[Federal Register Volume 60, Number 145 (Friday, July 28, 1995)]
[Notices]
[Pages 38875-38878]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18602]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36015; File No. SR-NYSE-94-34]
Self-Regulatory Organizations; Notice of Filing of Amendment No.
2 to Proposed Rule Change by New York Stock Exchange, Inc. Relating to
Amendment of Exchange Rule 92
July 21, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on July 13,
1995, the New York Stock Exchange, Inc. (``NYSE'' or ``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 prepared by the self-regulatory organization. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
As originally filed,\1\ the proposed rule change extended the
applicability of Rule 29 to trades by a member or member organization
on any market center and provided a limited exemption to permit member
organizations to trade along with their customers when liquidating a
block facilitation position. Amendment No. 1 to SR-NYSE-94-34 expanded
the purpose section of the original filing.\2\ This Amendment No. 2 to
SR-NYSE-94-34 revises the proposed rule change to specifically exclude
transactions in securities not listed on the NYSE, transactions by a
member organization acting in the capacity of a specialist or market
maker on a regional exchange, to the extent that a principal trade is
effected and immediately liquidated at the same price to a customer on
that exchange. An additional limited exemption also would allow a
member or member organization to trade along with a customer when
engaging in bona fide arbitrage or risk arbitrage provided certain
conditions are met.\3\
\1\ The filing was published for public comment in Securities
Exchange Act Release No. 35139 (December 22, 1994), 60 FR 156
(January 3, 1995). The Commission published notice of an extension
of the comment period in Securities Exchange Act Release No. 35274
(January 25, 1995), 60 FR 6330 (February 1, 1995).
\2\ Amendment No. 1 was included in the original publication for
public comment. See Securities Exchange Act Release No. 35139, supra
note 1.
\3\ 17 CFR 240.19c-3 (1994).
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The following is the text of the proposed rule change marked to
reflect all of the proposed changes to the current rule. Additions to
the current
[[Page 38876]]
rule are in italics and deletions are in brackets.
Rule 92: Limitations on Members' Trading Because of Customers' Orders
[(a) No member shall (1) personally buy or initiate the purchase of
any security on the Exchange for his own account or for any account in
which he, his member organization or any other member, allied member or
approved person, in such organization or officer thereof, is directly
or indirectly interested, while such member personally holds or has
knowledge that his member organization holds an unexecuted market order
to buy such security in the unit of trading for a customer, or (2)
personally sell or initiate the sale of any security on the Exchange
for any such account, while he personally holds or has knowledge that
his member organization holds an unexecuted market order to sell such
security in the unit of trading for a customer.
(b) No member shall (1) personally buy or initiate the purchase of
any security in the Exchange for any such account, at or below the
price at which he personally holds or has knowledge that his member
organization holds an unexecuted limited price order to buy such
security in the unit of trading for a customer, or (2) personally sell
or initiate the sale of any security on the Exchange for any such
account at or above the price at which he personally holds or has
knowledge that his member organization holds an unexecuted limited
price order to sell such security in the unit of trading for customer.]
(a) Except as provided in this Rule, no member or member
organization shall cause the entry of an order to buy (sell) any
Exchange-listed security on the Exchange or any other market center for
any account in which such member or member organization or any approved
person thereof is directly or indirectly interested (a ``proprietary
order''), if the person responsible for the entry of such order has
knowledge of any particular unexecuted customer's order to buy (sell)
such security which could be executed at the same price.
(b) A member or member organization may enter a proprietary order
while representing a customer order which could be executed at the same
price, provided the customer's order is not for the account of an
individual investor, and the customer has given express permission,
including an understanding of the relative price and size of allocated
execution reports, under the following conditions:
(1) the member or member organization is liquidating a position
held in a proprietary facilitation account, and the customer's order is
for 10,000 shares or more; or
(2) the member or member organization is engaging in bona fide
arbitrage or risk arbitrage transactions, and recording such
transactions in an account used solely to record arbitrage transactions
(an ``arbitrage account'').
(c) The provisions of this Rule shall not apply to:
(1) [to] any purchase or sale of any security in an amount of less
than the unit of trading made by an odd-lot dealer to offset odd-lot
orders for customers; [or]
(2) [to] any purchase or sale of any security upon terms for
delivery other than those specified in such unexecuted market or
limited price order [.];
(3) transactions by a member or member organization acting in the
capacity of a market maker pursuant to Regulation 240.19c-3 of the
Securities and Exchange Commission in a security listed on the
Exchange; and
(4) transactions by a member or member organization acting in the
capacity of a specialist or market maker on another national securities
exchange, to the extent that a riskless principal trade is effected and
immediately liquidated at the same price to a customer on that
exchange.
Supplementary Material
.10 A member or employee of a member or member organization
responsible for entering proprietary orders shall be presumed to have
knowledge of a particular customer order unless the member organization
has implemented a reasonable system of internal policies and procedures
to prevent the misuse of information about customer orders by those
responsible for entering such proprietary orders.
.20 This Rule shall also apply to a member organization's member on
the Floor, who may not execute a proprietary order at the same price,
or at a better price, as an unexecuted customer order that he or she is
representing, except to the extent the member organization itself could
do so under this Rule.
.30 For purposes of paragraph (b) above, the term ``account of an
individual investor'' shall have the same meaning as the meaning
ascribed to that term in Exchange Rule 80A. For purposes of paragraph
(b)(1) above, the term ``proprietary facilitation account'' shall mean
an account in which a member organization has a director interest and
which is used to record transactions whereby the member organization
acquires positions in the course of facilitating customer orders. Only
those positions which are recorded in a proprietary facilitation
account may be liquidated as provided in paragraph (b)(1). For purposes
of paragraph (b)(2) above, the terms ``bona fide arbitrage'' and ``risk
arbitrage' shall have the meaning ascribed to such terms in Securities
Exchange Act Release 15533, January 26, 1979. All transactions effected
pursuant to paragraph (b)(2) above must be recorded in an arbitrage
account.
[.10] .40 A member who issues a commitment or obligation to trade
from the Exchange through ITS or any other Application of the System
shall, as a consequence thereof, be deemed to be initiating a purchase
or sale of a security on the Exchange as referred to in this Rule.
[.20] .50 See paragraph (c)(i) of Rule 800 (Basket Trading:
Applicability and Definitions) and paragraph 99 (Off-Hours Trading:
Applicability and Definitions) in respect of the ability to initiate
basket transactions and transactions through the ``off-Hours Trading
Facility'' (as Rule 900 defines that term), respectively,
notwithstanding the limitations of this Rule.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
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 self-regulatory organization
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 \4\
Currently, Exchange Rule 92 provides that members may not trade for
their own accounts at a price at which they hold executable customer
orders. The Rule, by its express terms, does not apply to member
organizations or to transactions by members and member organizations in
market centers other than the exchange. The rule does not
[[Page 38877]]
contain any exceptions for any types of proprietary transactions,
including transactions where a member firm trades for its own account
along with a customer's block-size order when liquidating a proprietary
block facilitation position, or transactions involving bona fide
arbitrage and risk arbitrage, even if the customer has given permission
for the firm to trade along with the order.
\4\ This discussion consolidates the ``Purpose'' discussion as
submitted in SR-NYSE-94-34 and Amendment No. 1 thereto, see supra
note 1, and also discusses additional amendments to Rule 92 being
filed herein.
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The proposed amendments to Rule 92 make clear that the Rule applies
only to transactions in NYSE-listed securities and extend the Rule's
applicability to member organizations, and to transactions by members
and member organizations in market centers other than the Exchange. The
proposed amendments contain exemptions for liquidations of block
facilitation transactions and for bona fide arbitrage and risk
arbitrage, as discussed below. The proposed amendments also provide
exemptions, as discussed below, for member organizations acting as
market makers pursuant to Rule 19c-3 under the Act, or as regional
stock exchange specialists or market makers. In addition, the proposed
amendments provide an exemption for member organization proprietary
transactions where the member organization has implemented information
barrier procedures as discussed below.
Applicability of Rule 92 to Member Organizations
The proposed amendments to Rule 92 would broaden the Rule's
applicability to all proprietary trading in NYSE-listed stocks when a
member organization has an agency order capable of execution at the
price at which a proprietary trade is effected. The Exchange
understands that in most ``trading along'' situations, the same Floor
Broker represents the agency and proprietary orders and, even if that
was not the case, it would be unacceptable for a firm to enter a
proprietary order with a different broker, who could then compete
directly with the broker representing the member firm's customer. To
better deal with the current trading environment and still meet the
high standard of ethical conduct the Exchange expects of its membership
when dealing with their customers, the focus of Rule 92 should be
placed on the member organization itself. Rule 92 was drafted and
promulgated prior to the advent of block positioning and the
proliferation of upstairs proprietary position trading by member
organizations, but the Rule reflects fundamental concepts, rooted in
agency law, that an agent must place a customer's interest ahead of the
agent's proprietary interest. The Exchange and its constituent
committees that reviewed the proposed amendments to the Rule believe it
is appropriate to extend this emphasis on the priority of customer
interest to the member organization itself, as well as to the
organization's Floor members. While enforcement action has been taken
regarding inappropriate proprietary trading vis-a-vis agency orders as
violative of the NYSE Rule 476 prohibition against conduct inconsistent
with just and equitable principles of trade, recent investigations drew
the Exchange's attention to a practice of trading along with, but not
ahead of, institutional customer orders with the consent of the
consumer. When appropriate, the Exchange will continue to bring
enforcement action for violations of Rule 476 in the context of
inappropriate proprietary trading. The Exchange also believes that
amending Rule 92 offers the best approach to addressing expectations on
the subject of member organization proprietary trading in the context
of block facilitation. The proposed amendments change the scope and
focus of Rule 92 and strike an appropriate balance between block
facilitation and customer protection.
Applicability of Rule 92 to Transactions by Members and Member
Organizations in Market Centers other than the Exchange
The proposed amendments to Rule 92 extend the application of the
Rule to transactions by a member or member organization in a market
center other than the Exchange. The Exchange believes it is appropriate
that the broad concepts of agency law and fiduciary duty codified in
paragraph (a) of Rule 92 be made applicable to all agency
representation, irrespective of market center. The exceptions provided
in paragraphs (b) and (c) are intended to apply to transactions by
members and member organizations on the Exchange. Other market centers
may choose to adopt, or not adopt, comparable exceptions. The Exchange,
as well as other self-regulatory organizations, has a long history of
regulating activities involving, for example, sales practices and the
trading of a diverse range of financial products which occur in other
market centers. Many of these regulatory activities are conducted
through the Intermarket Surveillance Group.
Liquidation of Facilitation Positions
The ability to liquidate a block facilitation position by trading
along with a customer's block-size order is generally perceived by
positioning firms and their institutional customers as a reasonable
aspect of the block facilitation business, provided there is disclosure
to customers and customer consent. The inability to liquidate such
positions in these circumstances may impede the block facilitation
business, as firms may be reluctant to assume block facilitation
positions if they cannot liquidate them, subject to appropriate
safeguards, while representing customer orders.
The Exchange is proposing to amend Rule 92 to permit member
organizations to trade along with a customer, when liquidating a block
facilitation position, subject to the following conditions:
The customer is not an individual investor,\5\
\5\ The Exchange believes that consent to trade along should be
given by a market professional and therefore is limiting these
exemptions to orders which are not for the account of an individual
investor.
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The customer's order is for 10,000 shares or more;
The customer has given express permission for the member
organization to trade along with the order, including an understanding
of the relative price and size of allocated execution reports;
The member organization is liquidating a position acquired
in the course of facilitating a block transaction; and
The member organization's orders are for an account used
to record transactions whereby the member organization acquires
positions in the course of facilitating customer orders of 10,000
shares or more (a ``proprietary facilitation account'').
The Exchange intends to inform members and member organizations
that, although the amended rule does not outline a specific method of
record keeping evidencing that a customer has given permission to trade
along, the burden of proof to demonstrate that customer consent was
obtained will fall on the member or member organization.
Bona Fide Arbitrage and Risk Arbitrage Transactions
The Exchange believes it would be appropriate for members and
member organizations to be able to trade along with customers in bona
fide arbitrage and risk arbitrage transactions, subject to the
following conditions:
The customer is not an individual investor;
The customer has given express permission for the member
organization to trade along with the order, including an understanding
of the relative price and size of allocated execution reports; and
The member organization's transactions are recorded in an
account
[[Page 38878]]
used solely to record arbitrage transactions (an ``arbitrage
account'').
As with the exception for liquidation of block facilitation
positions, the burden of proof to demonstrate that customer consent was
obtained would fall on the member or member organization. The terms
``bona fide arbitrage'' and ``risk arbitrage'' would have the meaning
ascribed to them in Securities Exchange Act Release No. 15533.\6\
\6\ Securities Exchange Act Release No. 15533 (January 26,
1979).
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Exception for Market Makers
The Exchange's proposal would exempt from Rule 92 transactions by a
member organization acting in the capacity of a market maker pursuant
to Rule 19c-3 under the Act,\7\ and transactions by a regional exchange
specialist or market maker, to the extent that a riskless principal
trade is effected and immediately liquidated at the same price to a
customer on that exchange.
\7\ Rule 19c-3 under the Act provides that the rules of national
securities exchanges may not impose off-board trading restrictions
on securities listed after April 26, 1979.
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Information Barriers
The amendments to Rule 92 provide that a member or employee of a
member organization responsible for entering proprietary orders shall
be presumed to have knowledge of a particular customer order unless the
member organization has implemented a reasonable system of internal
policies and procedures to prevent the misuse of information about
customer orders by those responsible for entering such proprietary
orders. Each member organization would have the flexibility to
implement such procedures as it deemed appropriate to its own business
operations.
2. Statutory Basis
The basis under the Act for the proposed rule change is the
requirement under Section 6(b)(5) that an Exchange have rules that are
designed to promote just and equitable principles of trade, to remove
impediments to, and perfect the mechanism of a free and open market
and, in general, to protect investors and the public interest. The
proposed rule change will enable member organizations to add depth and
liquidity to the Exchange's market, while continuing to provide
customer protection through the requirement of customer approval for
trading along situations.
B. Self-Regulatory Organization's Statement on Burden on Competition
As the proposed amendments to Rule 92 would apply equally to all
market centers with respect to trading by NYSE members and member
organizations, the Exchange does not believe that the proposed rule
change will impose 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
The Exchange understands that the Commission has received comments
on SR-NYSE-94-34 and Amendment No. 1 thereto from several self-
regulatory organizations and member organizations. The Exchange
believes that issues raised by these commentators are addressed herein,
and in a letter from James E. Buck, Senior Vice President and Secretary
of the Exchange, to Brandon Becker, Director of the Division of Market
Regulation, dated March 15, 1995.\8\
\8\ This letter and all other comment letters received by the
Commission regarding the NYSE's proposal are available in the
Commission's public reference room in File No. SR-NYSE-94-34.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the publication of this notice in the Federal
Register or within such other 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 the self-regulatory organization consents, the Commission will:
(A) By order approve the 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, DC 20549.
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 at the
Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, DC 20549. Copies of such filing will also be available for
inspection and copying at the principal office of the NYSE. All
submissions should refer to File No. SR-NYSE-94-34 and should be
submitted by August 18, 1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-18602 Filed 7-27-95; 8:45 am]
BILLING CODE 8010-01-M
