[Federal Register Volume 73, Number 175 (Tuesday, September 9, 2008)]
[Notices]
[Pages 52439-52441]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-20808]
[[Page 52439]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-58450; File No. SR-NYSE-2008-78]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing of Proposed Rule Change Amending NYSE Rule 18 To Allow
NYSE Alternext US LLC To Participate in the Compensation Fund
Established by the NYSE To Reimburse Claimants for Losses Associated
With NYSE-Operated System Failures
September 2, 2008.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that on August 26, 2008, the New York Stock Exchange LLC (``NYSE'' or
the ``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 Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Rule 18 (Compensation in Relation to
Exchange System Failure) to provide, as part of the migration of NYSE
Alternext US LLC (``NYSE Alternext'') trading onto systems and
facilities operated by NYSE for the benefit of NYSE Alternext, that
NYSE Alternext may participate in the compensation fund established by
the Exchange to reimburse claimants for losses associated with
Exchange-operated system failures. The text of the proposed rule change
is available at NYSE's principal office, the Commission's Public
Reference Room, and http://www.nyse.com.
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 those 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 parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
This proposal is to amend NYSE Rule 18 to provide that NYSE
Alternext will be permitted to participate in the compensation fund
established by the Exchange to reimburse claimants for Exchange-
operated system failures.
Background
As described more fully in a related rule filing, NYSE Euronext is
expected to acquire The Amex Membership Corporation through a series of
mergers (the ``Mergers'') pursuant to an Agreement and Plan of Merger,
dated January 17, 2008 (the ``Merger Agreement'').\4\ Upon completion
of the Mergers, the American Stock Exchange LLC (``Amex''), currently a
subsidiary of The Amex Membership Corporation, will become a subsidiary
of NYSE Euronext and will continue to operate as a national securities
exchange registered under the Act.\5\ Following the Mergers, the name
of the new exchange will be NYSE Alternext US LLC.\6\
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\4\ See Securities Exchange Act Release No. 58284 (August 1,
2008), 73 FR 46086 (August 7, 2008) (SR-Amex-2008-62).
\5\ 15 U.S.C. 78f.
\6\ As noted, Amex will be renamed NYSE Alternext US LLC. For
the avoidance of doubt, NYSE Alternext US LLC will be a self-
regulatory organization distinct from NYSE Euronext's European-
market subsidiary, NYSE Alternext. See SR-Amex-2008-62.
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In connection with the Mergers, NYSE Alternext will relocate all
equities trading currently conducted on or through the Amex legacy
trading systems and facilities located at 86 Trinity Place, New York,
New York, to the NYSE trading systems and facilities located at 11 Wall
Street, New York, New York (the ``NYSE Alternext Trading Systems''),
which will be operated by the NYSE on behalf of NYSE Alternext (the
``Equities Relocation''). NYSE Euronext has determined that extending
its existing trading systems and facilities to NYSE Alternext will be
more efficient than maintaining two separate trading platforms for
trading equities. At the same time, because NYSE Euronext reports its
financial results on a consolidated basis, it does not plan to break
out and allocate technology costs between New York Stock Exchange LLC
(the registered self-regulatory organization that owns and operates the
NYSE market) and NYSE Alternext US LLC (the registered self-regulatory
organization that will own and operate the NYSE Alternext equities
market after the merger is complete).
In connection with the Equities Relocation, NYSE Alternext will
adopt NYSE Rules 1-1004 in substantially their existing form as the
``NYSE Alternext Equities Rules.'' \7\ Because the NYSE Alternext
Trading Systems will be operated by the NYSE for the benefit of NYSE
Alternext, the NYSE Alternext Equities Rules will be substantively
identical to the existing NYSE Rules, subject to certain changes
necessary to apply such rules to NYSE Alternext.
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\7\ See Securities Exchange Act Release No. 58265 (July 30,
2008), 73 FR 46075 (August 7, 2008) (SR-Amex-2008-63).
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Among the rules that NYSE Alternext is adopting is a version of
NYSE's Rule 18, which establishes that NYSE Alternext members may be
compensated for losses incurred as a result of an NYSE Alternext system
malfunction (NYSE Alternext rules elsewhere provide that the exchange
is not liable for losses resulting from the use of its systems or
facilities), and prescribes the procedures for submitting claims to the
fund. If there is a system malfunction, NYSE Alternext members will be
able to submit claims to NYSE Alternext pursuant to that rule.
Under NYSE's Rule 18, the Exchange has established a monthly fund,
described in more detail below, from which valid compensation claims
are paid. Because of the consolidated accounting referenced above,
however, NYSE Euronext does not intend to establish a separate
compensation fund for NYSE Alternext members under NYSE Alternext's
Rule 18. Instead, NYSE Alternext members who submit claims will be paid
directly by NYSE Alternext. Through this filing, the Exchange is
providing a mechanism for NYSE Alternext itself to seek reimbursement
for the amounts that it undertakes to pay out to its members under its
Rule 18 as a result of an NYSE system malfunction.
Current NYSE Rule 18 and Proposed NYSE Alternext Rule 18
NYSE Rule 18, adopted by the Exchange in 2007, provides a procedure
for compensating claimants in the event of an Exchange system
failure.\8\ In its
[[Page 52440]]
filing to amend its rules, Amex has proposed to adopt substantially the
same rule. Accordingly, the process described below will be the same
process for members of both NYSE and NYSE Alternext.
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\8\ See Securities Exchange Act Release Nos. 56085 (July 17,
2007), 72 FR 40348 (July 24, 2007) (SR-NYSE-2007-09) (adopting NYSE
Rule 18); 56718 (October 29, 2007), 72 FR 62506 (November 5, 2007)
(SR-NYSE-2007-95) (approving certain amendments to NYSE Rule 18).
NYSE Rule 18 defines an Exchange system failure as a ``malfunction
of the Exchange's physical equipment, devices, and/or programming
which results in an incorrect execution or no execution of an order
that was received in Exchange systems.'' However, misuse of Exchange
systems is not considered such a system failure. See NYSE Rule
18(b). As proposed by Amex, upon the Equities Relocation, those
systems and facilities will be deemed systems and facilities of NYSE
Alternext for the purposes of administering NYSE Alternext's
compensation plan.
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Both rules require claimants to informally notify their respective
Exchanges of a suspected Exchange system failure by the opening of the
next business day following an incident, followed by formal written
notice no later than end of the third business day after the
incident.\9\ Net losses less than $500 are not eligible for
compensation. Upon receipt of a claim, Exchange staff from the Division
of Floor Operations verify that (i) a valid order was accepted into the
Exchange's systems, and (ii) an Exchange system failure occurred during
the execution or handling of that order. If all of the criteria for
submitting a claim have been met, the claim will be qualified for
processing with all other eligible claims at the end of the calendar
month in which the incident occurred.\10\
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\9\ Because NYSE will operate the systems and facilities for
NYSE Alternext, there may not be a separate ``Division of Floor
Operations'' for NYSE Alternext. A member of the NYSE's Floor
Operations staff will be cross-designated as the Floor Operations
representative for NYSE Alternext for purposes of the NYSE Alternext
rules that require interfacing with the Division of Floor
Operations. NYSE Alternext members would submit their claims to this
representative.
\10\ See NYSE Rule 18(a).
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Each Exchange will appoint a Compensation Review Panel consisting
of three Floor Governors and three Exchange employees, who will meet
and review all qualified claims submitted for each calendar month and
administer any payments to be made thereon. As part of their
determinations, the respective Compensation Review Panels review the
actions of the claimant before and after the error occurred in order to
determine if any of the claimant's actions contributed to the loss
sustained. The Compensation Review Panels may increase or reduce the
amount deemed eligible for payment as a result of their review. All
decisions by the respective Compensation Review Panel are final, except
that where there is a deadlock, the final determination will be made by
the Exchange CEO or a designee.\11\
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\11\ See NYSE Rule 18(d)-(f).
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Payment of Valid Claims
Currently, claims by NYSE members are paid from a compensation fund
established by the Exchange. Each month the Exchange allots $500,000
(``Monthly Allotment'') to be used for payments to NYSE member
claimants who qualify for compensation under NYSE Rule 18. The Monthly
Allotments do not aggregate and, in the event that less than $250,000
of the Monthly Allotment is paid out in any given month, $50,000 of the
remaining Monthly Allotment (``Supplemental Allotment'') is added to a
supplemental fund available for payment in subsequent calendar months.
The Supplemental Allotment is used to pay NYSE member claims only after
the Monthly Allotment is exhausted. If NYSE member claims are satisfied
by the Monthly Allotment, the Supplemental Allotment, or any unused
portion thereof, is carried forward.\12\
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\12\ See NYSE Rule 18(c).
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If the total dollar amount of approved NYSE member claims is less
than the Monthly Allotment, then all claims will be paid in full. If
the total amount of approved NYSE member claims exceeds the Monthly
Allotment, then any Supplemental Allotment will be added to the Monthly
Allotment in order to satisfy approved claims. In the event that the
approved claims for a given month exceed the sum of the Monthly
Allotment and any Supplemental Allotment, the approved claims will be
paid out to claimants based on the proportion that each eligible claim
bears to the total amount of all approved claims.\13\
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\13\ See NYSE Rule 18(c).
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Proposed Amendments
The Exchange proposes to amend NYSE Rule 18 to add supplemental
material permitting NYSE Alternext to participate alongside NYSE
members in the compensation fund established by the Exchange to
reimburse claimants for Exchange-operated system failures.
As described above, upon the Equities Relocation, all equities
trading currently conducted on Amex legacy trading systems will take
place on the NYSE Alternext Trading Systems, which are the same trading
systems as those of the Exchange. As a result, any system failure on
the Exchange will affect equally both NYSE members and member
organizations and NYSE Alternext members and member organizations.
Through the proposed amendments, the Exchange wants to ensure that
members and member organizations of both SROs are treated fairly and
equitably in the event of such a system failure, while maintaining and
respecting the distinctions between them.
Under the proposed amendments, NYSE Alternext members and member
organizations affected by the failure of the NYSE Alternext Trading
Systems would submit claims for compensation to NYSE Alternext pursuant
to the proposed NYSE Alternext Equities Rule 18.\14\ NYSE Alternext
members and member organizations would not be able to submit their
claims directly to the NYSE. NYSE Alternext's Compensation Review Panel
will then decide the validity of NYSE Alternext claims.
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\14\ See SR-Amex-2008-63.
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After its Compensation Review Panel has determined the number and
amount of claims that NYSE Alternext deems valid, NYSE Alternext would
submit to the NYSE a separate claim for each valid claim made by NYSE
Alternext members or member organizations, subject to the same
requirements under NYSE Rule 18 as any other NYSE claimant. NYSE
Alternext will not, however, be required to provide verbal notice of
its claims to the Exchange's Division of Floor Operations.
In the event that the total amount of valid claims by NYSE members
and NYSE Alternext exceeds the available funds, NYSE Alternext would
receive a partial payment of claims pursuant to NYSE Rule 18(c), and
NYSE Alternext's obligation to compensate its members for valid claims
would be reduced by a like percentage. In view of (i) The probable
volume of trading on NYSE Alternext; (ii) the fact that to date, the
existing compensation fund has been sufficient to pay all valid claims
in full; and (iii) the current amount available in the supplemental
fund, the Exchange does not anticipate that the additional claims by
NYSE Alternext would create a substantial burden on the fund in the
event of a system malfunction
In the event that a reduction is required, in calculating any such
reduction, NYSE officials would consider each claim submitted by NYSE
Alternext as a separate claim, so that all claimants from both the
Exchange and NYSE Alternext will share equitably from the Compensation
Fund. As described more fully in the related filing by Amex, payments
against valid claims submitted by NYSE Alternext members are subject to
being reduced by the amount that NYSE Alternext's claims against the
NYSE fund are reduced.
The Exchange also proposes technical changes to NYSE Rule 18,
including renumbering subparagraphs (c)(iv)-(c)(vi), accordingly.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
and furthers the objectives of Section 6(b)(5) of the Act,\15\ in that
it is 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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\15\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed amendments to NYSE Rule 18
will enhance the efficient execution of transactions and fair
competition among broker-dealers and markets and provide a fair and
reasonable process by which both NYSE members and member organizations
and NYSE Alternext members and member organizations may petition for
compensation when they suffer a loss due to a failure of Exchange-
operated systems.\16\
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\16\ The second paragraph of the Statutory Basis section appears
in the Form 19b-4 portion of SR-NYSE-2008-78 filing, but not in
Exhibit 1. In a phone call with Jason Harman, Consultant, NYSE
Regulation on September 2, 2008, Sarah Albertson, Attorney, Division
of Trading and Markets, SEC, confirmed that NYSE inadvertently
omitted this paragraph of the Statutory Basis section in Exhibit 1.
Mr. Harman asked that the paragraph be included as the second
paragraph under the Statutory Basis heading in this Notice.
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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 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 NYSE consents, the Commission will:
(A) by order approve such 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. 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-NYSE-2008-78 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSE-2008-78. 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 Room, on official business
days between the hours of 10 a.m. and 3 p.m. Copies of the filing also
will be available for inspection and copying at the principal office of
the Exchange. 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-
NYSE-2008-78 and should be submitted on or before September 30, 2008.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-20808 Filed 9-8-08; 8:45 am]
BILLING CODE 8010-01-P