Document ID: SEC-2020-1285-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange, LLC
Posted Date: 2020-08-12T04:00Z

[Federal Register Volume 85, Number 156 (Wednesday, August 12, 2020)]
[Notices]
[Pages 48738-48740]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-17563]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89500; File No. SR-NYSE-2020-66]

Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change To Amend Rule 122

August 6, 2020.
    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 August 3, 2020, 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, 
II, and III 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 amend Rule 122 (Orders with More than One 
Broker). The proposed rule change is available on the Exchange's 
website 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
    Currently, Rule 122 (Orders with More than One Floor Broker) 
provides that a member organization may not maintain orders with more 
than one Floor broker to purchase the same security at the same price. 
Because each Floor broker is a separate Participant in a parity 
allocation,\4\ Rule 122 prevents member organizations from 
circumventing the parity allocation rules to obtain preferential 
execution by splitting a single order among multiple Floor brokers.
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    \4\ See Rule 7.36(a)(5) (defining the term ``Floor Broker 
Participant'' to mean a Floor Broker trading license).
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    Rule 122 currently contains an exception and the main purpose of 
the proposed amendment is to clarify this exception. The exception is: 
If the orders are not for the account of the same principal, then it is 
permissible for the member organization to maintain such orders with 
different Floor brokers. This exception reflects the Exchange's 
understanding that some member organizations, or customers of member 
organizations, have multiple trading desks that do not coordinate 
trading strategies and are separated by information barriers. In such 
circumstances, because there is no coordination between such trading 
desks, maintaining those separate orders with more than one Floor 
broker would not be circumventing the parity allocation rules. The 
proposed amendment to Rule 122 would add Commentary to add specificity 
about this exception with respect to both member organizations' 
proprietary orders and orders that member organizations represent on an 
agency basis for customers.
    Both member organizations and the customers of member organizations 
may consist of multiple trading units that are separated by information 
barriers that restrict the trading units from coordinating trading 
strategies, sharing capital, and sharing profits and losses. The 
proposed amended rule would provide that, if a member organization has 
knowledge and can verify that it or its customer is organized in this 
way, the member organization may route orders for the same security at 
the same price from its independent units to more than one Floor broker 
in a manner that is consistent with Rule 122.
    In addition, the Exchange proposes to amend the text of Rule 122 to 
remove certain obsolete language and to provide greater specificity to 
the rule text, without changing its meaning.
2. Proposed Changes to Text of Rule 122
    The Exchange proposes to amend Rule 122 to remove certain obsolete 
language and to provide greater specificity to the rule text, without 
changing its meaning.

[[Page 48739]]

    Because the text of current Rule 122 addresses two distinct topics, 
the Exchange proposes to reorganize the existing rule text into new 
subsections (a) and (b), which the Exchange believes will enhance 
comprehension of the rule.
    The Exchange proposes that new subsection (a) would include the 
current first sentence of Rule 122. Because the term ``member'' refers 
to the natural person associated with a member organization who has 
been designated by such member organizations to effect transactions on 
the Floor of the Exchange, e.g., a Floor broker,\5\ and Floor brokers 
do not originate orders,\6\ and because the term ``allied member'' no 
longer exists in Exchange rules,\7\ the Exchange proposes to delete the 
extraneous language ``member'' and ``or any allied member therein.''
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    \5\ See Rule 2(a) (definition of the term ``member'').
    \6\ See Rule 112(a).
    \7\ See Securities Exchange Act Release No. 58549 (September 15, 
2008), 73 FR 54444 (September 19, 2008) (SR-NYSE-2008-80) (Approval 
order).
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    The Exchange further proposes to amend new subsection (a) to 
specify that the rule applies both to orders ``sent to''--as well as 
those ``maintained with''--more than one Floor broker, and to insert 
the word ``Floor'' before ``broker'' to enhance the clarity of the 
sentence. The Exchange also proposes to replace the phrase ``market 
orders or orders at the same price'' in new subsection (a) with the 
phrase ``orders that may execute at the same price,'' to specify that 
the rule applies to multiple orders of any resting order type that may 
execute at the same price.
    The Exchange proposes that new subsection (b) would include the 
current second and third sentences of Rule 122, relating to how a Floor 
broker can represent an order that already has a portion transmitted to 
the Exchange Book. Because this text addresses a different topic than 
proposed Rule 122(a), the Exchange proposes to delete the extraneous 
``However'' at the start of the first sentence of this new subsection. 
The Exchange also proposes to delete from new subsection (b) several 
phrases--including ``manually or from a hand-held terminal,'' ``in the 
auction market or via the Floor broker agency interest file,'' and ``as 
part of an auction market transaction or automatic execution''--because 
they are extraneous, use obsolete text, and are not necessary to a 
clear understanding of the rule. The Exchange believes that making 
these deletions will have no substantive effect on the meaning of 
subsection (b).
    Finally, the Exchange proposes to delete from new subsection (b) 
several references to the ``Display Book[supreg] system,'' which is an 
obsolete system formerly used by the Exchange, and to replace them with 
references to the Exchange's current ``Exchange Book.'' \8\
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    \8\ See Rule 1.1(k).
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3. Proposed Rule Commentary
    In addition to the proposed amendments to the rule text listed 
above, the Exchange proposes to amend Rule 122 by adding new Rule 
Commentary to provide greater specificity as to the rule's application 
and to enhance comprehension of the rule.
    The Exchange proposes to add Rule Commentary .01 to specify that, 
for the purposes of Rule 122, sending to, maintaining with, or using 
``more than one Floor broker'' would mean more than one Floor broker 
member organization, or two different individual Floor brokers at the 
same Floor broker member organization. This proposed rule text is not 
intended to add new functionality, but rather to add clarity regarding 
the current Rule text.
    The Exchange proposes to add Rule Commentary .02 to provide more 
specificity as to when a member organization's own orders are not 
presumed to be for the account of the same principal. As proposed, for 
purposes of Rule 122, when a member organization uses more than one 
Floor broker, multiple orders originating from the member organization 
would be presumed not to be for the account of the same principal if 
each order is from a separate trading unit that is separated by 
information barriers or other barriers that restrict the trading unit 
from coordinating trading strategies, sharing capital, and sharing 
profits and losses with other trading units (an ``Independent Unit''), 
as defined in proposed Commentary .02(a). Proposed Rule Commentary 
.02(b) would require a member organization to have supervisory systems 
and written policies and procedures reasonably designed to ensure that 
it is not using more than one Floor broker for its orders that are for 
the account of the same principal.
    Proposed Rule Commentary .03 would apply the same concepts to 
circumstances when a member organization uses more than one Floor 
broker for multiple orders that it represents on an agency basis. 
Proposed Rule Commentary .03(a) would specify that orders that the 
member organization represents on an agency basis from a single 
customer are presumed not to be for the account of the same principal 
if the member organization's customer maintains Independent Units and 
the orders are from Independent Units. Proposed Rule Commentary .03(b) 
would specify that if a member organization is representing a customer 
on an agency basis and uses more than one Floor broker for such 
customer, the member organization's written policies and procedures 
must be reasonably designed to ensure that the orders it receives from 
the customer are from Independent Units of the customer. The proposed 
Rule Commentary would specify that the member organization must: (1) 
Use reasonable diligence to know and retain the essential facts 
relating to the operation and supervision of its customer's information 
barriers to ensure there is a prohibition against the coordination of 
trading strategies and that there is in fact no coordination of trading 
strategies, and that the orders are from Independent Units (see 
proposed Rule Commentary .03(b)(1)); (2) review and document such 
reviews that the orders received from its customers originated from 
Independent Units (see proposed Rule Commentary .03(b)(2)); and (3) 
obtain an annual written representation, in a form acceptable to the 
Exchange, from each customer that such orders originate from 
Independent Units (see proposed Rule Commentary .03(b)(3)). The 
Exchange believes that, taken together, these measures will provide the 
member organization and the Exchange with reasonable assurance that the 
orders are not for the account of the same principal, and member 
organizations are operating in compliance with Rule 122.
    The requirements of proposed Commentary .03(b) are not the first 
time that the Exchange has imposed obligations on its member 
organizations with respect to orders that they represent on an agency 
basis on behalf of their customers. For example, Rule 7.44(b)(6), 
relating to the Exchange's Retail Liquidity Program, provides that if 
the Retail Member Organization does not itself conduct a retail 
business but instead routes Retail Orders on behalf of another broker-
dealer, the Retail Member Organization's supervisory procedures must be 
reasonably designed to ensure that the orders it receives from such 
other broker-dealer meet the definition of a Retail Order. That Rule 
further provides that to fulfill this supervisory requirement, the 
Retail Member Organization must obtain an annual written 
representation, in a form acceptable to the Exchange, from the broker-
dealer sending the orders that the orders comply with Rule 7.44, and by 
monitoring whether Retail Order flow

[[Page 48740]]

routed on behalf of such other broker-dealer meets the applicable 
requirements. Here, the proposed amended rule would require a similar 
supervisory obligation for member organizations to ensure that orders 
placed by their customers in fact originate from Independent Units.
    Proposed Rule Commentary .04 would add that notwithstanding 
Commentary .02(a) and .03(a), that there is a presumption that orders 
are for the account of the same principal (i.e., not from Independent 
Units) if the trading strategies are run by the same desk, group, 
employee(s), or portfolio manager(s); are otherwise overseen or 
supervised by the same desk, group, employee(s), or portfolio managers; 
or share capital or roll up to the same profit and loss center.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\9\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\10\ in particular, because 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, 
and because it is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Exchange believes that the proposed rule will 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system because the proposed Rule 
Commentary provides greater specificity around the ``account of the 
same principal'' exception already contained within Rule 122, by 
clarifying the meaning of ``sending to more than one Floor broker'' and 
defining the term ``Independent Units.'' In addition, by extending that 
exception to orders from Independent Units of a member organization's 
customers, the Exchange believes that the proposed rule change would 
address the reality of how such customers may be organized, thereby 
removing impediments to such firms' trading in the national market 
system.
    Finally, the Exchange's proposal to make various non-substantive 
changes to the rule text--by adding subsection numbering, removing 
extraneous language, and removing references to the obsolete ``Display 
Book[supreg] system''--adds clarity and transparency to the Exchange's 
Rules and reduces potential investor confusion, which would remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system.

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, because it merely provides 
greater specificity for the ``account of the same principal'' exception 
already contained in Rule 122, and extends that exception to member 
organizations' customers that are organized into Independent Units. The 
Exchange believes that the proposal would have a positive effect on 
competition, by removing the current requirement that such member 
organizations' customers must use only one Floor broker for orders for 
the same security that may execute at the same price, even though such 
orders do not threaten to circumvent the Exchange's parity allocation 
rules when they originate from Independent Units.

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 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:
    (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 Number SR-NYSE-2020-66 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSE-2020-66. 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 internet website (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 website 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 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NYSE-2020-66 and should be submitted on 
or before September 2, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-17563 Filed 8-11-20; 8:45 am]
BILLING CODE 8011-01-P