[Federal Register Volume 73, Number 53 (Tuesday, March 18, 2008)]
[Notices]
[Pages 14543-14544]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-5352]
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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