

[Federal Register: February 21, 2006 (Volume 71, Number 34)]
[Notices]               
[Page 8877-8880]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21fe06-84]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53277; File No. SR-NYSE-2006-03]

 
Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Extend for an Additional Six Months the Pilot Program Permitting a 
Floor Broker and an RCMM To Use an Exchange Authorized and Provided 
Portable Telephone on the Exchange Floor

 February 13, 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 January 31, 2006, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange seeks to extend its pilot program that amends NYSE 
Rule 36 (Communication Between Exchange and Members' Offices) to allow 
Floor brokers and Registered Competitive Market Makers (``RCMMs'') to 
use Exchange authorized and provided portable telephones on the 
Exchange Floor upon approval by the Exchange (``Pilot'') for an 
additional six months, until July 31, 2006. The last extension of the 
Pilot was in effect on a six-month pilot basis expiring on January 31, 
2006.\3\ The text of the proposed rule change is available on the 
Exchange's Web site (http://www.nyse.com), at the


[[Page 8878]]

Exchange's principal office, and at the Commission's Public Reference 
Room.
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    \3\ See Securities Exchange Act Release No. 52188 (August 1, 
2005), 70 FR 46252 (August 9, 2005) (SR-NYSE-2005-53).
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose

Background

    The Commission originally approved the Pilot to be implemented as a 
six-month pilot \4\ beginning no later than June 23, 2003. \5\ Since 
the inception of the Pilot, the Exchange has extended the Pilot five 
times, with the current Pilot expiring on January 31, 2006.\6\ Most 
recently, the Exchange incorporated RCMMs into the Pilot and clarified 
the conditions under which a Floor broker may use an Exchange 
authorized and provided portable phone.\7\ The Exchange has also filed 
for permanent approval of NYSE Rule 36, as amended.\8\
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    \4\ See Securities Exchange Act Release No. 47671 (April 11, 
2003), 68 FR 19048 (April 17, 2003) (SR-NYSE-2002-11) (``Original 
Order'').
    \5\ See Securities Exchange Act Release No. 47992 (June 5, 
2003), 68 FR 35047 (June 11, 2003) (SR-NYSE-2003-19) (delaying the 
implementation date for portable phones from on or about May 1, 2003 
to no later than June 23, 2003).
    \6\ See Securities Exchange Act Release Nos. 48919 (December 12, 
2003), 68 FR 70853 (December 19, 2003) (SR-NYSE-2003-38) (extending 
the Pilot for an additional six months ending on June 16, 2004); 
49954 (July 1, 2004), 69 FR 41323 (July 8, 2004) (SR-NYSE-2004-30) 
(extending the Pilot for an additional five months ending on 
November 30, 2004); 50777 (December 1, 2004), 69 FR 71090 (December 
8, 2004) (SR-NYSE-2004-67) (extending the Pilot for an additional 
four months ending March 31, 2005); 51464 (March 31, 2005), 70 FR 
17746 (April 7, 2005) (SR-NYSE-2005-20) (extending the Pilot for 
additional four months ending July 31, 2005); and 52188, supra note 
3.
    \7\ See Securities Exchange Act Release No. 53213 (February 2, 
2006) (SR-NYSE-2005-80).
    \8\ See SR-NYSE-2004-52 (September 7, 2004).
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    With respect to regulatory actions concerning the Pilot, there is 
an open investigation into possible insider trading in an NYSE listed 
security in which the trading activity of two RCMMs has been identified 
and is under review. The use of an Exchange authorized and provided 
portable phone by one of the RCMMs in or about January 2005 is under 
review as part of the investigation. No administrative or technical 
problems, other than routine telephone maintenance issues, have 
resulted from the Pilot over the past few months.\9\ Therefore, the 
Exchange seeks to extend the Pilot for an additional six months, until 
July 31, 2006.
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    \9\ The Exchange notes that it has received incoming telephone 
records for Floor brokers for the period of July 4, 2005 through 
January 31, 2006, and for RCMMs for the period of November 22, 2005 
through January 31, 2006, and will continue to receive monthly 
updates.
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NYSE Rule 36

    NYSE Rule 36 governs the establishment of telephone or electronic 
communications between the Exchange Floor and any other location. Prior 
to the Pilot, NYSE Rule 36.20 prohibited the use of portable telephone 
communications between the Exchange Floor and any off-Floor location. 
The only way that voice communication could be conducted by Floor 
brokers between the Exchange Floor and an off-Floor location prior to 
the Pilot was by means of a telephone located at a broker's booth. 
These communications often involved a customer calling a broker at the 
booth for ``market look'' information. Prior to the Pilot, a broker 
could not use a portable phone at the point of sale in the trading 
crowd to speak with a person located off the Exchange Floor.
    Furthermore, until recently, NYSE Rule 36.20 only applied to a 
Floor broker's ability to use an Exchange authorized and provided 
portable phone.\10\ RCMMs are non-specialist members of the Exchange 
and do not have the same type of information (i.e., access to the 
Display Book[reg]) that a specialist has. As such, the Exchange 
believes it is appropriate for RCMMs to participate in the Pilot so 
that they can communicate with their offices in order to, among other 
things, enter off-Floor orders and better monitor their positions.\11\
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    \10\ Telephone conversation between Jeff Rosenstrock, Senior 
Counsel, NYSE, and Molly M. Kim, Attorney, Division of Market 
Regulation, Commission, on February 8, 2006.
    \11\ The Exchange has developed surveillance and examination 
procedures to monitor the activities of RCMMs, including their use 
of Exchange authorized and provided portable phones.
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    The Exchange proposes to extend the Pilot for an additional six 
months, expiring on July 31, 2006. The Pilot would amend NYSE Rule 36 
to permit Floor brokers and RCMMs to use Exchange authorized and issued 
portable telephones on the Exchange Floor. Thus, with the approval of 
the Exchange, a Floor broker would be permitted to engage in direct 
voice communication from the point of sale to an off-Floor location, 
such as a member firm's trading desk or the office of one of the 
broker's customers. Such communications would permit the broker to 
accept orders consistent with Exchange rules \12\ and provide status 
and oral execution reports of orders previously received, as well as 
``market look'' observations as have historically been routinely 
transmitted from a broker's booth location. Moreover, the Pilot would 
allow RCMMs to use an Exchange authorized and portable phone solely to 
communicate with their or their member organizations' off-Floor office 
and the off-Floor office of their clearing member organization, to 
enter off-Floor orders, and to discuss matters related to the clearance 
and settlement of transactions, provided the off-Floor office uses a 
wired telephone line for these discussions. RCMMs, however, would not 
be allowed to use a portable phone to conduct any agency business until 
issues involving the use of portable phones by RCMMs acting in the 
capacity of agent have been fully reviewed and resolved by NYSE 
Regulation in consultation with the Commission.\13\ For both RCMMs and 
Floor brokers, use of a portable telephone on the Exchange Floor other 
than one authorized and issued by the Exchange would continue to be 
prohibited.
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    \12\ Floor brokers receiving orders from the public over 
portable phones must be properly qualified to engage in such 
``direct access'' business under NYSE Rules 342 and 345, among 
others.
    \13\ Allowing RCMMs acting as Floor brokers to use Exchange 
authorized and provided portable phones would involve further 
discussions with the Commission and would be the subject of a 
separate filing with the Commission.
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    Furthermore, both incoming and outgoing calls would continue to be 
allowed, provided the requirements of all other Exchange rules have 
been met. Under NYSE Rule 123(e), a broker would not be permitted to 
represent and execute any order received as a result of such voice 
communication unless the order was first properly recorded by the 
member and entered into the Exchange's Front End Systemic Capture 
(``FESC'') electronic database.\14\ In addition, Exchange rules require 
that any Floor

[[Page 8879]]

broker receiving orders from the public over portable phones must be 
properly qualified to engage in such direct access business under NYSE 
Rules 342 and 345, among others.\15\
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    \14\ See Securities Exchange Act Release No. 43689 (December 7, 
2000), 65 FR 79145 (December 18, 2000) (SR-NYSE-98-25). See also 
Securities Exchange Act Release No. 44943 (October 16, 2001), 66 FR 
53820 (October 24, 2001) (SR-NYSE-2001-39) (discussing certain 
exceptions to FESC, such as orders to offset an error or a bona fide 
arbitrage, which may be entered within 60 second after a trade is 
executed).
    \15\ See Information Memos 01-41 (November 21, 2001), 01-18 
(July 11, 2001) (available on http://www.nyse.com) and 91-25 (July 

8, 1991) for more information regarding Exchange requirements for 
conducting a public business on the Exchange Floor.
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    In addition, NYSE Rule 36 does not apply to specialists, who are 
prohibited from speaking from the post to upstairs trading desks or 
customers.\16\ The Exchange notes that specialists are subject to 
separate restrictions in NYSE Rule 36 on their ability to engage in 
voice communications from the specialist post to an off-Floor 
location.\17\
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    \16\ NYSE Rule 36.30 provides that, with the approval of the 
Exchange, a specialist unit may maintain a telephone line at its 
stock trading post location to the off-Floor offices of the 
specialist unit or the unit's clearing firm. Such telephone 
connection shall not be used for the purpose of transmitting to the 
Floor orders for the purchase or sale of securities, but may be used 
to enter options or futures hedging orders through the unit's off-
Floor office or the unit's clearing firm, or through a member (on 
the Exchange Floor) of an options or futures exchange.
    \17\ See Securities Exchange Act Release No. 46560 (September 
26, 2002), 67 FR 62088 (October 3, 2002) (SR-NYSE-00-31) (discussing 
restrictions on specialists' communications from the post).
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    By enabling customers to speak directly to a Floor broker in a 
trading crowd on an Exchange authorized and issued portable telephone 
and by allowing RCMMs to communicate with their upstairs office's land 
line and the land line of their clearing member organization's upstairs 
office, the Exchange believes that the proposed rule change would 
expedite and make more direct the free flow of information which, prior 
to the Pilot, had to be transmitted somewhat more circuitously via the 
booth. The Exchange believes that an extension of the Pilot for an 
additional six months would enable the Exchange to provide more direct, 
efficient access to its trading crowds and customers, increase the 
speed of transmittal of orders and the execution of trades, and provide 
an enhanced level of service to customers in an increasingly 
competitive environment.\18\
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    \18\ See, e.g., Securities Exchange Act Release Nos. 43493 
(October 30, 2000), 65 FR 67022 (November 8, 2000) (SR-CBOE-00-04) 
(expanding the Chicago Board Options Exchange, Inc.'s existing 
policy and rules governing the use of telephones at equity option 
trading posts by allowing for the receipt of orders over outside 
telephone lines from any source, directly at equity trading posts) 
and 43836 (January 11, 2001), 66 FR 6727 (January 22, 2001) (SR-PCS-
00-33) (discussing and approving the Pacific Exchange's proposal to 
remove current prohibitions against Floor brokers' use of cellular 
or cordless phones to make calls to persons located off the trading 
floor).
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Pilot Program Results

    Since the Pilot's inception, the Exchange represents that there 
have been approximately 800 portable phone subscribers.\19\ In 
addition, with regard to portable phone usage, for a sample week of 
December 5, 2005 through December 9, 2005, an average of 10,951 calls 
per day were originated from portable phones, and an average of 4,932 
calls per day were received on portable phones. Of the calls originated 
from portable phones, an average of 7,216 calls per day was internal 
calls to the booth, and 3,735 calls per day were external calls. Thus, 
approximately 66% of the calls originated from portable phones were 
internal calls to the booth. With regard to received calls, of the 
4,932 average calls per days received, an average of 2,472 calls per 
day was external calls and an average of 2,460 calls per day was 
internal calls received from the booth. Thus, approximately 50% of all 
received calls were internally generated and 50% were calls from the 
outside.
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    \19\ The data includes both Floor brokers' and RCMMs' usage of 
Exchange authorized and provided phones. Telephone conversation 
between Jeff Rosenstrock, Senior Special Counsel, NYSE, and Molly M. 
Kim, Attorney, Division of Market Regulation, Commission, on 
February 7, 2006.
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    Therefore, the Exchange believes that the Pilot appears to be 
successful in that there is a reasonable degree of usage of portable 
phones. Furthermore, except as noted above, there have been no other 
regulatory, administrative, or other technical problems identified with 
their usage. The Exchange also believes that the Pilot appears to 
facilitate communication on the Exchange Floor for both Floor brokers 
and RCMMs without any corresponding drawbacks. Therefore, the Exchange 
believes it is appropriate to extend the Pilot for an additional six 
months, expiring on July 31, 2006.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \20\ in general, and further the 
objectives of Section 6(b)(5) of the Act \21\ in particular, in that it 
is designed to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest. The Exchange believes that the 
amendment to NYSE Rule 36 would support the mechanism of free and open 
markets by providing for increased means by which communications to and 
from the Exchange Floor could take place.
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    \20\ 15 U.S.C. 78f(b).
    \21\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \22\ and Rule 19b-
4(f)(6) thereunder.\23\ At any time within 60 days of the filing of the 
proposed rule change, the Commission may summarily abrogate such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
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    \22\ 15 U.S.C. 78s(b)(3)(A).
    \23\ 17 CFR 240.19b-4(f)(6).
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    The Exchange requests that the Commission waive the 30-day 
operative period under Rule 19b-4(f)(6)(iii).\24\ The Exchange believes 
that the continuation of the Pilot is in the public interest as it will 
avoid inconvenience and interruption to the public. The Commission 
believes that it is consistent with the protection of investors and the 
public interest to waive the 30-day operative delay and make this 
proposed rule change immediately effective upon filing on January 31, 
2006.\25\ The Commission believes that the waiver of the 30-day 
operative delay will allow the Exchange to continue, without 
interruption, the

[[Page 8880]]

existing operation of its Pilot until July 31, 2006.
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    \24\ 17 CFR 240.19b-4(f)(6)(iii).
    \25\ For purposes only of waiving, the 30-day operative delay of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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    The Commission notes that proper surveillance is an essential 
component of any telephone access policy to an exchange trading floor. 
Surveillance procedures should help to ensure that Floor brokers and 
RCMMs use portable phones as authorized by NYSE Rule 36 \26\ and that 
orders are being handled in compliance with NYSE rules. The Commission 
expects the Exchange to actively review these procedures and address 
any potential concerns that have arisen during the Pilot. In this 
regard, the Commission notes that the Exchange should address whether 
telephone records are adequate for surveillance purposes.
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    \26\ See note 11 supra and accompanying text for other NYSE 
requirements that Floor brokers be properly qualified before doing 
public customer business.
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    The Commission also requests that the Exchange report any problems, 
surveillance, or enforcement matters associated with the Floor brokers' 
and RCMMs' use of an Exchange authorized and provided portable 
telephone on the Exchange Floor. As stated in the Original Order, the 
NYSE should also address whether additional surveillance would be 
needed because of the derivative nature of the ETFs. Furthermore, in 
any future additional filings on the Pilot, the Commission would expect 
that the NYSE submit information documenting the usage of the phones, 
any problems that have occurred, including, among other things, any 
regulatory actions or concerns, and any advantages or disadvantages 
that have resulted.\27\
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    \27\ In the future, the Commission expects the information to 
distinguish between Floor brokers' and RCMMs' usage of the phones.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NYSE-2006-03 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-NYSE-2006-03. 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 NYSE. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly.
    All submissions should refer to File Number SR-NYSE-2006-03 and 
should be submitted on or before March 14, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-2367 Filed 2-17-06; 8:45 am]

BILLING CODE 8010-01-P
