Document ID: SEC-2008-1498-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange LLC
Posted Date: 2008-11-03T05:00Z

[Federal Register: November 3, 2008 (Volume 73, Number 213)]
[Notices]               
[Page 65435-65439]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03no08-106]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58857; File No. SR-NYSE-2008-52]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Approving Proposed Rule Change, as Modified by Amendment Nos. 1, 2 and 
3 Thereto, To Modify the Method by Which Securities Are Allocated and 
Reallocated to Designated Market Maker Units and To Establish an 
Allocation System Based on a Single Objective Measure To Determine a 
Designated Market Maker Unit's Eligibility To Participate in the 
Allocation Process

October 24, 2008.

I. Introduction

    On August 11, 2008, the New York Stock Exchange LLC (``NYSE'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(the ``Commission'') pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to modify its process for allocating and 
reallocating securities to DMM units. On August 13, 2008, NYSE filed 
Amendment No. 1 to the proposed rule change. The proposed rule change, 
as modified by Amendment No. 1, was published for comment in the 
Federal Register on August 21, 2008.\3\ The Commission received no 
comments on the proposed rule change, as modified by Amendment No. 1. 
On October 8, 2008, NYSE filed Amendment No. 2 to the proposed rule 
change.\4\ On October 24, 2008, NYSE filed Amendment No. 3 to the 
proposed rule change.\5\ This order approves the proposed rule change, 
as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 58363 (August 14, 
2008), 73 FR 49514 (``Notice'').
    \4\ Amendment No. 2 corrects a minor bracketing error in Section 
IX of the rule text of the proposed rule change. Because Amendment 
No. 2 is technical in nature, the Commission is not publishing it 
for comment.
    \5\ Amendment No. 3 updates the rule text to replace references 
to specialist and specialist units with references to designated 
market makers (``DMMs'') and DMM units respectively, which is 
consistent with changes recently approved by the Commission relating 
to the Exchange's new market model. See Securities Exchange Act 
Release No. 58845 (October 24, 2008) (order approving SR-NYSE-2008-
46). Because Amendment No. 3 is technical in nature, the Commission 
is not publishing it for comment.
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II. Description of the Proposed Rule Change

    The Exchange proposes amending NYSE Rules 103A (Specialist Stock 
Reallocation and Member Education and Performance) and 103B (Specialist 
Stock Allocation) to be more closely reflective of the Exchange's 
increased electronic trading environment.\6\ Generally, the Exchange 
proposes modifying the current Allocation Policy to establish a single 
quantifiable objective measure to determine a DMM unit's eligibility to 
participate in the allocation process and provide issuers with more 
choice in the selection of its DMM unit. The Exchange further proposes 
to allow the issuer to select the DMM units it chooses to interview 
directly. The Exchange therefore seeks to eliminate the Allocation 
Committee as the overseer of the allocation process and the Allocation 
Panel from which the Allocation Committee members are selected. The 
Exchange also proposes to eliminate the allocation decision criteria 
that are, in part, based on subjective measures of DMM performance by 
discontinuing the use of the Specialist Performance Evaluation 
Questionnaire (``SPEQ''). In doing so, the Exchange seeks to replace 
the SPEQ with an objective measure designed to set a minimum standard 
that would be used to determine a DMM unit's eligibility to participate 
in the new security allocation process.
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    \6\ The Exchange has indicated that the proposed rule change 
will become operative concurrently with the implementation of its 
new market model. See supra note 5.
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    In connection with the amendment of NYSE Rule 103A, the Exchange 
also proposes to eliminate the Market Performance Committee as the 
entity that is responsible for reallocating securities, as well as 
eliminate performance improvement actions. NYSE Regulation, Inc. 
(``NYSER'') would replace the Market Performance Committee as the 
entity responsible for developing procedures and standards with respect 
to the qualification and performance of members active on the Floor of 
the Exchange. Current sections of NYSE Rule 103A that address DMM 
security reallocation are amended and incorporated into NYSE Rule 103B.

A. Amendments to NYSE Rule 103A

    The Exchange seeks to amend NYSE Rule 103A to eliminate the concept 
of a performance improvement action. Instead, the Exchange recently has 
amended its system of variable payments to DMM units to create a 
liquidity provision payment (``LPP'') to incentivize DMM unit 
performance. The payment is based, in part, on the DMM unit's trading 
performance by measuring its liquidity enhancing behavior. LPPs are 
based on two revenue sources in NYSE-listed securities: (1) The 
Exchange's share of market data revenue derived from quoting shares; 
and (2) the Exchange's transaction fee revenue.\7\ The payments derived 
from transaction revenue are based on Exchange reviews of the DMM 
unit's executed volume in four categories: (1) Price improvement; (2) 
size improvement; (3) providing liquidity from posting bids or offers 
on the book; and (4) matching better bids or offers published by other 
market centers to reduce client routing cost.\8\ Moreover, the Exchange 
proposes to amend NYSE Rule 103A to vest the overview of member 
education programs with NYSER \9\ since the day to day administration 
of member education is currently performed by the Market Surveillance 
Division staff of NYSER.
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    \7\ See Securities Exchange Act Release No. 56591 (October 1, 
2007), 72 FR 57371 (October 9, 2007) (SR-NYSE-2007-89).
    \8\ NYSE Rule 104 sets forth quoting messages that DMM are 
permitted to send as part of their quoting functionality.
    \9\ NYSE Rule 103A, Section I.
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B. Amendments to NYSE Rule 103B

1. Proposed Objective Measure for Eligibility for Allocation Process
    The Exchange proposes establishing a single objective measure to 
determine a DMM unit's eligibility to participate in the allocation 
process.\10\ A DMM unit would be eligible to participate in the 
allocation process of a listed security when the DMM unit meets the 
quoting requirements for ``Less Active'' and ``More Active'' 
securities.\11\ A ``Less Active Security'' is defined as any listed 
security that has a consolidated average daily volume of less than one 
million shares per calendar month.\12\ A ``More Active Security'' is 
defined as any listed security that has a consolidated average daily 
volume equal to or greater than one million shares per calendar 
month.\13\
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    \10\ Proposed NYSE Rule 103B, Section II(A).
    \11\ Id.
    \12\ Proposed NYSE Rule 103B, Section II(B).
    \13\ Proposed NYSE Rule 103B, Section II(C).
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    For Less Active Securities, a DMM unit must maintain a bid and an 
offer at the National Best Bid (``NBB'') and National Best Offer 
(``NBO'') (collectively herein ``NBBO'') for an

[[Page 65436]]

aggregate average monthly NBBO of 10% or more during a calendar 
month.\14\ For More Active Securities, a DMM unit must maintain a bid 
and an offer at the NBBO for an aggregate average monthly NBBO of 5% or 
more during a calendar month.\15\ DMM units must satisfy the quoting 
requirement for both categories (Less Active and More Active) of their 
assigned securities.\16\
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    \14\ Proposed NYSE Rule 103B, Section II(D).
    \15\ Proposed NYSE Rule 103B, Section II(E).
    \16\ A more detailed description, as well as an example, of how 
the quoting requirement is calculated is contained in the Notice, 
supra note 3.
    The Exchange Strategic Analysis Department would be responsible 
for generating and monitoring the DMM units' performance data to 
determine those DMM units that are eligible to be allocated 
securities.
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    If a DMM unit fails to satisfy the requirements of proposed NYSE 
Rule 103B, Section II(D) and (E) for a one-month period, the Exchange 
would issue an initial warning letter to the DMM unit, advising it of 
its deficiency.\17\ The DMM unit would provide in writing an 
explanation and articulation of corrective action.\18\ If the DMM unit 
fails to meet the requirement of proposed NYSE Rule 103B, Section II(D) 
and (E) for a second consecutive month, the DMM unit would be 
ineligible to participate in the allocation process for a minimum of 
two months following the second consecutive month of its failure to 
meet its quoting requirement (``Penalty Period'').\19\
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    \17\ Proposed NYSE Rule 103B, Section II(J)(1). The Exchange 
Specialist Liaison Department would be responsible for issuing the 
warning letter to a DMM unit that fails to meet its requirement. It 
also would be responsible for advising a DMM unit of its eligibility 
or ineligibility to participate in the allocation process.
    \18\ Proposed NYSE Rule 103B, Section II(J)(1).
    \19\ Proposed NYSE Rule 103B, Section II(J)(2).
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    The DMM unit would have to satisfy the quoting requirement for the 
two consecutive months of the Penalty Period in order to become 
eligible to participate in the allocation process. In the event a DMM 
unit fails to satisfy its quoting requirement for the two consecutive 
months of the Penalty Period, the DMM unit would remain ineligible to 
participate in the allocation process until it has met the quoting 
requirement for a consecutive two calendar month period.\20\ The 
Exchange would review each DMM unit's trading on a monthly basis to 
determine whether the DMM unit has satisfied its quoting 
requirement.\21\
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    \20\ Proposed NYSE Rule 103B, Section II(J)(3).
    \21\ Proposed NYSE Rule 103B, Section II(J)(4).
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2. Elimination of the SPEQ
    The Exchange proposes to permanently eliminate the use of the SPEQ. 
According to the Exchange, while the SPEQ has been an important 
mechanism to evaluate DMM performance for allocation and performance 
improvement action purposes, recent moves by the Exchange to adopt a 
more electronic trading environment have rendered the SPEQ less 
reliable as an assessment tool.
3. Elimination of the Allocation Committee
    The Exchange proposes to allow an issuer to select the DMM units it 
chooses to interview directly from the DMM units that are eligible to 
participate in the allocation process, which obviates the need for an 
Allocation Committee.\22\
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    \22\ Proposed NYSE Rule 103B, Section III(A)(1)-(3).
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C. Administration of the New Allocation Policy

    Once the list of DMM units that meet the objective standard 
established by the Exchange is generated, the list would be provided to 
the listing company and the listing company may proceed under one of 
two options.
1. Issuer Selects DMM Unit
    Under the first option, the listing company would select the DMM 
units it wishes to interview. The issuer would then proceed to conduct 
interviews of the selected units. A DMM unit's eligibility to 
participate in the allocation process would be determined at the time 
the interview is scheduled, i.e., if it has met the quoting 
requirements set forth above at the time of the interview, it would be 
eligible to be considered for allocation.\23\
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    \23\ Proposed NYSE Rule 103B, Section II(I).
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    If the issuer selects the DMM unit, the issuer would select a 
minimum of three DMM units to interview from the pool of DMM units 
eligible to participate in the allocation process.\24\ DMM units 
selected for an interview may provide material to the Exchange, which 
would be given to the issuer the day before the scheduled interview. 
Such material may include a corporate overview of the DMM unit and the 
trading experience of the designated DMM. DMM units would be prohibited 
from giving issuers information about other DMM units or any additional 
market performance data.\25\
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    \24\ Proposed NYSE Rule 103B, Section III(A)(1).
    \25\ Proposed NYSE Rule 103B, Section III(A)(2)(a).
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    Within five business days after the issuer selects the DMM units to 
be interviewed (unless the Exchange has determined to permit a longer 
time period in a particular case), the issuer would meet with 
representatives of each of the DMM units. At least one representative 
of the listing company must be a senior official of the rank of 
Corporate Secretary or above of that company. In the case of the 
listing of a structured product, a senior officer of the issuer may be 
present in lieu of the Corporate Secretary. No more than three 
representatives of each DMM unit may participate in the meeting, each 
of whom must be an employee of the DMM unit, and one of whom must be 
the individual DMM who is proposed to trade the company's security, 
unless that DMM is unavailable to appear, in which case a telephone 
interview is permitted. Meetings would normally be held at the 
Exchange, unless the Exchange has agreed that they may be held 
elsewhere.\26\
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    \26\ Proposed NYSE Rule 103B, Section III(A)(2)(b).
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    Following its interview, a DMM unit may not have any contact with 
an issuer. If an issuer has a follow-up question regarding any DMM 
unit(s) it interviewed, it must be conveyed to the Exchange. The 
Exchange would contact the unit(s) to which the question pertains and 
would provide any available information received from the unit(s) to 
the listing company.\27\
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    \27\ Proposed NYSE Rule 103B, Section III(A)(2)(d).
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    Within two business days of the issuer's interviews with the DMM 
units, the issuer would select its DMM unit in writing, signed by a 
senior official of the rank of Corporate Secretary or higher, or in the 
case of a structured product listing, a senior officer of the issuer, 
duly authorized to so act on behalf of the company. The Exchange then 
would confirm the allocation of the security to that DMM unit, at which 
time the security would be deemed to have been so allocated. An issuer 
may request an extension from the Exchange if the issuer is unable to 
complete its selection within the specified period.\28\
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    \28\ Proposed NYSE Rule 103B, Section III(A)(3)(a).
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2. Issuer Delegates Selection to the Exchange
    If the issuer delegates authority to the Exchange to select its DMM 
unit, three members of the Exchange's Senior Management, as designated 
by the Chief Executive Officer (``CEO'') of the Exchange or his or her 
designee, one non-DMM Executive Floor Governor and two non-DMM Floor 
Governors (``Exchange Selection Panel''), would select a DMM unit based 
on a review of all information that would be available to the issuer. 
The non-DMM Executive Floor Governor and non-DMM Floor Governors would 
be designated on a rotating basis.
    The Exchange Selection Panel would select the DMM unit pursuant to 
the

[[Page 65437]]

provisions of NYSE 103B Section III(A) (``DMM Unit Selected by the 
Issuer'') with the Exchange Selection Panel acting on behalf of the 
issuer. The Exchange Selection Panel would be responsible for informing 
the issuer of the DMM unit.
    The selection of the DMM unit would be made by majority vote with 
any tie votes being decided by the CEO of the Exchange or his or her 
designee. The Exchange would notify the DMM unit and the issuer 
immediately of its decision. The DMM unit would then be responsible for 
providing the issuer with the name of the DMM with the requisite 
experience and skill it believes is appropriate to trade the issuer's 
security.\29\
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    \29\ Proposed NYSE Rule 103B, Section III(B)(1).
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    Whether the issuer or the Exchange selects the DMM unit to receive 
the security allocation, the individual DMM ultimately assigned the 
proposed security would be required to remain the assigned DMM for one 
year from the date that the issuer begins trading on the Exchange. The 
DMM unit may designate a different individual DMM within the year by 
notifying the Exchange of the change in DMM and setting forth the 
reasons for the change with the consent and approval of the issuer.\30\
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    \30\ Proposed NYSE Rule 103B, Section III(B)(2).
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D. Reallocation

    When an issuer has requested and confirmed a change of DMM unit 
pursuant to Section 806.01 of the Exchange Listed Company Manual, the 
security would be put up for reallocation as soon as practicable, in 
accordance with the allocation process set forth in proposed NYSE Rule 
103B, Section III.\31\
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    \31\ Proposed NYSE Rule 103B, Section IV.
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E. Egregious Situations

    The Exchange proposes moving current provisions codified in NYSE 
Rule 103A, which provide for the reallocation of a security when a DMM 
unit's performance is so egregiously deficient as to call into question 
the Exchange's integrity or impair the Exchange's reputation for 
maintaining an efficient, fair, and orderly market to, proposed NYSE 
Rule 103B. Currently, NYSE Rule 103A states that, in such an instance, 
the Market Performance Committee may immediately initiate a 
reallocation proceeding upon written notice to the DMM unit, specifying 
the reasons for the initiation of the proceeding. The Exchange proposes 
to incorporate this concept in NYSE Rule 103B and to transfer the 
authority to initiate a reallocation proceeding upon written notice to 
the DMM unit from the Market Performance Committee to the CEO or his or 
her designee.\32\
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    \32\ Proposed NYSE Rule 103B, Section V, based on Exchange Rule 
103A(f).
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    Following this decision, if the CEO or his or her designee makes a 
final determination that a security should be referred for 
reallocation, the Exchange proposes that the CEO or his or her designee 
would, in his or her expert business judgment, be responsible for 
reallocating the security to one of the remaining DMM units eligible 
for allocation. The CEO or his or her designee would then make a final 
determination as to which one or more of the DMM unit's securities 
would be referred for reallocation. All determinations made by the CEO 
or his or her designee would be communicated in writing to the DMM 
unit, with a statement of the reasons for such determinations. DMM 
units would have the right to have this decision reviewed by the 
Exchange's Board of Directors.\33\
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    \33\ Proposed NYSE Rule 103B, Section V(E).
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F. DMM Unit Communication Policies and Procedures With Listing Company

    Currently, NYSE Rule 106 requires, among other things, that DMM 
units make themselves available for contact with their listing 
companies periodically throughout the year. NYSE Rule 106 was adopted 
in 1989 at a time when orders entered with the DMM were handled 
manually and contact between a DMM unit and its listed companies was 
necessary to ensure that listed companies were informed about the 
trading in its listed security on the Floor.\34\ The Exchange believes 
that the requirements of NYSE Rule 106 are no longer necessary.\35\ As 
such, the Exchange seeks to rescind NYSE Rule 106 that sets forth the 
DMM unit's obligation to communicate with the aforementioned entities.
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    \34\ See Securities Exchange Act Release No. 27292 (September 
26, 1989), 54 FR 41193 (October 5, 1989) (SR-NYSE-89-13). As a 
result, NYSE Rule 106 mandates interaction between a DMM unit and 
representatives of listed companies. The rule requires that one or 
more senior officials of the rank of Corporate Secretary or higher 
at the listing company have an opportunity to have contact with the 
DMM unit on a quarterly basis. Further, the rule mandates that at 
least one of the quarterly meetings be in-person.
    \35\ NYSE Rule 106 further mandates that the DMM unit make 
itself available to the Exchange's fifteen largest member 
organizations through required semi-annual ``off the Exchange 
Floor'' contact. According to the Exchange, the interpersonal 
relationship between DMM units and member organizations that once 
took front stage in the marketplace has been significantly replaced 
by automated trading initiatives and computerized market data 
reports. DMM units are generally in contact with member 
organizations, either through electronic and/or telephonic means on 
a regular basis, which similarly renders the requirements of NYSE 
Rule 106(b) unnecessary.
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G. Exchange-Traded Funds

    The Exchange proposes to delete from NYSE Rule 103B the section 
related to the allocation of Exchange-Traded Funds (``ETFs'') admitted 
to trading on the Exchange on an Unlisted Trading Privileges (``UTP'') 
basis. In 2007, the Exchange completed a transfer of all ETFs admitted 
to trading on the Exchange on an UTP basis to NYSE Arca\SM\ NYSE 
Euronext's fully electronic U.S. listing and trading platform. 
Accordingly, the Exchange proposes to delete this provision from the 
rule.

H. Closed-End Management Investment Companies (``Funds'')

    The Exchange further proposes that Funds listing on the Exchange 
would be subject to the allocation process pursuant to proposed NYSE 
Rule 103B, Section III. If the issuer of an initial Fund lists 
additional funds within nine months from the date of its initial 
listing, the issuer may choose to maintain the same DMM unit for those 
subsequently listed funds or it may select a different DMM unit from 
the group of eligible DMM units that the issuer interviewed in the 
allocation process for its initial Fund. The fund may also delegate the 
selection of its DMM unit to the Exchange if it so chooses pursuant to 
proposed NYSE Rule 103B, Section III(B).\36\
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    \36\ Proposed NYSE Rule 103B, Section VI(F).
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    If a DMM unit is ineligible from participating in an allocation as 
set forth in proposed NYSE Rule 103B, Section III, at the time of a 
subsequent new Fund listing (within the designated nine-month period), 
that DMM unit would not be included for consideration for subsequent 
listings.\37\
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    \37\ Id.
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I. Spin-Offs, Relistings, Common Stock, Target Stock, Warrants and 
Rights

    The Exchange proposes to rename the section entitled ``Spin-offs 
and listing of related companies'' to also include ``related 
securities'' in order to address the assignment of warrants and 
rights.\38\ Proposed NYSE Rule 103B, Section VI(A) continues to allow 
the listing company to remain with the DMM unit registered in the 
related spin-off or related company and also would allow the listing 
company to be referred for allocation through the allocation process 
pursuant to proposed NYSE Rule 103B, Section III, if it so chooses. If 
the spin-off company, company

[[Page 65438]]

related to a listed company or the company relisting chooses to have 
its DMM unit selected by the Exchange pursuant to NYSE Rule 103B, 
Section III(B), and requests not to be allocated to the DMM unit that 
was its listed company's DMM unit, such request would be honored.
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    \38\ Proposed NYSE Rule 103B, Section VI(A).
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    The Exchange further proposes that common stock (listed after 
preferred stock) be referred for allocation through the allocation 
process pursuant to proposed NYSE Rule 103B, Section III.\39\
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    \39\ Id.
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    In addition, NYSE Rule 103B, Section VI(A) would be amended to 
codify that a warrant issued by a listed company and traded on the 
Exchange would be allocated to the DMM unit registered in the 
underlying security of the listed company.\40\ Upon request by the 
issuer, the warrant may be allocated through the allocation process 
pursuant to proposed NYSE Rule 103B, Section III.\41\
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    \40\ Proposed NYSE Rule 103B, Section VI(A)(2).
    \41\ Id.
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    Moreover, the Exchange proposes to codify that rights are not 
subject to the allocation process pursuant to proposed NYSE Rule 103B, 
Section III. Rights are considered short-term securities, which are 
exempt from registration under the Act.\42\ Accordingly, rights are not 
treated as listed securities on the Exchange and are not subject to the 
allocation process pursuant to proposed NYSE Rule 103B, Section III. 
Rights are assigned, when issued, to the DMM unit by the Exchange.\43\
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    \42\ See Rule 12a-4 under the Act; 17 CFR 240.12a-4; See also 
NYSE Listed Company Manual, Section 703.03(O).
    \43\ Proposed NYSE Rule 103B, Section VI(A)(4). The Exchange 
Market Watch, Security Operations, Records Management Division is 
responsible for assigning rights to the DMM unit.
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    DMM units that are ineligible to receive a new allocation due to 
its failure to meet the requirements of proposed NYSE Rule 103B, 
Sections (II)(D) and (E) would remain eligible to receive an allocation 
pursuant to NYSE Rule 103B, Section VI.

J. Listed Company Mergers

    When two NYSE listed companies merge, the merged entity is assigned 
to the DMM in the company that is determined to be the survivor-in-fact 
(dominant company). Where no surviving/dominant company can be 
identified after two NYSE listed companies merge, the NYSE proposes 
that the merged company may select one of the DMM units trading the 
merging companies' security without the security being referred for 
reallocation, or it may request that the matter be referred for 
allocation through the allocation process pursuant to NYSE Rule 103B, 
Section III.\44\ DMM units that are ineligible to receive a new 
allocation due to its failure to meet the requirements of NYSE Rule 
103B, Sections II(D) and (E) would remain eligible to receive an 
allocation pursuant to this section.\45\
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    \44\ Proposed NYSE Rule 103B, Section VI(D)(1).
    \45\ Id.
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    In situations involving the merger of a listed company and an 
unlisted company, where the unlisted company is determined to be the 
survivor-in-fact, such company may choose to remain registered with the 
DMM unit that had traded the security of listed company entity in the 
merger, or it may request that the matter be referred for allocation 
through the allocation process pursuant to proposed NYSE Rule 103B, 
Section III.\46\ If the unlisted company chooses to have its DMM unit 
selected by the Exchange, the company may not request that the Exchange 
exclude from consideration the DMM unit that had traded the listed 
company's security.\47\
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    \46\ Proposed NYSE Rule 103B, Section VI(D)(3).
    \47\ Proposed NYSE Rule 103B, Section VI(D)(4).
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K. Allocation Sunset Policy

    The Exchange proposes to extend the effectiveness of allocation 
decisions with respect to any initial public offering listing company, 
which lists on the Exchange, from three months to six months.\48\ In 
situations in which the selected DMM unit merges or is involved in a 
combination within the six-month period, the company may choose whether 
to stay with the selected DMM unit, or be referred to allocation. If a 
company approved for listing does not list within six months of its 
initial public offering, the matter would be referred for allocation 
through the allocation process pursuant to proposed NYSE Rule 103B, 
Section III.\49\
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    \48\ Proposed NYSE Rule 103B, Section VI(H).
    \49\ Id.
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L. Provisions for Allocation of Listing Companies Transferring From 
NYSE ARCA, Inc. (``NYSE ARCASM'') to the NYSE

    The Exchange further proposes that if a listing company 
transferring from NYSE ArcaSM to the NYSE was assigned a 
NYSE Arca Lead Market Maker unit, that is also a registered NYSE DMM 
unit, the listing company may waive the allocation process pursuant to 
Rule 103B and select as its registered DMM unit the same unit that was 
previously assigned as the NYSEArca Lead Mark Maker unit. 
Alternatively, the Exchange proposes that the listing company can 
choose to follow the regular allocation process and refer the matter 
for allocation through the allocation process pursuant to NYSE Rule 
103B.\50\
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    \50\ Proposed NYSE Rule 103B, Section VIII.
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M. Conforming Changes to NYSE Rule 476a, NYSE Rule 123E and NYSE Listed 
Manual Section 106.02

1. NYSE Rule 476A
    The Exchange seeks to make a conforming amendment to NYSE Rule 476A 
by removing failure to complete the SPEQ from the list of minor rule 
violations. NYSE Rule 476A provides for the imposition of fines for 
Minor Violation(s) of NYSE Rules. The Supplementary Material of NYSE 
Rule 476A enumerates the specific rules and conduct eligible for the 
imposition of a fine. Included in this list is ``Participation in the 
DMM Performance Evaluation Questionnaire (SPEQ) Process (Rule 103A).'' 
Since the Exchange proposes the elimination of the SPEQ process in its 
new allocation policy, the Exchange further proposes to amend NYSE Rule 
476A to reflect this rescission.
2. NYSE Rule 123E
    The Exchange also seeks to make conforming amendments to NYSE Rule 
123E to change DMM ``organization'' to DMM ``unit'' and ``stock'' to 
``security'' throughout the rule. The Exchange further proposes to 
delete and replace all references to the Quality of Markets Committee 
and the Market Performance Committee with ``the Exchange.'' \51\ Given 
the proposed changes to NYSE Rule 103A that rescind the Market 
Performance Committee's responsibility to monitor DMM performance, the 
Exchange proposes to assume responsibility for conducting a review of a 
proposed DMM combination. Similarly, the Exchange proposes to make a 
conforming amendment to eliminate the DMM performance measures from 
NYSE Rule 123E that also are proposed for deletion in connection with 
the proposed amendments to NYSE Rule 103B. The Exchange further 
proposes to correct a typographical error in Rule 123E.
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    \51\ In March 2006 after the NYSE's business combination with 
Archipelago Holdings, Inc., the Quality of Markets Committee ceased 
to exist upon completion of the revised corporate structure.
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3. NYSE Listed Company Manual
    The Exchange proposes to make conforming changes to Section 106.02 
of the NYSE Listed Company Manual. Currently Section 106.02 provides in 
pertinent part:

    As soon as the Exchange makes the allocation decision, the 
company is

[[Page 65439]]

immediately notified by telephone and in writing of the name of the 
specialist unit, selected background information on the unit and the 
reasons why the unit was selected.

    Section 106.02 gives the reader the impression that the Exchange is 
always responsible for the selection of the specialist unit (now DMM 
unit) to be allocated a listing company's security. The Exchange 
proposes to clarify Section 106.02 by amending it to acknowledge that 
the company can delegate the allocation decision to the Exchange.

N. Provisions for Allocation of Securities Issued by NYSE or its 
Affiliates

    Currently, Section IX of NYSE Rule 103B permits the NYSE, as the 
issuer of its own security, to select the pool of DMM units that it 
wishes to consider for allocation of its security, instead of having 
the DMM units be selected by the Allocation Committee. Because the 
Exchange proposes to eliminate the role of the Allocation Committee, 
and instead provide all issuers with the ability to select the pool of 
eligible DMM units that they wish to consider for allocation of their 
securities, this section of NYSE Rule 103B no longer is necessary.

III. Discussion and Findings

    The Commission finds that the proposed rule change, as modified by 
Amendment Nos. 1, 2 and 3, is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to a national 
securities exchange.\52\ Specifically, the Commission believes that the 
proposed rule change is consistent with the requirements of Section 
6(b)(5) of the Act,\53\ 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, in general, to protect 
investors and the public interest.
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    \52\ In approving this rule, the Commission has considered its 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
    \53\ 15 U.S.C. 78(f)(b)(5).
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    The Commission believes that it is appropriate for the Exchange to 
establish rules and procedures governing the allocation of securities 
to its DMM units. In this regard, the Commission believes that the 
Exchange's proposal to establish an allocation system based on an 
objective measure, which would be used to determine a DMM unit's 
eligibility to participate in the allocation process based on its 
ability to meet a specific quoting requirement, is reasonable and 
consistent with the Act. The Commission believes that it is important 
for the Exchange to provide an inducement to its market makers that can 
help improve the quality of NYSE's market. By establishing objective 
criteria for allocations of securities that are based on the percentage 
that a DMM unit maintained a bid and an offer at the NBBO for a 
specified time period, the Exchange will provide DMM units with 
transparent and unambiguous standards that they need to attain, if they 
wish to receive security allocations. Moreover, the Commission believes 
that greater issuer participation in the allocation and reallocation 
process may provide the issuer with greater choice in the assignment of 
a DMM unit and the DMM unit with a greater incentive to perform 
optimally.
    The Commission also believes that it is reasonable for the Exchange 
to eliminate the use of the SPEQ, along with several other performance 
measures, including SuperDot Turnaround and responses to administrative 
messages, since these performance criteria no longer are meaningful in 
the context of security allocations, given the Exchange's current 
electronic environment. The Commission believes that it is reasonable 
for the listed issuer to either select a DMM unit or delegate such 
selection to the Exchange Selection Panel. Further, in the event of an 
egregious situation that indicates a security is to be reallocated, the 
Commission notes that a DMM unit would have the right to appeal any 
reallocation decision to the Exchange's Board of Directors. 
Accordingly, the Commission believes that the Exchange's proposed 
allocation and reallocation process is reasonable and consistent with 
the Act.
    The Commission further believes that it is reasonable for the 
Exchange to codify its current practice in NYSE Rule 103B that a 
warrant issued by a listed company and traded on the Exchange is 
allocated to the DMM unit registered in the underlying security of the 
listed company. Further, the Commission believes that it is reasonable 
for rights, that are not considered by the Exchange to be listed 
securities, to not be subject to the NYSE Rule 103B, Section III 
allocation process.
    Lastly, the Commission believes that it is reasonable and 
consistent with the Act for a DMM unit that is ineligible to receive a 
new allocation, pursuant to proposed NYSE Rule 103B, Section VI(A) 
through (D), due to its failure to meet the requirements of proposed 
NYSE Rule 103B, Sections II(D) and (E), to remain eligible to receive 
an allocation pursuant to proposed NYSE Rule 103B, Section VI. 
Specifically, a DMM unit that is ineligible to receive a new allocation 
due to its failure to meet the requirements of NYSE Rule 103B, Section 
II(D) and (E) would remain eligible to receive current allocation of 
the spin-off company or current allocation of the listing of related 
companies, or current allocation of the relisting of the listed 
company; or current allocation of the common stock listing after the 
preferred stock listing; or the current allocation of certain types of 
company listed mergers. The Commission believes that there may be less 
disruption to the allocation process if the DMM unit were able to 
remain eligible to receive securities allocations, pursuant to NYSE 
Rule 103B, Section VI, in those discreet instances discussed above, 
even though the DMM unit may not be otherwise eligible to receive new 
securities allocations.
    The Commission notes, however, that if a DMM unit is ineligible 
from participating in an allocation as set forth in proposed NYSE Rule 
103B, Section III, at the time of a subsequent new closed-end 
management fund investment company listing (within the designated nine-
month period), that DMM unit would not be included for consideration 
for subsequent listings.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-NYSE-2008-52), as modified by 
Amendment Nos. 1, 2 and 3, be, and it hereby is, approved.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\54\
Florence E. Harmon,
Acting Secretary.
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    \54\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E8-26106 Filed 10-31-08; 8:45 am]

BILLING CODE 8011-01-P