Document ID: SEC-2011-0743-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange LLC
Posted Date: 2011-05-25T04:00Z

[Federal Register: May 25, 2011 (Volume 76, Number 101)]
[Notices]               
[Page 30418-30421]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25my11-139]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64522; File No. SR-NYSE-2011-22]

 
 Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change Amending NYSE Rule 70.40(3) to 
Permit Member Organizations to Engage in Proprietary Trading From Their 
Approved Booth Premises in Certain OTC Bulletin Board and OTC Markets 
Securities

May 19, 2011.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on May 11, 2011, New York Stock Exchange LLC (``NYSE'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(the ``Commission'') the proposed rule change as described in Items I 
and II below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend NYSE Rule 70.40(3) to permit member 
organizations to engage in proprietary

[[Page 30419]]

trading from their approved booth premises in certain OTC Bulletin 
Board (``OTCBB'') and OTC Markets \4\ securities. The text of the 
proposed rule change is available at the Exchange, at http://
www.nyse.com, at the Commission's Public Reference Room, and on the 
Commission's Web site at http://www.sec.gov.
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    \4\ The OTCBB and OTC Markets Group Inc. each operate electronic 
quotation systems for broker-dealers to trade unlisted securities. 
The marketplaces operated by OTC Markets Group Inc. include OTCQX, 
OTCQB and OTC Pink.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

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

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

1. Purpose
    NYSE proposes to amend NYSE Rule 70.40(3) to permit member 
organizations to engage in proprietary trading from their approved 
booth premises in certain OTCBB and OTC Markets securities.\5\
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    \5\ The Exchange's affiliate, NYSE Amex LLC (``NYSE Amex''), has 
proposed to adopt the same rule. See SR-NYSEAmex-2010-34.
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    In June 2007, the Exchange adopted NYSE Rule 70.40, which permits a 
member organization to operate its booth premises on the Exchange Floor 
in a manner similar to its ``upstairs'' office, thereby allowing member 
organizations to access other markets and trade a wider array of 
products from their booth premises and thus operate more efficiently 
and competitively.\6\ At the time that NYSE Rule 70.40 was adopted, it 
included certain conditions and limitations on such trading, including 
that only trading on behalf of customers would be permitted. As such, 
NYSE Rule 70.40(3) prohibits member organizations approved to operate 
booth premises pursuant to such Rule from effecting any transaction 
from their approved booth premises for their own account, the account 
of an associated person, or an account with respect to which they or an 
associated person thereof exercise investment discretion on the 
Exchange.
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    \6\ See Securities Exchange Act Release 55908 (June 14, 2007), 
72 FR 34056 (June 20, 2007) (SR-NYSE-2007-51) (notice of filing and 
immediate effectiveness of proposed rule change permitting member 
organizations to operate booth as upstairs office). Under NYSE Rule 
70.40, only Floor brokers may conduct activity from booth premises.
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    After more than three years of experience with NYSE Rule 70.40, 
member organizations have requested that certain types of proprietary 
trading be permitted under the Rule, and the Exchange has determined 
that it is appropriate to do so. Therefore, the Exchange proposes to 
revise NYSE Rule 70.40(3) to permit member organizations to effect 
transactions in the common, preferred, and debt securities of an 
operating company that is quoted on the OTC Bulletin Board or OTC 
Markets (an ``OTC Security'') from their approved booth premises for 
their own account, the account of an associated person, or an account 
with respect to which they or an associated person thereof exercise 
investment discretion, except that such member organizations could not 
effect such transactions in an OTC Security that is related to a 
security listed or traded on the Exchange or NYSE Amex.\7\ Because 
trading would be limited to the common, preferred, and debt securities 
of an operating company, a member organization could not trade in an 
index-based or derivative security (e.g., a right or warrant) that is 
quoted on the OTCBB or OTC Markets.
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    \7\ Since the merger of NYSE and NYSE Amex in 2008, the 
exchanges have conducted equity trading from the same Trading Floor, 
and NYSE Amex has conducted options trading in rooms adjacent the 
Trading Floor. See Securities Exchange Act Release No. 58673 
(September 29, 2008) (SR-Amex-2008-62 and SR-NYSE-2008-60), 73 FR 
57707 (October 3, 2008), and NYSE Rule 6A.
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    Under the proposed rule change, an OTC Security would be considered 
related to a security listed or traded on the Exchange or NYSE Amex \8\ 
if:
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    \8\ Securities listed on The NASDAQ Stock Market are traded on 
NYSE Amex pursuant to unlisted trading privileges and thus would be 
considered a security traded on NYSE Amex under the proposed rule 
change. See Rules 500-525-NYSE Amex Equities.

    (a) the OTC Security is issued by an issuer of a security that 
is listed or traded on the Exchange or NYSE Amex or that underlies 
an NYSE Amex option, or an affiliate of such issuer;
    (b) the OTC Security is subject to a corporate action that 
relates to the issuer of a security that is listed or traded on the 
Exchange or NYSE Amex or that underlies an NYSE Amex option, or an 
affiliate of such issuer;
    (c) the OTC Security is issued by an issuer of a security that 
is a component of a narrow-based security index \9\ that is linked 
to a security that listed or traded on the Exchange or NYSE Amex or 
that underlies an Amex option; or
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    \9\ For purposes of the proposed rule, the definition of narrow-
based security index would be the same as the definition in Section 
3(a)(55) of the Securities Exchange Act of 1934 (the ``Act'').
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    (d) the OTC Security is issued by a foreign issuer or is a 
depositary receipt (or the equivalent thereof) for such a security, 
and a security issued by such foreign issuer or a depositary receipt 
(or the equivalent thereof) for such a security is listed or traded 
on the Exchange or NYSE Amex or underlies an NYSE Amex option.

    Under the proposed rule, a corporate action would be any action by 
an issuer of an OTC Security or a security listed or traded on the 
Exchange or NYSE Amex that causes a relationship between the price of 
the OTC Security and the price of the security that is listed or traded 
on the Exchange or NYSE Amex or that underlies an NYSE Amex option, 
such as the announcement of a merger, acquisition, joint venture, 
spinoff, dissolution, bankruptcy filing or other similar type of event 
involving the issuers.
    The Exchange believes that an NYSE member organization would not 
have any type of time, place, or information advantage with respect to 
the proposed proprietary trading activity that could create a potential 
issue or conflict with respect to the federal securities laws or 
Exchange rules. A member organization's proprietary transactions in OTC 
Securities would receive the same treatment as any other investor's 
transactions in such securities. Consistent with the permitted customer 
trading under current NYSE Rule 70.40, the Exchange would deem the 
proposed proprietary transactions to be off-Floor or ``upstairs'' 
transactions for purposes of its Rules.\10\
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    \10\ Because the transactions would be (1) solely in securities 
not listed or admitted to unlisted trading privileges on NYSE or 
NYSE Amex, and (2) deemed initiated from off the Floor of NYSE, NYSE 
does not believe that Section 11(a) of the Act or the rules 
thereunder would be implicated by the proposed rule change.
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    The Exchange believes that member organizations face increased 
competition as a result of changes in the structure of securities 
markets and are continually searching for ways to operate more 
efficiently.\11\ The proposed rule change would allow member 
organizations to expand the types of activities that can be conducted 
from booth premises and more efficiently use member organization staff.
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    \11\ See supra note 6.
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    At the same time, the proposed proprietary transactions in OTC 
Securities would remain subject to all of the other provisions of NYSE 
Rule 70.40. First, a member organization

[[Page 30420]]

would have to obtain approval from NYSE Regulation, Inc. (``NYSER'') to 
engage in proprietary OTC Securities trading from booth premises.\12\
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    \12\ NYSE Rule 70.40(1).
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    Second, all such transactions would be subject to the regulatory 
requirements that apply to ``upstairs'' trading, including registration 
requirements and audit trail requirements applicable to those markets 
and supervision requirements under NYSE Rule 342.\13\
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    \13\ NYSE Rule 70.40(4) and (5).
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    Finally, a member organization would be required to adopt and 
implement comprehensive written procedures governing the conduct and 
supervision of proprietary trading in OTC Securities handled through 
the booth and the staff responsible for such activities; such 
procedures must be reasonably designed to ensure that the member 
organization would be trading in compliance with the requirements of 
NYSE Rule 70.40, including that it is not effecting transactions from 
booth premises in OTC Securities that are related to securities listed 
or traded on the Exchange or NYSE Amex. A member organization would be 
required to obtain NYSER approval of such written procedures before 
such trading commences.\14\ A member organization would be required to 
regularly review such procedures and compliance therewith, and obtain 
approval from NYSER of any subsequent changes to such procedures.\15\
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    \14\ If a member organization had already obtained approval to 
operate a booth premises under NYSE Rule 70.40, it would still be 
required to update its written procedures to address proprietary 
trading in OTC Securities and obtain NYSER approval under NYSE Rule 
70.40(7).
    \15\ NYSE Rule 70.40(6) and (7).
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    At a minimum, such written procedures must require the member 
organization to exercise due diligence before commencing trading in an 
OTC Security from the booth premises pursuant to this Rule to ensure 
that such trading is in compliance with the requirements of this Rule 
and that the member organization has procedures to monitor its trading 
activity in order to remain in compliance. A member organization must 
have supervisory systems in place that produce records sufficient to 
reconstruct, in a time-sequenced manner, all orders with respect to 
which the member organization is trading from the booth premises under 
this Rule. The member organization must be able to demonstrate which 
OTC Security transactions were effected from the booth premises (as 
compared to off-Floor trading, if applicable). If the member 
organization could not demonstrate which trading is from the booth 
premises, the Exchange would presume that all such trading was effected 
from the booth premises.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\16\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\17\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and, in general, to protect investors and the public interest. The 
proposed rule change provides member organizations with a means to 
remain competitive in view of changes in the markets by permitting 
Floor brokers to engage in proprietary trading in certain OTC 
Securities from their booth premises. Such trading offers member 
organizations no time, place, or information advantage but permits them 
to more fully utilize booth staff and thereby operate their booth 
premises more efficiently in conjunction with upstairs trading. The 
permitted proprietary trading activity in OTC Securities would remain 
subject to robust, existing regulatory requirements that serve to 
foster just and equitable principles of trade.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 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 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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate 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 or disapprove the 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-2011-22 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSE-2011-22. 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 Web site viewing and 
printing 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 the 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-

[[Page 30421]]

2011-22 and should be submitted on or before June 15, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-12876 Filed 5-24-11; 8:45 am]
BILLING CODE 8011-01-P