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Code · REGISTER · 2005-07-14 · SECURITIES AND EXCHANGE COMMISSION · Notices

Notices. SECURITIES AND EXCHANGE COMMISSION

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BILLING CODE 6325-38-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-51998; File No. S7-06-05] Notice of an Application of the New York Stock Exchange, Inc. for an Exemption Pursuant to Section 36 of the Securities Exchange Act of 1934 and Request for Comment July 8, 2005. On May 26, 2005, the Securities and Exchange Commission received an application from the New York Stock Exchange, Inc. (“NYSE”) for an exemption pursuant to Section 36 1 of the Securities Exchange Act of 1934, 2 in accordance with the procedures set forth in Exchange Act Rule 0-12. 3 The NYSE requests exemptive relief from Section 12(a) 4 of the Exchange Act to permit its members, brokers and dealers to trade certain unregistered debt securities on the NYSE's Automated Bond System. 5 We are publishing this notice and a proposed exemptive order to provide interested persons with an opportunity to comment. 6 1 15 U.S.C. 78mm.
Section 36 of the Exchange Act gives the Commission the authority to exempt any person, security or transaction from any Exchange Act provision by rule, regulation or order, to the extent that the exemption is necessary or appropriate in the public interest and consistent with the protection of investors. 2 15 U.S.C. 78a *et seq.* 3 17 CFR 240.0-12. Exchange Act Rule 0-12 sets forth the procedures for filing applications for orders for exemptive relief pursuant to Section 36. 4 15 U.S.C. 78 *l* (a). 5 The NYSE's application for exemptive relief is included as Appendix A. 6 The Commission's proposed exemptive order is included as Appendix B.
I. Background Section 12(a) of the Exchange Act provides in relevant part that it “shall be unlawful for any member, broker or dealer to effect any transaction in any security (other than an exempted security) on a national securities exchange unless a registration is effective as to such security for such exchange.” Section 12(b) 7 of the Exchange Act dictates how the registration referred to in Section 12(a) must be accomplished. Accordingly, all equity and debt securities that are not “exempted securities” 8 or are not otherwise exempt from Exchange Act registration must be registered by the issuer under the Exchange Act before a member, broker or dealer may trade that class of securities on a national securities exchange. 7 15 U.S.C. 78 *l* (b). 8 An exempted security may be traded on a national securities exchange absent Exchange Act registration.
Section 3(a)(12) of the Exchange Act [15 U.S.C. 78c(a)(12)] defines exempted security to include securities such as government securities, municipal securities, various trust fund interests, pooled income fund interests and church plan interests. Contrarily, brokers or dealers who trade debt securities otherwise than on a national securities exchange may trade debt securities regardless of whether the issuer registered that class of debt under the Exchange Act. This is so because Exchange Act registration for securities traded other than on a national securities exchange is required only for certain equity securities.
In particular, Section 12(g) 9 of the Exchange Act, the only Exchange Act provision other than Section 12(a) to impose an affirmative Exchange Act registration requirement, requires the registration of equity securities only. 10 9 15 U.S.C. 78 *l* (g). 10 Section 12(g)(1) of the Exchange Act and Rule 12g-1 [17 CFR 240.12g-1] promulgated thereunder require an issuer to register a class of equity securities if the issuer of the securities, at the end of its fiscal year, has more than $10,000,000 in total assets and a class of equity securities held by 500 or more recordholders.
When Congress amended the Exchange Act in 1964 to add Section 12(g), it extended the registration requirement to specified equity securities that are not exchange-traded. No comparable provision was provided for debt securities that are not exchange-traded. As the Commission has stated in the past, we believe that this disparate regulatory treatment may have negatively and unnecessarily affected the structure and development of the debt markets. 11 In 1994, to reduce existing regulatory distinctions between exchange-traded debt securities and debt securities that trade in the “over-the-counter” (“OTC”) market, we adopted Exchange Act Rule 3a12-11. 12 Rule 3a12-11 provides for the automatic effectiveness of Form 8-A 13 registration statements for exchange-traded debt securities, exempts exchange-traded debt from the borrowing restrictions under Section 8(a) 14 of the Exchange Act, and exempts exchange-traded debt from most of the proxy and information statement requirements under Sections 14(a),
(b)and
(c)of the Exchange Act. 15 Despite these efforts, the vast majority of secondary trading of debt securities continues to occur in the OTC market, which suggests that there still may be regulatory impediments that need to be addressed. 16 11 *See* Release Nos. 34-34922 (November 1, 1994) [59 FR 55342], and 34-34139 (June 1, 1994) [59 FR 29398]. 12 17 CFR 240.3a12-11. Release No. 34-34922 (November 1, 1994) [59 FR 55342]. 13 17 CFR 249.208a. 14 15 U.S.C. 78h(a). 15 15 U.S.C. 78n(a),
(b)and (c). Rule 3a12-11 states that Rules 14a-1, 14a-2(a), 14a-9, 14a-13, 14b-1, 14b-2, 14c-1, 14c-6 and 14c-7 continue to apply to the exchange-traded debt securities for which Rule 3a12-11 provides exemptive relief [17 CFR 240.14a-1, 14a-2(a), 14a-9, 14a-13, 14b-1, 14b-2, 14c-1, 14c-6 and 14c-7]. 16 The NYSE estimates that there are over 22,000 publicly offered corporate bond issues having a par value in excess of $3 trillion but only 8% of the $3 trillion par value is registered under the Exchange Act and so may be traded on the NYSE's Automated Bond System. See the NYSE's application for exemptive relief. In addition, we have sought to increase the level of transparency in the public debt markets. We have long believed that price transparency in the U.S. capital markets is fundamental to promoting the fairness and efficiency of our markets. 17 In 1998, the Commission's staff conducted a review of the public debt markets and found that in the area of corporate debt securities, price transparency was deficient. 18 Following the staff's 1998 review, the Commission requested the National Association of Securities Dealers, Inc. (“NASD”) to adopt rules requiring dealers to report transactions in corporate debt securities and preferred stock to the NASD and to develop a real-time price quotation system. 19 17 *See* Testimony of Chairman Arthur Levitt Before the House Subcommittee on Finance and Hazardous Materials, Committee on Commerce, Concerning Transparency in the United States Debt Market and Mutual Fund Fees and Expenses (September 29, 1998). 18 *Id.* 19 *Id.* The NASD was asked to undertake this initiative for two reasons. First, the vast majority of debt securities are traded on the OTC market. Second, the Commission believed that the NASD possessed the required infrastructure to undertake the initiative and this would obviate the need to “reinvent the wheel.” See Testimony of Chairman Arthur Levitt Before the House Subcommittee on Finance and Hazardous Materials, Committee on Commerce, Concerning Hedge Fund Activities in the U.S. Financial Markets (March 18, 1999). II. Summary of the Application The NYSE requests us to permit its members, brokers and dealers to trade certain classes of debt securities not registered under Section 12(b) of the Exchange Act on the NYSE's Automated Bond System. 20 The NYSE asserts that the statutory distinctions referred to above put the NYSE at a competitive disadvantage vis-à-vis the OTC market with respect to the trading of debt. 21 Further, the NYSE asserts that investors are adversely impacted by this distinction. The NYSE believes that the adverse impact on investors is twofold. 22 First, the NYSE asserts that investors are deprived of the advantage of competing markets. Second, the NYSE asserts that the Automated Bond System is generally more transparent than the OTC market. 23 The NYSE states that, in contrast to OTC bond trading, the Automated Bond System reports bid and ask quotations and last sale prices, exclusive of any mark-ups, mark-downs or other charges. In addition, the NYSE states that all Automated Bond System trades are reported instantaneously. The NYSE further asserts that it is not aware of any comparable level of transparency that exists currently. 20 For purposes of the requested exemption, the term “debt security” would be defined as any security that, if the class of securities were listed on the NYSE, would be listed under Sections 102.03 or 103.05 of the NYSE's Listed Company Manual. A debt security would not include any security that, if the class of securities were listed on the NYSE, would be listed under Sections 703.19 or 703.21 of the NYSE's Listed Company Manual. Provided, however, under no circumstances would a debt security include any security that is defined as an “equity security” under Section 3(a)(11) of the Exchange Act [15 U.S.C. 78c(a)(11)]. 21 See the NYSE's application for exemptive relief. 22 See the NYSE's application for exemptive relief. 23 The Automated Bond System is an automated trading and information system that allows member firms to enter directly into the system and execute debt security orders through remote terminals that match them on a price and time priority basis. Notwithstanding any competitive disadvantage to the NYSE that may have resulted from existing statutory distinctions or the potential benefits to investors of increased competition and enhanced transparency, 24 we believe that we must still balance these benefits against any loss of Exchange Act protections that could result if we determine to grant the requested exemptive relief. Further, as explained below, we believe that any proposed relief only should be granted in a way that mitigates any lost Exchange Act protections. 24 A May 2004 study entitled “Transparency of Corporate Bond Markets” by the Technical Committee of the International Organization of Securities Commissions found that transparency supports market efficiency, fosters investor confidence and strengthens investor protection. A similar study of U.S. corporate debt markets found that greater transparency reduces transaction costs of corporate bond trading. See “Corporate Bond Market Transparency and Transaction Costs” by Amy K. Edwards, Lawrence E. Harris and Michael S. Piwowar (March 2005). See *http://papers.ssrn.com/sol3/papers.cfm?abstract_id=593823.* We view the potential loss of the comprehensive public information that an issuer must provide under Section 13(a) of the Exchange Act as perhaps the most significant factor weighing against relief. 25 To address this concern, the NYSE proposes that any exemption be conditioned on two important protections designed to prevent the loss of Exchange Act disclosure. First, relief would be limited to a class of debt securities whose offer and sale was registered under the Securities Act of 1933. 26 This limitation is designed to ensure that investors would have access to the detailed disclosure in the Securities Act registration statement for the debt securities, including a trust indenture qualified under the Trust Indenture Act of 1939. 27 25 15 U.S.C. 78m(a). Section 13(a) provides the Exchange Act's comprehensive disclosure standards that require an issuer of securities registered under the Exchange Act to file annual, quarterly and current reports with the Commission. 26 15 U.S.C. 77a *et seq.* 27 15 U.S.C. 77aaa-77bbbb. Second, relief would be limited to issuers of debt securities with at least one class of equity securities registered under Section 12(b) and listed on the NYSE. 28 This condition is designed to guarantee that substantially all of the public information that would be available if the debt securities were registered under Section 12(b) would remain available with respect to the issuer of the debt securities covered by the exemption. The only significant Exchange Act disclosure for debt registered under Section 12 that would not continue to be provided under the proposed exemptive relief would be: 28 The debt securities of a wholly-owned subsidiary of a company with at least one class of equity securities registered under Section 12(b) of the Exchange Act and listed on the NYSE also would be covered by the proposed relief. In addition to the Exchange Act disclosure obligations mentioned below that would no longer apply to a parent debt issuer whose debt could be traded under the exemption, all other Exchange Act disclosure obligations also would not apply to a wholly-owned subsidiary of that company, assuming that the wholly-owned subsidiary had no other class of securities registered or reporting under the Exchange Act. The NYSE asserts that the Exchange Act disclosures and other public information available with respect to the wholly-owned debt issuer's parent, the consolidation of a wholly-owned subsidiary's financial information into its parent's financial statements, as well as the information regarding the wholly-owned subsidiary's debt securities available under the trust indenture and otherwise, are designed to ensure that all interested parties receive necessary information regarding the debt securities. • The extremely limited information contained in the Form 8-A required for Exchange Act registration; 29 29 Form 8-A is the short-form registration statement used by companies to register a class of securities under the Exchange Act. The form requires a description of the registrant's securities pursuant to Item 202 of Regulation S-K or S-B, and in certain circumstances, the filing of all constituent instruments, including any contracts or other documents, that define, limit or qualify the rights of the holders of the class of securities. The disclosures required by the form may be furnished by incorporation by reference to other filings with the Commission. • The listing of the class of debt on the annual report's cover page; • The disclosure of material modifications to instruments defining the rights of debt holders and material limitations or qualifications to the rights of debt holders required by Item 3.03 of Form 8-K; and • Certain exhibits to an issuer's annual and quarterly reports defining the rights of debt holders as provided in Item 601(b)(4) of Regulation S-K, although most of the exhibits required by Item 601 are filed as exhibits to the Securities Act registration statement for the debt securities. We preliminarily believe that the loss of this information is outweighed by the proposed relief's benefits to all interested parties, but will consider any public comment to the contrary. We also further note that this information is not required to be disclosed for debt traded in the OTC market. Further, the condition of the proposed exemptive order requiring the issuer of the debt security to have at least one class of common or preferred equity securities registered under Section 12(b) of the Exchange Act and listed on the NYSE is designed to assure that the issuer of debt securities has a significant and continuous listing (and oversight) relationship with the NYSE. 30 This relationship will allow the NYSE to better monitor issuers whose debt is traded on the Automated Bond System and will ensure that the issuers of traded debt satisfy the NYSE's comprehensive listing standards for equity securities. 30 In the case of an issuer that is a wholly-owned subsidiary, the issuer's parent would need to have at least one class of common or preferred equity securities registered under Section 12(b) of the Exchange Act and listed on the NYSE. In addition to the Exchange Act disclosure obligations that would no longer apply, holders of debt securities traded in reliance on the proposed relief would not be protected by the antifraud proscriptions of Exchange Act Rules 14a-9 and 14c-6 or the shareholder communications provisions in Exchange Act Rules 14a-13, 14b-1, 14b-2 and 14c-7, which govern the transmission of proxy and information statements to beneficial owners of securities. Although solicitations of debt holders are infrequent, 31 in its 1994 rulemaking, the Commission determined that the exemptive relief afforded by Exchange Act Rule 3a12-11 should not encompass these antifraud and shareholder communications provisions. 32 We believe that other requirements, the contractual terms of the trust indenture, and economic motivations for intermediaries to serve the needs of their customers would help to mitigate the loss of these protections. Specifically, the antifraud protection afforded by Exchange Act Rule 10b-5 33 would continue to apply to soliciting materials sent to holders of debt traded in reliance on the proposed exemption. In addition, NYSE Rule 451 34 requires NYSE member firms to transmit copies of all proxy and consent solicitation materials to beneficial owners. 35 Furthermore, we note that none of these provisions applies to debt securities traded in the OTC market. 31 According to the NYSE, only six solicitations of debt holders of NYSE-listed debt securities occurred during 2004. 32 In Release No. 34-34922, the Commission noted that the proxy rules relating to the transmission of materials to beneficial owners not only provide protection to investors, but also benefit issuers by facilitating their ability to communicate directly with their debtholders. Exchange Act Rules 14a-13, 14b-1 and 14b-2 establish procedures by which companies can request a list of their non-objecting beneficial owners from banks, brokers and similar intermediaries holding shares on behalf of such owners. 33 17 CFR 240.10b-5. 34 Paragraph 2451 of the NYSE Guide. 35 Although banks and other intermediaries that are not NYSE member firms would not be subject to NYSE Rule 451, many of these intermediaries owe fiduciary obligations to their beneficial owner customers that would cause them to continue transmitting soliciting materials to their customers even in the absence of an explicit Commission requirement. We also acknowledge that, if we grant the requested relief, the NYSE's listing standards generally would no longer apply to any debt traded, but not listed, on the Automated Bond System. This would include all debt currently listed on the system that qualifies for trading under the requested exemption because the NYSE intends to formally delist all debt securities that qualify for the exemption, if we approve its application. 36 Without a listing requirement, issuers of debt securities would no longer be required to notify the NYSE about various corporate actions related to the issuer's debt. However, the following actions by the NYSE should alleviate concerns in this regard: 36 As noted, debt that trades on the NYSE that does not qualify for the exemptive relief would continue to be “listed” on the NYSE. To distinguish between “listed” debt and “traded” debt, the NYSE would: provide definitions of, and distinguish between, listed debt securities and traded debt securities on the Automated Bond System log-on screen and on the NYSE's web site; directly provide each NYSE member and each NYSE listed company with notification clarifying the distinction between listed and traded debt, as well as notification that eligible listed debt will be delisted and, instead, traded on the Automated Bond System; and issue a press release explaining the Section 36 relief. • The NYSE would engage a third party data vendor to provide the NYSE and its members with a customized on-line reference for corporate actions relevant to debt securities trading on the Automated Bond System. 37 This information is similar to, although less comprehensive than, the information that the NYSE currently receives pursuant to its rules for the continued listing of debt securities. 38 Unlike some of the information that the NYSE currently receives pursuant to its rules for the continued listing of debt, the information provided by the third party data vendor would be available only to the NYSE and its members. While the NYSE has undertaken to hire a third party data vendor, the vendor's engagement and availability of the contemplated information would not be a formal condition to the proposed relief; and 37 The NYSE intends to engage Xcitek, LLC as its third party data vendor. 38 According to the NYSE, Xcitek, LLC's tracking service will provide notification of calls (redemptions), notice of defaults in the payment of interest, notice of consent solicitations and other corporate actions related to public debt including tender offers, issuer name changes and CUSIP number changes. The tracking service will not provide notification of changes in transfer agent or trustee, changes in the collateral deposited under a trust indenture, changes or unusual conditions related to the payment of interest, the issuance or authentication of duplicate bonds, all of which must be provided for listed debt securities. The NYSE asserts that the loss of certain information currently provided under the NYSE Listed Company Manual for listed debt securities is outweighed by the proposed relief's benefits to all parties with an interest. • The NYSE has filed proposed rule changes (SR-NYSE-2004-69) on Exchange Act Form 19b-4 that would specify the exchange's initial and continued requirements for trading unregistered debt securities on the Automated Bond System. In particular, the amended rules would state that trading on the NYSE's Automated Bond System could only commence for debt securities with an outstanding market value or principal amount of at least $10 million and trading would be suspended if the outstanding market value or principal amount fell below $1 million. In addition, the proposed rule would allow the NYSE to suspend trading in a debt security if, among other things, the issuer's assets were substantially reduced, the issuer declared bankruptcy, or the NYSE determined that the issuer engaged in operations that are contrary to the public interest. The Commission is publishing for comment the NYSE's proposed rule changes concurrently with our publication of this notice. 39 39 See Release No. 34-51999 (July 8, 2005). In addition to the previously noted actions that the NYSE intends to take, and conditions to the exemption, the proposed exemptive relief would be available only for debt securities of an issuer whose transfer agent for the debt security is registered under Section 17A of the Exchange Act and for classes of debt securities whose indenture is qualified under the Trust Indenture Act. The first condition is designed to ensure that the transfer agents providing services to issuers of debt securities trading pursuant to the exemption would be subject to Section 17A of the Exchange Act and the rules thereunder and to the Commission's oversight. The second condition is designed to ensure that specific protections afforded to debt holders under the Trust Indenture Act are included in the debt securities' trust indenture. III. Request for Comment We request and encourage any interested person to submit comments regarding the NYSE's application as well as the terms of our proposed exemptive order, including whether the request should be granted. 40 In particular, we solicit comment on the following questions: 40 The Commission's proposed exemptive order is included as Appendix B. • Is the scope of the requested exemption appropriate? • Would the requested exemption increase competition in the public debt markets? • Would the requested exemption increase the transparency of the public debt markets? • Would an issuer's Exchange Act reports for its equity securities and all other public information related to the issuer's class of debt adequately inform investors about the debt securities covered by the requested exemption? • Should the requested exemption relieve issuers of debt securities and other applicable parties from the antifraud proscriptions of Exchange Act Rules 14a-9 and 14c-6 and/or from Exchange Act Rules 14a-13, 14b-1, 14b-2 and 14c-7, which govern the transmission to beneficial owners of proxy and consent materials and information statements, as proposed? Does Exchange Act Rule 10b-5 provide adequate antifraud protection against misstatements or material omissions in proxy or information statements and related materials? Is there any significant concern that banks, brokers and similar intermediaries would refuse or fail to transmit proxy materials to beneficial owners if Rules 14b-1 and 14b-2 no longer expressly applied? • Should the requested exemption apply to a wholly-owned subsidiary of a company with at least one class of equity securities registered under Section 12(b) and listed on the NYSE, if the wholly-owned subsidiary independently does not satisfy the conditions for relief? Should the wholly-owned subsidiary's parent have to guarantee the subsidiary's debt securities for the requested exemption to apply? • Are there any other differences between exchange-traded debt and debt traded in the OTC market that warrant a more restrictive regulatory treatment for exchange-traded debt? • Are there any implications or concerns that may arise because NYSE members would be able to trade a debt security without the NYSE entering into a formal listing arrangement with the issuer of the debt security? • Should we condition the proposed exemption on any additional NYSE listing standards? • Are the conditions sufficiently designed so that investors are appropriately protected? • Are the bases triggering suspension of trading ( *e.g.* , bankruptcy, substantial reduction in assets, or NYSE determination that the issuer engaged in operations contrary to the public interest) appropriate? Should any be removed? Are there any others that should be added? • Is the use of a third party data vendor adequate to provide the NYSE and its members with sufficient information regarding corporate actions relevant to debt securities traded on the Automated Bond System? If not, what additional information or measures would be appropriate? Should any such information or measures be required as an additional condition of the exemption? • Is the information to be provided by Xcitek, LLC to the NYSE and its members significant enough to justify its inclusion in the proposed exemptive order as a formal condition to relief? Comments should be received on or before August 15, 2005. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form ( *http://www.sec.gov/rules/other.shtml* ); or • Send an e-mail to *rule-comments@sec.gov.* Please include File Number S7-06-05 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-9303. All submissions should refer to File Number S7-06-05. This file number should be included on the subject line if e-mail is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( *http://www.sec.gov/rules/other.shtml* ). Comments are also available for public inspection and copying in the Commission's Public Reference Room, 100 F Street, NE., Washington, DC 20549. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. For further information, you may contact Sean Harrison, Special Counsel, Office of Rulemaking, at
(202)551-3430, or Robert T. Plesnarski, Deputy Chief Counsel, Office of Chief Counsel, at 202-551-3832 in the Division of Corporation Finance or Timothy Fox, Attorney, or Michael Gaw, Senior Special Counsel, Office of Market Supervision, at
(202)551-5643 and
(202)551-5602, respectively, in the Division of Market Regulation, at the U.S. Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549. By the Commission. J. Lynn Taylor, Assistant Secretary. Appendices A The New York Stock Exchange's application for an exemption pursuant to Section 36 of the Exchange Act B Proposed order granting the New York Stock Exchange's application for an exemption pursuant to Section 36 of the Exchange Act Appendix A May 26, 2005. Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street NW., Washington, DC 20549-0609. Dear Mr. Katz: The New York Stock Exchange, Inc. (the “Exchange”) requests that the Securities and Exchange Commission (the “Commission”) provide relief pursuant to Section 36 41 of the Securities Exchange Act of 1934 (the “Exchange Act”) 42 to provide an exemption from the provisions of Section 12(a) 43 of the Exchange Act to permit NYSE members and member organizations to trade certain debt securities that are not registered under Section 12(b) 44 of the Exchange Act. 41 15 U.S.C. 78mm. 42 15 U.S.C. 78a. 43 15 U.S.C. 78 *l* (a). 44 15 U.S.C. 78 *l* (b). Conditions Applicable to the Exemptive Relief Requested The Exchange requests that the Commission provide exemptive relief with respect to Section 12(a), which provides in relevant part that it shall be unlawful for any “member, broker, or dealer to effect any transaction in any security (other than an exempted security) on a national securities exchange unless a registration is effective as to such security for such exchange.” 45 The Exchange further asks that this exemption be granted to allow NYSE members and member organizations to trade debt securities that satisfy the following conditions: 45 If the Commission grants exemptive relief from Section 12(a), members, brokers and dealers would be able to trade on the NYSE eligible debt securities that had not been registered under Section 12(b), which prescribes the procedures for an issuer's registration of a security and the information required to be submitted. Similarly, the Exchange would no longer need to comply with the provisions of Section 12(d) regarding the certification of listing and registration of debt securities. 1. The issuer of the debt securities registered the offer and sale of that class of debt securities under the Securities Act of 1933, as amended (the “1933 Act”), 46 46 15 U.S.C. 77a. 2. The issuer of the debt securities or the issuer's parent, if the issuer is a wholly-owned subsidiary, has at least one class of common or preferred equity securities registered under Section 12(b) 47 of the Exchange Act and listed on the New York Stock Exchange, and 47 15 U.S.C. 78 *l* (b). 3. The transfer agent for the debt securities is registered under Section 17A 48 of the Exchange Act. 48 15 U.S.C. 78q-1. In connection with this exemptive request, the NYSE undertakes that it will take or has taken the following steps:
(a)The NYSE will provide definitions of “listed” debt securities and “traded” debt securities on the Automated Bond System ® (the “ABS ® ”) log-on screen and on the NYSE's Web site,
(b)The NYSE will distinguish between “listed” debt securities and “traded” debt securities on the ABS ® and on the NYSE Web site's bond issue directory, 49 49 The NYSE will distinguish debt securities “listed” on the ABS ® from those “traded” on the ABS ® on the three different screens used to view the market and through which orders may be entered:
(1)The book showing all the orders in a particular security;
(2)the summary book showing aggregate interest at each price in a particular security; and
(3)the display of the best bid/offer, price range, and calculated accrued interest in a particular security. As will be clearly noted on the ABS ® log-on screen, “listed” debt securities will be identified by a letter or symbol, “traded” debt securities will be identifiable due to the absence of such letter or symbol. The location of the indicator will be the same on all three screens.
(c)The NYSE will directly provide each member organization and each listed company notification via letter and/or email prior to the date that trading of the debt securities commences on the ABS ® to clarify the distinction between “listed” debt securities and “traded” debt securities and to provide notification that eligible listed debt securities will be delisted and, instead, traded on the ABS ® ,
(d)The NYSE will issue a press release upon launch of this initiative stating that “listed” debt securities trade along side “traded” debt securities on the ABS ® , and
(e)The NYSE has contracted with Xcitek, LLC, (“Xcitek”), a third-party bond issue tracking service, for the provision of information prior to the date that this exemption is granted by the SEC. Xcitek's tracking service provides the NYSE a customized on-line reference for corporate actions relevant to bonds. The tracking system provides information and data electronically to the NYSE, and provides: • Notification of calls (redemptions) of traded bonds, • Notification of tender offers for traded bonds, • Notice of defaults in payment of interest on traded bonds, • Notice of consent solicitations for traded bonds, and • Notice of corporate actions for traded bonds (includes tender offers, issuer name changes, cusip number changes). The tracking system does not provide notification of changes in trustees, obligors or transfer agents with respect to traded debt securities. The NYSE has entered into a one-year contract with Xcitek to provide this information electronically on a daily basis. Xcitek independently obtains, researches and organizes the information. The NYSE does not itself verify the information provided by Xcitek. To the extent that in the future, Xcitek is no longer willing or able to provide this information, the NYSE will contract with another third party for the provision of similar information. The NYSE has separately filed SR-NYSE-2004-69 (December 3, 2004) and Amendment No. 1 to 2004-69 (March 15, 2005) on Exchange Act Form 19b-4 to propose NYSE Rules 1400 and 1401 that set forth the requirements for trading unlisted debt securities on the ABS ® . Proposed Rule 1400 provides that, for purposes of this exemption: “The term Debt Securities includes only securities that, if they were to be listed on the New York Stock Exchange, would be listed under Sections 102.03 or 103.05 of the New York Stock Exchange's Listed Company Manual; provided, however, that such securities shall not include any security that is defined as an “equity security” under Section 3(a)(11) of the Exchange Act. For the avoidance of doubt, note that the term “Debt Securities” does not include a security that, if listed on the New York Stock Exchange, would have been listed under Sections 703.19 or 703.21 of the New York Stock Exchange's Listed Company Manual. The references to Sections 102.03, 103.05, 703.19, and 703.21 of the NYSE's Listed Company Manual are to those sections as in effect on January 31, 2005.” Proposed Rule 1401 specifies that only Debt Securities with an outstanding market value or principal amount of at least $10 million will be permitted to be traded by NYSE members and member organizations on the ABS ® . Proposed Rule 1401 also specifies that trading in Debt Securities will be suspended if: • The outstanding aggregate market value or principal amount of the Debt Securities has fallen to less than $1,000,000, or • The Debt Securities may no longer be traded by NYSE members or member organizations on an unregistered basis pursuant to this exemptive request. In order to ensure that debt securities have at least $10,000,000 in aggregate market value or principal amount at the time trading commences, the NYSE will review two existing corporate bond issue data bases that provide issue size information for the preponderance of corporate bonds. To monitor the $1,000,000 suspension threshold, the NYSE will generally utilize the third party tracking system to monitor partial redemptions and tender offers. The most prevalent reason for outstanding principal amounts to fall below $1 million is when the price of the bond declines because of a default or potential bankruptcy. Prices of bonds in these situations will be monitored. We will also monitor the media for warnings of possible difficulties, in addition to ratings downgrades. With respect to debt securities that are currently listed on the NYSE, the Exchange intends to apply to delist debt securities that satisfy the NYSE's requirements for traded debt and, instead, to trade those debt securities on the ABS ® on an unlisted basis. As described above, the NYSE will be contacting listed companies to provide notification that eligible listed debt securities will be delisted and, instead, traded on the ABS ® . The NYSE will also inform listed companies of the NYSE's intention to identify currently outstanding or newly issued unlisted debt securities that are eligible to be traded by NYSE members and member organizations on the ABS ® . The NYSE's Fixed Income Markets Division will review a variety of sources, including SEC Securities Act filings and bond offerings posted daily in financial publications in order to identify additional unlisted debt securities that have been issued by a NYSE equity-listed company or wholly-owned subsidiary and that satisfy the requirements of proposed Rules 1400 and 1401. The NYSE intends to provide an opportunity for NYSE members and member organizations to trade all eligible debt securities. Once unlisted debt securities are identified and verified as satisfying the requirements of proposed Rule 1400 and 1401, the NYSE will notify NYSE members and member organizations that such unlisted debt securities are eligible to be traded on the ABS ® through ticker notices and postings on the ABS ® website. Debt securities that do not satisfy the proposed requirements of Exchange Rules 1400 and 1401 may continue to be listed on the NYSE. Debt securities that would not satisfy the proposed requirements for trading include convertible debt securities, debt securities that were listed under Sections 703.19 and 21 of the NYSE's Listed Company Manual, debt issued by listed company subsidiaries that are not wholly owned, foreign government debt and debt issued by an issuer that does not have equity securities listed on the NYSE. Background In 1992, the Exchange wrote to the Commission requesting that it grant a similar exemption pursuant to Section 3(a)(12) of the Exchange Act. 50 The Exchange pointed out that, while debt securities traded on a national securities exchange must be registered under Section 12(b) of the Exchange Act, 51 debt securities traded “over-the-counter” (“OTC”) were not subject to the same requirement. In fact, debt securities traded OTC need not even be issued by reporting companies. The Exchange argued that these statutory distinctions put it at a competitive disadvantage with respect to the OTC market. In an effort to be responsive, in November 1994, the Commission amended certain Exchange Act rules to “reduce regulatory distinctions between exchange-traded debt securities required to be registered under Section 12 of the Exchange Act and bonds traded over-the-counter for which such registration is not required.” 52 In doing so, the Commission acknowledged that “regulatory distinctions may have unnecessarily and unintentionally affected the structure and development of the debt markets.” 53 50 15 U.S.C. 78c(a)(12). *See* Letter from Donald J. Solodar, Executive Vice President, New York Stock Exchange, to William H. Heyman, Director, Division of Market Regulation, Securities and Exchange Commission, and Linda C. Quinn, Director, Division of Corporation Finance, Securities and Exchange Commission, dated April 7, 1992. 51 See footnote 4 *supra* . 52 See Securities Exchange Act Release No. 34-34922 (November 1, 1994), 59 FR 55342 (Nov. 7, 1994). The Commission, among other things, exempted debt securities listed on a national securities exchange from Sections 14(a), 14(b) and 14(c) of the Exchange Act. 53 See footnote 9 *supra* . The Exchange Act Bond Registration Requirement In the Exchange's view, the Exchange Act registration requirement for corporate bonds to be traded on exchanges continues to have an anti-competitive impact on exchange bond markets. Under Section 12(g) of the Exchange Act, 54 only equity securities are required to be registered to be traded in the OTC market. In contrast, corporate bond issues may trade on a national securities exchange only if those bonds are registered under the Exchange Act. 54 15 U.S.C. 78 *l* (g). The Exchange estimates that, in 1992, 90% of the par value of outstanding corporate debt (excluding private placements) was issued by reporting companies, but only 35% of that debt was registered under the Exchange Act. Currently, the Exchange estimates that 95% of the par value of outstanding corporate debt (excluding private placements) is issued by reporting companies, but only 8% of that debt is registered under the Exchange Act. 55 As a result, the Exchange's bond market remains small and has declined over the last decade. In 1991, approximately 1,800 corporate bond issues having a par value of $287 billion were traded on the Exchange, representing 675 issuers. At the end of 2004, the Exchange had some 500 corporate bond issues trading (having a par value of $230 billion), representing 220 issuers. In comparison, the Exchange estimates that there are over 22,000 publicly offered corporate bond issues, with a combined par value in excess of $2.8 trillion, trading in the OTC secondary markets in the United States without being registered under Section 12(b) of the Exchange Act. Thus, while there are over 22,000 corporate bond issues that can be traded on the OTC market, only about 500 of these issues may be traded on exchanges. Clearly, despite the reforms undertaken by the Commission in 1994, the Exchange believes that fewer companies are deciding to register their debt securities under the Exchange Act, and the number of debt securities eligible for trading on national securities exchanges continues to diminish. 55 While there are no definitive numbers as to the size of the corporate bond market, based upon issues rated by the Nationally Recognized Securities Rating Organizations (“NRSRO”), the Exchange estimates that there are over 22,000 publicly offered corporate bond issues, having a par value in excess of $3 trillion. These numbers do not include asset-backed securities, medium-term note offerings, or commercial paper. Telephone conversation between Fred Siesel, Consultant to the New York Stock Exchange and Dan Wyzocki, President, First Data Services (November 8, 2004). The consequences of the continued disparity in regulatory treatment of exchange and OTC debt securities are not limited to the competitive constraints on the Exchange. The Exchange believes that investors in corporate bonds are adversely impacted. In contrast to OTC bond trading, the Exchange's bond market has long disseminated both last sale prices as they occur on the Exchange exclusive of any mark-ups, mark-downs, or other charges, and bid and ask quotations. Continuous last sale price disclosure has existed since 1867, when the stock and bond ticker first went into operation. In 1919, the stock and bond tickers commenced separate operations, and in 1977, the bond high-speed quote line began the dissemination of last sale prices and quotations to market data providers, such as Bloomberg, Reuters, ILX and others. Today, this market data is available through some 400,000 market data displays providing subscribers—primarily securities firms and financial institutions—with direct instantaneous access to this information, throughout each trading day. Instantaneous means within one to two seconds of the actual trade. The Exchange is not aware of any comparable level of transparency—trade prices, quotations, and speed of availability for corporate bond prices—that exists currently elsewhere or will exist in the foreseeable future. The Exchange believes that all of this transparency is lost when a bond delists from, or is not traded on, the Exchange. 56 56 One instance in which this transparency may be lost is when a company with both listed equity and debt is merged or reorganizes with another company. The successor may list its stock on the Exchange but leave its debt in a now wholly owned subsidiary, which may seek to delist its debt to avoid separate Section 13 reporting requirements. Once delisted from the Exchange, the debt is traded only OTC, and the Exchange believes that investors lose the benefit of the transparency provided by the real time reporting of quotations and trades on the Exchange. Examples of such delisting, include Southwestern Bell debt (Securities Exchange Act Release No. 34-42141 (Nov. 16, 1999), 64 FR 63833 (Nov. 22, 1999)) and Pacific Bell debt (Securities Exchange Act Release No. 34-42142 (Nov. 16, 1999) 64 FR 63833 (Nov. 22, 1999)). Other examples have involved the debt of Mobil Corporation, Outdoor Systems, ITT Corporation, Chrysler Auburn Hills, Texaco, Ralston-Purina, Time-Warner Entertainment, New England Telephone and New York Telephone. Exchange bond trading is conducted through the ABS ® , which began operations in 1977. The ABS ® is a web-based trading system for fixed income securities to which Exchange member firms subscribe and through which they enter and match customer bond orders on a strict price and time priority basis. The system provides member subscribers with access to screens that display the order “book” in each bond in best price order and in the time sequence received. Completed, locked-in trades are submitted to the clearing corporation ( *i.e.* , Depository Trust Clearing Corporation) with calculated accrued interest. ABS ® centralizes bond trading and facilitates the high-speed dissemination of last sale prices and quotations to market data providers via the Exchange's dedicated bond quote line. ABS ® primarily serves the “small-lot” corporate bond market. Small-lot bond buyers and sellers are primarily individuals, bank trust accounts, and small institutions. In addition, bond dealers will use ABS ® to offset so-called “tail-end” bond positions acquired in the course of large-lot trading. As noted above, ABS ® is the only system, known to us, providing the public with real-time disclosure of quotations and trade prices, exclusive of mark-ups/mark-downs, commissions, or other charges. Bond Issue Information Because information that is disclosed in connection with the registration of bonds under the Exchange Act is generally also available through other Commission filings and other means, the Exchange believes that permitting a broker or dealer to effect a transaction in a debt security without requiring Exchange Act registration of eligible debt securities will not result in any significant loss of bond or issuer information to investors. First, the Exchange is only requesting exemptive relief with respect to the trading by NYSE members and member organizations of debt securities issued by eligible listed companies and their wholly owned subsidiaries. In order for debt securities to be traded by NYSE members and member organizations, the listed company must have equity securities listed on the NYSE and, thus, already be subject to the requirements of Section 13 of the Exchange Act. Information about the listed company will remain available to investors even in the absence of an Exchange Act registration requirement for bonds of these issuers or their wholly owned subsidiaries. Second, only debt securities that are registered under the 1933 Act would be eligible to be traded by NYSE members and member organizations on the ABS ® . Additionally, under Section 15(d) of the Exchange Act, issuers not required to register their debt securities under Section 12 of the Exchange Act are subject to Section 13 reporting requirements for the fiscal year following the effective date of a registration statement filed under the 1933 Act. 57 Issuers must continue to file such reports so long as they have a class of securities with at least 300 “holders of record” as defined under Exchange Act Rule 12g5-1. 58 Therefore, with respect to eligible debt securities that have been issued by the wholly owned subsidiary of a listed company, that wholly owned subsidiary may or may not itself be currently subject to the requirements of Section 15(d) or Section 13 of the Exchange Act. 57 15 U.S.C. 78o(d). 58 17 CFR 240.12g5-1. The 1933 Act registration statements themselves supply much of the relevant information needed by the bond markets and investors. Indeed, for the most part, the Exchange Act registration Form 8-A simply incorporates by reference the information found in the 1933 Act registration statement. The 1933 Act registration statement also contains a much more detailed and relevant description of the debt issue than is required by Rule 12b-3 of the Exchange Act. 59 The description contained in the term sheet of the registration statement provides the information necessary to trade that issue—whether on an exchange or OTC. The issue description contained in the Form 8-A registration statement does not provide the information needed to trade bonds. 59 17 CFR 240.12b-3. Rule 12b-3 requires that wherever the title of securities is required to be stated one shall also indicate “the type and general character of the securities * * *.” For funded debt, issuers are required to state the following: the rate of interest, the maturity date (or dates for serial issues), an indication if the payment of principal or interest is contingent, a brief indication of the priority of the issue, and, if the issue is convertible, a statement to that effect. Most of the other disclosure items required in connection with debt securities arise with respect to Forms 8-K, 10-Q and 10-K. These forms would continue to be filed by eligible listed companies and, where required by Sections 15(d) or 13 under the Exchange Act, by eligible wholly owned subsidiaries, regardless of whether the debt securities are registered under the Exchange Act. Item 2.04 of Form 8-K requires disclosure of any triggering event, such as a default, that accelerates or increases a direct financial obligation. Item 3.03 of Form 8-K requires disclosure of any material modification to the rights of security holders. Item 601(b)(4) of Regulation S-K (required to be included in 10-Ks and 10-Qs) discusses the definition of the rights of debt holders. Part II—Item 3(a) of Form 10-Q requires that, to the extent that the registrant has not previously disclosed such information on Form 8-K, the registrant must provide information regarding defaults in the payment of principal, interest, sinking fund, etc., “with respect to any indebtedness of the registrant or any of its significant subsidiaries exceeding 5 percent of the total assets of the registrant and its consolidated subsidiaries * * *” (emphasis added). Thus, the Form 10-Q requires disclosure of defaults in the payment of principal, interest, sinking fund, etc. for any bonds of the registrant, irrespective of whether such bonds are exchange-listed or not. If, as described above, a wholly owned subsidiary ceases to provide Exchange Act reports itself, much of the information that had been provided by the wholly owned subsidiary will be provided instead by the wholly owned subsidiary's listed parent company in its own Exchange Act reports. The listed parent company, however, will not be required to list and describe the debt securities issued by the wholly owned subsidiary on the cover page of its own annual report on Form 10-K or to include as an exhibit to its own Forms 10-K or 10-Q the exhibits that would have been required to be filed by the wholly owned subsidiary pursuant to Item 601(b)(4) of Regulation S-K (relating to creation of a new class of securities or indebtedness or the modification of existing rights of security holders). There are also a variety of databases providing bond information, including information regarding the listing and/or trading location of a bond. A few examples of these database services include: Standard & Poor's Bond Guide, the Mergent Bond Record, First Data Services' BORAS, Bloomberg and the Commission's EDGAR internet service, among other services. In addition, the Exchange's own bond issue directory is available on the Exchange's web site and carries the description of each listed bond issue, including bonds currently exempt from Exchange Act registration requirements, such as Tennessee Valley Authority and the International Bank for Reconstruction and Development (World Bank) bonds. Most notably, of course, OTC bond trading functions without the information obtained as a result of Exchange Act registration. OTC bond trading relies on the information disclosed in the 1933 Act registration statement and the indentures filed under the Trust Indenture Act, including amendments to the indenture affecting the rights of bondholders. Debt securities traded by NYSE members and member organizations on the ABS( will not be subject to the provisions of the NYSE's Listed Company Manual that relate to debt securities that are listed on the NYSE. While both traded and listed debt securities are subject to the same quantitative thresholds for initial trading/listing and continued trading/listing, listed debt securities are also subject to other requirements, including: • Issuers of listed debt securities are required to provide immediate notice to the NYSE and the public of defaults or other unusual circumstances relating to the payment of interest; • Issuers of listed debt securities are required to provide immediate notice to the NYSE and the public of any corporate action it (or third parties) may take towards the redemption, retirement or cancellation of the security; • Issuers of listed debt securities are subject to requirements for transfer agents; and • Issuers of listed debt securities are required to submit a listing application in order to list the securities. As noted above, in the case of traded debt securities, the NYSE will obtain notice regarding defaults and redemptions through the third-party tracking system. No Justification for Disparate Treatment In summary, the disparate regulation between exchanges and the OTC markets has occurred without deliberate design. In 1934, Congress determined to regulate all listed issuers, and did not distinguish between listed equity and listed debt. Of course, at the time, the only place a company could be “listed” was on an exchange. In 1964, Congress properly determined to extend Exchange Act registration requirements to issuers having a substantial number of public shareholders and to require them to file periodic reports with the Commission, even if they were not listed on an exchange. The focus, however, was on those companies with public stockholders, so Section 12(g) of the Exchange Act was made applicable only to issuers of equity held by the requisite number of holders. As a result, publicly held debt that is not listed does not trigger the registration requirement. 60 60 Also at that time, Section 15(d) was amended to replace the asset-size standard with a holder-of-record standard. *See* Securities Exchange Act Release No. 34-7492 (January 5, 1965), 30 FR 483 (1965). Because of the widespread use of street name holding, however, the vast majority of bonds issued by bond-only companies fall outside the reporting requirement of Section 15(d). Thus Section 15(d), though it applies to both equity and debt, does not fill the gap left by Section 12(g), and does not achieve Exchange Act ongoing reporting for the bonds of most bond-only companies. We believe that this exemptive relief is consistent with the Commission's interest in greater bond market transparency. We also believe that removing unnecessary anti-competitive barriers to exchange trading of debt of reporting companies and their consolidated subsidiaries will go a long way towards providing bond investors with the transparency that we all agree is so important. We urge the Commission to use its exemptive power to remove the requirement that bonds of NYSE-listed equity issuers and their consolidated subsidiaries must be registered under the Exchange Act in order to be traded on an exchange. This dichotomy between exchange and OTC bond markets has existed too long and should be ended. Sincerely yours, /s/ Mary Yeager cc: Alan L. Beller, Annette L. Nazareth, David Shillman, Paula Dubberly, Robert Plesnarski, Sean Harrison, Michael Gaw, Timothy C. Fox. Appendix B—Proposed Order Granting the New York Stock Exchange's Application for an Exemption Pursuant to Section 36 of the Securities Exchange Act of 1934 This is a proposed order regarding the exemptive application of the New York Stock Exchange, Inc. (“NYSE”). Before issuing any final order, the Commission will consider public comments received on the NYSE's exemptive application and proposed order. I. Introduction On May 26, 2005, the Commission received an application from the NYSE for an exemption pursuant to Section 36 61 of the Securities Exchange Act of 1934 (the “Exchange Act”), 62 in accordance with the procedures set forth in Exchange Act Rule 0-12. 63 The NYSE has requested exemptive relief from Section 12(a) 64 of the Exchange Act to permit its members and brokers or dealers to trade certain unregistered debt securities on the NYSE's Automated Bond System. This order grants the NYSE's application for an exemption. 61 15 U.S.C. 78mm. Section 36 of the Exchange Act gives the Commission the authority to exempt any person, security or transaction from any Exchange Act provision by rule, regulation or order, to the extent that the exemption is necessary or appropriate in the public interest and consistent with the protection of investors. 62 15 U.S.C. 78a *et seq.* 63 CFR 240.0-12. Exchange Act Rule 0-12 sets forth procedures for filing applications for orders for exemptive relief pursuant to Section 36. 64 15 U.S.C. 78 *l* (a). II. Proposed Order Granting the New York Stock Exchange's Application for an Exemption Pursuant to Section 36 of the Securities Exchange Act of 1934 Section 12(a) of the Exchange Act provides in relevant part that it shall be unlawful for any “member, broker or dealer to effect any transaction in any security (other than an exempted security) on a national securities exchange unless a registration is effective as to such security for such exchange.” Section 12(b) 65 of the Exchange Act dictates how the registration referred to in Section 12(a) must be accomplished. Accordingly, all equity and debt securities that are not “exempted securities” or are not otherwise exempt from Exchange Act registration must be registered by the issuer under the Exchange Act before a member, broker or dealer may trade that class of securities on a national securities exchange. 65 15 U.S.C. 78 *l* (b). Contrarily, brokers or dealers who trade debt securities otherwise than on a national securities exchange may trade debt securities regardless of whether the issuer registered that class of debt under the Exchange Act. This is so because Exchange Act registration for securities traded other than on a national securities exchange is required only for certain equity securities. In particular, Section 12(g) 66 of the Exchange Act, the only Exchange Act provision other than Section 12(a) to impose an affirmative Exchange Act registration requirement, requires the registration of equity securities only. 67 66 15 U.S.C. 78 *l* (g). 67 Section 12(g)(1) of the Exchange Act and Rule 12g-1 [17 CFR 240.12g-1] promulgated thereunder require an issuer to register a class of equity securities if the issuer of the securities, at the end of its fiscal year, has more than $10,000,000 in total assets and a class of equity securities held by 500 or more recordholders. As the Commission has stated in the past, we believe that this disparate regulatory treatment may have negatively and unnecessarily affected the structure and development of the debt markets. 68 In 1994, to reduce existing regulatory distinctions between exchange-traded debt securities and debt securities that trade in the “over-the-counter” (“OTC”) market, we adopted Exchange Act Rule 3a12-11. 69 Rule 3a12-11 provides for the automatic effectiveness of Form 8-A registration statements for exchange-traded debt securities, exempts exchange-traded debt from the borrowing restrictions under Section 8(a) 70 of the Exchange Act, and exempts exchange-traded debt from certain proxy and information statement requirements under Sections 14(a),
(b)and
(c)of the Exchange Act. 71 Despite these efforts, the vast majority of secondary trading of debt securities continues to occur in the OTC market, which suggests that there still may be regulatory impediments that need to be addressed. 72 68 *See* Release Nos. 34-34922 (November 1, 1994) [59 FR 55342], and 34-34139 (June 1, 1994) [59 FR 29398]. 69 17 CFR 240.3a12-11. 70 15 U.S.C. 78h(a). 70 71 15 U.S.C. 78n(a),
(b)and (c). 72 The NYSE estimates that there are over 22,000 publicly offered corporate bond issues having a par value in excess of $3 trillion but only 8% of the $3 trillion par value is registered under the Exchange Act and so may be traded on the NYSE's Automated Bond System. See the NYSE's application for exemptive relief. In addition, we have sought to increase the level of transparency in the public debt markets. We have long believed that price transparency in the U.S. capital markets is fundamental to promoting the fairness and efficiency of our markets. 73 In 1998, the Commission's staff conducted a review of the public debt markets and found that in the area of corporate debt securities, price transparency was deficient. 74 Following the staff's 1998 review, the Commission requested the National Association of Securities Dealers, Inc. (“NASD”) to adopt rules requiring dealers to report transactions in corporate debt securities and preferred stock to the NASD and to develop a real-time price quotation system. 75 73 *See* Testimony of Chairman Arthur Levitt Before the House Subcommittee on Finance and Hazardous Materials, Committee on Commerce, Concerning Transparency in the United States Debt Market and Mutual Fund Fees and Expenses (September 29, 1998). 74 *Id.* 75 *Id.* The NASD was asked to undertake this initiative for two reasons. First, the NASD is the self-regulatory agency for the OTC market, the market on which the vast majority of debt securities are traded. Second, the Commission believed that the NASD possessed the required infrastructure to undertake the initiative and this would obviate the need to “reinvent the wheel.” *See* Testimony of Chairman Arthur Levitt Before the House Subcommittee on Finance and Hazardous Materials, Committee on Commerce, Concerning Hedge Fund Activities in the U.S. Financial Markets (March 18, 1999). We view the exemptive relief requested by the NYSE as another step to improve the public debt markets. The Commission believes that granting the NYSE's application will serve the public interest by minimizing unnecessary regulatory disparity and promoting competition. Currently, unlike on a national securities exchange, broker dealers may trade debt securities in the OTC market regardless of whether the issuer registered that class of debt under the Exchange Act. The exemption is designed to minimize that disparate regulatory treatment and promote competition between the debt security markets. Moreover, the exemption may provide greater transparency than exists on the current OTC market. At the same time, the conditions of the exemption serve to protect investors by alleviating any reduction in information available as a result of the exemption. Further, the conditions are designed to ensure that investors continue to have access to comprehensive public information about an issuer, including the issuer's detailed disclosure in a registration statement filed under the Securities Act of 1933 registration statement and accompanying trust indenture qualified under the Trust Indenture Act of 1939, and substantially all of the public information that would be available if the securities were registered under Section 12 of the Exchange Act. In granting this relief, we expect that the NYSE will design and implement all rules related to the relief in a manner that protects investors and the public interest and does not unfairly discriminate between customers, issuers, brokers or dealers. Accordingly, *it is ordered* pursuant to Section 36 of the Exchange Act that, under the terms and conditions set forth below, a NYSE member, broker or dealer may effect a transaction on the NYSE's Automated Bond System in a debt security that has not been registered under Section 12(b) of the Exchange Act without violating Section 12(a) of the Exchange Act. For purposes of this order, a “debt security” is: Any security that, if the class of securities were listed on the NYSE, would be listed under Sections 102.03 or 103.05 of the NYSE's Listed Company Manual. A debt security does not include any security that, if the class of securities were listed on the NYSE, would be listed under Sections 703.19 or 703.21 of the NYSE's Listed Company Manual. Provided, however, under no circumstances does a debt security include any security that is defined as an “equity security” under Section 3(a)(11) of the Exchange Act. References to Sections 102.03, 103.05, 703.19, and 703.21 of the NYSE's Listed Company Manual are to those sections as in effect on January 31, 2005. For purposes of this order, the following conditions must be satisfied:
(1)The issuer of the debt security has registered the offer and sale of such securities under the Securities Act of 1933; 76 76 15 U.S.C. 77a *et seq.*
(2)The issuer of the debt security, or the issuer's parent company if the issuer is a wholly-owned subsidiary, 77 has at least one class of common or preferred equity securities registered under Section 12(b) of the Exchange Act and listed on the NYSE; 77 The terms “parent” and “wholly-owned” have the same meanings as defined in Rule 1-02 of Regulation S-X [17 CFR 210.1-02].
(3)The transfer agent of the debt security is registered under Section 17A 78 of the Exchange Act; 78 15 U.S.C. 78q-1.
(4)The trust indenture for the debt security is qualified under the Trust Indenture Act of 1939; 79 and 79 15 U.S.C. 77aaa-77bbbb.
(5)The NYSE has complied with the undertakings to distinguish between debt securities registered under Section 12(b) of the Exchange Act and listed on the NYSE and debt securities trading under this order, as set forth in the NYSE's exemptive application. By the Commission. [NAME] [TITLE] [FR Doc. E5-3742 Filed 7-13-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-52001; File No. 4-208] Intermarket Trading System; Order Granting Approval of the Twenty First Amendment to the ITS Plan Relating to the Recognition of the Automatic Generation of Outgoing ITS Commitments July 8, 2005. On April 27, 2005, the Intermarket Trading System Operating Committee (“ITSOC”) submitted to the Securities and Exchange Commission (“Commission”), pursuant to Section 11A of the Securities Exchange Act of 1934 (“Act”), 1 and Rule 11Aa3- thereunder, 2 a proposed amendment (“Twenty First Amendment”) to the restated ITS Plan. 3 The proposed amendment recognized the automatic generation of outgoing ITS commitments in circumstances where members in the Participants' markets send such commitments contemporaneously with trading at inferior prices, disseminating a locking bid/offer in their own market, or a block trade. Notice of the proposed amendment appeared in the **Federal Register** on June 6, 2005. 4 The Commission received no comments on the proposed amendment. This order approves the proposed amendment. 1 15 U.S.C. 78k-1. 2 17 CFR 240.11Aa3-2. 3 The ITS Plan is a National Market System (“NMS”) plan, which was designed to facilitate intermarket trading in exchange-listed equity securities based on current quotation information emanating from the linked markets. *See* Securities Exchange Act Release No. 19456 (January 27, 1983), 48 FR 4938 (February 3, 1983). The ITS Participants include the American Stock Exchange LLC (Amex”), the Boston Stock Exchange, Inc. (“BSE”); the Chicago Board Options Exchange, Inc. (“CBOE”); the Chicago Stock Exchange (“CHX”), Inc., the Cincinnati Stock Exchange, Inc. (“CSE”), the National Association of Securities Dealers, Inc. (“NASD”), the New York Stock Exchange, Inc. (“NYSE”), the Pacific Exchange, Inc. (“PCX”), and the Philadelphia Stock Exchange, Inc. (“Phlx”) (“Participants”). 4 *See* Securities Exchange Act Release No. 51755 (May 27, 2005), 70 FR 32853. The Commission finds that the proposed amendment is consistent with the Act, in particular, with Sections 11A(a)(1)(C)(ii) and (D), 5 which provide for fair competition among the Participants and their members, and the linking of all markets for qualified securities through communications and data processing facilities which foster efficiency, enhance competition, increase the information available to brokers, dealers, and investors, facilitate the offsetting of investors' orders, and contribute to best execution of such orders. Further, the Commission finds that the amendment is consistent with Rule 11A3-2(c)(2) under the Act, 6 which requires among other things, that a plan amendment must be necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, and shall remove impediments to, and perfect the mechanisms of, a national market system. Specifically, the Commission believes that the proposed amendment, which permits the members in the Participants' markets to send computer generated commitments contemporaneously with trading at inferior prices, disseminating a locking bid/offer, or a block trade, should enable Participants to effect transactions that otherwise would appear to violate the trade-through rule while simultaneously fulfilling their obligations under the ITS Plan. 5 15 U.S.C. 78k-1(a)(1)(C)(ii) and (D). 6 17 CFR 240.11A3-2(c)(2). *It is therefore ordered,* pursuant to Section 11A(a)(3)(B) of the Act 7 that the proposed Twenty First Amendment be, and hereby is, approved. 7 15 U.S.C. 78k1(a)(3)(B). For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 8 8 17 CFR 200.30-3(a)(29). J. Lynn Taylor, Assistant Secretary. [FR Doc. E5-3730 Filed 7-13-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 35-27997] Filing Under the Public Utility Holding Company Act of 1935, as Amended (“Act”) July 7, 2005. Notice is hereby given that the following filing(s) has/have been made with the Commission pursuant to provisions of the Act and rules promulgated under the Act. All interested persons are referred to the application(s) and/or declaration(s) for complete statements of the proposed transaction(s) summarized below. The application(s) and/or declaration(s) and any amendment(s) is/are available for public inspection through the Commission's Branch of Public Reference. Interested persons wishing to comment or request a hearing on the application(s) and/or declaration(s) should submit their views in writing by August 2, 2005, to the Secretary, Securities and Exchange Commission, Washington, DC 20549-0609, and serve a copy on the relevant applicant(s) and/or declarant(s) at the address(es) specified below. Proof of service (by affidavit or, in the case of an attorney at law, by certificate) should be filed with the request. Any request for hearing should identify specifically the issues of facts or law that are disputed. A person who so requests will be notified of any hearing, if ordered, and will receive a copy of any notice or order issued in the matter. After August 2, 2005, the application(s) and/or declaration(s), as filed or as amended, may be granted and/or permitted to become effective. Western Massachusetts Electric Company (70-10308) Western Massachusetts Electric Company (“WMECO”), a public utility subsidiary of Northeast Utilities, a registered public utility holding company, has filed with the Commission an application/declaration (“Application”) under sections 6(a) and 7 of the Act seeking authorization to maintain its common equity-to-total capitalization ratio below the Commission's threshold of 30% (the “30% Threshold”) when certain Rate Reduction Bonds (non-recourse securitization bonds) are included in the calculation of the ratio, through December 31, 2006 (the “Authorization Period”). The term “total capitalization” is defined to include, where applicable, common stock equity (comprised of common stock, additional paid in capital, retained earnings, accumulated other comprehensive income or loss and/or treasury stock), minority interests, preferred stock, preferred securities, equity linked securities, long-term debt (including Rate Reduction Bonds), short-term debt and current maturities. On March 7, 2000, the Commission issued an order in file 70-9541 (HCAR 35-27147, the “Prior Order”) granting WMECO's and its affiliates” previously-submitted application/declaration (“Original Application”) in which the Commission recognized the fact that WMECO (and other affiliated utilities) would fall below the 30% Threshold when the impact of Rate Reduction Bonds were included in its capitalization calculation and authorized this through December 31, 2004. The Commission noted that restructuring legislation in Massachusetts where WMECO operates allowed for the issuance of Rate Reduction Bonds to finance a portion of the utility's cost incurred in the sale of its regulatory assets and/or renegotiation of its obligations under purchase power contracts. Rate Reduction Bonds are securities issued in accordance with state law by a special purpose subsidiary of the utility to finance a portion of a utility's cost incurred in the sale of its regulatory assets and/or renegotiation of its obligations under purchase power contracts, and are non-recourse to WMECO or the NU system. As stated in the Original Application, because of the state-mandated divestiture of generating assets and issuance of Rate Reduction Bonds, NU's utilities, including WMECO, experienced a significant decrease in the amount of tangible assets that each owned and received a significant influx of cash causing each of NU's electric utilities to fall below the 30% Threshold when the impact of Rate Reduction Bonds and the effects of capital restructuring associated with the asset divestitures were considered. On May 17, 2001, WMECO Funding LLC, a subsidiary of WMECO, issued $155 million of Rate Reduction Bonds causing WMECO to fall below the 30% Threshold at that time. 1 1 In a financing order issued July 2, 2004, HCAR No. 27868A, the Commission noted that WMECO's Debt/Equity Ratio had improved to a level of 66.6% / 33.4%. The Original Application also stated that the ratings of the respective senior debt securities of WMECO would be unaffected or would be improved by the issuance of the Rate Reduction Bonds, as such bonds are not considered obligations of the utilities by the ratings agencies. The Original Application stated that the senior debt ratings of WMECO issued by Standard & Poor's (“S&P) were “BBB-” while the senior debt ratings of WMECO issued by Moody's Investor Service, Inc. (“Moody's”) were “Baa3”. Since that time, WMECO's credit ratings have improved. As of the date of this filing, WMECO's senior unsecured debt ratings from S&P and Moody's were BBB+ and Baa2, respectively. By order issued December 28, 2004 the Commission authorized an extension for WMECO's utility affiliates, Connecticut Light and Power Company (“CL&P”) and Public Service of New Hampshire (“PSNH”), to remain below the 30% Threshold when the impact of the Rate Reduction Bonds is considered. The Commission reserved jurisdiction on the request by CL&P and PSNH to remain below the 30% Threshold through December 31, 2007 but granted authority beyond December 31, 2006. WMECO was not an applicant for that extension of authority and did not receive the extension granted to its utility affiliates. During the fourth quarter of 2004, WMECO was forecasted to be at 30.6% common equity ratio at year's end and to improve thereafter. WMECO's actual common equity ratio at December 31, 2004 was 30.7%, but at March 31, 2005 its actual common equity ratio was at 30.8%, slightly lower than had been forecast. In preparing the budget and financing plans for WMECO for 2005, management noted that there is a risk that WMECO could fall below the 30% Threshold, when the impact of the Rate Reduction Bonds is considered, at some point during the Authorization Period and is forecast to remain only slightly above 30% through December 31, 2005. Management's forecast does anticipate that WMECO's common equity ratio will end the year at 31.7%. WMECO states, however, that there is inherent uncertainty in forecasts, and therefore is WMECO now seeking authorization through the Authorization Period for its common equity ratio to remain below the 30% Threshold when the impact of Rate Reduction Bonds is considered while remaining above 30% when the impact of Rate Reduction Bonds is excluded. For the Commission, by the Division of Investment Management, pursuant to delegated authority. J. Lynn Taylor, Assistant Secretary. [FR Doc. E5-3721 Filed 7-13-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-51991; File No. SR-BSE-2005-23] Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto To Add New Account Identification Codes July 7, 2005. 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 June 23, 2005, the Boston Stock Exchange, Inc. (“BSE” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I and II below, which Items have been prepared by the BSE. On July 7, 2005, the BSE filed Amendment No. 1 to the proposed rule change. 3 The BSE filed the proposal pursuant to Section 19(b)(3)(A) of the Act, 4 and Rule 19b-4(f)(6) thereunder, 5 which renders the proposal effective upon filing with the Commission. 6 The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 In Amendment No. 1, the Exchange made non-substantive changes to re-format certain account identification code headings and clarify references made to rules of the New York Stock Exchange, Inc. (“NYSE”) and the American Stock Exchange LLC (“AMEX”). The effective date of the original proposed rule change is June 23, 2005, and the effective date of Amendment No. 1 is July 7, 2005. For purposes of calculating the 60-day period within which the Commission may summarily abrogate the proposed rule change under Section 19(b)(3)(C) of the Act, the Commission considers such period to commence on July 7, 2005, the date on which the Exchange filed Amendment No. 1. *See* 15 U.S.C. 78s(b)(3)(C). 4 15 U.S.C. 78s(b)(3)(A). 5 17 CFR 240.19b-4(f)(6). 6 The BSE has asked the Commission to waive the five-day pre-filing notice requirement and the 30-day operative delay. *See* Rule 19b-4(f)(6)(iii), 17 CFR 240.19b-4(f)(6)(iii). *See also* discussion *infra* Section III. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The BSE proposes to amend its rules regarding Account Identification Codes. 7 The text of the proposed rule change is available on the BSE's Internet Web site ( *http://www.bostonstock.com* ), at the BSE's Office of the Secretary, and at the Commission's Public Reference Room. 7 *See infra* Section II.A.1 for a complete description of the terms and purpose of the proposed rule change. 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 BSE 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 these statements may be examined at the places specified in Item IV below. The BSE 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 seeking to add several Account Identification Codes to its existing rules regarding recordkeeping requirements. In Chapter II, “Dealings on the Exchange”, Section 15, “Record of Orders from Offices to Floor”, the BSE requires that each order be marked with one of several Account Identification Codes. The codes that are currently available are as follows: Program trade index arbitrage Program trade non-index arbitrage All other orders Member/member organization: —Proprietary D C P —As agent for other member M N W Customer: —Individual
(80A)J K I —Other agency U Y A Accompanying the existing Account Identification Codes are definitions, as follows: Definitions *Member/member organization, proprietary:* A member/member organization trading for its own account. *Member/member organization, as agent for other member:* A member/member organization trading as agent for the account of another member/member organization. *Program Trade, Index Arbitrage:* The purchase or sale of “baskets” or groups of stocks in conjunction with the intended purchase or sale of one or more cash-settled options or futures contracts in an attempt to profit by the price difference, as defined in NYSE Rule 80A. *Program Trade, Non-Index Arbitrage:* A trading strategy involving the related purchase or sale of a group of 15 or more stocks having a total market value of $1 million or more, as defined in NYSE Rule 80A. *Individual (80A):* An account for an individual as defined by NYSE Rule 80A. *Other Agency:* Any other non-member or non-member organization. The BSE proposes to add new Account Identification Codes and definitions to its rules in order to provide its members and customers with the ability to more accurately reflect their specific type of trading in the records of their orders. Similar identification codes and accompanying definitions are presently utilized by other exchanges, such as the NYSE, as required by NYSE Rule 123 “Record of Orders,” and the AMEX, as set forth in AMEX Rule 719, “Comparison of Exchange Transactions.” The account types and definitions that the BSE seeks to add to its existing rules are similar to those set forth by the NYSE and AMEX. The BSE proposes to add the following information to its account indicator requirements: Competing market maker Short exempt Competing market, maker, short exempt Member/member organization: —Proprietary O E L —As agent for other member T F X Customer: —Individual
(80A)— H — —Other agency R B Z Additional definitions would also be added to reflect the new codes: *Competing Market Maker:* Any person acting as a market maker, as defined in Section 3(a)(38) of the Securities Exchange Act of 1934, in an exchange-listed security. A person acting solely in the capacity of a block positioner would not be considered a competing market maker. *Proprietary, Competing Market Maker:* A member or member organization trading for its own competing market maker account. *As Agent for Other Member, Competing Market Maker:* A member or member organization trading as agent for another member's competing market maker account. *Other Agency, Competing Market Maker:* A member or member organization trading as agent for the proprietary account for a non-member competing market maker. *Short Exempt:* Short sale transactions that are exempt from the provisions of SEC Rule 10a-1. In proposing the above changes, the BSE seeks to be consistent with the similar requirements of other exchanges regarding account identification codes. Moreover, the addition of the various codes will provide Exchange members the ability to more appropriately identify the types of trading activity in which they engage, and therefore, to maintain more accurate and detailed records of their trading activity. 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with the requirements of Section 6(b) of the Act, 8 in general, and furthers the objectives of Section 6(b)(5) of the Act, 9 in particular, in that it is designed to promote just and equitable principles of trade and to remove impediments to and perfect the mechanism of a free and open market and a national market system, and is not designed to permit unfair discrimination between customers, brokers, or dealers, or to regulate by virtue of any authority matters not related to the administration of the Exchange. 8 15 U.S.C. 78f(b). 9 15 U.S.C. 78f(b)(5). B. Self-Regulatory Organization's Statement on Burden on Competition The BSE 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 BSE has neither solicited nor received comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing proposed rule change:
(1)Does not significantly affect the protection of investors or the public interest;
(2)does not impose any significant burden on competition; and
(3)by its terms does not become operative for 30 days after the date of this filing, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-4(f)(6) thereunder. A proposed rule change filed under Rule 19b-4(f)(6) normally does not become operative for 30 days after the date of filing. However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. In addition, Rule 19b-4(f)(6)(iii) requires a self-regulatory organization to provide the Commission with written notice of its intent to file the proposed rule change, along with a brief description and text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. The BSE has asked the Commission to waive the five-day pre-filing notice requirement and the 30-day operative delay to allow the Exchange to immediately apply the new Account Identification Codes. The Commission waives the five-day pre-filing notice requirement. In addition, the Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest because the proposed rule change will provide the Exchange's members and customers with the ability to more appropriately identify the types of trading activity in which they engage and more accurately reflect their specific type of trading in the records of their orders. 10 10 For purposes only of waiving the 30-day operative delay, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. 11 11 *See supra* note 3. 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 No. SR-BSE-2005-23 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, Station Place, 100 F Street, NE., Washington, DC 20549-9303. All submissions should refer to File No. SR-BSE-2005-23. 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 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 such filing will also be available for inspection and copying at the principal office of the BSE. 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-BSE-2005-23 and should be submitted on or before August 4, 2005. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 12 12 17 CFR 200.30-3(a)(12). J. Lynn Taylor, Assistant Secretary. [FR Doc. E5-3729 Filed 7-13-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-51992; File No. SR-CBOE-2005-24] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Approving Proposed Rule Change Relating to the Assignment of RAES Orders to Logged-In Market-Makers Participating on RAES July 7, 2005. I. Introduction On March 15, 2005, the Chicago Board Options Exchange, Incorporated (“CBOE” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) a proposed rule change pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act”) 1 and Rule 19b-4 thereunder, 2 to add an alternative to the current procedures that apply to the assignment of orders on the Exchange's Retail Automatic Execution System (“RAES”) to CBOE market-makers logged on to participate in RAES. The proposed rule change was published for comment in the **Federal Register** on May 18, 2005. 3 The Commission received no comments on the proposal. This order approves the proposed rule change. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 *See* Securities Exchange Act Release No. 51684 (May 11, 2005), 70 FR 28588. II. Description of the Proposal CBOE Rule 6.8 governs the execution of orders on RAES. CBOE Rule 6.8.06 sets forth alternatives available to the appropriate Floor Procedure Committee to implement the procedures for the assignment of RAES-eligible orders to CBOE market-makers logged onto RAES for execution. One alternative set forth in current Rule 6.8.06(c), the “100 Spoke RAES Wheel,” assigns RAES orders to logged-in market-makers based on the percentage of their in-person agency contracts traded in that class (excluding RAES contracts traded) compared to all of the market-maker in-person agency contracts traded (excluding RAES contracts) during the review period. The proposed rule change sets forth a new alternative, available only in index option classes, that offers a wheel with 1000 spokes and assignment procedures that are similar to the assignment procedures applicable to the 100 Spoke RAES Wheel. Under the proposed 1000 Spoke RAES Wheel, the appropriate Floor Procedure Committee will determine on a class-by-class basis whether the assignment of RAES orders to logged-in market-makers is based on the percentage of a market-maker's contracts traded in that index option class (excluding RAES contracts traded) compared to all market-maker contracts traded (excluding RAES contracts) during the review period, or the percentage of the market-maker's in-person agency contracts traded in that class (excluding RAES contracts traded) compared to all market-maker in-person agency contracts traded (excluding RAES contracts) during the review period. As is the case with the 100 Spoke RAES Wheel, the procedure for the 1000 Spoke RAES Wheel would provide that on each revolution of the wheel, each participating market-maker who is logged in RAES at the time will be assigned a number of contracts that approximates the percentage of contracts on RAES that the market-maker traded in-person in that index option class during the review period, subject to the restrictions set forth in current Rule 6.8.06(c). The effect of utilizing the 1000 Spoke RAES Wheel instead of the 100 Spoke RAES Wheel is that the number of contracts allocated to a market-maker will increase by a factor of 10 for every revolution of the RAES wheel. This procedure is designed to reduce the rounding effects that result under the 100 Spoke RAES Wheel (the RAES system configuration rounds contracts to the nearest whole number). III. Discussion After careful consideration, the Commission finds that the proposed rule change is consistent with the requirements of Section 6(b) of the Exchange Act 4 and the rules and regulations thereunder applicable to a national securities exchange. 5 In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Exchange Act, 6 which requires, among other things, that the Exchange's rules be designed to promote just and equitable principles of trade, to prevent fraudulent and manipulative acts and, in general, to protect investors and the public interest. 4 15 U.S.C. 78f(b). 5 In approving the proposed rule change, the Commission has considered its impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 6 15 U.S.C. 78f(b)(5). The Commission believes that the proposal to add the alternative of the 1000 Spoke RAES Wheel would provide the Exchange with a greater degree of flexibility in allocating index option contracts that are executed automatically through RAES. The Exchange initially developed the 100 Spoke RAES Wheel as a means to allocate contracts executed through RAES according to the liquidity each market-maker provided on the floor. The Exchange asserted in its proposal, however, that the Floor Procedure Committees for index options have not employed the 100 Spoke RAES Wheel alternative because of the effects of rounding of that allocation method in larger trading crowds. The Commission believes that, with the 1000 Spoke RAES Wheel alternative, market-makers in index options would have a greater incentive to compete effectively for orders, and this, in turn, should benefit investors and promote the public interest. The Commission notes that implementation of the 1000 Spoke RAES Wheel, as with the 100 Spoke RAES Wheel, will have no effect on the prices offered to customers. Under CBOE Rule 6.8(d)(i), RAES automatically provides to each retail customer order an execution price, generally determined by the prevailing market quote at the time of the order's entry into the system. The 1000 Spoke RAES Wheel simply provides for another method of contract allocation in the case of index option contracts automatically executed through RAES. IV. Conclusion *It is therefore ordered,* pursuant to Section 19(b)(2) of the Exchange Act, 7 that the proposed rule change (SR-CBOE-2005-24) be, and it hereby is, approved. 7 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 8 8 17 CFR 200.30-3(a)(12). J. Lynn Taylor, Assistant Secretary. [FR Doc. E5-3745 Filed 7-13-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-51997; File No. SR-CHX-2004-17] Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto To Amend Article XX, Rule 37(a)(3) of Its Rules To Eliminate Its Requirement That Specialists Guarantee Execution of Limit Orders When Certain Conditions Occur in Another Market July 8, 2005. 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 June 21, 2004, the Chicago Stock Exchange, Inc. (“CHX” 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 prepared by the CHX. On July 5, 2005, the Exchange filed an amendment to the proposed rule change. 3 The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 *See* Amendment No. 1 dated July 5, 2005, replacing the original filing in its entirety. In Amendment No. 1, the Exchange modified the text of the proposed rule change and the discussion in response to comments by the Commission staff. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend CHX Article XX, Rule 37(a)(3), which provides for execution of resting CHX limit orders based on activity in other markets, to permit, but not require, CHX specialists to guarantee execution of such limit orders when certain conditions occur in another market. The text of the proposed rule change, as amended, is available on CHX's Web site ( *http://www.chx.com/marketreg/proposed rules.htm* ), at CHX's principal office, 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 CHX included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received regarding the proposal. The text of these statements may be examined at the places specified in Item IV below. The CHX 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 Changes 1. Purpose The Exchange proposes to amend Article XX, Rule 37(a) of the CHX Rules, which provides for execution of resting CHX limit orders based on activity in other markets. The proposed rule change would permit, but not require, CHX specialists to guarantee execution of such limit orders when certain conditions occur in another market. Background CHX Article XX, Rule 37(a)(3) sets out specific execution guarantees for eligible limit orders. For listed issues, the rule generally obligates a CHX specialist to guarantee execution of limit orders resting in the specialist's book, when the issue is being traded in the primary market at a price equal to or better than the limit price. For NASDAQ/NM securities, the rule permits, but does not require, a CHX specialist to guarantee execution of limit orders resting in the specialist's book, when another market center's quotation locks or crosses the limit price. The guarantees set forth in CHX Article XX, Rule 37(a)(3), commonly referred to as “limit order protection” or “primary market protection,” were adopted voluntarily by the CHX over 15 years ago, as a means of attracting order flow. As noted by the Commission, the Exchange's initiatives relating to primary market protection were intended to ensure “* * * fair competition among exchange markets, which benefits public investors.” 4 4 *See* Securities Exchange Act Release No. 32124 (April 13, 1993), 58 FR 21325 (April 20, 1993). The Exchange believes that other regional exchanges have enacted similar rule-based guarantees. *See, e.g.* , BSE Chapter II, Section 33, Interpretation and Policy .01, NSX Rule 11.9, and Phlx Rule 229. The Exchange believes that the rule-based guarantees were enacted on a strictly voluntary basis and were not required by the Act or by any requirement promulgated by Congress or the Commission in accordance with the Act, including the Order Handling Rules issued by the Commission in 1996. *See* Securities Exchange Act Release No. 37619A (September 6, 1996), 61 FR 48290 (September 12, 1996). The standards for execution of limit orders set forth in the Order Handling Rules do not require that best execution be measured on an order-by-order basis. Rather, they contemplate evaluation using aggregate standards. Industry Changes Since Adoption of the Execution Guarantees As our industry has evolved, the Exchange's principal competitors for order flow, namely “third market” execution venues and alternative trading systems, do not provide such limit order protection guarantees. Accordingly, the Exchange believes that the guarantees no longer serve a clear competitive purpose. This is particularly the case in recent years, since CHX order-sending firms now have free access to comprehensive monthly order execution quality statistics, rendering “front-end” execution guarantees unnecessary as a means of attracting order flow. Firms are able to closely monitor execution quality and, thereby, ensure that they are meeting their best execution obligations, without relying on rule-based guarantees. 5 5 The Exchange notes the dramatic increase in market share that has been achieved by several of the Exchange's third market competitors as evidence that order-sending firms no longer consider rule-based execution guarantees essential to their order-routing decisions, or presumably to satisfaction of their best execution obligations. Compounding the lack of competitive value, the guarantees currently subject CHX specialists to exposure that was never intended when the rule-based guarantees were enacted. Since the securities industry conversion to decimal trading, the availability of liquidity at a best bid or offer (“BBO”) price point has declined, in many cases significantly. The CHX specialist, if he chooses to offset his positions in another market, often encounters great difficulty in accessing liquidity at the price that he is obligated to provide. This is particularly true in the case of manually-executed orders, given the associated time latency and the frequency with which quotes in other markets are changing. Many CHX specialists, thus, believe that it is no longer appropriate to mandate that specialists guarantee execution of resting limit orders for listed issues, based on activity in other market centers. Indeed, they believe that in today's trading environment, the limit order execution guarantee exposes them to unwarranted liability, which they often have limited ability to mitigate. 6 6 In fact, the exposure of a CHX specialist exceeds that of a specialist on the primary market, whose best execution obligation effectively requires only that he guarantee a limit order execution, if another market executes an order at a price *better* than the limit price. Under the current CHX rule, the CHX specialist is required to execute a limit order, if the primary market executes an order *at* the limit price. In short, the CHX believes that the environment has changed significantly since it voluntarily enacted its rule-based execution guarantees, warranting the amendments proposed by the CHX. The CHX believes that the guarantees no longer foster significant competition between markets. Absent this benefit to investors, the Exchange believes that there is no legal basis for continuing to mandate such guarantees, which, as discussed above, are not required under the Act or other requirements promulgated by Congress or the Commission. Accordingly, the Exchange believes that it is appropriate to render such guarantees voluntary, on the terms outlined below. Proposed Rule Change Under the proposed revision to CHX Article XX, Rule 37(a)(3), the mandate that CHX specialists guarantee execution of resting limit orders for listed issues, based on triggering activity in other markets, would be deleted. Instead, the amended rule would permit CHX specialists to continue to provide such guarantees solely on an issue-by-issue basis, on non-discriminatory terms approved by the Exchange. The Exchange's existing functionality providing for automated execution of resting limit orders would remain available for CHX specialists who elect to continue to guarantee limit order protection. 7 7 The Exchange anticipates that for the foreseeable future, CHX specialists would continue to provide limit order protection voluntarily, using the criteria for voluntary limit order protection currently set forth in CHX Article XX, Rule 37(a)(3). To the extent that the Exchange approved some variation in the limit order protection criteria, the Exchange would notify all CHX participants of this change. Significantly, deletion of the rule-based mandate regarding limit order protection would not remove a CHX specialist's obligation to provide a timely best execution for each order, nor would it modify any other specialist obligations set forth in CHX Article XXX of the CHX Rules. The CHX Department of Market Regulation would continue its surveillance of order executions to ensure that CHX specialists meet all of their obligations to each order. Accordingly, many CHX specialists would continue to execute resting limit orders for listed issues voluntarily, when quotes or executions at the limit price occur in other markets, as a means of satisfying their best execution obligations and maintaining superior execution quality statistics. 2. Statutory Basis The Exchange believes that the proposal, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder that are applicable to a national securities exchange, and, in particular, with the requirements of Section 6(b) of the Act. 8 Specifically, the CHX believes that the proposal, as amended, is consistent with Section 6(b)(5) of the Act, 9 in that it is designed 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. 8 15 U.S.C. 78f(b). 9 15 U.S.C. 78f(b)(5). B. Self-Regulatory Organization's Statement of Burden on Competition The Exchange does not believe that the proposed rule change, as amended, will impose any burden on competition. C. Self-Regulatory Organization's Statement on Comments Regarding the Proposed Rule Changes Received From Members, Participants or Others No written comments were either solicited or received. III. Date of Effectiveness of the Proposed Rule Changes and Timing for Commission Action Within 35 days of the date of publication of this notice in the **Federal Register** or within such other 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 self-regulatory organization 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, as amended, 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-CHX-2004-17 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-9303. All submissions should refer to File No. SR-CHX-2004-17. 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 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 such filing will also be available for inspection and copying at the principal office of the CHX. 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-CHX-2004-17 and should be submitted on or before August 4, 2005. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 10 10 17 CFR 200.30-3(a)(12). J. Lynn Taylor, Assistant Secretary. [FR Doc. E5-3743 Filed 7-13-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-52000; File No. SR-ISE-2005-21] Self-Regulatory Organizations; International Securities Exchange, Inc.; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change and Amendments No. 1 and 2 Thereto To Amend Its Summary Fine Schedule for Position Limit Violations July 8, 2005. 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 June 15, 2005, the International Securities Exchange, Inc. (“Exchange” or “ISE”) 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 prepared by ISE. On June 23, 2005, the Exchange filed Amendment No. 1 to the proposed rule change. 3 On July 7, 2005, the Exchange filed Amendment No. 2 to the proposed rule change. 4 The Commission is publishing this notice and order to solicit comments on the proposed rule change, as amended, from interested persons and to approve the proposal on an accelerated basis. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 In Amendment No. 1, the Exchange amended the proposed rule change such that under proposed ISE Rule 1614(d)(1)(B):
(1)fines for member accounts would be based on the number of violations in any 12-month rolling period and not within one calendar year; and
(2)the $5,000 fine proposed by the Exchange would be for the fourth and each subsequent offense and not just for the fourth offense. 4 In Amendment No. 2, the Exchange added a footnote to ISE Rules 1614(d)(1)(A) and
(B)providing that
(i)a one-trade date overage,
(ii)a consecutive string of trade date overage violations where the position does not change or where a steady reduction in the overage occurs, or
(iii)a consecutive string of trade violations resulting from other mitigating circumstances, may be deemed to constitute one offense, provided that the violations are inadvertent. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change ISE proposes to amend its summary fine schedule for position limits. The text of the rule change is available on ISE's Web site ( *http://www.iseoptions.com* ), at ISE's principal office, 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, ISE 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 these statements may be examined at the places specified in Item IV below. ISE 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's disciplinary rules authorize the imposition of fines for minor rule violations, which are set forth in ISE Rule 1614. With respect to option position limit violations, current ISE Rule 1614(d)(1) sets forth a graduated fine schedule that increases the dollar amount of the fine as the number of cumulative violations increase. The dollar amount of the fines ranges from $1.00 to $5.00 per contract for every contract exceeding the applicable position limit. Pursuant to ISE Rule 1614(a), a violation where the fine amount exceeds $5,000 is subject to disciplinary procedures under ISE Rules 1601 *et seq.* 5 5 ISE Rule 1614(a) provides in relevant part: “In lieu of commencing a disciplinary proceeding, the Exchange may, subject to the requirements set forth herein, impose a fine, not to exceed $5,000, on any Member, or person associated or employed by a Member, with respect to any Rule violation listed in section
(d)of this Rule.” Based on its experience with processing position limit violations, the Exchange has found that most position limit violations are technical in nature. Accordingly, the Exchange believes that position limit violations should be processed under a summary fine schedule. For example, the Exchange often encounters situations that involve inadvertent calculation errors or computer systems problems which result in sizable position limit overages and a consecutive string of single trade date violations. Because the ISE member is unaware of the problem that caused the violation, the violation can be sizeable and occur over a string of days. In these situations, once the Exchange has identified the overage and notified the ISE member, the ISE member takes appropriate action to bring the position into compliance and, if the overage was based on a computer systems problem, implements appropriate procedures to prevent a recurrence. Notwithstanding the unintentional nature of the violations, the Exchange's current rules provide for the imposition of fines for position limit violations in accordance with the fine schedule set forth in ISE Rule 1614(d)(1). For violations occurring in customer and member accounts, ISE Rule 1614(d)(1) deems one violation to equal a single date overage. Therefore, a single position limit overage that continues over a string of consecutive days would significantly increase the probability that the fine would exceed the $5,000 threshold set forth in ISE Rule 1614 as a result of reaching the next level in the graduated fine schedule. In these situations, the Exchange rules require the Exchange to remove the violation from the summary fine process of ISE Rule 1614(d) and place it under the disciplinary process set forth in ISE Rules 1601 *et seq.* The Exchange believes that removal of these types of violations from the summary fine process is incongruous with what it believes is the unintentional nature of the majority of the position limit violations that the Exchange comes across. To realign ISE Rule 1614(d) with the current landscape, the Exchange proposes to establish a fixed dollar fine amount per each offense, with the fine amount equaling $2,500 for violations occurring in the accounts of non-member customers and $5,000 for violations occurring in all other accounts. ISE believes that the cap on the fine amount would permit the Exchange to process the majority of position limit violations under the summary fine process without having to subject the violation to the disciplinary procedures provided in ISE Rules 1601 *et seq.* In addition to restructuring the fine amounts, the proposal would add a footnote to ISE Rules 1614(d)(1)(A) and
(B)that the following may be deemed to constitute one offense, provided that the violations are inadvertent:
(i)A one-trade-date overage,
(ii)a consecutive string of trade-date overage violations where the position does not change or where a steady reduction in the overage occurs, or
(iii)a consecutive string of trade violations where there are other mitigating circumstances. Contemporaneous with the imposition of a fine, the Exchange's regulatory staff would work with the subject ISE member to correct the problem that caused the position limit violation. Pursuant to ISE Rule 1614, the Exchange has the authority to remove the position limit violation from the summary fine process of ISE Rule 1614(d)(1). Under ISE Rule 1614, “the Exchange is not required to impose a fine pursuant to this Rule with respect to the violation of any Rule included herein, and the Exchange may, whenever it determines that any violation is not minor in nature, proceed under Exchange Rules 1603 or 1604, rather than under this Rule.” Therefore, the Exchange may remove the violation from the summary fine process whenever it determines that the violation is not minor in nature. 2. Statutory Basis The Exchange believes the proposed rule change, as amended, would enable the Exchange to deal more efficiently with the majority of position limit violations and to provide the Exchange with a more equitable method of dealing with inadvertent position limit violations. Therefore, ISE believes the proposed rule change, as amended, is consistent with Section 6(b) of the Act, 6 in general, and Section 6(b)(5), 7 in particular, in that it is designed to promote just and equitable principles of trade and to remove impediments to and perfect the mechanism for a free and open market and a national market system. 6 15 U.S.C. 78f(b). 7 15 U.S.C. 78f(b)(5). B. Self-Regulatory Organization's Statement on Burden on Competition The Exchange believes that the proposed rule change, as amended, would not 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 not solicited, and does not intend to solicit, comments on this proposed rule change. The Exchange has not received any unsolicited written comments from its members or other interested parties. III. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change, as amended, 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-ISE-2005-21 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, Station Place, 100 F Street, NE., Washington, DC 20549-9303. All submissions should refer to File Number SR-ISE-2005-21. 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 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 such filing will also be available for inspection and copying at the principal office of ISE. 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-ISE-2005-21 and should be submitted on or before August 4, 2005. IV. Commission's Findings and Order Granting Accelerated Approval of Proposed Rule Change The Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange. 8 In particular, the Commission believes that the proposal is consistent with Section 6(b)(5) of the Act, 9 which requires that the rules of an exchange be designed to promote just and equitable principles of trade, to remove impediments and to perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. The Commission also believes that the proposal is consistent with Sections 6(b)(1) and 6(b)(6) of the Act 10 which require that the rules of an exchange enforce compliance with, and provide appropriate discipline for, violations of Commission and Exchange rules. In addition, because the existing ISE Rule 1614(c) offers procedural rights to a person fined under the ISE Rule 1614, the Commission believes ISE Rule 1614, as amended by this proposal, provides a fair procedure for the disciplining of members and persons associated with members, consistent with Sections 6(b)(7) and 6(d)(1) of the Act. 11 8 In approving this proposed rule change, the Commission notes that it has considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 9 15 U.S.C. 78f(b)(5). 10 15 U.S.C. 78f(b)(1) and 78f(b)(6). 11 15 U.S.C. 78f(b)(7) and 78f(d)(1). Finally, the Commission finds that the proposal, as amended, is consistent with the public interest, the protection of investors, or otherwise in furtherance of the purposes of the Act, as required by Rule 19d-1(c)(2) under the Act 12 which governs minor rule violation plans. The Commission believes that the change to ISE Rule 1614 would strengthen its ability to carry out its oversight and enforcement responsibilities as a self-regulatory organization in cases where full disciplinary proceedings are unsuitable in view of the minor nature of the particular violation. The Commission also notes that ISE's proposal is similar to a proposal by the Chicago Board Options Exchange (“CBOE”) that was previously approved by the Commission. 13 12 17 CFR 240.19d-1(c)(2). 13 *See* Securities Exchange Act Release No. 47959 (May 30, 2003), 68 FR 34441 (June 9, 2003) (SR-CBOE-2002-05). In approving this proposed rule change, the Commission in no way minimizes the importance of compliance with Exchange rules and all other rules subject to the imposition of fines under ISE Rule 1614. The Commission believes that the violation of any self-regulatory organization's rules, as well as Commission rules, is a serious matter. However, ISE Rule 1614 provides a reasonable means of addressing rule violations that do not rise to the level of requiring formal disciplinary proceedings, while providing greater flexibility in handling certain violations. The Commission expects that ISE will continue to conduct surveillance with due diligence and make a determination based on its findings, on a case-by-case basis, whether a fine of more or less than the recommended amount is appropriate under ISE Rule 1614 or whether a violation requires formal disciplinary action. The Commission finds good cause, pursuant to Section 19(b)(2) of the Act, 14 for approving the proposed rule change, as amended, prior to the thirtieth day after the date of publication of the notice of the filing thereof in the **Federal Register** . Because the Commission recently approved a substantively similar proposal by CBOE after a full notice-and-comment period and this proposal does not raise any new regulatory issues, the Commission believes that accelerated approval is appropriate. 14 15 U.S.C. 78s(b)(2). V. Conclusion *It is therefore ordered* , pursuant to Section 19(b)(2) of the Act 15 and Rule 19d-1(c)(2) thereunder, 16 that the proposed rule change, as amended, (SR-ISE-2005-21) be, and hereby is, approved and declared effective. 15 15 U.S.C. 78s(b)(2). 16 17 CFR 240.19d-1(c)(2). For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 17 17 17 CFR 200.30-3(a)(12). J. Lynn Taylor, Assistant Secretary. [FR Doc. E5-3747 Filed 7-13-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-51994; File No. SR-NASD-2004-025] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendments No. 1 and 2 Thereto To Amend NASD's Minor Rule Violation Plan July 7, 2005. 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 February 10, 2004, the National Association of Securities Dealers, Inc. (“NASD”) 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 prepared by NASD. On March 17, 2005, NASD filed Amendment No. 1 to the proposed rule change. 3 On June 27, 2005, NASD filed Amendment No. 2 to the proposed rule change. 4 The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 Amendment No. 1 replaced the original filing in its entirety. 4 Amendment No. 2 replaced Amendment No. 1 in its entirety. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change NASD is proposing to amend NASD Interpretative Material 9216 (“IM-9216”) (“Violations Appropriate for Disposition Under the Plan Pursuant to SEC Rule 19d-1(c)(2)”) to expand the list of violations eligible for disposition under NASD's Minor Rule Violation Plan (“MRVP”). The text of the rule change is available on NASD's Web site ( *http://www.nasd.com* ), at NASD's principal office, 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, NASD included statements concerning the purpose of, and basis for, the proposed rule change, as amended, and discussed any comments it received on the proposal. The text of these statements may be examined at the places specified in Item IV below. NASD 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 Background In 1984, the Commission adopted amendments to Rule 19d-1(c) under the Act 5 that allow self-regulatory organizations to adopt, with Commission approval, plans for the disposition of minor violations of rules. 6 In 1993, pursuant to Rule 19d-1(c), NASD established its MRVP. 7 In 2001, the Commission approved significant amendments to NASD's MRVP. 8 In addition, in 2004, the Commission approved an amendment to NASD's MRVP to include failure to timely submit amendments to the Form U5 (“Uniform Termination Notice for Securities Industry Registration”). 9 5 17 CFR 240.19d-1(c). 6 *See* Securities Exchange Act Release No. 21013 (June 1, 1984), 49 FR 23828 (June 8, 1984). 7 *See* Securities Exchange Act Release No. 32383 (May 28, 1993), 58 FR 31768 (June 4, 1993) (SR-NASD-93-6). *See also* NASD Rule 9216(b) and Notice to Members 93-42 (July 1993). 8 *See* Securities Exchange Act Release No. 44512 (July 3, 2001), 66 FR 36812 (July 13, 2001) (SR-NASD-00-39). 9 *See* Securities Exchange Act Release No. 50466 (September 24, 2004), 69 FR 58568 (September 30, 2004) (SR-NASD-2004-121). NASD Rule 9216(b) authorizes NASD to impose a fine of $2,500 or less on any member or associated person of a member for a violation of any of the rules specified in NASD IM-9216. NASD staff reviews the number and seriousness of the violations, as well as the previous disciplinary history of the respondent, to determine if a matter is appropriate for disposition under the MRVP and to determine the amount of the fine. Once NASD has brought an MRVP action against an individual or member firm, NASD may, at its discretion, issue progressively higher fines for all subsequent minor rule violations within the next 24-month period or initiate more formal disciplinary proceedings. NASD states that the purpose of the MRVP is to provide a meaningful sanction for the minor or technical violation of a rule when the initiation of a disciplinary proceeding through the formal complaint process would be more costly and time-consuming than would be warranted. NASD further states that the inclusion of a rule in NASD's MRVP does not mean that it is unimportant; rather, a minor or technical violation of the rule may be appropriate for disposition under the MRVP. Moreover, NASD states that it retains the discretion to bring full disciplinary proceedings if violations of such rule occur. Discussion NASD proposes to amend its MRVP to make the following changes: • Transaction Reporting and Audit Trail Requirements in Equity and Debt Securities. NASD proposes to combine in one entry all of the rule violations eligible for disposition under the MRVP that relate to transaction reporting and audit trail requirements in equity and debt securities. As proposed, this entry would include violations of transaction reporting and audit trail requirements related to
(1)the Nasdaq Market Center;
(2)NASD's Trade Reporting and Comparison Service (“TRACS”); 10 and
(3)Trade Reporting and Compliance Engine (“TRACE”). 10 TRACS is the trade reporting system for NASD's Alternative Display Facility (“ADF”). ADF is a quotation collection, trade comparison, and trade reporting facility developed by NASD in accordance with the Commission's SuperMontage Approval Order. To effectuate this, NASD proposes to eliminate the separate minor rule violation pertaining to NASD Rules 6130 and NASD 6170 (transaction reporting to the Automated Confirmation Transaction Service) and add those rules to this consolidated entry. NASD further proposes to add to the MRVP, and this consolidated entry, violations of NASD Rules 4632A, 5430, 6130A, and 6170A, which relate to TRACS requirements. 11 Currently, NASD's MRVP includes transaction reporting for various systems, including the Nasdaq Market Center. NASD believes that including violations of ADF transaction reporting requirements in the MRVP is consistent with the current provisions for minor rule violations of transaction reporting requirements in equity securities. 11 NASD notes that NASD Rule 5430 governs both TRACS and the Nasdaq Market Center transaction reporting requirements. NASD also proposes to eliminate the reference in the MRVP to a violation of the Fixed Income Pricing System (“FIPS”), NASD Rule 6240, and replace it with a violation of NASD Rule 6230, the TRACE transaction reporting rule. 12 In adopting the TRACE rules in 2001, NASD eliminated FIPS, which required members to report trades for 50 high-yield debt securities. Because the TRACE system replaced and expanded upon FIPS, NASD proposes to amend its MRVP to replace the FIPS violation with a violation of the TRACE system transaction reporting requirement and also combine it into this single entry. 12 Prior to July 1, 2002, the NASD Rule 6200 Series pertained to FIPS, and NASD Rule 6240 governed transaction reporting in high-yield fixed income securities. *Communications with the Public.* NASD proposes to include in its MRVP violations of the standards applicable to member communications with the public. NASD's advertising rules (NASD Rules 2210, 2211, and 2220, and related Interpretive Materials) contain general and specific standards applicable to all member communications with the public. These standards prohibit incomplete, unbalanced, or unfair communications as well as exaggerated, unwarranted, or misleading statements or claims. The rules also enumerate specific standards for certain type of communications, including recommendations, hedge clauses, and projections. In addition, the rules set forth standards for the use and disclosure of the member's name. Under the current MRVP, NASD may issue minor rule violations only for procedural violations of the advertising rules, such as a failure to have advertisements and sales literature approved by a principal prior to use or a failure to meet specified time limits for filing advertisements. It is NASD's experience, however, that, based on the facts and circumstances, certain content-related violations of these rules can warrant more than a Letter of Caution, yet not rise to a level requiring or meriting full disciplinary action. Accordingly, the proposed rule change would allow NASD to address these minor or technical violations of content-related advertising rules, which might include, for example only, a technical violation of the provisions on the use and disclosure of members' names. NASD, therefore, proposes to include in its MRVP violations of the standards applicable to member communications with the public. *Contact Information.* NASD proposes to expand the MRVP to include, as a general category, a member's failure to identify to NASD and keep current information regarding any contact person that a member must provide to NASD under any current or future NASD rule. For example, a member's failure to provide or update emergency contact information under NASD Rule 3520 or failure to provide or update its executive representative designation and contact information as required by NASD Rule 1150 would be eligible for disposition as a minor rule violation under this category. 13 13 *See also* NASD Rule 1120(a)(7) (requirement to provide continuing education regulatory element contact person). NASD notes that it generally has sought to achieve consistency regarding the frequency with which members must review and update contact information (namely, within 17 business days after the end of each calendar quarter). *Other Changes.* In addition, NASD proposes to change “the Association” to “NASD” in the minor rule violation provision relating to NASD Rule 3110 14 and change “ECN's” to “ECNs” in the minor rule violation provision relating to Rule 11Ac1-1(c)(5) under the Act. 15 14 NASD no longer refers to itself or its subsidiary, NASD Regulation, Inc., using its full corporate name, “the Association,” “the NASD,” or “NASD Regulation, Inc.” Instead, NASD uses “NASD” unless otherwise appropriate for corporate or regulatory reasons. 15 17 CFR 240.11Ac1-1(c)(5). NASD would announce the effective date of the proposed rule change in a *Notice to Members* to be published no later than 60 days following Commission approval, if the Commission approves this proposal. The effective date would be 30 days following publication of that *Notice to Members* . 2. Statutory Basis NASD believes that the proposed rule change, as amended, is consistent with the provisions of Section 15A(b)(6) of the Act, 16 which requires, among other things, that NASD rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. NASD believes that the proposed rule change, as amended, is consistent with Section 15A(b)(7) of the Act 17 in that it works to safeguard adequately the interests of investors while establishing fair and reasonable rules for members and persons associated with members. NASD also believes that the proposed rule change also is consistent with Section 15A(b)(8) of the Act 18 in that it furthers the statutory goals of providing a fair procedure for disciplining members and associated persons. NASD believes that the addition of these violations to the MRVP will provide NASD with the ability to impose a meaningful sanction for violations of the rules discussed herein that warrant more than a Letter of Caution but do not necessarily rise to a level meriting a full disciplinary proceeding. 16 15 U.S.C. 78o-3(b)(6). 17 15 U.S.C. 78o-3(b)(7). 18 15 U.S.C. 78o-3(b)(8). B. Self-Regulatory Organization's Statement on Burden on Competition NASD does not believe that the proposed rule change, as amended, would result in 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 NASD neither solicited nor received any comments. 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 self-regulatory organization consents, the Commission will: A. By order approve such 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, as amended, 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-NASD-2004-025 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, Station Place, 100 F Street, NE, Washington, DC 20549-9303. All submissions should refer to File No. SR-NASD-2004-025. 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 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 such filing also will be available for inspection and copying at the principal office of NASD. 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 the File Number SR-NASD-2004-025 and should be submitted on or before August 4, 2005. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 19 J. Lynn Taylor, Assistant Secretary. 19 17 CFR 200.30-3(a)(12). [FR Doc. E5-3746 Filed 7-13-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-51980; File No. SR-NYSE-2005-19] Self-Regulatory Organizations; New York Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change To Require Members That Use Appendix E To Calculate Net Capital To File Supplemental and Alternative Reports July 6, 2005. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and Rule 19b-4 under the Act, 2 notice is given that on March 8, 2005, the New York Stock Exchange, Inc. (“NYSE” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I, II, and III below. These Items have been substantially prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend NYSE Rule 418 to require member organizations approved by the Commission to use the alternative method of computing net capital contained in Appendix E to Rule 15c3-1 under the Act (“Appendix E”) 3 to file supplemental and alternative reports with the Exchange. 3 17 CFR 240.15c3-1e. The Commission amended Rule 15c3-1 to establish this voluntary, alternative method of computing net capital, which is applicable to firms that qualify for consolidated supervised entity (“CSE”) treatment. Exchange Act Release No. 49830 (June 8, 2004), 69 FR 34428 (June 21, 2004). The text of the proposed rule change is available on the Exchange's Internet Web site ( *http://www.nyse.com* ), at the principal office of the NYSE, 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 Exchange 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 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 purpose of this proposal is to provide the Exchange with the authority to require member organizations approved by the Commission to use the alternative method of computing net capital contained in Appendix E (“CSE broker-dealers”) to file certain supplemental and alternative reports with the Exchange. Rule 17a-5 under the Act 4 contains broker-dealer reporting requirements. Broker-dealers file the monthly and quarterly reports required by Rule 17a-5 on Form X-17A-5 (the “FOCUS Report”). 5 Pursuant to Rule 17a-5(a)(5), 6 CSE broker-dealers are required to file certain additional monthly and quarterly reports. The Exchange has created a modified FOCUS Report form for CSE broker-dealers. The form contains new line items to capture the additional required reports. The proposed rule amendment is designed to require CSE broker-dealers to provide the additional reports to the Exchange. 4 17 CFR 240.17a-5. 5 17 CFR 249.617. 6 17 CFR 240.17a-5(a)(5). Under NYSE Rule 418, the Exchange may at any time require any member or member organization to be audited in accordance with the requirements of Rule 17a-5. The proposed amendment adds NYSE Rule 418.25, which would require member organizations that are CSE broker-dealers to file such supplemental and alternative reports as may be prescribed by the Exchange. A copy of the modified FOCUS report that CSE broker-dealers would have to file with the Exchange under proposed Rule 418.25 is available on the Exchange's Internet Web site ( *http://www.nyse.com* ). 2. Statutory Basis The Exchange believes that the proposed amendment to NYSE Rule 418 is consistent with Section 6(b) of the Act 7 in general, and furthers the objectives of Section 6(b)(5) of the Act 8 in particular, in that it is designed to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, and to remove impediments and perfect the mechanism of a free and open market and to protect investors and the public interest. 7 15 U.S.C. 78f(b). 8 15 U.S.C. 78f(b)(5). B. Self-Regulatory Organization's Statement on Burden on Competition The Exchange does not believe that the proposal will impose any inappropriate burden on competition. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Pursuant to Section 19(b)(2) of the Act, 9 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: 9 15 U.S.C. 78f(b)(2).
(A)By order approve such 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 proposed rule change, 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 e-mail to *rule-comments@sec.gov.* Please include File Number SR-NYSE-2005-19 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-9303. All submissions should refer to File Number SR-NYSE-2005-19. 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 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 Section, 100 F Street, Washington, DC 20549. Copies of the filings will also be available for inspection and copying at the principal office of the NYSE and will be available on the Exchange's Internet Web site ( *http://www.nyse.com* ). 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-2005-19 and should be submitted on or before August 4, 2005. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 10 10 17 CFR 200.30-3(a)(12). J. Lynn Taylor, Assistant Secretary. [FR Doc. E5-3720 Filed 7-13-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-51985; File No. SR-NYSE-2005-21] Self-Regulatory Organizations; New York Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto Relating to the Temporary Reallocation of Securities Among Specialists July 7, 2005. 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 March 11, 2005, the New York Stock Exchange, Inc. (“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 prepared by the Exchange. On June 16, 2005, the Exchange filed Amendment No. 1 to the proposed rule change. 3 The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 In Amendment No. 1, the NYSE added a paragraph to the purpose section concerning the designee of the Chief Regulatory Officer and corrected technical errors in the rule text. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange is proposing to amend NYSE Rule 103.11 regarding the temporary reallocation of securities traded on the Exchange from one specialist organization to another specialist organization. The text of the proposed rule change is set forth below. *Italics* indicate additions; [brackets] indicate deletions. Rule 103. Registration of Specialists No member shall act as a specialist on the Floor in any security unless such member is registered as a specialist in such security with the Exchange and unless the Exchange has approved of his so acting as a specialist and has not withdrawn such approval. As a condition of a member's registration as a specialist in one or more securities the Board of Directors may at any time require such member to register with the Exchange and act as an odd-lot dealer in such securities under Rule 101. Supplementary Material: .10 Registration of specialists.—Four classes of specialists have been established, namely
(1)regular specialists,
(2)relief specialists,
(3)associate specialists, and
(4)temporary specialists. No member is permitted to act as regular specialist, relief specialist or associated specialist unless he is registered with the Exchange. No registration is required for temporary specialists, but no member is permitted to act as such unless authorized by a Floor Official. Registration applies only to individual members, and not to member organizations. Consequently each Floor member of a specialist organization who expects to act as regular specialist, relief specialist or associate specialist at any time must register individually. All members of the Exchange registered as regular specialists, or odd-lot dealers or odd-lot brokers will be required to pay a monthly registration fee of $37.50 and all members registered as relief or associate specialists will be required to pay a monthly registration fee of $1.67. Notice of all new applications for registration as regular or relief specialist will be posted on the bulletin board. Approval will not be given on any such application until one week from the date of receipt thereof, except that, if circumstances require immediate action, temporary approval may be given. Members wishing to make representations with respect to any application should file their comments with the Market Surveillance and Evaluation Department during the period when notice is posted. Notice of applications for registration as associate specialists will not be posted. Before registration as a specialist, a member is required to pass a Specialist's Examination prescribed by the Exchange. Applications for this examination should be submitted to the Market Surveillance Department. .11 Temporary Reallocation of [Stocks] *Securities.* —The Chief [Executive] *Regulatory* Officer *or his or her designee* and two [most senior] *non-specialist* BoE Floor Representatives or [in the absence from the Floor of either of them, the next senior] *if only one or no non-specialist* BoE Floor Representative *s is* present on the Floor *, the most senior non-specialist Floor Governor or Governors based on length of consecutive service as a Floor Governor at the time of any action covered by this rule,* acting by a majority shall have the power to reallocate temporarily any [stock] *security* on an emergency basis to another location on the Floor whenever in their opinion such reallocation would be in the public interest. The member to whom a [stock] *security* has been temporarily reallocated under the provisions of this Rule will be registered as the regular specialist therein until the [Board of Directors] *Chief Regulatory Officer or his or her designee and two non-specialist BoE Floor Representatives* determine[s] *that the security may be returned to the original specialist organization or has been reallocated pursuant to Exchange rules* [the ultimate location of the security]. 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 Exchange 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 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 NYSE Rule 103.11 provides a procedure to temporarily reallocate securities listed on the NYSE from one specialist organization to another specialist organization on an expedited basis. Current NYSE Rule 103.11 requires the Chief Executive Officer and two Board of Executive (“BoE”) Floor Representatives to make the decision on such reallocation by majority agreement. The participation of the BoE Floor Representatives is on a seniority basis. The Exchange represents that recent changes to short sale regulations promulgated by the Commission in Regulation SHO 4 may result in the need to temporarily reallocate securities from one specialist organization to another specialist organization on an expedited basis. These regulations, which are intended to address aged fails to deliver resulting from short sale transactions, may preclude the specialist organization responsible for making a market in a particular security from effecting short sales in such security. As a result, Exchange specialist organizations would be subject to the prohibitions of Regulation SHO and could be prohibited from effecting sell-short transactions in a specialty security if it became a threshold security without first borrowing or arranging to borrow the security, which would be difficult to do in a manner consistent with the fulfillment of the specialist's Exchange-mandated market making obligations. In these circumstances, the Exchange would look to transfer the effected security to another specialist organization until such time as the first specialist organization is no longer precluded from selling short without first borrowing or arranging to borrow the security by Regulation SHO. 4 *See* Securities Exchange Act Release No. 50103 (July 28, 2004), 69 FR 48008 (August 6, 2004). The Exchange believes that the temporary reallocation of a security is most likely to be required for regulatory reasons and thus is more properly the responsibility of the Chief Regulatory Officer or his or her designee. Therefore, the Exchange proposes to amend NYSE Rule 103.11 in this regard. Under the proposed rule, the Chief Regulatory Officer may designate someone to meet his or her responsibility. The Exchange expects that the designee will be an officer in the Exchange's Regulatory Group, with the Executive Vice President of the Market Surveillance Division being the primary designee. 5 5 *See* Amendment No. 1. The NYSE's BoE advises the Chief Executive Officer in his or her management of the operations of the Exchange. The BoE consists of representatives of listed companies, investors, members and member organizations. Included on the BoE are specialist and Floor broker members. 6 These Floor member BoE representatives are also Floor Officials under NYSE Rule 46 and have certain powers and responsibilities under NYSE rules. Among these responsibilities is the power, along with the Chief Executive Officer, to temporarily reallocate securities on the Floor. 6 There are currently five BoE Floor Representatives—two specialist and three non-specialist Floor brokers. The Exchange believes that, for potential conflict of interest reasons, only non-specialist BoE Floor Representatives should be involved in a decision to reallocate a security from one specialist organization to another specialist organization. In addition, the Exchange proposes to remove as unnecessary the provision in NYSE Rule 103.11 that BoE Floor Representatives be chosen to act on a temporary reallocation in order of seniority. Finally, the Exchange proposes to provide as an alternative that, if there are not two non-specialist BoE Floor Representatives available to participate in the reallocation decision, the most senior non-specialist Floor Governor or Governors, based on his or her current length of service as a Floor Governor, would be authorized to act in place of the non-specialist BoE Floor Representative. The Exchange believes that seniority of the Floor Governors is relevant, because the experience of the ten non-specialist Floor Governors may vary widely, and the more senior non-specialist Floor Governors would have experience similar to that of a BoE Floor Representative. 2. Statutory Basis The basis under the Act for the proposed rule change is the requirement under Section 6(b)(5) of the Act 7 that an Exchange have rules that are designed 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. 7 15 U.S.C. 78f(b)(5). 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, as amended, 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-2005-21 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-9303. All submissions should refer to File Number SR-NYSE-2005-21. 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 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-2005-21 and should be submitted on or before August 4, 2005. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 8 8 17 CFR 200.30-3(a)(12). J. Lynn Taylor, Assistant Secretary. [FR Doc. E5-3722 Filed 7-13-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-51990; File No. SR-PCX-2005-16] Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto To Amend Its Market Data Rebate Program To Allow Equity Trading Permit Holders To Receive Rebates on an Estimated Basis July 7, 2005. 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 February 1, 2005, the Pacific Exchange, Inc. (“PCX” or “Exchange”), through its wholly owned subsidiary PCX Equities, Inc. (“PCXE”), 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 prepared by the PCX. On July 5, 2005, the PCX amended the proposed rule change. 3 The Commission is publishing this notice, as amended, to solicit comments on the proposed rule change from interested persons. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 In Amendment No. 1, the PCX amended the purpose section of this filing to include examples of how estimated market data rebates would be calculated and how estimated market data rebates would be distributed. I. Self-Regulatory Organization's Statement of the Terms of the Substance of the Proposed Rule Change The Exchange proposes to amend its rules governing the Archipelago Exchange (“ArcaEx”), the equities trading facility of PCXE. With this filing, the Exchange proposes to amend its current market data rebate program by allowing Equity Trading Permit Holders (“ETP Holders”) to receive market data rebates on an estimated basis when certain conditions are met. The text of the proposed rule change is available on the PCX's Web site ( *http://www.pacificex.com/* ), at the PCX's principal office, 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 PCX 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 these statements may be examined at the places specified in Item IV below. The PCX 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 PCX proposes to modify the current ArcaEx market data revenue sharing program applicable to limit orders posted in ArcaEx in Tape B securities 4 that execute against inbound marketable orders. The Exchange proposes to add language to the ArcaEx fee schedule describing a new estimated payment option available to qualifying ETP Holders who have earned certain Liquidity Provider Credits (the “Estimated Rebate Program”). Under the proposal, ETP Holders would be able to receive Liquidity Provider Credit payments on an estimated, monthly basis for limit orders posted by such ETP Holder in Tape B securities that execute against inbound marketable orders, if certain qualifying conditions are met. 4 Tape B securities include securities that are listed for trading on the American Stock Exchange and certain other securities that are deemed to be eligible for such listing. Currently, ETP Holders who earn Liquidity Provider Credits for such transactions receive payments from the Exchange on a quarterly basis, after the Exchange has received its share of market data revenue for Tape B from the Consolidated Tape Association (“CTA”) Plan. Under the proposed Estimated Rebate Program, eligible ETP Holders would be able to receive their share of Liquidity Provider Credits, based on an estimate, on a monthly basis before the quarterly revenues from the CTA Plan are paid to the Exchange. The amounts to be paid on an estimated basis to ETP Holders are calculated by using the tape credit percentages specified in the current rebate policy in effect for ArcaEx at the time 5 and applying such percentages to the ETP Holder's trading activity for the month in question. 5 The current Liquidity Provider Credit applied to limit orders in Tape B securities residing in the ArcaEx Book that execute against inbound marketable orders is 50% of tape revenue generated for such trade. The process for determining and maintaining eligibility in the program is described below. *Initial Qualification in the Estimated Rebate Program.* An ETP Holder will qualify for participation in the Estimated Rebate Program if, in the three-month period preceding the then-current month, the ETP Holder executed at least 250 million Tape B shares through ArcaEx. 6 This threshold is the “Initial Qualification” for the Estimated Rebate Program. An ETP Holder who has satisfied the Initial Qualification will be entitled to enroll in the Estimated Rebate Program and receive payments for Liquidity Provider Credits earned in the next month. 6 This figure will exclude QQQ from any trade activity before December 1, 2004. *Maintenance Level Requirement.* After an ETP Holder meets its Initial Qualification, it will be required to also meet a certain “Maintenance Level” to continue to qualify for the Estimated Rebate Program. The Maintenance Level will be satisfied if an ETP Holder executes at least 500 million Tape B Shares during each successive, continuous three-month period thereafter. If an ETP Holder who has met the Initial Qualification standard fails to sustain its Maintenance Level, the ETP Holder would not be eligible to receive estimated rebates for the next three months. Instead, the ETP Holder would be required to receive rebates as specified under the current rebate policy. This three-month period will be referred to as an “Ineligibility Period.” When the Ineligibility Period ends, the ETP Holder can attempt to re-qualify for the Estimated Rebate Program by meeting the Initial Qualification standard. Trading activity during the Ineligibility Period may count toward re-establishing the ETP Holder's eligibility in the Estimated Rebate Program. Any estimated Liquidity Provider Credits paid to an ETP Holder under the Estimated Rebate Program will be reconciled to the ETP Holder's actual Liquidity Provider Credit payment due when the Exchange receives the actual figures from the CTA Plan at quarter-end. Any necessary adjustments will be made with the next payment due to the ETP Holder ( *i.e.* , the next Estimated Rebate Program payment or current rebate policy payment, as applicable). *Example.* An example using hypothetical figures is included below. Assume a firm executes one million qualifying trades, totaling 300 million shares, each month for a period of nine consecutive months. After the first three months, the firm is entitled to receive the following amounts: Month Number of trades Number of shares Payment amounts January 1 million 300 million 0 February 1 million 300 million 0 March 1 million 300 million 0 At the end of the quarter, assume that payments received by the Exchange from the CTA plan for the quarter January through March amount to $1.00 per print. At this time, the firm would be due $1.5 million ( *i.e.* , 1 million trades multiplied by $.50, or half of the $1.00 print, multiplied by three months). In addition, the firm's level of activity would satisfy the Initial Qualification standard, qualifying the firm to participate in the Estimated Rebate Program for the next quarter. The next three months of firm payments are: Month Number of trades Number of shares Payment amounts April 1 million 300 million 7 $500,000 May 1 million 300 million 500,000 June 1 million 300 million 500,000 7 The $500,000 figure would be based on the trading totals and print amounts for the most recent quarter, *i.e.* , 1 million average trades multiplied by .50, or one-half of one $1.00 print. Assume that at the end of the quarter in June the payments received from the plan amount to $0.95 per print. At this point, it becomes clear that based on its activity levels, the firm should have received $475,000 per month ( *i.e.* , 1 million trades multiplied by $.475, or one-half of one print of $.95) for each month in the quarter. Because the firm received $500,000 per month in connection with the Estimated Rebate Program, its payments for the next quarter will have to be adjusted downward $75,000 ( *i.e.* , $25,000 for each month). In addition, the firm's trading levels for the quarter satisfy the Maintenance Level in the Estimated Rebate Program. The firm's adjusted payments for the next three months would be: Month Number of trades Number of shares Payment amounts July 1 million 300 million $400,000 August 1 million 300 million 475,000 September 1 million 300 million 475,000 The $400,000 payment in July is based on a $475,000 estimated payment ( *i.e.* , 1 million trades multiplied by $.475, or one-half of a print of $.95), minus the extra $75,000 received by the firm in the April through June time period. The rationale for the proposed changes in this filing is to make the pricing for executions on the ArcaEx more competitive. The Exchange evaluated the economics of modifying its current market data rebate structure and determined that it was feasible and appropriate, given the costs involved and competitive concerns. 2. Statutory Basis The PCX believes that the proposed rule change is consistent with the provisions of Section 6(b) of the Act, 8 in general, and with Section 6(b)(5) of the Act, 9 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 facilitating transactions in securities, and to remove impediments to and perfect the mechanisms of a free and open market and a national market system. 8 15 U.S.C. 78f(b). 9 15 U.S.C. 78f(b)(5). B. Self-Regulatory Organization's Statement on Burden on Competition The PCX does not believe that the proposed rule change would 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 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 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 self-regulatory organization consents, the Commission will: A. By order approve such 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-PCX-2005-16 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-9303. All submissions should refer to File Number SR-PCX-2005-16. 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 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 Room. Copies of such filing also will be available for inspection and copying at the principal office of the PCX. 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-2005-16 and should be submitted on or before August 4, 2005. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 10 10 17 CFR 200.30-3(a)(12). J. Lynn Taylor, Assistant Secretary. [FR Doc. E5-3724 Filed 7-13-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-51996; File No. SR-Phlx-2005-02] Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; Order Approving Proposed Rule Change and Amendment Nos. 1 and 2 Thereto Relating to Volume Weighted Average Price Crosses July 8, 2005. On January 25, 2005, the Philadelphia Stock Exchange, Inc. (“Phlx” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Security Exchange Act of 1934 (“Act”) 1 and Rule 19b-4 thereunder, 2 a proposed rule change to permit certain customer-to-customer crosses to be executed at a volume weighted average price (“VWAP”) during the Exchange's Post Primary Session. 3 On May 4, 2005, the Phlx submitted Amendment No. 1 to the proposed rule change, 4 and on May 18, 2005, the Phlx submitted Amendment No. 2 to the proposed rule change. 5 The proposed rule change, as amended, was published for comment in the **Federal Register** on June 3, 2005. 6 The Commission received no comments on the proposal. The order approves the proposed rule change, as amended. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 According to Phlx Rule 101, the Post Primary Session (“PPS”) operated from 4 to 4:15 p.m. 4 In Amendment No. 1, the Phlx:
(1)Eliminated the concept of linking a VWAP cross to a “primary market” and instead proposed to link a VWAP cross to correspond to any single market, and
(2)requested relief from the provisions of Rule 11Ac1-1 under the Act (the “Quote Rule”) with respect to VWAP crosses. 5 In Amendment No. 2, the Phlx:
(1)Eliminated the proposed rule text addressing the treatment of VWAP crosses in the case of trading halts,
(2)corrected a citing reference to Phlx auction market rules, and
(3)clarified the description of the “b” modifier. 6 *See* Securities Exchange Act Release No. 51731 (May 24, 2005), 70 FR 32692 (June 3, 2005) (“Notice”). The Phlx proposed to amend Phlx Rule 126, “Crossing” Orders, by adding new subsection
(i)to permit certain customer-to-customer 7 crosses to be executed at a VWAP 8 during the Exchange's PPS. 9 The new crossing transactions would be permitted to be executed at prices which are equal to any single market or consolidated market volume weighted average prices calculated for the entire trading day from 9:30 am. to 4 p.m., or for any portion of the trading day, as may be agreed to by the two parties to the trade. 10 Pursuant to the proposed rule change, the VWAP trade would be reported to the tape with the identifier “b” to the nearest decimal eligible for reporting by the Exchange. The “b” would distinguish VWAP trades from other transactions that may possibly be reported after the close. 7 Pursuant to Phlx Rule 126(b) a “customer” order would include any order which a broker represents in an agency capacity, including any order of a market marker or other broker-dealer not affiliated with the broker, and it would not include any order of a broker-dealer affiliated with the executing broker, or any associated person of such broker-dealer. 8 The Commission has observed that the VWAP for a security is generally determined by:
(1)Calculating raw values for regular session trades reported by the Consolidated Tape during the regular trading day by multiplying each such price by the total number of shares traded at that price;
(2)compiling an aggregate sum by adding each calculated raw value from step one above; and
(3)dividing the aggregate sum by the total number of reported shares for that day in the security. *See* Securities Exchange Act Release No. 48709 (October 28, 2003), 68 FR 62972, 62982, at n. 88 (November 6, 2003) (the Regulation SHO Proposing Release). Pursuant to the Exchange's proposed rule change, however, members would be able to elect to calculate a VWAP using only a single market's prices rather than all trades reported by the Consolidated Tape, and could elect to base that calculation on trades reported during a particular time slice during the day rather than including all trades reported during the regular trade day. Members would be required to document the particular trades they have agreed to be used in the calculation. 9 According to Phlx Rule 101, the PPS operates from 4 to 4:15 p.m. 10 These trades would therefore not be subject to the Phlx Rules 118, 119, and 120, which collectively establish auction market rules of priority, parity and precedence of order on the equity floor. The Commission finds that the proposed rule change, as amended, is consistent with the requirements of Section 6 of the Act 11 and the rules and regulations thereunder applicable to a national securities exchange. 12 In particular, the Commission finds that the proposed rule change, as amended, is consistent with Section 6(b)(5) of the Act, 13 which requires, among other things, that the rules of an exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. The Commission believes that the proposed rule change, as amended, will present market participants on Phlx with a new means of executing transactions at a VWAP, thereby enhancing investors' choices. Specifically, the proposed rule change would permit certain customer-to-customer crosses to be executed at a VWAP during the Exchange's PPS. 11 15 U.S.C. 78f. 12 In approving this proposed rule change, as amended, the Commission notes that it has considered the proposed rule's impact on efficiency, competition, and capital formation. *See* 15 U.S.C. 78c(f). 13 15 U.S.C. 78f(b)(5). The Phlx also has requested an exemption from Rule 11Ac1-1 of the Act (“Quote Rule”) with respect to these VWAP crosses. 14 The Quote Rule requires a national securities exchange to collect bids, offers, quotation sizes, and aggregate quotation sizes from “responsible brokers or dealers” for each reported security listed or admitted to unlisted trading privileges and to make them available to quotation vendors throughout the trading day with respect to reported securities traded on such exchange floor. 15 In addition, responsible brokers and dealers must promptly communicate their best bids, offers, and quotation sizes for any subject security to the exchange and be firm for their published bids and offers in any amount up to their published quotation sizes. 16 A bid or offer is defined in the Quote Rule as “the bid price and the offer price communicated by an exchange member or OTC market maker to any broker or dealer, or to any customer, at which it is willing to buy or sell one or more round lots of a covered security, as either principal or agent, but shall not include indications of interest.” 17 To constitute a bid or offer, the underlying trading interest must have been communicated to at least one other potential counterparty. Bids and offers are intended to attract other parties to deal with the person publishing the bid or offer at the quoted price. 14 17 CFR 240.11Ac1-1. *See also* Draft letter from Carla Behnfeldt, Director, Legal Department New Product Development Group, Phlx, to Larry E. Bergmann, Senior Associate Director, Division of Market Regulation, Commission, dated February 3, 2005. In addition, the Phlx has requested an exemption from the tick test provisions of Rule 10a-1 of the Act (“Short Sale Rule”) for crosses with a short sale component executed pursuant to proposed Phlx Rule 126(i). 17 CFR 240.10a-1. *See also* Notice, *supra* note 6, at 32693. The Commission is currently reviewing the Phlx's request for exemption from the Short Sale Rule. 15 Subsection (a)(21)(i) of the Quote Rule defines the term “responsible broker or dealer” to mean: “[w]hen used with respect to bids or offers communicated on an exchange, any member of such exchange who communicates to another member on such exchange, at the location (or locations) designated by such exchange for trading in a covered security, a bid or offer for such covered security, as either principal or agent. * * *” 17 CFR 240.11Ac1-1(a)(21)(i). 16 *See* 17 CFR 240.11Ac1-1(c). 17 17 CFR 240.11Ac1-1(a)(4). On the other hand, the Phlx is requesting relief from the Quote Rule because, with respect to the proposed Phlx Rule 126(i) VWAP crosses, the Phlx represents that bids and offers will not be made continuously and trades entered pursuant to Phlx Rule 126(i) would be entered for execution at a VWAP rather than at a specified bid or offer. In addition, the price of a VWAP cross would not be determined until such time as the VWAP is calculated. Furthermore, on account of the absence of a specified bid or offer, the Phlx represents that a VWAP cross is not a mechanism by which Phlx members would broadcast prices to other members and trade with one another at those prices. Thus, the Phlx represents that VWAP crosses do not implicate the reporting of bids and offers for the national market system concerns that Section 11A addresses. Therefore, under proposed Phlx Rule 126(i), it would not be possible for the Phlx to collect firm bids and offers at specific prices with respect to VWAP crosses and transmit each information on a continuous basis to quotation vendors. Only after the VWAP cross is effected after the close of trading is the Phlx able to transmit pricing information to vendors. Accordingly, the Commission believes it is appropriate to grant the Phlx's request for exemption from the requirement of the Quote Rule for VWAP crosses executed pursuant to proposed Phlx Rule 126(i). For the foregoing reasons, the Commission finds that the proposed rule change, as amended, is consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange, and, in particular, with Section 6(b)(5) of the Act. 18 18 15 U.S.C. 78f(b)(5). *It is therefore ordered,* pursuant to Section 19(b)(2) of the Act, 19 that the proposed rule change (SR-Phlx-2005-02), as amended, be, and it hereby is, approved. 19 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 20 20 17 CFR 200.30-3(a)(12). J. Lynn Taylor, Assistant Secretary. [FR Doc. 05-13842 Filed 7-13-05; 8:45 am]
Connectionstraces to 19
Traces to 19 documents
12 references not yet in our index
  • 15 USC 78
  • 17 CFR 240.12
  • 17 CFR 240.3
  • 17 CFR 249.208
  • 17 CFR 240.14
  • 15 USC 77aaa-77bbbb
  • 17 CFR 240.10
  • 63 CFR 240.0-12
  • 17 CFR 240.11
  • 17 CFR 240.19
  • 17 CFR 240.15
  • 17 CFR 240.17
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Notices
SECURITIES AND EXCHANGE COMMISSION
U.S.C.§ 78mm
U.S.C.§ 78a
C.F.R.§ 240.0-12
U.S.C.§ 78c
U.S.C.§ 78h
U.S.C.§ 78n
U.S.C.§ 78m
U.S.C.§ 77a
U.S.C.§ 78q–1
Cite15 USC 78
Cite17 CFR 240.12
Cite17 CFR 240.3
Cites 31 · showing 12Cited by 0 across 0 sources
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