Document ID: SEC-2008-1335-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange LLC
Posted Date: 2008-10-01T04:00Z

[Federal Register: October 1, 2008 (Volume 73, Number 191)]
[Notices]               
[Page 57185-57188]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01oc08-139]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58631; File No. SR-NYSE-2008-84]

 
Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by New York Stock Exchange LLC 
Proposing To Suspend the Operation of Certain NYSE Rules To Respond to 
the Impact to the Marketplace of the Events of September 15, 2008, 
Including the Bankruptcy Filing by Lehman Brothers Holding Inc.

September 24, 2008.
    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 September 15, 2008, 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

    New York Stock Exchange LLC (``NYSE'' or the ``Exchange'') is 
proposing to suspend the operation of certain NYSE rules to respond to 
the impact to the marketplace of the events of September 15, 2008, 
including the bankruptcy filing by Lehman Brothers Holding Inc. (LEH) 
and the proposed acquisition of Merrill Lynch by Bank of America.

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

    In its filing with the Commission, NYSE included statements 
concerning the purpose of, and basis for, the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. NYSE has prepared summaries, set forth in Sections A, B, 
and C below, of the most significant aspects of such statements.

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

1. Purpose
    On Monday, September 15, 2008, the markets experienced almost 
unprecedented turmoil that impacted some of the most significant 
players on Wall Street: Lehman Brothers Holding Inc. (LEH) (``Lehman'') 
filed for bankruptcy protection in the United States District Court for 
the Southern District of New York under Chapter 11 of the U.S. 
bankruptcy code; Bank of America agreed to acquire Merrill Lynch in an 
all-stock transaction; and American Insurance Group, Inc. (``AIG'') 
announced a significant restructuring.
    In response to these events, the Exchange undertook a number of 
steps to ensure continuity of the marketplace. First, the Exchange 
invoked NYSE Rule 48, which authorizes the Exchange to suspend certain 
rules relating to the opening of trading at the Exchange. Second, 
because the pre-opening market in LEH suggested that the stock would 
open below $1.05, at 9 a.m. on September 15, 2008, the Exchange 
announced a Rule 123D(3) ``Sub-penny trading'' condition for LEH and 
halted trading in LEH at the Exchange. Third, to ensure a fair and 
orderly market in all securities listed at the Exchange, the Exchange 
announced that, pursuant to NYSE Rule 103.11, NYSE-listed securities 
for which Lehman Brothers Market Makers, a division of Lehman Brothers 
Inc. (``Lehman Brothers''), had been the specialist, would be 
temporarily reallocated to Spear, Leeds & Kellogg Specialists LLC 
(``Spear Leeds''). Notwithstanding the reallocation, these stocks will 
continue to trade using Lehman Brothers technology and staff until a 
more permanent allocation can be effected.
    To ensure a fair and orderly market during this period of market 
stress, the Exchange is seeking temporary relief from certain NYSE 
rules that are implicated by the Lehman Brothers situation. In 
particular, the Exchange is proposing to suspend the operation of NYSE 
Rule 123D(3) on September 15, 2008 for derivative securities of LEH 
that trade at the Exchange (``LEH Preferreds'') \4\ that would open at 
a price of $1.05 or less. This proposed suspension relates only to the 
opening of LEH Preferreds on September 15, 2008. Immediately following 
the opening of such securities, the Exchange intends to halt trading of 
LEH Preferreds pursuant to NYSE Rule 123D(3) and invoke a Sub-penny 
trading condition.
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    \4\ See Lehman Bros Pfd C (LEH-PC); Lehman Bros 5.67 D (LEH-PD); 
Lehman Bros Dep SH F (LEH-PF); Lehman Dep Pfd G (LEH-PG); Lehman Pfd 
J (LEH-PJ); Lehman CP III 6.375 K (LEH-PK); Lehman Br Cap Tr IV 
(LEH-PL); Lehman Bro Cap V 6.0 (LEH-PM); and Lehman Br Hld 6.24 N 
(LEH-PN).
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    In addition, pending the installation of telephone lines at Lehman 
Brothers' specialist posts that are connected to Spear Leeds, the 
Exchange proposes to temporarily suspend NYSE Rule 36.30 so that Spear 
Leeds may conduct permitted communications from those post locations 
via non-Exchange portable telephones.
a. NYSE Rule 123D(3)
(1) Background
    NYSE Rule 123D(3) provides that if a security would open on the 
Exchange at a price of $1.05 or less, trading on the Exchange shall be 
immediately halted because of a ``Sub-penny trading'' condition. The 
Exchange adopted Rule 123D(3) in part to be compliant with Regulation 
NMS.
    Regulation NMS, adopted by the Securities and Exchange Commission 
(``SEC'') in April 2005,\5\ provides that each trading center intending 
to qualify for trade-through protection under Regulation NMS Rule 
611\6\ is required to have a Regulation NMS-compliant trading system 
fully operational by

[[Page 57186]]

March 5, 2007 (the ``Trading Phase Date'').\7\
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    \5\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 17 CFR Parts 200, 201, 230, 240, 242, 249 and 270.
    \6\ See 17 CFR 242.611.
    \7\ See Securities Exchange Act Release No. 55160 (January 24, 
2007), 72 FR 4202 (January 30, 2007) (S7-10-04).
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    For stocks priced below $1.00 per share, Regulation NMS Rule 612 
\8\ permits markets to accept bids, offers, orders and indications of 
interest in increments smaller than $0.01, but not less than $0.0001, 
and to quote and trade such stocks in sub-pennies. Markets may choose 
not to accept such bids, offers, orders or indications of interest and 
the NYSE has done so, maintaining a minimum trading and quoting 
variation of $0.01 for all securities trading below $100,000. See NYSE 
Rule 62.
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    \8\ See 17 CFR 242.612. Rule 612 originally was to become 
effective on August 29, 2005, but the date was later extended to 
January 29, 2006. See Securities Exchange Act Release No. 52196 
(Aug. 2, 2005), 70 FR 45529 (Aug. 8, 2005).
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    The SEC's interpretation of Rule 612 requires a market that routes 
an order to another market in compliance with Rule 611 and receives a 
sub-penny execution, to accept the sub-penny execution, report that 
execution to the customer, and compare, clear and settle that trade. 
Failure to do so constitutes a violation of Rule 611's Order Protection 
Rule. However, pursuant to Rule 611(b)(3) of Regulation NMS,\9\ 
transactions that constitute a single-priced opening, reopening, or 
closing transaction by a trading center are excepted from the Order 
Protection Rule. Accordingly, a sub-penny execution at the opening that 
trades through another market center does not constitute a violation of 
Regulation NMS Rule 611's Order Protection Rule.
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    \9\ See 17 CFR 242.611(b)(3).
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    The Exchange adopted Rule 123D(3) to provide for a ``Sub-penny 
trading'' condition because the Exchange's trading systems did not then 
accommodate sub-penny executions on orders routed to better-priced 
protected quotations, nor could it recognize a quote disseminated by 
another market center if such quote had a sub-penny component and, 
therefore, could have inadvertently traded through better protected 
quotations. The rule allows the Exchange to halt trading in a security 
whose price was about to fall below $1.00, without delisting the 
security, so that the security could continue to trade on other markets 
that deal in bids, offers, orders or indications of interest in sub-
penny prices, until the price of the security had recovered 
sufficiently to permit the Exchange to resume trading in minimum 
increments of no less than one penny or the issuer is delisted for 
failing to correct the price condition within the time provided under 
NYSE rules.\10\
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    \10\ See Securities and Exchange Commission Release No. 34-
55398; File No. SR-NYSE-2007-25 (Mar. 5, 2007).
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    A subsequent amendment established that any orders received by the 
NYSE in a security subject to a ``Sub-penny trading'' condition would 
be routed to NYSE Arca, Inc. (``NYSE Arca'') and handled in accordance 
with the rules governing that market.\11\ When a ``Sub-penny trading'' 
condition is invoked, all open limit orders in such security at the 
Exchange will be cancelled and will not be routed to NYSE Arca.
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    \11\ See Securities and Exchange Commission Release No. 34-
55537; File No. SR-NYSE-2007-30 (Mar. 27, 2007).
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(2) Proposed Suspension of Rule 123D(3) for LEH Preferreds
    Pre-opening quoting and trading in away markets relating to LEH 
Preferreds indicated that such securities would open at prices below 
$1.05.\12\ Prior to the opening, the Exchange received pre-opening 
orders in LEH Preferreds. If the Exchange were to invoke a ``Sub-penny 
trading'' condition for those securities prior to the opening, such 
orders would be cancelled and would not be routed to NYSE Arca. 
Therefore, such orders would not be executed, potentially harming the 
investing public that routed such orders to the Exchange before the 
Exchange's announcement of a sub-penny trading halt.
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    \12\ Prior to the open on September 15, 2008, the Exchange 
announced that it was invoking a Rule 123D(3) ``Sub-penny trading'' 
condition for LEH and that any trading in that security would take 
place at NYSE Arca. Trading in LEH had begun at NYSE Arca at 4 a.m. 
EST on September 15, 2008.
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    The Exchange notes that while such an opening transaction would be 
a violation of NYSE Rule 123D(3), an execution at a sub-penny price at 
the opening at the Exchange would not be a violation of Regulation NMS. 
Accordingly, because a sub-penny execution at the opening would not 
constitute a violation of the Regulation NMS Rule 611 Order Protection 
Rule, the Exchange believes that the harm to the investing public in 
not having their orders in LEH Preferreds executed at the opening 
outweighs any harm that may result from a violation of NYSE Rule 
123D(3). The Exchange therefore proposes a one-day suspension of the 
operation of NYSE Rule 123D(3) that would be in effect only for the 
opening transactions of LEH Preferreds on September 15, 2008.
    Once trading in LEH Preferreds open at the Exchange, should such 
opening prices be at or below $1.05, the Exchange would, in compliance 
with NYSE Rule 123D(3), immediately halt trading and invoke a ``Sub-
penny trading'' condition for such securities.
b. Proposed Suspension of NYSE Rule 36.30
    NYSE Rule 36 bars members or member organizations from establishing 
or maintaining any telephonic or electronic location between the Floor 
of the Exchange and any other location without the approval of the 
Exchange. NYSE Rule 36.30 permits a specialist unit to maintain 
telephone lines at its stock trading post locations that connect to 
off-Floor offices of the specialist unit or the unit's clearing firm. 
Specialists, however, are not permitted to use cell phones from the 
Floor of the Exchange.
    As permitted by NYSE Rule 36.30, the Lehman Brothers specialist 
posts (posts 10 and 11), which are located in the Main Room of the 
Floor of the Exchange, have telephone lines connected to its off-Floor 
offices. Those post locations do not have telephone lines connected to 
any other entities. Because the temporary reallocation to Spear Leeds 
of the securities registered with Lehman as specialist was done shortly 
before the opening of trading at the Exchange, the Exchange was unable 
to install telephone lines at posts 10 and 11 that connect to Spear 
Leeds in time for the opening of trading or otherwise reorganize so 
that the Lehman Brothers and Spear Leeds posts are located in 
contiguous space.
    Without telephone lines from the posts 10 and 11 to Spear Leeds' 
off-Floor location, Spear Leeds is limited in its ability to engage in 
permitted telephonic communications from posts 10 and 11. Accordingly, 
the Exchange proposes to temporarily suspend NYSE Rule 36.30 as it 
applies only to Spear Leeds at posts 10 and 11. Such suspension would 
end the earlier of (i) the installation of telephone wires at posts 10 
and 11 that connect to Spear Leeds' off-Floor locations; or (ii) the 
end of the temporary reallocation of the securities assigned to Lehman 
Brothers to Spear Leeds.
    In connection with this temporary relief, the Exchange will advise 
Spear Leeds' management and risk personnel that use of the mobile 
telephones is limited to permitted communications, and may not be used 
from the Lehman Brothers' posts for any other purposes.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
and furthers the objectives of Section 6(b)(5) of the Act,\13\ in that 
it is designed to prevent fraudulent and manipulative

[[Page 57187]]

practices, to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanisms of, a free and open market 
and a national market system, and, in general, to protect investors and 
the public interest.
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    \13\ 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

    The Exchange has designated the proposed rule change as one that: 
(1) Does not significantly affect the protection of investors or the 
public interest; (2) does not impose any significant burden on 
competition; and (3) does not become operative for 30 days from the 
date of filing, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest. 
Therefore, the foregoing rule change has become effective pursuant to 
Section 19(b)(3)(A) of the Act \14\ and subparagraph (f)(6) of Rule 
19b-4 thereunder.\15\
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under 19b-4(f)(6) normally does not 
become operative until 30 days after the date of filing.\16\ However, 
Rule 19b-4(f)(6)(iii) \17\ permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. In view of the immediate nature of 
the relief requested, the Exchange seeks to have the proposed 
amendments become operative immediately. The Exchange requests that the 
Commission waive the 30-day delayed operative date, so that the 
proposed rule change may become immediately operative pursuant to 
Section 19(b)(3)(A) and Rule 19b-4(f)(6) thereunder. Waiver of these 
periods will allow the Exchange to immediately implement the proposed 
rule change.
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    \16\ Id. In addition, Rule 19b-4(f)(6)(iii) requires a self-
regulatory organization to give the Commission written notice of its 
intent to file the proposed rule change at least five business days 
prior to the date of filing of the proposed rule change, or such 
shorter time as designated by the Commission. NYSE has satisfied 
this requirement.
    \17\ Id.
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    As outlined more fully above, the Exchange believes that the 
proposed relief is limited in nature, and that the benefits of the 
proposed relief outweigh the potential harms. In particular, the 
proposed suspension of NYSE Rule 123D(3) would be applicable only to 
the opening transactions on September 15, 2008 for nine Lehman 
Preferred securities. Similarly, the proposed temporary suspension of 
NYSE Rule 36.30 is only applicable for posts 10 and 11 on the Floor of 
the Exchange to respond to the emergency reallocation of Lehman 
Brothers securities to Spear Leeds, and the suspension would end the 
earlier of (i) the installation of telephone wires at posts 10 and 11 
that connect to Spear Leeds' off-Floor locations; or (ii) the end of 
the temporary reallocation of the securities assigned to Lehman 
Brothers to Spear Leeds.\18\ Moreover, given the rapidity of recent 
developments, the NYSE believes that immediate effectiveness is 
required in order to avoid significant disruption to the market. The 
NYSE believes that this need satisfies the standards set out in the 
Exchange Act and related rules regarding immediate effectiveness 
filings.
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    \18\ Subsequent to filing this proposed rule change, the 
Exchange informed the Commission that installation of telephone 
wires at posts 10 and 11 connecting to Spear Leeds's off-Floor 
locations was completed the afternoon of September 15, 2008. Thus, 
the suspension would end and Rule 36.30 would be in effect again 
prior to the opening of trading on September 16, 2008. Telephone 
conversation between Clare Saperstein, Director, Office of the 
General Counsel, Exchange, and Nathan Saunders, Special Counsel, 
Division of Trading and Markets, Commission, September 15, 2008.
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    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
The Commission therefore grants the Exchange's request and designates 
the proposal to be operative upon filing.\19\
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    \19\ For purposes only of waiving the 30-day operative delay of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File No. SR-NYSE-2008-84 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, Station Place, 100 F Street, NE., Washington, 
DC 20549-1090.
All submissions should refer to File Number SR-NYSE-2008-84. 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, on official business 
days between the hours of 10 a.m. and 3 p.m. Copies of such filing also 
will be available for inspection and copying at the principal office of 
NYSE. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR--
NYSE-2008-84 and should be submitted on or before October 22, 2008.

[[Page 57188]]

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-22966 Filed 9-30-08; 8:45 am]

BILLING CODE 8011-01-P