[Federal Register: September 8, 2006 (Volume 71, Number 174)]
[Notices]
[Page 53142-53148]
[DOCID:fr08se06-83]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54397; File No. SR-BSE-2005-11]

Self-Regulatory Organizations; Boston Stock Exchange, Inc.;
Notice of Filing and Order Granting Accelerated Approval of Proposed
Rule Change and Amendments Nos. 1 and 2 Thereto Relating to Rules to
Allow the Listing and Trading of Options on Indices on the Boston
Options Exchange

 August 31, 2006.
    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 May 5, 2005, the Boston Stock Exchange, Inc. (``BSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. On July 12,
2006, BSE filed Amendment No. 1 to the proposed rule change.\3\ On
August 29, 2006, BSE filed Amendment No. 2 to the proposed rule
change.\4\ The Commission is publishing this notice and order to
solicit comments on the proposal from interested persons and to approve
the proposed rule change, as amended, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superseded the original rule
filing in its entirety.
    \4\ In Amendment No. 2, BSE removed its proposal to have generic
listing standards for narrow-based options and added its proposal to
list and trade options and long term index options on the full value
of the Nasdaq 100 index, the one tenth value of the Nasdaq 100 index
and the Russell 2000 index. Amendment No. 2 replaced and superseded
the original rule filing in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    BSE proposes to adopt rules which would allow the Boston Options
Exchange (``BOX'') to list and trade options on indices, including
rules pursuant to Rule 19b-4(e) for the listing and trading of broad-
based index options.\5\ BSE also seeks approval herein for BOX to list
and trade index options and long term index options (``LEAPs'') on the
full value of the Nasdaq 100 index (``NDX''), the one tenth value of
the Nasdaq 100 index (``MNX''), and the Russell 2000 Index (``RUT'').
The text of the proposed rule change, as amended is available on BSE's
Web site (http://www.bostonstock.com), at BSE's

principal office, and at the Commission's Public Reference Room.
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    \5\ 17 CFR 240.19b-4(e).
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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, as
amended, 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 III 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 the
Statutory Basis for, the Proposed Rule Change

1. Purpose
    According to BSE, the purpose of the proposed rule change is to
adopt rules necessary to allow BOX to list and trade options on
indices. The proposed rules include, among other items, listing and
maintenance criteria for options on underlying indices, rules on
dissemination of index values, positions and exercise limits for index
options, strike price intervals, and exemptions from the limits and
terms of index options contracts. All of the proposed rules and changes
to existing BOX Rules are based on the existing rules of the other five
options exchanges.\6\
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    \6\ See rules of the American Stock Exchange LLC (``Amex), the
Chicago Board Options Exchange, Incorporated (``CBOE''), the
Philadelphia Stock Exchange, Inc. (``Phlx''), NYSE Arca, Inc.
(``NYSE Arca'') and the International Stock Exchange, Inc.
(``ISE''). See, e.g., Amex Rules 900C through 905C; CBOE Rules 4.11,
4.16, 6.2, 6.7, 8.7, 11.1, and 23.1 through 24.20; ISE Rules 413,
418, 803, 1100, and 2000 through 2012; NYSE Arca Rules 5.10 through
5.26; and Phlx Rules 1000A through 1104A. The proposed new rules and
changes to existing BOX Rules are primarily based on the ISE Rules
previously referenced. Any differences are due to the following: (i)
Section 11 of Chapter VI of the BOX Rules, unlike ISE Rule 1407,
currently incorporates the NASD's ``hedging exception'' and
therefore does not need to be amended to accommodate the listing and
trading of options on indices; (ii) the different terminology and
defined terms in the BOX Rules; (iii) different cross-references;
(iv) the regulatory role of the Boston Options Exchange Regulation
LLC (BOXR); (v) that BOX does not have ``trading rotations'' as that
term is used in ISE's Rules; and (vi) other minor differences in
current rules. BOX does not have ``trading rotations'' as that term
is used in ISE's Rules because BOX is not a specialist driven
system. On BOX, there are no designated specialists, primary market
makers, or lead market makers with authority to control trading in a
particular options class. Instead, BOX has multiple and competing
market makers trading in each options class. On a specialist driven
system, the specialist maintains control over the open and the
close, whereas on BOX, the electronic trading system maintains
control over the open and the close.
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    Because the rules related to trading options on indices are product
specific in many areas, BSE, on behalf of BOX, will need to file
additional proposed rule changes with the Commission when BOX
identifies specific products (with the exception of those products that
satisfy the ``generic'' broad-based listing standards pursuant to Rule
19b-4(e)). For purposes of this proposed rule change, certain rules
indicate that they apply to ``specified'' indices. Proposed Sections
2(l), 5(a), 7(a), 8(a), 10, and 12 of proposed Chapter XIV of the BOX
Rules all contain provisions that are dependant upon the BSE
identifying specific index products in the rule. Accordingly, proposed
Section 1 of proposed Chapter XIV of the BOX Rules states that where
the rules in Chapter XIV indicate that particular indices or
requirements with respect to particular indices will be ``Specified,''
the BSE shall file a proposed rule change with the Commission pursuant
to Section 19 of the Act \7\ and Rule 19b-4 thereunder \8\ to specify
such indices or requirements.
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    \7\ 15 U.S.C. 78s.
    \8\ 17 CFR 240.19b-4.
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    New Chapter XIV to BOX Rules. The Exchange proposes to add a new
Chapter XIV to the BOX Rules, as well as conforming changes to certain
existing BOX rules. The following are the specific rule changes:
    Proposed Section 1 of Chapter XIV: This proposed rule specifies
that Chapter XIV is applicable only to index options, and that the
rules in Chapters I through XIII also apply to index options, unless
they are replaced by the new rules or the context otherwise requires.
    Proposed Section 2 of Chapter XIV: This proposed rule contains the
necessary definitions for index options trading.
    Proposed Section 3 of Chapter XIV: This proposed rule contains the
general listing standards for broad-based index options. Under proposed
Section 3(a) of Chapter XIV the Exchange would be able to list broad-
based index options pursuant to Rule 19b-4(e) under the Act, if each of
the conditions set forth in proposed Section 3(b) of Chapter XIV are
satisfied. Pursuant to proposed Section 3(b) of Chapter XIV, the
proposed rule change would provide ongoing maintenance standards for
broad-based index options listed pursuant to proposed Section 3(a) of
Chapter XIV. These options would, in all other respects, be traded
pursuant to the Exchange's trading rules and procedures applicable to
index options.
    The Exchange notes that other options exchanges currently have
rules that contain generic listing standards pursuant to Rule 19b-4(e)
of the Act \9\ for broad-based index options.\10\ Other exchanges also
have rules that contain generic listing standards for narrow-based
indexes and micro-based index options.\11\ The Exchange states that the
standards contained in these proposed generic listing standards for
broad-based index options are based on the standards contained in the
generic listing standards for narrow-based index options and micro-
based index options that were previously approved by the Commission,
but have been modified to reflect the characteristics of broad-based
index options. The proposed Section 3 of Chapter XIV is based on the
broad-based index option rules of the ISE.\12\ At this time, the
Exchange is only proposing generic listing standards for broad-based
index options.
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    \9\ 17 CFR 240.19b-4(e).
    \10\ The ISE, CBOE, Amex, and Phlx have broad-based index
generic listing standard rules. See Securities Exchange Act Release
Nos. 52578 (October 7, 2005), 70 FR 60590 (October 18, 2005) (SR-
ISE-2005-27); 52781 (November 16, 2005), 70 FR 70898 (November 23,
2005) (SR-Amex-2005-069); 53266 (February 9, 2006), 71 FR 8321
(February 16, 2006)(SR-CBOE-2005-59); 54158 (July 17, 2006), 70 FR
41853 (July 24, 2006) (SR-Phlx-2006-17).
    \11\ Examples of narrow-based rules are NYSE Arca Rule 5.13 and
ISE Rule 2002. Examples of micro-based rules are NYSE Arca Rule 5.13
and CBOE Rules 24.2(d), 24.2(e) and 24.4B.
    \12\ See ISE Rules 2002(d) and 2002(e).
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    In order to list broad-based index options pursuant to the generic
Rule 19b-4(e) listing standards, the underlying index must satisfy all
the conditions contained in proposed Section 3(b). If the underlying
index does not satisfy all of the conditions, the Exchange would be
required to file a proposed rule change with the Commission on Form
19b-4 pursuant to Section 19(b)(2) of the Act and obtain Commission
approval in order to list options on that index. Following are the
conditions contained in proposed Section 3(b) of Chapter XIV.
    Under proposed Section 3(b) of Chapter XIV, the index must be
broad-based as defined in Section 2 of Chapter XIV as an index designed
to be representative of a stock market as a whole or for a range of
companies in unrelated industries. The index must be designated as A.M.
settled and must be either: (i) Capitalization-weighted; (ii) price-
weighted; (iii) equal-dollar weighted; or (iv) modified-capitalization
weighted. Broad-based indexes must consist of 50 or more component

securities. The Exchange believes that a 50 component minimum is
reasonable for broad-based indexes, and, when applied in conjunction
with the other listing requirements, would result in indexes that are
sufficiently broad-based in scope and not readily subject to
manipulation.\13\ Component securities comprising at least 95% of the
index by weight must have a minimum market capitalization of $75
million. Component securities comprising at least 65% of the index by
weight must have a minimum market capitalization of $100 million.
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    \13\ The Exchange notes that there are currently a number of
broad-based indexes that consist of fewer than 50 components, such
as, the Dow Jones Industrial Average Index (30 components) and the
Amex Major Market Index (20 components), which would require
specific approval for listing and trading by the Commission.
Telephone conference between Bill Meehan, General Counsel, BSE, and
Florence Harmon, Senior Special Counsel, Division of Market
Regulation, Commission on August 31, 2006 (``August 31 Telephone
Conference'').
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    Component securities comprising at least 80% of the index by weight
must satisfy the requirements of Section 3 of Chapter IV of BOX Rules
which sets forth the criteria for underlying securities. Accordingly,
those securities must be ``options eligible,'' meaning they must have,
for example, at least a $7 million share float, 2000 holders, total
annual trading volume of 2,400,000 shares, a minimum price of $3 per
share, and the issuer must be in compliance with its obligations under
the Act. The Exchange believes that an 80% weighting is reasonable for
broad-based indexes, and, when applied in conjunction with the other
listing requirements, will result in indexes that contain components
that are sufficiently liquid and not readily subject to manipulation.
The Exchange notes that broad-based indexes may consist of thousands of
components (for example, the Russell 3000 Index), and the components
comprising the bottom 10% to 20% of the weight of the index generally
are the smallest capitalized stocks and tend not to meet the
requirements of Section 3 of Chapter IV of BOX Rules.\14\
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    \14\ The Exchange further notes that the generic listing
standards pursuant to Rule 19b-4(e) for narrow-based index options
are less liberal, requiring a 90% weighting. August 31 Telephone
Conference.
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    Each component security that accounts for at least 1% of the weight
of the index must have an average daily trading volume (``ADTV'') of at
least 90,000 shares over the prior six-month period. The Exchange
believes that 90,000 ADTV is reasonable for broad-based indexes, and,
when applied in conjunction with the other listing requirements, will
result in indexes in which the more heavily-weighted components are
sufficiently liquid and not readily subject to manipulation.
    No single component security may account for more than 10% of the
weight of an index, and the five highest weighted components securities
in the index may not, in the aggregate, account for more than 33% of
the weight for an index. The Exchange notes that the 10% and 33%
weighting concentration caps are reasonable for broad-based indexes,
and, when applied in conjunction with the other listing requirements,
will result in indexes that are not unreasonably dominated by a few
heavily-weighted components.\15\
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    \15\ The Exchange notes that the generic listing standards for
narrow-based index options require 30% and 50% weighting
concentration caps. August 31 Telephone Conference.
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    All component securities must be NMS Stocks as defined in Rule 600
of Regulation NMS. No more than 20% of the securities in the index, by
weight, may be comprised of foreign securities or American Depositary
Receipts overlying foreign securities that are not subject to
comprehensive surveillance sharing agreements. Section 3(b) of Chapter
XIV also requires the current index value to be widely disseminated at
least once every fifteen seconds by one or more major market data
vendors during the time options on the index are traded on the
Exchange.
    The Exchange must reasonably believe it has adequate system
capacity to support the trading of options on the index. That belief
must be based on the performance of a calculation by the Exchange that
takes into account the Exchange's current Independent System Capacity
Advisor (``ISCA'') allocation and the number of new peak messages per
second expected to be generated by options on such index.
    An equal dollar-weighted index must be rebalanced at least once
every calendar quarter.
    Broker-dealer maintained indexes must be calculated by a third
party who is not a broker-dealer. Further, the broker-dealer must
establish procedures including informational barriers, to ensure that
the broker-dealer will not possess or be able to misuse any
informational advantages with respect to changes in, and adjustments
to, an index.
    The Exchange must also have written surveillance procedures in
place for broad-based index options.\16\
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    \16\ See infra Index Surveillance Letter, dated August 29, 2006.
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    Following the listing of a broad-based index option pursuant to
proposed Section 3(b) the underlying index must continue to satisfy the
maintenance standards contained in proposed Section 3(c) of Chapter
XIV, which are based on the criteria set forth in proposed Section 3(b)
of Chapter XIV. If the underlying index fails to satisfy the
maintenance standards, the Exchange may not open for trading any
additional series of options on that class of index options unless the
continued listing of that class of options has been approved by the
Commission pursuant to Section 19(b)(2) of the Act.
    Proposed Section 4 of Chapter XIV: This proposed rule requires the
dissemination of index values as a condition to the trading of options
on an index.
    Proposed Sections 5 through 8 of Chapter XIV: These proposed rules
contain the standard position limit and exercise limits for index
options, as well as exemption standards and the procedures for
requesting exemptions from those proposed rules. Proposed Section 5 of
Chapter XIV sets the standard position limit for broad-based index
options listed pursuant to Rule 19b-4(e) in proposed Section 3 of
Chapter XIV at 25,000 contracts unless ``specified'' as defined in
Proposed Section 1 of Chapter XIV. The Exchange has specified limits on
the three broad-based index options it intends to trade upon Commission
approval of these proposed rule changes. The Exchange proposes to have
no position limits for the NDX, a 750,000 contract position for the
MNX, and to have a 50,000 contact position limit for the RUT. Section
7(a)(5) of this Chapter XIV specifies that the broad-based hedge
exemption for the MNX index options is 1,500,000 contracts and for all
other broad-based index options 75,000 in addition to the standard
limit.
    Proposed Section 9 of Chapter XIV: This proposed rule provides that
index options will trade until 4:15 p.m. Eastern Time, the same as on
other exchanges. The proposed rule also contains procedures for
openings, as well as trading halts and suspensions.
    Proposed Sections 10 and 11 of Chapter XIV: Proposed Section 10
outlines the terms of index options contracts, while proposed Section
11 applies to debit put spreads. Proposed Section 10 incorporates a
rule change proposed by the ISE that was effective upon filing.\17\ In
the proposal, ISE clarified that the ``reporting authority'' (or index
calculator) for any securities index on which options are traded on the
ISE may determine to use the reported sales prices for one or more

underlying securities from a market that may not necessarily be the
primary market for that security in calculating the appropriate index
value. Proposed Section 10 also states that the NDX, MNX and RUT, and
LEAPS on those index options will be A.M. settled and European Style
exercised with strike prices intervals of no less than $2.50 if the
strike price is less than $200.
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    \17\ See Securities Exchange Act Release No. 51176 (February 9,
2005), 70 FR 7985 (February 16, 2005) (SR-ISE-2005-03).
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    Proposed Section 12 of Chapter XIV: This proposed rule disclaims
liability for index reporting authorities.
    Proposed Section 13 of Chapter XIV: This proposed rule contains
standards for exercising American-style index options.
    Amendments to Current Rules:
    Amendment to Section 8 of Chapter III: This proposed amendment adds
broad-based index options to the market maker exemption from position
limits.
    Amendments to Section 12 of Chapter III and Section 1 of Chapter
VII: In conjunction with proposed Section 13 of Chapter XIV, these
proposed rules will govern the exercise of American-style, cash settled
index options.
    Amendment to Section 6 of Chapter IV: This Section currently
provides that at the commencement of trading on BOX of a particular
class of options, BOXR usually will open three (3) series of options
for each expiration month in that class in the case of individual
equity options, or four (4) series of options for each expiration month
in that class in the case of index options. The proposal would amend
this section to replace BOXR with BOX because BOX, as the options
trading facility, is the entity responsible for opening all series of
options. In order to conform this Section to the corresponding rule of
other options exchanges, the proposal would also amend this section to
eliminate the separate reference to index options. However, the
Exchange also proposes to clarify this section to reflect actual market
practice by specifying that at the commencement of trading on BOX of a
particular class of options, BOX usually will open a ``minimum'' of
three (3) series of options for each expiration month in that class.
    Amendment to Section 26 of Chapter V: In conjunction with proposed
Section 12 of Chapter XIV, this proposed rule would limit liability
regarding the dissemination of index information.
    Amendment to Section 5 of Chapter VI: This proposed amendment
discusses bid/ask differentials for indices.
    Amendment to Section 4 of Chapter XII: In conjunction with proposed
Section 7 of Chapter XIV (specifically subsection (a)(14) of Section 7
of Chapter XIV), this proposed rule would permit BOXR to impose
additional margin upon an account if it determines that additional
margin is warranted in light of the risk associated with an under-
hedged options position in certain broad-based indices.
    NDX, MNX and RUT Index Options. The Exchange proposes to amend its
rules to provide for the listing and trading of NDX and MNX (one tenth
value of the NDX) \18\ including long term index options based upon the
full value of the Nasdaq 100 Index (``NDX Leaps'') and one tenth value
(``MNX Leaps''). These indexes are cash settled, European style options
based on the full and one tenth value of the Nasdaq 100, a stock index
calculated and maintained by the Nasdaq Stock Market, Inc.
(``Nasdaq'').\19\
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    \18\ MNX and NDX index options are currently listed and trading
on the Amex, the CBOE, and the ISE. See Securities Exchange Act
Release Nos. 51884 (June 20, 2005), 70 FR 36973 (June 27, 2005) (SR-
Amex-2005-038); 33166 (November 8, 1993), 58 FR 60710 (November 17,
1993) (SR-CBOE-93-42); and 51121 (February 1, 2005), 70 FR 6476
(February 7, 2005) (SR-ISE-2005-01).
    \19\ A description of the Nasdaq 100 Index is available on
Nasdaq's Web site at http://dynamic.nasdaq.com/dynamic/nasdaq100_activity.stm
.

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    The Nasdaq 100 includes 100 of the largest domestic and
international non-financial securities listed on Nasdaq, based on
market capitalization. The Nasdaq 100 reflects companies across major
industry groups including computer hardware and software,
telecommunications, retail/wholesale trade and biotechnology. The
Nasdaq 100 is calculated using a modified capitalization-weighted
methodology. To be eligible for initial inclusion in the Nasdaq 100, a
security must be listed on Nasdaq's Global or Global Select markets,
unless it was dually-listed on another exchange prior to January 1,
2004 and has maintained such listing. The security must have an ADTV of
at least 200,000 shares, and the issuer must not currently be in
bankruptcy proceedings. If a component security is of a foreign issuer,
based on its country of incorporation, it must have listed options or
be eligible for listed options trading. In addition, the issuer of a
component security must not have entered into any definitive agreement
or other arrangement that would result in the security no longer being
eligible for inclusion in the index within the next six months. In
addition, the issuer of a component security must not have annual
financial statements with an audit opinion, where the auditor or the
issuer indicated that the audit opinion cannot be currently relied
upon.
    As of July 31, 2006, the following were characteristics of the
Nasdaq 100:
     Total capitalization of all components of the Index was
approximately $2.4 trillion;
     Component capitalization: (a) The highest capitalization
of a component was $158.4 billion; (b) the lowest capitalization of a
component was $4.5 billion; (c) the mean capitalization was $24.1
billion; and (d) the median capitalization of the components was $14.5
billion.
     Component price per share: (a) The highest price per share
of a component was $386.60; (b) the lowest price per share of a
component was $2.13; (c) the mean price per share of the components was
$39.98; and (d) the median price per share of the components was
$32.31.
     Component weightings: (a) The highest weighting of a
component was 6.57%; (b) the lowest weighting of a component was .19%;
(c) the mean weighting of the components was 1.00%; and (d) the median
weighting of a component was .605%.
    Since the full value NDX options trade at a level that may be
uncomfortably high for retail investors, the Exchange believes that
listing index options on a reduced one-tenth value of the full value of
the NDX, such as the MNX, attracts a greater source of customer
business and provides an opportunity for investors to hedge or
speculate on the market risk associated with the component stocks with
a smaller outlay of capital, thereby creating a more active and liquid
trading environment.
    The Nasdaq maintains and monitors the Nasdaq 100 and is responsible
for any adjustments, component deletions and component additions. The
NDX component securities are evaluated on an annual basis. The NDX and
MNX are calculated continuously, using the last sale price for each
component stock in the Index, and are disseminated every 15 seconds
throughout the trading day.
    The Exchange is also amending its rules to provide for the listing
of index options on the Russell 2000 Index (``RUT'') \20\ and long-term
index options on the Russell 2000 Index (``RUT LEAPS'').\21\ The
Russell 2000 is constructed to provide a comprehensive and unbiased
small-cap barometer and is completely reconstituted annually to ensure
larger stocks do not distort the performance and characteristics of the
true small-cap opportunity set. The

Russell 2000 includes the smallest of the Russell 3000 stocks
representing approximately 8% of the investable U.S. equity market.
Component stocks must be trading at or above $1.00 on May 31st of every
year to be eligible for inclusion.
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    \20\ For more detailed description of the Russell 2000 Index,
see http://russell.com/indexes.

    \21\ Options on the Russell 2000 Index trade on the CBOE and
ISE. See Securities Exchange Act Release Nos. 51619 (April 27,
2005), 70 FR 22947 (May 3, 2005) (SR-ISE-2005-09) and 31382 (October
30, 1992), 57 FR 52802 (November 5, 1992) (SR-CBOE-92-02).
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    The Russell 2000 is capitalization-weighted and includes only
common stocks belonging to corporations domiciled in the United States
that are traded on the NYSE, AMEX or Nasdaq exchanges. Stocks are
weighted by their available market capitalization, which is calculated
by multiplying the primary market price by the available shares. As of
June 30, 2006, the average market capitalization was $1.07 billion, the
median market capitalization was $604 million, the largest company by
market capitalization had a $2.335 billion market capitalization, and
the smallest company had a market capitalization of $83 million.
    The Russell 2000 is monitored and maintained by the Frank Russell
Company. The Frank Russell Company is responsible for making any
adjustments, component deletions and component additions. The value of
the Russell 2000 is calculated by Reuters on behalf of the Frank
Russell Company and is disseminated every 15 seconds throughout the
trading day.
    The Exchange believes the NDX, NDX LEAPS, MNX, MNX LEAPS, RUT, and
RUT LEAPS are not readily subject to manipulation because of the broad-
based characteristics of the underlying indexes, including the
component security criteria, index weighting methodologies,
maintenance, evaluation, calculation and dissemination. The trading of
NDX, NDX LEAPS, MNX, MNX LEAPS, RUT, and RUT LEAPS would be subject to
the same rules proposed in Chapter XIV that would govern the trading of
all index options.
    The Exchange represents that it will not list any options on
indices without first determining that BOX has sufficient capacity to
accommodate the anticipated order flow. The Exchange will also not
commence the trading of any options on indices without having the
appropriate surveillance procedures for such index options trading in
operation as set forth to the Commission in the Exchange's Index
Surveillance Letter dated August 29, 2006 submitted confidentially
under a FOIA request (``Index Surveillance Letter''). Pursuant to the
Index Surveillance Letter the Exchange will incorporate new index
option products into the Exchange's surveillance reports and procedures
prior to trading these products.
2. Statutory Basis
    BSE believes that the proposed rule change, as amended, is
consistent with the requirements of Section 6(b) of the Act,\22\ in
general, and Section 6(b)(5) of the Act,\23\ in particular, in that it
is designed to foster cooperation and coordination with persons engaged
in regulating, clearing, settling, processing information with respect
to, and facilitating transaction in securities, to remove impediments
to and perfect the mechanism for a free and open market and a national
market system, and, in general, to protect investors and the public
interest.
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    \22\ 15 U.S.C. 78(f)(b).
    \23\ 15 U.S.C. 78(f)(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    BSE 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, as amended.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, 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_ADDRESS>Please include

File Number SR-BSE-2005-11 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-BSE-2005-11. 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. Copies of such
filing also will be available for inspection and copying at the
principal offices 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-BSE-2005-11 and should be submitted on or before
September 29, 2006.

IV. Commission's Findings and Order Granting Accelerated Approval of
the Proposed Rule Change

    After careful review, 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.\24\ In particular, the Commission finds that the
proposed rule change, as amended, is consistent with Section 6(b)(5) of
the Act,\25\ which requires, among other things, that the rules of a
national securities exchange be 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
for a free and open market and a national market system, and, in
general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \24\ In approving this rule change, the Commission notes that it
has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
    \25\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    To list options on a particular broad-based index, BSE currently
must file a proposed rule change with the Commission pursuant to
Section 19(b)(1) of the Act and Rule 19b-4 thereunder. However, Rule
19b-4(e) provides that the listing and trading of a new derivative
security product by a self-regulatory organization (``SRO'') will not
be deemed a proposed rule change pursuant to Rule 19b-4(c)(1) if the
Commission has approved, pursuant to Section 19(b) of the Act, the
SRO's

trading rules, procedures, and listing standards for the product class
that would include the new derivative securities product, and the SRO
has a surveillance program for the product class.
    As described more fully above, the BSE proposes to establish
listing standards for broad-based index options. The Commission's
approval of the BSE's listing standards for broad-based index options
will allow options that satisfy the listing standards to begin trading
pursuant to Rule 19b-4(e), without constituting a proposed rule change
within the meaning of Section 19(b) of the Act and Rule 19b-4, for
which notice and comment and Commission approval is necessary.\26\ The
Exchange's ability to rely on Rule 19b-4(e) to list broad-based index
options that meet the requirements of proposed Section 3 of Chapter XIV
of BOX Rules potentially reduces the time frame for bringing these
securities to the market, thereby promoting competition and making new
broad-based index options available to investors more quickly.
---------------------------------------------------------------------------

    \26\ When relying on Rule 19b-4(e), the SRO must submit Form
19b-4(e) to the Commission within five business days after the SRO
begins trading the new derivative securities product. See Securities
Exchange Act Release No. 40761 (December 8, 1998), 65 FR 70952
(December 22, 1998) (File No. S7-13-98).
---------------------------------------------------------------------------

    With regard to the NDX, MDX, and RUT index options and LEAPs, the
Commission finds the current characteristics of these indexes are such
that the indexes that contain components that are sufficiently liquid
and not readily subject to manipulation; and thus, the Exchange's
trading rules and surveillance procedures for these products address
the current characteristics of these products.
    The Commission notes that the Exchange has represented that it has
adequate trading rules, procedures, listing standards and a
surveillance program for broad-based index options, including the NDX,
MDX, and RUT. BSE's existing index option trading rules and procedures
will apply to broad-based index options listed pursuant to proposed
Chapter XIV. Other existing BOX rules, including provisions addressing
sales practices and margin requirements, also will apply to these
options. In addition, BSE proposes to establish position and exercise
limits of 25,000 contracts on the same side of the market for broad-
based index options listed pursuant to Section 5 of Chapter XIV.\27\
The Commission believes that the proposed position and exercise limits
should serve to minimize potential manipulation concerns.
---------------------------------------------------------------------------

    \27\ Under Section 10 of Chapter XIV of BOX Rules, the exercise
limits for index options are equivalent to the position limits
prescribed for option contracts with the nearest expiration in
Section 5 or Section 6 of BOX Rules. Also, the position and exercise
limits for the NDX, MDX, and RUT options and LEAPs are consistent
with those rules approved by the Commission for other options
exchanges.
---------------------------------------------------------------------------

    The BSE represents that its surveillance procedures are adequate to
properly monitor the trading of broad-based index options and that it
intends to apply its existing surveillance procedures for index options
to monitor trading in broad-based index options listed pursuant to
Section 3 of Chapter XIV of BOX Rules. In addition, because Section
3(b)(9) of Chapter XIV requires that each component of an index be an
``NMS stock'' as defined in Rule 600 of Regulation NMS under the Act,
each index component must trade on a registered national securities
exchange or through Nasdaq. Accordingly, the BSE will have access to
information concerned trading activity in the component securities of
an underlying index through the Intermarket Surveillance Group
(``ISG'').\28\ Section 3(b)(10) of Chapter XIV of BOX Rules also
provides that non-U.S. index components that are not subject to a
comprehensive surveillance sharing agreement between the BSE and the
primary market(s) trading the index components may comprise no more
than 20% of the weight of the index.\29\ The Commission believes that
these requirements will help to ensure that the BSE has the ability to
monitor trading in broad-based index options listed pursuant to Section
3 of Chapter XIV of BOX Rules and in the component securities of the
underlying indexes.
---------------------------------------------------------------------------

    \28\ The ISG was formed on July 14, 1983, to, among other
things, coordinate more effectively surveillance and investigative
information sharing arrangements in the stock and options markets.
All of the registered national securities exchanges and the National
Association of Securities Dealers, Inc. are members of the ISG. In
addition, futures exchanges and non-U.S. exchanges and associations
are affiliate members of the ISG.
    \29\ However, such non-U.S. index components, as ``NMS stocks,''
would be registered under Section 12 of the Act and listed and
traded on a national securities exchange or Nasdaq, where there is
last sale reporting.
---------------------------------------------------------------------------

    The Commission believes that the requirements Section 3 of Chapter
XIV of BOX Rules regarding, among other things, the minimum market
capitalization, trading volume, and relative weightings of an
underlying index's component stocks are designed to ensure that the
markets for the index's component stocks are adequately capitalized and
sufficiently liquid, and that no one stock dominates the index. In
addition, Section 3 of Chapter XIV of BOX Rules requires that the
underlying index be ``broad-based,'' as defined in Section 2 of Chapter
XIV of BOX Rules.\30\ The Commission believes that these requirements
minimize the potential for manipulating the underlying index.
---------------------------------------------------------------------------

    \30\ Section 2(j) of Chapter XIV of BOX Rules defines ``broad-
based index'' to mean ``an index designed to be representative of a
stock market as a whole or of a range of companies in unrelated
industries.''
---------------------------------------------------------------------------

    The Commission believes that the requirement in Section 3(b)(11) of
Chapter XIV of BOX Rules that the current index value be widely
disseminated at least once every 15 seconds by the Options Price
Reporting Authority, the Consolidated Tape Association, the Nasdaq
Index Dissemination Service or by one or more major market data vendors
during the time an index option trades on the BOX should provide
transparency with respect to current index values and contribute to the
transparency of the market for broad-based index options. In addition,
the Commission believes, as it has noted in other contexts, that the
requirement in Section 10 of Chapter XIV of BOX Rules that an index
option be settled based on the opening prices of the index's component
securities, rather than on closing prices, could help to reduce the
potential impact of expiring index options on the market for the
index's component securities.\31\
---------------------------------------------------------------------------

    \31\ See, e.g., Securities Exchange Act Release No. 30944 (July
21, 1992), 57 FR 33376 (July 28, 1992) (order approving CBOE
proposal to establish open price settlement for S&P 500 Index
options).
---------------------------------------------------------------------------

    The proposed rule change will permit the Exchange and its members
to trade options on indices on BOX and should allow BOX to remain
competitive with the other options exchanges that already list and
trade options on indices. The proposed rule change should also benefit
investors by increasing competition among markets that trade options on
indices.
    The Commission finds good cause for approving the proposed rule
change, as amended, prior to the 30th day after the date of publication
of the notice of filing in the Federal Register. The Exchange has
requested accelerated approval of the proposed rule change. The
proposal implements listing and maintenance standards and position and
exercise limits for broad-based index options substantially identical
to those recently approved for the ISE, the Amex and CBOE.\32\ The
Commission does not

believe that the Exchange's proposal raises any novel regulatory
issues. Therefore, the Commission finds good cause, consistent with
Section 19(b)(2) of the Act,\33\ to approve the proposed rule change,
as amended, on an accelerated basis.
---------------------------------------------------------------------------

    \32\ See Securities Exchange Act Release Nos. 52578 (October 7,
2005), 70 FR 60590 (October 18, 2005) (SR-ISE-2005-27); 52781
(November 16, 2005), 70 FR 70898 (November 23, 2005) (SR-Amex-2005-
069); and 53266 (February 9, 2006), 71 FR 8321 (February 16, 2006)
(SR-CBOE-2005-59).
    \33\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    BSE also proposes to amend its rules to provide for the listing of
the NDX and MNX (one tenth value of the NDX), including long term index
options based upon the full value of the Nasdaq 100 Index (``NDX
Leaps'') and one-tenth value (``MNX Leaps''). These indexes are cash
settled, European style options based on the full and one-tenth value
of the Nasdaq 100, a stock calculated and maintained by the Nasdaq
stock market. The BSE is also amending its rules to provide for the
listing of the RUT and RUT LEAPS.
    The Commission notes that it previously approved the listing and
trading of options on the NDX and MNX on other exchanges.\34\ The
Commission also notes that it has previously approved the listing and
trading of the RUT on other exchanges.\35\ The Commission is presently
not aware of any regulatory issues that should cause it to revisit that
earlier finding or preclude the trading of such options on the BSE.
---------------------------------------------------------------------------

    \34\ Options on the MNX and NDX are currently listed and trading
on the Amex, the CBOE and the ISE. See Securities Exchange Act
Release Nos. 51884 (June 20, 2005), 70 FR 36973 (June 27, 2005) (SR-
Amex-2005-038); 33166 (November 8, 1993), 58 FR 60710 (November 17,
1993) (SR-CBOE-93-42); and 51121 (February 1, 2005), 70 FR 6476
(February 7, 2005) (SR-ISE-2005-01).
    \35\ See Securities Exchange Act Release Nos. 51619 (April 27,
2005), 70 FR 22947 (May 3, 2005) (SR-ISE-2005-09) and 31382 (October
30, 1992), 57 FR 52802 (November 5, 1992) (SR-CBOE-92-02).
---------------------------------------------------------------------------

    In approving the proposal, the Commission has specifically relied
on the following representations made by the BSE:
    1. The BSE will notify the Commission's Division of Market
Regulation immediately if Nasdaq ceases to maintain or calculate the
Nasdaq 100 Index (or one-tenth Nasdaq 100 value), or if these Nasdaq
100 Index values are not disseminated every 15 seconds by a widely
available source during the time the index options trade on BOX. The
BSE will notify the Commission's Division of Market Regulation
immediately if the Frank Russell Company ceases to maintain or
calculate the Russell 2000 Index, or if the Russell 2000 Index value is
not disseminated every 15 seconds by a widely available source during
the time the index options trade on BOX. If such Indexes cease to be
maintained or calculated, or if the Index values are not disseminated
every 15 seconds by a widely available source, the BSE will not list
any additional series for trading and will limit all transactions in
such option to closing transactions for the purpose of maintaining a
fair and orderly market and protecting investors.
    2. The BSE has an adequate surveillance program in place for index
options traded on the Nasdaq 100 Index and the Russell 2000 Index.
    3. The additional quote and message traffic that will be generated
by listing and trading the NDX, MNX, NDX LEAPS, MNX LEAPS, the RUT and
the RUT LEAPS will not exceed the BSE's current message capacity
allocated by the Independent System Capacity Advisor.
    The Commission further notes that in approving this proposal, it
relied on the BSE's discussion of how Nasdaq and the Frank Russell
Company currently calculates the respective indexes. If the manner in
which Nasdaq or the Frank Russell Company calculates the indexes were
to change substantially, the approval might no longer be consistent
with the Act and might no longer be effective.
    With respect to the NDX, the MNX, and the RUT, the Commission
believes that the position limits for these index options and the hedge
exemption for such position limits are reasonable and consistent with
the Act. The Commission previously has found identical provisions for
NDX and MNX options to be consistent with the Act.\36\
---------------------------------------------------------------------------

    \36\ See e.g., Securities Exchange Act Release No. 44156 (April
6, 2001), 66 FR 19261 (April 13, 2001) (SR-CBOE-00-14) (order
approving a proposed rule change by CBOE to increase position limits
and exercise limits for Nasdaq 100 Index options, expand the Index
hedge exemption, and eliminate the near-term position limits).
---------------------------------------------------------------------------

    The Commission finds good cause for approving this proposal before
the thirtieth day after the publication of the notice thereof in the
Federal Register. Because options on the NDX, MNX, and the RUT already
trade on other exchanges, accelerating approval of the BSE's proposal
should benefit investors by creating, without due delay, additional
competition in the market for these options.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\37\ that the proposed rule change (SR-BSE-2005-11), as amended, is
approved on an accelerated basis.
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\38\
---------------------------------------------------------------------------

    \38\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Nancy M. Morris,
Secretary.
[FR Doc. E6-14878 Filed 9-7-06; 8:45 am]

BILLING CODE 8010-01-P


[Federal Register Volume 84, Number 173 (Friday, September 6, 2019)]
[Notices]
[Pages 47047-47048]
[FR Doc No: 2019-19262]

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DEPARTMENT OF TRANSPORTATION

Federal Motor Carrier Safety Administration

[Docket No. FMCSA-2019-0009]

Qualification of Drivers; Exemption Applications; Vision

AGENCY: Federal Motor Carrier Safety Administration (FMCSA), DOT.

ACTION: Notice of final disposition.

-----------------------------------------------------------------------

SUMMARY: FMCSA announces its decision to exempt 12 individuals from the
vision requirement in the Federal Motor Carrier Safety Regulations
(FMCSRs) to operate a commercial motor vehicle (CMV) in interstate
commerce. They are unable to meet the vision requirement in one eye for
various reasons. The exemptions enable these individuals to operate
CMVs in interstate commerce without meeting the vision requirement in
one eye.

DATES: The exemptions were applicable on June 22, 2019. The exemptions
expire on June 22, 2021.

FOR FURTHER INFORMATION CONTACT: Ms. Christine A. Hydock, Chief,
Medical Programs Division,<PHONE_NUMBER><EMAIL_ADDRESS>FMCSA,
Department of Transportation, 1200 New Jersey Avenue SE, Room W64-224,
Washington, DC 20590-0001. Office hours are from 8:30 a.m. to 5 p.m.,
ET, Monday through Friday, except Federal holidays. If you have
questions regarding viewing or submitting material to the docket,
contact Docket Services,<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:

I. Public Participation

A. Viewing Documents and Comments

    To view comments, as well as any documents mentioned in this notice
as being available in the docket, go to http://www.regulations.gov/docket?D=FMCSA-2019-0009 and choose the document to review. If you do
not have access to the internet, you may view the docket online by
visiting the Docket Management Facility in Room W12-140 on the ground
floor of the DOT West Building, 1200 New Jersey Avenue SE, Washington,
DC 20590, between 9 a.m. and 5 p.m., ET, Monday through Friday, except
Federal holidays.

B. Privacy Act

    In accordance with 5 U.S.C. 553(c), DOT solicits comments from the
public to better inform its rulemaking process. DOT posts these
comments, without edit, including any personal information the
commenter provides, to www.regulations.gov, as described in the system
of records notice (DOT/ALL-14 FDMS), which can be reviewed at
www.dot.gov/privacy.

II. Background

    On May 22, 2019, FMCSA published a notice announcing receipt of
applications from 14 individuals requesting an exemption from vision
requirement in 49 CFR 391.41(b)(10) and requested comments from the
public (84 FR 23629). The public comment period ended on June 21, 2019,
and one comment was received.
    FMCSA has evaluated the eligibility of these applicants and
determined that granting the exemptions to 12 out of 14 of these
individuals would achieve a level of safety equivalent to, or greater
than, the level that would be achieved by complying with Sec.
391.41(b)(10).
    The physical qualification standard for drivers regarding vision
found in Sec.  391.41(b)(10) states that a person is physically
qualified to drive a CMV if that person has distant visual acuity of at
least 20/40 (Snellen) in each eye without corrective lenses or visual
acuity separately corrected to 20/40 (Snellen) or better with
corrective lenses, distant binocular acuity of a least 20/40 (Snellen)
in both eyes with or without corrective lenses, field of vision of at
least 70[deg] in the horizontal meridian in each eye, and the ability
to recognize the colors of traffic signals and devices showing red,
green, and amber.

III. Discussion of Comments

    FMCSA received one comment in this proceeding. Robert Welsch stated
that the FMCSA should update the vision requirement to reflect that
individuals who have a combined visual acuity of at least 20/40 and
visual acuity of one eye of at least 20/40 are qualified to driver
rather than making them apply for an exemption.
    Modifications to the Medical Requirements for Commercial Drivers at
Sec.  391.41(b)(1-10) are outside the scope of this notice. However,
FMCSA has begun actions to update the vision standard at Sec.
391.41(b)(10).

IV. Basis for Exemption Determination

    Under 49 U.S.C. 31136(e) and 31315(b), FMCSA may grant an exemption
from the FMCSRs for no longer than a 5-year period if it finds such
exemption would likely achieve a level of safety that is equivalent to,
or greater than, the level that would be achieved absent such
exemption. The statute also allows the Agency to renew exemptions at
the end of the 5-year period. FMCSA grants medical exemptions from the
FMCSRs for a 2-year period to align with the maximum duration of a
driver's medical certification.
    The Agency's decision regarding these exemption applications is
based on medical reports about the applicants' vision, as well as their
driving records and experience driving with the vision deficiency. The
qualifications, experience, and medical condition of each applicant
were stated and discussed in detail in the May 22, 2019, Federal
Register notice (84 FR 23629) and will not be repeated here.
    FMCSA recognizes that some drivers do not meet the vision
requirement but have adapted their driving to accommodate their
limitation and demonstrated their ability to drive safely. The 12
exemption applicants listed in this notice are in this category. They
are unable to meet the vision requirement in one eye for various
reasons, including amblyopia, cataract, chorioretinal scar, macular
chorioretinal scars, macular degeneration, optic atrophy, prosthesis,
and retinal detachment. In most cases, their eye conditions did not
develop recently. Six of the applicants were either born with their
vision impairments or have had them since childhood. The six
individuals that developed their vision conditions as adults have had
them for a range of 4 to 28 years. Although each applicant has one eye
that does not meet the vision requirement in Sec.  391.41(b)(10), each
has at least 20/40

corrected vision in the other eye, and, in a doctor's opinion, has
sufficient vision to perform all the tasks necessary to operate a CMV.
    Doctors' opinions are supported by the applicants' possession of a
valid license to operate a CMV. By meeting State licensing
requirements, the applicants demonstrated their ability to operate a
CMV with their limited vision in intrastate commerce, even though their
vision disqualified them from driving in interstate commerce. We
believe that the applicants' intrastate driving experience and history
provide an adequate basis for predicting their ability to drive safely
in interstate commerce. Intrastate driving, like interstate operations,
involves substantial driving on highways on the interstate system and
on other roads built to interstate standards. Moreover, driving in
congested urban areas exposes the driver to more pedestrian and
vehicular traffic than exists on interstate highways. Faster reaction
to traffic and traffic signals is generally required because distances
between them are more compact. These conditions tax visual capacity and
driver response just as intensely as interstate driving conditions.
    The applicants in this notice have driven CMVs with their limited
vision in careers ranging for 3 to 96 years. In the past three years,
no drivers were involved in crashes, and no drivers were convicted of
moving violations in CMVs. Twelve of the applicants achieved a record
of safety while driving with their vision impairment that demonstrates
the likelihood that they have adapted their driving skills to
accommodate their condition. As the applicants' ample driving histories
with their vision deficiencies are good predictors of future
performance, FMCSA concludes their ability to drive safely can be
projected into the future.
    Consequently, FMCSA finds that in 12 of the 14 cases exempting
these applicants from the vision requirement in Sec.  391.41(b)(10) is
likely to achieve a level of safety equal to that existing without the
exemption. Two applicants, Donald K. Etter (PA) and Victor H. Lopez-
Campa (KS), were involved in crashes after the publication of the May
22, 2019 notice. Donald K. Etter (PA) has not yet submitted required
documentation about the crash. Victor H. Lopez-Campa (KS) was involved
in a CMV crash for which he received a citation and/or contributed.
Therefore, FMCSA is unable to conclude that granting an exemption to
these individuals is likely to achieve a level of safety equal to that
existing without the exemption.

V. Conditions and Requirements

    The terms and conditions of the exemption are provided to the
applicants in the exemption document and includes the following: (1)
Each driver must be physically examined every year (a) by an
ophthalmologist or optometrist who attests that the vision in the
better eye continues to meet the standard in Sec.  391.41(b)(10) and
(b) by a certified medical examiner (ME) who attests that the
individual is otherwise physically qualified under Sec.  391.41; (2)
each driver must provide a copy of the ophthalmologist's or
optometrist's report to the ME at the time of the annual medical
examination; and (3) each driver must provide a copy of the annual
medical certification to the employer for retention in the driver's
qualification file, or keep a copy in his/her driver's qualification
file if he/she is self-employed. The driver must also have a copy of
the exemption when driving, for presentation to a duly authorized
Federal, State, or local enforcement official.

VI. Preemption

    During the period the exemption is in effect, no State shall
enforce any law or regulation that conflicts with this exemption with
respect to a person operating under the exemption.

VII. Conclusion

    Based upon its evaluation of the 14 exemption applications, FMCSA
exempts the following 12 drivers from the vision requirement, Sec.
391.41(b)(10), subject to the requirements cited above:

Cesar Avila (PA)
Scott R. Barber (IL)
Jonathan A. Brown (GA)
Glenn E. Coombes (TX)
John A. DeVos (VT)
Marc Enderson (ND)
Robert R. Enoch (NC)
Juan O. Gonzalez (TX)
Vashion E. Hammond (FL)
John M. Harvey (TX)
Jerry L. Hofer (NM)
Mark A. Schlesselman (OH)

    In accordance with 49 U.S.C. 31136(e) and 31315(b), each exemption
will be valid for 2 years from the effective date unless revoked
earlier by FMCSA. The exemption will be revoked if the following
occurs: (1) The person fails to comply with the terms and conditions of
the exemption; (2) the exemption has resulted in a lower level of
safety than was maintained prior to being granted; or (3) continuation
of the exemption would not be consistent with the goals and objectives
of 49 U.S.C. 31136(e) and 31315(b).

    Issued on: August 29, 2019.
Larry W. Minor,
Associate Administrator for Policy.
[FR Doc. 2019-19262 Filed 9-5-19; 8:45 am]
BILLING CODE 4910-EX-P


[Federal Register Volume 76, Number 237 (Friday, December 9, 2011)]
[Notices]
[Pages 77042-77044]
[FR Doc No: 2011-31606]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65895; File No. SR-FINRA-2011-052]

Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Granting Approval of Proposed Rule Change To
Adopt NASD Rule 2320 (Best Execution and Interpositioning) and
Interpretive Material (``IM'') 2320 as FINRA Rule 5310 in the
Consolidated Rulebook

 December 5, 2011.

I. Introduction

    On October 4, 2011, Financial Industry Regulatory Authority, Inc.
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc.
(``NASD'')) 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 adopt NASD Rule 2320 (Best Execution and
Interpositioning) and Interpretive Material (``IM'') 2320 (Interpretive
Guidance with Respect to Best Execution Requirements) as a FINRA rule
in the consolidated FINRA rulebook with four notable changes. The
proposed rule change was published for comment in the Federal Register
on October 21, 2011.\3\ The Commission received one comment letter on
the proposal.\4\ FINRA filed a response to this comment on December 1,
2011.\5\ This order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 65579 (October 17,
2011), 76 FR 65549 (``Notice'').
    \4\ See Letter to Elizabeth M. Murphy, Secretary, Commission,
from David T. Bellaire, Esq., General Counsel and Director of
Government Affairs, Financial Services Institute, dated November 14,
2011 (``FSI Letter'').
    \5\ See Letter from Brant K. Brown, Associate General Counsel,
FINRA, to Elizabeth M. Murphy, Secretary, Commission, dated December
1, 2011 (``FINRA Response to Comment'').
---------------------------------------------------------------------------

II. Description of the Proposal

    As part of the process of developing a new consolidated rulebook
(``Consolidated FINRA Rulebook''),\6\ FINRA is proposing to adopt NASD
Rule 2320 (Best Execution and Interpositioning) and IM-2320
(Interpretive Guidance with Respect to Best Execution Requirements) as
a FINRA rule in the consolidated FINRA rulebook with four notable
changes.\7\ Specifically, the proposed rule change would combine and
renumber NASD Rule 2320 and IM-2320 as FINRA Rule 5310 in the
Consolidated FINRA Rulebook.
---------------------------------------------------------------------------

    \6\ The current FINRA rulebook consists of (1) FINRA Rules; (2)
NASD Rules; and (3) rules incorporated from NYSE (``Incorporated
NYSE Rules'') (together, the NASD Rules and Incorporated NYSE Rules
are referred to as the ``Transitional Rulebook''). While the NASD
Rules generally apply to all FINRA members, the Incorporated NYSE
Rules apply only to those members of FINRA that are also members of
the NYSE (``Dual Members''). The FINRA Rules apply to all FINRA
members, unless such rules have a more limited application by their
terms. For more information about the rulebook consolidation
process, see Information Notice, March 12, 2008 (Rulebook
Consolidation Process).
    \7\ As part of adopting the NASD rule as a FINRA rule, FINRA has
also proposed various technical and conforming changes.
---------------------------------------------------------------------------

Current NASD Rule 2320 and IM-2320

    NASD Rule 2320 currently requires a member, in any transaction for
or with a customer or a customer of another broker-dealer, to use
``reasonable diligence'' to ascertain the best market for a security
and to buy or sell in such market so that the resultant price to the
customer is as favorable as possible under prevailing market
conditions. The rule identifies five factors that are among those to be
considered in determining whether the member has used reasonable
diligence.\8\ The rule also includes provisions related to
interpositioning (i.e., interjecting a third party between the member
and the best available market), the use of a broker's broker,\9\ the
staffing of order rooms, and the application of the best execution
requirements to other parties.
---------------------------------------------------------------------------

    \8\ These five factors are: (1) The character of the market for
the security; (2) the size and type of transaction; (3) the number
of markets checked; (4) the accessibility of the quotation; and (5)
the terms and conditions of the order as communicated to the member.
    \9\ The proposed rule change moves part of the provision
concerning the use of a broker's broker from paragraph (b) of the
rule to Supplementary Material .05.
---------------------------------------------------------------------------

    In addition to these provisions, NASD Rule 2320(f) (commonly
referred to as the ``Three Quote Rule'') generally requires members
that execute transactions in non-exchange-listed securities on behalf
of customers to contact a minimum of three dealers (or all dealers if
three or fewer) and obtain quotations from those dealers subject to
certain exclusions.\10\ The Three Quote Rule establishes a minimum
standard, and compliance with the Three Quote Rule, in and of itself,
does not mean that a member has met its best execution obligations
under NASD Rule 2320.\11\
---------------------------------------------------------------------------

    \10\ The Three Quote Rule does not apply, for example, when two
or more priced quotations for a non-exchange-listed security are
displayed in an inter-dealer quotation system that permits quotation
updates on a real-time basis. Also excluded from the Three Quote
Rule are certain transactions in non-exchange-listed securities of
foreign issuers that are part of the FTSE All-World Index.
    \11\ See NASD Notice to Members 00-78 (November 2000).
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    IM-2320 was adopted in 2006 to codify interpretive guidance that
FINRA staff had provided involving compliance with NASD Rule 2320.\12\
Specifically, IM-2320 addresses issues involving the term ``market''
for purposes of the rule as well as the application of the rule to debt
securities and to broker-dealers that are executing a customer's order
against the broker-dealer's quote.
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    \12\ See Securities Exchange Act Release No. 54339 (August 21,
2006), 71 FR 50959 (August 28, 2006).
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Proposed Adoption and Changes to NASD Rule 2320 and IM-2320 as FINRA
Rule 2310

    FINRA is proposing to adopt NASD Rule 2320 (Best Execution and
Interpositioning) and IM-2320 (Interpretive Guidance with Respect to
Best Execution Requirements) as FINRA rule 5310 in the Consolidated
FINRA Rulebook with four notable changes, discussed in turn.
(1) Three Quote Rule
    Although the original concerns the Three Quote Rule was designed to
address are still valid, FINRA represents that the current requirements
in the Three Quote Rule, even with the various exclusions, are overly
prescriptive and can often result in unnecessary delay in the execution
of a customer's order or impose requirements that do not benefit the
customer.\13\ Accordingly, rather than maintain the Three Quote Rule
and the various exclusions in their current format, the proposed rule
change replaces the Three Quote Rule with Supplementary Material
emphasizing a member's best execution obligations

when handling an order involving any security, equity or debt, for
which there is limited pricing information available.\14\
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    \13\ See Notice at 65550.
    \14\ See proposed Supplementary Material .06. NASD Rule
2320(f)(2), which is a subparagraph within the Three Quote Rule,
generally requires members that display priced quotations on a real-
time basis for a non-exchange-listed security in two or more
quotation mediums that permit quotation updates on a real-time basis
to display the same priced quotation in each medium except for
certain customer limit orders displayed on an electronic
communications network. Paragraph (f)(4) of the rule includes
definitions of terms used in paragraph (f)(2). At this time, FINRA
is proposing to move paragraph (f)(2) into the FINRA Rule 6400
Series (Quoting and Trading in OTC Equity Securities) as FINRA Rule
6438. FINRA is also proposing to replace the term ``non-exchange-
listed security'' with the term ``OTC Equity Security'' to conform
the rule language to other FINRA rules addressing non-NMS stocks.
The terms ``OTC Equity Security'' and ``quotation medium'' are
defined in FINRA Rule 6420. Because the provisions relate to the
quotation of OTC Equity Securities, FINRA believes that they should
be relocated into the FINRA rule series concerning quoting and
trading OTC Equity Securities rather than remain part of the Best
Execution Rule.
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    NASD Rule 3110(b) (Books and Records) generally requires members to
indicate on the customer order ticket how they complied with the Three
Quote Rule, if applicable. FINRA is proposing to replace this provision
with a more general documentation requirement in the Supplementary
Material to proposed FINRA Rule 5310. Under that provision, members
would be required to retain records sufficient to demonstrate that they
had handled orders covered by the rule in accordance with their
policies and procedures.
(2) Regular and Rigorous Review of Execution Quality
    The proposed rule change includes Supplementary Material to
proposed FINRA Rule 5310 codifying a member's obligations when it
undertakes a regular and rigorous review of execution quality likely to
be obtained from different market centers. These longstanding
obligations are set forth and explained in various SEC releases and
NASD Notices to Members.\15\ The proposed rule change codifies this
guidance as Supplementary Material and does not alter existing
requirements regarding regular and rigorous review.
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    \15\ See, e.g., Securities Exchange Act Release No. 37619A
(September 6, 1996), 61 FR 48290 (September 12, 1996); NASD Notice
to Members 01-22 (April 2001).
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(3) Orders for Foreign Securities for With No U.S. Market
    While the determination as to whether a member has satisfied its
best execution obligations must take into account the market for a
security, NASD Rule 2320, as currently drafted, does not specifically
distinguish between orders for domestic securities and orders for
foreign securities, even if there is no U.S. market for the security.
The proposed rule change includes new Supplementary Material concerning
members' best execution obligations when handling orders for foreign
securities, and in particular foreign securities with no U.S. trading
activity.
    The new Supplementary Material recognizes that markets for
different securities can vary dramatically and that the standard of
``reasonable diligence'' must be assessed by examining specific
factors, including ``the character of the market for the security'' and
the ``accessibility of the quotation.'' Accordingly, the determination
as to whether a member has satisfied its best execution obligations
necessarily involves a ``facts and circumstances'' analysis.\16\
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    \16\ The new Supplementary Material notes that even though a
foreign security may not trade in the U.S., members still have an
obligation to seek best execution for customer orders involving the
security. Consequently, a member that handles customer orders for
foreign securities that do not trade in the U.S. must have specific
written policies and procedures in place regarding its handling of
customer orders for these securities that are reasonably designed to
obtain the most favorable terms available for the customer, taking
into account differences that may exist between U.S. markets and
foreign markets. The Supplementary Material further notes that a
member's best execution obligations also must evolve as changes
occur in the market that may give rise to improved executions,
including opportunities to trade at more advantageous prices.
Members must therefore regularly review their policies and
procedures to assess the quality of executions received and update
or revise the policies and procedures as necessary.
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(4) Customer Instructions Regarding the Routing of Orders
    When placing an order with a member, customers may specifically
instruct the member to route the order to a particular market for
execution.\17\ The proposed rule change includes Supplementary Material
to proposed FINRA Rule 5310 addressing situations where the customer
has, on an unsolicited basis, specifically instructed the member to
route its order to a particular market.\18\ Under those circumstances,
the member would not be required to make a best execution determination
beyond that specific instruction; however, the Supplementary Material
mandates that members process the customer's order promptly and in
accordance with the terms of the order. The Supplementary Material also
makes clear that where a customer has directed the member to route an
order to another specific broker-dealer that is also a FINRA member,
the exception would not apply to the receiving broker-dealer to which
the order was directed.\19\
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    \17\ When the order is for an NMS security, these orders are
often referred to as ``directed orders.'' See 17 CFR 242.600(b)(19).
    \18\ See proposed Supplementary Material .08. FINRA also has
proposed technical amendments to paragraph (e) of the rule to
clarify that a member's best execution obligations extend to all
customer orders and to avoid the potential misimpression that the
paragraph limits the scope of the rule's requirements.
    \19\ For example, if a customer of Member Firm A directs Member
Firm A to route an order to Member Firm B, Member Firm B would
continue to have best execution obligations to that customer order
received from Member Firm A.
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    FINRA will announce the implementation date of the proposed rule
change in a Regulatory Notice to be published no later than 90 days
following Commission approval. The implementation date will be no later
than 90 days following publication of the Regulatory Notice announcing
Commission approval.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule
change is consistent with Section 15A(b)(6) of the Act,\20\ which
requires, among other things, that FINRA rules be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, and, in general, to protect investors
and the public interest.\21\ The Commission believes that the proposed
rule change clarifies the existing best execution requirements, and
that these changes enhance investor protection and promote just and
equitable principles of trade. The Commission also believes that
codifying members' obligations regarding directed orders, regular and
rigorous review, and orders involving foreign securities will bring
clarification to these areas and ensure that all members are aware of
their obligations.
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    \20\ 15 U.S.C. 78o-3(b)(6).
    \21\ 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).
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    One commenter \22\ urged that FINRA provide additional guidance
regarding the manner in which a member firm may comply with its best
execution obligations with respect to orders for foreign securities
with no U.S. market. Specifically, the FSI Letter requests that FINRA
amend the Supplementary Material to provide that member firms draft and
maintain written policies and procedures regarding foreign securities
with no U.S. market that contain certain additional specific
elements.\23\
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    \22\ See FSI Letter, supra note 4, at 3.
    \23\ The commenter specifically requested that the Supplementary
Material provide that written policies and procedures regarding
foreign securities with no U.S. market: (1) Are reasonably designed
to obtain favorable terms; (2) provide reasonable notice to
customers of the policies and procedures; (3) require periodic
review for compliance with policies; and (4) require periodic review
of the policies themselves to ensure that they meet the requirements
of the rule. See id.

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    In its response to the comment, FINRA notes that the Supplementary
Material as currently drafted already provides that written policies
and procedures regarding orders in foreign securities with no U.S.
market be ``reasonably designed to obtain the most favorable terms
available for the customer'' and also requires that members ``regularly
review these policies and procedures to assess the quality of
executions received and update or revise the policies and procedures as
necessary.'' \24\ FINRA contends that the commenter's request for a
requirement to provide reasonable notice to customers of a member's
policies and procedures regarding foreign securities with no U.S.
market would inappropriately differentiate among a member's best
execution policies and procedures by specifically requiring
notification in the context of foreign securities and would be
irrelevant to those retail customers that do not trade in foreign
securities with no U.S. market.\25\ FINRA also argues that a
requirement requiring periodic review for compliance with the policies
at issue is redundant since, under existing FINRA rules, a member is
already responsible for reviewing the conduct of its associated persons
for compliance with both its policies and procedures and applicable
laws and rules in all aspects of its business.\26\ The Commission
believes that the proposed rule, and FINRA's response, respond to the
concerns raised by the commenter.
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    \24\ See FINRA Response to Comment, supra note 5, at 2, 3
(citing Supplementary Material .07 to FINRA Rule 5310).
    \25\ See id. at 2.
    \26\ See id. at 3 (citing NASD Rule 3010(b)(1)).
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    With respect to the proposed deletion of the Three Quote Rule,
FINRA has represented that replacing the Three Quote Rule with the
proposed Supplementary Material will improve the handling of customer
orders involving securities with limited quotation or pricing
information by decreasing the likelihood that execution of these orders
will be unnecessarily delayed while still ensuring that members
recognize that their best execution obligations apply to these
orders.\27\ The Commission believes that this proposed change will help
promote just and equitable principles of trade and will protect
investors and the public interest.
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    \27\ See Notice at 65551.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\28\ that the proposed rule change (SR-FINRA-2011-052) be, and it
hereby is, approved.
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    \28\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-31606 Filed 12-8-11; 8:45 am]
BILLING CODE 8011-01-P