[Federal Register: August 18, 2008 (Volume 73, Number 160)]
[Notices]
[Page 48260-48268]
[DOCID:fr18au08-104]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58328; File No. SR-NYSE-2008-45]

Self-Regulatory Organizations; New York Stock Exchange LLC; Order
Approving Proposed Rule Change, as Modified by Amendment No. 1 Thereto,
Amending NYSE Rule 98 and Related Rules To Redefine Specialist
Operations at the NYSE

August 7, 2008.

I. Introduction

    On June 11, 2008, the New York Stock Exchange LLC (``NYSE'' 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 Rule 98 and related rules to allow
its member organizations greater flexibility in structuring their
specialist operations and managing their risk. The proposed rule change
was published for comment in the Federal Register on July 3, 2008.\3\
On August 7, 2008, the NYSE filed Amendment No. 1 to the proposed rule
change.\4\ The Commission received no

comments on the proposal. This order approves the proposed rule change,
as amended.
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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. 58052 (June 27,
2008), 73 FR 38274 (``Notice'').
    \4\ In Amendment No. 1, the NYSE revises the text of proposed
NYSE Rule 460.10 to conform it to the description of proposed NYSE
Rule 460.10 as set forth in the Notice. Because Amendment No. 1 is
technical in nature, the Commission is not publishing it for
comment.
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II. Background and Introduction

    The NYSE adopted NYSE Rule 98 in 1986 when NYSE specialist firms,
which had been independent member-owned entities, were increasingly
becoming affiliates of larger member organizations.\5\ Because of the
specialists' unique position in the market, NYSE Rule 98 requires an
organizational separation between the specialist and any affiliates.
The purpose of that separation is to eliminate or control conflicts of
interest between the specialist's responsibilities to the market and to
any customer orders the specialist may represent as agent, and the
business activities of the specialist's affiliates.
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    \5\ See Securities Exchange Act Release No. 23768 (November 3,
1986), 51 FR 41183 (November 13, 1986) (SR-NYSE-85-25).
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    NYSE Rule 98 currently applies to specialist organizations and
``approved persons'' of specialist organizations. ``Approved persons''
are entities that are in a control relationship with a specialist
organization, or share a common corporate parent with the specialist
organization and are engaged in a kindred business.\6\ NYSE Rule 98
subjects all approved persons of a specialist organization to the NYSE
specialist rules. Among other things, approved persons are subject to
restrictions on their ability to trade in specialty stock options,
restrictions on certain of their business transactions with issuers for
whom the specialist organization is the registered specialist, and
limits on the amount of securities of such issuers that the specialist
and approved persons may own in the aggregate.
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    \6\See NYSE Rules 2(d) and 304(e).
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    To avoid unnecessarily restricting a member organization's overall
operations, however, the current rules provide that each approved
person may separately seek NYSE approval to be exempted from most of
these restrictions. To obtain such an exemption, an approved person and
the specialist member organization with which such approved person is
to be associated must obtain the written agreement of NYSE Regulation,
Inc. (``NYSE Regulation'') that the approved person and such member
organization have established policies and procedures that are
consistent with the guidelines prescribed by NYSE Rule 98. These
guidelines set out in detail how approved persons and their associated
specialist organizations should structure and conduct their respective
businesses in order to ensure complete separation between the
specialist organization and the rest of the member organization. For
example, these guidelines require (1) the specialist unit to be housed
in a separate corporate entity and broker-dealer from its approved
persons; (2) the maintenance of separate books and records, financial
accounting, and required capital by the specialist unit; and (3)
procedures to safeguard confidential information derived from business
interactions with the issuer or contained in draft research reports
prepared by the approved person.
    NYSE Rule 98 currently limits the ability of a specialist member
organization and its approved persons to share operational support
personnel, and permits dual affiliation only if the specialist member
organization and approved person provide the Exchange with a written
statement of the duties of such person and why it is necessary for the
individual to have a dual affiliation. Any changes to dual affiliations
must be submitted to the Exchange for approval in advance of making
such change.
    The current NYSE rules also limit the ability of a specialist, its
member organization, and approved persons to manage the specialist
member organization's trading risks. Specifically, NYSE Rule 98
restricts an approved person from being involved in any trading
decisions of an associated specialist member organization and NYSE Rule
105 restricts the specialist member organization's ability to trade in
options and security futures on securities allocated to the specialist
member organization.
    The NYSE believes that NYSE Rule 98 creates an administrative
burden on specialist organizations and their approved persons because
each approved person must continually update a separate exemption for
each activity that would otherwise be restricted. The NYSE also
believes that its current rule unnecessarily constrains the ability of
specialist organizations and their approved persons to manage the
specialist organization's risks and places them at a competitive
disadvantage vis-a-vis other market making or trading firms.
Accordingly, the NYSE proposes to amend NYSE Rule 98 to provide member
organizations with more flexibility with regard to how they structure
their specialist operations and manage risk. NYSE also proposes to make
conforming changes to other NYSE rules that rely on the NYSE Rule 98
exemptions for approved persons.
    As discussed in further detail below, the revisions to NYSE Rule 98
would include: (1) Redefining the persons to whom NYSE Rule 98 would
apply; (2) allowing specialist operations to be integrated into a
member organization; (3) permitting a specialist unit to share non-
trading related services with its member organization or approved
persons; and (4) providing flexibility to member organizations and
their approved persons in how to conduct risk management of specialist
operations.
    After careful review, and as discussed below, the Commission finds
that the proposed rule change, as amended, 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 finds that the proposed rule change, as amended, is
consistent with Section 6(b)(5) of the Act,\8\ which requires that the
rules of the an exchange be designed 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 securities system, and, in
general, to protect investors and the public interest.
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    \7\ In approving this proposed rule change, the Commission 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 restrictions in current NYSE Rule 98 and related rules are
intended to address two primary concerns. The first concern is the
potential that an affiliate could unfairly use non-public information,
such as information on a specialist's book or information regularly
provided to him by other market participants because of his central
role as a primary market specialist. If a specialist's affiliates had
access to such information, it would have a perceived advantage over
competing firms and the public at large in trading stocks assigned to
the affiliated specialist. The same concern about the potential for
unfair use of non-public information would arise if the specialist had
advance information about the activities of its affiliates (e.g., a
change in the firm's buy or sell recommendation or an imminent block
transaction away from the market). Access to such information would
allow the specialist to position itself to benefit from price changes
that might result once that information became publicly available. The
second concern is that a specialist unit could favor its affiliates by
providing orders placed by the affiliate with more favorable executions

and by providing useful market information to the affiliated firm (or
to its broker on the exchange trading floor) but not to others. In some
cases, such conflicts of interest could result in the specialist
neglecting his duty to make a fair and orderly market by giving an
affiliate's principal or agency orders a more favorable execution.
    The potential for misuse of non-public information and conflicts of
interest, if not addressed by appropriate procedures and the monitoring
and surveillance of the continuing adequacy of such procedures, could
result in potential manipulative market activity and informational
advantages benefiting the approved person, the specialist unit, or the
customers of either. As discussed in more detail below, the Commission
believes that the changes NYSE proposes to make to NYSE Rule 98 and
related rules address these concerns.

III. Proposed Amendments to NYSE Rule 98

    In response to concerns described above with current NYSE Rule 98,
NYSE proposes a wholesale change to NYSE Rule 98 that would apply a
more principles-based approach. In addition, under the proposed rule,
instead of reviewing whether to grant each approved person an exemption
from NYSE Rule 98, NYSE Regulation would review whether the specialist
unit itself has adequate policies, procedures, controls, and
surveillance designed to prevent the misuse of specialist confidential
information \9\ and non-public order \10\ information. If the
specialist unit has such policies, procedures, controls, and
surveillance, the specialist rules would generally only be applicable
to the specialist unit and not to affiliates of the specialist. In
addition to the information barriers and other NYSE Regulation approved
controls, specialists would continue to be subject to Exchange rules
that govern their access to and use of non-public order
information.\11\
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    \9\ ``Specialist confidential information'' means any non-public
information relating to a specialist unit's trading or quoting in
its specialty securities, including positions or any other
indication of a specialist's trading or quoting interest, the
specialist algorithm, or any other public information relating to a
specialist's interactions with its specialist security, but not
including non-public order information. See proposed NYSE Rule
98(b)(6).
    \10\ A ``Non-public order'' is an order, whether expressed
electronically or verbally, or any information regarding a
reasonably imminent non-public transaction or series of transactions
entered or intended for entry or execution on the NYSE and which is
not publicly available on a real-time basis via an NYSE-provided
data-feed. See proposed NYSE Rule 98(b)(7).
    \11\ See, e.g., NYSE Rules 70.20(h)(ii), 104(b), 115, and 115A.
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A. Operating a Specialist Unit

    Under proposed NYSE Rule 98(c), a member organization must obtain
prior written approval from NYSE Regulation to operate a specialist
unit. To obtain such approval, NYSE Regulation would have to determine
that the specialist unit has: (i) Adopted and implemented comprehensive
written procedures and guidelines governing the conduct and supervision
of business handled by the specialist unit; (ii) established a process
for regular review of such written policies and procedures; and (iii)
implemented controls and surveillances reasonably designed to prevent
and detect violations of these procedures and guidelines. These
policies and procedures would have to be reasonably designed to
maintain the confidentiality of specialist confidential information and
non-public order information. In this regard, proposed NYSE Rule 98(c)
would require a member organization's policies and procedures to
prohibit approved persons and the member organization's departments,
divisions, or aggregation units that are not part of the specialist
unit from having access to specialist confidential information and non-
public order information.\12\ In addition, such policies and procedures
would have to prohibit a specialist unit from having access to material
non-public order information in the possession of other aggregation
units of the member organization related to the securities allocated to
that specialist unit.\13\
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    \12\ However, a specialist may make available to a Floor broker
associated or affiliated with an approved person or member
organization any information that the specialist would be permitted
to provide under Exchange rules to an unaffiliated Floor broker. See
proposed NYSE Rule 98(c)(2)(A)(ii).
    \13\ See proposed NYSE Rules 98(c)(1) and (c)(2).
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    Further, a specialist unit that is not operated as part of an
integrated proprietary aggregation unit would have to comply with all
the requirements of an aggregation unit.\14\ Accordingly, as required
by Rule 200(f) of Regulation SHO, such a specialist unit would have to
have a written plan of organization that specifies its trading
objectives and meets all the other requirements of an independent
trading unit under Regulation SHO.\15\
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    \14\ See proposed NYSE Rules 98(b)(11) and 98(c)(2)(B).
    \15\ See 17 CFR 242.200(f). To be exempt from the restrictions
in NYSE Rule 105 pursuant to proposed Rule 98(f)(1), the written
plan of organization required by Rule 200(f) of Regulation SHO would
need to specify the specialist unit's trading objectives for trading
in related products.
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    The proposed rule would permit senior managers who are not
dedicated to the specialist unit and are associated with either an
approved person or a member organization that runs a specialist unit to
provide management oversight to the specialist unit. A member
organization's policies and procedures would need to be reasonably
designed to ensure that such management oversight does not conflict
with or compromise the specialist unit's compliance with the specialist
rules. The proposed rule would also provide specific guidelines for
access by the senior managers not assigned to the specialist unit to
specialist confidential information or non-public order information,
which are designed to prevent the misuse of such information. For
example, proposed NYSE Rule 98(c)(2)(E) would provide that if a senior
manager is called upon for risk management purposes and gains access to
specialist confidential information or non-public order information in
connection with that role, the senior manager must not make (directly
or indirectly) specialist confidential information or non-public order
information available to the persons or systems responsible for making
trading decisions in aggregation units, departments, divisions, or
trading desks that are not part of the specialist unit, including the
customer-facing departments. The senior manager also must not use such
information to directly or indirectly influence the day-to-day trading
decisions of the other aggregation units of the member organization or
approved person with respect to the securities allocated to the
specialist unit.\16\
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    \16\ See proposed NYSE Rule 98(c)(2)(E). See Notice, supra note
3, at 73 FR at 38278.
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    Proposed NYSE Rule 98(c) would enumerate certain bright line
divisions that the specialist unit must maintain, including information
barriers between the specialist unit and investment banking, research,
and customer-facing departments and approved persons. These divisions
are designed to ensure that the specialist unit cannot access material
non-public information about securities allocated to that unit from
either its approved persons or non-specialist operations of a parent
member organization.\17\ In addition, as discussed above, these
divisions are designed to ensure that a member organization's
departments, divisions, or aggregation units not part of the specialist
unit, including investment banking, research, and customer-facing
departments, cannot access specialist confidential information or non-
public order

information.\18\ Finally, a specialist unit would be required to
maintain or have allocated to it net capital sufficient to meet the
requirements of NYSE Rule 104.21.\19\
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    \17\ See proposed NYSE Rule 98(c)(2)(C).
    \18\ See proposed NYSE Rule 98(c)(2)(A)(i) and supra notes 12
and 13 and accompanying text.
    \19\ See proposed NYSE Rule 98(c)(2)(D).
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    NYSE Regulation would review a member organization's surveillance
plans and internal controls to ensure that they are reasonably designed
to protect information as required under the proposed rule. As with the
current rule, NYSE Regulation would also review whether a member
organization has implemented internal audit procedures to ensure
compliance with such organization's NYSE Rule 98 policies and
procedures. The Exchange represents that the NYSE Regulation review for
approving a specialist unit would be as rigorous as the current review
for obtaining an exemption from current NYSE Rule 98.\20\ As with the
current NYSE Rule 98 exemption process, staff from both the Market
Surveillance Division of NYSE Regulation, as well as staff from the
Financial Industry Regulatory Authority, Inc. (``FINRA'') who are
responsible for the routine examinations of specialist units, would be
involved in reviewing a specialist unit's written policies and
procedures and proposed automated surveillances and controls.\21\
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    \20\ See Notice, supra note 3, at 73 FR at 38278.
    \21\ See Notice, supra note 3, at 73 FR at 38279. In the Notice,
the Exchange stated that ``[w]here feasible, NYSE Regulation will
expect specialist units to use automated surveillances to check for
breaches of the information barriers required by the proposed
rule.'' Id.
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    After a member organization has been approved to operate a
specialist unit, NYSE Regulation and FINRA would conduct examinations
to determine whether a specialist unit's policies and procedures
continue to meet the rule requirements and whether the controls and
automated surveillances are functioning as designed. As part of the
examinations, NYSE Regulation and FINRA would conduct on-site reviews
of a specialist unit to review for breaches of the controls or
surveillances.\22\ In addition, NYSE states that a specialist unit
would need to seek approval from NYSE Regulation, before making any
material changes to its operations.\23\
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    \22\ Id.
    \23\ Id.
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    The Commission finds that the requirements in proposed Rule 98(c)
are consistent with the Act. The Commission believes that the proposed
rule change, as amended, establishes guidelines for a member
organization's policies and procedures that will protect against the
improper disclosure and sharing of specialist confidential information
and non-public order information.

B. Operating a Specialist Unit Within an Integrated Proprietary
Aggregation Unit

    Proposed NYSE Rule 98 would permit a member organization to seek
approval to operate a specialist unit within an integrated proprietary
aggregation unit. An ``integrated proprietary aggregation unit'' is
proposed to be defined to mean a department, division, or desk that
meets the requirements of the definition of an ``independent trading
unit'' under Rule 200 of Regulation SHO with a trading objective to
engage in proprietary trading, including market-making activities.\24\
An integrated proprietary aggregation unit must be separate from any
investment banking, research, or customer-facing department.\25\
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    \24\ See proposed NYSE Rule 98(b)(11) and (14); 17 CFR
242.200(f).
    \25\ See proposed NYSE Rule 98(b)(14).
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    To protect specialist confidential information and non-public order
information, a member organization would be permitted to operate a
specialist unit within an integrated proprietary aggregation unit, if
NYSE Regulation approves such operations and the member organization:
(i) Adopts and implements comprehensive written procedures and
guidelines governing the conduct and supervision of business handled by
the unit; (ii) establishes a process for regular review of such written
policies and procedures; and (iii) implements controls and
surveillances reasonably designed to prevent and detect violations of
these procedures and guidelines.\26\
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    \26\ See proposed NYSE Rule 98(d)(1) and (2).
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    In addition, to operate a specialist unit within an integrated
proprietary aggregation unit, the specialist unit's policies and
procedures would have to meet those requirements for operating a
specialist unit pertaining to information barriers associated with the
specialist unit and non-specialist unit operations, net capital
requirements, and senior management oversight.\27\ A specialist unit
operating within an integrated proprietary aggregation unit would not
be required to separately comply with all requirements of a Regulation
SHO independent trading unit because the integrated proprietary
aggregation unit of which it is a part would be required to comply with
Rule 200(f) of Regulation SHO.\28\
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    \27\ See proposed NYSE Rules 98(d)(2)(A) and 98(c)(2)(A), (C),
(D), and (E).
    \28\ See supra note 24 and accompanying text. The Exchange
states that there may be some Regulation SHO issues in connection
with how a member organization may choose to structure its
specialist unit within an integrated proprietary aggregation unit or
provide risk management to the specialist unit pursuant to proposed
NYSE Rule 98(f). Accordingly, the Exchange represents that it would
not approve a specialist unit to operate under proposed NYSE Rule 98
until all Regulation SHO issues that may arise have been resolved.
See Notice, supra note 3, at 73 FR at 38279.
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    The member organization's policies and procedures would also need
to restrict access within the integrated proprietary aggregation unit
to non-public order information. Specifically, except for senior
managers pursuant to policies and procedures adopted under proposed
NYSE Rule 98(c)(2)(E), the specialist unit must not permit systems and
individuals not assigned to the specialist unit to have access to non-
public order information.\29\ For example, because the specialist
application protocol interface (``specialist API'') currently has
access to non-public order information, systems not dedicated to the
specialist unit could not be integrated with the specialist API.
Accordingly, the trading algorithms of the integrated proprietary
aggregation unit that are not dedicated to the specialist unit must not
have access to any non-public order information via the specialist API,
or any other system.\30\
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    \29\ See proposed NYSE Rule 98(d)(2)(B)(i) and (ii).
    \30\ See Notice, supra note 3, at 73 FR 38279.
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    A member organization's policies and procedures would have to
prohibit individuals assigned to the specialist unit, while on the
Exchange floor,\31\ from communicating with individuals or systems
responsible for making trading decisions for the integrated proprietary
aggregation unit.\32\ However, such policies and procedures could
permit a specialist unit employee to move, on an intra-day basis, to an
off-Floor location and engage in a non-specialist related role within
the integrated proprietary aggregation unit.\33\ The policies and
procedures of a member organization that chooses to allow individuals
to so move must be reasonably designed to prohibit such individual from
(1) making any non-public order information or specialist confidential
information available to individuals or systems responsible for

making trading decisions for the integrated proprietary aggregation
unit and (2) using any non-public order information or, except for
certain risk management activities as described below,\34\ specialist
confidential information in connection with making trading decisions
for the integrated proprietary aggregation unit.\35\
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    \31\ NYSE rules define being on the Floor to include the trading
Floor of the Exchange, and the premises immediately adjacent
thereto, such as the various entrances and lobbies of 11 Wall
Street, 18 New Street, 12 Broad Street, and 18 Broad Street, as well
as the telephone lobby in the first basement of 11 Wall Street. See
NYSE Rule 112(b).
    \32\ See proposed NYSE Rule 98(d)(2)(B)(iii).
    \33\ See proposed NYSE Rule 98(d)(2)(B)(iv).
    \34\ See Section III(D) infra.
    \35\ See proposed NYSE Rule 98(d)(2)(B)(iv).
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    Proposed NYSE Rule 98 would no longer require separate books and
records for a specialist unit operating within an integrated
proprietary aggregation unit. However, to allow NYSE Regulation to
review the trading activity by the specialist unit at the Exchange
without having to parse through commingled records, under proposed NYSE
Rule 98(d)(2)(C), an integrated proprietary aggregation unit would have
to maintain records of its specialist's accounts in a manner that is
separate from the accounts of the integrated proprietary aggregation
unit.\36\ Similarly, to ensure that NYSE Regulation can review the
trading activities of the integrated proprietary aggregation unit,
proposed NYSE Rule 98(d)(4) would require an integrated proprietary
aggregation unit to maintain audit trail information for any trading by
such unit, including trading at the Exchange and at other market
centers. Further, the proposed amendments to NYSE Rule 132B would apply
the Order Tracking System (``OTS'') requirements to trading by a
specialist unit, and if applicable, an integrated proprietary
aggregation unit.\37\ A member organization would be required to
maintain sufficient records to reconstruct in a time-sequenced manner
its trading in securities allocated to the specialist unit and any
trading by the integrated proprietary aggregation unit in those
securities in other market centers or trading in related products.\38\
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    \36\ See NYSE Rule 98(d)(2)(C).
    \37\ The order tracking provisions in NYSE Rule 132B currently
do not apply to members effecting on the Floor proprietary
transactions when they are acting in the capacity of a specialist, a
Registered Competitive Market Maker, or a Competitive Trader. The
proposed amendments in NYSE Rule 132B would apply the order tracking
provisions in the rule to those persons.
    \38\ See proposed NYSE Rule 98(d)(4).
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    The Commission finds that the NYSE's proposal to permit a member
organization to operate a specialist unit within an integrated
proprietary aggregation unit is consistent with the Act. The Commission
believes that the guidelines established for member organization
policies and procedures and NYSE Regulation review are designed to
protect specialist confidential information and non-public order
information and mitigate the potential for conflicts of interest in a
member organization. The Commission also believes that operation of a
specialist unit within an integrated proprietary aggregation unit need
not interfere with the specialist's obligations under Exchange Rules.
In particular, proposed NYSE Rule 98(d) would establish that the
specialist rules would apply to any trading on or through the systems
and facilities of the Exchange by the integrated proprietary
aggregation unit through the specialist unit in the securities that are
allocated to the specialist unit and to the integrated proprietary
aggregation unit if the integrated proprietary aggregation unit causes
the specialist unit to violate the specialist rules.\39\ In this
regard, NYSE states that if there is a conflict between the specialist
unit's market making obligations and the integrated proprietary
aggregation unit's trading, the presumption would be in favor of the
specialist unit's market making obligations.\40\
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    \39\ See proposed NYSE Rule 98(d)(3).
    \40\ See Notice, supra note 3, at 73 FR at 38280.
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C. Sharing Non-Trading Related Services

    Proposed NYSE Rule 98(e) would allow a specialist member
organization and its approved persons to share non-trading related
services, subject to the approval of NYSE Regulation. To obtain
approval to share non-trading related services, the specialist unit
would be required to: (i) Adopt written policies and procedures
governing the sharing of non-trading related services; (ii) establish a
process for regular review of such written policies and procedures; and
(iii) implement controls and surveillances reasonably designed to
prevent and detect violations of those policies and procedures. At a
minimum, the specialist unit's policies and procedures would have to be
reasonably designed to provide that the specialist unit and the member
organization or approved person must maintain the confidentiality of
specialist confidential information and non-public order information.
Under no circumstances may non-public order information or specialist
confidential information be made available to a member's organizations
investment banking, research, or customer-facing departments.\41\
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    \41\ See NYSE Rule 98(e)(2).
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    The Commission finds that NYSE's proposal to allow a specialist
unit to share certain non-trading related services with its member
organization or approved person is consistent with the Act because such
sharing would be conducted pursuant to policies and procedures designed
to protect specialist confidential information and non-public order
information. Moreover, such policies and procedures would be reviewed
by NYSE Regulation prior to a member organization being approved to
share non-trading related services and NYSE Regulation and FINRA would
examine on an ongoing basis whether the specialist unit's policies and
procedures and controls comply with the requirements of the rule.\42\
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    \42\ See Notice, supra note 3, at 73 FR 38281.
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D. Risk Management

1. Changes to NYSE Rule 105
    NYSE Rule 105 currently limits the ability of specialists,
specialist organizations and approved persons (and any officer or
employee thereof) to conduct risk management trading in options and
single stock futures on stock in which the specialist is registered.
The Guidelines for Specialists' Specialty Stock Option and Single Stock
Futures Transactions Pursuant to Rule 105 (``Rule 105 Guidelines'')
currently sets forth the permissible options positions that a
specialist may establish and maintain for the purpose of hedging risks
associated with holding specialty stocks. The proposed amendments to
NYSE Rule 105 would limit the applicability of the rule to the
specialist unit itself (and any officer or employee thereof); approved
persons would no longer be subject to NYSE Rule 105.\43\
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    \43\ NYSE Rule 105(a), which prohibits specialists, their member
organization and their approved persons (or officer or employee
thereof) from being directly or indirectly interested in a pool
dealing or trading in a stock in which such member is registered as
a specialist, would continue to apply to approved persons.
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    Paragraph (m)(i) of the Rule 105 Guidelines currently prohibits
specialists, their member organization and their approved persons (or
officer or employee thereof) from acting in any market-making capacity
in an option or security future overlying a security in which the
specialist is registered. An approved person may seek an exception from
these restrictions under NYSE Rule 98 and paragraphs (m)(ii) and (iii)
of the Rule 105 Guidelines exempt such approved person to engage in
such market making activities. Such approved person, however, may not
also act as a market maker in any equity security in which the
associated specialist is registered and which underlies an option or
security future in

which the approved person is acting as market maker.\44\
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    \44\ Paragraph (m)(ii) of the Rule 105 Guidelines.
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    Consistent with the proposal to amend NYSE Rule 105 so that
approved persons are no longer subject to the Rule, the proposed rule
change would eliminate the reference to ``approved persons'' in
paragraph (m)(i) of the Rule 105 Guidelines. Thus, an approved person
and an integrated proprietary aggregation unit would not be prohibited
by NYSE Rules from engaging in options or security futures market-
making activities. In addition, the proposed rule change would delete
paragraphs (m)(ii) and (m)(iii), which apply only to approved persons,
from the Rule 105 Guidelines.
    The Commission believes that these proposed changes to NYSE Rule
105 and the Rule 105 Guidelines are consistent with the Act. Under
proposed NYSE Rule 98, the specialist unit would be walled-off from
approved persons pursuant to a member organization's policies and
procedures reviewed by NYSE Regulation that must be reasonably designed
to protect against the improper disclosure and sharing of specialist
confidential information and non-public order information. The
Commission believes that these barriers between the specialist unit and
other business activities of a member organization, including market
making in securities in which a specialist is registered and related
securities, will limit the potential for unfair use of non-public order
information, manipulation and other improper trading practices, and
conflicts of interest.
2. Proposed Risk Management Models
    Proposed NYSE Rule 98(f) would broaden the ability of specialist
units to trade in related products and expand the universe of who may
be involved in managing the risk of the specialist unit. In this
regard, the NYSE proposes three models for a specialist unit to set up
its risk management operation. Specifically, under the first model,
risk management may be conducted within the specialist unit itself.\45\
Under the second model, risk management may be conducted within an
integrated proprietary aggregation unit.\46\ Under the third model,
risk management may be conducted within another affiliate of the
specialist unit.\47\ Regardless of the risk management model, the
specialist unit would be responsible for its quoting or trading
decisions at the Exchange.\48\
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    \45\  See proposed NYSE Rule 98(f)(1).
    \46\ See proposed NYSE Rule 98(f)(2).
    \47\ See proposed NYSE Rule 98(f)(3).
    \48\ See Notice, supra note 3, at 73 FR at 38281; see also
proposed NYSE Rules 98(f)(2)(A)(i) and 98(f)(3)(C)(iv).
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a. Specialist Unit Risk Management
    NYSE Rule 105 limits a specialist unit's trading in options and
single stock futures on stock in which the specialist is registered.
Proposed NYSE Rule 98(f)(1) would allow a specialist unit to seek an
exemption from NYSE Rule 105 for the purpose of conducting risk
management trading. A specialist unit and its officers and employees
would continue to be prohibited from engaging in any capacity as a
market maker in options or security futures overlying securities in
which the specialist is registered. To obtain an exemption from the
NYSE Rule 105 restrictions, the specialist unit would have to: (i)
Adopt and implement comprehensive written procedures and guidelines
governing the conduct of trading in related products; (ii) establish a
process for regular review of such written procedures and guidelines;
and (iii) implement controls and surveillances reasonably designed to
prevent and detect violations of these procedures and guidelines. These
policies and procedures would have to be reasonably designed to ensure
that the individuals or systems responsible for trading related
products do not have access to non-public order information or except
as described below,\49\ specialist confidential information.\50\
Individuals who work on the Exchange Floor would not be permitted to
trade or direct trading in related products,\51\ nor would the
specialist API be permitted to make any trading decisions in related
products.\52\ Accordingly, any trading in related products by the
specialist unit would have to be conducted by an off-Floor, i.e.,
``upstairs'' office, by individuals who are qualified and registered to
trade in the marketplaces where such trading occurs.\53\
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    \49\ See infra notes 55-56 and accompanying text.
    \50\ The proposed rule change would permit a specialist unit to
transfer a specialist back and forth from the Floor of the Exchange
to a specialist unit desk upstairs that trades in related products,
so long as that specialist is registered and qualified to trade in
related products and non-public order information is not used when
trading in related products. In such case, however, a specialist
unit must have policies and procedures reasonably designed to ensure
that a specialist who moves off the Floor of the Exchange does not
make available or use any non-public information or, unless
otherwise specified, specialist confidential information, to which
the specialist may have had access while on the Floor of the
Exchange. See proposed NYSE Rule 98(f)(1)(A)(iii).
    \51\ See proposed NYSE Rule 98(f)(1)(A)(ii); Notice, supra note
3, at 73 FR at 38281.
    \52\ See proposed NYSE Rule 98(f)(1)(A)(iv). Under the proposal,
a specialist unit that has not been approved for an exemption from
NYSE Rule 105 would still be permitted to enter orders in options or
single-stock futures from the Floor, subject to the requirements of
NYSE Rule 105; see also Notice, supra note 3, at 73 FR at 38281.
    \53\ The Exchange notes that the member organization with the
specialist unit would have to be a member of FINRA or another self-
regulatory organization, as required by each marketplace where the
specialist unit proposes to trade. See Notice, supra note 3, at 73
FR at 38281.
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    The NYSE proposes to allow individuals or systems responsible for
trading related products to have limited access to specialist
confidential information. Specifically, individuals or systems,
including computer algorithms, responsible for making trading decisions
in related products may have electronic access to the specialist unit's
trades at the Exchange in securities allocated to the specialist unit,
provided that such trades have been printed to the Consolidated
Tape.\54\
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    \54\ See proposed NYSE Rule 98(f)(1)(A)(v).
---------------------------------------------------------------------------

    In addition, a senior manager of the specialist unit would be
permitted to provide risk management oversight of both Floor specialist
operations and any specialist unit upstairs trading in related
products.\55\ Such oversight, however, would have to be done pursuant
to policies and procedures reasonably designed to prevent the
specialist unit senior managers who have access to non-public order
information or specialist confidential information from making such
information available to the individuals or systems on the upstairs
trading desk responsible for trading related products within the
specialist unit or using such information to directly or indirectly
influence trading in related products by that upstairs desk.\56\ The
proposed rule also would bar specialists from directly entering or
executing trades in related products while on the Floor of the
Exchange.\57\
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    \55\ See proposed NYSE Rule 98(f)(1)(A)(vi).
    \56\ Id.
    \57\ See proposed NYSE Rule 98(f)(1)(ii).
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    The Commission believes that the proposal to permit a specialist
unit to conduct risk management within the specialist unit itself is
consistent with the Act. The Commission notes that the proposed rule
would require a specialist unit's policies and procedures to be
reasonably designed to ensure that the individuals or systems
responsible for trading related products do not have access to non-
public order information or, except under limited conditions,
specialist confidential information.
    The Commission believes that those limited circumstances in which
specialist confidential information may

be used to manage a specialist unit's risks would not be a misuse of
information. The Commission does not believe that information about
trades that have been printed to the Consolidated Tape would provide
the member organization with an unfair advantage because such trades
would be publicly available.\58\
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    \58\ Once trades are disseminated publicly, the individuals or
systems, including computer algorithms, responsible for trading in
related products may have access to the specialist unit's aggregate
net long or short position that includes the printed trades.
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b. Integrated Proprietary Aggregation Unit Risk Management
    Proposed NYSE Rule 98(f)(2) would permit an integrated proprietary
aggregation unit to conduct risk management trading related to the
specialist unit's trading.\59\ NYSE Regulation would need to approve
the integrated proprietary aggregation unit to conduct such risk
management trading.
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    \59\ An integrated proprietary aggregation unit conducting risk
management trading outside of its specialist unit pursuant to
proposed NYSE Rule 98(f)(2) would not require an exemption from the
requirements of NYSE Rule 105(b)-(d) and the Rule 105 Guidelines
because, under the proposed changes to NYSE Rule 105, the
prohibitions on risk management trading would apply only to the
specialist unit itself and not to approved persons. See supra
Section III(D)(1).
---------------------------------------------------------------------------

    Proposed NYSE Rule 98(f)(2) incorporates the requirements described
above for conducting risk management trading within the specialist unit
itself, except for the requirement in proposed NYSE Rule
98(f)(1)(A)(vi) relating to senior managers of the specialist unit.\60\
The requirement in proposed NYSE Rule 98(f)(1)(A)(vi) is not applicable
where risk management is being conducted by an integrated proprietary
aggregation unit, because senior managers of the specialist unit would
not be providing risk management oversight. In addition, an integrated
proprietary aggregation unit would be required to: (i) Adopt and
implement comprehensive written procedures and guidelines governing the
conduct of risk management of the specialist unit; (ii) establish a
process for regular review of such written procedures and guidelines;
and (iii) implement controls and surveillances reasonably designed to
prevent and detect violations of these procedures and guidelines.
---------------------------------------------------------------------------

    \60\ See proposed NYSE Rule 98(f)(2)(A). An integrated
proprietary aggregation units would have to meet the requirements of
proposed NYSE Rule 98(f)(1)(A)(i)-(v), see supra notes 49-54 and
accompanying text.
---------------------------------------------------------------------------

    Rule 98 (f)(2)(A)(i) would permit the ``upstairs'' risk management
desk to electronically direct the specialist unit's trading or quoting,
subject to the specialist unit's market making obligations. To provide
the recommendations to the specialist unit, the ``upstairs'' risk
management desk would be permitted to have real-time access both to the
integrated proprietary aggregation unit's positions in related products
and other securities and to the specialist unit's positions in
securities allocated to it, provided that such specialist unit's
positions comprise only trades that have been printed to the
Consolidated Tape.\61\
---------------------------------------------------------------------------

    \61\ See Notice, supra note 3, at 73 FR at 38282; see also
proposed Rule 98(f)(2)(A)(i).
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    The Commission finds that the proposal to permit a specialist
unit's risk management operations to be performed by an integrated
proprietary aggregation unit of which it is part is consistent with the
Act. The Commission believes that the policies and procedures an
integrated proprietary aggregation unit would be required to establish
and that NYSE Regulation would need to review would protect specialist
confidential information and non-public order information.
    The Commission also believes that the proposed NYSE Rule 98 would
continue to mitigate conflicts of interest between the specialist's
responsibilities to the market and the business activities of
specialist affiliates. In this regard, the proposed rule would require
the specialist unit to determine whether any recommendations provided
to it by an ``upstairs'' risk management desk are consistent with its
market making obligations, including Exchange specialist rules. Thus,
the Commission expects that the specialist unit would accept or reject
such recommendations in a manner that is consistent with its market
making obligations.
c. Approved Person or Member Organization Risk Management
    Finally, under proposed NYSE Rule 98(f)(3) an approved person or a
member organization that runs a specialist unit could seek approval of
NYSE Regulation to conduct risk management trading related to the
specialist unit's trading.\62\ This alternative would provide broker-
dealers the flexibility to keep the specialist unit as a separate
member organization or aggregation unit, yet have an approved person or
separate aggregation unit provide risk management services for the
specialist unit. Under this option, the approved person or member
organization would provide the same type of risk management as an
integrated proprietary aggregation unit that includes that the
specialist unit under proposed NYSE Rule 98(f)(2). Thus, as required
for an integrated proprietary aggregation unit under proposed NYSE Rule
98(f)(2) described above, proposed NYSE Rule 98(f)(3) would require an
approved person or member organization conducting such risk management
to: (i) Adopt and implement comprehensive written procedures and
guidelines governing the conduct of risk management of the specialist
unit; (ii) establish a process for regular review of such written
procedures and guidelines; and (iii) implement controls and
surveillances reasonably designed to prevent and detect violations of
these procedures and guidelines.\63\ These policies and procedures must
be reasonably designed to satisfy the requirements in the rule,
including that individuals and systems responsible for managing the
risk of the specialist unit could not have access to non-public order
information, or with certain exceptions, specialist confidential
information.\64\ These exceptions are limited to allowing individuals
and systems responsible for managing the risk of the specialist unit to
have electronic access to the specialist unit's trades once they are
printed to the Consolidated Tape.\65\ In addition, an approved person
or member organization could electronically direct the specialist
unit's trading or quoting, subject to the specialist unit's market
making obligations.
---------------------------------------------------------------------------

    \62\ An affiliate of a specialist unit conducting risk
management trading pursuant to proposed NYSE Rule 98(f)(3) would not
require an exemption from the requirements of NYSE Rule 105(b)-(d)
and the Rule 105 Guidelines because, under the proposed changes to
NYSE Rule 105, the prohibitions on risk management trading would
apply only to the specialist unit itself and not to approved
persons. See supra Section III(D)(1).
    \63\ See proposed Rule 98(f)(3)(C).
    \64\ See proposed Rule 98(f)(3)(C)(ii).
    \65\ See supra note 54 and accompanying text.
---------------------------------------------------------------------------

    The Commission finds that the proposed rule change to permit an
approved person or a member organization associated with a specialist
unit to conduct its risk management trading related to the specialist
unit's trading is consistent with the Act. The Commission believes that
the policies and procedures an approved person or member organization
would be required to establish and that NYSE Regulation would need to
revise would protect specialist confidential information and non-public
order information.
    The Commission also believes that proposed NYSE Rule 98 would
continue to mitigate conflicts of interest between the specialist's
responsibilities to the market and the business activities of

specialist affiliates. In this regard, the proposed rule would require
the specialist unit to determine whether any recommendations provided
to it by an ``upstairs'' risk management desk are consistent with its
market making obligations, including Exchange specialist rules. Thus,
the Commission expects that the specialist unit would accept or reject
such recommendations in a manner that is consistent with its market
making obligations.

E. Failure To Maintain Confidentiality, Reporting Obligations, and
Breaches

    Proposed NYSE Rule 98(g) would provide that, if a specialist
becomes aware of non-public material information from its approved
person or parent member organization, the specialist may have to cease
acting as a specialist temporarily in the security involved. Proposed
NYSE Rule 98(i) would provide that any breach of the proposed NYSE Rule
98 could result in disciplinary action, including the withdrawal of one
or more securities allocated to the specialist unit or withdrawal of
approval to operate a specialist unit. Both rules are substantially
similar to provisions in current NYSE Rule 98 \66\ and the Commission
believes they are consistent with the Act.
---------------------------------------------------------------------------

    \66\ See current NYSE Rule 98, Guidelines (i) and (k).
---------------------------------------------------------------------------

    Paragraphs (1) and (2) of proposed NYSE Rule 98(h) are
substantially similar to the current reporting obligations in current
NYSE Rule 98.\67\ Proposed NYSE Rule 98(h)(1) would require ``after the
fact'' reporting of information regarding material investment banking
activities in which the member organization or approved person has been
engaged and material research reports, recommendations, etc. pertaining
to any security that has been allocated to the specialist unit.
Proposed NYSE Rule 98(h)(2) would require ``after the fact'' reporting
of information about determinations regarding whether the specialist
should cease acting as specialist in the event the specialist unit
receives non-public information. Paragraphs (3) and (4) of proposed
NYSE Rule 98(h) would add a new requirement for specialist units to
report any actual breaches, or internal investigations of possible
breaches, of the information barriers required by the rule. In
particular, a specialist unit would be required to conduct an internal
investigation into any trading activity that may be a result of a
breach of information barriers required by proposed NYSE Rule 98. In
addition, on a quarterly basis, a specialist unit would have to report
in writing to NYSE Regulation whether it has commenced such an internal
investigation, the quarterly progress of any open investigations, what
remedial measures, if any, were taken, and the completion of any
internal investigation, including the methodology and results of such
investigation, any internal disciplinary action taken, and any referral
of the matter to the NYSE, another self-regulatory organization, or the
Commission.\68\
---------------------------------------------------------------------------

    \67\ See current NYSE Rule 98, Guidelines (j).
    \68\ See proposed NYSE Rule 98(h)(4).
---------------------------------------------------------------------------

    The Commission finds that proposed NYSE Rule 98(h) is consistent
with the Act and would provide NYSE Regulation with an additional tool
to monitor compliance with NYSE Rule 98. The Commission notes that NYSE
designed the reporting obligation for internal investigations in the
proposed rule to be effectively similar to the reporting obligation in
other NYSE rules.\69\
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    \69\ See NYSE Rules 351(e) and 342.21.
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F. Existing Specialists

1. NYSE Rule 98 (Former)
    Because a current specialist may decide to keep its current
operational structure or delay implementation of a new operational
structure, the NYSE proposes to retain current NYSE Rule 98 but limit
its applicability to specialist organizations and their associated
approved persons operating as of the date of this Order. Specifically,
current NYSE Rule 98 would be re-designated as ``Rule 98 (Former)'' in
the NYSE Rules until all specialist units are approved for operation
pursuant to the proposed rule.\70\ Except for the sharing of non-
trading related services, as discussed below, such member organization
and its approved persons would continue to be subject to NYSE Rule 98
(Former) as well as the ``(Former)'' versions of NYSE Rules that
reference exemptions from Rule 98 (Former) for approved persons. Any
new specialist units would be required to comply with proposed NYSE
Rule 98. Any significant changes to the status quo after the effective
date of the proposed rule would require the member organization to
apply for approval pursuant to the procedures of proposed NYSE Rule
98.\71\
---------------------------------------------------------------------------

    \70\ See proposed NYSE Rule 98 (Former).
    \71\ See Notice, supra note 3, at 73 FR at 38276.
---------------------------------------------------------------------------

    The Commission finds that the NYSE's proposal to continue to permit
current specialist units to operate under current NYSE Rule 98,
redesignated as NYSE Rule 98 (Former), is consistent with the Act.
Allowing specialist units to continue to operate under current NYSE
Rule 98 would provide specialist units time to develop or modify their
policies and procedures and avoid any unnecessary disruption in their
businesses.

2. Sharing of Non-Trading Related Services

    The proposed rule change would provide that a member organization
operating pursuant to NYSE Rule 98 (Former) could apply for approval
from NYSE Regulation to share non-trading related services.\72\ Any
such sharing of non-trading related services would be pursuant to
proposed NYSE Rule 98(e).\73\
---------------------------------------------------------------------------

    \72\ See NYSE Rule 98 (Former), Guidelines(c).
    \73\ See supra notes 41-42 and accompanying text for a
discussion of these rules.
---------------------------------------------------------------------------

    The Commission finds that the NYSE proposal to permit specialist
units operating under NYSE Rule 98 (Former) to seek approval under
proposed NYSE Rule 98 to share non-trading related services is
consistent with the Act. Specialist units operating under NYSE Rule 98
(Former) and their approved persons would be required to maintain
informational barriers prescribed by the current NYSE Rule 98
Guidelines. The Commission believes that those Guidelines, combined
with the requirements under proposed NYSE Rule 98(e) regarding the
sharing of non-trading related services would protect against the
misuse of non-public information.

G. Additional Rule Changes

    As described above, under the proposed rule, instead of reviewing
whether to grant each approved person an exemption from NYSE Rule 98,
NYSE Regulation would review the specialist unit's policies,
procedures, controls, and surveillance. For this reason, the NYSE
proposes to amend the NYSE rules that refer to approved persons and to
the need for an exemption from NYSE Rule 98.
1. Proposed Amendments to NYSE Rule 98A
    NYSE Rule 98A currently requires approved persons to agree in
writing not to cause a specialist or odd-lot dealer to violate rules
applicable to the specialist or odd-lot dealer. The rule further
requires that approved persons report to the Exchange any off-Floor
orders for securities in which an associated specialist member
organization specializes for any account in which the approved person
has a direct or indirect interest.

    Under the proposed amendments to NYSE Rule 98A, approved persons
would no longer be required to agree in writing not to cause a
specialist or odd-lot dealer to violate rules applicable to the
specialist or odd-lot dealer. Approved persons also would no longer be
required to report any off-Floor orders for securities in which an
associated specialist member organization specializes for any account
in which the approved person has a direct or indirect interest to the
Exchange. The Commission believes that the elimination of these
requirements is consistent with the Act because, under proposed NYSE
Rule 98, the specialist unit would be walled-off from approved persons.
2. Proposed Amendments to NYSE Rules 99, 102, 103B, 104, and 113
    NYSE Rules 99, 103B, 104, and 113 currently specifically apply to
approved persons, unless such approved person has obtained an exemption
under Rule 98. Under the proposed rule change, current NYSE Rules 99,
103B, 104, and 113 would be amended to remove references to approved
persons.\74\ The Commission believes that the elimination of the
references to approved persons in these rules is consistent with the
Act because, under proposed NYSE Rule 98, the specialist unit would be
walled-off from approved persons.
---------------------------------------------------------------------------

    \74\ For the period of time that the current NYSE Rule 98 stays
in the NYSE Rules as ``NYSE Rule 98 (Former),'' each of NYSE Rules
99, 103B, 104, and 113 will have two forms: One to meet the
requirements of NYSE Rule 98 (Former) and one to meet the
requirements of proposed NYSE Rule 98. The version of the rules that
relate to NYSE Rule 98 (Former) will be similarly designated with
the ``(Former)'' title either for the entire rule, or for a section
of a rule, as appropriate.
---------------------------------------------------------------------------

    NYSE Rule 102 currently governs trading in related products by an
odd-lot dealer. The Commission believes that the deletion of current
NYSE Rule 102 is consistent with the Act. The Commission notes that the
Exchange no longer has separate odd-lot dealers and all specialists are
also responsible for odd-lot trading in securities in which they are
registered. The Commission also notes that specialists would be subject
to the standards set forth in proposed Rules NYSE 98 and 105.
3. Proposed Amendments to NYSE Rule 460
    Current NYSE Rule 460.10 prohibits a specialist, its member
organization or approved person (or officer or employee thereof) from,
individually or in the aggregate, owning more than 10% of the
outstanding shares of any equity security in which the specialist is
registered.\75\ Current NYSE Rule 460.10 also requires such person to
report to the NYSE when it, directly or indirectly, acquires more than
5% of the outstanding shares of such equity security and promptly
dispose or reduce such interest if advised to do so by the Exchange. A
specialist, its member organization or approved person (or officer or
employee thereof) may exceed the 10% ownership threshold for derivative
securities whose values are based on an underlying currency or index
only with the approval of the NYSE; however, in no event may such
person directly or indirectly own more than 25% of such derivative
securities.
---------------------------------------------------------------------------

    \75\ The prohibitions in current NYSE Rule 460.10 do not apply
if the security is a convertible security, American Depositary
Receipt, Global Depositary Receipt or exchange-traded funds tied to
the equity securities, current or index warrants.
---------------------------------------------------------------------------

    The proposed amendments to NYSE Rule 460 would make changes so that
it would apply only to the specialist member and his specialist unit
and not to his member organization or approved persons. In addition,
the proposed amendments would replace the 10% ownership limitation set
forth in NYSE Rule 460.10 with a requirement that the specialist unit
report to the Exchange the beneficial ownership of more than 5% of an
equity security that is allocated to it. The specialist unit would be
required to update such reports if its beneficial ownership exceeds 10%
or falls below 5%. In addition, the specialist unit would be prohibited
from acquiring, directly or indirectly, more than 25% of the
outstanding shares in any security allocated to the specialist unit.
\76\ The proposed amendments to NYSE Rule 460 would apply to specialist
units operating under proposed NYSE Rule 98, as well as to specialist
member organizations that continue to operate under NYSE Rule 98
(Former).
---------------------------------------------------------------------------

    \76\ See Amendment No. 1, supra note 4.
---------------------------------------------------------------------------

    The Commission believes that the proposed changes to NYSE Rule
460.10 are consistent with the Act. Consistent with the NYSE's proposed
changes to Rule 98, the changes to Rule 460 would apply the
restrictions in the rule only to the specialist. The Commission
believes that, because of the policies and procedures a specialist unit
or any integrated proprietary aggregation unit in which it is a part
would be required to implement, these changes to Rule 460 are
consistent with the Act. Further, the Commission believes that, because
of the increased competition among markets in NYSE listed securities,
the elimination of the restrictions in Rule 460.10 are consistent with
the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-NYSE-2008-45), as modified by
Amendment No. 1, be, and it hereby is, approved.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\77\
---------------------------------------------------------------------------

    \77\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-18964 Filed 8-15-08; 8:45 am]

BILLING CODE 8010-01-P


[Federal Register Volume 81, Number 61 (Wednesday, March 30, 2016)]
[Notices]
[Pages 17761-17763]
[FR Doc No: 2016-07092]

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DEPARTMENT OF TRANSPORTATION

National Highway Traffic Safety Administration

[Docket No. NHTSA-2014-0045; Notice 2]

General Motors, LLC, Grant of Petition for Decision of
Inconsequential Noncompliance

AGENCY: National Highway Traffic Safety Administration (NHTSA),
Department of Transportation (DOT).

ACTION: Grant of petition.

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SUMMARY: General Motors, LLC, (GM) has determined that certain model
year (MY) 2014 GMC Sierra Denali vehicles do not fully comply with
paragraph S3.1.4 of Federal Motor Vehicle Safety Standard (FMVSS) No.
102, Transmission shift position sequence, starter interlock, and
transmission braking effect. GM filed a report dated January 31, 2014
pursuant to 49 CFR part 573, Defect and Noncompliance Responsibility
and Reports. GM then petitioned NHTSA under 49 CFR part 556 requesting
a decision that the subject noncompliance is inconsequential to motor
vehicle safety.

ADDRESSES: For further information on this decision contact John
Finneran, Office of Vehicle Safety Compliance, National Highway Traffic
Safety Administration (NHTSA), telephone

(202) 366-5289, facsimile<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:
    I. GM's Petition: Pursuant to 49 U.S.C. 30118(d) and 30120(h) and
the rule implementing those provisions at 49 CFR part 556, GM submitted
a petition for an exemption from the notification and remedy
requirements of 49 U.S.C. Chapter 301 on the basis that this
noncompliance is inconsequential to motor vehicle safety.
    Notice of receipt of GM's petition was published, with a 30-Day
public comment period, on May 22, 2014 in the Federal Register (79 FR
29501). One comment was received from the Advocates for Highway and
Auto Safety. To view the petition and all supporting documents log onto
the Federal Docket Management System (FDMS) Web site at: http://www.regulations.gov/. Then follow the online search instructions to
locate docket number ``NHTSA-2014-0045.''
    II. Vehicles Involved: Affected are approximately 2,747 MY 2014 GMC
Sierra Denali vehicles equipped with RPO code ``UHS'' instrument
cluster displays that were manufactured between July 16, 2013 and
January 22, 2014.
    III. Noncompliance: GM explains that in certain circumstances the
subject vehicles may experience a condition where the instrument
cluster resets, and the analog gauges and the PRNDM indicators turn off
momentarily to ensure the integrity of the information being displayed
by electronic devices. Since all vehicles sold in the U.S. must display
the shift positions, including the positions in relation to each other
and the position selected whenever the ignition is in a position where
the transmission can be shifted; or the transmission is not in park,
these vehicles fail to fully meet the requirements set forth in
paragraph S3.1.4 of FMVSS No. 102.
    IV. Rule Text: Paragraph S3.1.4 of FMVSS No. 102 requires in
pertinent part:

    S3.1.4 Identification of shift positions and of shift position
sequence . . .
    S<IP_ADDRESS> Expect as specified in S<IP_ADDRESS>, if the transmission
shift position sequence includes a park position, identification of
shift positions, including the positions in relation to each other
and the position selected, shall be displayed in view of the driver
whenever any of the following conditions exist:
    (a) The ignition is in a position where the transmission can be
shifted; or
    (b) The transmission is not in park . . .
    S<IP_ADDRESS> Such information need not be displayed when the
ignition is in a position that is used only to start the vehicle . .
.

    V. Summary of GM's Analyses: GM stated its belief that the subject
noncompliance is inconsequential to motor vehicle safety for the
following reasons:
    1. GM believes that the condition is extremely unlikely to occur.
For the condition to occur, the instrument cluster design input rate
must be exceeded. This can only happen under extreme load conditions.
For example, GM was able to create the condition in the laboratory by
simultaneously inputting a series of warnings into the cluster during
an active search of a media device connected to the vehicle while a
Bluetooth[supreg] connected phone call is received by the vehicle.
    2. GM states that any disruption of the PRNDM display as a result
of this condition is very brief. In the unlikely event the condition
were to occur and the instrument cluster resets, the PRNDM display
would be restored within 1.3 seconds. This momentary reset would be a
clear indication to the driver that service may be required.
    3. GM also believes that the condition has little effect on the
normal operation of the vehicle. While the operation of the instrument
panel is briefly affected by the underlying condition, none of the
other vehicle operations are affected.
    4. GM states that the condition is extremely remote and not likely
to occur during shifting. Considering the unusual combination of pre-
conditions for the condition to occur, it is very unlikely the brief
disruption of the PRNDM display would occur when it is needed, i.e.,
during shifting. Most shifting occurs shortly after the vehicle is
started, or just prior to being turned off. In the rare instance of a
cluster reset, it would be more likely to occur during driving, not
immediately after starting the vehicle or just prior to the driver
exiting the vehicle.
    5. GM is not aware of any reported instrument cluster resets as a
result of the subject noncompliance.
    6. GM also expressed its belief that for previous noncompliances
that GM believes were similar, NHTSA granted petitions for
inconsequential noncompliance.
    GM has additionally informed NHTSA that it has corrected the
noncompliance so that all future production vehicles will comply with
FMVSS No. 102.
    In summation, GM believes that the described noncompliance of the
subject vehicles is inconsequential to motor vehicle safety, and that
its petition, to exempt GM from providing recall notification of
noncompliance as required by 49 U.S.C. 30118 and remedying the recall
noncompliance as required by 49 U.S.C. 30120 should be granted.

NHTSA'S Decision

    NHTSA'S Analysis: GM explains that because they could only
duplicate the subject condition with a series of unlikely simultaneous
inputs, they believe that the subject noncompliance is not likely to
occur. As an example, if all of the following conditions were to occur
simultaneously the subject condition may occur causing an instrument
cluster reset: A navigation route is active; three cluster warnings are
initiated simultaneously; there is an incoming Bluetooth[supreg]
connected phone call that triggers a Driver Information Center message;
and a passenger actively searches a media device that provides more
data than a typical radio display (e.g., XM radio, or a paired media
device). If all the above were to occur at precisely the same instant
(within a millisecond) according the GM, a cluster reset may be
triggered. NHTSA agrees with GM that the possibility of this condition
occurring is improbable because multiple specific actions must be taken
by the driver and/or passenger simultaneously.
    GM states that the disruption of the PRNDM as a result of this
condition is very brief and in the unlikely event the condition where
to occur and the instrument cluster resets, the PRNDM display would be
restored within 1.3 seconds. GM also noted that while the operation of
the instrument panel would be briefly affected by the underlying
condition, no other vehicle operations are affected.
    After receipt of GM's petition, NHTSA requested more information
regarding the subject noncompliance. GM submitted videos showing that
when the condition occurs any existing warning lights extinguish, the
indicators (gauges) drop to zero, and operation of the entire
instrument panel is interrupted. Specifically, any illuminated
telltales extinguish for approximately 1.3 seconds before a bulb check
that lasts approximately five seconds is initiated. At the conclusion
of the bulb check any previously illuminated telltales will illuminate
and remain illuminated.
    NHTSA agrees with GM that if the instrument panel reset were to
happen it would only be a momentary condition, the instrument panel
telltales and indicators would extinguish and return to normal very
quickly, with little, if any, impact to the driver.
    GM mentioned two previous petitions that the agency granted due to
the loss or failure of telltale indications. In the first petition,
General Motors Corp.; Grant of Petition for Determination of

Inconsequential Noncompliance, 56 FR 33323 (July 19, 1991), the
noncompliance would only manifest itself when the headlight high beams
were turned on and the cigar lighter was activated. In this situation
the required high beam telltale could dim or extinguish altogether for
a short period of time while the cigar lighter was being powered. The
petition was granted because the agency determined there was no
consequence to motor vehicle safety attached to the extinguishment of
the high beam telltale.
    In the second petition, submitted by Nissan, Nissan North America,
Incorporated, Grant of Petition for Decision of Inconsequential
Noncompliance, 78 FR 59090 (Sept. 25, 2013), under rare circumstances
the transmission gear selected was not always displayed correctly as
required. The petition was granted because it was only possible for the
gear indication to extinguish when the engine was inactive and the
vehicle was inoperable. Upon reactivating the engine the gear indicator
displayed the correct gear.
    Advocates for Highway and Auto Safety (Advocates), provided
comments about GM's petition in response to the petition receipt notice
published in the Federal Register. The Advocates do not specifically
support the granting or denial of GM's petition, but believe that the
existence of such a malfunction raises serious questions regarding
vehicle design which can lead to this kind of situation.
    Finally, GM states that they are not aware of any reported
instrument cluster resets as a result of the subject condition. NHTSA'S
Decision: In consideration of the foregoing, NHTSA finds that GM has
met its burden of persuasion that the FMVSS No. 102 noncompliance in
the affected vehicles is inconsequential to motor vehicle safety.
Accordingly, GM's petition is hereby granted and GM is consequently
exempted from the obligation of providing notification of, and a free
remedy for, that noncompliance under 49 U.S.C. 30118 and 30120.
    NHTSA notes that the statutory provisions (49 U.S.C. 30118(d) and
30120(h)) that permit manufacturers to file petitions for a
determination of inconsequentiality allow NHTSA to exempt manufacturers
only from the duties found in sections 30118 and 30120, respectively,
to notify owners, purchasers, and dealers of a defect or noncompliance
and to remedy the defect or noncompliance. Therefore, this decision
only applies to the subject noncompliant vehicles that GM no longer
controlled at the time it determined that the noncompliance existed.
However, the granting of this petition does not relieve vehicle
distributors and dealers of the prohibitions on the sale, offer for
sale, or introduction or delivery for introduction into interstate
commerce of the noncompliant vehicles under their control after GM
notified them that the subject noncompliance existed.

    Authority: 49 U.S.C. 30118, 30120: Delegations of authoriy at 49
CFR 1.95 and 501.8.

Jeffrey M. Giuseppe,
Director, Office of Vehicle Safety Compliance.
[FR Doc. 2016-07092 Filed 3-29-16; 8:45 am]
BILLING CODE 4910-59-P


[Federal Register Volume 83, Number 241 (Monday, December 17, 2018)]
[Notices]
[Pages 64612-64614]
[FR Doc No: 2018-27202]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84790; File No. SR-MRX-2018-38]

Self-Regulatory Organizations; Nasdaq MRX, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change to MRX Section 22
of the Rulebook

December 11, 2018.
    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 November 29, 2018, Nasdaq MRX, LLC (``MRX'' 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. 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\ 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 a proposal to delete MRX Section 22 of the
Rulebook entitled ``Rate-Modified Foreign Currency Options Rules.''
    The text of the proposed rule change is available on the Exchange's
website at http://nasdaqmrx.cchwallstreet.com/, at the principal office
of the Exchange, and at the Commission's Public Reference Room.

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
    MRX rules at Section 22, titled ``Rate-Modified Foreign Currency
Options Rules'' incorporate by reference Nasdaq ISE, LLC (``ISE'')
Chapter 22. ISE recently filed to delete Section 22 from its
Rulebook.\3\ At this time, the Exchange proposes to delete the text at
Section 22 of MRX rules as the ISE rule no longer exists and there is
no rule to incorporate by reference.
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    \3\ Securities Exchange Act Release No. 84516 (November 1,
2018), 83 FR 55771 (November 7, 2018) (SR-ISE-2018-91).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\4\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\5\ in particular, in that it is designed 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,
by eliminating rule text within MRX's Rulebook which redirects MRX
Members to a non-existent ISE section of rules for listing and trading
FCOs.
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    \4\ 15 U.S.C. 78f(b).
    \5\ 15 U.S.C. 78f(b)(5).
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    The Exchange [sic] recently eliminate [sic] ISE rules at Section
22. MRX Section 22 incorporated by reference ISE Section 22. MRX
proposes to remove the text at Section 22 to avoid confusion.

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 not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange does not believe
that eliminating the MRX Section 22 rules will create an undue burden
on intra-market competition because this rule set directs MRX Members
to a nonexistent ISE section of rules.

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

    Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \6\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\7\
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    \6\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \7\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or 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 email to<EMAIL_ADDRESS>Please include
File Number SR-MRX-2018-38 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-MRX-2018-38. This
file number should be included on the subject line if email 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 website (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 website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-MRX-2018-38 and should

be submitted on or before January 7, 2019.
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    \8\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\8\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2018-27202 Filed 12-14-18; 8:45 am]
 BILLING CODE 8011-01-P