Document ID: SEC-2013-0810-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange LLC
Posted Date: 2013-04-30T04:00Z

[Federal Register Volume 78, Number 83 (Tuesday, April 30, 2013)]
[Notices]
[Pages 25327-25329]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-10051]

[[Page 25327]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69441; File No. SR-NYSE-2013-29]

Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change Deleting NYSE Rule 476(a)(8), 
Which Addresses Wash Sales, in Order To Harmonize the Exchange's Rules 
With the Rules of the Financial Industry Regulatory Authority

April 24, 2013.
    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 April 10, 2013, New York Stock Exchange LLC (``NYSE'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(the ``Commission'') the proposed rule change as described in Items I 
and II, below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to delete NYSE Rule 476(a)(8), which 
addresses wash sales, in order to harmonize the Exchange's rules with 
the rules of the Financial Industry Regulatory Authority (``FINRA''). 
The text of the proposed rule change is available on the Exchange's Web 
site at www.nyse.com, at the principal office of the Exchange, and at 
the Commission's Public Reference Room.

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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to delete NYSE Rule 476(a)(8), which 
addresses wash sales, in order to harmonize the Exchange's rules with 
the rules of FINRA.
Background
    On July 30, 2007, FINRA's predecessor, the National Association of 
Securities Dealers, Inc. (``NASD''), and NYSE Regulation, Inc. 
(``NYSER'') consolidated their member firm regulation operations into a 
combined organization, FINRA. Pursuant to Rule 17d-2 under the 
Securities Exchange Act of 1934, as amended (the ``Act''), NYSE, NYSER 
and FINRA entered into an agreement (the ``Agreement'') to reduce 
regulatory duplication for their members by allocating to FINRA certain 
regulatory responsibilities for certain NYSE rules and rule 
interpretations (``FINRA Incorporated NYSE Rules''). NYSE MKT LLC 
(``NYSE MKT'') became a party to the Agreement effective December 15, 
2008.\4\
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    \4\ See Securities Exchange Act Release Nos. 56148 (July 26, 
2007), 72 FR 42146 (August 1, 2007) (order approving the Agreement); 
56147 (July 26, 2007), 72 FR 42166 (August 1, 2007) (SR-NASD-2007-
054) (order approving the incorporation of certain NYSE Rules as 
``Common Rules''); and 60409 (July 30, 2009), 74 FR 39353 (August 6, 
2009) (order approving the amended and restated Agreement, adding 
NYSE MKT LLC as a party). Paragraph 2(b) of the Agreement sets forth 
procedures regarding proposed changes by FINRA, NYSE or NYSE MKT to 
the substance of any of the Common Rules.
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    As part of its effort to reduce regulatory duplication and relieve 
firms that are members of FINRA, NYSE, and NYSE MKT of conflicting or 
unnecessary regulatory burdens, FINRA is now engaged in the process of 
reviewing and amending the NASD and FINRA Incorporated NYSE Rules in 
order to create a consolidated FINRA rulebook.\5\
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    \5\ FINRA's rulebook currently has three sets of rules: (1) NASD 
Rules, (2) FINRA Incorporated NYSE Rules, and (3) consolidated FINRA 
Rules. The FINRA Incorporated NYSE Rules apply only to those members 
of FINRA that are also members of the NYSE (``Dual Members''), while 
the consolidated FINRA Rules apply to all FINRA members. For more 
information about the FINRA rulebook consolidation process, see 
FINRA Information Notice, March 12, 2008.
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Proposed Rule Change
    Current NYSE Rule 476(a)(8) prohibits a member, member 
organization, principal executive, approved person, registered or non-
registered employee of a member or member organization, or person 
otherwise subject to the jurisdiction of the Exchange from (i) making a 
fictitious bid, offer, or transaction, (ii) giving an order for the 
purchase or sale of securities the execution of which would involve no 
change of beneficial ownership, or (iii) executing such an order with 
knowledge of its character. In 2009, the Exchange adopted NYSE Rules 
6140(a) and (b), which are substantially the same as FINRA Rules 
6140(a) and (b) \6\ and also address wash sale activity. NYSE Rule 
6140(a) provides that no member or member organization may execute or 
cause to be executed or participate in an account for which there are 
executed purchases of any NMS stock as defined in Rule 600(b)(47) of 
SEC Regulation NMS (``designated security'') at successively higher 
prices, or sales of any such security at successively lower prices, for 
the purpose of creating or inducing a false, misleading or artificial 
appearance of activity in such security or for the purpose of unduly or 
improperly influencing the market price for such security or for the 
purpose of establishing a price that does not reflect the true state of 
the market in such security. NYSE Rule 6140(b) prohibits a member or 
member organization, for the purpose of creating or inducing a false or 
misleading appearance of activity in a designated security or creating 
or inducing a false or misleading appearance with respect to the market 
in such security, from:
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    \6\ See Securities Exchange Act Release No. 59965 (May 21, 
2009), 74 FR 25783 (May 29, 2009) (SR-NYSE-2009-25).
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    (1) Executing any transaction in such security which involves no 
change in the beneficial ownership thereof;
    (2) entering any order or orders for the purchase of such security 
with the knowledge that an order or orders of substantially the same 
size, and at substantially the same price, for the sale of any such 
security, has been or will be entered by or for the same or different 
parties; or
    (3) entering any order or orders for the sale of any such security 
with the knowledge that an order or orders of substantially the same 
size, and at substantially the same price, for the purchase of such 
security, has been or will be entered by or for the same or different 
parties.
    The Exchange notes that NYSE Rule 476(a)(8), which was adopted at a 
time when the Exchange was operating in a manual on-Floor trading 
environment, has a different scienter standard than NYSE Rule 6140 and 
FINRA Rule 6140. These rules provide that a market participant is 
prohibited from engaging in wash sales that have the purpose of

[[Page 25328]]

creating or inducing a false or misleading appearance of activity in a 
designated security. The ``purpose'' or scienter requirement in NYSE 
Rule 6140 and FINRA Rule 6140 recognizes that in today's markets there 
can be certain instances of trading activity that may inadvertently and 
unknowingly result in executions with no change in beneficial 
ownership, for example trades entered from an off-Floor participant 
that experience latency issues over which the participant has little or 
no control, and that such conduct should not always be treated as a 
wash sale violation if the market participant did not act with purpose.
    On the other hand, NYSE Rule 476(a)(8) prohibits (i) making a 
fictitious bid, offer, or transaction, (ii) giving an order for the 
purchase or sale of securities the execution of which would involve no 
change of beneficial ownership, or (iii) executing such an order with 
knowledge of its character. The second prong can be read as having no 
scienter requirement.\7\ As such, the example given above involving an 
off-Floor market participant's algorithmic orders that inadvertently 
execute against themselves due to latency issues could be deemed a 
violation of the second prong of NYSE Rule 476(a)(8). The Exchange 
believes that such conduct should not be treated as a wash sale 
violation in all instances and therefore proposes to eliminate NYSE 
Rule 476(a)(8) and instead utilize NYSE Rule 6140 for wash sale 
disciplinary actions. The proposed rule change would achieve a greater 
level of consistency with FINRA's rules and promote harmonization, 
consistency, transparency, and clarity with respect to the Exchange's 
rules and thereby facilitate FINRA's enforcement of them.\8\
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    \7\ In at least one case, a hearing panel was divided as to 
whether scienter is required in order to find a violation of the 
second prong of NYSE Rule 476(a)(8) and adjudged the respondent not 
guilty. See In the Matter of X, NYSE Hearing Panel Decision 92-163 
(Oct. 23, 1992).
    \8\ The Exchange notes that it can bring disciplinary actions 
under NYSE Rule 476(a)(8) for conduct that occurred prior to the 
time the rule is deleted. Thus, the proposed rule change would have 
no impact on ongoing disciplinary actions involving violations of 
NYSE Rule 476(a)(8).
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    The proposed rule change would not result in any material 
diminution of the Exchange's enforcement authority or any material 
change in surveillance of potentially violative activity. The Exchange 
may still bring a disciplinary action in appropriate cases where a 
market participant engages in a significant amount of trades without 
change of beneficial ownership, even if such activity does not violate 
Rule 6140(b) per se because the participant did not act with 
``purpose.'' Such conduct could also give rise to other violations, 
such as a failure to supervise under NYSE Rule 342, and the Exchange 
has brought at least one such case.\9\ Such conduct could also violate 
just and equitable principles of trade or otherwise constitute 
unethical activity under NYSE Rule 2010.\10\
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    \9\ See In the Matter of Goldman Sachs & Co., NYSE Hearing Board 
Decision 12-3 (Apr. 4, 2012) (between January 2009 and at least 
September 2011, member firm violated NYSE Rule 342 in its capacity 
as a NYSE Supplemental Liquidity Provider by failing to maintain 
supervisory procedures that were reasonably designed to detect and 
prevent potentially violative wash trading activity).
    \10\ See Calvin David Fox, 56 S.E.C. 1371, 1376 (2003) (``With 
respect to a charge that conduct was inconsistent with just and 
equitable principles of trade, we have held that a self-regulatory 
organization need not find that the respondent acted with scienter, 
but must find that the respondent acted in bad faith or 
unethically.''). NYSE Rule 2110 [sic] is a broad ethical concept 
that covers all unethical business-related conduct. See also In the 
Matter of Merrill Lynch, Pierce, Fenner & Smith Incorporated, NYSE 
Hearing Board Decision 10-13 (May 14, 2010) (firm violated just and 
equitable principles of trade in that it introduced prearranged or 
wash sales in the round-lot portion of a partial round lot order); 
In the Matter of Robert Cutter Matlock, Jr., NYSE Hearing Board 
Decision 06-19 (March 27, 2006) (Exchange need not prove scienter 
for violations of just and equitable principles of trade, but rather 
is required to show the respondent acted in bad faith or 
unethically); In the Matter of Mary Roy Wong, NYSE Hearing Board 
Decision 06-187 (February 13, 2007) (Exchange need not prove 
scienter for violations of just and equitable principles of trade, 
but rather is required to show the respondent acted in bad faith or 
unethically).
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    So that there is no change in the scope of persons subject to 
disciplinary action for wash sales, the Exchange proposes to make a 
conforming amendment to NYSE Rules 6140(a) and (b) to provide that the 
rules apply not only to members and member organizations but also to 
principal executives, approved persons, registered or non-registered 
employees of a member or member organization or persons otherwise 
subject to the jurisdiction of the Exchange.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Act,\11\ in general, and furthers the objectives of Section 
6(b)(5),\12\ in particular, in that 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 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. Specifically, the Exchange 
believes that the proposed rule change supports the objectives of the 
Act by addressing an inconsistency in the scienter requirements between 
NYSE Rule 476(a)(8) on the one hand and NYSE Rule 6140 and FINRA Rule 
6140 on the other. Eliminating this inconsistency would provide member 
firms with better notice of prohibited wash sale activities and promote 
transparency and clarity with respect to the Exchange's rules, thereby 
facilitating FINRA's enforcement of them. Moreover, the proposed rule 
change would not result in any material diminution of the Exchange's 
overall enforcement authority or any material change in surveillance of 
potentially problematic trading activity. The Exchange may still bring 
a disciplinary action in appropriate cases where a market participant 
engages in a significant amount of trades without change of beneficial 
ownership, even if such activity does not violate Rule 6140(b) per se 
because the participant did not act with ``purpose,'' because such 
conduct could violate supervision rules, just and equitable principles 
of trade, or other Exchange rules prohibiting unethical conduct. As 
such, the Exchange's rules would continue to protect investors and the 
public interest.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 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. The proposed rule change is 
not intended to address competitive issues but rather to achieve 
greater consistency both within NYSE's rules and between NYSE and FINRA 
rules.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

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

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:

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    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File No. SR-NYSE-2013-29 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 No. SR-NYSE-2013-29. 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 Web site (http://www.sec.gov/rules/sro.shtml). Copies 
of the submission, all subsequent amendments, all written statements 
with respect to the proposed rule change that are filed with the 
Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE., Washington, 
DC 20549, on official business days between the hours of 10:00 a.m. and 
3:00 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 No. SR-NYSE-2013-29 and should be 
submitted on or before May 21, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-10051 Filed 4-29-13; 8:45 am]
BILLING CODE 8011-01-P