Document ID: SEC-2011-1000-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Amex LLC
Posted Date: 2011-07-14T04:00Z

[Federal Register Volume 76, Number 135 (Thursday, July 14, 2011)]
[Notices]
[Pages 41539-41541]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-17690]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64844; File No. SR-NYSEAmex-2011-34]

Self-Regulatory Organizations; NYSE Amex LLC; Order Approving a 
Proposed Rule Change Amending NYSE Amex Equities Rule 70.40(3) To 
Permit Member Organizations To Engage in Proprietary Trading From Their 
Approved Booth Premises in Certain OTC Bulletin Board and OTC Markets 
Securities

July 8, 2011.

I. Introduction

    On May 11, 2011, NYSE Amex LLC (``NYSE Amex'' or the ``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 
amend NYSE Amex Equities Rule 70.40(3) to permit member organizations 
to engage in proprietary trading from their approved booth premises in 
certain OTC Bulletin Board (``OTCBB'') and OTC Markets securities. The 
proposed rule change was published for comment in the Federal Register 
on May 25, 2011.\3\ The Commission received no comment letters on 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. 64521 (May 19, 
2011); 76 FR 30415 (``Notice'').
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II. Description

    NYSE Amex proposes to amend NYSE Amex Equities Rule 70.40(3) to 
permit member organizations to engage in proprietary trading from their 
approved booth premises in certain OTCBB and OTC Markets securities.\4\
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    \4\ The Exchange's affiliate, New York Stock Exchange LLC 
(``NYSE''), has proposed to adopt the same rule. See SR-NYSE-2011-
22.
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    In June 2007, the New York Stock Exchange LLC adopted NYSE Rule 
70.40, which permits a member organization to operate its booth 
premises on the NYSE Floor in a manner similar to its ``upstairs'' 
office, thereby allowing member organizations to access other markets 
and trade a wider array of products from their booth premises and thus 
operate more efficiently and competitively.\5\ At the

[[Page 41540]]

time that NYSE Rule 70.40 was adopted, it included certain conditions 
and limitations on such trading, including that only trading on behalf 
of customers would be permitted. In October 2008, the Exchange adopted 
NYSE Amex Equities Rule 70.40, which is identical to NYSE Rule 
70.40.\6\ As such, NYSE Rule Amex Equities 70.40(3) prohibits member 
organizations approved to operate booth premises pursuant to such Rule 
from effecting any transaction from their approved booth premises for 
their own account, the account of an associated person, or an account 
with respect to which they or an associated person thereof exercise 
investment discretion on the Exchange.
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    \5\ See Securities Exchange Act Release 55908 (June 14, 2007), 
72 FR 34056 (June 20, 2007) (SR-NYSE-2007-51) (notice of filing and 
immediate effectiveness of proposed rule change permitting member 
organizations to operate their booth premises as an upstairs 
office). Under NYSE Amex Equities Rule 70.40, only Floor Brokers may 
conduct activity from booth premises.
    \6\ See Securities Exchange Act Release No. 58705 (October 1, 
2008), 73 FR 58995 (October 8, 2008) (SR-Amex-2008-63) (Order 
Granting Approval of Proposed Rule Change To Establish New 
Membership, Member Firm Conduct, and Equity Trading Rules Following 
the Exchange's Acquisition by NYSE Euronext). Under NYSE Amex 
Equities Rule 70.40, only Floor Brokers may conduct activity from 
booth premises.
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    After more than two years of experience with NYSE Amex Equities 
Rule 70.40, member organizations have requested that certain types of 
proprietary trading be permitted under the Rule, and the Exchange has 
determined that it is appropriate to do so. Therefore, the Exchange 
proposes to revise NYSE Amex Equities Rule 70.40(3) to permit member 
organizations to effect transactions in the common, preferred, and debt 
securities of an operating company that is quoted on the OTC Bulletin 
Board or OTC Markets (an ``OTC Security'') from their approved booth 
premises for their own account, the account of an associated person, or 
an account with respect to which they or an associated person thereof 
exercise investment discretion, except that such member organizations 
could not effect such transactions in an OTC Security that is related 
to a security listed or traded on the Exchange or NYSE.\7\ Because 
trading would be limited to the common, preferred, and debt securities 
of an operating company, a member organization could not trade in an 
index-based or derivative security (e.g., a right or warrant) that is 
quoted on the OTCBB or OTC Markets.
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    \7\ Since the merger of NYSE and NYSE Amex in 2008, the 
exchanges have conducted equity trading from the same Trading Floor, 
and NYSE Amex has conducted options trading in rooms adjacent the 
Trading Floor. See Securities Exchange Act Release No. 58673 
(September 29, 2008) (SR-Amex-2008-62 and SR-NYSE-2008-60), 73 FR 
57707 (October 3, 2008), and NYSE Rule 6A.
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    Under the proposed rule change, an OTC Security would be considered 
related to a security listed or traded on the Exchange or NYSE \8\ if:
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    \8\ Securities listed on The NASDAQ Stock Market are traded on 
NYSE Amex pursuant to unlisted trading privileges and thus would be 
considered a security traded on NYSE Amex under the proposed rule 
change. See Rules 500-525--NYSE Amex Equities.

    (a) The OTC Security is issued by an issuer of a security that 
is listed or traded on the Exchange or NYSE or that underlies an 
NYSE Amex option, or an affiliate of such issuer;
    (b) The OTC Security is subject to a corporate action that 
relates to the issuer of a security that is listed or traded on the 
Exchange or NYSE or that underlies an NYSE Amex option, or an 
affiliate of such issuer;
    (c) The OTC Security is issued by an issuer of a security that 
is a component of a narrow-based security index \9\ that is linked 
to a security that is listed or traded on the Exchange or NYSE or 
that underlies an NYSE Amex option; or
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    \9\ For purposes of the proposed rule, the definition of narrow-
based security index would be the same as the definition in Section 
3(a)(55) of the Securities Exchange Act of 1934 (the ``Act'').
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    (d) The OTC Security is issued by a foreign issuer or is a 
depositary receipt (or the equivalent thereof) for such a security, 
and a security issued by such foreign issuer or a depositary receipt 
(or the equivalent thereof) for such a security is listed or traded 
on the Exchange or NYSE or underlies an NYSE Amex option.

    Under the proposed rule, a corporate action would be any action by 
an issuer of an OTC Security or a security listed or traded on the 
Exchange or NYSE that causes a relationship between the price of the 
OTC Security and the price of the security that is listed or traded on 
the Exchange or NYSE or that underlies an NYSE Amex option, such as the 
announcement of a merger, acquisition, joint venture, spinoff, 
dissolution, bankruptcy filing or other similar type of event involving 
the issuers.
    The proposed proprietary transactions in OTC Securities would 
remain subject to all of the other provisions of NYSE Amex Equities 
Rule 70.40. First, a member organization would have to obtain approval 
from NYSE Regulation, Inc. (``NYSER'') to engage in proprietary OTC 
Securities trading from booth premises.\10\ Second, all such 
transactions would be subject to the regulatory requirements that apply 
to ``upstairs'' trading, including registration requirements and audit 
trail requirements applicable to those markets and supervision 
requirements under NYSE Amex Equities Rule 342.\11\ Finally, a member 
organization would be required to adopt and implement comprehensive 
written procedures governing the conduct and supervision of proprietary 
trading in OTC Securities handled through the booth and the staff 
responsible for such activities; such procedures must be reasonably 
designed to ensure that the member organization would be trading in 
compliance with the requirements of NYSE Amex Equities Rule 70.40, 
including that it is not effecting transactions from booth premises in 
OTC Securities that are related to securities listed or traded on the 
Exchange or NYSE. A member organization would be required to obtain 
NYSER approval of such written procedures before such trading 
commences.\12\ A member organization would be required to regularly 
review such procedures and compliance therewith, and obtain approval 
from NYSER of any subsequent changes to such procedures.\13\
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    \10\ NYSE Amex Equities Rule 70.40(1).
    \11\ NYSE Amex Equities Rule 70.40(4) and (5).
    \12\ If a member organization had already obtained approval to 
operate booth premises under NYSE Amex Equities Rule 70.40, it would 
still be required to update its written procedures to address 
proprietary trading in OTC Securities and obtain NYSER approval 
under NYSE Amex Equities Rule 70.40(7).
    \13\ NYSE Amex Equities Rule 70.40(6) and (7).
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    At a minimum, such written procedures must require the member 
organization to exercise due diligence before commencing trading in an 
OTC Security from the booth premises pursuant to this Rule to ensure 
that such trading is in compliance with the requirements of this Rule 
and that the member organization has procedures to monitor its trading 
activity in order to remain in compliance. A member organization must 
have supervisory systems in place that produce records sufficient to 
reconstruct, in a time-sequenced manner, all orders with respect to 
which the member organization is trading from the booth premises under 
this Rule. The member organization must be able to demonstrate which 
OTC Security transactions were effected from the booth premises (as 
compared to off-Floor trading, if applicable). If the member 
organization could not demonstrate which trading is from the booth 
premises, the Exchange would presume that all such trading was effected 
from the booth premises.

III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \14\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\15\ In

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particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\16\ which requires, among 
other things, that the Exchange's rules be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, 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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    \14\ 15 U.S.C. 78f.
    \15\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \16\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the proposed rule change will enable 
member organizations to expand the types of activities that can be 
conducted from booth premises to include transactions in certain OTCBB 
and OTC Markets securities for the member organization's own account, 
the account of an associated person, or an account with respect to 
which they or an associated person thereof exercise investment 
discretion. At the same time, the proposal excludes such transactions 
in an OTC Security that is related to a security listed or traded on 
the Exchange or on NYSE. In addition, the Commission notes that the 
proposed proprietary transactions in OTC Securities would remain 
subject to the registration, audit trail, and supervision requirements 
of NYSE Amex Equities Rule 70.40.\17\ This includes the requirement to 
adopt and implement comprehensive written procedures governing the 
conduct and supervision of proprietary trading in OTC Securities 
handled through the booth and the staff responsible for such 
activities. These procedures must be reasonably designed to ensure that 
member organizations are not effecting transactions from booth premises 
in OTC Securities that are related to securities listed or traded on 
the Exchange or NYSE.\18\
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    \17\ See Notice, supra note 3.
    \18\ See id.
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    The primary reason for the earlier restriction on proprietary 
trading by Floor Brokers was concern that the Floor Broker's knowledge 
of events on the floor and the state of the market would provide him 
with an unfair advantage over off-floor market participants. However, 
in light of the proposed rule's restriction on trading OTC Securities 
that are related to a security listed or traded on the Exchange or 
NYSE, the Commission believes that the opportunities for members to 
trade on non-public information will be appropriately minimized or 
eliminated.
    In addition to written procedures, the member organization must 
have a supervisory system in place to produce records sufficient to 
reconstruct, in a time-sequenced manner, all orders with respect to 
trading from booth premises and must be able to demonstrate which OTC 
Security transactions were effected from the booth premises. 
Furthermore, as noted above, to the extent that a member organization 
has already obtained approval to operate booth premises under NYSE Amex 
Equities Rule 70.40, it would still be required to update its written 
procedures to address proprietary trading in OTC Securities and obtain 
NYSER approval under NYSE Amex Equities Rule 70.40(7).\19\
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    \19\ See Notice. See also supra note 12.
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    In light of the foregoing requirements, which provide for 
appropriate limitations on and oversight of proprietary trading by 
Exchange members from their approved booth premises adjacent to the 
floor, the Commission finds that the proposed rule change is consistent 
with the Act.

IV. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the proposed rule change (SR-NYSEAmex-2011-34) be, and it 
hereby is, approved.
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-17690 Filed 7-13-11; 8:45 am]
BILLING CODE 8011-01-P