
[Federal Register Volume 76, Number 135 (Thursday, July 14, 2011)]
[Notices]
[Pages 41551-41552]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-17689]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64843; File No. SR-NYSE-2011-22]


Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Approving a Proposed Rule Change Amending NYSE Rule 70.40(3) To Permit 
Member Organizations To Engage in Proprietary Trading from Their 
Approved Booth Premises in Certain OTC Bulletin Board and OTC Markets 
Securities

July 8, 2011.

I. Introduction

    On May 11, 2011, New York Stock Exchange LLC (``NYSE'' or the 
``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 Rule 70.40(3) to permit member 
organizations to engage in proprietary trading from their approved 
booth premises in certain OTC Bulletin Board (``OTCBB'') and OTC 
Markets securities. The proposed rule change was published for comment 
in the Federal Register on May 25, 2011.\3\ The Commission received no 
comment letters on the proposed rule change. 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. 64522 (May 19, 
2011); 76 FR 30418 (``Notice'').
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II. Description

    NYSE proposes to amend NYSE Rule 70.40(3) to permit member 
organizations to engage in proprietary trading from their approved 
booth premises in certain OTCBB and OTC Markets securities.\4\
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    \4\ The Exchange's affiliate, NYSE Amex LLC (``NYSE Amex''), has 
proposed to adopt the same rule. See SR-NYSEAmex-2011-34.
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    In June 2007, the Exchange adopted NYSE Rule 70.40, which permits a 
member organization to operate its booth premises on the Exchange Floor 
in a manner similar to its ``upstairs'' office, thereby allowing member 
organizations to access other markets and trade a wider array of 
products from their booth premises and thus operate more efficiently 
and competitively.\5\ At the time that NYSE Rule 70.40 was adopted, it 
included certain conditions and limitations on such trading, including 
that only trading on behalf of customers would be permitted. As such, 
NYSE Rule 70.40(3) prohibits member organizations approved to operate 
booth premises pursuant to such Rule from effecting any transaction 
from their approved booth premises for their own account, the account 
of an associated person, or an account with respect to which they or an 
associated person thereof exercise investment discretion on the 
Exchange.
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    \5\ See Securities Exchange Act Release 55908 (June 14, 2007), 
72 FR 34056 (June 20, 2007) (SR-NYSE-2007-51) (notice of filing and 
immediate effectiveness of proposed rule change permitting member 
organizations to operate their booth premises as an upstairs 
office). Under NYSE Rule 70.40, only Floor Brokers may conduct 
activity from booth premises.
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    After more than three years of experience with NYSE Rule 70.40, 
member organizations have requested that certain types of proprietary 
trading be permitted under the Rule, and the Exchange has determined 
that it is appropriate to do so. Therefore, the Exchange proposes to 
revise NYSE Rule 70.40(3) to permit member organizations to effect 
transactions in the common, preferred, and debt securities of an 
operating company that is quoted on the OTC Bulletin Board or OTC 
Markets (an ``OTC Security'') from their approved booth premises for 
their own account, the account of an associated person, or an account 
with respect to which they or an associated person thereof exercise 
investment discretion, except that such member organizations could not 
effect such transactions in an OTC Security that is related to a 
security listed or traded on the Exchange or NYSE Amex.\6\ Because 
trading would be limited to the common, preferred, and debt securities 
of an operating company, a member organization could not trade in an 
index-based or derivative security (e.g., a right or warrant) that is 
quoted on the OTCBB or OTC Markets.
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    \6\ Since the merger of NYSE and NYSE Amex in 2008, the 
exchanges have conducted equity trading from the same Trading Floor, 
and NYSE Amex has conducted options trading in rooms adjacent the 
Trading Floor. See Securities Exchange Act Release No. 58673 
(September 29, 2008) (SR-Amex-2008-62 and SR-NYSE-2008-60), 73 FR 
57707 (October 3, 2008), and NYSE Rule 6A.
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    Under the proposed rule change, an OTC Security would be considered 
related to a security listed or traded on the Exchange or NYSE Amex \7\ 
if:
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    \7\ Securities listed on The NASDAQ Stock Market are traded on 
NYSE Amex pursuant to unlisted trading privileges and thus would be 
considered a security traded on NYSE Amex under the proposed rule 
change. See Rules 500-525-NYSE Amex Equities.

    (a) The OTC Security is issued by an issuer of a security that 
is listed or traded on the Exchange or NYSE Amex or that underlies 
an NYSE Amex option, or an affiliate of such issuer;
    (b) The OTC Security is subject to a corporate action that 
relates to the issuer of a security that is listed or traded on the 
Exchange or NYSE Amex or that underlies an NYSE Amex option, or an 
affiliate of such issuer;
    (c) The OTC Security is issued by an issuer of a security that 
is a component of a narrow-based security index \8\ that is linked 
to a security that is listed or traded on the Exchange or NYSE Amex 
or that underlies an NYSE Amex option; or
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    \8\ For purposes of the proposed rule, the definition of narrow-
based security index would be the same as the definition in Section 
3(a)(55) of the Securities Exchange Act of 1934 (the ``Act'').
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    (d) The OTC Security is issued by a foreign issuer or is a 
depositary receipt (or the equivalent thereof) for such a security, 
and a security issued by such foreign issuer or a depositary receipt 
(or the equivalent thereof) for such a security is listed or traded 
on the Exchange or NYSE Amex or underlies an NYSE Amex option.

    Under the proposed rule, a corporate action would be any action by 
an issuer of an OTC Security or a security listed or traded on the 
Exchange or NYSE Amex that causes a relationship between the price of 
the OTC Security and the price of the security that is listed or traded 
on the Exchange or NYSE Amex or that underlies an NYSE Amex option, 
such as the announcement of a merger, acquisition, joint venture, 
spinoff, dissolution, bankruptcy filing or other similar type of event 
involving the issuers.
    The proposed proprietary transactions in OTC Securities would 
remain subject to all of the other provisions of NYSE Rule 70.40. 
First, a member organization would have to obtain approval from NYSE 
Regulation, Inc. (``NYSER'') to engage in proprietary OTC Securities 
trading from booth premises.\9\ Second, all such transactions would be 
subject to the regulatory requirements that apply to ``upstairs'' 
trading, including registration requirements and audit trail 
requirements applicable to those markets and supervision requirements 
under NYSE Rule 342.\10\ Finally, a member organization would be 
required to adopt and implement comprehensive written procedures 
governing the conduct and supervision of proprietary trading in OTC 
Securities handled through the booth and the staff responsible for such 
activities; such

[[Page 41552]]

procedures must be reasonably designed to ensure that the member 
organization would be trading in compliance with the requirements of 
NYSE Rule 70.40, including that it is not effecting transactions from 
booth premises in OTC Securities that are related to securities listed 
or traded on the Exchange or NYSE Amex. A member organization would be 
required to obtain NYSER approval of such written procedures before 
such trading commences.\11\ A member organization would be required to 
regularly review such procedures and compliance therewith, and obtain 
approval from NYSER of any subsequent changes to such procedures.\12\
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    \9\ NYSE Rule 70.40(1).
    \10\ NYSE Rule 70.40(4) and (5).
    \11\ If a member organization had already obtained approval to 
operate booth premises under NYSE Rule 70.40, it would still be 
required to update its written procedures to address proprietary 
trading in OTC Securities and obtain NYSER approval under NYSE Rule 
70.40(7).
    \12\ NYSE Rule 70.40(6) and (7).
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    At a minimum, such written procedures must require the member 
organization to exercise due diligence before commencing trading in an 
OTC Security from the booth premises pursuant to this Rule to ensure 
that such trading is in compliance with the requirements of this Rule 
and that the member organization has procedures to monitor its trading 
activity in order to remain in compliance. A member organization must 
have supervisory systems in place that produce records sufficient to 
reconstruct, in a time-sequenced manner, all orders with respect to 
which the member organization is trading from the booth premises under 
this Rule. The member organization must be able to demonstrate which 
OTC Security transactions were effected from the booth premises (as 
compared to off-Floor trading, if applicable). If the member 
organization could not demonstrate which trading is from the booth 
premises, the Exchange would presume that all such trading was effected 
from the booth premises.

III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \13\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\14\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\15\ 
which requires, among other things, that the Exchange's rules be 
designed to prevent fraudulent and manipulative acts and practices, 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.
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    \13\ 15 U.S.C. 78f.
    \14\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the proposed rule change will enable 
member organizations to expand the types of activities that can be 
conducted from booth premises to include transactions in certain OTCBB 
and OTC Markets securities for the member organization's own account, 
the account of an associated person, or an account with respect to 
which they or an associated person thereof exercise investment 
discretion. At the same time, the proposal excludes such transactions 
in an OTC Security that is related to a security listed or traded on 
the Exchange or on NYSE Amex. In addition, the Commission notes that 
the proposed proprietary transactions in OTC Securities would remain 
subject to the registration, audit trail, and supervision requirements 
of NYSE Rule 70.40.\16\ This includes the requirement to adopt and 
implement comprehensive written procedures governing the conduct and 
supervision of proprietary trading in OTC Securities handled through 
the booth and the staff responsible for such activities. These 
procedures must be reasonably designed to ensure that member 
organizations are not effecting transactions from booth premises in OTC 
Securities that are related to securities listed or traded on the 
Exchange or NYSE Amex.\17\
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    \16\ See Notice, supra note 3.
    \17\ See id.
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    The primary reason for the earlier restriction on proprietary 
trading by Floor Brokers was concern that the Floor Broker's knowledge 
of events on the floor and the state of the market would provide him 
with an unfair advantage over off-floor market participants. However, 
in light of the proposed rule's restriction on trading OTC Securities 
that are related to a security listed or traded on the Exchange or NYSE 
Amex, the Commission believes that the opportunities for members to 
trade on non-public information will be appropriately minimized or 
eliminated.
    In addition to written procedures, the member organization must 
have a supervisory system in place to produce records sufficient to 
reconstruct, in a time-sequenced manner, all orders with respect to 
trading from booth premises and must be able to demonstrate which OTC 
Security transactions were effected from the booth premises. 
Furthermore, as noted above, to the extent that a member organization 
has already obtained approval to operate booth premises under NYSE Rule 
70.40, it would still be required to update its written procedures to 
address proprietary trading in OTC Securities and obtain NYSER approval 
under NYSE Rule 70.40(7).\18\
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    \18\ See Notice. See also supra note 11.
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    In light of the foregoing requirements, which provide for 
appropriate limitations on and oversight of proprietary trading by 
Exchange members from their approved booth premises adjacent to the 
floor, the Commission finds that the proposed rule change is consistent 
with the Act.

IV. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-NYSE-2011-22) be, and it 
hereby is, approved.
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    \19\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-17689 Filed 7-13-11; 8:45 am]
BILLING CODE 8011-01-P


