
[Federal Register: March 18, 2008 (Volume 73, Number 53)]
[Notices]               
[Page 14543-14544]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18mr08-132]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57469; File No. SR-NYSEArca-2008-08)]

 
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving 
Proposed Rule Change Pertaining to the Imposition of Fines for Minor 
Rule Violations

March 11, 2008.
    On January 18, 2008, NYSE Arca, Inc. (``NYSE Arca'' 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 NYSE Arca Rule 6.24, ``Exercise of 
Options Contracts,'' and NYSE Arca Rule 10.12 ``Minor Rule Plan.'' The 
proposed rule change was published for comment in the Federal Register 
on February 5, 2008.\3\ The Commission received no comments regarding 
the proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 57220 (January 29, 
2008), 73 FR 6757.
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    NYSE Arca Rule 6.24 contains special procedures that apply to the 
exercise of options on the last business day before expiration. The 
Exchange proposes to amend NYSE Arca Rule 6.24 to: (i) Add a reference 
to new terminology; (ii) make minor revisions to the procedures related 
to exercising option contracts; (iii) amend Commentary .08 of NYSE Arca 
Rule 6.24 to authorize the Exchange to sanction an OTP Holder or OTP 
Firm that fails to follow NYSE Arca Rule 6.24, pursuant to the Minor 
Rule Plan (``MRP''); and (iv) add the recommended sanctions to the MRP 
contained in NYSE Arca Rule 10.12.
    An option holder desiring to exercise or not exercise expiring 
options must either: (i) take no action and allow exercise 
determinations to be made in accordance with the Options Clearing 
Corporation's (``OCC'') Ex-by-Ex procedures, where applicable; or (ii) 
submit a Contrary Exercise Advice (``CEA'') to the Exchange.\4\ A CEA 
is also referred to within the options industry as an Expiring Exercise 
Declaration (``EED''). While the form itself may be called by a 
different name, the purpose and procedure for submitting an EED is 
identical to that of a CEA. Therefore, the Exchange proposes adding a 
parenthetical reference to EEDs within NYSE Arca Rule 6.24.
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    \4\ A CEA is a communication to either: (i) Not exercise an 
option that would be automatically exercised under OCC's Ex-by-Ex 
procedure, or (ii) exercise an option that would not be 
automatically exercised under OCC's Ex-by-Ex procedure.
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    An OTP Holder or OTP Firm that manually submits a CEA to the 
Exchange does so by completing a form and putting it in the Exchange's 
Contrary Exercise Advice Box. Going forward, the Exchange will 
discontinue the use of the Contrary Exercise Advice Box; and instead, 
an OTP Holder or OTP Firm will submit a CEA directly to a designated 
representative of the Exchange's Options Surveillance Department.
    Commentary .08 to NYSE Arca Rule 6.24 provides that the failure of 
any OTP Holder to follow the provisions contained in this rule may be 
referred to the Ethics and Business Conduct Committee (``EBCC'') and 
result in the assessment of a fine, which may include, but is not 
limited to, the disgorgement of potential economic gain obtained or 
loss avoided by the subject exercise. Referral to the EBCC involves a 
formal disciplinary proceeding. NYSE Arca proposes to add a provision 
to Commentary .08 that would authorize the Exchange to sanction an OTP 
Holder or OTP Firm that fails to follow NYSE Arca Rule 6.24, pursuant 
to the MRP. The Exchange would retain the authority to refer violators 
to the EBCC for formal disciplinary proceedings.
    The Exchange also proposes adding the phrase ``or OTP Firm'' to 
Commentary .08 to NYSE Arca Rule 6.24. The Exchange has always intended 
to apply NYSE Arca Rule 6.24 equally to both OTP Holders and OTP Firms. 
The addition of OTP Firms will codify the original intent of the NYSE 
Arca Rule 6.24.
    Under this proposal, violators of the NYSE Arca Rule 6.24 may be 
subject to MRP fines based on the number of violations occurring within 
a rolling 24-month period. An individual OTP Holder would be subject to 
a fine of $500 for the first offense, $1,000 for the second offense, 
and $2,500 for the third offense. An OTP Firm would be subject to a 
$1,000 fine for the first offense, $2,500 for the second offense, and 
$5,000 for a third offense.\5\ A list of the proposed fines would be 
added to the MRP fine schedule in NYSE Arca Rule 10.12. The addition of 
a sanction under the MRP adds an additional method for disciplining 
violators of NYSE Arca Rule 6.24.\6\ The Exchange submits that

[[Page 14544]]

it will continue to conduct surveillance with due diligence and make 
its determination, on a case by case basis, whether a fine under the 
MRP is appropriate, or whether a violation should be subject to formal 
disciplinary proceedings.
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    \5\ The Exchange, in its discretion, processes subsequent 
violations, after the third violation, according to NYSE Arca Rule 
10.4. See NYSE Arca Rule 10.12(h), n.1.
    \6\ In addition, as a member of the Intermarket Surveillance 
Group, the Exchange, as well as certain other self-regulatory 
organizations (``SROs'') executed and filed on October 29, 2007 with 
the Commission, a final version of an Agreement pursuant to Section 
17(d) of the Act (the ``17d-2 Agreement''). As set forth in the 17d-
2 Agreement, the SROs have agreed that their respective rules 
concerning the filing of Expiring Exercise Declarations, also 
referred to as Contrary Exercise Advices, of options contracts, are 
common rules. As a result, the proposal to amend NYSE Arca's MRVP 
will result in further consistency in sanctions among the SROs that 
are signatories to the 17d-2 Agreement concerning Contrary Exercise 
Advice violations.
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    Finally, the Exchange proposes to use NYSE Arca Rule 10.12(h)(33) 
and Rule 10.12(k)(i)(33), which are presently designated as 
``Reserved,'' for new NYSE Arca Rule 10.12(h)(33), which would 
reference CEA/EED violations pursuant to Rule 6.24, and new NYSE Arca 
Rule 10.12(k)(i)(33), which would include the recommended fines for 
CEA/EED violations.
    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\7\ In 
particular, the Commission believes that the proposal is consistent 
with Section 6(b)(5) of the Act,\8\ which requires that the rules of an 
exchange be designed to promote just and equitable principles of trade, 
to facilitate transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest.
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    \7\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5).
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    The Commission further believes that NYSE Arca's proposal to 
sanction individuals and member organizations who fail to submit Advice 
Cancel or exercise instructions in a timely manner is consistent with 
Sections 6(b)(1) and 6(b)(6) of the Act,\9\ which require that the 
rules of an exchange enforce compliance with, and provide appropriate 
discipline for, violations of Commission and Exchange rules. In 
addition, the Commission finds that the proposal is consistent with the 
public interest, the protection of investors, or otherwise in 
furtherance of the purposes of the Act, as required by Rule 19d-1(c)(2) 
under the Act,\10\ which governs minor rule violation plans. The 
Commission believes that the proposed rule change should strengthen the 
Exchange's ability to carry out its oversight and enforcement 
responsibilities as an SRO in cases where full disciplinary proceedings 
are unsuitable in view of the minor nature of the particular violation.
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    \9\ 15 U.S.C. 78f(b)(1) and 78f(b)(6).
    \10\ 17 CFR 240.19d-1(c)(2).
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    In approving this proposed rule change, the Commission in no way 
minimizes the importance of compliance with NYSE Arca rules and all 
other rules subject to the imposition of fines under the MRVP. The 
Commission believes that the violation of any SRO rules, as well as 
Commission rules, is a serious matter. However, the MRVP provides a 
reasonable means of addressing rule violations that do not rise to the 
level of requiring formal disciplinary proceedings, while providing 
greater flexibility in handling certain violations. The Commission 
expects that NYSE Arca would continue to conduct surveillance with due 
diligence and make a determination based on its findings, on a case-by-
case basis, whether a fine of more or less than the recommended amount 
is appropriate for a violation under the NYSE Arca MRVP or whether a 
violation requires formal disciplinary action.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\11\ and Rule 19d-1(c)(2) under the Act,\12\ that the proposed rule 
change (SR-NYSEArca-2008-08) be, and hereby is, approved and declared 
effective.
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    \11\ 15 U.S.C. 78s(b)(2).
    \12\ 17 CFR 240.19d-1(c)(2).
    \13\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(44).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-5352 Filed 3-17-08; 8:45 am]

BILLING CODE 8011-01-P
