Document ID: SEC-2012-0621-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2012-04-18T04:00Z

[Federal Register Volume 77, Number 75 (Wednesday, April 18, 2012)]
[Notices]
[Pages 23303-23305]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-9289]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66798; File No. SR-NYSEArca-2012-27]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Adopt Recent 
Changes to FINRA Rules 7440 and 7450, and To Adopt Recent Changes to 
FINRA Rule 5320 by Amending Commentary .02 to NYSE Arca Equities Rule 
5320 To Require That ETP Holders Report to the Order Audit Trail System 
Information Barriers Put Into Place by the ETP Holder in Reliance on 
Commentary .02 to NYSE Arca Equities Rule 5320

 April 12, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on April 2, 2012, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the Exchange. 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\ 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 (i) adopt recent changes to Financial 
Industry Regulatory Authority, Inc. (``FINRA'') Rules 7440 and 7450, 
which the Exchange has incorporated by reference in its own rules, and 
(ii) adopt recent changes to FINRA Rule 5320 by amending Commentary .02 
to NYSE Arca Equities Rule 5320 to require that ETP Holders report to 
the Order Audit Trail System (``OATS'') information barriers put into 
place by the ETP Holder in reliance on Commentary .02 to NYSE Arca 
Equities Rule 5320. The text of the proposed rule change is available 
at the Exchange, www.nyse.com, the Commission's Public Reference Room, 
and the Commission's Web site at www.sec.gov.

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
    The Exchange proposes to (i) adopt recent changes to FINRA Rules 
7440 and 7450, which the Exchange has incorporated by reference in its 
own rules, and (ii) adopt recent changes to FINRA Rule 5320 by amending 
Commentary .02 to NYSE Arca Equities Rule 5320 to require that ETP 
Holders report to OATS information barriers put into place by the ETP 
Holders in reliance on Commentary .02 to NYSE Arca Equities Rule 5320.
    FINRA recently received Commission approval of changes to the order 
recording and transmission requirements of the OATS rules in FINRA 
Rules 7440 and 7450.\3\ First, FINRA amended FINRA Rule 7440 to require 
FINRA members relying on the no-knowledge exception in Supplementary 
Material .02 to FINRA Rule 5320 (Prohibition Against Trading Ahead of 
Customer Orders) to report information to OATS regarding the 
information barriers adopted by the member in reliance on the 
exception--FINRA also added this requirement under Supplementary 
Material .02 to FINRA Rule 5320. Second, FINRA amended FINRA Rule 7440 
to extend, to all OATS-eligible securities, the existing requirement to 
reflect on OATS reports a customer's instruction regarding display of 
the customer's limit orders--the requirement previously applied only to 
limit orders involving NMS stocks. Finally, FINRA amended FINRA Rule 
7450 to codify the specific time by which OATS reports must be 
transmitted to FINRA.
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    \3\ See Securities Exchange Act Release No. 66021 (December 21, 
2011), 76 FR 81551 (December 28, 2011) (SR-FINRA-2011-63) [sic].
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    The Exchange recently adopted the NYSE Arca Equities Rule 7400 
Series, which consists of NYSE Arca Equities Rules 7410 through 7470 
and is based substantially on the FINRA Rule 7400 Series.\4\ In this 
regard, NYSE Arca Equities Rules 7440 and 7450

[[Page 23304]]

incorporate by reference the order data recording and transmission 
requirements of FINRA Rules 7440 and 7450, respectively, by requiring 
ETP Holders and associated persons to comply with FINRA Rules 7440 and 
7450 as if those rules were part of the Exchange's rules. Accordingly, 
the Exchange hereby proposes to adopt the changes to FINRA Rules 7440 
and 7450 that were approved pursuant to SR-FINRA-2011-063.\5\
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    \4\ See Securities Exchange Act Release No. 65544 (October 12, 
2011), 76 FR 64406 (October 18, 2011) (SR-NYSEArca-2011-69).
    \5\ The Exchange notes that the approved changes to FINRA Rules 
7440 and 7450 that the Exchange proposes to adopt would be 
applicable only to ETP Holders that are also FINRA members. In 
particular, the changes relate to cross-references to FINRA Rule 
5320, and for the Exchange, to NYSE Arca Equities Rule 5320, which 
is not applicable to Proprietary Trading Firms, as defined in NYSE 
Arca Equities Rule 7410(p), because they do not have customers and 
therefore do not need to maintain information barriers.
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    The Exchange also recently adopted NYSE Arca Equities Rule 5320, 
which is substantially the same as FINRA Rule 5320 and prohibits 
trading ahead of customer orders with certain exceptions, including 
large order and institutional account exceptions, a no-knowledge 
exception, a riskless principal exception, an intermarket sweep order 
exception, and odd lot and bona fide error transaction exceptions.\6\ 
The Exchange hereby proposes to adopt as Commentary .02(b) to NYSE Arca 
Equities Rule 5320 the same language that was approved pursuant to SR-
FINRA-2011-063 as Supplementary Material .02(c) to FINRA Rule 5320.\7\ 
Specifically, if an ETP Holder implements and utilizes appropriate 
information barriers in reliance on the no-knowledge exception provided 
under Commentary .02 to NYSE Arca Equities Rule 5320, the ETP Holder 
must uniquely identify such information barriers as prescribed in FINRA 
Rule 7440(b)(19).
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    \6\ See Securities Exchange Act Release No. 65166 (August 18, 
2011), 76 FR 53013 [sic] (August 24, 2011) (SR-NYSEArca-2011-57).
    \7\ For consistency with Exchange rules, the Exchange proposes 
to change references from ``members'' in Supplementary Material 
.02(c) to FINRA Rule 5320 to ``ETP Holders'' in proposed Commentary 
.02(b) to NYSE Arca Equities Rule 5320. The Exchange also proposes 
the designate the existing text of Commentary.02 to NYSE Arca 
Equities Rule 5320 as paragraph (a) thereto.
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    The no-knowledge exception in Commentary .02 to NYSE Arca Equities 
Rule 5320 provides that if an ETP Holder implements and uses an 
effective system of internal controls--such as appropriate information 
barriers--that operate to prevent one trading unit from obtaining 
knowledge of customer orders held by a separate trading unit, that 
other trading unit may trade in a proprietary capacity at prices that 
would satisfy the customer orders held by the separate, walled-off 
trading unit. Through the use of OATS, FINRA will be able to ascertain, 
on an automated basis, those ETP Holders claiming the no-knowledge 
exception.\8\ This will reduce the potential for ``false positive'' 
alerts by allowing FINRA to account for the existence of information 
barriers when running automated surveillance patterns designed to 
identify inappropriate trading ahead of customer orders. These new 
requirements should substantially reduce the number of ``false 
positives'' that are identified through automated surveillance patterns 
by permitting FINRA to account for information barriers when trading 
ahead may otherwise be indicated.
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    \8\ All Exchange ETP Holders that are subject to NYSE Arca 
Equities Rule 5320 are also FINRA members, and FINRA reviews 
compliance with that rule pursuant to an allocation plan under Rule 
17d-2 of the Securities Exchange Act of 1934.
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    The Exchange proposes to implement the changes proposed herein on 
the same date that FINRA implements the changes approved pursuant to 
SR-FINRA-2011-063, thereby eliminating the potential for different 
regulatory requirements between common members.\9\
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    \9\ FINRA has announced that it will implement the changes on 
April 16, 2012. See http://www.finra.org/Industry/Compliance/MarketTransparency/OATS/OATSReport/P125612.
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Securities Exchange Act of 1934 (the ``Act''),\10\ in general, and 
furthers the objectives of Section 6(b)(5),\11\ in particular, because 
it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, 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. Specifically, 
the proposed rule change would remove impediments to and perfect the 
mechanism of a free and open market and a national market system by 
providing greater harmonization between NYSE Arca Equities Rules and 
FINRA Rules of similar substance and purpose. This would result in less 
burdensome and more efficient regulatory compliance, which would foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities and promote the protection of investors and 
the public interest. The changes proposed herein are also designed to 
prevent fraudulent and manipulative acts and practices and to promote 
just and equitable principles of trade by ensuring that FINRA Rules 
incorporated by reference in the NYSE Arca Equities Rules and rules 
that are common to both NYSE Arca Equities and FINRA remain consistent 
after amendments to the particular FINRA Rules.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 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

    Because the proposed rule change does not: (i) Significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \12\ and Rule 19b-
4(f)(6) thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
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. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \14\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6) permits the Commission to 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange requests 
that the Commission waive the 30-day operative delay so that the 
proposed rule change may become effective on the same date that FINRA 
implements the changes to FINRA Rules 7440, 7450, and

[[Page 23305]]

5320.\15\ The Commission believes that waiving the 30-day operative 
delay is consistent with the protection of investors and the public 
interest and, therefore, designates the proposal operative upon 
filing.\16\ Waiving the 30-day operative delay will enable the Exchange 
to implement the proposed rule change on the same day that FINRA 
implements the changes to its rules on which the proposed rule change 
is based, thereby eliminating the potential for different regulatory 
requirements for members of both FINRA and the Exchange.
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    \14\ 17 CFR 240.19b-4(f)(6).
    \15\ FINRA has announced that it will implement the changes on 
April 16, 2012. See supra note 9.
    \16\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 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 summarily may temporarily suspend 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 email to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2012-27 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-NYSEArca-2012-27. This 
file number should be included on the subject line if email 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 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 New York Stock 
Exchange LLC's principal office and on its Internet Web site at 
www.nyse.com. 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-
NYSEArca-2012-27, and should be submitted on or before May 9, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-9289 Filed 4-17-12; 8:45 am]
BILLING CODE 8011-01-P