Document ID: SEC-2007-0997-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange LLC
Posted Date: 2007-07-24T04:00Z

[Federal Register: July 24, 2007 (Volume 72, Number 141)]
[
Notices]               
[Page 40348-40351]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24jy07-143]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56085; File No. SR-NYSE-2007-09]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Amendment No. 3 and Order Granting Accelerated 
Approval to a Proposed Rule Change as Modified by Amendments No. 1, 2, 
and 3 Thereto Relating to Rule 18 (Compensation in Relation to System 
Failure)

July 17, 2007.

I. Introduction

    On January 26, 2007, the New York Stock Exchange LLC (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposal to adopt Rule 18, ``Compensation in Relation to Exchange 
System Failure,'' which will provide a form of compensation to member 
organizations when a loss is sustained in relation to an Exchange 
system failure. The Exchange filed Amendments No. 1 and 2 to the 
proposal on February 1, 2007, and March 28, 2007, respectively. The 
proposal, as modified by Amendments No. 1 and 2, was published for 
comment in the Federal Register on April 5, 2007.\3\ The Commission 
received one comment letter regarding the proposal.\4\ The Exchange 
filed Amendment No. 3 with the Commission on June 21, 2007.\5\

[[Page 40349]]

This order provides notice of filing of Amendment No. 3 and approves 
the proposal, as modified by Amendments No. 1, 2, and 3, on an 
accelerated basis.
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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. 55555 (March 29, 
2007), 72 FR 16841 (``Notice'').
    \4\ See letter from Jerry O'Connell, Chair, Trading Committee, 
Securities Industry and Financial Markets Association (``SIFMA''), 
to Nancy M. Morris, Secretary, Commission, dated April 26, 2007 
(``SIFMA Letter''). On June 21, 2007, NYSE submitted a response to 
the SIFMA Letter. See letter from Mary Yeager, Assistant Secretary, 
NYSE, to Nancy M. Morris, Secretary, Commission (``Response 
Letter'').
    \5\ Amendment No. 3: (i) Removed the exclusion of queuing from 
the proposed definition of Exchange system failure; (ii) withdrew 
the proposed modification of NYSE Rule 134; and (iii) clarified that 
the Chief Executive Officer or his or her designee shall make the 
final determinations on claims in the event that the members of the 
Compensation Review Panel are deadlocked. The text of Amendment No. 
3 is available on the Exchange's Web site (http://www.nyse.com), at 

the Exchange's Office of the Secretary, and at the Commission's 
Public Reference Room.
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II. Description of the Proposal

    The Exchange proposes to adopt Rule 18, ``Compensation in Relation 
to Exchange System Failure,'' in order to establish a procedure to 
compensate member organizations in relation to Exchange system 
failures. The proposed rule defines an Exchange system failure as a 
``malfunction of the Exchange's physical equipment, devices, and/or 
programming which results in an incorrect execution or no execution of 
an order that was received in Exchange systems. Misuse of Exchange 
systems is not considered an Exchange system failure.'' \6\
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    \6\ The Exchange's original proposal, as described in the 
Notice, see supra note 3, stated that delays in order processing as 
a result of large volume or other capacity issues, commonly known as 
``queuing,'' are not within the definition of Exchange system 
failures. In response to a comment in the SIFMA Letter, see supra 
note 4, NYSE revised the proposal to delete this aspect of the 
definition in Amendment No. 3.
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    For a member organization to be eligible to receive payment for a 
claim, it must incur a net loss equal to or greater than $5,000. Member 
organizations are not permitted to aggregate losses incurred as a 
result of more than one system failure in order to satisfy the $5,000 
minimum claim requirement.
    Proposed Rule 18 would require member organizations to informally 
notify the Exchange's Division of Floor Operations of a suspected 
Exchange system failure by the opening of the next business day 
following an incident. Formal written notice of the suspected Exchange 
system failure must be provided to the Exchange's Division of Floor 
Operations no later than the end of the third business day after the 
incident.
    Once in receipt of a claim, the Exchange's Division of Floor 
Operations will verify that: (i) A valid order was accepted into the 
Exchange's systems; and (ii) an Exchange system failure occurred during 
the execution or handling of that order. If all of the criteria for 
submitting a claim have been met, the claim will be qualified for 
processing with all other eligible claims at the end of the calendar 
month in which the incident occurred.
    The Exchange proposes to allot $500,000 each calendar month 
(``Monthly Allotment'') to be used for payments to member organizations 
that qualify for compensation under proposed Rule 18. The Monthly 
Allotments will not aggregate; however, in the event that less than 
$250,000 of the Monthly Allotment is paid out for a given calendar 
month, $50,000 of that month's remaining Monthly Allotment 
(``Supplemental Allotment'') will be added to a supplemental fund 
available for payment in subsequent calendar months. This Supplemental 
Allotment will be used only to pay claims after the Monthly Allotment 
is exhausted. If claims are satisfied by the Monthly Allotment, the 
Supplemental Allotment, or any unused portion thereof, will be carried 
forward every month.
    Under the current proposal, there is no cap on the amount that may 
accrue over time from the Supplemental Allotments. The Exchange may 
determine to institute such a cap in the future. Any such determination 
would be formally reflected in the text of Rule 18. In addition, the 
Exchange represented in its proposal that, a few years after Rule 18's 
implementation, Exchange management intends to review both the maximum 
dollar amount, if any, that may be accrued as part of the Supplemental 
Allotment and the Monthly Allotment to determine whether they are 
appropriate. The Exchange represents that any modification of the terms 
of the Supplemental Allotment or the Monthly Allotment will be filed 
with the Commission under Section 19(b)(1) of the Act as a proposed 
rule change.
    In the original proposal, the Exchange sought to amend Rule 134.40 
to require that profits equal to or greater than $5,000 gained in 
relation to an Exchange system failure be remitted to the Exchange in 
order to be applied to payments to member organizations in the event 
that the Monthly Allotment and Supplemental Allotment were inadequate. 
However, in response to industry comment,\7\ in Amendment No. 3, the 
Exchange withdrew its proposed amendment to Rule 134.40. Thus, under 
Rule 134.40, member organizations must continue to report profits from 
Exchange error transactions to the Exchange, but they will not be 
required to remit any part of such profits to the Exchange.
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    \7\ See SIFMA Letter, supra note 4.
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    The Exchange proposes to establish a panel consisting of three 
Floor Governors and three Exchange employees (``Compensation Review 
Panel'') that will review qualified claims and administer payments. The 
Compensation Review Panel will meet and review all the claims that are 
submitted for a calendar month in order to determine if each claim 
satisfies all the criteria for payment, and the amount to be paid on 
the claim (``approved claims''). As part of its determination, the 
Compensation Review Panel will review the actions of the member 
organization and its employees before and after the error occurred in 
order to determine if any of the claimant's actions contributed to the 
loss sustained. The Compensation Review Panel may increase or reduce 
the amount deemed eligible for payment as a result of its review. All 
decisions by the Compensation Review Panel will be final.
    The determinations of the Compensation Review Panel will be by 
majority vote. In the event of deadlock, all relevant information about 
the claim will be sent to the Chief Executive Officer of the Exchange 
(``CEO'') of the Exchange or his or her designee,\8\ who will make a 
final determination. Like the determinations of the Compensation Review 
Panel, all the determinations of the CEO will be final.
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    \8\ The description of the proposal set forth in the Notice, see 
supra note 3, provided that, in the event of a deadlock, the CEO of 
the Exchange or the President or his or her designee would make the 
final determination. The inclusion of the President in this 
provision was an error on the Exchange's part. In Amendment No. 3, 
the Exchange corrected this provision of the proposed rule change to 
reflect the Exchange's intention that the CEO or his or her designee 
would serve this function. Telephone conversation between Deanna 
Logan, Director, Rule Development, NYSE, and Nathan Saunders, 
Special Counsel, Division of Market Regulation, Commission, on July 
16, 2007.
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    If the total dollar amount of approved claims is less than the 
Monthly Allotment, then the claims will be paid in full. If the total 
amount of approved claims exceeds the Monthly Allotment, then any 
Supplemental Allotment will be added to the Monthly Allotment in order 
to satisfy approved claims. In the event that the approved claims for a 
month exceed the sum of the Monthly Allotment and any Supplemental 
Allotment, the approved claims will be paid out to member organizations 
based on the proportion that each eligible claim bears to the total 
amount of all approved claims.
    Finally, the Exchange proposes to make NYSE Rule 18 effective 
retroactively to September 1, 2006. Following Commission approval of 
the proposed rule, member organizations may submit claims to the 
Exchange for any alleged Exchange system failures

[[Page 40350]]

that occurred between September 1, 2006, and the date of Commission 
approval. A Monthly Allotment will be set aside for each calendar month 
in the period for which Rule 18 is retroactively effective. However, 
the Supplemental Allotment provision will not be retroactive, but will 
be effective beginning with the first calendar month after Commission 
approval of proposed Rule 18.

III. Discussion

    After careful consideration of the proposed rule change, the SIFMA 
Letter, and the NYSE's Response Letter, the Commission finds that the 
proposed rule change, as amended, is consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to a 
national securities exchange.\9\ In particular, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\10\ 
which requires, inter alia, that the rules of a national securities 
exchange be designed to promote just and equitable principles of trade, 
to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and 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.
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    \9\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that proposed Rule 18 provides for a fair 
and reasonable process by which NYSE member organizations may petition 
for compensation when they suffer a loss due to a system failure on the 
Exchange. In addition, the proposed amount of the Monthly Allotment and 
the Supplemental Allotment and the procedures relating to requests for 
compensation for Exchange system failures are reasonable. The Exchange 
has represented that it will review the terms of the Supplemental 
Allotment and the Monthly Allotment to evaluate whether they are 
sufficient and will file with the Commission a proposed rule change 
under Section 19(b)(1) of the Act to reflect any proposed revisions.
    The Commission received one comment letter on the proposed rule 
change.\11\ First, the commenter objected to the proposed exclusion of 
queuing delays from the definition of Exchange system failure, stating 
that the Exchange's proposed definition of system failure was narrower 
than the definition used by other exchanges.\12\ In response to this 
comment, in Amendment No. 3, the Exchange removed the exclusion of 
queuing from the definition of Exchange system failure.
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    \11\ See SIFMA Letter, supra note 4.
    \12\ See NYSE Arca Rule 14.2 and Nasdaq Rule 4626.
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    Second, the commenter objected to the proposed provision requiring 
remittance to the exchange of certain net gains resulting from system 
failure, stating that this element of the proposal would impose new 
obligations on member organizations to remit profits that result not 
from any act or omission on their part, but from an act or omission on 
the part of the Exchange. The commenter also questioned how this 
proposed requirement could be reconciled with NYSE Rule 411, which 
requires members to resolve certain erroneous executions in favor of 
non-member customers.\13\ In response to the comment letter, in 
Amendment No. 3, the Exchange withdrew its proposal to amend Rule 
134.40 to require remittance of certain net gains.
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    \13\ See NYSE Rule 411(a)(ii).
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    Third, the commenter argued that the guidelines set forth in 
proposed Rule 18 for the Compensation Review Panel are vague and 
subjective--specifically, the provision allowing the Panel to award a 
lesser amount than that claimed based on the actions or inactions of 
the claiming member. Fourth, with respect to the proposal that any 
deadlock of the Compensation Review Panel would be broken by the 
Exchange's CEO or his or her designee, the commenter argued that 
decisions impacting the regulation and compensation of NYSE member 
organizations should be made by the Chief Regulatory Officer or some 
other senior officer within the Exchange's regulatory arm. In response 
to these comments, NYSE stated its view that the business judgment of 
the Compensation Review Panel should be based on a reasonableness 
standard when this panel evaluates whether a claimant should have 
taken, and did take, actions to mitigate the claimed loss. NYSE further 
noted that the expert professional judgment of the CEO makes the CEO 
the appropriate person with whom to vest the authority to break a 
deadlock of the Compensation Review Panel. The Commission believes that 
the proposed guidelines and tie-breaking procedures for the 
Compensation Review Panel's are reasonable in light of the Exchange's 
goal to provide a mechanism to compensate members for system failures.
    Pursuant to Section 19(b)(2) of the Act,\14\ the Commission finds 
good cause for approving the proposal prior to the thirtieth day after 
the publication of the proposal, as modified by Amendments No. 1, 2, 
and 3, in the Federal Register. In Amendment No. 3, the Exchange 
proposed to eliminate the exclusion of queuing from the definition of 
system failure, which would make this definition consistent with the 
definitions of system failure used by Nasdaq and NYSE Arca.\15\ In 
Amendment No. 3, the Exchange also retracted its proposal to amend Rule 
134.40 to require remittance of profits resulting from Exchange system 
failure. Rule 134.40 will remain unchanged under the proposal, as 
modified by Amendment No 3. Finally, Amendment No. 3 clarified the tie-
breaking procedures of the Compensation Review Panel. Thus, the changes 
proposed in Amendment No. 3 to the proposed rule change do not 
introduce any new regulatory issues, and the Commission finds good 
cause for approving the amended proposal on an accelerated basis.
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    \14\ 15 U.S.C. 78s(b)(2).
    \15\ See supra note 12.
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IV. Solicitation of Comments Concerning Amendment No. 3

    Interested persons are invited to submit written data, views, and 
arguments concerning the proposed rule change as modified by Amendment 
No. 3, including whether it 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-2007-09 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NYSE-2007-09. 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

[[Page 40351]]

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, 100 F Street, NE., Washington, DC 20549, 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 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-2007-09 and should be submitted on or before August 
14, 2007.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (File No. SR-NYSE-2007-09), as 
modified by Amendments No. 1, 2, and 3, be, and it hereby is, approved 
on an accelerated basis.
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    \16\ Id.
    \17\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-14217 Filed 7-23-07; 8:45 am]

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