
[Federal Register Volume 78, Number 117 (Tuesday, June 18, 2013)]
[Notices]
[Pages 36611-36612]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-14467]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69751; File No. SR-NYSE-2013-29]


Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Approving Proposed Rule Change Deleting NYSE Rule 476(a)(8), Which 
Addresses Wash Sales, in Order To Harmonize the Exchange's Rules With 
the Rules of the Financial Industry Regulatory Authority

June 13, 2013.

I. Introduction

    On April 10, 2013, New York Stock Exchange LLC (``NYSE'' or the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to delete NYSE Rule 476(a)(8) to harmonize the 
Exchange's rules with the rules of the Financial Industry Regulatory 
Authority, Inc. (``FINRA''). The proposed rule change was published for 
comment in the Federal Register on April 30, 2013.\3\ The Commission 
received no comments on 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. 69441 (April 24, 
2013), 78 FR 25327 (``Notice'').
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II. Description of the Proposal

    On July 30, 2007, FINRA's predecessor, the National Association of 
Securities Dealers, Inc. (``NASD''), and NYSE Regulation, Inc. 
(``NYSER'') consolidated their member firm regulation operations into a 
combined organization, FINRA. Pursuant to Rule 17d-2 under the Act, 
NYSE, NYSER and FINRA entered into an agreement (the ``Agreement'') to 
reduce regulatory duplication for their members by allocating to FINRA 
certain regulatory responsibilities for certain NYSE rules and rule 
interpretations (``FINRA Incorporated NYSE Rules''). NYSE MKT LLC 
(``NYSE MKT'') became a party to the Agreement effective December 15, 
2008.\4\
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    \4\ See Securities Exchange Act Release Nos. 56148 (July 26, 
2007), 72 FR 42146 (August 1, 2007) (order approving the Agreement); 
56147 (July 26, 2007), 72 FR 42166 (August 1, 2007) (SR-NASD-2007-
054) (order approving the incorporation of certain NYSE Rules as 
``Common Rules''); and 60409 (July 30, 2009), 74 FR 39353 (August 6, 
2009) (order approving the amended and restated Agreement, adding 
NYSE MKT LLC as a party). Paragraph 2(b) of the Agreement sets forth 
procedures regarding proposed changes by FINRA, NYSE or NYSE MKT to 
the substance of any of the Common Rules.
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    As part of its effort to reduce regulatory duplication and relieve 
firms that are members of FINRA, NYSE, and NYSE MKT of conflicting or 
unnecessary regulatory burdens, FINRA is now engaged in the process of 
reviewing and amending the NASD and FINRA Incorporated NYSE rules in 
order to create a consolidated FINRA rulebook.\5\ In this proposal, the 
Exchange has proposed to delete NYSE Rule 476(a)(8) in order to 
harmonize the NYSE's rules with the rules of FINRA.
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    \5\ FINRA's rulebook currently has three sets of rules: (1) NASD 
Rules, (2) FINRA Incorporated NYSE Rules, and (3) consolidated FINRA 
Rules. The FINRA Incorporated NYSE Rules apply only to those members 
of FINRA that are also members of the NYSE (``Dual Members''), while 
the consolidated FINRA Rules apply to all FINRA members. For more 
information about the FINRA rulebook consolidation process, see 
FINRA Information Notice, March 12, 2008.
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Proposed Rule Change
    NYSE Rule 476(a)(8) prohibits a member, member organization, 
principal executive, approved person, registered or non-registered 
employee of a member or member organization, or person otherwise 
subject to the jurisdiction of the Exchange from making a fictitious 
bid, offer, or transaction; or giving an order for the purchase or sale 
of securities the execution of which would involve no change of 
beneficial ownership; or executing such an order with knowledge of its 
character.
    In 2009, the Exchange adopted NYSE Rule 6140(a)-(b),\6\ which is 
substantially the same as FINRA Rule 6140(a)-(b) and which also 
addresses wash sale activity. NYSE Rule 6140(a) provides that no member 
or member organization shall execute or cause to be executed or 
participate in an account for which there are executed purchases of any 
NMS stock as defined in Rule 600(b)(47) of Regulation NMS \7\ 
(``designated security'') at successively higher prices, or sales of 
any such security at successively lower prices, for the purpose of 
creating or inducing a false, misleading or artificial appearance of 
activity in such security or for the purpose of unduly or improperly 
influencing the market price for such security or for the purpose of 
establishing a price that does not reflect the true state of the market 
in such security.
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    \6\ See Securities Exchange Act Release No. 59965 (May 21, 
2009), 74 FR 25783 (May 29, 2009) (SR-NYSE-2009-25).
    \7\ 17 CFR 242.600(b)(47).
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    NYSE Rule 6140(b) prohibits a member or member organization, for 
the purpose of creating or inducing a false or misleading appearance of 
activity in a designated security or creating or inducing a false or 
misleading appearance with respect to the market in such security, from 
(1) executing any transaction in such security which involves no change 
in the beneficial ownership thereof; (2) entering any order or orders 
for the purchase of such security with the knowledge that an order or 
orders of substantially the same size, and at substantially the same 
price, for the sale of any such security, has been or will be entered 
by or for the same or different parties; or (3) entering any order or 
orders for the sale of any such security with the knowledge that an 
order or orders of substantially the same size, and at substantially 
the same price, for the purchase of such security, has been or will be 
entered by or for the same or different parties.
    In the filing, the Exchange represented that NYSE Rule 476(a)(8), 
which was adopted at a time when the Exchange was operating in a 
manual, on-floor trading environment, differs from NYSE Rule 6140 and 
FINRA Rule 6140 in that the second prong of NYSE Rule 476(a)(8), which 
prohibits giving an order for the purchase or sale of securities the 
execution of which would involve no change of beneficial ownership, can 
be read as having no scienter standard. On the other hand, NYSE Rule 
6140 and FINRA Rule 6140 provide that a market participant is 
prohibited from engaging in wash sales that have the purpose of 
creating or inducing a false or misleading appearance of activity in a 
designated security.
    The Exchange stated that it believes that the scienter requirement 
in NYSE Rule 6140 and FINRA Rule 6140 recognizes that in today's 
markets there can be certain instances of trading

[[Page 36612]]

activity that may inadvertently and unknowingly result in executions 
with no change in beneficial ownership, and that such conduct should 
not always be treated as a wash sale violation if the market 
participant did not act with purpose. The Exchange noted that activity 
involving an off-floor market participant's algorithmic orders that 
inadvertently execute against themselves due to latency issues could be 
deemed a violation of the second prong of NYSE Rule 476(a)(8), thus the 
Exchange has proposed to eliminate NYSE Rule 476(a)(8) because it 
believes that such conduct should not be treated as a wash sale 
violation in all instances, and stated that it will instead utilize 
NYSE Rule 6140 for disciplinary actions involving wash sales.
    The Exchange also proposes to make a conforming amendment to NYSE 
Rule 6140(a) and (b) to expand its coverage to include principal 
executives, approved persons, registered or non-registered employees of 
a member or member organization or persons otherwise subject to the 
jurisdiction of the Exchange. The change to NYSE Rule 6140 will cover 
the persons originally covered by NYSE Rule 476(a)(8) who would be 
subject to disciplinary action for wash sales.

III. Discussion and Commission Findings

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of Section 6 of the 
Act \8\ and the rules and regulations thereunder applicable to a 
national securities exchange.\9\ In particular, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\10\ 
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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    \8\ 15 U.S.C. 78f.
    \9\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(5).
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    The Exchange is deleting NYSE Rule 476(a)(8), a rule which the 
Exchange explained was adopted to address manual, floor-based trading 
activity. The Exchange stated that NYSE Rule 6140, which has a scienter 
standard that the second prong of NYSE Rule 476(a)(8) lacks, 
substantively covers the same conduct as NYSE Rule 476(a)(8). The 
Exchange has explained that in today's markets, algorithmic trading can 
result in unintended executions with no change in beneficial ownership. 
The Exchange believes that such executions should not be treated as 
wash sale violations because they lack the intent to create or induce a 
false or misleading appearance of activity in a security. In addition, 
the Exchange is amending NYSE Rule 6140 to cover the same persons that 
NYSE Rule 476(a)(8) covered.
    The Commission understands that algorithmic trading can result in 
inadvertent executions with no change in beneficial ownership.\11\ The 
Exchange has represented that the proposed rule change would not result 
in any material change in the surveillance of potentially violative 
activity nor any material diminution of the Exchange's enforcement 
authority as it may still bring a disciplinary action in cases where a 
market participant engages in a significant number of trades without a 
change of beneficial ownership, even if such activity does not per se 
violate Rule 6140(b) because the participant did not act with 
``purpose.'' The Exchange further represented that such unintended 
activity could also give rise to other violations, such as a failure to 
supervise under NYSE Rule 342, or a violation of just and equitable 
principles of trade or could otherwise constitute unethical activity 
under NYSE Rule 2010. Accordingly, the Commission expects the Exchange 
to continue to surveil for potential wash sale activity and to take 
necessary action as appropriate.
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    \11\ The Commission notes that algorithmic trading resulting in 
executions with no change in beneficial ownership, even if 
unintended, raises concerns.
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    The Commission believes that the proposed deletion of NYSE Rule 
476(a)(8) promotes harmonization, consistency and clarity with respect 
to the Exchange's rules \12\ by resolving the inconsistent scienter 
standards of NYSE Rule 476(a)(8) and NYSE Rule 6140 and FINRA Rule 
6140, as well as extending the breadth of persons covered by NYSE Rule 
6140 to those persons covered by NYSE Rule 476(a)(8). The Commission 
further believes that the proposed rule change would result in less 
burdensome and more efficient regulatory compliance for firms that are 
members of FINRA and the NYSE. As such, the Exchange's rules would 
continue to protect investors and the public interest.
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    \12\ The Exchange stated that it can bring disciplinary actions 
under NYSE Rule 476(a)(8) for conduct that occurred prior to the 
time the rule is deleted. Thus, the proposed rule change would have 
no impact on ongoing disciplinary actions involving violations of 
NYSE Rule 476(a)(8).
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    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \13\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \13\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\14\ that the proposed rule change (SR-NYSE-2013-29) be, 
and it hereby is, approved.
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    \14\ 15 U.S.C. 78s(b)(2).

For the Commission, by the Division of Trading and Markets, pursuant 
to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-14467 Filed 6-17-13; 8:45 am]
BILLING CODE 8011-01-P


