Notices. Notice of application for an order pursuant to Section 26(c) of the Investment Company Act of 1940 (the “1940 Act” or “Act”) approving certain substitutions of securities and for an order of exemption pursuant to Section 17(b) of the Act from Section 17(a) of the Act
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BILLING CODE 7710-FW-P SECURITIES AND EXCHANGE COMMISSION [Release No. IC-27118; File No. 812-13195] Ameritas Variable Life Insurance Company, et al.: Notice of Application October 20, 2005. AGENCY: Securities and Exchange Commission (“Commission”). ACTION: Notice of application for an order pursuant to Section 26(c) of the Investment Company Act of 1940 (the “1940 Act” or “Act”) approving certain substitutions of securities and for an order of exemption pursuant to Section 17(b) of the Act from Section 17(a) of the Act. *Applicants:* Ameritas Variable Life Insurance Company (“Ameritas”), Ameritas Variable Life Insurance Company Separate Account V (“Account V”) and Ameritas Variable Life Insurance Company Separate Account VA-2 (“Account VA-2”, together with Account V “Separate Accounts”) and Ameritas Investment Corp.
(“Ameritas Investment”) (collectively, the “Applicants”). *Summary of Application:* The Applicants request an order pursuant to Section 26(c) of the 1940 Act to permit the substitution of shares of Calvert Variable Series, Inc.'s Ameritas Portfolios (“Ameritas Portfolios”) Income & Growth Fund (“Ameritas Income & Growth” or “Replacement Fund”) for
(a)shares of Alger American Leveraged AllCap—Class 0 Portfolio (“Alger AllCap”) of the Alger American Fund and
(b)shares of Salomon Variable All Cap Portfolio (“Salomon Variable All Cap”) of the Salomon Brothers Variable Series Trust (Alger AllCap and Salomon Variable All Cap collectively, the “Substituted Portfolios”) currently held by the Separate Accounts. Applicants also request an order of exemption pursuant to Section 17(b) of the 1940 Act from the provisions of Section 17(a) of the Act to permit certain in-kind transactions in connection with the substitutions. *Filing Date:* The application was filed on May 31, 2005 and amended and restated on September 12, 2005, September 29, 2005, October 3, 2005 and October 7, 2005. *Hearing or Notification of Hearing:* An order granting the application will be issued unless the Commission orders a hearing. Interested person may request a hearing by writing to the Secretary of the Commission and serving Applicants with a copy of the request, in person or by mail. Hearing requests must be received by the Commission by 5:30 p.m. on November 14, 2005, and should be accompanied by proof of service on the Applicants, in the form of an affidavit or, for lawyers, a certificate of service. Hearing requests should state the nature of the writer's interest, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request notification by writing to the Secretary of the Commission. ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-9303. Applicants, c/o Kenneth W. Reitz, Ameritas Variable Life Insurance Company, 5900 “O” Street, Lincoln, NE 68501. FOR FURTHER INFORMATION CONTACT: Joyce M. Pickholz, Senior Counsel, or William J. Kotapish, Assistant Director, Office of Insurance Products, Division of Investment Management at
(202)551-6795. SUPPLEMENTARY INFORMATION: The following is a summary of the application. The complete application may be obtained for a fee from the Public Reference Branch of the Commission, 100 F Street, NE., Room 1580, Washington, DC 20549 (telephone
(202)551-5850). Applicants' Representations 1. Ameritas is a stock life insurance company organized in the State of Nebraska currently licensed to sell life insurance in 49 states (all except New York) and in the District of Columbia. Ameritas is a wholly owned subsidiary of AMAL Corp. which is a direct subsidiary of Ameritas Life Insurance Corp. Ameritas Life Insurance Corp. is a subsidiary of Ameritas Acacia Mutual Holding Company. 2. Ameritas Investment, a Nebraska corporation, is registered as an investment adviser under the 1940 Act and as a broker-dealer under the Securities Exchange Act of 1934. Ameritas Investment is an affiliate of Ameritas. Ameritas Investment is the investment adviser of the Ameritas Portfolios and principal underwriter of the Contracts. 3. Account V is a separate account established by Ameritas under Nebraska law to fund variable life insurance contracts issued by Ameritas. Account VA-2 is a separate account established by Ameritas under Nebraska law to fund variable annuity contracts issued by Ameritas. Account V and Account VA-2 are registered under the 1940 Act as unit investment trusts (File Nos. 811-04473 and 811-05192 respectively). The variable life insurance contracts and variable annuity contracts issued through the Separate Accounts (together, “Contracts”) have been registered under the 1933 Act. 4. Calvert Variable Series, Inc. (“CVS”) is registered under the 1940 Act as an open-end management investment company of the series type. The Ameritas Portfolios, including Ameritas Income and Growth, are series of CVS. CVS obtained an order pursuant to Section 6(c) of the 1940 Act exempting it and Ameritas Investment, as investment advisor, from Section 15(a) of the 1940 Act with respect to subadvisory agreements (the “Manager of Managers Order”). The Manager of Managers Order permits Ameritas Investment to replace any sub-adviser or to employ a new sub-adviser for each of its series without obtaining shareholder approval. At a meeting held on January 15, 2002, shareholders of each Ameritas Portfolio approved the implementation of procedures contemplated in the Manager of Managers Order. Fred Alger Management, Inc. is the subadviser to Ameritas Income & Growth. 5. Each of the Contracts permits its owners to allocate the Contract's accumulated value among numerous Subaccounts of the Separate Accounts. Each Subaccount invests exclusively in a different investment portfolio (“Fund”) of an underlying mutual fund. Depending on the Contract, between twenty-one and thirty-six different Subaccounts (and corresponding funds) are currently available for this purpose. 6. Contract Owners can allocate accumulated Contract value to one or more Subaccounts and/or, where available, to the Fixed Account, subject to certain potential restrictions described in the application and in the prospectus relating to each Contract. No sales charge applies to any transfer of accumulated Contract value among Subaccounts. Applicants represent that the relief requested here will not affect any charge to which Contract Owners of any Contract would otherwise be subject, or affect any right or privilege to which such owners are otherwise entitled. 7. The Contracts expressly reserve to Ameritas the right to substitute shares of another investment company for shares of an investment company held by a Subaccount of the Separate Accounts. Ameritas proposes to substitute shares of Ameritas Income and Growth for shares of
(a)Alger AllCap and
(b)Salomon Variable All Cap held by Subaccounts of the Separate Accounts (each a “Substitution” and together, the “Substitutions”). 8. The investment objectives and principal investment policies of the Replacement Fund and the Substituted Portfolios are as follows: Ameritas Income & Growth primarily seeks to provide a high level of dividend income, with a secondary goal to provide capital appreciation, by investing in dividend paying equity securities, such as common or preferred stocks, preferably those which the subadviser believes also offer opportunities for capital appreciation. Alger AllCap seeks long-term capital appreciation by investing in equity securities of companies of any size which demonstrate promising growth potential. Salomon Variable All Cap seeks capital appreciation by investing primarily in securities which the manager believes have above-average capital appreciation potential. A secondary consideration is given to a company's dividend record and the potential for improved dividend return. Salomon Variable All Cap invests primarily in common stocks and common stock equivalents of large well known domestic companies, but may also invest a significant portion of its assets in securities of small to medium-sized companies and may invest in fixed income securities, convertible debt securities, securities of foreign issuers, and in non-dividend paying stocks. 9. Following is the comparative expense data for the Substitutions as of December 31, 2004. Applicants submit that each Substitution will result in a Replacement Fund with net expenses and management fees less than the Substituted Fund. Applicants also represent that there are no breakpoints in fund expenses for either the Substituted Funds or the Replacement Fund. [In percent] Substituted fund Alger AllCap Replacement fund Ameritas Income & Growth Substituted fund Salomon Variable All Cap Replacement fund Ameritas Income & Growth Management Fees 0.85 0.74 0.75 0.74 Distribution and service (12b-1) fees Other Expenses 0.12 0.22 0.05 0.22 Total Expenses 0.97 0.96 0.80 0.96 Waivers 1 0.18 2 0.18 Net Expenses 0.97 0.78 0.80 0.78 1 Pursuant to a contractual agreement between Ameritas Portfolios and Ameritas Investment, Ameritas Investment, has agreed to waive fees or reimburse expenses so that Total Expenses do not exceed the rate shown in the table above through April 30, 2006. Management Fee includes both the investment advisory fee and administrative service fee. The administrative service fee is 0.05% of the fund's average daily net assets with a minimum of $50,000. 2 Supra, footnote 1. 10. The day-to-day manager of both the Substituted Alger AllCap Fund as its adviser and to the Replacement Ameritas Income & Growth Fund as its subadviser is Fred Alger Management, Inc. 11. Applicants note that Contract Owners with Subaccount balances invested in shares of the Replacement Funds will have lower total expense ratios than they currently have in the Substituted Funds. Moreover, there will be no increase in Contract fees and expenses including mortality and expense risk fees and administration and distribution fees charged to the Separate Accounts as a result of the Substitutions. Applicants believe that, if the proposed Substitutions are implemented, the core investment goals of affected Contract Owners will not be frustrated and the investment expectations of affected Contract Owners can continue to be met. Applicants expect that the Substitutions will provide significant benefits to Contract Owners, including improved selection of portfolio managers and simplification of fund offerings through the elimination of overlapping offerings. Applicants state that Ameritas considered the performance history of the Substituted Funds and the Replacement Funds and determined that no Contract Owners would be materially adversely affected as a result of the Substitutions. Applicants believe that the Substitutions, each of which replaces outside funds with a fund for which Ameritas Investment acts as investment advisor, will permit Ameritas Investment, under a multi-manager order granted by the Commission and under shareholder approval previously obtained, to hire, monitor and replace subadvisers as necessary to seek optimal performance and to ensure a consistent investment style. Applicants further believe that the subadviser to the Replacement Fund is better positioned to provide consistent above-average performance for its Fund than the adviser or subadvisers of the Substituted Funds. Applicants state that Contract Owners will continue to be able to select among a large number of funds, with a full range of investment objectives, investment strategies, and managers. Applicants believe there will also be a significant savings to Contract Owners because certain costs, such as the costs of printing and mailing lengthy periodic reports and prospectuses for the Substituted Funds will be substantially reduced. 12. Applicants represent that they will not receive, for three years from the date of the Substitutions, any direct or indirect benefits from the new fund, its advisors or underwriters, or from affiliates of the new funds, their advisors or underwriters, in connection with assets attributable to Contracts affected by the Substitutions, at a higher rate than Applicants have received from substituted funds, their advisors or underwriters, or from affiliates of substituted funds, their advisors or underwriters, including without limitation Rule 12b-1 fees, shareholder service or administrative or other service fees, revenue sharing or other arrangements (collectively “Revenue Arrangements”). Applicants represent that the substitutions and the selection of the new fund was not motivated by any financial consideration paid or to be paid to Applicants or any affiliate of Applicants by the new fund, its advisors, underwriters, or affiliates. 13. The proposed Substitutions will take place at relative net asset value with no change in the amount of any Contract Owner's Contract value, cash value, or death benefit or in the dollar value of his or her investment in the Separate Accounts. Applicants expect that the Substitutions will be effected by redeeming shares of a Substituted Fund and reinvesting the proceeds of such redemption in shares of the Replacement Fund through a combination of cash and “in kind” transactions. 14. Contract Owners will not incur any fees or charges as a result of the proposed Substitutions, nor will their rights or Ameritas' obligations under the Contracts be altered in any way. All expenses incurred in connection with the proposed Substitutions, including brokerage, legal, accounting, and other fees and expenses, will be paid by Ameritas. In addition, the proposed Substitutions will not impose any tax liability on Contract Owners. The proposed Substitutions will not cause the Contract fees and charges currently being paid by existing Contract owners to be greater after the proposed Substitutions than before the proposed Substitutions. No fees will be charged on the transfers made at the time of the proposed Substitutions because the proposed Substitutions will not be treated as a transfer for the purpose of assessing transfer charges or for determining the number of remaining permissible transfers in a Contract year. 15. Following the date on which Ameritas is notified that the notice of the Application is to be published in the **Federal Register** , but before the date on which the order requested by the application becomes effective, Ameritas will send to affected Contract Owners notice (“Substitution Notice”). The Substitution Notice will inform affected Contract Owners of
(a)the Effective Date of the Substitutions (“Effective Date”);
(b)the right of each affected Contract Owner, under their Contract, to transfer contract values among the various Subaccounts; and
(c)the fact that any such transfer involving a transfer from a substituted fund will not be subject to any administrative charge and will not count as one of the “free transfers” to which affected Contract Owners may otherwise be entitled. The Substitution Notice will also inform affected Contract Owners that
(a)Ameritas will not exercise any rights reserved under any Contract to impose additional restrictions on transfers (other than with respect to “market timing” activity described in each Contract's prospectus) until at least 30 days after the proposed Substitutions;
(b)for 30 days after the proposed Substitutions, Ameritas will permit affected Contract Owners to make transfers of Contract value (or annuity unit exchange) out of the Replacement Fund Subaccount to another Subaccount without the transfer (or exchange) being treated as one of a limited number of transfers (or exchanges) permitted without a transfer charge. 16. Within five days after the Effective Date, Ameritas will also send affected Contract Owners a second written notice (“Confirmation Notice”). The Confirmation Notice will
(a)confirm that the Substitutions were carried out;
(b)reiterate that each affected Contract Owner may transfer all of the contract value or cash value under a Contract that is invested in a Substituted Fund to any other Subaccount available under their Contract without such transfer being subject to any administrative charge, or being counted as one of the “free transfers” (or one of the limited number of transfers) to which affected Contract Owners may be entitled under the Contracts; and
(c)state that, other than with respect to “market timing” activity described above, Ameritas will not exercise any rights reserved by it under the Contracts to impose additional restrictions on transfers until at least 30 days after the Effective Date. 17. For those who were Contract Owners on the date of the proposed Substitutions, Ameritas and Ameritas Investment will reimburse, on the last business day of each fiscal period (not to exceed a fiscal quarter) during the twenty-four months following the date of the proposed Substitutions, the Subaccount investing in the Replacement Fund such that the sum of the Replacement Fund's operating expenses (taking into account fee waivers and expense reimbursements) and Subaccount expenses (asset-based fees and charges deducted on a daily basis from Subaccount assets and reflected in the calculation of Subaccount unit values) for such period will not exceed, on an annualized basis, the sum of the Replacement Fund's operating expenses (taking into account fee waivers and expense reimbursements) and Subaccount expenses for the fiscal year preceding the date of the proposed Substitutions. In addition, for twenty-four months following the proposed Substitutions, Ameritas and Ameritas Investment will not increase separate account fees or charges for Contracts outstanding on the date of the proposed Substitutions. Applicants' Legal Analysis 1. Section 26(c) of the 1940 Act provides, in pertinent part, that “it shall be unlawful for any depositor or trustee of a registered unit investment trust holding the security of a single issuer to substitute another security for such security unless the Commission shall have approved such substitution.” Section 26(c) of the 1940 Act also provides that the Commission shall issue an order approving such substitutions if the evidence establishes that the substitutions are consistent with the protection of investors and the purposes fairly intended by the policies and provisions of the 1940 Act. 2. The Contracts expressly reserve to Ameritas the right, subject to compliance with applicable law, to substitute shares of another investment company for shares of an investment company held by a Subaccount of the Separate Accounts. Applicants assert that the prospectuses for the Contracts and the Separate Accounts contain appropriate disclosure of this right. 3. In each case, Applicants believe that it is in the best interests of the Contract Owners to substitute the Replacement Fund for the Substituted Fund. In this regard, Applicants contend that the proposed Replacement Fund for each Substituted Fund has an investment objective that is at least substantially similar to that of the Substituted Fund. Applicants also assert that the principal investment policies of the Replacement Funds are similar to those of the corresponding Substituted Funds. In addition, with respect to each proposed substitution, Applicants note that affected Contract Owners with balances invested in the Replacement Fund will have a lower or the same expense ratio in all cases. 4. Applicants anticipate that Contract Owners will be better off with the array of Subaccounts offered after the proposed Substitutions than they have been with the array of Subaccounts offered prior to the Substitutions. The proposed Substitutions retain for Contract Owners the investment flexibility which is a central feature of the Contracts. If the proposed Substitutions are carried out, all Contract Owners will be permitted to allocate purchase payment and transfer Contract values and cash values between and among approximately the same number of Subaccounts as they could before the proposed Substitutions. Moreover, the elimination of the costs of printing and mailing prospectuses and periodic reports of the Substituted Funds will benefit Contract Owners. 5. Applicants note that Contract Owners who do not wish to participate in a Replacement Fund will have an opportunity to reallocate their accumulated value among other available Subaccounts without the imposition of any charge or limitation (other than with respect to “market timing” activity). 6. Applicants assert that, for the reasons summarized above, the proposed Substitutions and related transactions meet the standards of Section 26(c) of the 1940 Act and that the requested order should be granted. 7. Sections 17(a)(1) and
(2)of the 1940 Act prohibit an affiliated person of a registered investment company, or affiliated persons of any such affiliated person, or any principal underwriter for such company (collectively, “Transaction Affiliates”) from selling a security to, or purchasing a security from, the registered investment company. Applicants may be deemed to be Transaction Affiliates of one another based upon the definition of “affiliated person” under Section 2(a)(3) of the 1940 Act. Because the Substitutions may be effected, in whole or in part, by means of in-kind redemptions and purchases, the Substitutions may be deemed to involve one or more purchases or sales of securities or property between Transaction Affiliates. 8. Section 17(b) provides that the Commission may grant an application exempting proposed transactions from the prohibitions of Section 17(a) if the terms of the proposed transaction are reasonable and fair and do not involve overreaching on the part of any person concerned; the transaction is consistent with the investment policies of each registered investment company concerned; and the transaction is consistent with the general purposes of the Act. Applicants state that the consideration to be paid by the Replacement Fund, and each of the Substituted Funds, will be fair and reasonable and will not involve overreaching because the Substitutions will not result in the dilution of the interests of any affected Contract Owners and will not effect any change in economic interest, Contract value or the dollar value of any variable contract held by an affected Contract Owner. 9. In addition, Applicants state that to the extent the Substitutions are effected by redeeming shares of the Substituted Funds and using the redemption proceeds to purchase shares of the Replacement Funds, the Substitutions will satisfy each of the procedural safeguards adopted by the Board of Directors responsible for each of the Ameritas Portfolios and the Substituted Funds, respectively under Rule 17a-7 under the 1940 Act. Applicants' Conclusion Applicants assert that for the reasons summarized above the proposed substitutions and transactions meet the standards of Section 26(c) of the Act and are consistent with the standards of Section 17(b) of the Act and that the requested orders should be granted. For the Commission, by the Division of Investment Management, pursuant to delegated authority. Jonathan G. Katz, Secretary. [FR Doc. E5-5944 Filed 10-25-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-52646; File No. SR-Amex-2005-068] Self-Regulatory Organizations; American Stock Exchange LLC; Order Granting Approval of Proposed Rule Change and Amendment Nos. 1 and 2 Thereto Relating to Amendments to Amex Rules 26 and 27 October 20, 2005. On June 17, 2005, the American Stock Exchange LLC (“Amex” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and Rule 19b-4 thereunder, 2 a proposed rule change to:
(i)Combine the Equities, Options and Special Allocations Committees into a single Allocations Committee;
(ii)change the composition of the new Allocations Committee; and
(iii)provide the Performance Committee with sole authority to reallocate securities in connection with specialist unit transfers resulting from business transactions. On June 30, 2005, Amex filed Amendment No. 1 to the proposed rule change. 3 On August 19, 2005, Amex filed Amendment No. 2 to the proposed rule change. 4 The proposed rule change, as amended, was published for comment in the **Federal Register** on September 1, 2005. 5 The Commission received no comments on the proposal. This order approves the proposed rule change, as amended. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 In Amendment No. 1, the Exchange made a technical correction to the proposed amendment to Amex Rule 26 and proposed to amend Amex Rule 27 to reflect that, in the case of an equity security, the list of qualified specialists shall consist of five specialists. 4 In Amendment No. 2, the Exchange proposed to amend Amex Rule 27 to clarify:
(1)the composition of the Allocations Committee for equities and other securities admitted for trading on the Exchange except Exchange Traded Funds (“ETFs”) and options; and
(2)that the Allocations Committee may be chaired by the Chief Executive Officer's designee. 5 *See* Securities Exchange Act Release No. 52334 (August 25, 2005), 70 FR 52146. The proposed rule change would combine the existing Equity, Options and Special Allocations Committees into a single Allocations Committee for equities, options and other listed securities. The proposal would create a single Allocations Committee consisting of the Chief Executive Officer (or his or her designee 6 ), a representative of an upstairs member firm and either:
(i)Four
(4)brokers for equities and other securities admitted to trading on the Exchange except for Exchange Traded Funds and options;
(ii)two
(2)brokers and two
(2)Registered Traders for ETFs; or
(iii)two
(2)brokers and two
(2)Registered Options Traders for options. The Chief Executive Officer (or his or her designee) would chair the Allocations Committee and would not vote except to make or break a tie. In the absence of the Chief Executive Officer (or his or her designee), a Floor Governor or a Senior Floor Official may chair the Allocation Committee. In addition, the Exchange proposes to permit the Performance Committee to reallocate securities in connection with specialist unit transfers resulting from business transactions. 6 The Exchange represents that the designee of the Chief Executive Officer would be an Exchange employee knowledgeable about the securities business and capable of representing the views of the Chief Executive Officer. Telephone conversation of October 12, 2005, between Jeffery Burns, Associate General Counsel, Amex, and David Michehl, Attorney, Division of Market Regulation, Commission. The Commission finds that the proposed rule change, as amended, is consistent with the requirements of section 6 of the Act, 7 and the rules and regulations thereunder applicable to a national securities exchange. 8 In particular, the Commission finds that the proposed rule change is consistent with section 6(b)(5) of the Act, 9 which requires, among other things, that the Exchange's rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, and to remove impediments to and perfect the mechanism of a free and open market and a national market system. The Commission believes that, by combining the Equities, Options and Special Allocations Committees into a single Allocations Committee and streamlining the composition of the Allocations Committee, the proposed rule change is designed to reduce potential inefficiencies in connection with the securities allocation process. In addition, the Commission believes that, by providing the Performance Committee with the sole authority to reallocate securities in connection with specialist unit transfers, the proposed rule change is designed to streamline the reallocation process in these special circumstances. 7 15 U.S.C. 78f(b). 8 In approving this proposed rule change, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 9 15 U.S.C. 78f(b)(5). *It is therefore ordered* , pursuant to section 19(b)(2) of the Act, 10 that the proposed rule change (SR-Amex-2005-068), as amended, is approved. 10 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 11 11 17 CFR 200.30-3(a)(12). Jonathan G. Katz, Secretary. [FR Doc. E5-5946 Filed 10-25-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-52639; File No. SR-BSE-2005-41] Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Notice of Filing and Order Granting Accelerated Approval to Proposed Rule Change To Establish Certain Fees With Respect to Transactions Executed Through the Intermarket Trading System October 19, 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 September 9, 2005, the Boston Stock Exchange, Inc. (“BSE” or “Exchange”) filed with the Securities and Exchange Commission (“Commission” or “SEC”) the proposed rule change as described in Items I and II below, which Items have been prepared by the BSE. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons, and is approving the proposal on an accelerated basis. 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 enter into arrangements with other national securities exchanges to pass certain fees they have collected from members for transactions executed on another exchange through the Intermarket Trading System (“ITS”). This proposal does not require changes to BSE rule text. 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 III 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 Section 31 of the Act 3 requires each national securities exchange to pay the Commission a fee based on the aggregate dollar amount of certain sales of securities (“covered sales”). Rules 31 and 31T, adopted by the Commission in June 2004, 4 established procedures for the calculation and collection of Section 31 fees on such covered sales. Rule 31 requires each national securities exchange that owes Section 31 fees to submit a completed Form R31 to the Commission each month, beginning with July 2004. Rule 31T required each exchange to submit a completed Form R31 for each of the months September 2003 to June 2004, inclusive. Each national securities exchange must report its covered sales volume based on the data from a designated clearing agency, when available. The designated clearing agency for covered sales of equity securities is the National Securities Clearing Corporation (“NSCC”). These covered sales are reported in Part I of Form R31, and each exchange is required to “provide in Part I only the data supplied to it by a designated clearing agency.” 5 The data supplied by NSCC for the period September 2003 through August 2004 did not accurately reflect the aggregate dollar value of the covered sales occurring on each exchange to permit reports to be made in accordance with new Rules 31 and 31T. In particular, the data NSCC reported to each national securities exchange included non-covered sales data for sales originating on one exchange and executed on another exchange through the ITS. 6 3 15 U.S.C. 78ee. 4 *See* Securities Exchange Act Release No. 49928 (June 28, 2004), 69 FR 41060 (July 7, 2004) (“Adopting Release”). 5 17 CFR 240.31(b)(5). 6 As a result of this and other inaccuracies in the data reported by NSCC, the national securities exchanges were unable to report accurate information on Form R31, unless they made adjustments to the NSCC data based on data other than that provided by NSCC. On October 6, 2004, the Commission's Division of Market Regulation (“Division”) issued a “no-action” letter advising exchanges for whom NSCC acts as a designated clearing agency under Rule 31, that the Division staff would not recommend that the Commission take enforcement action if a national securities exchange adjusts the data provided by NSCC to accurately reflect covered sales occurring on the national securities exchange. *See* letter from Robert L.D. Colby, Deputy Director, Division, Commission to Ellen J. Neely, Senior Vice President and General Counsel, Chicago Stock Exchange, Inc. (“CHX”), dated October 6, 2004. Section 31 requires that national securities exchanges pay a fee based on the aggregate dollar amount of sales of securities transacted on the exchange. Given the specific language of Section 31, the Commission in the Adopting Release for Rules 31 and 31T advised that the current methodology for treating sales of securities that occur through ITS 7 was no longer appropriate and that “it would be simpler and more transparent for each covered [self-regulatory organization (“SRO”)] to report all covered sales that occur on its market.” The Commission further stated: 7 In the Adopting Release, the Commission described the current methodology: “SRO A sends an ITS commitment to a member of SRO B to sell a security, and the commitment is executed on SRO B. Under existing arrangements, SRO A pays the Section 31 fee arising from this trade and passes the fee to its member that initiated the trade. * * * [T]he SROs devised this system because SRO B does not have the ability to require members of SRO A to reimburse it for the cost of its Section 31 fees.” Adopting Release, 69 FR at 41067. The Commission acknowledges that a covered SRO on which a covered sale occurs as a result of an incoming ITS order may not be able to collect funds to pay the Section 31 fee from one of its own members. However, Section 31 does not address the manner or extent to which covered SROs may seek to recover the amounts that they pay pursuant to Section 31 from their members. Covered SROs may wish to devise new arrangements for passing fees between themselves so that the funds are collected from the covered SRO that originated the ITS order. 8 8 *Id.* The Commission further noted that any such arrangements devised by the SROs would have to be established pursuant to Section 19(b) of the Act and Rule 19b-4 thereunder. A subcommittee of the ITS Operating Committee 9 (“Subcommittee”) has had discussions in order to devise new arrangements for passing fees between the ITS participants that
(1)were collected from their members for the months of September 2003 through August 2004; and
(2)are being collected from their members beginning in September 2004 and continuing. This proposed rule change is being submitted by the BSE with the understanding that the other exchanges participating in the proposed arrangement devised by the subcommittee will be submitting substantially similar rule change proposals. 10 9 The ITS participants are American Stock Exchange LLC, BSE, Chicago Board Options Exchange, CHX, National Association of Securities Dealers (“NASD”), National Stock Exchange, New York Stock Exchange (“NYSE”), Pacific Exchange, and Philadelphia Stock Exchange. 10 NASD has determined not to participate in the arrangement for passing fees between exchanges although they participated in many of the conference calls regarding the proposed arrangement. Pursuant to the new arrangement being proposed, each ITS participant exchange determines whether it has received and executed more in dollar value of covered sales than it has originated and sent to each other ITS participant exchange. For example, for the historical period, September 2003 through August 2004, SRO A sent ITS commitments for covered sales whose dollar value was $150 million to SRO B for execution. SRO A collected fees from its members to fund its Section 31 obligation for those covered sales executed on SRO B. SRO B, as the executing market center, is obligated to pay the Section 31 fee to the SEC. During the same period, SRO B sent ITS commitments for covered sales whose dollar value was $210 million to SRO A. SRO B collected fees from its members for those covered sales executed on SRO A. SRO A, as the executing market center, is obligated to pay the Section 31 fee to the SEC. Since SRO A executed a greater dollar value of covered sales from SRO B than it sent to SRO B, the proposed arrangement requires SRO A to determine the amount of the fees collected by SRO B from its members based on the aggregate dollar value of covered sales from SRO B and executed on SRO A through ITS commitments. When invoicing SRO B, SRO A will deduct the amount of the fee it owes to SRO B ( *i.e.* , the fee amount based on SRO A's $210 million in aggregate covered sales less the fee amount based on SRO B's $150 million in aggregate covered sales) and will invoice only for the difference of $60 million. Once the fees have been invoiced and paid for the historical period, the ITS participant exchanges plan to use the same arrangement for the period beginning September 2004 and continuing. It is anticipated that the invoicing process will occur twice yearly to coincide with the March 15 and September 30 payment schedule for Section 31 fees set forth in the Act. To implement this proposed arrangement, an ITS participant exchange will require access to the aggregate dollar value of buy and sell transactions occurring through ITS. Under the proposed arrangement for fees collected for the months of September 2003 through August 2004, an ITS participant exchange may choose to use data obtained from the Inter-market Surveillance Information System (“ISIS”) or data that provides comparable information that includes aggregate dollar value of ITS transactions. 11 The ISIS data is sorted by originating market center ( *i.e.* , the sender of an ITS commitment) and receiving market center ( *i.e.* , the market center that executes the ITS commitment). Using this data, each ITS participant exchange can determine on a monthly basis the dollar value of all executed commitments sent to and received from another ITS participant exchange. At its meeting on February 23, 2005, the Subcommittee asked the Securities Industry Automation Corporation (“SIAC”) to determine the time and expense involved for SIAC to use the ITS database that it maintains to provide reports of the aggregate dollar value of buy and sell transactions occurring through ITS to the ITS participants. On March 15, 2005, representatives of the Subcommittee authorized SIAC to develop new reports. SIAC has developed these reports. Once a parallel testing period for the new reports in concluded, it will no longer be necessary for ISIS data to be used. The new reports provided by SIAC will be used by ITS participants in connection with determining which ITS participant exchange will pay the fee for transactions occurring through ITS and which ITS participant exchange has collected the fee from its members. 11 The NYSE has made available to the ITS participants spreadsheets for each month in the period using the ISIS data. The BSE believes that the proposed arrangement is a fair and efficient means for passing fees collected at one ITS participant exchange based upon executions of covered sales occurring at another ITS participant exchange. The BSE acknowledges that the legal duty to report and pay the Section 31 fee remains with the ITS participant on which the sale was in fact transacted. 2. Statutory Basis This proposal would establish a process for SROs to enter into arrangements to pass fees they have collected from members for transactions executed on another SRO through ITS. For these reasons, the Exchange believes that the proposed rule change is consistent with the Act and the rules and regulations thereunder that are applicable to a national securities exchange and, in particular, the requirements of Section 6(b) of the Act. 12 Specifically, the Exchange believes the proposed rule change is consistent with the requirements of Section 6(b)(5) of the Act, 13 in that it is designed to promote just and equitable principles of trade, to prevent fraudulent and manipulative acts and practices, and, in general, to protect investors and the public interest. In addition, the Exchange believes that the proposed rule change is consistent with the provisions of Section 6(b)(4) of the Act, 14 which requires that the rules of an exchange provide for the equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities. 12 15 U.S.C. 78f(b). 13 15 U.S.C. 78f(b)(5). 14 15 U.S.C. 78f(b)(4). 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 No written comments were solicited or received with respect to the proposed rule change. III. 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-BSE-2005-41 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-BSE-2005-41. 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 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 Number SR-BSE-2005-41 and should be submitted on or before November 16, 2005. IV. Commission's Findings and Order Granting Accelerated Approval of a Proposed Rule Change After careful consideration, the Commission finds that the proposed rule change is consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange. 15 In particular, the Commission believes that the proposal is consistent with Section 6(b)(4) of the Act, 16 which requires that the rules of an exchange provide for the equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities. National securities exchanges obtain funds to pay their Section 31 fees to the Commission by charging fees to broker-dealers who generate the covered sales on which Section 31 fees are based. An exchange can obtain most of these funds by imposing a fee on one of its members whenever the member is on the sell side of a transaction. However, when the exchange accepts an ITS commitment to buy, the ultimate seller is a party on another market. The exchange lacks the ability to pass a fee to that seller directly, because the seller may not be a member of the exchange. Under the proposed arrangement, which the Commission understands will be adopted by each of the ITS participant exchanges, 17 the exchange that routed the ITS commitment away will continue to collect a fee from the broker-dealer that placed the sell order. Then, with respect to each ITS participant exchange, the exchange will determine whether it is a net sender or net receiver of ITS trades and send fees to or accept fees from each other exchange accordingly. The Commission believes this is an equitable manner for the exchanges to obtain funds to pay their Section 31 fees on covered sales resulting from ITS trades. 15 In approving this proposal, the Commission has considered its impact on efficiency, competition, and capital formation. *See* 15 U.S.C. 78c(f). 16 15 U.S.C. 78f(b)(4). 17 *See* letter from George W. Mann, Jr., Executive Vice President and General Counsel, BSE, and Chairman, Subcommittee, to Michael Gaw, Assistant Director, Division, Commission, dated September 29, 2005. Under Section 19(b)(2) of the Act, 18 the Commission may not approve any proposed rule change prior to the thirtieth day after the date of publication of the notice of filing thereof, unless the Commission finds good cause for so doing. The Commission hereby finds good cause for approving the proposed rule change prior to the thirtieth day after publishing notice of filing thereof in the **Federal Register** . In this case, the Commission does not believe a comment period is necessary because all of the parties affected by the proposed fee—the other ITS participant exchanges—have already consented to and will adopt the same fee arrangement. 19 18 15 U.S.C. 78s(b)(2). 19 *See supra* note 17. For the reasons set forth above, the Commission finds good cause to accelerate approval of the proposed rule change pursuant to Section 19(b)(2) of the Act. 20 20 *Id* . V. Conclusion *It is therefore ordered* , pursuant to Section 19(b)(2) of the Act, 21 that the proposed rule change (SR-BSE-2005-41) is hereby approved on an accelerated basis. 21 *Id* . For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 22 22 17 CFR 200.30-3(a)(12). Jonathan G. Katz, Secretary. [FR Doc. E5-5921 Filed 10-25-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-52643; File No. SR-CBOE-2005-71] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change and Amendment Nos. 1 and 2 Thereto Relating to Transaction Fees Assessed on DIAMONDS Options October 20, 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 September 1, 2005, the Chicago Board Options Exchange, Incorporated (“CBOE” 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 CBOE. On September 8, 2005, the CBOE submitted Amendment No. 1 to the proposed rule change. 3 On October 17, 2005, the CBOE submitted Amendment No. 2 to the proposed rule change. 4 The CBOE has designated this proposal as one establishing or changing a due, fee, or other charge imposed by the CBOE under section 19(b)(3)(A)(ii) of the Act, 5 and Rule 19b-4(f)(2) thereunder, 6 which renders the proposal effective upon filing with the Commission. 7 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 a technical change to the proposed rule text. 4 In Amendment No. 2, the Exchange revised the proposed rule text to amend the transaction fees assessed to non-member market makers for orders in DIA options sent to CBOE through the Intermarket Options Linkage (“Linkage”) and outside of Linkage. The Exchange states that the transaction fees assessed to non-member market-makers for orders in DIA options sent to CBOE through Linkage or outside of Linkage will be implemented on November 1, 2005. 5 15 U.S.C. 78s(b)(3)(A)(ii). 6 17 CFR 240.19b-4(f)(2). 7 The effective date of the original proposed rule change is September 1, 2005, the effective date of Amendment No. 1 is September 8, 2005, and the effective date of Amendment No. 2 is October 17, 2005. For purposes of calculating the 60-day period within which the Commission may summarily abrogate the proposed rule change, as amended, under Section 19(b)(3)(C) of the Act, the Commission considers the period to commence on October 17, 2005, the date on which the Exchange submitted Amendment No. 2. *See* 15 U.S.C. 78s(b)(3)(C). I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend its Fees Schedule relating to fees for options on the DIAMONDS ® (“DIA”). The text of the proposed rule change is available on the Exchange's Web site ( *http://www.cboe.com* ), at the Exchange's Office of the Secretary, and at the Commission's Public Reference Room. The text of the proposed rule change is also included below. Proposed new language is *italicized;* proposed deletions are in [brackets]. Chicago Board Options Exchange, Inc.—Fees Schedule [August 24] *September 1,* 2005 1. Options Transaction Fees (1)(3)(4)(7)(16): Per Contract. Equity Options (13): I.-IX. Unchanged. QQQQ and SPDR OPTIONS: I.-VII. Unchanged. INDEX OPTIONS (includes Dow Jones DIAMONDS, OEF and other ETF and HOLDRs options): I. CUSTOMER (2): S&P 100, PREMIUM > or = $1 $.35 S&P 100, PREMIUM < $1 .20 MNX and NDX .15 RUT and [REDUCED VALUE RUSSELL 2000] *RMN* .15 ETF and HOLDRs options [ *(except DIA)* ] .15 OTHER INDEXES, PREMIUM > OR = $1 .45 OTHER INDEXES, PREMIUM < $1 .25 II. MARKET-MAKER AND DPM—EXCLUDING DOW JONES PRODUCTS: *OTHER THAN DIA*
(10).24 MARKET-MAKER—DOW JONES PRODUCTS *(except DIA)*
(10).34 III. MEMBER FIRM PROPRIETARY:
(11)FACILITATION OF CUSTOMER ORDER, MNX and NDX .24 FACILITATION OF CUSTOMER ORDER, OTHER INDEXES .20 NON-FACILITATION ORDER .24 IV. BROKER-DEALER (EXCLUDING THE PRODUCTS BELOW) INDEX CUSTOMER RATES: ETF *(except DIA),* HOLDRS, RUT and [REDUCED VALUE RUSSELL 2000] *RMN,* PREMIUM > or = $1 .45 ETF *(except DIA),* HOLDRS, RUT and [REDUCED VALUE RUSSELL 2000] *RMN,* PREMIUM < $1 .25 *DIA,* MNX and NDX .25 V. NON-MEMBER MARKET MAKER: *DIA* *$.26* S&P 100 (including OEF), PREMIUM > or = $1 .37 S&P 100 (including OEF), PREMIUM < $1 .22 OTHER INDEXES, PREMIUM > or = $1 .47 OTHER INDEXES, PREMIUM < $1 .27 VI. MNX and NDX LICENSE FEE
(15).10 VII. RUT DPM and MARKET MAKER LICENSE FEE (Russell 2000 cash settled index)
(12).10 VIII. LINKAGE ORDERS (8)(15): *DIA* *.26* S&P 100 (OEF), PREMIUM > or = $1 .35 S&P 100 (OEF), PREMIUM < $1 .20 OTHER INDEXES, PREMIUM > or = $1 .45 OTHER INDEXES, PREMIUM < $1 .25 2. MARKET-MAKER, RMM, e-DPM & DPM MARKETING FEE (in option classes in which a DPM has been appointed) (6)(16): Unchanged. 3. FLOOR BROKERAGE FEE (1)(5)(16): Unchanged. 4. RAES ACCESS FEE (RETAIL AUTOMATIC EXECUTION SYSTEM) (1)(4)(16): Unchanged. 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 CBOE included statements concerning the purpose of, and basis for, the proposed rule change, as amended, and discussed any comments it received on the proposed rule change, as amended. The text of these statements may be examined at the places specified in Item IV below. The CBOE 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 proposes to amend its Fees Schedule to amend certain fees for DIA options. Specifically, the Exchange proposes to reduce customer and broker-dealer fees for transactions in DIA options, amend non-member market-maker fees for orders in DIA options sent to CBOE through Linkage and outside of Linkage, 8 and eliminate the market-maker license fee surcharge applicable to transactions in DIA options. 8 *See* Amendment No. 2, *supra* note 4. In particular, the transaction fees for public customer transactions in DIA options are currently $.45 per contract if the premium is equal to or greater than $1, and $.25 per contract if the premium is less than $1. The Exchange proposes to reduce the transaction fees for public customer transactions in DIA options to $.15 per contract, regardless of the premium. Moreover, the transaction fees for broker-dealer transactions in DIA options are currently $.45 per contract if the premium is equal to or greater than $1, and $.25 per contract if the premium is less than $1. The Exchange proposes to reduce the transaction fees for broker-dealer transactions in DIA options to $.25 per contract, regardless of the premium. Further, the transaction fees for non-member market-maker transactions in DIA options are currently $.47 per contract if the premium is greater than or equal to $1, and $.27 per contract if the premium is less than $1. The transaction fees assessed to non-member market-makers for orders in DIA options sent to CBOE through Linkage are currently $.45 per contract if the premium is greater than or equal to $1, and $.25 per contract if the premium is less than $1. The Exchange proposes to change both the non-member market maker transaction fee and the Linkage transaction fee for transactions in DIA options to $.26 per contract, regardless of the premium. 9 9 *See* Amendment No. 2, *supra* note 4. According to CBOE, the proposed changes to the transaction fees assessed to non-member market-makers for orders in DIA options sent to CBOE through Linkage or outside of Linkage will be implemented on November 1, 2005. In addition, the Exchange currently charges market-makers that trade Dow Jones products, including DIA options, a license fee of $.10 per contract in addition to the regular transaction fee of $.24 per contract, to assist the Exchange in offsetting some of the royalty fees the Exchange must pay to Dow Jones for its license to trade Dow Jones products. 10 The Exchange proposes to eliminate the $.10 license fee solely with respect to market-maker transactions in DIA options. 11 10 *See* Securities Exchange Act Release No. 48223 (July 24, 2003), 68 FR 44978, 44979 (July 31, 2003). 11 The Commission notes that the Exchange currently charges market-makers that trade Dow Jones products, including DIA options, a total fee of $.34 per contract, which reflects a $.10 licensing fee surcharge. Under the proposed rule change, the fee for market-makers that trade DIA options will be $.24 per contract. The proposed rule change, as amended, is intended to establish fees for CBOE's DIA options that will be competitive with fees charged by other exchanges for transactions in DIA options. The Exchange also proposes to make a minor technical amendment to its Fees Schedule to change references relating to “Reduced Value Russell 2000” options to its ticker symbol, “RMN.” 2. Statutory Basis The CBOE believes that the proposed rule change, as amended, is consistent with section 6(b) of the Act, 12 in general, and furthers the objectives of section 6(b)(4) of the Act, 13 in particular, in that it is designed to provide for the equitable allocation of reasonable dues, fees, and other charges among CBOE members. 12 15 U.S.C. 78f(b). 13 15 U.S.C. 78f(b)(4). B. Self-Regulatory Organization's Statement on Burden on Competition The CBOE does not believe that the proposed rule change, as amended, will impose any burden on competition. 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 The foregoing proposed rule change, as amended, has been designated as a fee change pursuant to section 19(b)(3)(A)(ii) of the Act 14 and Rule 19b-4(f)(2) 15 thereunder, because it establishes or changes a due, fee or other charge imposed by the Exchange. Accordingly, the proposal will take effect upon filing with the Commission. 16 At any time within 60 days of the filing of the proposed rule change, as amended, 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. 17 14 15 U.S.C. 78s(b)(3)(A)(ii). 15 17 CFR 240.19b-4(f)(2). 16 *See supra* note 7. 17 *Id.* 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-CBOE-2005-71 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-CBOE-2005-71. 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, as amended, that are filed with the Commission, and all written communications relating to the proposed rule change, as amended, 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 the CBOE. 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-CBOE-2005-71 and should be submitted on or before November 16, 2005. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 18 18 17 CFR 200.30-3(a)(12). Jonathan G. Katz, Secretary. [FR Doc. E5-5945 Filed 10-25-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-52631; File No. SR-FICC-2005-14] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of a Proposed Rule Change Relating to the Federal Reserve's National Settlement System October 18, 2005. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), 1 notice is hereby given that on September 9, 2005, Fixed Income Clearing Corporation (“FICC”) 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 primarily by FICC. 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). I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The proposed rule change would amend the rules of FICC's Government Securities Division (“GSD”) to have funds-only settlement obligation payment processing occur through the Federal Reserve's National Settlement System (“NSS”). II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, FICC 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. FICC has prepared summaries, set forth in Sections (A), (B), and
(C)below, of the most significant aspects of such statements. 2 2 The Commission has modified parts of these statements.
(A)Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change The purpose of the proposed rule change is to amend the rules of GSD to require netting members to satisfy their funds-only settlement amounts ultimately through the Federal Reserve's NSS. 3 GSD's funds-only settlement process is set forth in GSD Rule 13. On a daily basis, FICC reports a funds-only settlement amount, which is either a debit amount or a credit amount, to each netting member. Each netting member that has a debit is required to satisfy its obligation by the applicable deadline. Netting members with credits are subsequently paid by FICC by the applicable deadline. All payments of funds-only settlement amounts by a netting member to FICC and all collections of funds-only settlement amounts by a netting member from FICC are done through depository institutions that are designated by such netting member and FICC to act on their behalves with regard to such payments and collections. All payments are made by fund wires from one depository institution to the other. 3 This is consistent with the manner in which FICC's affiliates, The Depository Trust Company (“DTC”) and the National Securities Clearing Corporation (“NSCC”), handle their funds settlement process. DTC and NSCC do not currently use NSS for the processing of funds credits, whereas FICC is proposing to have the GSD process both the debits and credits of its funds-only settlement process through NSS. In 1997, the Commission approved an enhancement to GSCC's 4 funds-only settlement payment processing (“1997 Filing”). 5 This enhancement gave members the option to participate in an auto-debit arrangement that was to eliminate the need to send fund wires for the satisfaction of funds-only settlement payments. Under the auto-deposit arrangement, GSCC, the netting member, and the netting member's depository institution would enter into a “funds-only settlement procedures agreement” whereby the depository institution would pay or collect funds-only settlement amounts on behalf of the netting member and GSCC through accounts of the member at the depository institution. As a result, the need for fund wire payments would be eliminated. 6 4 The Government Securities Clearing Corporation (“GSCC”) was the predecessor to GSD. GSCC became the GSD division of FICC when GSCC and the Mortgage Backed Securities Clearing Corporation were merged to create FICC in 2002. 5 Securities Exchange Act Release No. 39309 (November 7, 1997), 62 FR 61158 (November 14, 1997) [File No. SR-GSCC-97-06]. 6 This was a voluntary arrangement that was never implemented because until recently GSCC and then GSD continued to make manual adjustments to the final funds-only settlement amounts of netting members. These manual adjustments have recently largely been eliminated. The proposed rule change will replace the auto-debit process of the 1997 Filing and will provide even further enhancements to the current approach to payment processing than was envisioned by the 1997 Filing. Under the proposed rule change, the required payment mechanism for the satisfaction of funds-only settlement amounts will be the NSS. FICC will appoint The Depository Trust Company (“DTC”) as its settlement agent for purposes of interfacing with the NSS. 7 7 DTC currently performs this service for NSCC. In order to satisfy their funds-only settlement obligations through the NSS process, netting members must appoint banks or trust companies to act as their “funds-only settling banks.” A netting member that qualifies may act as its own funds-only settling bank. The GSD will establish a limited membership category for the funds-only settling banks. Banks or trust companies that are DTC settling banks, as defined in DTC's rules and procedures, or that are GSD netting members with direct access to the Federal Reserve and the NSS will be eligible to become GSD funds-only settling bank members by executing the requisite membership agreement for this purpose. Other banks or trust companies that desire to become funds-only settling bank members must apply to FICC. They must also have direct access to a Federal Reserve Bank and the NSS as well as satisfy the financial responsibility standards imposed by FICC from time to time. Initially, these applicants must meet and maintain a Tier 1 capital ratio of 6 percent. 8 8 This is the same financial requirement for NSCC settling bank-only members. Under FICC's proposal, FICC would retain the discretion to change this financial criterion by providing advanced notice to the fund-only settling banks and the netting members through important notice. In addition to the membership agreement, the funds-only settling bank and the netting member must execute an agreement whereby the member will appoint the bank to act on its behalf for funds-only settlement purposes. The bank must also execute any agreements required by the Federal Reserve Bank for participation in the NSS for FICC's funds-only settlement process. The funds-only settling banks will be required to follow the procedures for funds-only settlement payment processing set forth in FICC's proposed new rules. This will include, for example, providing FICC or its settlement agent with the requisite acknowledgement of the bank's intention to settle the funds-only settlement amounts of the netting members it represents on a timely basis and participating in the NSS process. Funds-only settling banks will have the right to refuse to settle for a particular netting member and will also be able to opt out of NSS for one business day if they are experiencing extenuating circumstances. 9 Under FICC's proposal, the netting member shall be responsible for ensuring that its funds-only debit is wired to the depository institution designated by FICC for this purpose by the payment deadline. The proposed rule change makes clear that the obligation of a netting member to fulfill its funds-only settlement amount remains at all times with the netting member. 9 These procedures are consistent with the NSCC and DTC procedures in this respect. As FICC's settlement agent, DTC will submit instructions to have the Federal Reserve Bank accounts of the funds-only settlement banks charged for the debit amounts and credited for the credit amounts. Utilization of NSS will eliminate the need for the initiation of wire transfers in satisfaction of funds-only settlement amounts, and FICC believes that it will therefore reduce the risk that the netting member that designated the bank may incur a late payment fine due to delay in wiring funds. The proposal will also reduce operational burden for the operations staff of FICC. The NSS is governed by the Federal Reserve's Operating Circular No. 12 (“Circular”). Under the Circular, DTC, as FICC's settlement agent, has certain responsibilities with respect to an indemnity claim made by a relevant Federal Reserve Bank as a result of the NSS process. FICC will apportion the entirety of any such liability to the netting members for whom the funds-only settling bank to which the indemnity claim relates was acting. This allocation will be done in proportion to the amount of such members' funds-only settlement amounts on the business day in question. If for any reason such allocation is not sufficient to fully satisfy the Federal Reserve Bank's indemnity claim, the remaining loss shall be treated as an “Other Loss” as defined by the GSD's Rule 4 and allocated accordingly. The proposed rule change will not change the current GSD deadlines regarding the payment and receipt of funds-only settlement amounts, which are set forth in the GSD's rules. FICC believes the proposed rule change is consistent with the requirements of Section 17A of the Act, and the rules and regulations thereunder because it will enhance the current operation of the GSD's funds-only settlement payment process by promoting the timely processing of funds payments and credits. As such, the proposed rule change should support the prompt and accurate clearance and settlement of securities transactions.
(B)Self-Regulatory Organization's Statement on Burden on Competition FICC does not believe that the proposed rule change would have any impact or impose any burden on competition.
(C)Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments relating to the proposed rule change have not been solicited or received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within thirty-five 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 ninety 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 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-FICC-2005-14 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-FICC-2005-14. 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 Section, 100 F Street, NE., Washington, DC 20549. Copies of such filing also will be available for inspection and copying at the principal office of FICC and on FICC's Web site at *http://www.ficc.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-FICC-2005-14 and should be submitted on or before November 16, 2005. For the Commission by the Division of Market Regulation, pursuant to delegated authority. 10 10 CFR 200.30-3(a)(12). Jonathan G. Katz, Secretary. [FR Doc. E5-5943 Filed 10-25-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-52637; File No. SR-NASD-2004-026] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing of Amendments No. 3 and 4 to Proposed Rule Change To Amend NASD Rule 2320(a) Governing Best Execution October 19, 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 22 and September 22, 2005, the National Association of Securities Dealers, Inc. (“NASD”) filed with the Securities and Exchange Commission (“Commission” or “SEC”) Amendments No. 3 and 4 to the proposed rule change as described in Items I, II, and III below which Items have substantially been prepared by the NASD. The proposed rule change, incorporating Amendments No. 1 and 2, was published for comment in the **Federal Register** on February 25, 2005. 3 The Commission is publishing this notice to solicit comments on the proposed rule change, as amended by Amendments No. 3 and 4 from interested persons. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 *See* Securities Exchange Act Release No. 51229 (Feb. 18, 2005), 70 FR 9416. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change In response to comments on the original proposal, NASD is proposing additional amendments to Rule 2320(a) (“Best Execution Rule”). Below is the text of the proposed rule change marked to show changes from the text that was published previously. 4 Proposed deletions are in brackets. The discussion section of this notice focuses on the changes made in Amendments No. 3 and 4. For an explanation of the original filing, see the release cited in footnote 3. 4 *Id.* 2300. TRANSACTIONS WITH CUSTOMERS 2320. Best Execution and Interpositioning
(a)In any transaction for or with a customer or a customer of another broker-dealer, a member and persons associated with a member shall use reasonable diligence to ascertain the best market [center] for the subject security and buy or sell in such market [center] so that the resultant price to the customer is as favorable as possible under prevailing market conditions. Among the factors that will be considered in determining whether a member has used “reasonable diligence” are:
(1)The character of the market for the security, *e.g.* , price, volatility, relative liquidity, and pressure on available communications;
(2)The size and type of transaction;
(3)The number of markets checked;
(4)Accessibility of the quotation; and
(5)The terms and conditions of the order which result in the transaction, as communicated to the member and persons associated with the member.
(b)through
(g)No 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, NASD 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. 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 The Best Execution Rule currently requires a member, in any transaction for or with a customer, to use reasonable diligence to ascertain the best inter-dealer market for a security and to buy or sell in such a market so that the price to the customer is as favorable as possible under the prevailing market conditions. NASD has received a number of questions regarding the application of the term “customer,” in the context of best execution. NASD Rule 0120(g) defines “customer” to exclude a broker or dealer, unless the context otherwise requires. For example, if a firm that receives an order from a customer (“originating broker-dealer”) routes the order to a member firm (“recipient member”) and the recipient member executes the order in a manner inconsistent with the Best Execution Rule, the recipient member could argue that it has not violated the Best Execution Rule because the transaction was not “for or with a customer,” but rather for or with a broker-dealer. NASD believes that not applying the Best Execution Rule to recipient members is contrary to both the interests of the investing public and the general intent of the Best Execution Rule. Proposal NASD filed Amendments No. 3 and 4 in response to the commenters' concerns about how the proposed rule change would apply to the debt markets and in instances where another broker-dealer is simply executing a customer order against a member's quote. Amendment No. 3 deletes proposed references to market centers and instead uses the term “market.” NASD is making this change in response to comments that suggest that the term “market center” would:
(1)Create an unfair competitive disparity in the equity market; and
(2)create confusion and problems of interpretation, application, and enforcement in the debt market. While the term “market” has been in the text of NASD Rule 2320 since its adoption, it is an undefined term. Accordingly, NASD is providing interpretive guidance that states that, for purposes of NASD Rule 2320, the term “market” or “markets” should be interpreted broadly to include a variety of different venues, including, but not limited to, market centers that are trading a particular security. Such an expansive interpretation is for the purposes of both informing broker-dealers as to the scope of venues that must be considered in the furtherance of their best execution obligations and promoting fair competition among broker-dealers, exchange markets, and markets other than exchange markets, as well as any other venue that may emerge, by not mandating that certain trading venues have less relevance than others in the course of best execution. In Amendment No. 3, NASD also is providing interpretive guidance concerning how the Best Execution Rule should be applied in the debt market with respect to one of the factors used to determine if a member has used reasonable diligence: Accessibility of the quotation. When quotations are available, such as for certain liquid debt securities, NASD will consider the “accessibility of such quotations” when examining whether a member has used reasonable diligence. For purposes of debt, the term “quotation” refers to either dollar (or other currency) pricing or yield pricing. 5 5 NASD notes, however, that accessibility is only one of the non-exhaustive reasonable diligence factors set out in NASD Rule 2320. In the absence of accessibility, members are not relieved from taking reasonable steps and employing their market expertise in achieving the best execution of customer orders. Amendment No. 4 clarified that a member's duty to provide best execution in any transaction “for or with a customer of another broker-dealer” does not apply in instances when another broker-dealer is simply executing a customer order against the member's quote. Stated in another manner, the duty to provide best execution to customer orders received from other broker-dealers arises only when an order is routed from the broker-dealer to the member for the purpose of order handling and execution. This clarification is intended to draw a distinction between those situations in which the member is acting solely as the buyer or seller in connection with orders presented by a broker-dealer against the member's quote, as opposed to those circumstances in which the member is accepting order flow from another broker-dealer for the purpose of facilitating the handling and execution of such orders. 2. Statutory Basis NASD believes that the proposed rule change is consistent with the provisions of Section 15A of the Act, 6 in general, and with Section 15A(b)(6) of the Act, 7 in particular, which requires that NASD rules 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. The obligation of a member firm to provide best execution to its customers has long been an important investor protection rule, characteristic of fair and orderly markets and a central focus of NASD's examination, customer complaint, and automated surveillance programs. NASD believes that the proposed rule change will expand customer protection under the Best Execution Rule, provide better clarity to members, and enhance NASD's ability to pursue actions for failure to provide best execution. 6 15 U.S.C. 78 *o* -3. 7 15 U.S.C. 78 *o* -3(b)(6). B. Self-Regulatory Organization's Statement on Burden on Competition NASD does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act, as amended. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others On February 25, 2005, the SEC published SR-NASD-2004-026 for comment in the **Federal Register** . 8 The SEC received three comment letters in response to the publication of the rule proposal in the **Federal Register** . 9 On June 22, 2005, the NASD responded to the comments. 10 BMA responded to the NASD's response. 11 8 *See* footnote 3, supra. 9 *See* letters from Amal Aly, Vice President and Associate General Counsel, and Ann Vlcek, Vice President and Associate General Counsel, Securities Industry Association (“SIA”) dated March 18, 2005 (“SIA Letter”); Paul A. Merolla, Executive Vice President and General Counsel, Instinet Group, Inc. (“Instinet”) dated March 22, 2005 (“Instinet Letter”); Michele C. David, Vice President and Assistant General Counsel, The Bond Market Association (“BMA”) dated April 5, 2005 (“BMA Letter”); all of which were addressed to Jonathan G. Katz, Secretary, Commission. 10 *See* Amendment No. 3. 11 *See* letter from Marjorie Gross, Senior Vice President and Regulatory Counsel, BMA to Jonathan G. Katz, Secretary Commission, dated September 6, 2005 (“BMA Letter 2”). The BMA submitted a comment letter stating, among other things, its belief that NASD only considered equities trading when drafting the proposed rule change. 12 Specifically, BMA states that NASD's proposed change of terminology in an attempt to clarify and modernize the Best Execution Rule exemplifies how the rule change was drafted to address equities trading only and states further that changing “inter-dealer” markets to “market centers” has no meaning in the context of the bond market. BMA believes the proposal is inappropriate for fixed income securities and, if adopted, would exacerbate existing difficulties with regard to bond trading. In addition, BMA believes applying the Best Execution Rule, as amended, is impractical, unfair, anti-competitive, unworkable in the case of the bond market, and inconsistent with a customer's reasonable expectations of how its orders will be handled. 12 NASD did not intend to only consider equity trading when drafting this proposal. In this rule proposal, NASD is again clarifying that the Best Execution Rule is applicable to the debt market, and is providing additional interpretive guidance. Specifically, NASD is providing interpretive guidance with respect to the “accessibility of the quotations” reasonable diligence factor and the application of this factor in the debt market. When quotations are available, such as for certain liquid debt securities, NASD will consider the “accessibility of such quotations” when examining whether a member has used due diligence. In such instances, the term “quotation” refers to either dollar (or other currency) pricing or yield pricing. NASD appreciates the comments of BMA but does not find them to be persuasive. Essentially, BMA is advocating, for a number of reasons, that the Best Execution Rule is not applicable to the debt market. However, the terms of NASD Rule 2320 have never been limited to equity securities and the consistency of this observation is expressed in NASD Rule 0116 in which the Best Execution Rule, among others, is made applicable to transactions and business activities relating to exempted securities (other than municipal securities) conducted by members and associated persons. 13 13 *See* Securities Exchange Act Release No. 44631 (July 31, 2001), 66 FR 41283 (August 7, 2001) (Approval of SR-NASD-2000-38). Further, BMA asserts that the term “market center” is an equity term and cannot be applied in the context of debt. The NASD acknowledges that the term “market center” has traditionally been used in connection with certain equity securities. For example, Rule 600(b)(38) under the Act, 14 which is applicable to national market system securities, defined “market center” as any exchange market maker, over-the-counter
(OTC)market maker, alternative trading system, national securities exchange, or national securities association. In seeking to modernize the Best Execution Rule, NASD sought a recognized term that was aimed broadly at capturing order execution venues. However, in response to comments, including BMA's concerns that use of this term may introduce confusion in the debt market; NASD has determined to amend the Best Execution Rule to instead use the term “market.” It should be noted, as discussed above, that the term “market” or “markets” for purposes of NASD Rule 2320, should be interpreted broadly to include a variety of different venues, including but not limited to market centers that are trading a particular security. Such an expansive interpretation is for the purposes of both informing broker-dealers as to the scope of venues that must be considered in the furtherance of their best execution obligations and promoting fair competition among broker-dealers, exchange markets, and markets other than exchange markets, as well as any other venue that may emerge; it is not NASD's intention to mandate that certain trading venues have less relevance than others in the course of best execution. 14 17 CFR 242.600(b)(38). BMA also believes imposing a best execution obligation on a “downstream” chain of dealers is impractical, unfair, anti-competitive, and unworkable in the case of the bond market. BMA argues that such an obligation should not be imposed on recipient broker-dealers because there is no pre-trade quote transparency, no mandatory firm quote obligation, and no uniform, regulated inter-market and inter-dealer linkage. 15 BMA fails to recognize that the Best Execution Rule has been in place since 1968. It was adopted at a time when the market structure of the OTC market was quite different. There was significantly less market transparency. Trading decisions and pricing information were based upon telephone and wire quotations as well as quotations in the National Quotation Bureau sheet. At that time, in response to a recommendation made in Chapter VII of the Report of Special Study of Securities Markets of the Securities and Exchange Commission, 16 NASD had recently adopted a policy with respect to firmness of quotations. Furthermore, no uniform, regulated inter-market, inter-dealer linkage existed. The fact is that the Best Execution Rule has been in force since the time when the OTC equity market more closely resembled the current fixed income market. 15 BMA notes in its comment letter that the fixed income market is, in fact, not a single market, but in effect, several different markets ranging from the U.S. Treasury market, where dealer quotations may be very representative of market prices and quotations on trading systems may be executable, to the corporate bond market, where large and active issuers may be actively quoted and where screens may provide good transparency for certain securities of active issuers (but not for other securities or issuers), to the market for distressed and emerging market paper and derivative instruments, such as structured notes, where there may be limited trading, quoting or transparency. Notwithstanding these observations, they do not obviate the application of the Best Execution Rule in wholesale fashion. As discussed subsequently in the text, NASD's Best Execution Rule looks at a number of factors, including the character of the market for the security, to determine whether a member or associated person(s) has used reasonable diligence. Accordingly, it can be applied in a variety of different markets that can possess divergent characteristics, including the U.S. debt market. 16 *See* Report of Special Study of Securities Markets of the Securities and Exchange Commission, H.R. Doc. No. 95, 88th Cong., 1st Sess., pt. II, 674 (1963). The principles embodied in the Best Execution Rule have evolved over time with changes in technology and the structure of the financial markets. 17 This evolution arises because the standard in the Best Execution Rule is one of “reasonable diligence” that is assessed by examining specific factors including “the character of the market for the security.” Accordingly, the determination as to whether a member has satisfied its best execution obligations necessarily involves a “facts and circumstances” analysis. In sum, in its refutation of the best execution obligation in the context of the debt markets, BMA is incorrect as a matter of law and regulation. Moreover, BMA's policy attack on this important investor protection safeguard is fatally undermined by the elasticity of NASD Rule 2320 in its recognition that the character of the market will be among the reasonable diligence factors in the execution of the obligation. 17 The SEC has expressly recognized the evolving nature of the best execution obligations of broker-dealers. *See, e.g.* , Final Rules, 61 FR at 48322-23 (“The scope of this duty of best execution must evolve as changes occur in the market that give rise to improved executions for customer orders, including opportunities to trade more advantageous prices. As these changes occur, broker-dealers' procedures for seeking to obtain best execution for customer orders also must be modified to consider price opportunities that become ‘reasonably available.’ ”). Accordingly, the principles embodied in the text of the Best Execution Rule are applicable to a variety of different market structures and evolve as the market structure for a particular type of security evolves. BMA posits that extending best execution obligations to customers of another broker-dealer is inconsistent with a customer's reasonable expectations of how its orders will be handled because the customer would not have the same expectations of the chain of “unknown” intermediary firms involved in its transactions. NASD strongly disagrees with BMA. 18 BMA's assertion that customers' expectations would somehow be different when an “unknown” intermediary is involved is inconsistent with the generally recognized principle that customers generally seek their own economic gain and that broker-dealers have a corresponding duty to use reasonable efforts to maximize the economic benefits for their customers. 19 There is nothing in the case law that suggests that a broker-dealer's determination to use an unrelated intermediary should relieve its duties in this regard. NASD strongly believes that customers are entitled to receive equivalent best execution protections without regard to whether their order is executed by the originating broker-dealer or routed to or through another broker-dealer for execution. 18 It has been NASD's consistent position since at least 1963 that “the integrity of the industry can be maintained only if the fundamental principle that a customer should at all times get the best available price which can reasonably be obtained for him is followed.” *See,* Report of Special Study of Securities Markets of the Securities and Exchange Commission, H.R. Doc. No. 95, 88th Cong., 1st Sess., pt. II, 624 (1963). 19 *See, e.g., Newton* v. *Merrill Lynch, Pierce, Fenner & Smith, Inc.,* 135 F.3d 266, 270 (3d Cir. 1998) (en banc) (citation omitted), cert. denied sub nom., *Merrill Lynch, Pierce, Fenner & Smith Inc.* v. *Kravitz* , 525 U.S. 811 (1998). The Court, in the context of an agency relationship, recognized that customers seek their own economic gain. Specifically, the Court stated that “* * * the client-principal seeks his own economic gain and the purpose of the agency is to help the client-principal achieve that objective, the broker-dealer, absent instructions to the contrary, is expected to use reasonable efforts to maximize the economic benefit to the client in each transaction.” The SIA and Instinet submitted comment letters that, taken together, promote the view that a recipient broker-dealer's compliance with the terms and conditions of the order, as communicated by the originating broker-dealer, solely, should constitute satisfaction of its best execution obligation with regard to such routed orders. SIA and Instinet assert that this is appropriate because the recipient broker-dealer is not in the same position as the routing firm to weigh the relative importance of various factors related to each customer, as it usually has no knowledge of the actual customer. NASD disagrees with the arguments of SIA and Instinet. The recipient member is certainly entitled to rely on the routing member to understand the terms of the order absent any other direct contact with the customer; with that allowance noted, the recipient member is not at any further disadvantage in complying with the terms of Rule NASD 2320, and, consequently, investor protection requires that recipient members must be subject to all of the relevant reasonable diligence factors in determining whether best execution has occurred as a matter of fact and circumstance. Instinet also asserted that the proposal would create an unfair competitive disparity between otherwise similarly situated market centers that execute orders on an electronic agency basis because the proposed rule would not apply to market centers operated by NASD and other self-regulatory organizations (“SROs”). Instinet requests that NASD revise the proposal to exclude member-operated Electronic Communication Networks and Alternative Trading Systems that interact with orders on a fully automated basis, or else apply the same obligations under the proposal to the market centers operated by NASD and other SROs. 20 As noted above, NASD has responded to this comment, as well as BMA's, by deleting proposed references to market centers and simply using the term “market.” For purposes of NASD Rule 2320, this term should be interpreted broadly to include a variety of different venues, including, but not limited to, market centers that are trading a particular security. Finally, in response to the commenters' concerns, in Amendment No. 4, NASD clarified that a member's duty to provide best execution to customer orders received from other broker-dealers “arises only when an order is routed from the broker-dealer to the member for the purpose of order handling and execution” and does not arise when another broker-dealer is simply executing against a member's quote. 20 Instinet also claims that, in light of Regulation NMS' effects on interaction among market centers and the potential conflicts and interpretive issues, NASD's proposal could be interpreted to require a market center (the recipient broker-dealer) to consider routing an order to another market center displaying a better price even though the originating broker-dealer already has indicated that it has attempted to access such interest. NASD's Best Execution Rule contains a number of factors that are examined to determine whether a member or associated person has used reasonable diligence, including “accessibility of the quotation.” Accordingly, the facts and circumstances surrounding the “accessibility of the quotations” would be considered to the extent they are appropriate. 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-2004-026 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-NASD-2004-026. 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 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 File Number SR-NASD-2004-026 and should be submitted on or before November 16, 2005. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 21 21 17 CFR 200.30-3(a)(12). Jonathan G. Katz, Secretary. [FR Doc. E5-5922 Filed 10-25-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-52645; File No. SR-NASD-2005-116] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing of Proposed Rule Change To Modify Nasdaq's Auditor Peer Review Requirement October 20, 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 September 29, 2005, the National Association of Securities Dealers, Inc. (“NASD”), through its subsidiary, The Nasdaq Stock Market, Inc. (“Nasdaq”), 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 Nasdaq. 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 Nasdaq proposes to modify NASD Rule 4350(k) to reflect changes to the oversight of auditors mandated by the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) 3 and to make a conforming amendment to NASD Rule 4200(a). Nasdaq will implement the proposed rule immediately upon Commission approval. The text of the proposed rule change is below. Proposed new language is in *italics* ; proposed deletions are in [brackets]. 3 Pub. L. 107-204, 116 Stat. 745 (2002). 4200. Definitions
(a)For purposes of the Rule 4000 Series, unless the context requires otherwise:
(1)No change.
(2)*Reserved* . [“AICPA” means the American Institute of Certified Public Accountants.] (3)-(38) No change.
(b)No change. 4350. Qualitative Listing Requirements for Nasdaq National Market and Nasdaq SmallCap Market Issuers Except for Limited Partnerships (a)-(j) No change.
(k)[Peer Review] *Auditor Registration* [(1)] Each *listed* issuer must be audited by an independent accountant that[:] *Is registered as a public accounting firm with the Public Company Accounting Oversight Board, as provided for in Section 102 of the Sarbanes-Oxley Act of 2002 [15 U.S.C. 7212]* . [(A) has received an external quality control review by an independent public accountant (“peer review”) that determines whether the auditor's system of quality control is in place and operating effectively and whether established policies and procedures and applicable auditing standards are being followed; or] [(B) is enrolled in a peer review program and within 18 months receives a peer review that meets acceptable guidelines.] [(2) The following guidelines are acceptable for purposes of this paragraph:] [(A) The peer review should be comparable to AICPA standards included in Standards for Performing on Peer Reviews, codified in the AICPA's SEC Practice Section Reference Manual;] [(B) The peer review program should be subject to oversight by an independent body comparable to the organizational structure of the Public Oversight Board as codified in the AICPA's SEC Practice Section Reference Manual; and] [(C) The administering entity and the independent oversight body of the peer review program must, as part of their rules of procedure, require the retention of the peer review working papers for 90 days after acceptance of the peer review report and allow Nasdaq access to those working papers.] (l)-(n) No 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, Nasdaq 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. Nasdaq 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 NASD Rule 4350(k) currently requires that issuers be audited by an independent public accountant that has received an external quality control review by another independent public accountant (a “peer review”) or is enrolled in a peer review program. However, as part of the Sarbanes-Oxley Act, Congress created the Public Company Accounting Oversight Board (the “PCAOB”) and prohibited accounting firms that are not registered with the PCAOB from preparing or issuing audit reports on U.S. public companies and from participating in such audits. 4 The Sarbanes-Oxley Act also requires the PCAOB to conduct a continuing program of inspections of registered public accounting firms. 5 Pursuant to these requirements, the PCAOB is required to conduct inspections annually for firms that provide audit reports for more than 100 issuers and at least triennially for firms that provide audit reports for fewer issuers. 6 4 Section 102 of the Sarbanes-Oxley Act, 15 U.S.C. 7212. 5 Section 104 of the Sarbanes-Oxley Act, 15 U.S.C. 7214. 6 *See* Section 104 of the Sarbanes-Oxley Act, 15 U.S.C. 7214(b). In light of these new requirements, the American Institute of Certified Public Accountants (“AICPA”) has modified its peer review program. The new AICPA peer review program, which succeeds the SEC Practice Section Peer Review Program currently referred to in NASD Rule 4350(k), is designed to review and evaluate only the non-SEC issuer practice of the firm. 7 As a result, this peer review program is no longer relevant with respect to the audits of Nasdaq-listed issuers. 7 *See* Web site for the AICPA's Center for Public Company Audit Firms Peer Review Program at: *http://www.aicpa.org/centerprp/index.htm.* Given these changes to the oversight and inspection of auditors, the proposed rule change is designed to modify existing NASD Rule 4350(k) to reflect the new role of the PCAOB and change the existing requirement to a requirement that each issuer's auditor be registered as a public accounting firm with the PCAOB. As a result, auditors of Nasdaq companies will be subject to the PCAOB's program of continuing inspections. 8 8 *See* Sections 4000-4012 of the PCAOB Rules. Note that in the case of non-U.S. auditors, where the PCAOB determines it appropriate, the PCAOB may rely instead on non-U.S. inspections. *See* Section 4012 of the PCAOB Rules. Under the proposed rule change, an issuer seeking to list on Nasdaq would be permitted to continue to use historical financial statements that were audited by a non-registered firm at a time when the applicant was not a public company. Nasdaq believes that this view is consistent with an interpretation adopted by the PCAOB, which provides that an auditor does not have to register with the PCAOB merely because it issues a consent to include an audit report for a prior period, if the auditor does not have or expect to have an ongoing role in the auditing engagement. 9 Of course, if the issuer was a public company immediately prior to listing on Nasdaq, the company's financial statements must have been audited and/or reviewed by a public accounting firm that was registered with the PCAOB, as required by the Sarbanes-Oxley Act and the rules of the PCAOB. 9 *See* PCAOB Rule 2100, Note 2. Finally, Nasdaq proposes to make a conforming amendment to the language of NASD Rule 4200(a) to delete the definition of “AICPA,” which would no longer be necessary. 2. Statutory Basis Nasdaq believes that the proposed rule change is consistent with the provisions of Section 15A of the Act, 10 in general, and with Section 15A(b)(6) of the Act, 11 in particular, in that the proposal is designed to remove impediments to a free and open market and a national market system, prevent fraudulent and manipulative acts and practices, and, in general, to protect investors and the public interest. Specifically, the proposed rule change will remove a redundant listing requirement, thereby removing an impediment to a free and open market, and will align Nasdaq's listing standards with the requirements of the Sarbanes-Oxley Act, thereby allowing Nasdaq to further the investor protection goals of that Act. 10 15 U.S.C. 78o-3. 11 15 U.S.C. 78o-3(b)(6). B. Self-Regulatory Organization's Statement on Burden on Competition Nasdaq does not believe that the proposed rule change will 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 Written comments were neither solicited nor received. 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 Nasdaq 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-NASD-2005-116 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-NASD-2005-116. 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 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 File Number SR-NASD-2005-116 and should be submitted on or before November 16, 2005. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 12 12 17 CFR 200.30-3(a)(12). Jonathan G. Katz, Secretary. [FR Doc. E5-5942 Filed 10-25-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-52638; File No. SR-NYSE-2005-37] Self-Regulatory Organizations; New York Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto Relating to Amendments to Certain Sections of the Exchange Constitution Concerning the Exchange's Hearing Board and Related Amendments to Exchange Rule 475 and Rule 476 October 19, 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 May 23, 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 NYSE. On September 9, 2005, NYSE amended the proposed rule change (“Amendment No. 1”). 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 filed on September 9, 2005. In Amendment No. 1, the Exchange made technical corrections to proposed rule text contained in Exhibit 5 of the original filing. I. Self-Regulatory Organization's Statement of the Terms of the Substance of the Proposed Rule Change The Exchange proposes to amend Article IX of the Exchange's Constitution and NYSE Rules 475 and 476 to modify certain aspects of the Exchange's disciplinary procedures and to provide a structure for a summary suspension hearing and a “call-up” procedure for review by members of the Board of Directors (“Board”), certain members of the Board of Executives listed in NYSE Rule 476(f), any member of the Regulation, Enforcement and Listing Standards Committee and either the Division of the Exchange that initiated the proceedings or the respondent. The text of the proposed rule change, as amended, is below. Proposed new language is in italics; proposed deletions are in brackets. 4 4 The rule as set forth herein reflects several minor revisions to the proposal's rule text that the Exchange has committed to incorporate in an amendment to the filing. Telephone conversation between Peggy Kuo, Chief Hearing Officer, NYSE and Cyndi N. Rodriquez, Special Counsel, Division of Market Regulations (“Division”), Commission on September 29, 2005. Disciplinary Rules (Rules 475—477) Rule 475. Prohibition or Limitation with Respect to Access to Services Offered by the Exchange or a Member or Member Organization—Summary Proceedings
(a)Except as provided [is] *in* subsection
(b)of this Rule, the Exchange shall not prohibit or limit any person with respect to access to services offered by the Exchange or any member or member organization thereof unless the Exchange shall have notified such person in writing of, and shall have given such person, upon not less than 15 days prior written notice, an opportunity to be heard upon, the specific grounds for such prohibition or limitation. The Exchange shall keep a record of any proceeding pursuant to this Rule. Any determination by the Exchange to prohibit or limit any person with respect to access to services offered by the Exchange or a member or member organization thereof shall be supported by a statement setting forth the specific grounds on which the prohibition or limitation is based.
(b)The Exchange may summarily—
(i)suspend a member, member organization, allied member, approved person, or registered or non-registered employee of a member or member organization who has been and is expelled or suspended from any other self-regulatory organization, as defined in Section 3(a)(26) of the Securities Exchange Act of 1934, or barred or suspended from being associated with a member or any such self-regulatory organization provided, however, that any such summary suspension imposed by the Exchange shall not exceed the termination of the suspension imposed by such other self-regulatory organization on such member, member organization, allied member, approved person, or registered or non-registered employee;
(ii)suspend a member or member organization who is in such financial or operating difficulty that the Exchange determines and so notifies the Securities and Exchange Commission that the member or member organization cannot be permitted to continue to do business as a member or member organization with safety to investors, creditors, other members or member organizations, or the Exchange;
(iii)limit or prohibit any person with respect to access to services offered by the Exchange if subparagraph
(i)or
(ii)of this subsection is applicable to such person or, in the case of a person who is not a member or member organization, if the Exchange determines that such person does not meet the qualification requirements or other prerequisites for such access and such person cannot be permitted to continue to have such access with safety to investors, creditors, members, member organizations, or the Exchange. Any person aggrieved by any such summary action shall be notified in writing of, and shall be promptly afforded an opportunity to be heard by the Exchange upon, the specific grounds for such summary action. The Exchange shall keep a record of any proceeding pursuant to the Rule. Any determination by the Exchange with respect to such summary action shall be supported by a statement setting forth the specific grounds on which the summary action is based. The Commission, by order, may stay any such summary action in accordance with the provisions of the Securities Exchange Act of 1934. *(c) Hearings and proceedings pursuant to subsections
(a)and
(b)of this Rule shall be under the jurisdiction of a Hearing Officer, appointed by the Board, acting alone. The Hearing Officer shall schedule and conduct Hearings promptly and, in doing so, provide such discovery to the person whose access or suspension is the subject of the Hearing and to the Exchange officers and employees as provided for under Rule 476(c). The Hearing Officer shall render determinations based upon the record at such Hearings. No determinations by the Hearing Officer shall be effective to modify, reverse or terminate a summary action until and unless
(i)ten days have elapsed after the determination has been rendered and
(ii)during such ten days, no request for review has been filed with the Secretary of the Exchange pursuant to the next sentence. Any member of the Board, any member of the Board of Executives referred to in Rule 476(f), any member of the Regulation, Enforcement and Listing Standards Committee and either the Division of the Exchange initiating the proceedings or the respondent may require a review by the Board of any determination by the Hearing Officer by filing with the Secretary of the Exchange a written request therefor within ten days following such determination. The Board shall have power to affirm, modify or reverse any such determination, or remand the matter to the Hearing Officer for further proceedings.* [c]( *d* ) Whenever a member or member organization fails to perform his or its contracts, becomes insolvent, or is in such financial or operating difficulty that he or it cannot be permitted to continue to do business as a member or member organization with safety to investors, creditors, other members or member organizations, or the Exchange, such member or member organization shall promptly give written notice thereof to the Secretary of the Exchange. [d]( *e* ) If the Board of Directors determines, after not less than ten days written notice to a member described in Section 1(a) of Article II who is suspended under the provisions of this Rule, that the protection of the persons entitled to make claim against the proceeds of the transfer of the membership of such member under Section 11 of Article II of the Constitution requires the transfer of the membership of such member, such membership may be disposed of by the Board of Directors. In any case, if a member suspended under the provisions of this Rule is not reinstated within one year from the time of his suspension, or within such further time as the Board of Directors may grant, his membership shall be disposed of by the Board of Directors; but the Board may, by the affirmative vote of a majority of the Directors then in office, extend the time for settlement for periods not exceeding one year each. [e]( *f* ) Any person suspended under the provisions of this Rule shall, at the request of the Exchange, submit to the Exchange his or its books and records (including those books and records with respect to which such person has access or control) or the books and records of any employee thereof and furnish information to or to appear or testify before or cause any such employee to appear or testify before the Exchange. [f]( *g* ) Any person suspended under the provisions of this Rule may, at any time, be reinstated by the Board of Directors. [g]( *h* ) Any person suspended under the provisions of this Rule may be disciplined in accordance with the Rules of the Exchange for any offense committed by him or it either before or after his or its suspension in all respects as if he or it were not under such suspension. [h]( *i* ) A member suspended under the provisions of this Rule shall be deprived during the term of his suspension of all rights and privileges of membership, but such suspension shall not operate to bar or affect the payments provided for by Article XV of the Constitution in the event of his death. Any suspension under the provisions of this Rule of a member or allied member shall create a vacancy in any office or position held by such member or allied member. *(j) The limitations on the Chief Executive Officer contained in Rule 476(l) shall apply to all matters under this Rule.* Rule 476. Disciplinary Proceedings Involving Charges Against Members, Member Organizations, Allied Members, Approved Persons, Employees, or Others
(a)If a member, member organization, allied member, approved person, registered or non-registered employee of a member or member organization or person otherwise subject to the jurisdiction of the Exchange is adjudged guilty in a proceeding under this Rule of any of the following offenses— [1.] *(1)* violating any provision of the Securities Exchange Act of 1934 or any rule or regulation thereunder; [2.] *(2)* violating any of his or its agreements with the Exchange; [3.] *(3)* violating any provision of the Constitution or any Rule adopted by the Board of Directors of the Exchange; [4.] *(4)* making a material misstatement to the Exchange; [5.] *(5)* fraud or fraudulent acts; [6.] *(6)* conduct or proceeding inconsistent with just and equitable principles of trade; [7.] *(7)* acts detrimental to the interest or welfare of the Exchange; [8.] *(8)* making a fictitious bid, offer or transaction or giving an order for the purchase or sale of securities the execution of which would involve no change of beneficial ownership or executing such an order with knowledge of its character; [9.] *(9)* making any purchases or sales or offers of purchase or sale of securities for the purpose of upsetting the equilibrium of the market or bringing about a condition in which prices will not fairly reflect market values, or assisting in making any such purchases or sales with knowledge of such purpose, or being, with such knowledge, a party to or assisting in carrying out any plan or scheme for the making of such purchases or sales or offers of purchase or sale; [10.] *(10)* having made a misstatement or omission of fact on his or its application for membership or approval, or on any financial statement, report, or other submission filed with the Exchange; or [11.] *(11)* refusing or failing to comply with a request of the Exchange to submit his or its books and records (including those books and records with respect to which such member, member organization, allied member, approved person, registered or non-registered employee or person otherwise subject to the jurisdiction of the Exchange has access and control) to the Exchange, any other self-regulatory organization, as defined in Section 3(a)(26) of the Securities Exchange Act of 1934, any contract market, as referenced in Section 6(a) of the Commodities Exchange Act, any registered futures association, as referenced in Section 17 of the Commodities Exchange Act, or any foreign self-regulatory organization or association with which the Exchange has entered into an agreement or to furnish information to or to appear or testify before the Exchange or such other organization or association, as specified above, or failing to take any of the foregoing actions on the date or within the time period that the Exchange requires; or if a member who is registered as a specialist is adjudged guilty in a proceeding under this Rule of substantial or continued failure to engage in a course of dealings for his own account to assist in the maintenance, so far as practicable, of a fair and orderly market in any security in which he is registered; then, in any such event, the Hearing Panel *or, when authorized by this Rule, a Hearing Officer* shall, in accordance with the procedures set forth in this Rule, impose one or more of the following disciplinary sanctions on such member, member organization, allied member, approved person, registered or non-registered employee or person otherwise subject to the jurisdiction of the Exchange: expulsion; suspension; limitation as to activities, functions, and operations, including the suspension or cancellation of a registration in, or assignment of, one or more stocks; fine; censure; suspension or bar from being associated with any member or member organization; or any other fitting sanction. [In any proceeding under this Rule, any sanction imposed may be remitted or reduced by the Hearing Panel on such terms and conditions as it deems fair and equitable.]
(b)All proceedings under this Rule, except as to matters [referred to in paragraph (c),] *which are resolved by a Hearing Officer when authorized by this Rule* , shall be conducted at a Hearing in accordance with the provisions of this Rule and shall be held before a Hearing Panel consisting of at least three persons *of integrity and judgment:* a Hearing Officer, who shall [be Chairman of] *chair* the Panel, [with the remainder of the Panel being] *and at least two* members of the Hearing Board, *at least one of whom shall be engaged in securities activities differing from that of the respondent or, if retired, was so engaged in differing activities at the time of retirement. In any disciplinary proceeding involving activities on the Floor of the Exchange, no more than one of the persons serving on the Hearing Panel shall be, or if retired, shall have been, active on the Floor of the Exchange. A Hearing Panel can include only one retired person* . The Chairman, subject to the approval of the Board [of Directors], shall from time to time appoint a Hearing Board to be composed of such number of members and allied members of the Exchange who are not members of the Board of [Directors] *Executives* , and registered employees and non-registered employees of members and member organizations, *and such other persons as set forth in the rules* as the Chairman shall deem necessary. *Former members, allied members, or registered and non-registered employees of members and member organizations who have retired from the securities industry can be appointed to the Hearing Board within five years of their retirement* . The members of the Hearing Board shall be appointed annually and shall serve at the pleasure of the Board [of Directors]. The Chairman, subject to the approval of the Board [of Directors], shall also designate [from among the officers and employees of the Exchange] a Chief Hearing Officer and one or more other Hearing Officers who shall have no Exchange duties or functions relating to the investigation or preparation of disciplinary matters and who shall be appointed annually and shall serve as Hearing Officers at the pleasure of the Board [of Directors]. *An individual cannot be a Hearing Officer (including the Chief Hearing Officer) if he or she is, or within the last three years was, a member, allied member, or registered or non-registered employee of a member or member organization* . [In any hearing under this Rule involving as a respondent therein a member, member organization, allied member, or approved person, the members of the Hearing Board serving on the Panel shall be members or allied members and at least one of whom, to the extent reasonably possible, is engaged in similar activities as the respondent. In any such proceeding relating to activities on the Floor of the Exchange, at least one of the persons serving on the Panel shall be a member active on the Floor of the Exchange. In any such proceeding relating to any other activities, at least one of the persons serving on the Panel shall work in the office of a member or member organization which engages in a business involving substantial direct contact with securities customers.] [In any hearing under this Rule involving as a respondent therein a registered or non-registered employee of a member or member organization who is not a member or allied member, the members of the Hearing Board serving on the Panel shall be registered employees or non-registered employees of members and member organizations who are not members or allied members and at least one of whom, to the extent reasonably possible, is engaged in similar activities as the respondent. In any such proceeding relating to such employee's activities on the Floor of the Exchange, at least one of the persons serving on the Panel shall be a registered or non-registered employee of a member or member organization active on the Floor of the Exchange who is not a member or allied member. In any such proceeding relating to any other activities at least one of the persons serving on the Panel shall work in the office of a member or member organization which engages in a business involving substantial direct contact with securities customers.] [In any hearing under this Rule involving as joint respondents therein one or more members or member organizations, allied members or approved persons, together with one or more registered or non-registered employees of a member or member organization who are not members or allied members, at least one of the persons serving on the Panel shall be a member or allied member and at least one other person serving on the Panel shall be a registered or non-registered employee of a member or member organization who is not a member or allied member, and the functional qualifications required of Hearing Panel members as stated above shall be satisfied.] For all purposes of this Rule, the decision of a majority of the Panel shall be the decision of the Panel and shall be final and conclusive, unless a request to the Board [of Directors] for review is filed as provided in this Rule.
(c)Upon application to the Chief Hearing Officer [of the Exchange] by either party to a proceeding, the Chief Hearing Officer, or any Hearing Officer designated by the Chief Hearing Officer, shall resolve any and all procedural and evidentiary matters *and substantive legal motions* , and may require the Exchange to permit the respondent to inspect and copy documents or records in the possession of the Exchange which are material to the preparation of the defense or are intended for use by the [d] *D* ivision [or department] of the Exchange initiating the proceeding as evidence in chief at the [h] *H* earing. *The respondent may be required to provide discovery of non-privileged documents and records to the Exchange* . This provision does not authorize the discovery or inspection of reports, memoranda, or other internal Exchange documents prepared by the Exchange in connection with the proceeding. There shall be no interlocutory appeal to the Board [of Directors] of any determination as to which this provision applies.
(d)Except as provided in paragraph (g), in any proceeding under this Rule before a Hearing Panel, *or Hearing Officer as provided by this rule* , the specific charges against the respondent shall be in the form of a written statement (Charge Memorandum) and shall be signed by an authorized officer or employee of the Exchange on behalf of the [d] *D* ivision [or department] of the Exchange bringing the charges. A copy of such Charge Memorandum (including any exhibits attached thereto) shall be *filed with the Hearing Board at the same time it is* served upon the respondent. Service shall be deemed effective by personal service of such Charge Memorandum, or by leaving same either at the respondent's last known office address during business hours or respondent's last place of residence as reflected in Exchange records, or upon mailing same to the respondent at the aforesaid office address or place of residence. *The Hearing Board shall assume jurisdiction upon receipt of the Charge Memorandum* . An Answer to the Charge Memorandum shall be filed not later than twenty five days from the date of service or within such longer period of time as the [Exchange] *Hearing Officer* may deem proper. The Answer shall be in writing, signed by or on behalf of the respondent and filed with *the Hearing Board, with a copy served on* the [d] *D* ivision [or department] of the Exchange bringing the charges. The Answer shall indicate specifically which assertions of fact and charges in the Charge Memorandum are denied and which are admitted; and shall also contain any specific facts in contradiction of the charges and any affirmative defenses. A general denial without more shall not be deemed to satisfy this requirement. Any assertions of fact not specifically denied in the Answer may be deemed admitted and failure to file an Answer may be deemed an admission of any facts asserted in the Charge Memorandum. *The Hearing Board shall set a schedule for filing of motions and shall establish Hearing dates. If the respondent has failed to file an Answer, the Division of the Exchange bringing the charges, by motion, accompanied by proof of notice to the respondent, may request a determination of guilt by default, and may recommend a penalty to be imposed. If the respondent opposes the motion, the Hearing Officer, on a determination that respondent had adequate reason to fail to file an Answer, may adjourn the Hearing date and direct the respondent to promptly file an Answer. If the default motion is unopposed, or respondent did not have adequate reason to fail to file an Answer, or respondent failed to file an Answer after being given an opportunity to do so, the Hearing Officer, on a determination that respondent has had notice of the charges and that the Exchange has jurisdiction in the matter, may find guilt and determine penalty* . Notice of the [h] *H* earing to be held for the purpose of considering the charges shall be served upon the *Division of the Exchange and the* respondent as provided above[, who shall be] *. The respondent shall be* entitled to be personally present thereat if a natural person, and if other than a natural person, by a designee. The Hearing Officer shall determine the specific facts [put into] *in* issue [by the Charge Memorandum and the Answer], and with respect to those facts only, both the [d] *D* ivision [or department] of the Exchange bringing the charges and the respondent may produce witnesses and any other evidence and they may examine and cross-examine any witnesses so produced. [If the respondent has failed to file an Answer or if the facts and charges in the Charge Memorandum are not specifically denied, any witnesses or other evidence may be limited to the determination of the penalty to be imposed. In the event a respondent who has failed to file an Answer appears at the hearing, such respondent shall not be entitled to produce witnesses or other evidence or testify in defense of the facts or charges contained in the Charge Memorandum unless the Hearing Panel determines that such respondent had adequate reason to excuse his failure to file an Answer. Upon such determination by the Hearing Panel, the hearing may be adjourned and the respondent may be directed to promptly file a written Answer.] After hearing all the witnesses and considering all the evidence, the *Hearing* Panel shall determine whether the respondent is guilty of the charges. If the *Hearing* Panel determines that the respondent is guilty, it shall fix and impose the penalty or penalties.
(e)The Exchange shall keep a record of any [h] *H* earing conducted under this Rule and a written notice of the result setting forth the requirements contained in Section 6(d)(1) of the Securities Exchange Act of 1934 shall be served upon the respondent and the [d] *D* ivision [or department] of the Exchange which brought the charges. The determination of the Hearing Panel, *or of the Hearing Officer on a determination of default* , and any penalty imposed, shall be final and conclusive twenty five days after notice thereof has been served upon the respondent in the manner provided in paragraph
(d)above, unless a request to the Board [of Directors] for review of such determination and/or penalty is filed as hereinafter provided. If such a request to the Board [of Directors] for review is filed as hereinafter provided, any penalty imposed shall be stayed pending the outcome of such review.
(f)The Division [or department] of the Exchange which brought the charges, the respondent, [or] *and* any member of the Board *,* [of Directors or] *any member* of the Board of Executives [of the Exchange] *representing the groups referenced in clauses
(ii)and
(iii)of Article V, Section 2(b) of the Exchange Constitution, any member of the Board of Executives in such other categories as the Board, by rule, shall designate, and any member of the Regulation, Enforcement and Listing Standards Committee* may require a review by the Board of any determination or penalty, or both, imposed by a Hearing Panel *or Hearing Officer* . A request for review shall be made by filing with the Secretary of the Exchange a written request therefore, which states the basis and reasons for such review, within twenty *-* five days after notice of the determination and/or penalty is served upon the respondent. The Secretary of the Exchange shall give notice of any such request for review to the [d] *D* ivision [or department] of the Exchange which brought the charges and any respondent affected thereby. Any review by the Board [of Directors] shall be based on oral arguments and written briefs and shall be limited to consideration of the record before the Hearing Panel *or Hearing Officer* . Upon review, the Board [of Directors], by the affirmative vote of a majority of the Directors then in office, may sustain any determination or penalty imposed, or both, may modify or reverse any such determination, and may increase, decrease or eliminate any such penalty, or impose any penalty permitted under the provisions of this Rule, as it deems appropriate. Unless the Board [of Directors] otherwise specifically directs, the determination and penalty, if any, of the Board [of Directors] after review shall be final and conclusive subject to the provisions for review of the Securities Exchange Act of 1934. Notwithstanding the foregoing, if either party upon review applies to the Board [of Directors] for leave to adduce additional evidence, and shows to the satisfaction of the Board [of Directors] that the additional evidence is material and that there was reasonable ground for failure to adduce it before the Hearing Panel *or Hearing Officer* , the Board [of Directors] may remand the case [to a Hearing Panel] for further proceedings, in whatever manner and on whatever conditions the Board [of Directors] considers appropriate.
(g)In lieu of the procedures set forth in paragraph
(d)above, a Hearing [Panel] *Officer acting alone* [,at a hearing called for that purpose,] shall also determine whether a member, member organization, allied member, approved person, or registered or non-registered employee of a member or member organization has committed any one or more of the offenses specified in paragraph
(a)above, on the basis of a written Stipulation and Consent entered into between the respondent and any authorized officer or employee of the Exchange. Any such Stipulation and Consent shall contain a stipulation with respect to the facts, or the basis for findings of fact by the Hearing [Panel] *Officer* ; a consent to findings of fact by the Hearing [Panel] *Officer* , including a finding that a specified offense had been committed; and a consent to the imposition of a specified penalty. *A Hearing Officer shall convene a Hearing Panel, if the Hearing Officer requires clarification or further information on the Stipulation and Consent, or if either party requests a Hearing before a Hearing Panel. A Hearing Officer, acting alone, may not reject a Stipulation or Consent, but shall convene a Hearing Panel to consider such action.* Notice of any Hearing held for the purpose of considering a Stipulation and Consent shall be served upon the respondent as provided in paragraph
(d)above. In any such [h] *H* earing, if the Hearing Panel determines that the respondent has committed an offense, it may impose the penalty agreed to in such Stipulation and Consent [or any penalty which is less severe than the stipulated penalty, as it deems appropriate]. In addition, a Hearing Panel may reject such Stipulation and Consent. Such rejection shall not preclude the parties to the proceeding from entering into a modified Stipulation and Consent which shall be presented to a Hearing Panel in accordance with the provisions of this subsection, nor shall such rejection preclude the Exchange from bringing or presenting the same or different charges to a Hearing Panel in accordance with the provisions of paragraph
(d)above. The Exchange shall keep a record of any Hearing conducted under this Rule and a written notice of the result setting forth the requirements contained in Section 6(d)(1) of the Securities Exchange Act of 1934 shall be served on the parties to the proceeding. The determination of the Hearing Panel *or Hearing Officer* and any penalty imposed shall be final and conclusive, twenty five days after notice thereof has been served upon the respondent in the manner provided in paragraph
(d)above, unless a request to the Board [of Directors] for review of such determination and/or penalty is filed as hereinafter provided. If such a request to the Board [of Directors] for review is filed as hereinafter provided, any penalty imposed shall be stayed pending the outcome of such review. Any member of the Board *,* [of Directors or of] the Board of Executives [of the Exchange] *specified in or designated pursuant to paragraph
(f)above and any member of the Regulation, Enforcement & Listing Standards Committee* may require a review by the Board of any determination or penalty, or both, imposed by a Hearing Panel *or Hearing Officer* in connection with a Stipulation and Consent. [In addition, the division or department of the Exchange which entered into the written consent may require a review by the Board of Directors of any penalty which is less severe than the stipulated penalty.] The respondent or the [d] *D* ivision [or department] which entered into the written consent may require a review by the Board [of Directors] of any rejection of a Stipulation and Consent by the Hearing Panel. A request for review shall be made by filing with the Secretary of the Exchange a written request therefor, which states the basis and reasons for such review, within twenty-five days after notice of the determination and/or penalty is served on the respondent. The Secretary of the Exchange shall give notice of any such request for review to the [d] *D* ivision [or department] of the Exchange involved in the proceeding and any respondent affected thereby. Any review by the Board [of Directors] shall consist of oral arguments and written briefs and shall be limited to consideration of the record before the Hearing Panel *or Hearing Officer* . Upon review, the Board [of Directors], by the affirmative vote of a majority of the Directors then in office, may fix and impose the penalty agreed to in such Stipulation and Consent or any penalty which is less severe than the stipulated penalty, or may remand for further proceedings. Unless the Board [of Directors] otherwise specifically directs, the determination and penalty, if any, of the Board [of Directors] after review shall be final and conclusive subject to the provisions for review of the Securities Exchange Act of 1934.
(h)A member, member organization, allied member, approved person, or registered or non-registered employee of a member or member organization, or any other person shall have the right to be represented by legal counsel or other representative in any [h] *H* earing or review held pursuant to the provisions of this Rule and in any investigation before any committee, officer, or employee of the Exchange. *A Hearing Officer may impose a fine or any other appropriate sanction on any party or the party's representative for improper conduct in connection with a matter before the Hearing Board, and may, if appropriate, exclude any participant, including any party, witness, attorney or representative from a Hearing on the basis of such conduct.*
(i)A member or allied member of the Exchange who is associated with a member organization is liable to the same discipline and penalties for any act or omission of such member organization as for his own personal act or omission. The Hearing Panel which considers the charges against such member or allied member or the Board [of Directors] upon any review thereof, may relieve him from the penalty therefor or may remit or reduce such penalty on such terms and conditions as the Panel or the Board shall deem fair and equitable.
(j)When a member is suspended under the provisions of this Rule, such member shall be deprived during the term of his suspension of all rights and privileges of membership. No such suspension shall operate to bar or affect the payments provided for by Article XV of the Constitution of the Exchange in the event of the death of the suspended member. The expulsion of a member shall terminate all rights and privileges arising out of his membership except such rights as he may have under the provisions of Sections 11 and 14 of Article II of the Constitution.
(k)Any approved person or registered or non-registered employee who shall neglect to pay any fine within forty five days after the same shall become payable may, after written notice mailed to such person at either his office or last place of residence as reflected in Exchange records, be summarily suspended from association in any capacity with a member organization or have his approval withdrawn until such fine is paid. (See Art. X, Sec. 6 for penalties imposed upon members, allied members and member organizations for failure to pay fines or other sums due the Exchange.) Whenever a member, member organization, allied member, approved person or registered or non-registered employee of a member or member organization is suspended under the provisions of this Rule, [he or it] *that person or organization* may be proceeded against for any offense other than that for which such member, member organization, allied member, approved person or registered or non-registered employee was suspended. The suspension or expulsion of a member or allied member under the provisions of this Rule shall create a vacancy in any office or position held by him. *(l) Notwithstanding any other provisions of this Rule, the Chief Executive Officer
(a)may not require a review by the Board under this Rule and
(b)shall be recused from deliberations and actions of the Board with respect to matters to be reviewed by the Board under this Rule.* NYSE Constitution ARTICLE IX Disciplinary Proceedings Sec. 1. Disciplinary Rules. The Board shall adopt such rules as it deems necessary or appropriate for the discipline of members, member organizations, allied members, approved persons, and registered and non-registered employees of members and member organizations for the violation of the Act, the rules of the Exchange and for such other offenses as may be set forth in the rules of the Exchange. The Board shall also adopt such rules as it deems necessary or appropriate governing the conduct of disciplinary proceedings including disciplinary hearings and reviews thereof. The determination and penalty, if any, of the Board after review shall be final and conclusive, subject to the provisions of the Act. Sec. 2. Hearing Panel. All proceedings relating to disciplinary matters, except as otherwise specifically set forth in the rules of the Exchange [with respect to procedural and evidentiary matters,] shall be conducted before a hearing panel consisting of at least three persons[;] *:* a hearing officer, who shall [be chairman of] *chair* the panel, [with the remainder of the panel being] *and at least two* members of the hearing board. Sec. 3. Hearing Board. The Chairman of the Board, subject to the approval of the Board, shall from time to time appoint a hearing board to be composed of such number of members and allied members of the Exchange who are not members of the Board or of the Board of Executives, and registered employees and non-registered employees of members and member organizations, *and such other persons as set forth in the rules,* as the Chairman of the Board shall deem necessary. The members of the hearing board shall be appointed annually and serve at the pleasure of the Board. The Chairman of the Board, subject to the approval of the Board, shall also designate [from among the officers and employees of the Exchange] a chief hearing officer and one or more other hearing officers who shall have no Exchange duties or functions relating to the investigation or preparation of disciplinary matters and who shall be appointed annually and shall serve as hearing officers at the pleasure of the Board. *An individual cannot be a hearing officer (including the chief hearing officer) if he or she is, or within the last three years was, a member, allied member, or registered or non-registered employee of a member or member organization.* Sec. 4. Composition of Hearing Panel. [In any disciplinary proceeding involving as a respondent therein a member, member organization, allied member, or approved person, the members of the hearing board serving on the panel shall be members or allied members. In any such proceeding relating to activities on the floor of the Exchange, at least one of the persons serving on the panel shall be a member active on the floor of the Exchange. In any such proceeding relating to any other activities, at least one of the persons serving on the panel shall work in the office of a member or member organization which engages in a business involving substantial direct contact with securities customers.] [In any disciplinary proceeding involving as a respondent therein a registered or non-registered employee of a member or member organization who is not a member or allied member, the members of the hearing board serving on the panel shall be registered employees or non-registered employees of members or member organizations who are not members or allied members. In any such proceeding relating to such employee's activities on the floor of the Exchange, at least one of the persons serving on the panel shall be a registered or non-registered employee of a member or member organization active on the floor of the Exchange who is not a member or allied member. In any such proceeding relating to any other activities, at least one of the persons serving on the panel shall work in the office of a member or member organization which engages in a business involving substantial direct contact with securities customers.] [In any disciplinary proceeding involving as joint respondents therein one or more members or member organizations, allied members or approved persons, together with one or more registered or non-registered employees of a member or member organization who are not members or allied members, at least one of the persons serving on the panel shall be a member or allied member and at least one other person serving on the panel shall be a registered or non-registered employee of a member or member organization who is not a member or allied member, and the functional qualifications required of hearing panel members as stated in this Section shall be satisfied.] * A hearing panel shall be composed of a hearing officer, who shall chair the panel, and at least two members of the hearing board, at least one of whom shall be engaged in securities activities differing from that of the respondent. In any disciplinary proceeding involving activities on the Floor of the Exchange, no more than one of the persons serving on the hearing panel shall be active on the Floor of the Exchange. * The decision of a majority of the panel shall be the decision of the panel and shall be final and conclusive, unless a request to the Board for review is filed as provided in this Article and in the rules of the Exchange. Sec. 5. Penalties. If a member, member organization, allied member, approved person or registered or non-registered employee of a member or member organization is adjudged guilty in any disciplinary proceeding, the hearing panel *, or, to the extent provided in the rules, the hearing officer,* shall impose one or more of the following disciplinary sanctions: expulsion, suspension; limitation as to activities, functions, and operations, including the suspension or cancellation of a registration in, or assignment of, one or more stocks, fine, censure, suspension or bar from being associated with any member or member organization, or any other fitting sanction. [In any disciplinary proceeding, any sanction imposed may be remitted or reduced by the hearing panel on such terms and conditions as it shall deem fair and equitable. In a disciplinary proceeding involving a written consent to the imposition of a specified penalty, the hearing panel in imposing a penalty, may impose the penalty agreed to or any penalty which is less severe than the stipulated penalty as it deems appropriate or the hearing panel may reject such consent.] Sec. 6. Review. In a disciplinary proceeding not involving a written consent to the imposition of a specified penalty, any member, member organization, allied member, approved person, or registered or non-registered employee of a member or member organization, adjudged guilty of any charge, or the division [or department] of the Exchange which brought the charges, [or] *and* any member of the Board *,* [or] *any member of* the Board of Executives *representing the groups referenced in clauses
(ii)and
(iii)of Article V, Section 2(b), any member of the Board of Executives in such other categories as the Board, by rule, shall designate, and any member of the Regulation, Enforcement & Listing Standards Committee,* may, in accordance with procedures set forth in the rules of the Exchange, require a review by the Board, of any determination or penalty, or both [, imposed by the hearing panel]. Upon review, the Board, by the affirmative vote of a majority of the entire Board, may sustain any determination or penalty imposed, may modify or reverse any such determination, and may increase, decrease or eliminate any such penalty, or impose any penalty permitted under this Article as it deems appropriate. In a disciplinary proceeding involving a written consent to the imposition of a specified penalty, any member of the Board *,* or the Board of Executives *specified in or designated pursuant to the preceding paragraph, and any member of the Regulation, Enforcement & Listing Standards Committee* may require a review by the Board of any determination or penalty, or both[, imposed by the hearing panel. In any such proceeding, the division or department which entered into the written consent, may require a review by the Board of any penalty, including any determination related thereto, imposed by the hearing panel, which is less severe than the stipulated penalty]. The respondent or the division or department which entered into the written consent may require a review by the Board of any rejection of the written consent by the hearing panel. Any review provided in this paragraph shall be conducted in accordance with procedures set forth in the rules of the Exchange. Upon review, the Board, by the affirmative vote of a majority of the entire Board, may fix and impose the penalty agreed to in such written consent or any penalty which is less severe than the stipulated penalty, or remand the case for further proceedings. Notwithstanding any other provisions of this Section, the Chief Executive Officer
(a)may not require a review by the Board under this Section and
(b)shall be recused from deliberations and actions of the Board with respect to matters to be reviewed by the Board under this Section. 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 NYSE 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 NYSE 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 proposes to amend Article IX of the Exchange's Constitution and NYSE Rules 475 and 476 to modify certain aspects of the Exchange's disciplinary procedures and to provide a structure for a summary suspension hearing to prohibit or limit a person's access to services and a “call-up” procedure for review by members of the Board, certain members of the Board of Executives listed in NYSE Rule 476(f), any member of the Regulation, Enforcement and Listing Standards Committee and either the Division of the Exchange that initiated the proceedings or the respondent. Amendment to NYSE Rule 475 NYSE Rule 475 currently provides a process for the Exchange:
(i)To prohibit or limit a person with respect to access of services offered by the Exchange, or
(ii)to summarily suspend an Exchange member or member organization facing certain circumstances, such as financial or operating difficulties, or expulsion or suspension by another self-regulatory organization (“SRO”). NYSE Rule 475 permits the subject individual or organization to request and obtain a hearing. The proposed rule change would provide a structure for such a hearing and for a “call-up” procedure for review by members of the Board and certain members of the Board of Executives, any member of the Regulation, Enforcement and Listing Standards Committee and either the Division of the Exchange that initiated the proceedings or the respondent. Amendments to Constitution and NYSE Rule 476 Amendments to Constitution At the Exchange's annual members' meeting on April 7, 2005, the members voted to amend the Exchange's Constitution to modify certain aspects of the Exchange's disciplinary process. The Exchange had engaged former Federal judge Stanley Sporkin to review and make recommendations regarding the Exchange's disciplinary process. The amendments adopted at the member's meeting were proposed by the Exchange's Board, in part, in response to Judge Sporkin's recommendations. The amendments would: • Require that at least one member of any hearing panel be employed in a field of activity other than that in which the charged person is employed; • Remove the constitutional requirement that full panels handle stipulations and uncontested cases; • Permit individuals who are not employees of the Exchange to serve as hearing officers; • In conjunction with the proposed amendments to the Exchange's principal disciplinary rule, NYSE Rule 476, permit former members and allied members, and former registered and non-registered employees of members and member organizations to be appointed to the Hearing Board within five years of their retirement; • Remove the constitutional requirement that a hearing panel decide all matters except procedural and evidentiary matters; and • Relieve members of the Board of Executives (other than those representing the trading floor) from the responsibility for “calling up” disciplinary decisions for review, and extend that responsibility to all members of the Regulation, Enforcement and Listing Standards Committee. A collateral effect of the changes would be to reduce the overlap between the Constitutional text and NYSE Rule 476 by removing some of the detail that is currently in the Constitution. The Exchange believes that this would enable the Board to effect further refinements to the Exchange's disciplinary process without a vote of the membership, so long as those changes are consistent with the revised Constitutional text. Composition of Hearing Panels in Disciplinary Proceedings The Exchange's Constitution currently requires that disciplinary hearings be conducted before a hearing panel consisting of a hearing officer (an Exchange staff member) and two peer panelists. Charges against a member must be heard by a panel including two members; charges against member firm employees must be heard by a panel including other member firm employees; and cases involving activity on the Exchange floor must include at least one panelist engaged in floor activities. The Exchange believes that this “trial by peers” requirement raises a concern about bias and perception of bias. In cases involving charges against individuals on the trading floor, the perception of bias is potentially heightened because of the relatively small floor community. Although the Exchange has found no empirical evidence to indicate that bias exists in the Exchange's disciplinary proceedings, the Exchange believes that any perception of bias would be reduced if at least one member of a hearing panel were required to be employed in a field of activity other than that in which the charged person is employed. For example, in a case involving the trading floor, charges against a specialist or floor broker would be heard before a hearing panel consisting of no more than one individual employed on the trading floor. In effect, the available pool of panelists to hear a particular matter would be expanded, and any possible perceptions of bias in having a majority of the panel members in the same line of business as the respondent would be avoided. The amendments would, nevertheless, allow individuals with extensive knowledge of the securities industry, in general, and the particular business of the respondent to serve on hearing panels. Furthermore, the proposed rule change would permit hearing officers to handle stipulations and uncontested cases without the full hearing panel. Currently, all disciplinary hearings (including settled cases, in which a respondent consents to a penalty, and uncontested cases, in which a respondent does not file an answer to the charges) must be heard before a full hearing panel. Under the constitutional amendments, in conjunction with the proposed amendments to NYSE Rule 476, a hearing officer of the Exchange, acting alone, could consider such uncontested cases and settled cases and impose penalties, without a hearing, in order to expedite resolution of such matters. The hearing officer would convene a hearing panel and hold a hearing if either the Enforcement Division or the respondent requests a hearing before a full panel, or if the hearing officer on his or her own initiative calls for a hearing. Moreover, the hearing officer could not reject a stipulated penalty without convening a hearing panel. The Amendments to the Constitution, in Conjunction With the Proposed Amendments to NYSE Rule 476, Would Allow Non-NYSE Employees To Serve as Hearing Officers and Certain Recently Retired Individuals To Be Appointed to the Hearing Board The amendments to the Constitution would eliminate the requirement that Exchange hearing officers be employees or officers of the Exchange, thereby enabling the Exchange to retain outside professionals to serve as hearing officers if needed. For example, if the Exchange experienced a sudden increase in disciplinary cases, it could retain part-time hearing officers to manage the increased caseload. However, under the amendments to the Constitution and the proposed amendments to NYSE Rule 476, an individual who is, or was within the last three years, a member, allied member, or registered or non-registered employee of a member or member organization would not be eligible to serve as a hearing officer. The proposed rule change also would allow former members, allied members, and former registered and non-registered employees of members and member organizations to be appointed to the Hearing Board within five years of their retirement. 5 This would enlarge the pool of individuals with the requisite expertise to adjudicate cases. In addition, these individuals could more readily serve during normal business hours, potentially allowing cases to be resolved more expeditiously. However, a hearing panel could include only one retired person. 5 The proposed rule change would amend NYSE Rule 476 to state that members of its Board of Executives may not serve on the Hearing Board. The Exchange, however, has advised that it intends to submit an amendment to the proposed rule change to conform the text of NYSE Rule 476 regarding the composition of the Hearing Board with the language contained in Article IX, Section 3 of the Exchange's Constitution. In this regard, NYSE Rule 476 will be amended to state that Hearing Board members may not be members of the Exchange's Board or of its Board of Executives. Telephone conversation between Peggy Kuo, Chief Hearing Officer, NYSE and Cyndi N. Rodriguez, Special Counsel, Division, Commission on October 17, 2005. Hearing Officer Authority To Resolve Substantive Legal Motions The proposed rule change would permit hearing officers to resolve substantive legal motions, such as motions to dismiss and motions for summary judgment, by no longer requiring that a hearing panel resolve such motions. This authority could serve to expedite the hearing process by allowing the hearing officer to resolve motions that currently require action by the full panel. In addition, these motions often involve legal issues that the hearing officer, who historically has been an attorney, is best suited to resolve. “Call Up” Authority Reallocated At present, all members of the Board of Executives (as well as all Directors other than the Chief Executive Officer) have the right and the responsibility to “call up” disciplinary decisions for review. The Exchange believes that the Board of Executives' members who represent investors, listed companies, “upstairs” firms, and others do not ordinarily have the requisite experience to discharge this responsibility well. On the other hand, the Exchange believes that the Board of Executives' members representing the trading floor and members of the Regulation, Enforcement and Listing Standards Committee are well suited to discharge this responsibility. The amendments to the Constitution and NYSE Rule 476 would reallocate this responsibility accordingly, but would preserve the Board of Directors' right to charge other classes of members of the Board of Executives with this responsibility if warranted. Amendment to NYSE Rule 476 Composition of Hearing Panels in Disciplinary Proceedings The Exchange's Constitution and Rules currently require that disciplinary hearings be conducted before a Hearing Panel consisting of a Hearing Officer (an Exchange staff member) and two peer panelists. Charges against a member must be heard by a panel including two members; charges against member firm employees must be heard by a panel including other member firm employees; and cases involving activity on the Exchange floor must include at least one panelist engaged in floor activities. The Exchange believes that the requirement of “trial by peers” raises a concern about bias and perception of bias, particularly with respect to charges against individuals on the trading floor, given the relatively small floor community. The proposed rule changes would reverse these requirements, in effect, requiring that at least one panelist in every case be employed in an area of responsibility other than that of the person facing charges. With respect to cases involving the trading floor, the intent of the proposal is such that charges against a specialist or floor broker would be heard before a panel consisting of no more than one individual employed on the trading floor. By doing so, the available pool of panelists to hear a particular matter would be expanded, and the perception of bias in having a majority of the panel members in the same line of business as the respondent would be avoided. The proposals would, nevertheless, allow individuals with extensive knowledge of the securities industry in general, and the particular business of the respondent, to serve on Hearing Panels. Furthermore, at present, all disciplinary hearings (including settled cases, in which a respondent consents to a penalty, and uncontested cases, in which a respondent does not file an answer to the charges) must be heard before a Hearing Panel. The proposal would confer authority on an Exchange Hearing Officer alone to consider consents and uncontested cases, without a hearing, in order to expedite resolution of such matters. The Hearing Officer would convene a panel and hold a hearing if either Enforcement or the respondent requests a hearing before a full panel, or if the Hearing Officer, on his or her own initiative, calls for a hearing. Moreover, the Hearing Officer could not reject a stipulated penalty without convening a Hearing Panel. Conferring Jurisdiction on the Hearing Board Upon Filing of the Charge Memorandum Under current procedures, the hearing in a disciplinary matter is scheduled only upon request of the Division of Enforcement, after a respondent's answer is received or the time to file an answer has expired. The Hearing Board has no jurisdiction to resolve any issues that arise until the Division of Enforcement requests a hearing, and a respondent has no avenue of recourse if the respondent believes there has been an unreasonable or prejudicial delay. The proposed rule changes would require the filing of charges with the Hearing Board at the time they are served on the respondent. The Hearing Board would assume jurisdiction of the matter at that juncture and be able to schedule expeditiously hearings, as well as rule on pre-hearing motions. Hearing Officer Authority To Order Pre-Hearing Discovery and Resolve Substantive Legal Motions Today, a Hearing Officer has clear authority to order pre-hearing discovery of documents from the Division of Enforcement. The proposed rule change would clarify the Hearing Officer's authority to order discovery from the respondent as well. In addition, the proposal would permit the Hearing Officer to resolve substantive legal motions, such as motions to dismiss and motions for summary judgment. Hearing Officer Authority To Penalize Contemptuous Participants A Hearing Officer must necessarily have the authority to control the proceedings, including dealing with obstreperous and disruptive participants. The proposal would make this authority clear, and permit the Hearing Officer to impose fines on a party for inappropriate behavior of either the party or the party's representative. This authority would not be limited to dealing with such behavior during a hearing, but would allow for sanctions to be imposed at any time during the course of proceedings. The Hearing Officer could also, in extreme situations, exclude any such persons from further participation in the proceeding. Allowing Non-NYSE Employees To Serve as Hearing Officers, and Allowing Certain Recently Retired Individuals To Be Appointed to the Hearing Board The proposed rule changes would eliminate the requirement that Exchange Hearing Officers be employees or officers of the Exchange, thereby enabling the Exchange to retain outside consultants to serve as Hearing Officers, if and when needed. The proposals also would allow recently retired members, allied members, registered and non-registered employees of members and member organizations to be appointed to the Hearing Board within five years of their retirement. “Call Up” Authority Reallocated At present, all members of the Board of Executives (as well as all Directors other than the Chief Executive Officer) have the right to “call up” disciplinary decisions for review. This authority would be reallocated to members of the Board, Board of Executives' members representing the trading floor, and members of the Regulation, Enforcement and Listing Standards Committee. 2. Statutory Basis The Exchange believes that the proposed rule change, as amended, is consistent with Section 6(b)(5) 6 of the Act in that it promotes just and equitable principles of trade by ensuring that members and member organizations and the public have a fair and impartial forum for the resolution of their disputes. 6 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, as amended, 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, as amended. 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: • By order approve such proposed rule change; or • 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-2005-37 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-2005-37. 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 Section, 100 F Street, NE., Washington, DC 20549. Copies of such filing also will be available for inspection and copying at the principal office of the NYSE and on the NYSE's Web site, *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-2005-37 and should be submitted on or before November 16, 2005. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 7 7 17 CFR 200.30-3(a)(12). Jonathan G. Katz, Secretary. [FR Doc. E5-5923 Filed 10-25-05; 8:45 am] BILLING CODE 8010-01-P DEPARTMENT OF STATE [Public Notice 5209] Bureau of Economic and Business Affairs; List of September 20, 2005, of Participating Countries and Entities (Hereinafter Known as “Participants”) Under the Clean Diamond Trade Act of 2003 (Pub. L. 108-19) and Section 2 of Executive Order 13312 of July 29, 2003 AGENCY: Department of State. ACTION: Notice. SUMMARY: In accordance with Sections 3 and 6 of the Clean Diamond Trade Act of 2003 (Public Law 108-19) and Section 2 of Executive Order 13312 of July 29, 2003, the Department of State is identifying all the Participants eligible for trade in rough diamonds under the Act, and their respective Importing and Exporting Authorities, and revising the previously published list of August 22, 2005 (70 FR 49006-49007) FOR FURTHER INFORMATION CONTACT: Sue Saarnio, Special Advisor for Conflict Diamonds, Bureau of Economic and Business Affairs, Department of State
(202)647-1713. SUPPLEMENTARY INFORMATION: Section 4 of the Clean Diamond Trade Act (the “Act”) requires the President to prohibit the importation into, or the exportation from, the United States of any rough diamond, from whatever source, that has not been controlled through the Kimberley Process Certification Scheme (KPCS). Under Section 3(2) of the Act, “controlled through the Kimberley Process Certification Scheme” means an importation from the territory of a Participant or exportation to the territory of a Participant of rough diamonds that is either
(i)carried out in accordance with the KPCS, as set forth in regulations promulgated by the President, or
(ii)controlled under a system determined by the President to meet substantially the standards, practices, and procedures of the KPCS. The referenced regulations are contained at 31 CFR Part 592 (“Rough Diamonds Control Regulations”) (69 FR 56936, September 23, 2004). Section 6(b) of the Act requires the President to publish in the **Federal Register** a list of all Participants, and all Importing and Exporting Authorities of Participants, and to update the list as necessary. Section 2 of Executive Order 13312 of July 29, 2003 delegates this function to the Secretary of State. Section 3(7) of the Act defines “Participant” as a state, customs territory, or regional economic integration organization identified by the Secretary of State. Section 3(3) of the Act defines “Exporting Authority” as one or more entities designated by a Participant from whose territory a shipment of rough diamonds is being exported as having the authority to validate a Kimberley Process Certificate. Section 3(4) of the Act defines “Importing Authority” as one or more entities designated by a Participant into whose territory a shipment of rough diamonds is imported as having the authority to enforce the laws and regulations of the Participant regarding imports, including the verification of the Kimberley Process Certificate accompanying the shipment. List of Participants Pursuant to Section 3 of the Clean Diamond Trade Act (the Act), Section 2 of Executive Order 13312 of July 29, 2003, and Delegation of Authority No. 245 (April 23, 2001), I hereby identify the following entities as of September 20, 2005, as Participants under section 6(b) of the Act. Included in this List are the Importing and Exporting Authorities for Participants, as required by Section 6(b) of the Act. This list revises the previously published list of August 15, 2005 (70 FR 49006-49007, August 22, 2005). Angola—Ministry of Geology and Mines. Armenia—Ministry of Trade and Economic Development. Australia—Exporting Authority—Department of Industry, Tourism and Resources; Importing Authority—Australian Customs Service. Belarus—Department of Finance. Botswana—Ministry of Minerals, Energy and Water Resources. Brazil—Ministry of Mines and Energy. Bulgaria—Ministry of Finance. Canada—Natural Resources Canada. Central African Republic—Ministry of Energy and Mining. China—General Administration of Quality Supervision, Inspection and Quarantine. Democratic Republic of the Congo—Ministry of Mines and Hydrocarbons. Croatia—Ministry of Economy. European Community—DG/External Relations/A.2. Ghana—Precious Minerals and Marketing Company Ltd. Guinea—Ministry of Mines and Geology. Guyana—Geology and Mines Commission. India—The Gem and Jewellery Export Promotion Council. Indonesia—Directorate General of Foreign Trade of the Ministry of Trade. Israel—The Diamond Controller. Ivory Coast—Ministry of Mines and Energy. Japan—Ministry of Economy, Trade and Industry. Republic of Korea—Ministry of Commerce, Industry and Energy. Laos—Ministry of Finance. Lebanon—Ministry of Economy and Trade. Lesotho—Commissioner of Mines and Geology. Malaysia—Ministry of International Trade and Industry. Mauritius—Ministry of Commerce. Namibia—Ministry of Mines and Energy. Norway—The Norwegian Goldsmiths' Association. Romania—National Authority for Consumer Protection. Russia—Gokhran, Ministry of Finance. Sierra Leone—Government Gold and Diamond Office. Singapore—Singapore Customs. South Africa—South African Diamond Board. Sri Lanka—National Gem and Jewellery Authority. Switzerland—State Secretariat for Economic Affairs. Taiwan—Bureau of Foreign Trade. Tanzania—Commissioner for Minerals. Thailand—Ministry of Commerce. Togo—Ministry of Mines and Geology. Ukraine—State Gemological Centre of Ukraine. United Arab Emirates—Dubai Metals and Commodities Center. United States of America—Importing Authority—United States Bureau of Customs and Border Protection; Exporting Authority—Bureau of the Census. Venezuela—Ministry of Energy and Mines. Vietnam—Ministry of Trade. Zimbabwe—Ministry of Mines and Mining Development. Robert B. Zoellick, Deputy Secretary of State, Department of State. [FR Doc. 05-21377 Filed 10-25-05; 8:45 am]
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U.S. Code
- Registration, responsibilities, and oversight of self-regulatory organizations§ 78s
- National securities exchanges§ 78f
- Definitions and application§ 78c
- Transaction fees§ 78ee
- Public information; agency rules, opinions, orders, records, and proceedings§ 552
- Registration with the Board§ 7212
- Inspections of registered public accounting firms§ 7214
- Registered securities associations§ 78o–3
CFR
statutes-at-large
register
8 references not yet in our index
- 17 CFR 240.19
- 10 CFR 200.30-3(a)(12)
- 15 USC 78
- 135 F.3d 266
- 525 U.S. 811
- Pub. L. 107-204
- Pub. L. 108-19
- 31 CFR 592
Citation graph
cites case law
Notices
Notice of application for an order pursuant to Section 26(c) of the Investment Company Act of 1940 (the “1940 Act” or “Act”) approving certain substitutions of securities and for an order of exemption pursuant to Section 17(b) of the Act from Section 17(a) of the Act
F. App'x135 F.3d 266
SCOTUS525 U.S. 811
Cite17 CFR 240.19
Cites 21 · showing 12Cited by 0 across 0 sources