Document ID: SEC-2011-1515-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange LLC
Posted Date: 2011-10-06T04:00Z

[Federal Register Volume 76, Number 194 (Thursday, October 6, 2011)]
[Notices]
[Pages 62122-62123]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-25825]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65453; File No. SR-NYSE-2011-45]

Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Approving a Proposed Rule Change Amending NYSE Rule 17(c)(2)(B) To Make 
Permanent the Pilot Program That Permits the Exchange To Accept Inbound 
Orders Routed by Archipelago Securities LLC in Its Capacity as a 
Facility of Affiliated Exchanges and To Clarify the Text of NYSE Rule 
17(c)(2)(A)(ii) to More Accurately Reflect the Regulatory Services 
Agreement Between the Exchange and the Financial Industry Regulatory 
Authority

September 30, 2011.

I. Introduction

    On August 18, 2011, 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 
proposed rule change to make permanent the existing pilot program that 
permits the Exchange to accept inbound orders routed by Archipelago 
Securities LLC (``Arca Securities'') in its capacity as a facility of 
an affiliated exchange (with the attendant obligations and conditions), 
and to clarify the text of NYSE Rule 17(c)(2)(A)(ii) to more accurately 
reflect the regulatory services agreement (``RSA'') between the 
Exchange and the Financial Industry Regulatory Authority (``FINRA''). 
The proposed rule change was published for comment in the Federal 
Register on August 26, 2011.\3\ The Commission received no comment 
letters regarding the proposed rule change. This order approves the 
proposed rule change.
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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. 65183 (August 22, 
2011), 76 FR 53513 (``Notice'').
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II. Background

    Arca Securities is a broker-dealer that is an NYSE member,\4\ and, 
among other things, is permitted to provide to members of NYSE Amex and 
NYSE Arca optional routing services to other market centers.\5\ On June 
16, 2011, the Exchange filed an immediately effective proposed rule 
change to, among other things, permit the Exchange to receive inbound 
routes of equity orders that Arca Securities routes in its capacity as 
a facility of NYSE Amex and NYSE Arca on a pilot basis ending September 
30, 2011.\6\ The Exchange now seeks permanent approval of this inbound 
routing pilot.\7\
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    \4\ Arca Securities is owned indirectly by NYSE Euronext (``NYSE 
Euronext''), which also indirectly owns three registered securities 
exchanges--NYSE Amex LLC (``NYSE Amex''), the Exchange, and NYSE 
Arca, Inc. (``NYSE Arca''). Thus, Arca Securities is an affiliate of 
each of these exchanges.
    \5\ Arca Securities operates as a facility of NYSE Amex and NYSE 
Arca that provides outbound routing from NYSE Amex and NYSE Arca to 
other market centers, subject to certain conditions. See Securities 
Exchange Act Release Nos. 58705 (October 1, 2008), 73 FR 58995 
(October 8, 2008) (SR-Amex-2008-63); and 52497 (September 22, 2005), 
70 FR 56949, 56952-56953 (September 29, 2005) (SR-PCX-2005-90).
    \6\ See Securities Exchange Act Release No. 64729 (June 23, 
2011), 76 FR 38232 (June 29, 2011) (SR-NYSE-2011-24) (``Routing 
Pilot Release''). See also Notice, 76 FR at 53513, n.5 and 
accompanying text.
    \7\ See Notice.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange.\8\ 
Specifically, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(1) of the Act,\9\ which requires, among 
other things, that a national securities exchange be so organized and 
have the capacity to carry out the purposes of the Act, and to comply 
and enforce compliance by its members and persons associated with its 
members, with the provisions of the Act, the rules and regulation 
thereunder, and the rules of the Exchange. Further, the Commission 
finds that the proposed rule change is consistent with Section

[[Page 62123]]

6(b)(5) of the Act,\10\ which requires, among other things, that the 
rules of a national securities exchange be 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, and 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. Section 6(b)(5) also 
requires that the rules of an exchange not be designed to permit unfair 
discrimination among customers, issuers, brokers, or dealers.
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    \8\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f(b)(1).
    \10\ 15 U.S.C. 78f(b)(5).
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    Recognizing that the Commission has expressed concern regarding the 
potential for conflicts of interest in instances where a member firm is 
affiliated with an exchange to which it is routing orders, the Exchange 
previously implemented limitations and conditions to Arca Securities's 
affiliation with the Exchange to permit the Exchange to accept orders 
routed inbound to NYSE Arca by Arca Securities from its affiliates, 
NYSE Amex and NYSE Arca, on a pilot basis.\11\ The Exchange now seeks 
to make this pilot permanent, and to more accurately reflect in its 
rule text its RSA with FINRA. Specifically, the Exchange states it is 
in compliance with the following obligations and conditions:\12\
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    \11\ See Routing Pilot Release. See also supra note 6 and 
accompanying text.
    \12\ See Notice, 76 FR at 53514.
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     First, the Exchange will maintain an agreement pursuant to 
Rule 17d-2 under the Exchange Act with FINRA to relieve the Exchange of 
regulatory responsibilities for Arca Securities with respect to rules 
that are common rules between the Exchange and FINRA, and maintain an 
RSA with FINRA to perform regulatory responsibilities for Arca 
Securities for unique Exchange rules.
     Second, the RSA will require the Exchange to provide FINRA 
with information, in an easily accessible manner, regarding all 
exception reports, alerts, complaints, trading errors, cancellations, 
investigations, and enforcement matters (collectively ``Exceptions'') 
in which Arca Securities is identified as a participant that has 
potentially violated Exchange or Commission Rules and of which the 
Exchange becomes aware, and shall require that FINRA provide a report, 
at least quarterly, to the Exchange quantifying all Exceptions in which 
Arca Securities is identified as a participant that has potentially 
violated Exchange or Commission Rules; \13\
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    \13\ See Notice, 76 FR at 53514, n.8 and accompanying text. The 
Exchange proposed to modify this provision, as set forth in NYSE 
Rule 17(c)(2)(A)(ii) to more accurately reflect its RSA with FINRA 
and specify that the quarterly report of Exceptions shall be 
provided to the Exchange's Chief Regulatory Officer (``CRO''). The 
Exchange states that upon approval of this change, it will continue 
to comply with the obligations and conditions as set forth in NYSE 
Rule 17(c)(2). See Notice, 76 FR at 53514.
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     Third, the Exchange, on behalf of its parent, NYSE 
Euronext, will establish and maintain procedures and internal controls 
reasonably designed to prevent Arca Securities from receiving any 
benefit, taking any action or engaging in any activity based on non-
public information regarding planned changes to Exchange systems, 
obtained as a result of its affiliation with the Exchange, until such 
information is available generally to similarly situated member 
organizations of the Exchange in connection with the provision of 
inbound order routing to the Exchange; and
     Fourth, the Exchange may furnish to Arca Securities the 
same information on the same terms that the Exchange makes available in 
the normal course of business to any other member organization.\14\

    \14\ See NYSE Rule 17(c)(2). See also Notice, 76 FR at 53514.
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The Exchange believes that by meeting the above-listed conditions it 
has set up mechanisms that protect the independence of the Exchange's 
regulatory responsibility with respect to Arca Securities, and has 
demonstrated that Arca Securities cannot use any information it may 
have because of its affiliation with the Exchange to its advantage.\15\
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    \15\ See Notice, 76 FR at 53514.
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    In the past, the Commission has expressed concern that the 
affiliation of an exchange with one of its members raises potential 
conflicts of interest, and the potential for unfair competitive 
advantage.\16\ Although the Commission continues to be concerned about 
potential unfair competition and conflicts of interest between an 
exchange's self-regulatory obligations and its commercial interest when 
the exchange is affiliated with one of its members, for the reasons 
discussed below, the Commission believes that it is consistent with the 
Act to permit Arca Securities to provide inbound routing to the 
Exchange on a permanent basis instead of a pilot basis, subject to the 
other conditions described above.
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    \16\ See, e.g., Securities Exchange Act Release Nos. 54170 (July 
18, 2006), 71 FR 42149 (July 25, 2006) (SR-NASDAQ-2006-006) (order 
approving Nasdaq's proposal to adopt Nasdaq Rule 2140, restricting 
affiliations between Nasdaq and its members); 53382 (February 27, 
2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77) (order 
approving the combination of the New York Stock Exchange, Inc. and 
Archipelago Holdings, Inc.); 58673 (September 29, 2008), 73 FR 57707 
(October 8, 2008) (SR-Amex-2008-62) (order approving the combination 
of NYSE Euronext and the American Stock Exchange LLC); 59135 
(December 22, 2008), 73 FR 79954 (December 30, 2008) (SR-ISE-2009-
85) (order approving the purchase by ISE Holdings of an ownership 
interest in DirectEdge Holdings LLC); and 59281 (January 22, 2009), 
74 FR 5014 (January 28, 2009) (SR-NYSE-2008-120) (order approving a 
joint venture between NYSE and BIDS Holdings L.P.).
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    The Exchange has proposed four ongoing conditions applicable to 
Arca Securities's routing activities, which are enumerated above. The 
Commission believes that these conditions mitigate its concerns about 
potential conflicts of interest and unfair competitive advantage. In 
particular, the Commission believes that FINRA's oversight of Arca 
Securities,\17\ combined with FINRA's monitoring of Arca Securities's 
compliance with the Exchange's rules and quarterly reporting to NYSE's 
CRO, will help to protect the independence of the Exchange's regulatory 
responsibilities with respect to Arca Securities.
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    \17\ This oversight will be accomplished through the Regulatory 
Contract between the Exchange and FINRA and a 17d-2 Agreement.
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V. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-NYSE-2011-45) be, and hereby 
is, approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-25825 Filed 10-5-11; 8:45 am]
BILLING CODE 8011-01-P