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Code · REGISTER · 2006-10-20 · SECURITIES AND EXCHANGE COMMISSION · Rules and Regulations

Rules and Regulations. Notice

16,155 words·~73 min read·/register/2006/10/20/06-8789

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BILLING CODE 7590-01-M SECURITIES AND EXCHANGE COMMISSION Proposed Collection; Comment Request *Upon written request, copies available from:* Securities and Exchange Commission, Office of Filings and Information Services, Washington, DC 20549. *Extension:* Form 18-K; OMB Control No. 3235-0120; SEC File No. 270-108. Notice is hereby given that pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 *et seq.* ) the Securities and Exchange Commission (“Commission”) is soliciting comments on the collection of information summarized below.
The Commission plans to submit this existing collection of information to the Office of Management Budget for approval. Form 18-K (17 CFR 249.318) is an annual report form used by foreign governments and political subdivisions with securities listed on a United States exchange. The information to be collected is intended to ensure the adequacy of information available to investors in the registration of securities and assures public availability. Form 18-K takes approximately 8 hours to prepare and is filed by approximately 40 respondents for a total annual reporting burden of 320 hours.
We estimate that 100% of the total burden is prepared by the company. Written comments are invited on:
(a)Whether these proposed collections of information are necessary for the proper performance of the functions of the agency, including whether the information will have practical utility;
(b)the accuracy of the agency's estimate of the burden imposed by the collection of information;
(c)ways to enhance the quality, utility, and clarity of the information collected; and
(d)ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology. Consideration will be given to comments and suggestions submitted in writing within 60 days of this publication. Please direct your written comments to R. Corey Booth, Director/Chief Information Officer, Securities and Exchange Commission, c/o Shirley Martinson 6432 General Green Way, Alexandria, Virginia 22312; or send an e-mail to: *PRA_Mailbox@sec.gov.* Dated: October 12, 2006. Jill M. Peterson, Assistant Secretary. [FR Doc. E6-17537 Filed 10-19-06; 8:45 am] BILLING CODE 8011-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-54608; File No. SR-Amex-2005-060] Self-Regulatory Organizations; American Stock Exchange LLC; Order Approving a Proposed Rule Change and Amendment Nos. 1, 2, and 3 Thereto and Notice of Filing and Order Granting Accelerated Approval to Amendment Nos. 4 and 5 Thereto Relating to Amendments to the Obvious Error Rules October 16, 2006. I. Introduction On June 1, 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 amend the Exchange's equity and index options obvious error rules. On September 21, 2005, the Amex submitted Amendment No. 1 to the proposed rule change. 3 On October 4, 2005, the Amex submitted Amendment No. 2 to the proposed rule change. 4 On October 27, 2005, the Amex submitted Amendment No. 3 to the proposed rule change. 5 The proposed rule change, as amended by Amendment Nos. 1, 2, and 3 was published for comment in the **Federal Register** on November 8, 2005. 6 The Commission received one comment letter 7 regarding the proposed rule change. The Exchange responded to the comment letter on February 6, 2006. 8 On August 16, 2006, the Amex filed Amendment No. 4 to the proposed rule change. 9 On October 13, 2006, the Amex filed Amendment No. 5 to the proposed rule change. 10 This order approves the proposed rule change, as amended by Amendment Nos. 1, 2, and 3, publishes notice of Amendment Nos. 4 and 5 to the proposed rule change, and grants accelerated approval to Amendment Nos. 4 and 5. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 *See* Form 19b-4 dated September 21, 2005, which replaced the original filing in its entirety (“Amendment No. 1”). 4 Amendment No. 2 corrected technical errors in the proposed rule text. 5 Amendment No. 3 clarified the definition of “Fair Market Value” for purposes of Amex Rules 936C and 936C—ANTE and made technical corrections to those rules with respect to references to “Fair Market Value.” 6 *See* Securities Exchange Act Release No. 52718 (November 2, 2005), 70 FR 67765 (“Notice”). 7 *See* letter to Jonathan G. Katz, Secretary, Commission, from Matthew B. Hinerfeld, Managing Director and Deputy General Counsel, Citadel Investment Group, L.L.C. on behalf of Citadel Derivatives Group LLC (collectively “Citadel”), dated November 28, 2005 (“Citadel Letter”). 8 *See* letter to Nancy M. Morris, Secretary, Commission, from Neal L. Wolkoff, Chairman and Chief Executive Officer, Exchange, dated February 6, 2006. 9 Amendment No. 4 revised the definition of “Theoretical Price,” with respect to multiply-traded options, to refer to the midpoint of the national best bid or national best offer (“NBBO”) just prior to the trade that does not reflect the erroneous quote. Quantifiable standards were also added to indicate more clearly how the Exchange would determine when a quote is “erroneous.” Amendment No. 4 also revised the definition of Theoretical Price for transactions occurring as part of an opening to state that Theoretical Price is the midpoint of the NBBO after the transaction(s) in question that does not reflect the erroneous transaction(s). In addition, Amendment No. 4 made minor technical revisions to the proposed rule text. 10 Amendment No. 5 clarified that the process for calculating average quote width set forth in Amex Rules 936(a)(5) and 936(a)(5)—ANTE also applies to the determination of average quote width for purposes of Amex Rules 936C(a)(5) and 936C(a)(5)—ANTE. II. Description of the Proposal Amex proposes to amend Amex Rules 936(a)(1) and 936(a)(1)—ANTE that pertain to equity options (“Equity Options Obvious Error Rules”) and Amex Rules 936C(a)(1) and 936C(a)(1)—ANTE pertaining to index options (“Index Options Obvious Error Rules”) (collectively, “Obvious Error Rules”). The Exchange proposes to amend Amex Rules 936C(a)(1) and 936C(a)(1)—ANTE to revise the definition of Theoretical Price; provide for the cancellation of a transaction resulting from a verifiable disruption or malfunction of an Exchange system, unless the parties agree to a price adjustment; permit additional types of electronic trades resulting from an erroneous quote in the underlying security to be adjusted or cancelled; revise the provision relating to “no bid series”; and add a new provision for transactions executed outside of trading hours. In addition, the Exchange proposes to amend Amex Rules 936(C)(a)(1) and 936(C)(a)(1)—ANTE to revise the definition of Fair Market Value; provide for the cancellation of a transaction resulting from a verifiable disruption or malfunction of an Exchange system, unless the parties agree to a price adjustment; permit additional types of electronic trades resulting from an erroneous quote in the underlying security to be adjusted or cancelled; revise the provision relating to “no bid series”; and add a new provision for transactions executed outside of trading hours. Erroneous Quotes The Exchange's Obvious Error Rules set forth several types of transactions that may qualify as an obvious error. If the transaction meets the appropriate Rule's conditions, it is subject to either adjustment or cancellation, as specified in the Rule. The proposal, as amended, would revise the Obvious Error Rules to account for the situation where the Amex posts an erroneous quote and subsequently a competing options exchange, in direct response to the erroneous quote, widens its quote to incorporate the prior erroneous quote of the Amex. Equity Options Amex Rules 936(a)(1) and 936(a)(1)—ANTE currently provide that, in the case of equity options, an obvious pricing error will be deemed to have occurred when the execution price of an electronic transaction ( *i.e.* , not open outcry) varies from the option's Theoretical Price by the requisite amount set forth in the chart contained in these Rules. 11 For multiply-traded equity options, the Theoretical Price is the last bid (offer) price with respect to an erroneous sell
(buy)transaction just prior to the trade that is disseminated by the competing options exchange with the most liquidity in that class over the preceding two
(2)calendar months. If there are no quotes for comparison purposes, then trading officials will determine the Theoretical Price. For transactions occurring as part of an opening, the Theoretical Price is the first quote after the transaction(s) in question that does not reflect the erroneous transaction(s). When an obvious price error occurs, the Amex either will adjust or cancel the transaction pursuant to Amex Rules 936(a)(1)(i) and 936(a)(1)(i)—ANTE. 11 The requisite amount is: $0.25 for options below $2; $0.40 for options priced from $2 to $5; $0.50 for options priced above $5 to $10; $0.80 for options priced above $10 to $20; and $1.00 for options priced above $20. The proposed rule change, as amended, revises the definition of Theoretical Price with respect to multiply-traded options to refer to the midpoint of the NBBO just prior to the erroneous trade. Under the proposal, Theoretical Price will not include the national best bid (in case of a request for review by a seller) or national best offer (in case of a request for review by a buyer) of the competing options exchange(s) if such competing options exchange(s) widened its quote(s) to incorporate the prior erroneous quote of the Exchange. In such a case, the Theoretical Price will be the mid-point of the NBBO just prior to the trade that does not reflect the erroneous quote. If there are no competing options exchanges left without an erroneous quote, the Theoretical Price will be the mid-point of the NBBO after the transaction(s) in question that does not reflect the erroneous quote. For this purpose, an erroneous quote is a bid and/or offer that is above or below the midpoint of the NBBO immediately preceding the quote by at least the amount set forth in the chart contained in Amex Rules 936(a)(1) and 936(a)(1)—ANTE. 12 12 *See id.* for a description of the requisite amount set forth in Amex Rules 936(a)(1) and 936(a)(1)—ANTE. Index Options Currently, Amex Rules 936C(a)(1) and 936C(a)(1)—ANTE provide that an obvious pricing error will be deemed to have occurred when the execution price of an electronic transaction ( *i.e.* , not open outcry) varies from the option's Fair Market Value by a prescribed amount. 13 For multiply-traded options, the Fair Market Value is the midpoint of the national best bid for erroneous sell transactions or national best offer for erroneous buy transactions. If there are no quotes for comparison purposes, then Amex Trading Officials will determine the Fair Market Value. For both singly-listed options and transactions occurring as part of an opening, Fair Market Value is the midpoint of the first quote after the transaction(s) in question that does not reflect the erroneous transaction(s). 13 For index options series trading with normal bid-ask differentials as established in Amex Rule 958(c), the prescribed amount is:
(a)the greater of $0.10 or 10% for index options trading under $2.50;
(b)10% for index options trading at or above $2.50 and under $5; or
(c)$0.50 for index options trading at $5 or higher. For index options series trading with bid-ask differentials that are greater than the widths established in Amex Rule 958(c), the prescribed amount is:
(a)the greater of $0.20 or 20% for index options trading under $2.50;
(b)20% for index options trading at or above $2.50 and under $5; or
(c)$1.00 for index options trading at $5 or higher. The Exchange proposes to revise the rule text to state that the Fair Market Value will not include the national best bid price (erroneous sell transaction) or national best offer price (erroneous buy transaction) of competing options exchange(s) if such competing options exchange(s) widen their quote(s) to incorporate the prior erroneous quote of the Amex. In such a case, the Fair Market Value will be the midpoint of the first quote after the transaction(s) in question that does not reflect the erroneous quote. When an obvious price error occurs, Amex will either adjust or cancel the transaction pursuant to Amex Rules 936C(c) and 936C(c)—ANTE. For this purpose, an erroneous quote is a bid and or offer that is above or below the midpoint of the NBBO immediately preceding the quote by at least the amount set forth in Amex Rules 936C(a)(1) and 936C(a)(1)—ANTE. 14 14 *See id.* for a description of the prescribed amount set forth in Amex Rules 936C(a)(1) and 936C(a)(1)—ANTE. Erroneous Quote in Underlying Security As set forth in the Obvious Error Rules, under certain conditions a transaction resulting from an erroneous quote in the underlying security may be adjusted or cancelled. However, a quote in an underlying security that is declared “erroneous” by the exchange that trades the security may not necessarily qualify for cancellation or adjustment under the current Obvious Error Rules. 15 Therefore, the Exchange proposes to amend Amex Rules 936(a)(5), 936(a)(5)—ANTE, 936C(a)(5), and 936C(a)(5)—ANTE so that when an exchange trading the underlying security declares its quote(s) “non-firm,” or when an exchange communicates to the Amex that it is experiencing systems or other problems affecting the reliability of its disseminated quotes, an electronic options trade on Amex resulting from such “erroneous” underlying quote could be cancelled or adjusted. For such a trade to be cancelled or adjusted, the Exchange would have to have proper documentation of the underlying exchange's non-firm declaration or notification of unreliable quotes, as applicable. 15 The Obvious Error Rules define an erroneous quote as a quote that occurs when the underlying security has a width of at least $1.00 and a width at least five times greater than the average quote width for such underlying security on the primary market (as defined in Amex Rule 900(b)(26) and Rule 900(b)(26)—ANTE) during the time period encompassing two minutes before and after the dissemination of such quote. The average quote width is determined by adding the quote widths of each separate quote during the four minute time period referenced above (excluding the quote in question) and dividing the number of quotes during such time period (excluding the quote in question). Transactions Executed Outside of Trading Hours The Exchange further proposes that any equity options or index options transaction that occurs outside normal trading hours (currently, 9:30 a.m. until 4 p.m. Eastern time (“ET”) for equity options and 9:30 a.m. until 4:15 p.m. ET for broad-based index options and options on select Exchange-Traded Fund Shares) would be cancelled if the Trading Officials determine that the transaction took place outside of Amex trading hours, except as set forth in Commentary .02 to Amex Rule 1. 16 16 Amex Rule 1 sets forth the hours of business at the Exchange. Commentary .02 to Amex Rule 1 provides that no option series may freely trade after 4 p.m. ET except that broad stock index group options and options on select Exchange-Traded Fund Shares shall freely trade until 4:15 p.m. ET each business day. Three exceptions to the general rule are provided in Commentary .02, so that a trading rotation in any class of options may be effected even though the transaction will occur after 4 p.m. as follows:
(i)trading in the underlying security opens or re-opens after 3:30 p.m. ET;
(ii)such rotation was initiated due to unusual market conditions pursuant to Amex Rule 918 and notice of such rotation is publicly disseminated no later than the commencement of the rotation or 4 p.m. whichever is earlier or notice of such rotation is publicly disseminated after 4 p.m. and the rotation does not commence until five minutes after news of such rotation is publicly disseminated; or
(iii)for option classes trading on ANTE, an automated trading rotation is held at the close of trading as soon as practicable after 4 p.m. ET. Verifiable Disruptions or Malfunctions of Exchange Systems In connection with transactions arising out of “verifiable disruptions or malfunctions of Exchange systems,” the Obvious Error Rules provide that those transactions that qualify for price adjustment will be adjusted to the Theoretical Price for equity options or Fair Market Value for index options. The Exchange proposes to add that, unless the parties agree to a price adjustment, the transaction would be cancelled. No Bid Series Under the “no bid series” provisions of the Obvious Error Rules, electronic transactions in option series quoted “no bid at a nickel” ( *i.e.* , $0.05 offer) will be cancelled, provided at least one strike price below (for calls) or above (for puts) in the same options class was quoted “no bid at a nickel” at the time of execution. A “no bid” option refers to an option where the bid price is $0.00. 17 The proposal seeks to revise the “no bid series” provision in the Obvious Error Rules to specify that the option series must be quoted no bid, rather than “no bid at a nickel.” According to the Exchange, the reason for this proposed change is that options that are priced at “no bid,” regardless of the offer, are typically deep out-of-the-money series that are perceived as having little, if any, chance of expiring in-the-money. The Exchange notes that this is especially the case when the series below (for calls) or above (for puts) in the same option class similar is quoted no bid. The Amex remarks that, in this situation, the offer price is irrelevant. The Exchange states that transactions in series that are quoted “no bid at a dime,” for example, are just as likely to be the result of an obvious error as are transactions in series that are quoted no bid at a nickel when the series below (for calls) or above (for puts) in the same option series similarly is quoted no bid. 17 If the bid price is $0.00, the offer price is typically $0.05. In this instance, the option typically is referred to as “no bid at a nickel.” III. Discussion After careful consideration of the comments, 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. 18 In particular, the Commission finds that, the proposed rule change, as amended, is consistent with Section 6(b) of the Act, 19 in general, and furthers the objectives of Section 6(b)(5) of the Act, 20 in particular, in that 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. 18 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). 19 15 U.S.C. 78f(b). 20 15 U.S.C. 78f(b)(5). The Commission considers that in most circumstances trades that are executed between parties should be honored. On rare occasions, the price of the executed trade indicates an “obvious error” may exist, suggesting that it is unrealistic to expect that the parties to the trade had come to a meeting of the minds regarding the terms of the transaction. In the Commission's view, the determination of whether an “obvious error” has occurred should be based on specific and objective criteria and subject to specific and objective procedures. The Commission believes that the proposed rule change provides objective guidelines for the determination of whether an obvious price error has occurred. In addition, the Exchange's proposal to base the definition of Theoretical Price on the midpoint of the NBBO would ensure that the Amex's Obvious Error Rules are consistent with the Options Intermarket Linkage Plan, which requires exchanges to avoid trade throughs. The Commission also believes that the proposal sets forth specific objective criteria for the determination of obvious error transactions when a competing options exchange has widened its quote to incorporate an erroneous quote of the Amex. The proposal also establishes specific and objective procedures with respect to trades executed outside of the Exchange's trading hours and trades resulting from an erroneous quote in the underlying security when an exchange trading the underlying security directly communicates or disseminates a message that its quotes are not firm or directly communicates or confirms that it is experiencing systems or other problems affecting the reliability of its disseminated quotes. For these reasons, the Commission believes that the proposal, as amended, is consistent with the Act. The Commission has carefully considered the comments in the Citadel Letter. 21 The Citadel Letter raised several concerns about Amex's current Obvious Error Rules and the Exchange's application of those rules. 22 With respect to the proposed rule change, the Citadel Letter objected to the Exchange's proposal to revise the definition of Theoretical Price 23 to account for the situation when the Amex disseminates an erroneous quote that is then reflected in the quote of a competing exchange. The Citadel Letter contended that it will generally be impossible to discern whether another exchange widened its quotes as a result of an Amex erroneous quote. The Citadel Letter noted that allowing the Amex to determine whether another Exchange's quotes were erroneous and thus remove them from the calculation of Theoretical Price would inject uncertainty and unpredictability into the determination of obvious error. 21 *See* Citadel Letter, *supra* note 7. 22 The Citadel Letter asserts that:
(1)Amex rules are biased against other market participants;
(2)Amex forces the rest of the market to bear the cost of alleged problems with its computer systems; and
(3)Amex rules permitting the Exchange to nullify trades that are not numerical obvious errors should be abolished as a means to force Amex to internalize the costs of its allegedly defective computer systems. *See* Citadel Letter, *supra* note 7. 23 In Amex's Obvious Error Rules relating to index options, Theoretical Price is referred to as Fair Market Value. In Amendment No. 4, the Exchange revised the definition of Theoretical Price by adding quantifiable standards to better indicate how the Exchange will determine when a quote is “erroneous” and thus should be disregarded for purposes of calculating Theoretical Price. The Commission believes that the proposed rule change, as amended, addresses the concerns raised by the Citadel Letter that pertain to the proposed rule change. 24 Amex's proposal to add numerical criteria to assess when another exchange's quote is erroneous should help to ensure that the Exchange's obvious error determinations with respect to erroneous quotes are objective. 24 *See* Amendment No. 4, *supra* note 9. The Commission also finds good cause to approve Amendment Nos. 4 and 5 to the proposed rule change prior to the thirtieth day after the amendment is published for comment in the **Federal Register** pursuant to Section 19(b)(2) of the Act. 25 Amendment No. 4 bases the definition of Theoretical Price on the midpoint of the NBBO, ensuring that the Amex's obvious error rule is consistent with the Options Intermarket Linkage Plan, which requires exchanges to avoid trade-throughs. This revision is also consistent with recent changes to the obvious error rule of the Philadelphia Stock Exchange that were approved by the Commission. 26 Amendment No. 5 simply clarifies that the process for calculating average quote width set forth in Amex Rules 936(a)(5) and 936(a)(5)—ANTE (relating to equity options) also applies to the calculation of average quote width for purposes of Amex Rules 936C(a)(5) and 936C(a)(5)—ANTE (relating to index options). The Commission believes that accelerated approval of Amendment Nos. 4 and 5 would enable investors to benefit from the changes in the proposed rule change without further delay. Therefore, for these reasons, the Commission believes that good cause exists to accelerate approval of Amendment Nos. 4 and 5. 25 15 U.S.C. 78s(b)(2). 26 Securities Exchange Act Release No. 54070 (June 29, 2006), 71 FR 38441 (July 6, 2006) (SR-Phlx-2005-73). IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning Amendment Nos. 4 and 5, including whether Amendment Nos. 4 and 5 are consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form ( *http://www.sec.gov/rules/sro.shtml* ); or • Send an e-mail to *rule-comments@sec.gov.* Please include File No. SR-Amex-2005-060 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, Station Place, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-Amex-2005-060. 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 Amex. 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-Amex-2005-060 and should be submitted on or before November 13, 2006. V. Conclusion For the foregoing reasons, the Commission finds that the proposed rule change, as amended, is consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange, and, in particular, with Section 6(b)(5) of the Act 27 in that 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. 27 15 U.S.C. 78f(b)(5). *It is therefore ordered* , pursuant to Section 19(b)(2) of the Act, 28 that the proposed rule change (SR-Amex-2005-060) and Amendment Nos. 1, 2 and 3 thereto are approved, and that Amendment Nos. 4 and 5 thereto are approved on an accelerated basis. 28 15 U.S.C. 78s(b)(2). 29 17 CFR 200.30-3(a)(12). For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 29 Jill M. Peterson, Assistant Secretary. [FR Doc. E6-17562 Filed 10-19-06; 8:45 am] BILLING CODE 8011-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-54603; File No. SR-ISE-2006-62] Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing of Proposed Rule Change To Implement a Pilot Program To Quote and To Trade Certain Options in Pennies October 16, 2006. 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 October 11, 2006, the International Securities Exchange, LLC (the “Exchange” or the “ISE”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been substantially prepared by the ISE. 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 ISE is proposing to implement a pilot program to quote and to trade certain options in pennies. The text of the proposed rule change is available on the ISE's Web site at *http://www.iseoptions.com,* at the Exchange's Office of the Secretary, and at the Commission's Public Reference Room. 3 3 Exhibit 5 to the proposed rule change contains a proposed Regulatory Information Circular that also is part of the text of the proposed rule change. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the 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 ISE has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The proposed rule change will implement a pilot program (the “Pilot”) for the quoting and trading of specified options contracts in $.01 increments. In a letter dated June 7, 2006, Chairman Cox of the Commission encouraged the six options exchanges to commence the Pilot. ISE proposes the following rule changes and related actions to implement the Pilot: • To amend ISE Rule 710, regarding trading increments, to specify that the Exchange:
(i)Will participate in the Pilot; and
(ii)will identify the specific options to be included in the Pilot, as well as the increments for the quoting and trading of such options, in circulars that the Exchange will file with the Commission as proposed rule changes and will distribute to its members. • To issue the proposed regulatory information circular attached as Exhibit 5 to the proposed rule change, identifying the initial Pilot options. These options are the NASDAQ 100 Trust, for which all series will be quoted and traded in pennies, and 12 other options, for which series trading at less than $3.00 will be quoted and traded in penny increments, and series trading at $3.00 or more will be quoted and traded in nickel increments. • To amend ISE Rule 716, which currently permits trades in the Exchange's Block, Facilitation and Solicitation Mechanisms to be effected at “split prices,” which are the mid-points of the current standard trading increments. The Exchange proposes that options trading in penny increments not be eligible for such split pricing. • To codify certain ISE “quote mitigation” actions. In proposing the Pilot, Chairman Cox noted that the Pilot “is almost certain to increase demands on all market participants' systems” and that “it is essential that any exchange proposal also include a workable strategy for quote mitigation.” The Exchange believes that it currently has an effective quote mitigation strategy in place. Specifically: • API Fees: The ISE has implemented a fee program that requires market makers to purchase more APIs as the market maker generates more quotes, providing economic incentives on market makers to limit the number of quotations they disseminate. 4 4 *See* Securities Exchange Act Release No. 53522 (March 20, 2006), 71 FR 14975 (March 24, 2006) (SR-ISE-2006-09). • Monitoring: The ISE submits that it actively monitors the quotation activity of its market makers. When the Exchange detects that a market maker is disseminating significantly more quotes than an average market maker, the Exchange contacts that market maker and alerts it to such activity. Often such monitoring reveals that the market maker may have internal system issues or has incorrectly-set system parameters that were not immediately apparent to it. The Exchange believes that, even without uncovering problems, alerting a market maker to possible excessive quoting usually leads the market maker to take steps to reduce the number of its quotes. • Holdback Timer: The ISE has the systemic ability to limit the dissemination of quotations and other changes to the ISE best bid and offer according to prescribed time criteria (a “holdback timer”). For example, if there is a change in the price of a security underlying an option, multiple market makers likely will adjust the price or size of their quotes. Rather than disseminating each individual change, the holdback timer permits the Exchange to wait until all market makers have adjusted their quotes and then to disseminate a new quotation. This helps prevent the “flickering” of quotations. The ISE proposes to codify the holdback timer in this rule filing. As proposed in ISE Rule 804, the ISE will utilize a holdback timer that delays quotation updates for no longer than one second. • Delisting: The ISE has committed to the Commission that it will delist options with average daily volume (“ADV”) of less than 20 contracts. 5 However, it has been the ISE's policy to be much more aggressive in delisting relatively inactive options, thereby eliminating the quotation traffic attendant to such listings. Currently, it is the ISE's policy to delist options with ADV of less than 50, even with the advent of the Exchange's new “Second Market,” 6 which provides liquidity for less-active options. 5 *See* Securities Exchange Act Release No. 47483 (March 11, 2003), 68 FR 13352 (March 19, 2003) (SR-ISE-2003-04). 6 *See* Securities Exchange Act Release No. 54340 (August 21, 2006), 71 FR 51240 (August 29, 2006)(SR-ISE-2006-40). • To submit certain reports. The Commission staff has asked the options exchanges to prepare reports regarding the first three months' experience under the Pilot and to submit such reports by the end of the fourth month of the Pilot. The reports will compare quotation and trading activity in the three months prior to the Pilot (October 26, 2006 through January 25, 2007), to the first three months of the Pilot (January 26, 2007 through April 25, 2007). The ISE will submit the following reports to the Commission pursuant to this timetable: ○ Quality of Markets: This report will focus on quotation spread and size of quotations, as well as a number of other factors, including average daily volume. ○ Capacity: This report will focus on the number of quotations in the Pilot options and the effect on the ISE's system's capacity. ○ Linkage: This report will focus on trade-throughs, Satisfaction orders the ISE sends and receives, the number of Linkage Orders that “time out” without a response and the flickering of quotations. 2. Statutory Basis The Exchange believes that its proposed rule change is consistent with Section 6(b) of the Act, 7 in general, and furthers the objectives of Section 6(b)(5) of the Act, 8 in particular, in that the proposed rule change 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. In particular, the proposed rule change will permit the pilot quoting and trading of certain options in pennies to help determine whether such quoting and trading increments benefit investors. 7 15 U.S.C. 78f(b). 8 15 U.S.C. 78f(b)(5). B. Self-Regulatory Organization's Statement on Burden on Competition The Exchange does not believe that the 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 Written comments on the proposed rule change 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 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 *http://www.sec.gov/rules/sro.shtml;* or • Send an e-mail to *rule-comments@sec.gov.* Please include File No. SR-ISE-2006-62 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-ISE-2006-62. 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 ISE. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-ISE-2006-62 and should be submitted on or before November 13, 2006. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 9 9 17 CFR 200.30-3(a)(12). Jill M. Peterson, Assistant Secretary. [FR Doc. E6-17564 Filed 10-19-06; 8:45 am] BILLING CODE 8011-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-54607; File No. SR-NASD-2005-094] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change and Amendment No. 1 Thereto Relating to Amendments to the Classification of Arbitrators Pursuant To Rule 10308 of the NASD Code of Arbitration Procedure October 16, 2006. I. Introduction On June 17, 2005, the National Association of Securities Dealers, Inc. (“NASD”) filed with the Securities and Exchange Commission (“SEC” or “Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and Rule 19b-4 thereunder, 2 a proposed rule change to amend NASD Rule 10308 relating to the classification of arbitrators as non-public or public. 3 On August 5, 2005, NASD filed amendment No. 1 to the proposed rule. 4 The proposed rule change, as amended, was published for comment in the **Federal Register** on August 30, 2005, 5 and the Commission received 65 comments on the proposal. 6 The majority of commenters are lawyers that represent investors in arbitrations. This order approves the proposed rule change as amended. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 On September 6, 2006, the Commission approved similar amendments to NYSE Rule 607 (SR-NYSE-2005-43) (the “NYSE Rule Change”), which also governs securities industry and public arbitrators. The NYSE Rule Change will become effective on Dec. 13, 2006, which is 90 days after the Commission's approval order was published in the **Federal Register** . *See* Exchange Act Release No. 54407 (Sept. 6, 2006), 71 FR 54102 (Sept. 13, 2006). 4 The amendment clarified the rule's text and purpose, and revised the effective date of the rule. NASD will announce the effective date of the proposed rule change in a Notice to Members to be published no later than 30 days following Commission approval. The effective date will be no later than 60 days following publication of the Notice to Members announcing Commission approval. 5 *See* Exchange Act Release No. 52332 (Aug. 24, 2005), 70 FR 51395 (Aug. 30, 2005) (the “Notice”). 6 Richard H. Levenstein, Kramer, Sopko & Levenstein, P.A., Feb. 1, 2006 (“Levenstein”); Les Greenberg, Law Offices of Les Greenberg, Oct. 9 2005 (“Greenberg”); Bradford D. Kaufman, Greenberg Traurig, Oct. 7, 2005 (“Kaufman”); Jonathan L. Hochman, Schindler Cohen & Hochman LLP, Sept. 30, 2005 (“Hochman”); Jonathan W. Evans, Jonathan W. Evans and Associates, Sept. 21, 2005 (“Evans”); Scot Bernstein, Sept. 21, 2005 (“Bernstein”); John W. Barnes, Sept. 21, 2005 (“Barnes”); L. Jerome Stanley, Sept. 20, 2005 (“Stanley”); Dale Ledbetter, Ardorno & Yoss, Sept. 20, 2005 (“Ledbetter”); Randall R. Heiner, Sept. 20, 2005 (“Heiner”); Sam T. Brannan, Page Perry, LLC, Sept. 20, 2005 (“Brannan”); Jason R. Doss, Page Perry, LLC, Sept. 20, 2005 (“Doss”); William B. Langenbacher, Sept. 20, 2005 (“Langenbacher”); Steve Parker, Page Perry, LLC, Sept. 20, 2005 (“Parker”); Jeffrey D. Pederson, Sept. 20, 2005 (“Pederson”); Martin Seiler, Sept. 20, 2005 (“Seiler”); Brian Greenman, Sept. 20, 2005 (“Greenman”); Teresa M. Gillis, Shustak Jalil & Heller, Sept. 20, 2005 (“Gillis”); William F. Davis, Sept. 20, 2005 (“Davis”); David Harrison, Spivak & Harrison, Sept. 20, 2005 (“Harrison”); Susan N. Perkins, Sept. 20, 2005 (“Perkins”); Mitchell S. Ostwald, Law Offices of Mitchell S. Ostwald, Sept. 20, 2005 (“Ostwald”); Scot D. Bernstein, Law Offices of Scot D. Bernstein, Sept. 20, 2005 (“Bernstein”); William F. Galvin, Commonwealth of Massachusetts, Sept. 20, 2005 (“Galvin”); William P. Torngren, Law Offices of William P. Torngren, Sept. 20, 2005 (“Torngren”); Charles C. Mihalek and Steven M. McCauley, Charles C. Mihalek, P.S.C., Sept. 20, 2005 (“Mihalek”); Timothy A. Canning, Sept. 20, 2005 (“Canning”); Laurance M. Landsman, Block & Landsman, Sept. 20, 2005 (“Landsman”); Steven J. Gard, Gard Smiley Bishop & Dovin LLP, Sept. 20, 2005 (“Gard”); Scott L. Silver, Blum & Silver, P.A., Sept. 20, 2005 (“Silver”); G. Mark Brewer, Brewer Carlson, LLP, Sept. 20, 2005 (“Brewer”); John D. Hudson, Sept. 20, 2005 (“Hudson”); Joel A. Goodman, Kalju Nekvasil, Steven Krosschell, and Jennifer Newsom, Goodman & Nekvasil, P.A., Sept. 20, 2005 (“Goodman”); Jill I. Gross, Barbara Black, and Per Jebsen, Pace Investor Rights Project, Sept. 20, 2005 (“Gross”); Royal B. Lea, III, Bingham & Lea, and Randall A. Pulman, Pulman, Bresnahan & Pullen, LLP, Sept. 19, 2005 (“Lea”); Richard P. Ryder, Securities Arbitration Commentator, Inc., Sept. 19, 2005 (“Ryder”); Alan C. Friedberg, Pendelton, Friedberg, Wilson & Hennessey, P.C., Sept. 19, 2005 (“Friedberg”); Robert K. Savage, Savage Law Firm, P.A., Sept. 19, 2005 (“Savage”); Michael Chasen, Sept. 19, 2005 (“Chasen”); Adam S. Doner, Sept. 19, 2005 (“Doner”); Jan Graham, Graham Law Offices, Sept. 19, 2005 (“Graham”); Frederick W. Rosenberg, Sept. 19, 2005 (“Rosenberg”); Debra G. Speyer, Law Offices of Debra G. Speyer, Sept. 19, 2005 (“Speyer”); Andrew Stoltmann, Stoltmann Law Offices, P.C., Sept. 19, 2005 (“Stoltmann”); Al Van Kampen, Rohde & Van Kampen PLLC, Sept. 19, 2005 (“Van Kampen”); Elliott Goldstein, Sept. 19, 2005 (“Goldstein”); W. Scott Greco, Greco & Greco, P.C., Sept. 18, 2005 (“Greco”); Barry D. Estell, Sept. 18, 2005 (“Estell”); Charles W. Austin, Jr., C. W. Austin, Jr. P.C., Sept. 17, 2005 (“Austin”); Robert C. Port, Cohen Goldstein Port & Gottlieb, LLP, Sept. 16, 2005 (“Port”); Kurt Arbuckle, Sept. 16, 2005 (“Arbuckle”); Bill Fynes, Sept. 15, 2005 (“Fynes”); Jeffrey A. Feldman, Sept. 15, 2005 (“Feldman”); Jay H. Salamon, Hermann, Cahn & Schneider LLP, Sept. 14, 2005 (“Salamon”); Steven B. Caruso, Maddox Hargett & Caruso, P.C., Sept. 14, 2005 (“Caruso”); Jorge A. Lopez, Law Offices of Jorge A. Lopez, P.A., Sept. 14, 2005 (“Lopez”); Michael J. Willner, Miller Faucher And Cafferty LLP, Sept. 13, 2005 (“Willner”); Jeffrey S. Kruske, Law Offices of Jeffrey S. Kruske, P.A., Sept. 13, 2005 (“Kruske”); Richard M. Layne, Layne Lewis, LLP, Sept. 13, 2005 (“Layne”); John Miller, Law Offices of John J. Miller, P.C., Sept. 13, 2005 (“Miller”), Herb Pounds, Sept. 13, 2005 (“Pounds”); Laurence S. Schultz, Driggers, Schultz & Herbst, Sept. 12, 2005 (“Schultz”); Rosemary J. Shockman, Public Investors Arbitration Bar Association, Sept. 9, 2005 (“PIABA”); Seth E. Lipner, Baruch College and Deutsch & Lipner, Sept. 8, 2005 (“Lipner”); and Scott I. Batterman, Clay Chapman Crumpton Iwamura and Pulice, Aug. 30, 2005 (“Batterman”). II. Description of the Proposal The purpose of the proposed rule change is to amend the arbitrator classification criteria in Rule 10308 of the NASD Code of Arbitration Procedure (“Code”) to ensure that individuals with significant ties to the securities industry may not serve as public arbitrators in NASD arbitrations. The Code classifies arbitrators as public or non-public. When investors have a dispute with member firms or associated persons in NASD arbitration that involves claims of no more than $50,000, they are entitled to have their cases heard by a panel consisting of one public arbitrator or, if the dispute involves a claim of more than $50,000, a panel consisting of two public arbitrators and one non-public arbitrator. 7 7 NASD Rule 10308(b)(1). The panel composition for intra-industry disputes (not involving any parties who are investors) is governed by NASD Rule 10202. Depending on the nature of the dispute, intra-industry panels may consist of all public arbitrators, all non-public arbitrators, or a majority of public arbitrators. The arbitrator classification provisions of NASD Rule 10308 apply to all such panels. Under current NASD Rule 10308(a)(4), a person is classified as a non-public arbitrator if he or she:
(A)Is, or within the past 5 years, was:
(i)Associated with a broker or a dealer (including a government securities broker or dealer or a municipal securities dealer);
(ii)Registered under the Commodity Exchange Act;
(iii)A member of a commodities exchange or a registered futures association; or
(iv)Associated with a person or firm registered under the Commodity Exchange Act;
(B)Is retired from, or spent a substantial part of a career, engaging in any of the business activities listed in subparagraph (4)(A);
(C)Is an attorney, accountant, or other professional who has devoted 20 percent or more of his or her professional work, in the last two years, to clients who are engaged in any of the business activities listed in subparagraph (4)(A); or
(D)Is an employee of a bank or other financial institution and effects transactions in securities, including government or municipal securities, and commodities futures or options or supervises or monitors the compliance with the securities and commodities laws of employees who engage in such activities. Current NASD Rule 10308(a)(5) sets forth the criteria for public arbitrators. In particular, a person is allowed to serve as a public arbitrator if he or she is not engaged in the conduct described in paragraphs
(A)through
(D)of NASD Rule 10308(a)(4), was not engaged in that conduct for 20 or more years, is not an investment adviser, and is not “an attorney, accountant, or other professional whose firm derived 10 percent or more of its annual revenue in the past 2 years from any persons or entities listed in paragraph (a)(4)(A).” 8 The current rule also excludes the spouse or an immediate family member of a person engaged in the conduct described in paragraphs
(A)through
(D)of NASD Rule 10308(a)(4) from serving as a public arbitrator. 9 8 NASD Rule 10308(a)(5)(A)(i)-(iv). 9 NASD Rule 10308(a)(5)(A)(v). In order to ensure that individuals with significant ties to the securities industry may not serve as public arbitrators in NASD arbitrations, NASD proposed to amend the definition of public arbitrator to exclude individuals who work for, or are officers or directors of, an entity that controls, is controlled by, or is under common control with a partnership, corporation, or other organization that is engaged in the securities business. 10 The amendment also applies to individuals who have a spouse or immediate family member who works for, or is an officer or director of, an entity that is in such a control relationship with a partnership, corporation, or other organization that is engaged in the securities business, such as a broker-dealer. Under the current rule, such individuals may be considered public arbitrators. For example, a person who works for a real estate firm that is under common control with, and perhaps shares the same corporate name of, a broker-dealer may be classified as a public arbitrator under current rules. Because investors may view such an arbitrator as not truly “public,” NASD proposed to revise the definition of public arbitrator as described above. 10 For purposes of this rule, the term “control” has the same meaning that it has for purposes of Form BD, which broker-dealers use to register with NASD and to make periodic updates. Specifically, control is defined as: The power, directly or indirectly, to direct the management or policies of a company, whether through ownership of securities, by contract, or otherwise. Any person that
(i)is a director, general partner or officer exercising executive responsibility (or having similar status or functions);
(ii)directly or indirectly has the right to vote 25% or more of a class of a voting security or has the power to sell or direct the sale of 25% or more of a class of voting securities; or
(iii)in the case of a partnership, has the right to receive upon dissolution, or has contributed, 25% or more of the capital, is presumed to control that company. *See* Uniform Application for Broker-Dealer Registration (Form BD). In addition, NASD proposed to revise the definition of non-public arbitrator to clarify that persons who are registered with a broker-dealer may not be classified as public arbitrators. Under current rules, arbitrators who are associated with a broker or dealer are considered non-public. In the financial services industry, it is not uncommon for a person to be employed by one company (such as a bank or insurance company) and to be registered to sell securities through another company (such as an affiliated broker-dealer). NASD believes that there may be some uncertainty among arbitrators who work for entities in a control relationship with a broker-dealer as to whether they are associated with a broker-dealer for purposes of NASD Rule 10308, even though they are registered with the broker-dealer. Because the definition of “person associated with a member” in the NASD By-Laws includes persons who are registered with a broker-dealer, regardless of their status as employees, such persons are considered non-public arbitrators. Therefore, NASD proposes to amend the definition of non-public arbitrator to specifically include anyone registered with a broker-dealer. 11 11 For purposes of NASD Rule 10308(a)(4)(A)(i), the term “including” is expanding or illustrative, not exclusive or limiting. The use of the term “including but not limited to” in NASD Rule 10321(d) of the Code is not intended to create a negative implication regarding the use of “including” without the term “but not limited to” in NASD Rule 10308(a)(4)(A)(i) or other provisions of the Code. III. Summary of Comments The Commission received 65 comments on the proposal. 12 Several commenters believed that the changes proposed were laudatory. 13 Many viewed the proposed amendments as insufficient to address what they considered to be an arbitration process that is unfair to investors. Their concerns generally centered in three areas:
(1)The inclusion of any non-public arbitrators on arbitration panels;
(2)the criteria for qualifying as a non-public or public arbitrator; and
(3)the desire to harmonize NASD and NYSE rules on this issue. 14 12 *See* footnote 6. 13 *See, e.g.* , Barnes, Chasen, Gross, Kaufman, Lipner, PIABA, Pounds, and Rosenberg. 14 Many of these comments also applied to the NYSE Rule Change and were also addressed by the NYSE. *See* Letter from Mary Yeager, Assistant Secretary, NYSE, to Katherine A. England, Assistant Director, SEC, dated June 5, 2006, available at: *http://www.sec.gov/rules/sro/nyse/nyse200543/myeager060506.pdf.* Inclusion of Non-Public Arbitrators The majority of commenters expressed the view that the mandatory inclusion of arbitrators who are involved in the securities industry on arbitration panels creates an unfair burden for investors seeking redress, and stated that arbitration panels should be comprised only of individuals with no ties to the securities industry. 15 A number of commenters maintained that the mandatory inclusion of non-public arbitrators creates a perception that the process is unfair and biased against investors, 16 and some suggested eliminating the non-public arbitrator. 17 15 *See, e.g.* , Arbuckle, Austin, Barnes, Bernstein, Brewer, Canning, Caruso, Chasen, Davis, Doner, Doss, Estell, Evans, Feldman, Friedberg, Fynes, Gard, Gillis, Goldstein, Goodman, Graham, Greco, Greenman, Harrison, Heiner, Hudson, Kampen, Kruske, Landsman, Langenbacher, Layne, Lea, Ledbetter, Levenstein, Lipner, Lopez, Mihalek, Miller, Ostwald, Parker, Pederson, Perkins, PIABA, Port, Pounds, Salamon, Savage, Schultz, Seiler, Silver, Stoltmann, Torngren, and Willner. 16 * See, e.g.* , Galvin, Gillis, Greco, Greenberg, Harrison, Heiner, Lopez, Salamon, Torngren, and Willner. 17 *See, e.g.* , Davis, Harrison, Ostwald, and Torngren. Two commenters stated that any required securities industry expertise should come from expert testimony, thereby negating the need for a non-public arbitrator on a panel. 18 Another commenter opined that non-public arbitrators face pressure from their firms to prevent or to reduce damage awards against the securities industry. 19 One commenter stated that overturning the factual findings of an arbitration panel on appeal is significantly more difficult than overturning the factual findings of a jury, and thus it is critical to establish the objectivity of panel members by removing the non-public arbitrator. 20 Another commenter stated that arbitration should be voluntary because, in his view, non-public arbitrators are inherently biased. 21 18 Brannan and Lopez. 19 Feldman. 20 Pederson. 21 Mihalek. Criteria for Non-Public and Public Arbitrators Several commenters also stated that the proposed rule change would neither adequately preclude persons with ties, either directly or through their firms, to the securities industry from meeting the definition of public arbitrator, nor would it thoroughly include such people within the definition of non-public arbitrator. 22 In particular, commenters criticized two existing provisions in the current Rule. First, they commented that current NASD Rule 10308(a)(4)(C) defines a non-public arbitrator to include any attorney, accountant, or other professional who has devoted 20 percent or more of his or her professional work, in the last two years, to brokerage or commodity firms or their associated persons. Second, they noted that current NASD Rule 10308(a)(5)(A)(iv) provides that an attorney, accountant, or other professional whose firm derived 10 percent or more of its annual revenue in the past two years from brokerage or commodity firms or their associated persons is precluded from being a public arbitrator. 22 *See, e.g.* , Caruso, Evans, Galvin, Lipner, Lopez, and PIABA. One commenter stated that the definition of non-public arbitrator should be amended to remove the 20 percent threshold and instead include all attorneys, accountants or other professionals who have devoted “any” work to the securities industry. 23 Another opined that both the 20 percent and 10 percent limitations are too liberal and they fail to address the conflicts these professionals are subject to. 24 In this commenter's view, public arbitrators should have no role in representing securities or commodities firms. 23 Caruso. The commenter noted that the preclusion should apply to individuals that have represented clients in the securities industry for the last 5 years. NASD Rule 10308(a)(4)(C) currently applies only to activities in the last two years. 24 Galvin. One commenter stated that the 10 percent threshold “is arbitrary and has no practical or legal significance.” 25 The commenter stated that large law firms may represent securities industry clients that generate millions of dollars in fees, but still may not exceed 10 percent of the firm's revenues. It further stated that “an attorney who represents industry clients which comprise less than 10 percent of the firm's annual revenue in the past two years, has the same obligation, commitment and duty of loyalty to the client as does the attorney with clients who equal or exceed the 10 percent limit.” 26 Another commenter stated that “an attorney whose firm represents any securities industry clients is inescapably subject to the securities industry influence regardless of the percentage of industry business.” 27 This commenter remarked that even firms with a small percentage of securities industry business would like to have more. 25 PIABA. 26 *Id.* 27 Bernstein. Some commenters recommended eliminating the 10 percent threshold and, as a result, excluding from the definition of public arbitrator all attorneys, accountants or other professionals whose firms have derived any revenue from the securities industry in the last two years. 28 Two commenters opined that, at a minimum, NASD should remove all defense lawyers who represent the securities industry from the pool of public arbitrators. 29 28 Evans, Bernstein, PIABA, and Schultz. 29 Feldman and Lipner. Harmonizing NYSE and NASD Rules One commenter expressed concern that the proposed rule change would “differ significantly” from the Uniform Code of Arbitration (“UCA”) classification rule, and stated that NASD's proposed rule change and the NYSE Rule Change should have been “brought to the Commission with the same text after being vetted by SICA” (the Securities Industry Conference on Arbitration). 30 In this commenter's view, the Commission should compel NASD and the NYSE to develop “identical solutions” to this issue. 31 30 Ryder. 31 *Id.* In particular, this commenter highlighted the differences in relatives who would be considered an “immediate family member” under each rule. The NASD proposal would exclude immediate family members of all control-related parties from serving as public arbitrators, while the NYSE Rule Change excluded only immediate family members of associated persons. The NASD proposal also would include step-relatives, while the NYSE Rule Change did not. Finally, the NASD proposal does not include in-laws within the definition of control-related parties, while the NYSE Rule Change did not. IV. NASD Response to Comments As a preliminary matter, NASD stated that suggestions that non-public arbitrators should be eliminated from arbitration panels were beyond the scope of the rule filing, which applies to the classification of arbitrators and not the composition of arbitration panels. 32 32 *See* letter from John D. Nachmann, Counsel, NASD, to Lourdes Gonzalez, Assistant Chief Counsel—Sales Practices, SEC, dated Aug. 23, 2006, available at: *http://www.sec.gov/rules/sro/nasd/nasd2005094/nasd2005094-65.pdf.* NASD also stated that the current definitions of non-public arbitrator and public arbitrator, in conjunction with the proposed rule change, will properly exclude individuals with significant ties to the securities industry from being classified as public arbitrators. 33 It stressed that the proposed rule change eliminates from the definition of public arbitrator both persons with “actual bias” and those “perceived as being biased.” NASD noted that its rules already prohibit professionals from serving as public arbitrators if they have devoted 20 percent or more of their work in the last two years to securities industry clients. It also stated that it has taken the additional step in the current rule to exclude from the definition of public arbitrator professionals whose firm derived 10 percent or more of its annual revenue in the past two years from securities industry clients. 34 33 *Id.* 34 *Id.* NASD noted that its rules already prohibit the following individuals from serving as public arbitrators:
(1)Anyone associated with securities industry during the past five years,
(2)anyone who has spent 20 or more years in the securities industry, and
(3)anyone who is the spouse or immediate family member of a person who is associated with the securities industry. NASD Rules 10308(a)(4)-(5). NASD further commented that it is not necessary for its rules with respect to the classification of arbitrators to be identical to those of the NYSE, and noted existing differences, such as the 10 percent threshold for certain professionals, between its rules and the NYSE rule. 35 Regarding the proposed amendment to prohibit certain family members or relatives of certain family members who work for a controlled entity from serving as public arbitrators, NASD stated that it drafted this proposal to ensure that individuals with significant ties to the securities industry do not serve as public arbitrators. 36 35 Similar to the current NASD Rule 10308(a)(4)(C), NYSE Rule 607(A)(2)(iv) defines an industry arbitrator to include any attorney, accountant or other professional who has devoted 20 percent or more of his or her work to securities industry clients within the last two years. 36 *Id.* V. Discussion and Commission Findings After careful review, the Commission finds that the proposed rule change, as amended, is consistent with the provisions of Section 15A(b)(6) 37 of the Act, which require, among other things, NASD's rules to 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. 38 37 15 U.S.C. 78o-3(b)(6). 38 In approving this proposed rule change, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. *See* 15 U.S.C. 78c(f). The Commission believes that the proposed rule change will promote the public interest by limiting certain people who have ties to the securities industry from serving as public arbitrators. In particular, by expanding the list of entities controlled by companies engaged in the securities business, the rule will further limit the industry ties the public arbitrator may have. The inclusion of immediate family members within the list of controlled parties who may not be public arbitrators should have a similar result. 39 In addition, reminding persons registered with broker-dealers that they are associated persons of a broker-dealer should further assist in the correct classification of these persons as non-public arbitrators. 40 39 Section 19(b)(2) of the Act requires the Commission to approve a proposed rule change if it finds that the proposed rule change is consistent with the requirements of the Act, and the applicable rules and regulations thereunder. This standard does not require NASD rules to be identical to rules adopted by the NYSE or by SICA. 40 The Commission notes that persons employed by a broker-dealer (other than in a clerical or ministerial capacity) are associated persons of a broker-dealer as defined in Section 3(a)(18) of the Act. The Commission appreciates the comments suggesting the elimination of non-public arbitrators, and the further restriction on persons who have any ties to the securities industry from serving as public arbitrators. While these comments are beyond the scope of this rule filing, they raise important questions regarding the arbitration process. We understand that SICA is actively considering proposals from its membership regarding these issues. We note that NASD has stated that it will review any rule regarding panel composition that SICA adopts to the UCA, and that it is considering further amendments to the definitions of public arbitrator and non-public arbitrator. 41 41 Telephone conversation between John D. Nachmann, Counsel, NASD, and Michael Hershaft, Special Counsel, SEC (Oct. 3, 2006). VI. Conclusion *It is therefore ordered,* pursuant to Section 19(b)(2) of the Act 42 that the proposed rule change, as amended (SR-NASD-2005-094), be, and hereby is, approved. 42 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 43 43 17 CFR 200.30-3(a)(12). Jill M. Peterson, Assistant Secretary. [FR Doc. E6-17563 Filed 10-19-06; 8:45 am] BILLING CODE 8011-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-54597; File No. SR-NYSEArca-2006-21] Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving Proposed Rule Change Relating to NYSE Arca Data October 12, 2006. I. Introduction On May 23, 2006, the NYSE Arca, Inc. (“NYSE Arca” or “Exchange”) filed with the Securities and Exchange Commission (“Commission” or “SEC”), 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 establish fees for the receipt and use of certain market data that the Exchange makes available. The proposal was published for comment in the **Federal Register** on June 9, 2006. 3 The Commission received four comment letters regarding the proposal. 4 On July 25, 2006, and August 25, 2006, the Exchange filed letters responding to the issues raised in the comment letters. 5 This order approves the proposal. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 *See* Securities Exchange Act Release No. 53952 (June 7, 2006), 71 FR 33496. 4 *See* letters from Gregory Babyak, Chair, Market Data Subcommittee, the Securities Industry Association (“SIA”), and Christopher Gilkerson, Chair, Technology and Regulation Committee, SIA, to Nancy M. Morris, Secretary, SEC, dated June 30, 2006 (“SIA Letter I”), and August 18, 2006 (“SIA Letter II”); web comment from Steven C. Spencer, Esq., dated June 18, 2006 (“Spencer Letter”); and letter from Markham C. Erickson, Executive Director and General Counsel, Netcoalition, to the Honorable Christopher Cox, Chairman, SEC, dated August 9, 2006 (“Netcoalition Letter”). SIA Letters I and II also provide comments concerning File No. SR-NYSE Arca-2006-23, NYSE Arca's proposal to establish a pilot program setting fees for the receipt and use of market data relating to NYSE Arca's best bids and offers. The Netcoalition Letter's comments also apply to File Nos. SR-NYSE Arca-2006-23; SR-NASD-2005-056; and SR-NASD-2006-072. 5 *See* letters from Janet Angstadt, Acting General Counsel, NYSE Arca, Inc., to Nancy M. Morris, Secretary, SEC, dated July 25, 2006 (“NYSE Arca Response I”) and August 25, 2006 (“NYSE Arca Response II”). II. Description of the Proposal Through NYSE Arca, LLC, the equities trading facility of NYSE Arca Equities, Inc., the Exchange makes available on a real-time basis ArcaBook, SM a compilation of all limit orders resident in the NYSE Arca limit order book. In addition, the Exchange makes available real-time information relating to transactions and limit orders in debt securities that are traded through the Exchange's facilities. The Exchange makes ArcaBook and the bond transaction and limit order information (collectively, “NYSE Arca Data”) available to market data vendors, broker-dealers, private network providers, and other entities by means of data feeds. Currently, the Exchange does not charge fees for the use receipt and use of NYSE Arca Data. The Exchange proposes to establish fees for the receipt and use of NYSE Arca Data. Specifically, the Exchange proposes to establish a $750 per month access fee for access to the Exchange's data feeds that carry the NYSE Arca Data. The Exchange also proposes to establish professional and non-professional device fees for the NYSE Arca Data. 6 For professional subscribers, the Exchange proposes to establish a monthly fee of $15 per device for the receipt of ArcaBook data relating to exchange-traded funds (“ETFs”) and those equity securities for which reporting is governed by the CTA Plan (“CTA Plan and ETF Securities”) and a monthly fee of $15 per device for the receipt of ArcaBook data relating to those equity securities, excluding ETFs, for which reporting is governed by the Nasdaq UTP Plan (“Nasdaq UTP Plan Securities”). 7 For non-professional subscribers, the Exchange proposes to establish a monthly fee of $5 per device for the receipt of ArcaBook data relating to CTA Plan and ETF Securities and a monthly fee of $5 per device for the receipt of ArcaBook data relating to Nasdaq UTP Plan Securities. 8 6 In differentiating between professional and non-professional subscribers, the Exchange proposes to apply the same criteria used by the Consolidated Tape Association Plan (“CTA Plan”) and the Consolidated Quotation System Plan (“CQ Plan”) for qualification as a non-professional subscriber. 7 The “Nasdaq UTP Plan” is the Joint Self-Regulatory Organization Plan Governing the Collection, Consolidation and Dissemination of Quotation and Transaction Information for Nasdaq-Listed Securities Traded on Exchanges on an Unlisted Trading Privileges Basis. 8 There will be no monthly device fees for limit order and last sale price information relating to debt securities traded through the Exchange's facilities. The Exchange also proposes a maximum monthly payment for device fees paid by any broker-dealer for non-professional subscribers that maintain brokerage accounts with the broker-dealer. 9 For 2006, the Exchange proposes a $20,000 maximum monthly payment. For the months falling in a subsequent calendar year, the maximum monthly payment shall increase (but not decrease) by the percentage increase (if any) in the annual composite share volume 10 for the calendar year preceding that subsequent calendar year, subject to a maximum annual increase of five percent. 9 Professional subscribers may be included in the calculation of the monthly maximum amount so long as
(i)nonprofessional subscribers comprise no less than 90 percent of the pool of subscribers that are included in the calculation;
(ii)each professional subscriber that is included in the calculation is not affiliated with the broker-dealer or any of its affiliates (either as an officer, partner or employee or otherwise); and
(iii)each such professional subscriber maintains a brokerage account directly with the broker-dealer (that is, with the broker-dealer rather than with a correspondent firm of the broker-dealer). 10 “Composite share volume” for a calendar year refers to the aggregate number of shares in all securities that trade over NYSE Arca facilities for that calendar year. Lastly, the Exchange proposes to waive the device fees for ArcaBook data during the duration of the billable month in which a subscriber first gains access to the data. III. Summary of Comments The Commission received four comment letters from three commenters regarding the proposal. 11 All of the commenters objected to the proposal. Two commenters argued that the advent of for-profit exchanges raises significant issues, including the potential for conflicts of interest between an exchange's self-regulatory obligations and its obligations to shareholders. 12 One commenter urged the Commission to consider significant market data proposals, such as the current proposal, in the context of its pending review of self-regulatory organizations (“SROs”). 13 11 *See* note 4, supra. 12 *See* SIA Letter I and Netcoalition Letter, *supra* note 4. 13 *See* Netcoalition Letter, *supra* note 4. Specifically, the commenter urged the Commission to consider these issues in the context of the Concept Release concerning self-regulation. *See* Securities Exchange Act Release No. 50700 (November 18, 2004), 69 FR 71256 (December 8, 2004). Two commenters argued that the proposal reflects changes in the Exchange's policies due to its recent merger with the New York Stock Exchange, Inc. (“NYSE”). 14 One commenter stated that the merger eliminated the Exchange's incentive to compete with the NYSE and resulted in the Exchange's proposal to implement fees for its market data. 15 This commenter argued that all investors should be allowed to view market data free of charge. 14 *See* SIA Letter I and Spencer Letter, *supra* note 4. 15 *See* Spencer Letter, *supra* note 4. Another commenter noted that “[i]n the aftermath of a merger promising the new owners of the [E]xchange new revenue opportunities, the [E]xchange has fundamentally altered the role and distribution of, and changed the rules regarding access to, [the Exchange's] market data.” 16 This commenter noted that the Exchange currently provides its data for free and that the Exchange's post-merger decision to charge fees for its data and require vendors to enter into contracts governing the distribution of its data diminish market transparency and impede competition, which the commenter asserted was inconsistent with the requirements of Section 6(b)(5) of the Act. 17 Further, the commenter stated that the proposed fees would be prohibitively expensive for the “vast majority” of retail investors and could result in a two-tier market for transparency. 18 16 *See* SIA Letter I, *supra* note 4. 17 *See* SIA Letter I, *supra* note 4. The commenter also argued that the Exchange failed to address whether the proposal imposed a burden on competition and the statutory basis for the proposal. *See also* SIA Letter II *supra* note 4. 18 *See* SIA Letter I, *supra* note 4. Two commenters also argued that the proposal was deficient because the Exchange failed to adequately justify the reasonableness of the proposed fees. 19 Specifically, one commenter argued that the Exchange failed to provide the information necessary to determine whether the proposed fees bear any relation to costs, or whether they constitute an equitable allocation of the costs associated with using the Exchange's facilities. 20 The commenter also noted that the Exchange failed to provide the methodology it used to determine the proposed fees. 21 The commenter asserted that without the foregoing information, the Commission lacks a legally sufficient foundation to approve the proposed fees. 22 Another commenter argued that the Exchange provided no basis for assessing how the fees were determined and noted that the Exchange's only guidance was an assertion that its fees are in line with fees charged by other SROs. 23 19 *See* SIA Letters I and II, and Netcoalition Letter, *supra* note 4. 20 *See* SIA Letters I and II, *supra* note 4. 21 *Id* . 22 *See* SIA Letter I, *supra* note 4. 23 *See* Netcoalition Letter, *supra* note 4. One commenter argued that the proposal should not be approved because the Exchange failed to include the contract terms which would govern the distribution and access to the NYSE Arca Data. 24 The commenter believed that the Exchange should have to file the terms of its vendor contract with Commission for public comment and review because they will “restrict access and set material terms” for access to the NYSE Arca Data. 25 24 *See* SIA Letters I and II, *supra* note 4. 25 *See* SIA Letter I, *supra* note 4. *See also* SIA Letter II, *supra* note 4. Further, the commenter argued that Regulation NMS established that broker-dealers can distribute their own data so long as the terms of distribution are fair and reasonable and not unreasonably discriminatory. 26 The commenter asserted that the Exchange failed to “recognize [these] rights reflected in Regulation NMS” or “to negotiate with the industry a reciprocal licensing agreement.” 27 26 *See* SIA Letters I and II, *supra* note 4. 27 *Id* . Finally, one commenter argued that the Exchange failed to consider the administrative burdens associated with implementing the proposal. 28 This commenter noted that firms would be required to track access and usage, which could impose “significant development costs.” 29 28 *See* SIA Letter I, *supra* note 4. 29 *See* SIA Letter I, *supra* note 4. IV. Exchange's Responses to Comments In its responses to the commenters, the Exchange acknowledged that it was seeking to impose fees for data it currently distributes for free. The Exchange noted, however, that Regulation NMS allows each national securities exchange to distribute market data outside of the national market system plans so long as the terms of distribution are fair, reasonable, and not unreasonably discriminatory. 30 The Exchange argued that the proposal is consistent with these requirements and reflects an equitable allocation of the Exchange's overall costs to users of its facilities. 31 NYSE Arca also noted its “desire to participate in a revenue stream that is growing increasingly significant for its primary competitors.” 32 30 *See* NYSE Arca Response I and II, *supra* note 5. 31 *See* NYSE Arca Response I, *supra* note 5. 32 *See* NYSE Arca Response II, *supra* note 5. The Exchange argued that the proposal establishes “a framework for distributing data in which all vendors and end users are permitted to receive and use the Exchange's market data on equal, non-discriminatory terms.” 33 The Exchange reiterated its assertion that the proposed professional and non-professional device fees for the NYSE Arca Data were fair and reasonable because they “are far lower than those already established—and approved by the Commission—for similar products offered by other U.S. equity exchanges and stock markets.” 34 In particular, the Exchange noted that the proposed $15 per month device fee for each of the ArcaBook data products is less than both the $60 per month and $70 per month device fees that the NYSE and Nasdaq, respectively, charge for comparable market data products. 35 33 *See* NYSE Arca Response I, *supra* note 5. 34 *See* NYSE Arca Response I, *supra* note 5. 35 *See* NYSE Arca Response I, *supra* note 5. *See also* NYSE Arca Response II, *supra* note 5. With respect to its proposed fees, the Exchange noted, further, that it had invested significantly in its ArcaBook products, including making technological enhancements that allowed the Exchange to expand capacity and improve processing efficiency as message traffic increased, thereby reducing the latency associated with the distribution of ArcaBook data. 36 The Exchange stated that “[i]n determining to invest the resources necessary to enhance ArcaBook technology, the Exchange contemplated that it would seek to charge for the receipt and use of ArcaBook data.” 37 The Exchange also emphasized the quality of its market data relative to other comparable products, asserting, for example, that “NYSE Arca is at the inside price virtually as often as Nasdaq, yet the proposed fee for ArcaBook is merely one-fifth of the TotalView fee.” 38 36 *See* NYSE Arca Response II, *supra* note 5. 37 *See* NYSE Arca Response II, *supra* note 5. 38 *See* NYSE Arca Response II, *supra* note 5. The Exchange stated that it proposes to use the CTA and CQ Plan contracts to govern the distribution of NYSE Arca Data and that it was not amending the terms of these existing contracts or imposing restrictions on the use or display of its data beyond those that are currently set forth in the contracts. 39 Further, the Exchange specifically noted that these contracts do not prohibit a broker-dealer from making its own data available outside of the CTA and CQ Plans. Finally, the Exchange argued that by using this current structure, it believes that the administrative burdens on firms and vendors should be low. 40 39 *See* NYSE Arca Response I, *supra* note 5. 40 *See* NYSE Arca Response I, *supra* note 5. The Exchange also argued that it believes that the proposal would foster competition because the proposed fees
(i)will apply equally to all subscribers;
(ii)will allow the Exchange to further diversify its revenue stream to compete with its rivals; and
(iii)may provide a competitive advantage to those markets that elect not to charge fees. 41 41 *See* NYSE Arca Response I, *supra* note 5. V. Discussion After careful review, the Commission finds that the proposal is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange and, in particular, with the requirements of Section 6(b)(4) of the Act, 42 which requires that the rules of a national securities exchange provide for the equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities, and with Section 6(b)(5) of the Act, 43 which requires, among other things, that the rules of a national securities exchange be 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. 44 42 15 U.S.C. 78f(b)(4). 43 15 U.S.C. 78f(b)(5). 44 In approving the proposed rule change, the Commission considered the proposal's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). As described more fully above, the proposal establishes fees for NYSE Arca Data, including a $750 per month access fee and device fees of $30 per month for professional subscribers and $10 per month for non-professional subscribers. 45 The Commission finds that these fees are consistent with Section 6(b)(4) of the Act because they are reasonable when compared to the fees charged by other markets for similar products. In this regard, the Commission notes that the NYSE has established an access fee of $5,000 per month for the receipt of its OpenBook data feed, with a $60 per month terminal fee. 46 Similarly, Nasdaq charges access fees ranging from $1,000 to $5,000 per month for its TotalView product, and $1,000 to $5,000 per month for its OpenView product, with a combined monthly device fee of $76 for both products for professional subscribers and a monthly fee of $14 for non-professional subscribers to TotalView. 47 45 Professional subscribers would pay a monthly fee of $15 per device for the receipt of ArcaBook data relating to CTA Plan and ETF Securities, and $15 per device for the receipt of ArcaBook data relating to Nasdaq UTP Plan Securities. Non-professional subscribers would pay a monthly fee of $5 per device for the receipt of ArcaBook data relating to CTA Plan and ETF Securities, and $5 per device for the receipt of ArcaBook data relating to Nasdaq UTP Plan Securities. 46 *See* Securities Exchange Act Release No. 53585 (March 31, 2006), 71 FR 17934 (April 7, 2006) (order approving File Nos. SR-NYSE-2004-43 and SR-NYSE-2005-32). 47 According to the Exchange, Nasdaq does not offer a nonprofessional subscriber rate for OpenView. In the proposal, the Exchange analyzes its proposed fees in comparison with the fees that other U.S. markets, and the CTA and Nasdaq UTP Plans, charge for comparable products. 48 As described more fully above, 49 the Exchange also asserts that it devoted resources to enhancing ArcaBook's technology and that it considered the quantity and quality of ArcaBook data relative to comparable market data products in setting fees for NYSE Arca Data. 50 Accordingly, the Commission disagrees with commenters' assertion 51 that the Exchange has failed to justify its proposed fees. 48 The Exchange provides an additional discussion of its proposed fees in NYSE Arca Responses I and II, *supra* note 5. 49 *See* notes 30—32, *supra* , and accompanying text. 50 *See* NYSE Arca Response II, *supra* note 5. In this regard, the Exchange states that “[f]or ArcaBook, the Exchange examined the quantity and quality of the market data relative to other similar products and determined to comparatively under-price the product so as to minimize the impact on market data budgets as ArcaBook transitions to a fee-liable product.” *See* NYSE Arca Response II, *supra* note 5. 51 *See* SIA Letters I and II and Netcoalition Letter, *supra* note 4. As discussed more fully above, one commenter also asserts that the imposition of fees for NYSE Arca Data, which previously was distributed without charge, would diminish market transparency and impede competition, 52 and make NYSE Arca Data prohibitively expensive for most retail investors, thereby creating a “two-tier market for transparency” that is “contrary to the fairness goals of the Order Protection Rule.” 53 Another commenter believes that investors should be able to view market data free of charge. 54 52 *See* SIA Letter I, *supra* note 4. 53 *See* SIA Letters I and II, *supra* note 4. 54 *See* Spencer Letter, *supra* note 4. As the Commission stated in adopting Regulation NMS, Exchange Act Rule 601 55 rescinded the prohibition on SROs and their members disseminating their trade reports independently, with or without fees. 56 The Commission noted, further, that Exchange Act Rule 603(a) 57 establishes uniform standards for the distribution of quotations and trades that creates an equivalent regulatory regime for all types of markets. 58 In this regard, Exchange Act Rule 603(a)(1) requires that any market information distributed by an exclusive processor, or by a broker or dealer that is the exclusive source of information, be made available to securities information processors on terms that are fair and reasonable. 59 Exchange Act Rule 603(a)(2) requires any SRO, broker, or dealer that distributes market information to do so on terms that are not unreasonably discriminatory. As the Commission stated: 55 17 CFR 242.601. 56 *See* Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005) (“Regulation NMS Adopting Release”), at Section V.B.3.a. 57 17 CFR 242.603(a). 58 *See* Regulation NMS Adopting Release, *supra* note 56, at Section V.B.3.a. 59 *See* Regulation NMS Adopting Release, *supra* note 56, at Section V.B.3.a. These requirements prohibit, for example, a market from making its ‘core data’ ( *i.e.* , data that it is required to provide to a Network processor) available to vendors on a more timely basis than it makes available the core data to a Network processor. 60 60 * See* Regulation NMS Adopting Release, *supra* note 56, at Section V.B.3.a. The Commission believes that the commenter's assertion that the proposal is inconsistent with the fairness goals of the Order Protection Rule fails to recognize that Exchange Act Rules 601 and 603 permit, and establish general conditions for, the distribution of quotation and transaction information by SROs and other entities. Accordingly, the Commission believes that the proposal, which establishes fees and terms for the distribution of the Exchange's limit order data, involve activities permitted under Exchange Act Rule 603, subject to the requirements of Exchange Act Rule 603(a). The Commission does not believe that the imposition of fees for NYSE Arca Data will diminish market transparency or impede competition. In this regard, the Commission notes that NYSE Arca Data will continue to be available, and that, like the Exchange, other SROs, as well as brokers and dealers, will be free to distribute their market information. In addition, the Exchange believes that the fees for NYSE Arca Data could help it to compete more effectively with other markets. 61 The Exchange also notes that its fees will apply equally to all professional and non-professional subscribers, and that its fee structure will not advantage any one subscriber relative to another. 62 Accordingly, the Commission does not believe that the proposal will impede competition. 61 *See* NYSE Arca Response I, *supra* note 5. 62 *See* NYSE Arca Response I, *supra* note 5. One commenter also raises concerns regarding the contract terms that will govern the distribution of NYSE Arca Data. In particular, the commenter asserts that the Exchange has not filed its vendor distribution agreement with the Commission for public notice and comment and Commission approval, or with the CTA. 63 63 *See* SIA Letters I and II, *supra* note 4. In this regard, the commenter states that, procedurally, the Exchange “is amending and adding to the CTA vendor agreement without first submitting its contractual changes through the CTA's processes, which are subject to industry input through the new Advisory Committee mandated by Regulation NMS.” *See* SIA Letter I, *supra* note 4. The Commission disagrees with this assertion, and notes that the Exchange stated in its proposal that it planned to use the vendor and subscriber agreements used by CTA and CQ Plan Participants (the “CTA/CQ Vendor and Subscriber Agreements”) to govern the distribution of NYSE Arca Data. According to the Exchange, the CTA/CQ Vendor and Subscriber Agreements “are drafted as generic one-size-fits all agreements and explicitly apply to the receipt and use of certain market data that individual exchanges make available in the same way that they apply to data made available under the CTA and CQ Plans,” and the contracts need not be amended to cause them to govern the receipt and use of the Exchange's data. 64 The Exchange maintains that because “the terms and conditions of the CTA/CQ contracts do not change in any way with the addition of the Exchange's market data * * * there are no changes for the industry or Commission to review.” 65 64 *See* NYSE Arca Response I, *supra* note 5. 65 *See* NYSE Arca Response I, *supra* note 5. The Commission believes that the Exchange may use the CTA/CQ Vendor and Subscriber Agreements to govern the distribution of NYSE Arca Data. 66 The Commission notes that the NYSE used the CTA Vendor Agreement to govern the distribution of its OpenBook and Liquidity Quote market data products. 67 In addition, according to NYSE Arca, the CTA/CQ Vendor and Subscriber Agreements “have been in effect for many years and enjoy widespread use and acceptance.” 68 The Exchange represents that, following consultations with vendors and end-users, and in response to client demand, the Exchange: chose to fold itself into an existing contract and administration system rather than to burden clients with another set of market data agreements and another market data reporting system, both of which would require clients to commit additional legal and technical resources to support the Exchange's data products. 69 66 The Commission is not approving the CTA/CQ Vendor and Subscriber Agreements, which the CTA and CQ Plan Participants filed with the Commission as amendments to the CTA and CQ Plans that were effective on filing with the Commission pursuant to Exchange Act Rule 11Aa3-2(c)(3)(iii) (redesignated as Rule 608(b)(3)(iii) of Regulation NMS). *See,* *e.g.* , Securities Exchange Act Release No. 28407 (September 6, 1990), 55 FR 37276 (September 10, 1990) (File No. 4-2811) (notice of filing and immediate effectiveness of amendments to the Consolidated Tape Association Plan and the Consolidated Quotation Plan). Exchange Act Rule 11Aa3-2(c)(3)(iii) (redesignated as Rule 608(b)(3)(iii) of Regulation NMS) allows a proposed amendment to a national market system plan to be put into effect upon filing with the Commission if the plan sponsors designate the proposed amendment as involving solely technical or ministerial matters. 67 *See* Securities Exchange Act Release Nos. 53585 (March 31, 2006), 71 FR 17934 (April 7, 2006) (order approving File Nos. SR-NYSE-2004-43 and NYSE-2005-32) (relating to OpenBook); and 51438 (March 28, 2005), 70 FR 17137 (April 4, 2005) (order approving File No. SR-NYSE-2004-32) (relating to Liquidity Quote). For both the OpenBook and Liquidity Quote products, the NYSE attached to the CTA Vendor Agreement an Exhibit C containing additional terms governing the distribution of those products, which the Commission specifically approved. NYSE Arca is not including additional contract terms in its proposal. 68 *See* NYSE Arca Response I, *supra* note 5. 69 *See* NYSE Arca Response I, *supra* note 5. In addition, the Commission notes that the Exchange has represented that it is not imposing restrictions on the use or display of its data beyond those set forth in the existing CTA/CQ Vendor and Subscriber Agreements. 70 Because the Exchange has not proposed changes to the CTA/CQ Vendor and Subscriber Agreements, the Commission disagrees with one commenter's assertion that the Exchange is “amending and adding to the CTA vendor agreement.” 71 70 *See* NYSE Arca Response I, *supra* note 5. 71 *See* SIA Letter I, *supra* note 4. This commenter also believes that the Exchange has not recognized the rights of a broker or dealer, established in Regulation NMS, to distribute its order information, subject to the condition that it does so on terms that are fair and reasonable and not unreasonably discriminatory. 72 In response, the Exchange states that the CTA/CQ Vendor and Subscriber Agreements do not prohibit a broker-dealer member of a Plan Participant from making available to the public information relating to the orders and transaction reports that it provides to Plan Participants. 73 Accordingly, the Commission believes that the Exchange has acknowledged the rights of a broker or dealer to distribute its market information, subject to the requirements of Exchange Act Rule 603(a). 72 *See* SIA Letters I and II, *supra* note 4. 73 *See* NYSE Arca Response I, *supra* note 5. One commenter also asserts that the Exchange has failed to consider the administrative burdens that the proposal would impose, including the need for broker-dealers to develop system controls to track ArcaBook access and usage. 74 In response, the Exchange represents that it has communicated with its customers to ensure system readiness and is using a long-standing and broadly-used administrative system to minimize the amount of development effort required to meet the administrative requirements associated with the proposal. 75 Accordingly, the Commission believes that the Exchange has considered the administrative requirements associated with the proposal. 74 *See* SIA Letter I, *supra* note 4. 75 *See* NYSE Arca Response I, *supra* note 5. VI. Conclusion *It is therefore ordered,* pursuant to Section 19(b)(2) of the Act, 76 that the proposal (SR-NYSEArca-2006-21), is approved. 76 15 U.S.C. 78s(b)(2). 77 17 CFR 200.30-3(a)(12). For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 77 Jill M. Peterson, Assistant Secretary. [FR Doc. E6-17539 Filed 10-19-06; 8:45 am] BILLING CODE 8011-01-P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration Approval of Noise Compatibility Program; Orlando Sanford International Airport, Sanford, FL AGENCY: Federal Aviation Administration, DOT. ACTION: Notice. SUMMARY: The Federal Aviation Administration
(FAA)announces its findings on the noise compatibility program modification submitted by the Sanford Airport Authority under the provisions of 49 U.S.C. (the Aviation Safety and Noise Abatement Act, hereinafter referred to as “the Act”) and 14 CFR part 150. These findings are made in recognition of the description of Federal and nonfederal responsibilities in Senate Report No. 96-52 (1980). On June 22, 2005, the FAA determined that the noise exposure maps submitted by the Sanford Airport Authority under part 150 were in compliance with applicable requirements. On August 23, 2006, the FAA approved the Orlando Sanford International Airport modification to the noise compatibility program. All of the recommended modifications of the program were approved. No program elements relating to new or revised flight procedures for noise abatement were proposed by the airport operator. DATES: *Effective Date:* The effective date of the FAA's approval of the Orlando Sanford International Airport modification to the noise compatibility program is August 23, 2006. FOR FURTHER INFORMATION CONTACT: Ms. Lindy McDowell, Federal Aviation Administration, Orlando Airports District Office, 5950 Hazeltine National Dr., Suite 400, Orlando, Florida 32822,
(407)812-6331, Extension 130. Documents reflecting this FAA action may be reviewed at this same location. SUPPLEMENTARY INFORMATION: This notice announces that the FAA has given its overall approval of a modification to the noise compatibility program for Orlando Sanford International Airport, effective August 23, 2006. Under Section 47504 of the Act, an airport operator who has previously submitted a noise exposure map may submit to the FAA a noise compatibility program which sets forth the measures taken or proposed by the airport operator for the reduction of existing non-compatible land uses and prevention of additional non-compatible land uses within the area covered by the noise exposure maps. The Act requires such programs to be developed in consultation with interested and affected parties including local communities, government agencies, airport users, and FAA personnel. Each airport noise compatibility program developed in accordance with Federal Aviation Regulations
(FAR)part 150 is a local program, not a Federal Program. The FAA does not substitute its judgment for that of the airport proprietor with respect to which measure should be recommended for action. The FAA's approval or disapproval of FAR part 150 program recommendations is measured according to the standards expressed in part 150 and the Act, and is limited to the following determinations: a. the noise compatibility program was developed in accordance with the provisions and procedures of FAR part 150; b. Program measures are reasonably consistent with achieving the goals of reducing existing non-compatible land uses around the airport and preventing the introduction of additional non-compatible land uses; c. Program measures would not create an undue burden on interstate or foreign commerce, unjustly discriminate against types or classes of aeronautical uses, violate the terms of airport grant agreements, or intrude into areas preempted by the Federal government; and d. Program measures relating to the use of flight procedures can be implemented within the period covered by the program without derogating safety, adversely affecting the efficient use and management of the navigable airspace and air traffic control systems, or adversely affecting other powers and responsibilities of the Administrator prescribed by law. Specific limitations with respect to FAA's approval of an airport noise compatibility program are delineated in FAR Part 150, Section 150.5. Approval is not a determination concerning the acceptability of land uses under Federal, state, or local law. Approval does not by itself constitute an FAA implementing action. A request for Federal action or approval to implement specific noise compatibility measures may be required, and an FAA decision on the request may require an environmental assessment of the proposed action. Approval does not constitute a commitment by the FAA to financially assist in the implementation of the program nor a determination that all measures covered by the program are eligible for grant-in-aid funding from the FAA. Where Federal funding is sought, requests for project grants must be submitted to the FAA Airports District Office in Orlando, Florida. Sanford Airport Authority submitted to the FAA on January 6, 2006, the noise exposure maps, descriptions, and other documentation produced during the noise compatibility modification study conducted from March 8, 2004, through January 6, 2006. The Orlando Sanford International Airport noise exposure maps, submitted to the FAA on June 9, 2005, were determined by FAA to be in compliance with applicable requirements on June 22, 2005. Notice of this determination was published in the **Federal Register** on June 22, 2005. The Orlando Sanford International Airport study contains a proposed modification to the noise compatibility program comprised of actions designed for phased implementation by airport management and adjacent jurisdictions from 2004 to the year 2009. It was requested that FAA evaluate and approve this material as a noise compatibility program modification as described in section 47504 of the Act. The FAA began its review of the program modification on March 3, 2006, and was required by a provisions of the Act to approve or disapprove the program within 180 days (other than the use of new or modified flight procedures for noise control). Failure to approve or disapprove such program within the 180-day period shall be deemed to be an approval of such program. The submitted program contained one
(1)proposed action for noise mitigation off the airport. The FAA completed its review and determined that the procedural and substantive requirements of the Act and FAR Part 150 have been satisfied. The overall program modification, therefore, was approved by the FAA effective August 23, 2006. Outright approval was granted for all of the specific program elements. Approved actions include a modification to Land Use Measure H in which the airport proposes additional acquisition for noise abatement purposes those areas that are identified as non-compatible land uses and located in the 65 DNL noise contour in the updated NEM (2004). These determinations are set forth in detail in a Record of Approval signed by the FAA on August 23, 2006. The Record of Approval, as well as other evaluation materials and the documents comprising the submittal, are available for review at the FAA office listed above and at the administrative office of the Sanford Airport Authority. The Record of Approval also will be available on-line at *http://www.faa.gov/arp/environmental/14cfr150/index14.cfm* . Issued in Orlando, Florida on September 28, 2006. W. Dean Stringer, Manager, Orlando Airports District Office. [FR Doc. 06-8789 Filed 10-19-06; 8:45 am]
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  • 17 CFR 240.19
  • 14 CFR 150
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U.S.C.§ 78c
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U.S.C.§ 552
C.F.R.§ 200.30-3
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C.F.R.§ 242.601
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