NYSE Rule Proposal to Permit Specialists to Trade ETFs while Registered as Specialist in Component Securities
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August 8, 2007
TO: EQUITY MARKETS ADVISORY COMMITTEE No. 46-07ETF ADVISORY COMMITTEE No. 28-07
SEC RULES MEMBERS No. 106-07
SMALL FUNDS MEMBERS No. 69-07 RE: NYSE RULE PROPOSAL TO PERMIT SPECIALISTS TO TRADE ETFS WHILE REGISTERED AS SPECIALIST IN COMPONENT SECURITIES
The Securities and Exchange Commission has published for comment a proposed rule change filed by the NYSE that would permit, subject to NYSE approval, specialist member organizations to trade exchange-traded funds (“ETFs”) in a specialist capacity while at the same time registered as a specialist in securities that are a component of the ETF. * The proposal would permit member organizations to establish policies and procedures that must include, at a minimum, information barriers that prevent the flow of non-public information between a member organization’s ETF specialist on the one hand and the member organization’s specialist in an associated component security on the other hand.
The Release explains that the NYSE has an examination program that evaluates the integrity of information barriers to ensure confidentiality of trading information among various trading departments at its member firms and their approved persons that would be adapted to review specialists firms trading ETFs along with component securities. These information barriers are, and would continue to be, tested and reviewed for breaches and weaknesses by NYSE examination staff on an annual basis and for cause, when warranted. Specifically, to determine whether the firm has developed and implemented adequate information barriers between its specialist equity and ETF trading operations, NYSE examiners would review on-site the combined specialist firm’s written policies and procedures and physical layout for adequacy. Examiners also would test member organization controls and would determine whether the firm’s relevant information barriers and related policies and procedures are adequate to preclude the improper sharing of trading information and whether there have been any apparent breaches of those barriers.
The Release also notes that the NYSE will periodically assess its surveillance and examination procedures to determine whether they are adequate to assure that member organizations and market participants do not engage in manipulative or improper trading. According to the Release, the proposed rule does not prohibit the usual and customary sharing of information regarding trades after the fact.
Jane G. Heinrichs
Associate Counsel
endnotes
* SEC Release No. 34-56183, File No. SR-NYSE-2004-42 (August 2, 2007) (“Release”), available on the SEC’s website at http://sec.gov/rules/sro/nyse/2007/34-56183.pdf. Comments on the proposal are due to the SEC no later than 21 days from publication in the Federal Register.