[Federal Register Volume 64, Number 105 (Wednesday, June 2, 1999)]
[Notices]
[Pages 29723-29725]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-13867]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41441; File No. SR-NYSE-98-47]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the New York Stock Exchange, Inc. To Adopt Rule 440 I
Requiring Records of Compensation Arrangements Concerning Floor
Brokerage
May 24, 1999.
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 December 23, 1998, the New York Stock Exchange, Inc. (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II and III below, which Items have been prepared by the
Exchange. Amendment No. 1 was filed with the Commission on May 14,
1999.\3\ 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.
\3\ See letter to Richard C. Strasser, Assistant Director,
Division of Market Regulation, SEC, from James E. Buck, Senior Vice
President and Secretary, NYSE dated May 12, 1999.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The NYSE is filing a proposed rule change to adopt new Rule 440 I,
Records of Compensation Arrangements--Floor Brokerage. Below is the
text of the proposed rule change. Additions are italicized.
Rule 440 I Records of Compensation Arrangements--Floor Brokerage
(a) Every member not associated with a member organization and each
member organization primarily engaged as an agent in executing
transactions on the Floor of the Exchange must maintain a written
record including a description of each type of compensation arrangement
entered into with other members, member organizations, non-member
organizations and customers in connection with transactions executed on
the Floor of the Exchange.
(b) Records maintained in accordance with paragraph (a) of this
Rule must identify, by name, the members, member organizations, non-
member organizations and customers who are parties to each type of
compensation arrangement in effect.
Supplementary Material
.10 For purposes of paragraphs (a) and (b) of this Rule 440 I, the
requirement to maintain a written record of each type of compensation
arrangement shall not apply to:
(a) any compensation arrangement wherein a member or member
organization receives gross compensation of less than $10,000 per year
from any member, member organization, non-member organization or
customer; or
(b) any compensation arrangement involving the transmission of
orders solely through the Exchange's electronic order routing system.
.20 A member or member organization is deemed to be primarily
engaged as an agent in executing transactions on the Floor of the
Exchange if at least 75% of its revenue is derived from floor
brokerage.
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 Exchange 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
New Rule 440 I will require that every member not associated with a
member organization, and each member organization primarily engaged as
an agent in executing transactions on the Floor of the Exchange,
maintain a written record of each type of compensation arrangement that
they enter into with other members, member organizations, non-member
organizations, or customers relating to transactions on the Floor. The
written record must include a description of each type of arrangement
and identify, by name, the parties to each type of arrangement in
effect.
In addition, proposed Rule 440 I, Supplementary Material .10
excludes the following compensation arrangements from the requirements
to maintain a written record:
[[Page 29724]]
(1) arrangements involving gross compensation of less than $10,000
per year; and
(2) arrangements involving orders transmitted solely through the
Exchange's electronic order routing system (e.g. SuperDot).
Rule 440 I, Supplementary Material .20 provides that a member or
member organization is deemed to be primarily engaged as an agent in
executing transactions on the Floor of the Exchange if at least 75% of
its revenue is derived from floor brokerage.
Rule 440 I will enhance the Exchange's oversight of floor brokerage
compensation arrangements in connection with Exchange members' and
member organizations' compliance with Section 11(a) of the Act \4\ and
Rule 11a-1 \5\ thereunder which, among other things, prohibit a member
or member organization from executing on the Exchange an order for that
member's or member organization's ``own account'' or any account in
which the member or member organization has an interest, unless the
member or member organization acts in reliance on one of the exceptions
provided in Section 11(a).\6\
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\4\ 15 U.S.C. 78k(a).
\5\ 17 CFR 240.11a-1.
\6\ The circumstances under which a member or member
organization may trade for its ``own account'' or any account in
which the member or member organization has a interest are listed in
Section 11(a)(1)(A)-(I). 15 U.S.C. 78k(a)(1)(A)-(I).
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The new rule will apply to members and member organizations
primarily engaged as agents in executing transactions on the Floor of
the Exchange (e.g., so called ``$2 brokers'' or ``independent
brokers''). The Exchange has determined to exclude from the scope of
proposed new Rule 440 I ``upstairs'' (i.e., off the Floor) members and
member organizations because the Exchange believes that the
requirements would be unduly burdensome on and impractical for those
members and member organizations, based on the diverse nature and size
of their business activities and customer base. Because of their size,
the Exchange believes that these upstairs organizations generally have
independent supervisory structures and internal control procedures of
the supervision and review of the organization's diverse business
activities, including the monitoring and review of compensation
arrangements. Accordingly, the Exchange believes that the existing
regulatory scheme is adequate, and that the application of the
requirements of the new rule to upstairs organizations would be
duplicative and unnecessary.
In contrast, according to the NYSE, the supervisory oversight and
review structure for Floor members and member organizations is very
different from upstairs organizations. Many Floor members act as sole
proprietors with a limited customer and product base and, therefore, do
not generally have independent supervisory structures nor are they
subject to the same formalized internal supervisory oversight as
upstairs organizations. Absent the requirements of proposed new Rule
440 I, records of compensation arrangements may not be maintained in a
formalized manner by the Floor members and member organizations. Rule
440 I will provide an audit trail by requiring the creation of records
of compensation arrangements that will facilitate the implementation
and maintenance of the Exchange's new examination program geared
specifically to such members. Proposed Rule 440 I specifies a type of
record, records of compensation arrangements, in addition to the
records required to be maintained pursuant to Rules 17a-3 \7\ and 17a-4
of the Act,\8\ that will be critical in providing the Exchange the
ability to monitor Floor Broker activities.
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\7\ 17 CFR 204.17a-3.
\8\ 17 CFR 204.17a-4.
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Maintaining records of compensation arrangements by members and
member organizations primarily engaged as agents in executing
transactions on the Floor will facilitate the Exchange's review of
these members' and member organizations' activities on an ongoing basis
as part of the routine examination process, as well as on a for cause
basis. During the course of routine reviews and examinations, the
Exchange will be able to sample those compensation arrangements in
place to review for compliance with section 11(a) of the Act in terms
of whether any such arrangement constitutes a member or member
organization having an interest in an account.
The adoption of proposed new Rule 440 I will better enable the
Exchange to review and examine, as necessary, members' and member
organizations' activities in connection with the Exchange's regulatory
oversight responsibility to surveil for potentially violative conduct.
2. Statutory Basis
The basis under the Act for the proposed rule change is the
requirement under Section 6(b)(5) \9\ that an Exchange have rules that
are 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. The Exchange represents that the proposed rule change
is designed to accomplish these ends by strengthening the Exchange's
ability to examine and surveil activities on the Exchange Floor.
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\9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange represents that the proposed rule change will impose
no burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No written comments were solicited or received with respect to the
proposed rule change.
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 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, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609.
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
[[Page 29725]]
Room. Copies of such filing will also be available for inspection and
copying at the principal office of the Exchange. All submissions should
refer to File No. SR-NYSE-98-47 and should be submitted by June 23,
1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-13867 Filed 6-1-99; 8:45 am]
BILLING CODE 8010-01-M