Notices. SECURITIES AND EXCHANGE COMMISSION
12,790 words·~58 min read·
/register/2005/12/20/05-24251·A research copy — for the controlling text, always check the official state or federal source. Not legal advice.
BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-52950; File No. SR-CBOE-2004-53] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Approving a Proposed Rule Change and Partial Amendment No. 1 Relating to Margin Requirements for Complex Options Spreads December 14, 2005. I. Introduction On July 30, 2004, the Chicago Board Options Exchange, Incorporated (“CBOE” or the “Exchange”) filed with the Securities and Exchange Commission (“Commission”) a proposed rule change related to margin requirements for complex options spreads under Section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”) 1 and Rule 19b-4. 2 On August 23, 2005, the Exchange filed a partial amendment to its proposed rule change. 3 The proposed rule change, as amended, was published in the **Federal Register** on November 14, 2005. 4 The Commission received no comments on the proposal. 1 15 U.S.C. 78s(b)(1). 2 17 CFR240.19b-4. 3 SR-CBOE-2004-53:
Amendment No. 1. CBOE, in coordination with the New York Stock Exchange, Inc. (“NYSE”), filed the partial amendment to conform the complex spreads strategies to which its rule amendments apply to those of the NYSE. 4 *See* Securities Exchange Act Release No. 52739 (Nov. 4, 2005); 70 FR 69173 (Nov. 14, 2005). II. Description The CBOE has proposed to incorporate the provisions of a Regulatory Circular (RG03-066— *Margin Requirements for Certain Complex Spreads,* dated August 13, 2003) (the “Circular”) into the Exchange's margin rules (Chapter 12).
The Circular presents an interpretation of current margin requirements that allows the Exchange to derive, and put into effect, margin requirements for certain complex option spreads. The Commission approved the Circular on a one-year pilot basis. 5 The Commission granted two extensions of the pilot period. 6 5 *See* Securities Exchange Act Release No. 48306 (Aug. 8, 2003), 68 FR 48974 (Aug. 15, 2003) (approving SR-CBOE-2003-24). 6 *See* Securities Exchange Act Release No. 50164 (Aug. 6, 2004), 69 FR 50405 (Aug. 16, 2004) and Securities Exchange Act Release No. 51407 (Mar. 22, 2005), 70 FR 15669 (Mar. 28, 2005).
The Exchange has proposed to add definitions of a “long condor spread,” “short iron butterfly spread” and “short iron condor spread” to Rule 12.3(a). These definitions cover six of the seven strategies identified in the Circular. Each definition covers two strategies identified in the Circular because each definition provides for a base strategy, in which all options expire at the same time, and a calendar spread strategy, in which a long option may expire after the other options expire concurrently.
The Exchange has proposed a revision to its current definition of a butterfly spread to provide for the remaining strategy, a calendar spread version of the long butterfly spread. These revisions consist of
(1)splitting the current butterfly spread definition into two definitions, one for the long butterfly spread and one for the short butterfly spread,
(2)fashioning the two definitions so that they are consistent with the style and format of the new definitions referred to in the prior paragraph, and
(3)providing for a calendar spread version in the long butterfly spread definition. In the Circular, call options were utilized to construct three of the seven strategy examples. Each of these three strategies has a parallel application with put options. For brevity, the put option versions were not specifically identified in the Circular, but the Circular was intended to apply to the put option counterpart of each of the strategies demonstrated with call options. Both the put and call option versions are provided for in the newly proposed rule definitions. The remaining four complex spread strategies originally identified in the Circular involved both call options and put options (that is, “iron” strategies). Each of these four strategies has a reciprocal configuration (that is, the call options can precede the put options in ascending sequence of exercise prices). However, there is no need to address the reciprocal variations because there is no benefit from a margin requirement standpoint of including them in the iron strategy definitions. According to the Exchange, each of the complex spreads identified in the proposed rule can be derived by combining and netting two or more option spreads (that is, the butterfly spread, the box spread and the time spread) that already are identified in the margin rules and ascribed a margin requirement. Furthermore, the sum of the margin required on the basic option spreads that can be combined and netted to form a complex spread covers the maximum risk of the complex spread and, as in the Circular, is the margin requirement specified in the proposed rules. Each of the subject complex spread strategies has a known and limited risk when configured as specified in the proposed definitions. The Exchange has proposed to revise current Rule 12.3(c)(5)(C)(6) to provide a margin requirement for each of the long condor spread, short iron butterfly spread and short iron condor spread. The Exchange noted that the proposed rule prohibits European style options in the case of the calendar version of a complex spread and requires that the interval between each option series be equal in the case of all complex spread strategies. Unlike the Circular, the proposed rules would not limit complex spreads to a margin account. The Exchange also has proposed a revision to Rule 12.3(e)— *Customer Cash Account—Spreads,* that adds the long condor spread, short iron butterfly spread and short iron condor spread as strategies permitted to be established and carried in a cash account, provided they are composed of cash-settled, European style options that all expire at the same time. The Exchange noted that it has received no negative comments concerning the Circular since it was issued. Moreover, the Exchange is not aware of any negative consequences as a result of applying the margin requirements permitted by the Circular. III. Discussion and Commission Findings After careful review, the Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange. 7 In particular, the Commission believes that the proposed rule change is consistent with Section 6(b)(5) of the Act, 8 which requires that the rules of the exchange be designed, among other things, to remove impediments to and perfect the mechanisms of a free and open market, and, in general, to protect investors and the public interest. The Commission finds that amending the rules to permit complex option spread strategies that are the net result of combining two or more spread strategies that are currently recognized in the Exchange's margin rules is consistent with the requirements of Section 6(b)(5) because the amendments will allow the Exchange to set levels of margin that more precisely represent the actual net risk of the option positions in the account and enable customers to implement these strategies more efficiently. 7 In approving this proposal rule change, the Commission notes that it has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 8 15 U.S.C. 78f(b)(5). IV. Conclusion *It is therefore ordered,* pursuant to Section 19(b)(2) of the Act, 9 that the proposed rule change (File No. SR-CBOE-2004-53), as amended, be, and it hereby is, approved. 9 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 10 10 17 CFR 200.30-3(a)(12). Jonathan G. Katz, Secretary. [FR Doc. E5-7522 Filed 12-19-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-52949; File No. SR-CBOE-2005-104] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change to Amend its Rules Governing the Hours of Trading in Equity Options and Narrow-Based Index Options December 13, 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 December 6, 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. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The CBOE proposes to amend its rules governing the hours of trading in equity options and narrow-based index options. The Exchange proposes that these changes become effective February 1, 2006. The text of the proposed rule change is available on the CBOE's Web site ( *http://www.cboe.com* ), at the CBOE's Office of the Secretary, and at the Commission's Public Reference Room. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of this rule change is to amend the CBOE's rules governing the hours of trading in equity options and narrow-based index options. Specifically, the CBOE proposes to amend its rules to change the close of the normal trading hours in equity options and in narrow-based index options from 3:02 p.m. (Chicago time) to 3 p.m. (Chicago time). After the change, the time of the close of trading in these CBOE options will correspond to the normal time set for the close of trading on the primary exchanges listing the stocks underlying the CBOE options. The primary exchanges generally close at 3 p.m. (Chicago time). According to the Exchange, in 1997, the CBOE decided to change its closing time for equity options and narrow-based index options from 3:10 p.m. to 3:02 p.m. At the time, the CBOE determined that there were reasons to continue trading options for a limited period of time after the close of trading of the primary markets for the underlying securities. Specifically, the Exchange believed that the extended period allowed for options traders to respond to late reports of closing prices over the consolidated tape. If the price of a late reported trade on an underlying security was substantially different from the previous reported price, the extended trading session gave options traders the opportunity to bring options quotes in line with the closing price of the underlying security. However, because of improvements in the processing and reporting of transactions, the CBOE believes that there are no longer significant delays in the reporting of closing prices; and therefore, a two minute session is no longer needed to trade options after the underlying securities close trading. Additionally, the Exchange believes that pricing aberrations can occur if an option is traded when the underlying stock is no longer trading, since there is a close relationship in the price of the underlying stock and the overlying option. As a result, the CBOE believes that it is difficult for the market to price options accurately when the underlying security is not trading. As noted above, the Exchange also proposes to change the closing time for narrow-based indexes under CBOE Rule 24.6 because these indexes are subject to the same pricing problems as options on individual stocks. According to the CBOE, a significant news announcement on one component of a narrow-based index could have a significant effect on that index. However, the Exchange is not at this time proposing to change the closing time of 3:15 p.m. for broad-based index options because it does not believe that a significant news announcement by the issuer of one component stock of a broad-based index is likely to have a significant effect on the price of that broad-based index. Accordingly, the CBOE proposes to amend its rules, including CBOE Rules 6.1, 6.2, 12.3, 24.6, and 24.16, in which references are made to a 3:02 p.m. closing time for equity options and narrow-based index options. The Exchange notes that if it were to unilaterally modify its closing time, the existence of dissimilar closing times applicable to the different options exchanges would likely lead to confusion for options investors and broker-dealers. Accordingly, in September 2005, the Exchange requestedfrom the Commission's Division of Market Regulation express authorization to jointly discuss this operational issue with the other options exchanges who are participants in the Options Price Reporting Authority, 3 and received such authorization. 4 The CBOE believes that all of the options exchanges will make similar changes to their rules to revise the closing time in equity options and narrow-based index options from 3:02 p.m. (Chicago time) to 3 p.m. (Chicago time). According to the CBOE, the options exchanges collectively have determined that they would implement this new closing time on February 1, 2006. 3 *See* letter from Joanne Moffic-Silver, Executive Vice President, General Counsel & Corporate Secretary, CBOE, to Robert L.D. Colby, Deputy Director, Division of Market Regulation (“Division”), Commission, dated September 16, 2005. 4 *See* letter from Robert L.D. Colby, Deputy Director, Division, Commission, to Joanne Moffic-Silver, Executive Vice President, General Counsel and Secretary, CBOE, dated September 16, 2005. 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with the Section 6(b) of the Act 5 in general, and furthers the objectives of Section 6(b)(5) of the Act 6 in particular because it is 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. 5 15 U.S.C. 78f(b). 6 15 U.S.C. 78f(b)(5). B. Self-Regulatory Organization's Statement on Burden on Competition The CBOE 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. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 35 days of the date of publication of this notice in the **Federal Register** or within such longer period
(i)as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii)as to which the Exchange consents, the Commission will:
(A)By order approve 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 at ( *http://www.sec.gov/rules/sro.shtml* ); or • Send an e-mail to *rule-comments@sec.gov* . Please include File Number SR-CBOE-2005-104 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-2005-104. 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. 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-2005-104 and should be submitted on or before January 10, 2006. 7 17 CFR 200.30-3(a)(12). For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 7 Jonathan G. Katz, Secretary. [FR Doc. E5-7549 Filed 12-19-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-52948; File No. SR-MSRB-2005-11] Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto Relating to Definition of Solicitation Under MSRB Rules G-37 and G-38 December 13, 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 10, 2005, the Municipal Securities Rulemaking Board (“MSRB” or “Board”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the MSRB. On December 7, 2005, the MSRB filed Amendment No. 1 to the proposed rule change. 3 The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 Amendment No. 1 clarifies that the central element in determining whether a communication is a solicitation is whether the communication occurs with the purpose of obtaining or retaining municipal securities business, and makes certain other changes. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The MSRB has filed with the Commission a proposal consisting of an interpretive notice relating to the definition of solicitation for purposes of Rules G-37 and G-38. The text of the proposed rule change, as amended, is available on the MSRB's Web site ( *http://www.msrb.org* ), at the MSRB's principal office, and at the Commission's Public Reference Room. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the MSRB 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 MSRB 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 MSRB has recently amended Rule G-38, on solicitation of municipal securities business, to prohibit brokers, dealers and municipal securities dealers (“dealers”) from making direct or indirect payments to any persons who are not affiliated persons 4 of the dealers for solicitations of municipal securities business 5 on behalf of the dealers. The proposed rule change provides interpretive guidance on the definition of “solicitation” as used in Rule G-38 and in Rule G-37, on political contributions and prohibitions of municipal securities business. This definition is important for purposes of determining whether dealer payments to non-affiliated persons of the dealer would be prohibited under Rule G-38. In addition, the definition is central to determining whether communications by dealer personnel would result in such personnel being considered municipal finance professionals of the dealer for purposes of Rule G-37. 4 Rule G-38(b)(ii) generally defines an affiliated person of a dealer as an employee or other personnel of the dealer or of an affiliated company of the dealer. 5 Municipal securities business is defined in Rule G-37 as the purchase of a primary offering from the issuer on other than a competitive bid basis ( *e.g.* , negotiated underwriting), the offer or sale of a primary offering on behalf of an issuer ( *e.g.* , private placement or offering of municipal fund securities), and the provision of financial advisory, consultant or remarketing agent services to an issuer for a primary offering in which the dealer was chosen on other than a competitive bid basis. The proposed rule change makes clear that the central element in determining whether a communication is a solicitation is whether the communication occurs with the purpose of obtaining or retaining municipal securities business. As a general proposition, the proposed rule change provides that a communication made under circumstances reasonably calculated to obtain or retain municipal securities business could be considered a solicitation unless the circumstances indicate otherwise. The proposed rule change provides numerous examples of circumstances where a communication may or may not be considered a solicitation, including guidance on communications with issuer representatives, promotional communications, work-related communications, communications with conduit borrowers, and communications by non-affiliated professionals. 2. Statutory Basis The MSRB believes that the proposed rule change, as amended, is consistent with section 15B(b)(2)(C) of the Act, 6 which provides that the MSRB's rules shall: 6 15 U.S.C. 78o-4(b)(2)(C). 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 regulating, clearing, settling, processing information with respect to, and facilitating transactions in municipal securities, to remove impediments to and perfect the mechanism of a free and open market in municipal securities, and, in general, to protect investors and the public interest. The MSRB believes that the proposed rule change, as amended, is consistent with the Act because it will further investor protection and the public interest by ensuring that dealers understand their obligations under MSRB rules designed to maintain standards of fair practice and professionalism, thereby helping to maintain public trust and confidence in the integrity of the municipal securities market. B. Self-Regulatory Organization's Statement on Burden on Competition The MSRB does not believe that the proposed rule change, as amended, will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act since it would apply equally to all dealers. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The MSRB published notices for comment on draft amendments to Rule G-38 on April 5, 2004 (the “April 2004 Notice”) 7 and September 29, 2004 (the “September 2004 Notice”). 8 The April 2004 Notice sought comments on draft amendments limiting payments by a dealer for the solicitation of municipal securities business on its behalf solely to its associated persons, and also provided certain guidance on the definition of solicitation. The MSRB received comments from 28 commentators, eight of which provided comments on the definition of solicitation. 9 The September 2004 Notice sought comments on revised draft amendments to Rule G-38 prohibiting a dealer from making payments for the solicitation of municipal securities business on its behalf to any person who is not an associated person of the dealer. The September 2004 Notice also provided more detailed guidance on the definition of solicitation. The MSRB received comments from 19 commentators, five of which provided comments on the definition of solicitation. 10 The comments received on the April and September 2004 Notices relating to the definition of solicitation are discussed below. 11 7 *See* MSRB Notice 2004-11 (April 5, 2004). 8 *See* MSRB Notice 2004-32 (September 29, 2004), as modified by MSRB Notice 2004-33 (October 12, 2004). 9 Letters commenting on the definition of solicitation consisted of letters from Jerry L. Chapman (“Mr. Chapman”), to Ernesto A. Lanza, Senior Associate General Counsel, MSRB, dated April 22, 2004; Maud Daudon, Managing Director, Investment Banking, and John Rose, President & CEO, Seattle-Northwest Securities Corporation (“Seattle-Northwest”) to Christopher A. Taylor, MSRB Executive Director, dated May 19, 2004; Gordon Reis III, Managing Principal, Seasongood & Mayer, LLC (“Seasongood”) to Mr. Taylor, dated May 20, 2004; Bruce Moland, Vice President & Assistant General Counsel, Wells Fargo & Company (“Wells Fargo”), to Mr. Lanza dated June 2, 2004; Sarah A. Miller, General Counsel, ABA Securities Association (“ABASA”), to Mr. Lanza dated June 4, 2004; Lynette Kelly Hotchkiss, Senior Vice President and Associate General Counsel, Bond Market Association (“BMA”), to Mr. Lanza dated June 4, 2004; Robyn A. Huffman, Vice President and Associate General Counsel, Goldman Sachs & Co. (“Goldman”), to Mr. Lanza dated June 4, 2004; and James S. Keller, Chief Regulatory Counsel, PNC Capital Markets, Inc. (“PNC”), to Mr. Lanza dated June 4, 2004. 10 Letters commenting on the definition of solicitation consisted of letters from Ms. Daudon and Mr. Rose, Seattle-Northwest, to Mr. Lanza dated December 13, 2004; Mr. Moland, Wells Fargo, to Mr. Lanza dated December 15, 2004; Ms. Hotchkiss, BMA, to Mr. Lanza dated December 15, 2004; Ms. Huffman, Goldman, to Mr. Lanza dated December 15, 2004; and Ms. Miller, ABASA, to Mr. Lanza dated December 17, 2004. 11 The remaining comments received on the April and September 2004 Notices were discussed in SR-MSRB-2005-04. *See* Exchange Act Release No. 51561, 70 FR 20782 (April 21, 2005). Communications With Conduit Borrowers In the April 2004 Notice, the MSRB asked whether a communication with a conduit borrower to hire a dealer as an underwriter for a private activity bond issue where the issuer ultimately must approve the underwriter for the issue should be considered an indirect communication with the issuer. In the September 2004 Notice, the MSRB stated that, from a literal perspective, any communication by a dealer with a conduit borrower intended to cause the borrower to select the dealer to serve as underwriter for a conduit issue could be considered a solicitation of municipal securities business. This is because the conduit borrower eventually communicates its selection of the dealer to the conduit issuer for approval, with the result that this series of communications becomes an indirect communication by the dealer through the conduit borrower to the conduit issuer with the intent of obtaining municipal securities business. However, if the dealer can establish that no reasonable nexus could exist between the making of contributions to officials of the conduit issuer and the selection of the underwriter for such conduit financing, then a communication with the borrower would be deemed not to be a solicitation for purposes of Rule G-38. For example, if a conduit issuer historically defers to its conduit borrowers' selections of underwriters without influencing the selection, communications with the conduit borrower to obtain the underwriting assignment would not be treated as a solicitation, even if that communication is relayed by the conduit borrower to the conduit issuer. *Comments Received.* Several commentators stated that communications with conduit borrowers should not be considered solicitations, or that the circumstances under which they are so considered should be narrowly drawn. ABASA, BMA, PNC and Wells Fargo stated that communications with conduit borrowers generally should not be considered solicitations, whereas Mr. Chapman stated that communications should be treated as solicitations. The ABA noted that, in conduit financings, typically a complete package (including the underwriter) is presented to the selected conduit issuer, with the issuer either accepting or rejecting the package. BMA stated that in a conduit deal, if an employee is only communicating with a private obligor and not with the issuer, then there is no possibility that a contribution made by that employee to an official of such issuer would influence the underwriter selection process. ABASA and Wells Fargo asked, in the alternative, that the MSRB provide more specific guidance on what would cause a communication to be a solicitation. ABASA and BMA characterized the MSRB's guidance in the September 2004 Notice as creating a presumption that a communication with a conduit borrower is a solicitation which can be rebutted only under narrowly drawn circumstances. They also observed that many communications with conduit borrowers occur before the identity of the issuer has been determined. As a result, they suggested that a dealer often cannot know if a communication with a conduit borrower might later be considered a solicitation since the dealer does not know if the issuer ultimately used will meet the requirements for rebutting the presumption that a communication with the borrower is a solicitation. *MSRB Response* . The MSRB believes that ABASA and BMA incorrectly implied that the only way for a dealer to rebut the presumption that a communication with a conduit borrower is a solicitation is by establishing that a conduit issuer historically defers to its conduit borrowers' selections of underwriters. The September 2004 Notice provided that a communication would not be considered a solicitation if there is no reasonable nexus between the making of contributions to officials of a conduit issuer and the selection of the underwriter for a conduit financing. The method mentioned by ABASA and BMA was simply one example of how a dealer could establish that there was no such reasonable nexus. Nonetheless, the MSRB agrees that a dealer's communication with a conduit borrower generally should not be deemed an indirect solicitation of the issuer unless a reasonable nexus can be established between the making of contributions to officials of the conduit issuer within the meaning of Rule G-37 and the selection of the underwriter for such conduit financing. A determination of whether such a reasonable nexus could exist depends on the specific facts and circumstances. The proposed rule change reflects this position. Inform and Refer In the April 2004 Notice, the MSRB noted that, where an issuer representative asks an associated person of a dealer whether the dealer has municipal securities capabilities, a limited affirmative response by the associated person, together with the provision to the issuer representative of contact information for dealer personnel who handle municipal securities business, generally would not be presumed to be a solicitation by such associated person. In the September 2004 Notice, the MSRB provided further elaboration and additional examples, noting in particular that the associated person could have an MFP of the dealer contact the issuer representative directly in response to such an inquiry. In both notices, the MSRB stated that, if the associated person receives compensation such as a finder's or referral fee for such business, the associated person generally would be viewed as having solicited the business. *Comments Received.* In response to the April 2004 Notice, ABASA stated that, in a bank holding company, bankers should be free to inform issuers that affiliated dealers have municipal securities capabilities and provide contact information without such communication being deemed a solicitation. PNC stated that the draft amendment would “negatively impact the ability of affiliated companies to conduct banking business and make referrals. It would require dealers to disassemble the structures and controls that have been created to address requirements of the rule.” ABASA appreciated the clarification of the “inform and refer” concept provided in the September 2004 Notice. However, ABASA continued to object that the MSRB viewed the receipt of a finder's fee or referral fee as causing a communication to be considered a solicitation. ABASA stated that this would significantly add to the regulatory burden of bank dealers and, at a minimum, the MSRB should exempt any referral fees permitted under the Gramm-Leach-Bliley Act. PNC stated that dealer personnel should be permitted to approach issuer representatives to inform them of the dealer's municipal securities capabilities without such communication being considered a solicitation, but Mr. Chapman disagreed. *MSRB Response.* The MSRB believes that the guidance provided in the September 2004 Notice on this topic is appropriate and has not made any further changes. Technical Experts *Comments Received.* BMA, Goldman and Seattle-Northwest requested that the MSRB explicitly exempt communications by attorneys, accountants, engineers and legislative lobbyists with issuers from the definition of solicitation. They noted that such technical experts were exempted from former Rule G-38 relating to consultants 12 and argued that such exclusion should be continued in revised Rule G-38. BMA argued that “the MSRB's broad interpretation of the meaning of solicitation means that broker-dealers would be prohibited from hiring outside persons to perform necessary services given that they would have to, as a practical matter, attend * * * meetings with issuers and will ultimately make the broker-dealer more appealing to the issuer by doing a good job.” PNC stated that including conversations through or with secondary participants of an issue would not serve to enhance the goal of the rule. Seasongood stated that all contact by or through third parties should be considered a solicitation. 12 Attorneys, accountants and engineers were excluded from the definition of consultant under former Rule G-38 only so long as their sole basis of compensation from the dealer was the actual provision of legal, accounting or engineering services on the municipal securities business that the dealer is seeking. As BMA noted, the rule did not exempt legislative lobbying; rather, the MSRB had noted in a Question and Answer guidance that the activity of lobbying legislators for legislation granting an issuer authority to issue certain types of municipal securities would not, by itself, result in the lobbyist being considered a consultant. *See* Rule G-38 Question & Answer #5, dated February 28, 1996, published in *MSRB Rule Book.* *MSRB Response.* The proposed rule change makes clear that, so long as non-affiliated persons providing legal, accounting, engineering or other professional services 13 are not being paid directly or indirectly for their solicitation activities, 14 they would not become subject to Rule G-38. The MSRB believes that this language adequately addresses the concerns raised by the commentators. 13 The proposed rule change does not enumerate all professional services that may be provided in connection with municipal securities business but makes clear that such services are not strictly limited to legal, accounting and engineering services ( *e.g.* , another dealer serving as a syndicate member). 14 The proposed rule change reminds dealers that the term “payment” under MSRB rules is broadly defined and can include, depending on the facts and circumstances, *quid pro quo* arrangements whereby a non-affiliated person solicits municipal securities business for the dealer in exchange for being hired by the dealer to provide other unrelated services. 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-MSRB-2005-11 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-MSRB-2005-11. 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 MSRB's offices. 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-MSRB-2005-11 and should be submitted on or before January 10, 2006. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 15 15 17 CFR 200.30-3(a)(12). Jonathan G. Katz, Secretary. [FR Doc. E5-7523 Filed 12-19-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-52947; File No. SR-NASD-2005-132] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to a Session Fee Increase for the Regulatory Element of the Continuing Education Requirements of NASD Rule 1120 December 13, 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 November 22, 2005, the National Association of Securities Dealers, Inc. (“NASD”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the NASD. NASD has designated this proposal as one establishing or changing a due, fee, or other charge imposed by the NASD under Section 19(b)(3)(A)(ii) of the Act, 3 and Rule 19b-4(f)(2) thereunder, 4 which renders the proposal effective upon filing with the Commission. 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. 3 15 U.S.C. 78s(b)(3)(A)(ii). 4 17 CFR 240.19b-4(f)(2). I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change NASD is proposing to amend Section 4 of Schedule A to the NASD By-Laws to increase the session fee for the Regulatory Element of the continuing education requirements of NASD Rule 1120. Below is the text of the proposed rule change. Proposed new language is in *italics* ; proposed deletions are in [brackets]. SCHEDULE A TO NASD BY-LAWS Section 4—Fees
(a)through
(e)No change.
(f)There shall be a session fee of [$60.00] *$75.00* assessed as to each individual who is required to complete the Regulatory Element of the Continuing Education Requirements pursuant to Rule 1120. 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 The Regulatory Element, a computer-based education program administered by NASD to help ensure that registered persons are kept up-to-date on regulatory, compliance, and sales practice matters in the industry, is a component of the Securities Industry Continuing Education Program (“Program”) under NASD Rule 1120. The Securities Industry/Regulatory Council on Continuing Education (“Council”) 5 was organized in 1995 to facilitate cooperative industry/regulatory coordination of the administration and future development of the Program in keeping with applicable industry regulations and changing industry needs. Its roles include recommending and helping develop specific content and questions for the Regulatory Element, defining minimum core curricula for the Firm Element component of the Program, and developing and updating information about the Program for industry-wide dissemination. 5 The Council currently consists of 20 individuals, 14 of whom are securities industry professionals associated with NASD member firms, and six of whom represent self-regulatory organizations (the American Stock Exchange LLC, the Chicago Board Options Exchange, Inc., the Municipal Securities Rulemaking Board, NASD, the New York Stock Exchange, Inc., and the Philadelphia Stock Exchange, Inc.). It is the Council's responsibility to maintain the Program on a revenue neutral basis while maintaining adequate reserves for unanticipated future expenditures. 6 In December 2003, the Council voted to reduce the Regulatory Element session fee from $65 to $60 effective January 1, 2004, in order to reduce the reserves to a level necessary to support current and expected programs and expenses. The Council decided to review the reserve level and evaluate the Regulatory Element session fee on an annual basis. The 2004 financial review and evaluation produced no change in the Regulatory Element session fee. In September 2005, the Council's annual financial review and evaluation revealed that unless the Regulatory Element session fee were adjusted, the Council's reserves were likely to be insufficient in 2006. The reasons for the declining surplus are:
(1)Lower than projected session volume resulting in a significant decrease in actual revenue over projected revenue;
(2)higher delivery-related expenses beginning in 2006; and
(3)costs associated with the rebuilding of PROCTOR ®. 7 At its September 2005 meeting, the Council voted unanimously to increase the Regulatory Element session fee from $60 to $75, effective January 1, 2006, in order to meet costs and maintain an adequate reserve in 2006. 6 The Regulatory Element session fee was initially set at $75 when NASD established the continuing education requirements in 1995. The fee was reduced in 1999 to $65 and again in 2004 to $60. The proposed fee increase returns the Regulatory Element session fee to its original level. 7 PROCTOR ® is a technology system that supports computer-based testing and training. The Regulatory Element program uses PROCTOR ® to package content, deliver, score and report results, and maintain and generate statistical data related to the Program. The proposed implementation date is January 1, 2006. 1. Statutory Basis NASD believes that the proposed rule change is consistent with the provisions of Section 15A of the Act, 8 in general, and furthers the objectives of Sections 15A(b)(5) and 15A(b)(6) of the Act in particular. 9 Section 15A(b)(5) of the Act requires, among other things, that NASD rules provide for the equitable allocation of reasonable dues, fees, and other charges among members and issuers and other persons using any facility or system that NASD operates or controls. Further, Section 15A(b)(6) of the Act provides that NASD rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. NASD believes that the proposed rule change is designed to accomplish these ends by enabling the Program to be maintained on a revenue neutral basis while maintaining adequate reserves for unanticipated future expenditures. 8 15 U.S.C. 78 *o* -3. 9 15 U.S.C. 78 *o* -3(b)(5) and (b)(6). B. Self-Regulatory Organization's Statement on Burden on Competition NASD 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 NASD has neither solicited nor received comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act 10 and Rule 19b-4(f)(2) thereunder, 11 because it establishes or changes a due, fee, or other charge imposed by the NASD. Accordingly, the proposal will take effect upon filing with the Commission. At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. 12 10 15 U.S.C. 78s(b)(3)(A)(ii). 11 17 CFR 240.19.b-4(f)(2). 12 15 U.S.C. 78s(b)(3)(C). 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-2005-132 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-2005-132. 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 offices 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-2005-132 and should be submitted on or before January 10, 2006. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 13 13 17 CFR 200.30-3(a)(12). Jonathan G. Katz, Secretary. [FR Doc. E5-7521 Filed 12-19-05; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-52954; File No. SR-NYSE-2005-87] Self-Regulatory Organizations; New York Stock Exchange, Inc.; Notice of Filing and Order Granting Accelerated Approval of a Proposed Rule Change and Amendment No. 1 Thereto Relating to the Pilot to Put Into Operation Phase 1 of the NYSE HYBRID MARKET SM December 14, 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 December 9, 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 and II below, which Items have been prepared by the Exchange. On December 13, 2005, the Exchange filed Amendment No. 1 to the proposed rule change. 3 The Commission is publishing this notice and order to solicit comments on the proposed rule change, as amended, from interested persons and to approve the proposed rule change, as amended, on an accelerated basis. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 *See* Partial Amendment dated December 13, 2005 (“Amendment No. 1”). In Amendment No. 1, the Exchange submitted Exhibit 3 to the proposed rule change, which identified the securities that would be included in the Pilot, and corrected a typographical error. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange is proposing a pilot to put into operation Phase 1 of the NYSE HYBRID MARKET SM (“Hybrid Market”) initiative, as proposed in SR-NYSE-2004-05 and amendments thereto (“Hybrid Market filings”) with respect to a group of securities trading on the Exchange (“Pilot”). 4 In addition, the Pilot will implement certain system changes discussed in SR-NYSE-2005-57. 5 This filing sets forth amended rules (previously described in the Hybrid Market filings) which would be operational during the Phase 1 pilot as well as certain new proposals, discussed herein. The text of the proposed rule change is available on NYSE's Web site ( *http://www.nyse.co* ), at the principal office of the Exchange, and at the Commission's Public Reference Room. 4 *See* Securities Exchange Act Release No. 50173 (August 10, 2004), 69 FR 50407 (August 16, 2004) (Amendment No. 1 to SR-NYSE-2004-05); Securities Exchange Act Release No. 50667 (November 15, 2004), 69 FR 67980 (November 22, 2004) (Amendment Nos. 2 and 3 to SR-NYSE-2004-05) (The Exchange withdrew Amendment No. 4 and replaced it with Amendment No. 5); Securities Exchange Act Release No. 51906 (June 22, 2005), 70 FR 37463 (June 29, 2005) (Amendment No. 5 to SR-NYSE-2004-05). *See also* Amendment No. 6 to SR-NYSE-2004-05 (September 16, 2005) and Amendment No. 7 to SR-NYSE-2004-05 (October 10, 2005). 5 *See* Securities Exchange Act Release No. 52362 (August 30, 2005), 70 FR 53701 (September 9, 2005) (SR-NYSE-2005-57). While submitted as effective upon filing, the Exchange intended to implement these changes upon approval of the Hybrid Market filings by the Commission, if such approval is granted. 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 The Exchange proposes a Pilot to put into operation Phase 1 of the Hybrid Market initiative with respect to a group of securities, known as Phase 1 6 Pilot securities (“Pilot securities”). The Pilot would commence following Commission approval of the Pilot, during the week of December 12, 2005 and would terminate the earlier of:
(1)90 calendar days from the date of Commission approval, if granted, or
(2)Commission approval of the Exchange's Hybrid Market proposal, if granted. 6 *See* Securities Exchange Act Release No. 51906 (June 22, 2005), 70 FR 37463 (June 29, 2005) (Amendment No. 5 to SR-NYSE-2004-05). Approximately 200 securities out of the 3,600 securities listed on the Exchange (approximately 5%) have been identified as Pilot securities and are listed on Exhibit 3 of the filing. 7 In addition, the list of Pilot securities will be posted on the Exchange's Web site. 7 The NYSE selected the Pilot securities based on the following criteria:
(1)Trading location so as to include in the Pilot securities from each room and post on the floor;
(2)crowd participation so as to include securities that generally have crowd participation;
(3)trading characteristics so as to include securities whose trading characteristics are typically less volatile to minimize the likelihood of disruptions during the systems testing; and
(4)specialist firm so as to include each of the equity specialist firms on the floor. The Pilot securities represent approximately 10% of the average daily NYSE trading volume. Telephone call between Nancy Reich Jenkins, NYSE and Kelly Riley, SEC on December 14, 2005. The Pilot will allow the Exchange to conduct real-time system and user testing of certain features of the Hybrid Market filings in order to be in a position to comply with the implementation of Regulation NMS. 8 8 *See* Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005). The Exchange believes the Pilot will prove beneficial from both a technology and a training perspective. It will give the Exchange the opportunity to identify and address any system problems and to identify and incorporate beneficial system changes that become apparent as a result of usage in real time and under real market conditions. The ability to have such real time user interface will be invaluable, as it is impossible to accurately anticipate behavioral changes in a development or mock-trading environment. In addition, the Pilot will allow users to gain essential practical experience with the new systems and processes in a well-modulated way. The Exchange anticipates that the Pilot will operate with minimal problems given the amount and degree of testing and training that has occurred to date. In addition, the Exchange plans to phase-in the Pilot, if approved, to allow for a controlled and moderated roll out of the new systems and capabilities. 9 9 The NYSE intends to phase in the Pilot gradually, beginning with a single security on the first day of the Pilot and expanding gradually over the course of four weeks. The timing of the phase-in will be adjusted depending on the extent and significance of any technical or user interface problems that might arise. Telephone call between Nancy Reich Jenkins, NYSE and Kelly Riley, SEC on December 14, 2005. There has been extensive testing of the approximately 15 Exchange systems impacted by the Pilot, individually and collectively, both in development and production environments. This testing occurred at all levels, including development testing, automation testing, SIAC testing, NYSE testing, integrated system testing and code reviews, production environment testing, fall-back and recovery testing, and regression and new functionality testing. In addition, there has been comprehensive training for both Floor brokers and specialists, individually and together in a mock trading environment. Training was conducted by the Exchange and was supplemented in most cases by firm-specific training conducted by member organizations for their employees. In addition, the Exchange training environment was made available to proprietary system vendors for their training sessions. Moreover, the Exchange intends to have available at all times during the Pilot two versions of the operating software—the new version that would be operational and the original, pre-Pilot version. If a problem develops during the Pilot, the Exchange will be able to revert to the pre-Pilot software within an average time of two minutes or less. Accordingly, the Exchange believes that the extensiveness of the testing and training, the phase-in approach and the fall-back capabilities provide significant assurances that the Pilot will operate as expected. However, in the event systems or other problems arise with the Pilot that adversely impact investors or impede the Exchange's ability to maintain a fair and orderly market, the Exchange will immediately terminate the Pilot in whole or in part, as appropriate, and return trading to current operations under current NYSE rules. Phase 1 Pilot During the Pilot, the following rules and provisions of the Hybrid Market initiative as outlined in the Hybrid Market filings will be operational. To eliminate possible confusion as to what rule provisions apply to Pilot securities, the Exchange has identified those new or amended rules which will be operational during the Pilot with a “P.” Where part of a provision of a proposed Hybrid Market rule will be operational during the Pilot, but another part of the proposed rule will not, the Exchange has noted this in the attached rule text with the designation that the section is “intentionally omitted.” In addition, during the Pilot, all other Exchange rules apply to Pilot securities as they do today. NYSE Direct+ ® (Exchange Rules 1000-1005) During the Pilot, NYSE Direct+® (“Direct+”) will continue to operate as it does today under current Exchange Rules 1000-1005 and subject to the same availability, restrictions and conditions, as outlined in those rules. NYSE Floor Broker Agency Interest Files ® (Exchange Rule 70.20(a)-(l)(P)) During the Pilot, the Exchange is proposing to activate the Floor broker agency file to permit brokers to enter their interest at or outside the best bid and offer in Pilot securities (also referred to as “e-Quoting”). The following sections of proposed Exchange Rule 70.20, described in the Hybrid Market filings, would apply during the Pilot: • 70.20(a)(i)(ii) • 70.20(b) • 70.20(c)(i)-(iv): Floor brokers will be able to populate the reserve file but it will be *visible* to the specialist in this phase • 70.20(e) • 70.20(f) • 70.20(i)-(l) • 70.30 During the Pilot, the following sections of proposed Rule 70.20 would *not* apply: • Rule 70.20(d)(i)-(ii): Sweep functionality • Rule 70.20(g)-(h): Feature permitting brokers to exclude their interest from the aggregate information available to the specialist The above sections that are not applicable during the Pilot are intentionally omitted from the proposed rule text. In the event that a proprietary vendor system has not been activated or vender systems or Exchange systems that have been activated otherwise become unavailable, a Floor broker who is unable to enter his or her own Floor broker agency interest has the following options:
(i)Request a specialist to enter the agency interest on behalf of the Floor broker who is unable to enter it for himself or herself;
(ii)Send an order through SuperDot; ® 10 10 SuperDot ® is an electronic order-routing system used by NYSE member firms to send market and limit orders to the NYSE.
(iii)Send a CAP-DI order 11 to the specialist; 11 *See* Exchange Rule 123A.30. The CAP-DI order guides the specialist to represent the order to ensure that the elected or converted portion goes along with the market, by not initiating a significant price change or lagging behind the market. CAP-DI orders are subject to a number of restrictions intended to minimize the specialist's discretion in handling such orders. Elected and converted CAP-DI orders that are not executed revert to CAP-DI status.
(iv)Trade manually in the Crowd, as is done today;
(v)Ask another Floor broker to represent the order through his or her agency interest file; or
(vi)Send an order for Direct+ execution. Rule 70.20(f)(P) The Hybrid Market filings described proposed rule 70.20(f) which requires cancellation of agency interest files when the broker leaves the Crowd. In connection with the Pilot, the Exchange proposes to amend this provision to clarify that a Floor broker may leave the Crowd without canceling his or her agency interest files in order to recharge his or her handheld device. *See* proposed Exchange Rule 70.20(f)(P). NYSE Specialist Interest Files SM (Exchange Rule 104(c)(P)) During the Pilot, specialists will be able to manually layer their interest at and outside the best bid and offer, which will give specialists' bids and offers persistent standing (also referred to as s-Quotes). *See* Exchange Rule 104(c)(P). This means that if the specialist bids/offers at a price that is not the best bid/offer, but layers its interest below/above such best bid/offer, the specialist's interest will remain in the specialist interest file and be available to be displayed as the best bid/offer should better bids/offers be exhausted. The Hybrid Market filings discuss the specialists' ability to do this systemically via algorithmically generated messages sent via the NYSE Specialist API SM (“API”). During the Pilot, however, specialists will not be able to use systems employing algorithms to generate messages to bid, offer, or trade via the API. Accordingly, for the purposes of the Pilot, the Exchange is proposing a new rule to provide specialists with the ability to manually layer interest at and outside the Exchange best bid and offer. *See* proposed Exchange Rule 104(c)(P). During the Pilot, specialists will not be able to disseminate NYSE Specialist Files SM via NYSE OPENBOOK ® or other Exchange data distribution channels. During the Pilot, specialists will not be able to have systems using algorithms to send messages via the API to layer their interest or to otherwise trade or quote, nor will the specialist's reserve capability be operational. Therefore, proposed Exchange Rules 104(b)-(h) will not be in effect. Priority, Parity, and Yielding: Exchange Rules 70.20(b)(P), 72(c)-(g)(P), 104.10(6)(i)(C)P, 108(a)(P) During the Pilot, the systemic programming of priority, parity and yielding, as proposed by the Hybrid Market filings, other than the yielding requirements for additional specialist interest, will be operational. As a result, the following rules will apply during the Pilot: 70.20(b)(P), 72(c)-(g)(P), 104.10(6)(i)(C)(P), and 108(a)(P). The most substantive change that will apply to trading in Pilot securities will be that Floor brokers will lose their current ability to object to the specialist trading on parity with their orders unless the specialist is manually trading with them in the Crowd. However, a Floor broker's use of an e-Quote implicitly suggests his or her agreement that the specialist can be on parity with his or her orders. A Floor broker who does not want to permit the specialist to trade on parity with his or her orders may send the order through SuperDot, ® enter a Direct+ order, or hit a bid/take an offer. A Floor broker who is manually bidding or offering ( *i.e.* , not through his or her agency interest file) will not be able to participate in an execution involving e-Quotes and/or s-Quotes or, as today, in Direct+ executions. Other Exchange Rules During the Pilot, the following rules, as amended in the Hybrid Market filings would apply to Pilot securities: Exchange Rules 60(e)(P), 117P, 122P, 123(e)P, and 132B(a)(D)(P). Pilot Trading Example The Exchange quotation is 20.05 bid, offered at 20.07, 3,000 x 300. The bid consists of: 1,000 shares of book interest, which arrived first and has priority; 1,000 shares of broker agency interest comprised of two brokers' bids for 500 shares each at 20.07, and 1,000 shares of specialist interest. A market order to sell 3,000 shares arrives and trades with the 20.05 bid, as follows: 3,000 shares trade and this is reported by the specialist via the Smart Report Template and the system assigns the contra-parties as follows: 1,000 shares of book interest trade first (priority), and the remaining 2,000 shares are split equally (1,000 shares each) between the floor broker agency interest files and specialist interest file, as they are on parity. Automatic Execution of CAP-DI Orders and Stop Orders Currently, when a trade occurs, the Exchange's system notifies the specialist if any CAP-DI or stop orders have been elected by such trade. The specialist has to then determine if there is any liquidity against which the elected orders (or portions thereof) can trade. If so, the specialist manually executes and reports trades involving the elected volume. The Commission recently published an Exchange filing that provides that elected stop and CAP-DI volume will be automatically executed 12 to the extent that contra-side interest is available to trade with the elected orders. 13 These executions will be automatically reported, including the relevant information regarding participants to the execution ( *See* Exchange Rule 123A.30, discussed below). Elected CAP-DI volume unable to trade will automatically revert to CAP-DI status, and elected stop limit orders unable to trade will become a limit order on the Display Book. Elected stop orders will be executed in the same manner as any market order. The rules regarding the election and execution of CAP-DI and stop orders remain the same. The implementation of this process will commence with the Pilot. 12 This automatic execution will not be done through NYSE Direct+, but rather a different system. Therefore, such execution is not subject to the volume limitations of the Direct+ rules. 13 *See supra* note 5. In connection with the Pilot, the Exchange is proposing changes to Rule 76 to clarify that elected stop and stop limit orders are exempt from the requirement that a member expose the order for possible price improvement before crossing it. In addition, the Exchange is proposing amendments to Rule 13 with respect to stop and stop limit orders. Certain of these changes were proposed in the Hybrid Market filings. With respect to the Pilot, the Exchange is proposing additional changes to Rule 13 to add language that provides for the possibility of manual representation of stop and stop limit orders in the Crowd. Converted CAP-DI Orders and Direct+ In addition, commencing with the Pilot, converted CAP-DI orders will be systemically represented to enable them to participate in NYSE Direct+ ® executions under current Rules 1000-1005. 14 14 *See id.* Automation of Parity Between Specialist and Elected CAP-DI Orders Exchange Rule 123A.30 provides that a Floor broker may permit a specialist to trade on parity with CAP-DI orders. The rule currently provides that if a specialist is on parity with one or more CAP-DI orders, at no time may the specialist participate for its own account in an amount in excess of that which each CAP-DI order would receive, except that the specialist may participate for its own account to an extent greater than any particular CAP-DI order where the size specified on such order has been satisfied. A specialist trading on parity with a CAP-DI order remains subject to the limitations in Exchange Rule 104.10 as to transactions for his or her own account effected on destabilizing ticks. Commencing with the Pilot, the Exchange will systemically ensure that the specialist's participation when trading along with CAP-DI orders is in accordance with the parity requirements of Rule 123A.30. The system will assign the proper number of shares to the specialist and CAP-DI orders. The Exchange filed 15 this change for immediate effectiveness pursuant to Section 19(b)(3)(A) of the Act 16 and Rule 19b-4(f)(5) 17 thereunder. 15 *See id.* 16 15 U.S.C. 78s(b)(3)(A). 17 17 CFR 240.19b-4(f)(5). Automatic Conversions of CAP-DI Orders Current Exchange Rule 123A.30 also provides that specialists have the ability, subject to certain restrictions noted in the rule, to convert CAP-DI orders to participate in transactions or to bid or offer, without an electing trade. Proposed Exchange Rule 123A.30(a)(P) 18 provides in part that the elected or converted portion of a “percentage order that is convertible on a destabilizing tick and designated immediate execution or cancel election” (“CAP-DI order”) may be automatically executed. An elected or converted CAP-DI order on the same side of the market as an automatically executed electing order may participate in a transaction at the bid (offer) price if there is volume associated with the bid (offer) remaining after the electing order is filled in its entirety. An elected or converted CAP-DI order on the contra-side of the market as an automatically executed electing order may participate in a transaction at the bid (offer) price if there is volume remaining in the electing order. 18 This rule is parallel to amendments made to Rule 123A.30. *See* Securities Exchange Act Release No. 51906 (June 22, 2005), 70 FR 37463 (June 29, 2005) (Amendment No. 5 to SR-NYSE-2004-05). In addition, the Exchange is proposing to add new section (iv)(P) to proposed Exchange Rule 123A.30(a)(P) to provide that when a specialist is bidding or offering and an automatic execution occurs with such bid/offer, marketable CAP-DI orders on the Display Book® on the same side as the specialist's interest will be automatically actively converted to participate in this execution, with the system assigning the proper number of shares to the specialist and CAP-DI orders, as discussed above. This will allow CAP-DI orders to better participate in executions. However, in certain instances, an automatic conversion of marketable CAP-DI orders will not occur even though the specialist is trading for its own account. This will occur where the execution that included automatically converted CAP-DI orders elects a contra-side stop or stop limit order. In this situation, pursuant to current Exchange Rule 123A.40, the specialist, as party to the election of the stop order, owes such elected stop order an execution at the same price as the specialist traded. The execution of such stop orders, in which the specialist is the contra-party, may be manual 19 or automatic, 20 depending upon whether any specialist interest remains at the execution price. In either situation, marketable CAP-DI interest at that price will not be automatically converted to participate along with the specialist. However, the specialist will be alerted to the fact there are CAP-DI orders on the Display Book® capable of trading so that he or she can take appropriate action. 19 If there is no specialist interest remaining in the bid/offer, and the specialist must guarantee an execution to the stop order at the electing price pursuant to Rule 123A.40, the specialist must do a manual transaction to guarantee that the stop order receives the same price as the specialist. 20 If there is specialist interest remaining in the bid/offer and the specialist must guarantee an execution to the stop order at the electing price pursuant to Rule 123A.40, the Display Book system will automatically execute the remaining specialist interest against the elected stop order at the same price the specialist traded. 2. Statutory Basis The Exchange believes that the proposed rule change, as amended, is consistent with Section 6(b)(5) of the Act 21 in that it is designed to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system and, in general, to protect investors and the public interest. The Exchange believes that the proposed rule change, as amended, is also designed to support the principles of Section 11A(a)(1) of the Act 22 in that it seeks to assure economically efficient execution of securities transactions, make it practicable for brokers to execute investors' orders in the best market and provide an opportunity for investors' orders to be executed without the participation of a dealer. 21 15 U.S.C. 78f(b)(5). 22 15 U.S.C. 78k-1(a)(1). B. Self Regulatory Organization's Statement on Burden on Competition The Exchange does not believe that the proposed rule change, as amended, 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 *See* the SEC's Web site ( *http://www.sec.gov* ) for the comment letters received on the Hybrid Market initiative and a copy of the Exchange's response to the letters. III. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change, as amended, is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form ( *http://www.sec.gov/rules/sro.shtml* ); or • Send an e-mail to *rule-comments@sec.gov* . Please include File Number SR-NYSE-2005-87 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-2005-87. 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 Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NYSE-2005-87 and should be submitted on or before January 10, 2006. IV. Commission's Finding and Order Granting Accelerated Approval of the Proposed Rule Change The Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange. 23 Specifically, the Commission finds that approval of the proposed rule change is consistent with Section 6(b)(5) of the Act because the proposal is designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. 23 In approving this proposal, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). With this proposed rule change, the Exchange has requested temporary approval by the Commission of certain features of its Hybrid Market, so that it may begin live systems testing in a limited group of stocks. According to the Exchange, this Pilot is necessary so that the Exchange can maintain its planned implementation schedule for the Hybrid Market and meet the Regulation NMS compliance dates. 24 The Commission recognizes that certain of the processes that NYSE has proposed to begin testing have generated comment in the Hybrid Market filings. The Commission wishes to emphasize that it continues to review the larger Hybrid Market filings, including the processes included in this Pilot. 25 The Commission is considering all of the comments submitted in response to the Hybrid Market filings and has not reached a decision on whether they should be approved or disapproved. The Commission, however, believes that due to the limited nature of the Pilot and its short duration, that it is consistent with the Act to allow NYSE to begin testing its new systems with this Pilot. 24 NYSE has represented that it has proposed the Hybrid Market with the intent that it will entitle NYSE quotations to protection under Rule 611 as well as to comply with its obligations under this rule. The compliance date for certain rules adopted under Regulation NMS is June 29, 2006. 17 CFR 242.611. 25 The Commission notes that the scope of the Pilot is extremely limited. This Pilot is intended to enable NYSE to technologically test certain features of its Hybrid Market proposal. Other significant features of the Hybrid Market proposal, such as the expansion of Direct+ and the ability of specialists to electronically interact with the Display Book, are not included in this Pilot. The NYSE represented that it expects to be able to use the results of the systems testing in evaluating and addressing any technology issues related to its Hybrid Market proposal that become apparent. The NYSE explained in its filing that it has tested these functions extensively but that it needs to test them in an actual trading environment to ensure that they operate as intended. Accordingly, NYSE represented that it does not anticipate any significant problems arising from the Pilot. However, NYSE will immediately terminate the Pilot, in whole or in part, as appropriate, should any systems or other problems arise that adversely impact the protection of investors or impede its ability to maintain a fair and orderly market, and return trading to its current operations under current NYSE rules. 26 26 The Exchange stated that it would be able to revert back to pre-Pilot operations within an average of two minutes or less. The Exchange will notify the public via its Web site if the Pilot is terminated in whole or in part. In addition, the Exchange will notify floor members at the post if the Pilot is terminated in whole or in part. The Commission finds good cause, pursuant to Section 19(b)(2) of the Act, 27 for approving the proposed rule change prior to the thirtieth day after the date of publication of the notice in the **Federal Register** . The Pilot, which as discussed above is limited in scope and duration, will allow the NYSE to conduct real-time system and user testing of certain features of the proposed Hybrid Market. According to NYSE, such testing should be beneficial from both a technology and a training perspective. Although preliminary steps have been taken—the NYSE has provided training for both Floor brokers and specialists, many member organizations also provided firm-specific training for their employees, and proprietary system vendors were able to utilize the NYSE trading environment for their training sessions—the Pilot should give the Exchange the opportunity, in advance of the compliance date of Regulation NMS, to identify and address any system problems with these particular rules under the proposed Hybrid Market. Further, the Pilot should allow users to gain essential practical experience with the new systems and processes. Therefore, the Commission finds that immediate implementation of the Pilot, which is limited in both scope and duration, should permit NYSE to remain on schedule to implement the Hybrid Market filings, if approved by the Commission so that it may meet the Regulation NMS compliance dates. 27 15 U.S.C. 78s(b)(2). V. Conclusion *It is therefore ordered* , pursuant to Section 19(b)(2) of the Act, that the proposed rule change (SR-NYSE-2005-87), as amended, is hereby approved on an accelerated basis until March 14, 2006 or the Commission otherwise acts on the Hybrid Market filings. By the Commission. Jonathan G. Katz, Secretary. [FR Doc. 05-24251 Filed 12-19-05; 8:45 am]
Connectionstraces to 8
Traces to 8 documents
U.S. Code
- Registration, responsibilities, and oversight of self-regulatory organizations§ 78s
- Definitions and application§ 78c
- National securities exchanges§ 78f
- Public information; agency rules, opinions, orders, records, and proceedings§ 552
- Municipal securities§ 78o–4
- National market system for securities; securities information processors§ 78k–1
2 references not yet in our index
- 17 CFR 240.19
- 15 USC 78
Citation graph
cites case law
Notices
SECURITIES AND EXCHANGE COMMISSION
Cite17 CFR 240.19
Cite15 USC 78
Cites 10Cited by 0 across 0 sources