Document ID: SEC-2007-0503-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange LLC
Posted Date: 2007-04-05T04:00Z

[Federal Register: April 5, 2007 (Volume 72, Number 65)]
[Notices]               
[Page 16841-16844]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05ap07-140]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55555; File No. SR-NYSE-2007-09]

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

March 29, 2007.
    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 January 26, 2007, the New York Stock Exchange LLC (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been substantially prepared by the 
Exchange. The Exchange filed Amendments No. 1 and 2 to the proposal on 
February 1, 2007, and March 28, 2007, respectively. The Commission is 
publishing this notice to solicit comment on the proposed rule change, 
as amended, 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 is proposing 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 further proposes 
to amend Rule 134 (``Differences and Omissions-Cleared Transactions 
(``QTs'')'') to require that profits equal to or greater than $5,000 
gained in relation to an Exchange system failure be remitted to the 
Exchange to be included in funds available for distribution pursuant to 
proposed Rule 18.
    The text of the proposed rule change is available on the Exchange's 
Web site (http://www.nyse.com), at the

[[Page 16842]]

Exchange's Office of the Secretary, 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, 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. The Exchange 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
    The Exchange is a self-regulatory organization (``SRO'') as that 
term is defined under the Act.\3\ In its capacity as a SRO the Exchange 
functions as a quasi-governmental authority and is therefore entitled 
to immunity from lawsuits.\4\ NYSE Rule 17 provides that the ``Exchange 
shall not be liable for any damages sustained by a member, allied 
member or member organization growing out of the use or enjoyment by 
such member, allied member or member organization of the facilities 
afforded by the Exchange, except as provided in the rules.''
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    \3\ See 15 U.S.C. 78c(a)(26).
    \4\ See DL Capital Group, LLC v. Nasdaq Stock Market, Inc., 409 
F.3d 93, 99 (2d Cir. 2005); D'Alessio v. New York Stock Exchange, 
Inc., 258 F.3d 93, 104-05 (2d Cir. 2001).
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    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 Exchange recognizes that the current industry practice of 
exchanges that function as SROs is to provide a form of compensation 
for losses sustained in relation to the use of the company's systems. 
As such, the Exchange seeks to adopt NYSE Rule 18 in order to conform 
to current industry practice.
a. Claims for Compensation
    Pursuant to the proposed rule, an Exchange system failure is 
defined 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 and delays in order processing as a result of large 
volume or other capacity issues, commonly known as ``queuing,'' are not 
considered Exchange system failures.
    In order 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. That is, the loss must total $5,000 after any profits received 
in relation to the same incident are subtracted. Claims must be 
submitted on a per incident basis. 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.
    In addition to the minimum claim requirement, member organizations 
are required 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 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 
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.
b. Exchange Funds Available for Claims
    Pursuant to proposed Rule 18, the Exchange will allot $500,000 each 
calendar month (``Monthly Allotment'') to be used for payments to 
member organizations that qualify for compensation under the Rule. The 
Monthly Allotment constitutes the initial amount to be contributed by 
the Exchange to provide compensation in relation to Exchange system 
failures for each calendar month regardless of the total dollar amount 
of claims eligible for payment. The Monthly Allotments do not 
aggregate, and except as set forth below, the Monthly Allotment for 
each calendar month is $500,000. 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. For example, if during the first full 
calendar month of operating under proposed NYSE Rule 18, the total 
amount paid to member organizations is $100,000, leaving $400,000 
remaining from the original Monthly Allotment, the following month, the 
Exchange will allot the Monthly Allotment of $500,000 and an additional 
$50,000 will be carried over from the previous calendar month's 
remaining balance for a total of $550,000 eligible for payment to 
member organizations in the second calendar month.
    This Supplemental Allotment will only be used 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. Every month that does not 
pay out more than $250,000 of the Monthly Allotment will result in a 
Supplemental Allotment to the subsequent Monthly Allotment as described 
above. If in any calendar month the amount of funds required to pay 
eligible claims of member organizations is equal to or exceeds $250,000 
of the Monthly Allotment, no Supplemental Allotment will be added to 
the Monthly Allotment for the subsequent calendar month.
    The Exchange shall determine what, if any, maximum dollar amount 
may accrue over time as part of the Supplemental Allotment. Any and all 
Exchange determinations as to a maximum dollar amount that may accrue 
over time as part of the Supplemental Allotment shall be formally 
reflected in the text of Rule 18. In addition, after a few years of 
Rule 18's implementation, Exchange management intends to review both 
the maximum dollar amount, if any, which may be accrued as part of the 
Supplemental Allotment and the Monthly Allotment to determine whether 
they are appropriate. The Exchange understands that it would be 
required to file a proposed rule change should Exchange management 
determine to establish or change any maximum dollar amount for the 
Supplement Allotment or to modify the amount of the Monthly 
Allotment.\5\
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    \5\ Telephone conversation between Deanna Logan, Director, 
Office of the General Counsel, NYSE, and Nathan Saunders, Special 
Counsel, Division of Market Regulation (``Division''), Commission, 
on March 29, 2007.
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c. Other Funds Available for Payment of Claims
    In addition to the Monthly Allotment and Supplemental Allotment, 
the Exchange proposes to amend Exchange Rule 134.40 to provide that any 
error transactions in a member organization's account in relation to an 
Exchange system failure which results in a profit

[[Page 16843]]

equal to or greater than $5,000 must be remitted to the Exchange 
(``Profit Contribution''). Profit Contributions will be added to the 
Monthly Allotment and any Supplemental Allotment.
    Currently, pursuant to Exchange Rule 134.40, member organizations 
must report certain profits to the Exchange, but are not required to 
remit any part thereof to the Exchange. The Exchange proposes 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 
pursuant to proposed NYSE Rule 18.
    The Profit Contribution will operate similarly to the Supplemental 
Allotment in that it will only be used for payments after all other 
funds are exhausted (i.e., Monthly Allotment and any Supplemental 
Allotment). In the event that the payments to member organizations are 
satisfied by the Monthly Allotment and any Supplemental Allotment, then 
the Profit Contribution will carry over each subsequent calendar month 
until required for the payments of eligible claims.
d. Compensation Payments to Claimants
    In order to review qualified claims and administer payments, the 
Exchange will establish a panel consisting of three (3) Floor Governor 
and three (3) Exchange employees (the ``Compensation Review Panel''). 
The Compensation Review Panel will meet and review all the claims that 
are submitted for a calendar month in order to determine: (i) If each 
claim satisfies all the criteria for payment; and (ii) the amount to be 
paid on the claim (``approved claims'').
    As part of its determination, the Compensation Review Panel must 
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 are 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'') or the President or his or her designee who will make a final 
determination. Like the determinations of the Compensation Review 
Panel, all the determinations of the CEO are final.
    Once each claim is reviewed and the amount to be paid on each 
approved claim is decided, the Compensation Review Panel will total the 
dollar amount of all approved claims for the calendar month under 
review. If the total dollar amount of approved claims is less than the 
Monthly Allotment, then the claims will be paid to the claimants in 
full. If the total amount of approved claims exceeds the Monthly 
Allotment, then any Supplemental Allotment and/or Profit Contribution 
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, the Supplemental Allotment (if any), and 
the Profit Contribution (if any), then the approved claims will be paid 
out to member organizations based upon the proportion that each 
eligible claim bears to the total amount of all approved claims.
e. Retroactivity of Proposed Rule 18
    The Exchange further requests to have proposed NYSE Rule 18 
function retroactively. Specifically, the Exchange seeks to allow 
member organizations to submit claims to the Exchange for any alleged 
Exchange system failures that occurred between September 1, 2006 and 
the date of Commission approval of the proposed rule. After Commission 
approval, all other claims must be submitted as prescribed by the rule. 
The Monthly Allotment will be set aside for each calendar month in the 
period for which Rule 18 is retroactively effective.\6\ However, the 
Supplemental Allotment and Profit Contribution provisions of the rule 
will not be retroactive, but will begin to accrue the month after 
Commission approval of proposed Rule 18 in accordance with provisions 
governing those funds.
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    \6\ Telephone conversation between Deanna Logan, Director, 
Office of the General Counsel, NYSE, and Nancy Sanow, Assistant 
Director, and Nathan Saunders, Special Counsel, Division, 
Commission, on March 7, 2007.
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2. Statutory Basis
    The Exchange's basis under the Act \7\ for this proposed rule 
change is the requirement under Section 6(b)(5) \8\ that an Exchange 
have rules that are 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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    \7\ 15 U.S.C. 78a.
    \8\ 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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) As the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve 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 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, 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

[[Page 16844]]

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. Copies of the 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 April 26, 2007.
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    \9\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-6376 Filed 4-4-07; 8:45 am]

BILLING CODE 8010-01-P