

[Federal Register: January 26, 2007 (Volume 72, Number 17)]
[Notices]               
[Page 3896-3897]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26ja07-160]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55132; File No. SR-NYSE-2006-57]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Granting Approval of a Proposed Rule Change Amending Rule 180 to 
Require Member Organizations to Use the Automated Liability 
Notification System of a Registered Clearing Agency

January 19, 2007.

I. Introduction

    On August 3, 2006, the New York Stock Exchange LLC (``NYSE'') filed 
with the Securities and Exchange Commission (``Commission'') and on 
November 15, 2006, amended proposed rule change SR-NYSE-2006-57 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'').\1\ Notice of the proposal was published in the Federal 
Register on December 7, 2006.\2\ One comment letter was received.\3\ 
For the reasons discussed below, the Commission is granting approval of 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 54818 (November 27, 
2006), 71 FR 71010 (December 7, 2006) [File No. SR-NYSE-2006-57].
    \3\ Letter from John J. Wagner, Past President, 2003-2005, 
Corporate Actions Division, Inc., SIFMA, to Nancy M. Morris, 
Secretary, Commission (January 11, 2007).
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II. Description

    Prior to the rule change, NYSE's Rule 180 provided that if 
securities were not delivered within the required time frame, the party 
who failed to deliver was liable for any resulting damages. Rule 180 
also required that claims for damages had to be made promptly. It is 
industry practice when one party is owed and has not received 
securities that are the subject of a voluntary corporate action for the 
owed party to send to the failing counterparty a notice of the 
liability that will be attendant with the failure to deliver the 
securities in time for the owed party to participate in the voluntary 
corporate action.
    It is also customary in the industry for the failing counterparty 
that receives a liability notification either to reject the notice, to 
deliver the securities that are the subject of the liability 
notification, or to convert or exchange the securities to the 
corresponding corporate actions proceeds and deliver the proceeds. 
Liability notifications are usually sent by fax directly to the 
responsible failing counterparty or to its designees.
    Failing counterparties are subjected to potential liability by 
their failure to respond to liability notifications. Failure to respond 
typically occurs because of processing errors, such as overlooking the 
faxed liability notification or not receiving it all, and because of 
the overall lack of uniformity in the process. There is currently no 
uniform method of notifying and confirming the transmission and receipt 
of liability notifications.
    In response to a need for a reliable and uniform method of 
transmitting liability notifications, The Depository Trust Company 
(``DTC'') developed the SMART/Track for Corporate Action Liability 
Notification Service (SMART/Track''), a web-based system for the 
communication of liability notifications that is currently available to 
all DTC participants. SMART/Track allows DTC participants to easily 
create, send, process, and track corporate action liability 
notifications. Email notifications are automatically generated when 
liability notifications or replies to liability notifications are sent.
    In response to an industry request that NYSE adopt a rule that 
would mandate the use of a system that would make uniform the method by 
which liability notifications are sent and received, NYSE is amending 
Rule 180. As amended, Rule 180 clarifies that if securities that were 
to be delivered pursuant to the rules of a registered clearing agency 
are not so delivered, the contract may be closed as provided by the 
rules of that clearing agency. If the contracts are not so closed or if 
there is a failure to deliver securities which are to be delivered 
pursuant to NYSE Rule 176 or 177 and in the absence of any notice or 
agreement, the contract shall continue without interest until the 
following business day. However, in every such case of non-delivery, 
the party not delivering the securities shall be liable for any damages 
which accrue thereby.
    Rule 180 is also being amended to require that when the parties to 
a failed contract are both participants in a registered clearing agency 
that has an automated service for notifying a failing party of the 
liability that will be attendant to a failure to deliver and the 
contract was to be settled through the facilities of that registered 
clearing agency, the transmission of the liability notification must be 
accomplished through the use of the registered clearing agency's 
automated liability notification system.\4\
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    \4\ Currently DTC is the only registered clearing agency 
operating an automated liability notification service. At present, 
approximately 155 DTC participants are voluntarily using SMART/
Track.
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III. Comment Letters

    The Commission received one comment letter, which supported the 
rule as proposed.\5\ The commenter stated, ``The Corporate Actions 
Division of the Securities Industry and Financial Markets Association 
is 100% in favor of this rule change.''
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    \5\ Supra note 3.
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IV. Discussion

    Section 6(b)(5) of the Act requires, among other things, that the 
rules of an exchange be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities, to remove impediments to 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public 
interest.\6\ Requiring the use of an automated liability notification 
system of a registered clearing agency should help reduce risk, costs, 
and delays resulting from processing errors and missing or inaccurate 
information that often occurs with manually processed liability 
notifications. Such an automated system should also provide broker-
dealers with more timely receipt and distribution of such notices, 
immediate identification of the security affected by the notice, and a 
centralized system to manage and control all liability notifications. 
These benefits should, in turn, facilitate more efficient and cost-
effective clearance and settlement of securities transactions.
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    \6\ 15 U.S.C. 78f(b)(5).
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    Accordingly, for the reasons stated above the Commission finds that 
the rule change is consistent with NYSE's obligation under Section 6(b) 
of the Act to foster cooperation and coordination with persons engaged 
in regulating, clearing, settling, processing information with respect 
to, and facilitating transactions in securities, and, in general, to 
protect investors and the public interest.

[[Page 3897]]

VI. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular with the requirements of Section 6(b)(5) of the Act and 
the rules and regulations thereunder. It is therefore ordered, pursuant 
to Section 19(b)(2) of the Act, that the proposed rule change (File No. 
SR-NYSE-2006-57) be and hereby is approved.\7\
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    \7\ In approving the proposed rule change, the Commission 
considered the proposal's impact on the efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon
Deputy Secretary.
 [FR Doc. E7-1227 Filed 1-25-07; 8:45 am]

BILLING CODE 8011-01-P
