
[Federal Register: April 29, 2008 (Volume 73, Number 83)]
[Notices]               
[Page 23287-23290]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29ap08-116]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57697; File No. SR-NYSEArca-2008-32]

 
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of a Proposed Rule Change as Modified by Amendment No. 1 Thereto 
Relating to the Minor Rule Plan

April 22, 2008.
    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 March 18, 2008, NYSE Arca, Inc. (``NYSE Arca'' or the ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been substantially prepared by the Exchange. On April 17, 
2008, the Exchange submitted Amendment No. 1 to the proposed rule 
change. The Commission is publishing this notice to solicit comments on 
the proposed rule change, as amended, 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

    NYSE Arca through its wholly owned subsidiary, NYSE Arca Equities, 
Inc. (``NYSE Arca Equities'' or the ``Corporation''), proposes to amend 
Rule 10.12 (Minor Rule Plan) (``MRP'') and other related rules that 
underlie the minor rules violations, including Rules

[[Page 23288]]

5.2(b)(1) (Applications to List), 6.1 (Adherence to Law), 6.15 
(Miscellaneous Prohibitions), 6.18 (Supervision), and 9.2(c) (Customer 
Records).
    The text of the proposed rule change is available at NYSE Arca's 
principal office, the Commission's Public Reference Room, and http://
www.nyse.com.

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

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

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

1. Purpose
    The Minor Rule Plan fosters compliance with applicable rules and 
also helps to reduce the number and extent of rule violations committed 
by ETP Holders and associated persons. The Corporation's enforcement 
staff has found that the MRP is particularly useful in reducing both 
the number and extent of rule violations because Rule 10.12 enables 
staff to promptly impose a limited but meaningful financial penalty 
soon after the violations are detected. The prompt imposition of a 
financial penalty helps to quickly educate and improve the conduct of 
ETP Holders who have engaged in inadvertent or otherwise minor 
violations of the Corporation's rules, particularly those who may not 
pay attention to mere warnings that they are violating Exchange rules. 
By promptly imposing a meaningful financial penalty for such 
violations, the MRP helps such ETP Holders focus on correcting their 
conduct before it gives rise to more serious enforcement action.
    The last amendments to Rule 10.12 were approved in 2004.\3\ Since 
then, new and altered patterns of activity by ETP Holders, as well as 
numerous additions and amendments to other Exchange rules, have created 
the need for numerous additions and updates to the MRP and underlying 
rules, as described in greater detail below. The changes are designed 
to update Rule 10.12 to encompass appropriate new types of violations, 
as well as to update or otherwise correct existing MRP provisions and 
further clarify the circumstances in which use of the MRP is 
appropriate.
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    \3\ See Securities Exchange Act Release No. 50356 (September 13, 
2004), 69 FR 56259 (September 20, 2004) (SR-PCX-2004-29).
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    The MRP will continue to be used for inadvertent and occasional 
rule violations. Serious violations of Exchange rules will continue to 
be addressed through formal enforcement action.

Rule 10.12--Minor Rule Plan

Rule 10.12(e)--Minor Rule Plan

    The Corporation proposes to clarify that any person or organization 
found in violation of a minor rule under Rule 10.12 is not required to 
report such violation on SEC Form BD or Form U-4.

Rule 10.12(f)--Minor Rule Plan

    The Corporation seeks to amend Rule 10.12(f) to remove the 
provision stating that the Business Conduct Committee (``BCC'') shall 
review ``each citation'' of the MRP citation. When the NYSE Arca equity 
rules were first drafted based upon the NYSE Arca options rules, this 
provision was not removed. The provision should have been removed 
because there is no such concept of ``floor citations'' under the 
equity rules. As a result, the Exchange seeks to correct 10.12(f) now 
and remove the provision from the rule.

10.12(g)--Minor Rule Plan: Minor Trading Rule Violations; 10.12(h)--
Minor Rule Plan: Record Keeping and Other Minor Rule Violations

    The Corporation proposes to amend Rule 10.12(g) to add several 
minor violations related to trading rule violations and subsection (h) 
related to record keeping and other violations. Corporation staff 
frequently encounters inadvertent or otherwise minor violations of 
certain trading rules, including Rules 6.2(g), 6.15(b), 7.20(a), 
7.23(a)(1), 7.29, 7.30, and 7.38(c), and certain recordkeeping and 
other rules, including Rules 2.16(b), 2.21, 2.23, 2.24, 5.2(b)(1), 6.3, 
6.17, 6.18, and 9.2. Such minor violations do not give rise to formal 
enforcement action. However, staff believes that it can further enhance 
compliance with these rules by imposing MRP fines, which will draw ETP 
Holders' attention to the need for improved compliance by promptly 
imposing meaningful but limited financial penalties for violations.

10.12(i)--Minor Rule Plan: Recommended Fine Schedule

    The Corporation proposes to change the procedure set forth in the 
MRP fine schedules to escalate MRP fine levels in cases involving 
multiple instances of the same offense. This change will enhance the 
fair administration of the MRP in the context of higher speed and 
volume of electronic trading on the NYSE Arca Marketplace.
    Currently, the MRP Recommended Fine Schedule sets forth an initial 
MRP fine for a ``First Violation,'' as well as a higher level for a 
``Second Violation'' and a still higher level for a ``Third 
Violation.'' This escalation plan, which predates the widespread use of 
electronic trading on the Exchange, has led to several difficulties 
when applied to the much greater speed and volume of electronic 
trading.
    First, while the fine escalation is meant to deter repeat offenses, 
it often fails to deliver this effect, because Permit Holders engaged 
in the high speed and volume of electronic trading can frequently incur 
``second'' and ``third'' offenses before they are sanctioned or even 
notified of the initial violation. For the same reason, these Permit 
Holders complain that it is unfair for them to incur escalated fine 
levels for second and third violations before they learn of their first 
violations.
    Additionally, the current fine schedule does not allow an MRP 
sanction for any more than three violations. In some cases, this is 
appropriate, but in other cases, it makes sense to impose an MRP fine 
for the fourth violation as for the first three. The MRP can best 
assist the Exchange's regulatory and enforcement efforts if it provides 
Exchange officials with discretion to determine how to address 
particular instances of multiple violations, rather than implicitly 
requiring formal enforcement action whenever there are more than three 
violations.
    To address these concerns, the Exchange proposes to modify the 
Recommended Fine Schedules in NYSE Arca Equities Rule 10.12(i) so that 
MRP fines are escalated based not on the number of ``violations,'' but 
upon the number of times the Exchange has imposed one or more MRP fines 
upon a Permit Holder for the violation of a particular rule. The three 
current column headers in the Fine Schedules that specify different 
fine levels for first, second, and third ``violations'' will be 
replaced with ``First Level,'' ``Second Level,'' and ``Third Level.''
    With this change, the Fine Schedule will continue to specify the 
fine to be

[[Page 23289]]

imposed for each violation, but the first time a Permit Holder is fined 
under the MRP for the violation of a given rule, the fine for each 
violation will be imposed at the ``First Level,'' whether there is one 
or more than one such violation.

Example

    Due to a systems breakdown that goes undiscovered for an entire 
afternoon, an ETP Holder with no previous rules violations executes 
three sell orders on the Exchange that are not properly labeled 
``short,'' as required by NYSE Arca Equities Rule 7.16(b). Under the 
current MRP Fine Schedule in NYSE Arca Equities Rule 10.12(i)(1), the 
ETP Holder would be charged under the MRP with a first violation fine 
of $500, as well as a second violation fine of $1,000, and a third 
violation fine of $2,500, for a total MRP fine of $4,000. The 
escalation for the second and third offenses would be imposed under the 
current Fine Schedule even though all the violations occurred in the 
same afternoon, and the second and third violations occurred before the 
ETP Holder became aware of the first violation.
    By contrast, under the proposed Fine Schedule, the fines no longer 
escalate based upon the number of offenses, but instead based on the 
number of times the ETP Holder has been fined for the same offense. 
Because the ETP Holder here had not previously been fined for 
violations of Rule 7.16, the ETP Holder would receive the ``First 
Level'' of $500 per violation for each of the three violations, for a 
total MRP fine of $1,500.
    If the ETP Holder were later fined again under the MRP for more 
such violations, the fine for each violation would then be $1,000.
    This proposed new procedure for escalating MRP fines is largely the 
same as the escalation procedure specified by the New York Stock 
Exchange in its ``List of Exchange Rule Violations and Fines'' for 
imposing summary fines pursuant to NYSE Rule 476A.
    It will continue to be the case that nothing in the MRP will 
require the imposition of a MRP fine when Exchange enforcement 
officials believe that repeat violations or other aggravating factors 
warrant formal enforcement action.

Other Changes to Rule 10.12(i)

    The fines for the proposed minor rule violations in subsections (g) 
and (h) are reflected in the Recommended Fine Schedule in Rule 
10.12(i). NYSE Arca Equities staff believes that the proposed fines are 
fair in relation to the scope and occurrence of the MRP violation by an 
ETP Holder.
    The Corporation has also proposed to amend Rule 10.12(i)(2) to 
include a new footnote 2. Rule 2.21 (employee registration) requires 
ETP Holders to pay certain fees to the Corporation. Footnote 2 permits 
the Corporation to require violators of Rule 2.21 to remit all fees 
that it should have paid to the Exchange pursuant to compliance with 
Rule 2.21. The Corporation has based this proposed amendment upon a 
similar provision of the Boston Stock Exchange's MRP for violation of 
trade-through rules, which was recently approved by the Commission.\4\
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    \4\ See Securities Exchange Act Release No. 55606 (April 10, 
2007), 72 FR 19221 (April 17, 2007) (approving SR-BSE-2006-11).
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    NYSE Arca Equities Rule 2.21 requires an ETP Holder to continually 
disclose to the Corporation through the registration process the ETP 
Holder's personnel who are responsible for trading decisions on behalf 
of the ETP Holder. By requiring such disclosure, Rule 2.21, like the 
trade-through rules, substantially protects the Corporation's ability 
to regulate its marketplace and help ensure marketplace integrity. 
Corporation staff proposes to include the back-payment of registration 
fees in addition to a MRP fine so that the MRP can effectively deter 
ETP Holders from trying to save money and effort by not registering 
their appropriate personnel.
    In addition to the changes proposed to the MRP, the Corporation 
also proposes the following related changes.

Rule 5.2(b)(1)--Notification Requirements for Offering of Securities

    The Corporation proposes amendments to correct a scrivener's error 
that was inadvertently created when the NYSE Arca Rules were updated to 
replace the obsolete term ``Member'' with the replacement term ``ETP 
Holder.'' The intended reference in this rule, however, is to all 
members of a syndicate, which is related to compliance with Regulation 
M, so we propose to reinsert the correct term ``members.''

Rule 6.1--Adherence to Law and Good Business Practices

    The proposed rule change clarifies the language of the newly 
designated Rule 6.1(a) by substituting the word ``just'' for ``fair.'' 
The Corporation proposes to adopt Rule 6.1(b) and make violations of 
the rule eligible for MRP disposition. New subsection (b) to Rule 6.1 
would require all ETP Holders, their associated persons, and other 
participants to adhere to the principles of good business practice in 
the conduct of their business operations. This Rule is patterned on the 
current NYSE Rule 401(a). Like NYSE Rule 401(a), it encompasses 
miscellaneous conduct that is inconsistent with the maintenance of a 
fair and orderly marketplace or that otherwise violates good business 
practices without also showing the bad faith or unethical conduct that 
have been found to be essential elements of ``conduct inconsistent with 
just and equitable principles of trade,'' as that standard has been 
clarified in decisions such as In re. Calvin David Fox.\5\
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    \5\ See Securities Exchange Act Release No. 48731, 81 SEC Docket 
1511-31 (October 31, 2003).
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Rule 6.15--Miscellaneous Prohibitions

    The Corporation proposes to add a subsection (c) that will 
expressly prohibit transactions in a security that involves no change 
in beneficial ownership, commonly known as ``wash trades.'' This filing 
also proposes to make violation of the wash trade prohibition eligible 
for disposition through an MRP fine. Exchange Market Regulation has 
observed a trend toward increasing amounts of wash trading. Much of 
this trading may be unintentional or otherwise resulting from 
circumstances that do not rise to the level of prearranged trading or 
other purposeful market manipulation. However, even inadvertent wash 
trading can create an exaggerated or otherwise false appearance of 
trading activity in the affected securities. The Corporation proposes 
to halt this trend by expressly prohibiting wash trading. By also 
including this violation among those eligible for disposition through 
MRP fines, Exchange Market Regulation and Enforcement will have the 
flexibility to impose appropriate fine levels based upon the particular 
circumstances of each individual case.

Rule 6.18--Supervision

    The Corporation proposes to amend Rule 6.18 to remove language that 
limits the reach of its supervisory rules. The current language of Rule 
6.18(b) provides that only ETP Holders for whom the Corporation is the 
Designated Examining Authority (``DEA'') are subject to its supervisory 
requirements. The amendment removes the language limiting the scope of 
the rule so that all ETP Holders regardless of DEA are subject to 
maintaining systems to supervise activities of their associated persons 
and the operations of their businesses.
    As noted above, this filing also proposes to make minor violations 
of

[[Page 23290]]

Rule 6.18 eligible for disposition through an MRP fine. Exchange Market 
Regulation frequently encounters ``minor'' supervisory failures by 
Permit Holders, i.e., supervisory failures whose consequences have not 
yet risen to a level justifying formal enforcement action, but which 
could have serious consequences if not remedied. By making such 
failures eligible for MRP fines, Exchange Market Regulation and 
Enforcement will have a greater ability to encourage ETP Holders to 
correct their supervisory problems before they lead to more serious 
violations.
    To further enhance the ability of the Exchange to use the MRP to 
improve Permit Holder supervisory procedures and overall compliance on 
a prospective basis, the filing proposes to add a new footnote 1 to the 
MRP Fine Schedule that will allow Exchange enforcement staff, as part 
of an MRP disposition of certain supervisory-related offenses, not only 
to impose a monetary fine, but also to require the violator to make 
specified changes to its supervisory or other compliance procedures. 
This will enable Exchange enforcement staff to negotiate, as part of an 
MRP disposition of a supervisory violation, a requirement that the 
violator undertake certain remedial measures to ensure that such 
violations do not recur, as is already done in some formal enforcement 
actions for such offenses.

Rule 7.38(c)--Odd and Mixed Lots--Prohibitions

    The Corporation proposes to delete language in the current 
subsection (c) of Rule 7.38 that presently defines all odd-lot 
violations to be conduct inconsistent with just and equitable 
principles of trade. The Corporation believes that this change keeps 
Rule 7.38(c) consistent with current Commission caselaw because many 
violations of Exchange odd-lot rules do not necessarily involve the bad 
faith or unethical conduct, which has been determined to be required 
for a finding of ``conduct inconsistent with just and equitable 
principles of trade,'' as that standard has been clarified by the 
Commission in decisions such as In re. Calvin David Fox.\6\ This and 
other changes in this filing would also permit minor odd-lot violations 
to be disposed of through the MRP.
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    \6\ See id.
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Rule 9.2(c)--Customer Records

    The Corporation proposes to change Rule 9.2(c) by adding the single 
word ``current,'' to clarify and reiterate the obligation that firms 
with customer accounts must not only keep records of their customer 
accounts, but also keep them current.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\7\ in general, and with 
Section 6(b)(5) of the Act,\8\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to remove impediments to 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\ 15 U.S.C. 78f.
    \8\ 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 would 
result in 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 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 Amex 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 Number SR-NYSEArca-2008-32 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-NYSEArca-2008-32. 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, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of NYSE Arca. 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-NYSEArca-2008-32 and should 
be submitted on or before May 20, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-9289 Filed 4-28-08; 8:45 am]

BILLING CODE 8010-01-P
