[Federal Register Volume 69, Number 171 (Friday, September 3, 2004)]
[Notices]
[Pages 53966-53969]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2066]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-50287; File No. SR-BSE-2004-25]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment Nos. 1, 2 and 3 Thereto by the Boston Stock
Exchange, Inc. Relating to Its Specialist Performance Evaluation
Program
August 27, 2004.
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 June 21, 2004, the Boston Stock Exchange, Inc. (``BSE'' 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 BSE. On July 26,
2004, BSE submitted Amendment No. 1 to the proposed rule change.\3\ On
August 25, 2004, BSE submitted Amendment Nos. 2 \4\ and 3 \5\ to the
proposed rule change. 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 from John Boese, Vice President, Chief Regulatory
Officer, BSE, to Nancy Sanow, Assistant Director, Division of Market
Regulation (``Division''), Commission, dated July 22, 2004 and
accompanying Form 19b-4 (``Amendment No. 1''). Amendment No. 1
replaced and superceded the originally filed proposed rule change.
\4\ See letter from John Boese, Vice President, Chief Regulatory
Officer, BSE, to Nancy Sanow, Assistant Director, Division,
Commission, dated August 18, 2004 (``Amendment No. 2''). Amendment
No. 2 replaced and superceded BSE Rule Chapter XV, Section 17,
Paragraph (a) of the previously filed proposed rule change.
\5\ See letter from John Boese, Vice President, Chief Regulatory
Officer, BSE, to Nancy Sanow, Assistant Director, Division,
Commission, dated August 19, 2004 (``Amendment No. 3''). Amendment
No. 3 replaced and superceded BSE Rule Chapter XV, Section 17,
Paragraph (a) of the previously filed proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
BSE seeks to amend its rules concerning its Specialist Performance
Evaluation Program (``SPEP''). Below is the text of the proposed rule
change. Proposed new language is italicized; proposed deletions are in
[brackets].
* * * * *
Chapter XV
Specialists
Specialist Performance Evaluation Program
SEC. 17
(a) All Specialists shall be subject to regular [performance]
evaluation [designed to identify areas of performance needing
improvement]. The Specialist Performance Evaluation Program shall be
administered by the Exchange, subject to the supervision of the Market
Performance Committee. The Market Performance Committee will determine,
from time to time as it deems necessary, which measures under Rule
11Ac1-5 (``Rule 5'') of the Act shall be used to evaluate Exchange
specialists, and the threshold levels of performance against which
specialist will be evaluated in each of the relevant Rule 5
measurements. Measurements and threshold levels will be communicated to
all members via Floor Memoranda on a periodic basis, at least thirty
days in advance, at least each time a new Rule 5 measurement is chosen,
or a new threshold established. Specialists will be evaluated for
competitive stock allocation purposes and any other purposes for which
the Market Performance Committee deems it necessary and/or prudent to
have objective standards by which it can evaluate all Exchange
specialists equally. Any Specialist whose performance is below
acceptable levels established by the Market Performance Committee shall
be subject to specific improvement actions as determined by the Market
Performance Committee as set forth in paragraphs 2156.10 through
2156.80.
(b) In the event that the performance of a Specialist is below
acceptable performance levels, notice of such fact shall be given to
the Specialist.
(c) Set forth below are the conditions warranting performance
improvement action:
(i) Any Specialist who receives a deficient score in one objective
measure in any review period shall be deemed to have a deficient
performance, and shall
[[Page 53967]]
be required to attend an informal meeting with the [Performance
Improvement Action]Market Performance Committee to discuss possible
methods of improving his/her performance. If a[A]ny Specialist [who]
receives a deficient score in any one objective measure for two out of
three consecutive review periods, [shall be required to appear before]
the Market Performance Committee[, which] shall take such actions as it
deems necessary and appropriate to address the deficient score,
including imposing actions as specified in the Supplemental Material.
(ii) Those Specialists that fall below the threshold level for the
overall performance evaluation program in any evaluation review period
shall be required to appear before the Market Performance Committee,
which shall take such actions it deems necessary and appropriate to
address the deficient performance. (See Supplemental Material for
possible actions.)
[(iii) Exceptions. Where Specialists have threshold scores in each
measure at the following levels (subject to change pursuant to
Commission approval), they will be deemed to have adequately performed:
Overall Evaluation Score--at or above weighted score of 5.00
Turnaround Time--below 21.0 seconds (5 points) (5%)
Holding Orders Without Action--below 21.0% (5 points) (5%)
Price Improvement in <8th Markets--at or above 2.0% (5 points) (20%)
Price Improvement in 8th Markets--at or above 15.0% (5 points) (15%)
Price Improvement in >8th Markets--at or above 25.0% (5 points) (15%)
Depth--at or above 75.0% (5 points) (20%)
Added Depth--at or above 1.0% (5 points) (20%)]
(d) The Specialist shall be notified in writing of the basis for
such action and shall have an opportunity to submit a written reply no
later than ten days after the receipt of such notice.
(e) The Specialist shall also have an opportunity to be heard upon
the specific grounds to be considered before the Market Performance
Committee and a written record of any such hearing shall be maintained.
Following any such proceeding, the Market Performance Committee will
inform the Specialist in writing of its decision and any actions to be
imposed, and its reasons therefore. The decision of a majority of the
members of that Committee shall be final, subject to the power of the
Board of Governors to review such decision in accordance with the
provisions of Article II, Section 6 of the Constitution.
Supplementary Material
.10 Stock Reallocation--Notice of Particular Stock--Together with
written notice of the specific grounds to be considered as the basis
for withdrawal of approval, the Market Performance Committee will give
the member written notice of the particular stock or stocks to be
considered for withdrawal of approval and give a written explanation of
the basis on which the stock or stocks were selected.
.20 Stock Reallocation--Selection of Particular Stocks--In
designating a particular stock or stocks to be considered as the basis
for withdrawal of approval, the Market Performance Committee shall
consider indications of weaknesses in specialist performance in
individual stocks to the extent such indications are available. Such
indications of weak performance may include, among other factors,
references to a particular stock by those responding to initial or
supplemental evaluation questionnaires, references in such
questionnaires to weaknesses in performance of a type which relate to a
particular stock or groups of stocks, and/or indications of weaknesses
as demonstrated by the objective measures in such stock or stocks.
When the available measures of Specialist performance indicate weak
performance generally, and not precisely in any particular stock or
stocks, the Market Performance Committee may decide nonetheless to
withdraw approval for a particular stock or stocks. In any case, the
Market Performance Committee will exercise its best judgment to select
a stock or stocks as to which a reallocation by the Stock Allocation
Committee is likely to result in improved Specialist performance.
.30 Trading and/or Alternate Specialist Account Suspension--A
Specialist that meets a condition for review subject to the Specialist
Performance Evaluation Program criteria after one review period
resulting in a deficient score for the overall evaluation program or
for two review periods with a deficient score in any one objective
measure shall be put on notice that approval for his or her trading
account or Alternate Specialist Account may be suspended if the
Specialist receives a deficient score in the subsequent review period
and may continue until the Specialist's scores meet the threshold
levels as set forth in Paragraph 2156(d).
.40 Other Action--The Market Performance Committee, in addition to
the foregoing actions, may take such other action as it deems
appropriate to address deficient performance of a Specialist.
.50 While reallocated stocks will not be restored upon the improved
performance of a Specialist, a Specialist may, with the approval of the
Market Performance Committee, have lifted one or more of the actions
previously imposed.
.60 The Market Performance Committee, in determining which
action(s) should be applied against a deficient Specialist, will use
the following guidelines to determine the order of actions, but in its
discretion may apply them in any order or may apply more than one in a
given situation:
(i) Suspension of trading account privilege.
(ii) Suspension of Alternate Specialist account privilege.
(iii) Stock reallocation.
.70 In the event that a Specialist is ranked in the bottom ten
percent but does not fall below the threshold level for the overall
evaluation program, Exchange staff will review the performance of the
Specialist to determine if there is sufficient reason to warrant
informing the [Performance Improvement Action]Market Performance
Committee of potential performance problems.
* * * * *
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
The rules governing the Exchange's SPEP program, set forth in
Chapter XV, Dealer-Specialists, Section 17, Specialist Performance
Evaluation Program, of the BSE Rules, were approved in their current
form in 1998,\6\ primarily for use
[[Page 53968]]
in ranking BSE specialists for performance measurement and stock
allocation purposes. The SPEP program currently operates on a pilot
basis, with the current pilot approved through September 30, 2004.\7\
The Exchange now believes that the SPEP program is outdated and
redundant with several measures required under Rule 11Ac1-5 under the
Act \8\ (``Rule 5'').\9\ The BSE proposes to eliminate the current
measurement standards set forth in its SPEP program and replace them
with a ranking program based on statistics reported under Rule 5. The
statistics to be utilized would vary from time to time, as determined
by the Exchange's Market Performance Committee. The Market Performance
Committee of the Exchange has approved the proposal to replace the
current SPEP measurements with existing Rule 5 measurements.
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\6\ See Securities Exchange Act Release No. 39730 (March 6,
1998), 63 FR 12847 (March 16, 1998) (File No. SR-BSE-97-09).
Telephone conversation between John Boese, Vice President, Chief
Regulatory Officer, BSE, and David Liu, Attorney, Division,
Commission, on August 2, 2004.
\7\ See Securities Exchange Act Release No. 49525 (April 2,
2004), 69 FR 18994 (April 9, 2004) (File No. SR-BSE-2004-12).
\8\ 17 CFR 240.11Ac1-5.
\9\ See Securities Exchange Act Release No. 43590 (November 17,
2000), 65 FR 75414 (December 31, 2000) (adopting Rule 5).
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The BSE states that the primary purpose for the replacement of the
current SPEP measurements is the duplicative nature between them and
the measurements required under Rule 5. Both SPEP and Rule 5 require
that the BSE make available monthly reports of statistical information
concerning Exchange specialists' order executions. The Exchange
believes that this provides a means to evaluate the performance of
specialists, which encourages visibility and competition, particularly
on the factors of execution price and speed. According to the BSE, the
rankings have also been utilized by the Exchange's Stock Allocation
Committee as a consideration in competitive stock allocations.
SPEP currently measures 7 different categories against BSE floor
averages, with threshold levels for each measure. Rule 5 has numerous
categories, many of which correspond to the Exchange's SPEP
measurements currently utilized. The categories currently measured in
the SPEP program are:
Price Improvement--.01-.05
Price Improvement--.06-.15
Price Improvement--> .15
Depth
Added Depth
Turnaround Time
Holding Orders w/o Actions
In comparison, Rule 5 has three main measurements (security, order
type, and order size) each subcategorized by 11 smaller measurements.
For market orders and marketable limit orders there are an additional 9
sub-measurements. The Exchange believes that the Rule 5 measurements
provide a much broader view on which to base the performance of
specialists. By utilizing existing statistics required under Rule 5,
the BSE believes it would be expanding its current evaluation of
specialists and avoiding repetition and confusion. For instance,
instead of the current measurements, the Exchange could evaluate
specialist performance in such Rule 5 measurements as those addressing
average effective spread, price improvement, liquidity enhancement,
away shares and time of execution.
The proposed rule text would not set forth specific Rule 5
measurements which will be utilized. Rather, the Exchange seeks to have
the Market Performance Committee determine, from time to time as
conditions warrant, which Rule 5 statistics would be utilized as
measurement criteria for ranking specialists. The Market Performance
Committee's determinations would be disseminated to all Exchange
members via Floor Memorandum at least thirty days prior to their
application, as is currently the practice.
The Exchange believes that its proposal would give the Market
Performance Committee the flexibility to respond to market conditions
or future changes in the Exchange's rules which may obviate or change
the reason for a particular SPEP measurement. For example, according to
the BSE, one of the primary reasons the BSE started the SPEP program
was to provide its Stock Allocation Committee with an additional
criteria during deliberations of competitive stock allocations.
However, with the expansion of the Exchange's Competing Specialist
Initiative, the instances of competitive stock allocations have been
greatly reduced. The Exchange believes that future changes to the
Exchange's rules may likewise render a particular SPEP measurement moot
in favor of another Rule 5 measurement, or none at all. Therefore, the
Exchange seeks to give its Market Performance Committee the ability to
determine which Rule 5 statistics should be used to rank Exchange
specialists, as necessitated by market conditions, rule changes or
other factors.
The proposed rule change would leave intact the disciplinary
procedures set forth throughout the SPEP rules. Although the Exchange
believes that economic forces will compel specialists to maximize their
performance so as to receive the benefits of directed order flow, the
BSE also believes that there is some merit to providing for punitive
and other actions to encourage specialists to perform at least at a
threshold level.
Finally, the Exchange is also proposing to replace the Performance
Improvement Action Committee in the rule text with the Market
Performance Committee. The Performance Improvement Action Committee was
a subcommittee of the Market Performance Committee which has been
abolished, and its duties have been subsumed by the Market Performance
Committee.\10\
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\10\ The Performance Improvement Action Committee was abolished
as of January 1, 2004. Telephone conversation between John Boese,
Vice President, Chief Regulatory Officer, BSE, and David Liu,
Attorney, Division, Commission, on August 11, 2004.
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2. Statutory Basis
The Exchange believes that the proposed rule change, as amended, is
consistent with section 6(b) of the Act \11\ in general, and furthers
the objectives of section 6(b)(5) \12\ in particular, in that it is
designed to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating
securities transactions, 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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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
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
No written comments were either solicited or received.
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 Exchange consents, the Commission will:
(A) By order approve such proposed rule change; or
[[Page 53969]]
(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. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-BSE-2004-25 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File Number SR-BSE-2004-25. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 in the Commission's Public Reference Section, 450 Fifth
Street, NW., Washington, DC 20549. Copies of such filing also will be
available for inspection and copying at the principal office of the
BSE. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-BSE-
2004-25 and should be submitted on or before September 24, 2004.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E4-2066 Filed 9-2-04; 8:45 am]
BILLING CODE 8010-01-P