issuance of 
summary fines (NYSE Rule 476A), and specialist combination review 
policy (NYSE Rule 123E).\5\
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    \5\ See Securities Exchange Act Release No. 53382 (February 27, 
2006), 71 FR 11251 (March 6, 2006) (order approving SR-NYSE-2005-77) 
(``Merger Release''). The Merger Release contains conforming 
language changes to reflect the new entities that will exist as a 
result of the Exchange's merger with Archipelago Holdings, Inc. In 
addition, the Merger Release amended NYSE Rule 103B, with respect to 
the allocation of the proposed new NYSE Group stock to: (i) Give 
NYSE Group the right to determine the number and identity of 
specialist firms that will be included in the group from which it 
shall choose its specialist, provided the group consists of at least 
four specialist firms; and (ii) provide NYSE Group with the same 
material with respect to each specialist firm applicant as would 
have been reviewed by the Committee in allocating other securities. 
Telephone conversation between Deanna Logan, Principal Rule Counsel, 
NYSE and David Michehl, Attorney, Division of Market Regulation 
(``Division''), Commission on February 28, 2006.
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Allocation Policy and Procedures

    NYSE Rule 103B contains the Exchange's requirements with respect to 
allocation of securities to specialist member organizations 
(``Allocation Policy''). The Exchange represents that the intent of the 
Allocation Policy is: (1) To ensure that securities are allocated in an 
equitable and fair manner and that all specialist units have a fair 
opportunity for allocations based on established criteria and 
procedures; (2) to provide an incentive for ongoing enhancement of 
performance by specialist units; (3) to provide the best possible match 
between the specialist unit and security; and (4) to contribute to the 
strength of the specialist system.
    The Exchange represents that decisions as to the allocation of 
securities on the Exchange are made by the Committee. This Committee is 
comprised of market professionals who use their judgment to make 
allocation decisions based on the allocation criteria specified in the 
Allocation Policy. The current allocation criteria includes the SPEQ, 
objective performance measures, listing company input, allocations 
received, capital, disciplinary history, and the Committee's 
professional judgment.

Elimination of SPEQ

    The Exchange states that the SPEQ is a quarterly survey on 
specialist performance completed by Floor Broker members of the 
Exchange. The SPEQ requires Floor Brokers to rate and provide written 
comments on the performance of specialist firms with whom they deal 
regularly on the Floor. Floor Broker evaluations of specialist firm 
performance focuses on five functional areas--dealer, service, 
competitiveness, communications and administrative. Floor Brokers rate 
specialist firms on a 0% to 100% scale, in ten-point increments, that 
reflect the percentage of the time that the broker feels the specialist 
firm engaged in the described behavior. An evaluation of 100% is 
defined as ``always'' and an evaluation of 0% is defined as ``never''.
    The Exchange represents that the SPEQ process uses a relative 
scoring methodology that combines Floor Broker scores for any one 
specialist firm to determine each firm's overall performance and 
performance in each of the five functional areas. The scores are then 
arrayed from highest to lowest, and the specialist firms receive a 
ranking for the overall score and within each function. Also, a range 
of ranks is determined that identifies where a firm stood in relation 
to other units whose scores were not statistically different. From 
these rankings, the specialist firms are aligned into tiers, up to a 
maximum of four, with each tier containing those specialist firms with 
similar rankings. The Committee receives information on SPEQ results 
only as to the tier classifications.
    Although SPEQ has been an important mechanism for evaluation of 
specialist performance for both allocation and performance improvement 
action purposes, the Exchange represents that certain weaknesses in its 
use as an assessment tool have become apparent. For example, SPEQ 
evaluations are subjective, with ratings based on personal experiences 
rather than comparisons with accepted objective standards. Further, 
except for the written comments, which are not incorporated into the 
formula for SPEQ rankings, SPEQ does not focus on market-making by 
individual specialists. Importantly, as the number of specialist firms 
has decreased, SPEQ tier classifications have become tightly clustered 
with statistically insignificant differences among the firms.\6\ Also, 
SPEQ participants recognize the limitations of SPEQ and have requested 
a more meaningful process for evaluating specialist performance. For 
these reasons, the Exchange proposes eliminating SPEQ and replacing it 
with the objective measures described below. The Exchange represents 
that by addressing the deficiencies of SPEQ in today's environment, 
these measures will enable a more meaningful comparison of specialist 
performance at all levels, based on truly objective criteria.
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    \6\ The Exchange states that there are currently seven firms 
registered as specialists in equity securities on the NYSE. As 
recently as 2000, there were 25 specialist firms.
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Expansion of the Use of Objective Measures

    The Exchange also proposes to add objective measures designed to 
evaluate market quality using pre-determined standards of performance 
based on actual trading data. The measures will rate the performance of 
stocks, individual specialists and specialist firms overall. Data will 
be provided to specialists on a daily basis, and monthly and quarterly 
to the Committee. In addition, the performance information derived from 
the objective measures will be made available to listing companies to 
aid in their decision as to the choice of a specialist firm.
    The Exchange proposes to add two new objective measures of 
specialist performance and to change an existing measure. The Exchange 
represents that one new measure is price continuity. Price continuity 
measures the absolute value of the price change, if any, from one trade 
to the next, in the same stock. Currently, price continuity is part of 
the existing near neighbor analysis,\7\ which is among the information 
provided to specialists and the Committee. However, current continuity 
percentages are too tightly clustered because of tighter markets, 
making it difficult to derive useful data for comparison purposes. In 
addition, there are no trading standards specifically related to price 
continuity against which to measure performance. The Exchange proposes 
making price continuity an independent measure and has

[[Page 18793]]

developed appropriate benchmarks and standards to enable an objective 
comparison of each individual specialist's market-making as it relates 
to price continuity. The Exchange has also developed a system to 
identify acceptable and unacceptable performance for this measure.
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    \7\ An explanation of the near neighbor performance measure was 
given in SR-NYSE-1995-05. See Securities Exchange Act Release No. 
35927 (June 30, 1995), 60 FR 35764 (July 11, 1995); See also 
Securities Exchange Act Release No. 38158 (January 10, 1997), 62 FR 
2704 (January 17, 1997) (making permanent the near neighbor pilot). 
Telephone conversation between Deanna Logan, Principal Rule Counsel, 
NYSE and David Michehl, Attorney, Division, Commission on February 
28, 2006.
---------------------------------------------------------------------------

    The second new objective measure is depth. Depth refers to the 
price movement of a stock during a sequence of transactions totaling a 
particular volume. Currently, depth is measured over 3,000-share volume 
sequences and is also part of the near neighbor analysis. The Exchange 
is proposing to make depth an independent measure \8\ and to add three 
new volume sequences--5,000, 10,000 and 25,000 shares--and has 
developed appropriate benchmarks and standards for this measure as 
well.
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    \8\ Telephone conversation between Deanna Logan, Principal Rule 
Counsel, NYSE and David Michehl, Attorney, Division, Commission on 
March 2, 2006.
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    According to the Exchange, the benchmarks and standards developed 
for continuity and depth have been reviewed with two university 
professors from the Massachusetts Institute of Technology, with whom 
the Exchange consults on matters relating to allocation measures. For 
each measure, eligible securities \9\ are grouped by price and non-
block volume into categories. Eligibility requirements for securities 
include minimum average price, volume, and number of trades.\10\ Each 
category has two performance benchmarks based on actual trading data. 
Each benchmark has upper and lower performance ranges. Each trading 
day, the performance of eligible securities will be compared with the 
upper and lower ranges for the two benchmarks used for each measure and 
assigned a classification of upper, middle or lower. Upper 
classifications are worth two points, middle classifications are worth 
one point and lower classifications are worth negative one point. The 
points earned for each of the two performance benchmarks within each 
measure will be combined to determine an overall score for the relevant 
measure. The overall scores for each measure are combined to determine 
the security's daily score. Scores range from four points (for upper 
classifications in both continuity and depth) to negative two points 
(for lower classifications in both continuity and depth). Daily scores 
will be provided to specialist firms at the end of each day, monthly 
scores at the end of each month and quarterly scores at the end of each 
quarter.\11\
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    \9\ Eligible securities are all Exchange-listed domestic common 
stocks.
    \10\ An eligible security will be evaluated on any day when any 
of the following conditions exists: (a) The security's average 
trading price is between $1 and $200; (b) the security's Exchange 
non-block volume (trades under 25,000 shares) is at least 100 
shares; or (c) the security had at least five depth sequences on the 
Exchange (for depth only) or at least five Exchange transactions 
(for continuity only); (d) an individual security's overall 
quarterly depth and continuity score will be calculated only if it 
had daily scores on more than 31 days in the quarter.
    \11\ Telephone conversation between Deanna Logan, Principal Rule 
Counsel, NYSE and David Michehl, Attorney, Division, Commission on 
March 2, 2006.
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    The Committee will be provided with the monthly scores for each 
specialist firm. In addition, the Exchange will provide the Committee 
with average daily non-block volume and price activity and average 
continuity and depth scores for each of the maximum of twenty most 
active stocks \12\ handled by the individual who is identified by his/
her firm to be the designated specialist for the stock of the listing 
company. The information will include trading data for the current 
month through the week preceding the distribution of the security data 
sheet to the specialists plus the three preceding calendar months.
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    \12\ The Exchange represents that the average daily non-block 
volume is generally determined using data on the total number of 
shares traded during the most recent prior three months divided by 
the number of trading days in that period. The number of stocks is 
determined by creating a list of stocks traded most frequently by a 
specialist, ranked by average daily non-block volume. If the list 
contains less than twenty stocks, information on all stocks 
contained in the list is provided to the Committee. If the list 
contains more than twenty stocks, information on only the twenty 
most active stocks contained in the list is provided to the 
Committee. Telephone conversation between Deanna Logan, Principal 
Rule Counsel, NYSE and David Michehl, Attorney, Division, Commission 
on April 4, 2006.
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    The existing measure to be changed is SuperDOT[reg] turnaround for 
orders received by the specialist. Currently, this measure is based on 
the percentage of total post-opening market orders that are either 
executed or ``stopped'' within 60 seconds of the time they are received 
by the specialist. The Exchange proposes tightening this benchmark to 
30 seconds to better reflect actual trading conditions and to focus 
performance on the individual post and panels rather than the firm 
overall performance.\13\
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    \13\ The Exchange intends to review the continued applicability 
of this measure after the implementation of the NYSE HYBRID 
MARKETsm. See Securities Exchange Act Release No. 53539 
(March 22, 2006), 71 FR 16353 (March 31, 2006) (order approving the 
NYSE HYBRID MARKETsm).
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    The Exchange believes that the use of these objective measures will 
provide for a more meaningful comparison of specialist performance and 
will promote better market-making as a result of the availability of 
more objective and detailed information and competition among the firms 
for allocations. Unlike the subjective criteria, which provided tier 
rankings for firms only, the objective performance measures will permit 
comparisons by stock, panel, and post, as well as by firm, and thus, 
will more clearly distinguish between strong and weak performance. The 
use of these measures will also enable specialist firms to better 
manage and more easily improve performance.
    Although the Exchange believes that the objective measures provide 
the more meaningful comparison, it is also acknowledged that subjective 
input from the Floor brokers and off-Floor customers with direct 
knowledge of the performance of specialist firms and individual 
specialists, may serve a useful purpose in the evaluation process. To 
this end, the proposed rule change includes a provision for providing 
subjective information to the Committee. The Exchange continues to 
develop the specific format of how the subjective information will be 
provided to the Committee, in consultation with constituent committees 
\14\ that have previously provided feedback on the allocation process.
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    \14\ The Exchange represents that the constituent committees 
consist of the Institutional Traders Advisory Committee, the 
Upstairs Traders Advisory Committee, the Exchange Traders Advisory 
Committee, the Market Performance Committee and the proposed Hybrid 
Performance Committee. Telephone conversation between Deanna Logan, 
Principal Rule Counsel, NYSE and David Michehl, Attorney, Division, 
Commission on March 2, 2006.
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    In addition, the Exchange proposes a number of other changes to 
NYSE Rule 103B. In summary, these changes are as follows:
    A. As noted above, the Committee will receive performance 
information regarding both the specialist firm and the individual 
designated by the firm to handle the security should the firm receive 
the allocation. Currently, the Committee only receives performance 
information with respect to the firm.
    B. In order to provide an incentive to specialist firms to ensure 
quality performance, provisions will be added that poor performance may 
result in the inability of an individual specialist or a specialist 
firm from applying for or receiving allocations, as follows:

[[Page 18794]]

                             Specialist Firm
------------------------------------------------------------------------
                                       Duration of         Period of
             Criteria                   criteria         ineligibility
------------------------------------------------------------------------
Overall depth or continuity score  Two consecutive     One month.
 below 1.90 and more than one       months.
 standard deviation below average
 score for all specialist firms.
Same as above....................  Three consecutive   Two months.
                                    months.
Same as above....................  Three out of six    Two months.
                                    months.
Overall 30-second DOT turnaround   One month.........  One month.
 percentage below 90%.
Two panels at same post with 30-   One month.........  One month.
 second DOT turnaround
 percentages below 75%.
------------------------------------------------------------------------

                          Individual Specialist
------------------------------------------------------------------------
                                       Duration of         Period of
             Criteria                   criteria         ineligibility
------------------------------------------------------------------------
Any of the assigned securities     Three consecutive   Two months.
 that the individual specialist     months.
 handled most frequently during a
 month receive overall a depth or
 continuity score below 0.50\15\.
Same as above....................  Three out of five   Two months.
                                    months.
Panel with 30-second DOT           One month.........  One month.
 turnaround percentage below 75%.
------------------------------------------------------------------------
\15\ Telephone conversation between Deanna Logan, Principal Rule
  Counsel, NYSE and David Michehl, Attorney, Division, Commission on
  April 4, 2006.

    C. The composition of the nine-member Committee will be changed, as 
illustrated in the chart below, in order to equalize representation on 
the Allocation Panel and the Committee and to give non-Floor 
constituents a greater role in the allocation process.

------------------------------------------------------------------------
    Committee member type         Current rule            Proposed
------------------------------------------------------------------------
Floor Broker................  3 Governors (1 may    4 At least 1 Floor
                               be Independent).      Governor, Executive
                                                     Floor Official or
                                                     Senior Floor
                                                     Official.
                              3 Others (1 must be
                               Independent).
Allied Member...............  2...................  4 At least 1 Allied
                                                     Member and at least
                                                     1 Institutional
                                                     Representative.
Institutional...............  1...................
Chairperson.................  Floor Broker........  1 Floor Broker or
                                                     Allied Member/
                                                     Institutional
                                                     Representative.
                              ....................  In alternating
                                                     terms, an
                                                     additional Floor
                                                     Broker or Allied
                                                     Member/
                                                     Institutional
                                                     Representative will
                                                     be chosen for the
                                                     Committee.
                                                    The Committee
                                                     members will select
                                                     a chairperson from
                                                     the dominant group
                                                     on the Committee
                                                     that term.
                                                    No reappointments as
                                                     chairperson until
                                                     all members of
                                                     Allocation Panel in
                                                     same category have
                                                     served a term as
                                                     chairperson.
------------------------------------------------------------------------

    D. Each standing Committee will be selected one month before its 
term commences and will elect its chairperson at that time. Currently, 
the rule provides that the chairperson is elected two months before 
his/her term starts.
    E. The requirement that the Committee chairperson be approved by 
the Quality of Markets Committee (``QOM'') of the Exchange Board of 
Directors will be eliminated. As a result of corporate governance 
changes in December 2003, the Exchange's Board of Directors no longer 
has an active QOM.
    F. In order to encourage more participation from various 
constituent representatives on the Committee, the term of service for 
Committee members will be modified as follows:

------------------------------------------------------------------------
        Current terms of service            Proposed terms of service
------------------------------------------------------------------------
4-month term...........................  2-month term.
Terms staggered so that every 2 months,  No staggered terms.
 4-5 members rotate off.
Reappointment possible, provided a       No reappointment until all
 minimum of 2 months have passed since    members of Allocation Panel in
 expiration of term.                      same category have served a
                                          term.
------------------------------------------------------------------------

    G. Provide standing Committee with quarterly information 
identifying the individuals designated in each allocation application 
and the number of allocations they received, to provide informational 
continuity among Committees.
    H. As a mechanism to facilitate greater efficiency in the 
allocation process, the Committee quorum requirement is modified as 
follows:

[[Page 18795]]

------------------------------------------------------------------------
    Committee member type         Current rule            Proposed
------------------------------------------------------------------------
Floor Broker................  6, at least 2         Any 7 members of the
                               Governors.            standing Committee.
Allied Member...............  1...................
Institutional...............  None required.......
------------------------------------------------------------------------

    I. Increase the number of Allocation Panel members from 69+ to 75+ 
to encompass the need for added allied member and institutional 
representation on the Committee.
    J. Modify the composition of the Allocation Panel:

------------------------------------------------------------------------
      Panel member type           Current rule            Proposed
------------------------------------------------------------------------
Floor Broker................  28..................  20
Floor Broker Governors......  10..................  10
Sr./Exec. Floor Officials...  5 (minimum).........  5 (minimum).
Allied Members..............  15 including those    20 including those
                               on MPC\16\.           on MPC.
Institutional...............  11 including those    20 including those
                               on MPC.               on MPC.
------------------------------------------------------------------------
\16\ MPC stands for Market Performance Committee.

    K. In order to make the process more efficient, the number of 
specialist firms selected for the interview pool under Option 2 of the 
Allocation Policy will be modified to four firms, including one firm 
designated as instrumental by the listing company. Currently, the rule 
provides that the pool may be composed of three, four or five firms.
    L. Redefine the ``quiet period'' for specialist contact with a 
listing company so that it commences solely with the date that 
allocation applications are solicited for that issuer.
    M. Extend the requirement that the specialist firm's designated 
specialist remain the primary specialist in an allocated security from 
six months to one year unless the listed company agrees to a change, in 
which case the specialist must provide written notice of the change and 
the listed company's agreement to the Committee and Market 
Surveillance.
    N. Extend the ``Allocation Sunset Policy'' for initial public 
offerings (``IPOs'') from three months to six months and for Exchange 
traded funds (``ETFs'') from three months to one year. Updated 
information on objective performance measures and disciplinary data 
will be provided to companies after three months (IPOs) and six months 
(ETFs).
    O. Provide the Committee with more disciplinary history:

------------------------------------------------------------------------
              Current rule                           Proposed
------------------------------------------------------------------------
Provided as to firms only..............  Provided for designated
                                          specialist and firm.
Informal discipline (Summary Fines and   All informal discipline for 12
 Admonition and Education letters) is     months from time of issuance.
 reported as follows: market
 maintenance--12 months from time of
 issuance; non-market maintenance--6
 months from time of issuance.
Significant pending Enforcement matters  Same.
 once action is authorized.
Hearing Panel decisions, for 12 months   Final Hearing Panel decisions,
 after they become final.                 for three years after they
                                          become final.
------------------------------------------------------------------------

    P. Eliminate the provision that NYSE Rule 103A performance 
improvement action criteria (timeliness of openings, SuperDOTreg; 
turnaround, etc.) be reported to the Committee. Currently, the rule 
requires this information to be reported as a ``pass'' or ``fail''. The 
revised system will provide the Committee with more detailed 
information.
    Q. In order to expedite the process, specialist firms will be 
required to designate an individual specialist for each listing, 
regardless of whether they apply for the allocation. Included in this 
requirement is the specialist firm's obligation to describe any 
contacts they, or any individual acting on their behalf, have had with 
any employee of the listing company, or any individual acting on behalf 
of that company, with regard to its prospective listing on the 
Exchange. This will enable staff to produce individual performance data 
in a timely manner for firms that may be selected for interview pools 
on a ``without prejudice'' basis.
    R. Provide the listing company with the same objective performance 
measure information the Committee considered, with respect to the 
members of its interview pool. In addition, as noted in ``N'' and ``T'' 
herein, provide the listing company with disciplinary history for the 
firms in the interview pool and their designated specialists.
    S. Preclude specialists, and anyone acting in their behalf, from 
offering to pay for or subsidize the cost of services or other 
incentives provided to a listing company in whole or in part by third 
parties in order to avoid even the semblance of impropriety.
    T. Provide that interview pools for the allocation of closed-end 
funds by the same issuer will remain operative for a nine-month period 
following the selection of a specialist. Any further closed-end fund 
listings from the same issuer in the nine-month period will be able to 
select any specialist from this group or ask for the matter to be 
referred to the Committee, in which case the group dissolves. The fund 
will be given updated objective performance and disciplinary 
information before making its decision. If a specialist firm/individual 
is ineligible for an allocation, that firm will be dropped from the 
group. If an individual specialist is no longer with a firm at the time 
of a new allocation of a closed-end fund, the firm will be dropped from 
the group.
    U. Delete references to QOM from NYSE Rule 103B.
    V. Substitute the term ``admonition letter'' for ``cautionary 
letter.''
    W. Eliminate the requirement that the Committee chair receive 
orientation from the QOM.
    X. In order to provide an incentive for ongoing enhancement of 
performance

[[Page 18796]]

by specialist firms, add the following to the list of factors 
considered by a special committee consisting of certain members of the 
Committee, which determines the allocation of ETFs under this policy: 
The extent to which a specialist organization has supported in the 
past, and will continue to support, the Exchange's efforts to 
strengthen and expand its ETF market.
    Y. Allow the issuer of a structured product to participate in the 
specialist interview via a senior official of its subsidiary 
participating in the issuance of the structured product.
    Additionally, the following amendments are proposed to NYSE Rule 
103A:
    A. Delete references to SPEQ.
    B. Provide new criteria for performance improvement actions, as 
follows:
    i. SuperDOT[supreg] market order turnaround:
    In any case where a firm:
    (a) Does not turn around 90% of its DOT orders in 30 seconds or 
less (previously 60 seconds) during any quarter (previously two 
quarters) in a rolling four-quarter period; or
    (b) Has two panels at the same post with 30-second turnaround 
percentages below 75% for any one quarter.
    ii. Market Depth:
    In any case where a firm has:
    (a) An overall quarterly Depth score below 1.90 and more than one 
standard deviation below the average quarterly Depth score for all 
specialist firms for two consecutive quarters, or
    (b) An overall quarterly Depth score below 1.90 and more than one 
standard deviation below the average quarterly Depth score for all 
specialist firms for two out of four consecutive quarters, or
    (c) More than ten percent of its eligible stocks with overall 
quarterly Depth scores below 0.50 and the percent is more than one 
standard deviation above the Floor average for two consecutive 
quarters.
    iii. Price Continuity
    In any case where a firm has:
    (a) An overall quarterly Continuity score that is below 1.90 and 
more than one standard deviation below the average quarterly Continuity 
score for all specialist firms for two consecutive quarters, or
    (b) An overall quarterly Continuity score that is below 1.90 and 
more than one standard deviation below the average quarterly Continuity 
score for all specialist firms for two out of four consecutive 
quarters, or
    (c) More than ten percent of its eligible stocks with overall 
quarterly Continuity scores below 0.50 and the percent is more than one 
standard deviation above the Floor average for two consecutive 
quarters.
    Further, the Exchange proposes to eliminate references to SPEQ and 
add references to the proposed objective measures in NYSE Rule 123E 
(Specialist Combination Review Policy).
    Finally, the Exchange proposes to add NYSE Rule 103B to the list of 
rules for which summary fines are available, specifically NYSE Rule 
476A (Imposition of Fines for Minor Violation(s) of Rules) to allow the 
Exchange to sanction members' and member organizations' less serious 
violations of NYSE Rule 103B pursuant to the minor fine provisions of 
NYSE Rule 476A.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6(b)(5) of the Act \17\ 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. The Exchange believes that the proposed rule change is 
consistent with these objectives in that it enables the Exchange to 
further enhance the process by which securities are allocated.
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    \17\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change will not 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 not solicited, and does not intend to solicit, 
comments regarding the proposed rule change. The Exchange has not 
received any unsolicited written comments from members or other 
interested parties.

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, as amended; or
    B. Institute proceedings to determine whether the proposed rule 
change, as amended, 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, 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 an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NYSE-2005-40 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-2005-40. 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. 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-2005-40 and should be submitted on or before May 3, 
2006.

[[Page 18797]]

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-5368 Filed 4-11-06; 8:45 am]

BILLING CODE 8010-01-P