REG 2008-28: Written Supervisory Procedures Related to Planned Transfer to NYSE Alternext US LLC ("NYSE Alternext")

Rule Interpretations and Training
July 31, 2008
Contacts
David De Gregorio, Chief Counsel, NYSE Market Surveillance - 212-656-4166
Claudia Crowley, Amex Chief Regulatory Officer - 212-306-2432

REG 2008-28

Written Supervisory Procedures Related to Planned Transfer to NYSE Alternext US LLC ("NYSE Alternext")

Purpose

The purpose of this Notice is to advise that, in connection with the planned relocation of Amex equities trading to New York Stock Exchange ("NYSE") systems and facilities located at 11 Wall Street ("NYSE Alternext Trading Systems"), all Amex members and member organizations that trade in Amex-listed equities and have a Floor-based presence (specialists and Floor brokers) and are planning on relocating such equities operations to NYSE Alternext Trading Systems ("Transferring Floor-Based Equities Members"), must have a compliance program, including adequate written supervisory policies and procedures ("WSPs"), in place prior to relocating to NYSE Alternext Trading Systems. These WSPs must address compliance with all proposed NYSE Alternext and FINRA rules as well as SEC requirements and other provisions of law applicable to such member or member organization's business activities. Accordingly, Transferring Floor-Based Equities Members must update their WSPs to incorporate such requirements. ¹

Please note that each Transferring Floor-Based Equities Member must obtain pre-clearance of its WSPs by appropriate regulation staff prior to relocation to NYSE Alternext Trading Systems. For those Transferring Floor-Based Equities Members that are planning on relocating their equities operations to NYSE Alternext Trading Systems on the same day that Amex relocates its equities operations, it is highly recommended that these members and member organizations submit their WSPs for such review no later than August 15, 2008, to Michelle Battaglia, Surveillance Director, FINRA, 20 Broad St., 24th Floor, New York, New York 10005, (646)315-8409. Failure to submit WSPs timely could delay or prevent relocation of equities operations to NYSE Alternext Trading Systems. See generally NYSE and proposed NYSE Alternext Rules 342 and 311. For those Transferring Floor-Based Equities Members that are planning on relocating their equities operations to NYSE Alternext Trading Systems at a later date, it is highly recommended that their WSPs be submitted for review no later than one month prior to the anticipated relocation date.

Background

The NYSE implemented the Hybrid Market^sm in four phases from late 2005 through early 2007. With the introduction of the Hybrid Market^sm, the NYSE expanded its auto-execution facility and integrated it with its Floor-based auction market. As part of this initiative, the NYSE developed new electronic tools for specialists and Floor brokers to participate in both auction and electronic trading, such as s-Quotes and e-Quotes. The Specialist API was also developed to enable specialists to algorithmically send various types of messages replicating aspects of what they have long done manually in order to maintain fair and orderly markets. Additional significant changes in NYSE's marketplace are scheduled to occur in the near future.

As you are aware, NYSE Euronext plans to acquire the American Stock Exchange ("Amex"), currently scheduled for September 2008. ² At that time, it is anticipated that Amex will be renamed NYSE Alternext US LLC ("NYSE Alternext"). Shortly after completion of the acquisition, NYSE Alternext equities trading currently conducted on trading systems at 86 Trinity Place, will be relocated to NYSE trading systems and facilities, the NYSE Alternext Trading Systems. Pending Securities and Exchange Commission ("SEC") approval, NYSE Alternext will adopt rules that are virtually identical to current NYSE rules applicable to the NYSE Hybrid Market^sm governing equities trading, since such rules reflect the market structure and features of the NYSE Alternext Trading Systems. See SR-Amex-2008-63, which sets forth the proposed rule changes applicable to equities trading and other related requirements, as well as SR-Amex-2008-62 with respect to other proposed rule changes that will be applicable to Amex members and member organizations immediately following the NYSE acquisition.

Please note as well that in connection with the relocation to NYSE Alternext Trading Systems, all Amex members and member organizations that intend to engage in equities trading must apply for and obtain an NYSE Alternext equities license. In connection with obtaining this license, the member or member organization, as applicable, will also be required to become an NYSE and FINRA member.

Discussion

NYSE Rule 342 and proposed NYSE Alternext Rule 342 require, among other things, that member firms establish and maintain appropriate policies and procedures for the supervision and control of compliance, and establish a separate system of follow-up and review to reasonably ensure compliance with NYSE rules as well as other applicable requirements, including but not limited to the federal securities laws. The duty to maintain a written statement of supervisory procedures should be reflected in a distinct and specifically identifiable manual of such procedures, whose provisions are to be enforced by the member organization. See NYSE Interpretation Handbook - 342.16/02 (Written Statement of Supervisory Procedures) (available on the NYSE's website, under the Regulation tab). A principal method for ensuring that member organization personnel are aware of and comply with the organization's internal procedures, NYSE requirements, SEC regulations, and other applicable provisions of law, is by the maintenance of a timely, accurate and complete written manual of procedures and practices with which all member organization personnel are expected to comply. See NYSE Interpretation Handbook - 342.16/03 (Compliance Manual).

Each Transferring Floor-Based Equities Member must have identified a Compliance Officer and put in place an applicable compliance program, including adequate WSPs, prior to transfer to NYSE Alternext (see proposed NYSE Alternext Rule 342). Compliance Officers of member organizations that conduct a specialist business must pass the Compliance Official for Specialist Firm Qualification Examination (Series 14A Examination) within six months of moving to NYSE Alternext. This examination will be administered at a date subsequent to the relocation to NYSE Alternext.

As mentioned above, depending on the scope of business (specialist or Floor brokers), Transferring Floor-Based Equities Members must update their current WSPs and compliance programs to adequately address compliance with all applicable existing and new and/or modified requirements of the proposed new NYSE Alternext rules, as well as other applicable NYSE, FINRA and SEC requirements, including, but not limited to, the following ³:

Trading ahead. Pursuant to proposed NYSE Alternext Rules 92 and 104, members must not trade ahead of executable agency orders, or incoming commitments on the same side of the market, or engage in interpositioning. In this regard, specialists may override certain automated system blocks only pursuant to a valid exception, in accordance with applicable rules. Each specialist firm's WSPs and compliance program should provide adequate guidance on the permissible overrides and also provide for adequate supervisory review in order to identify any possible improper overrides;
Gap quotations (see proposed NYSE Alternext Rules 60, 79A.15, and 104.10, and Reg NMS Rules 600, 602, and 604, and NYSE Information Memo 07-66);
Liquidity Replenishment Points (see proposed NYSE Alternext Rules 79A.15, 104.10, and 1000, and Reg NMS Rule 604);
Specialist affirmative and negative obligations including specialist stabilization requirements. Proposed NYSE Alternext Rule 104, will include specific restrictions and requirements applicable to Neutral Transactions, Prohibited Transactions, Non-Conditional Transactions, and Conditional Transactions and related re-entry requirements, as well as the applicable use of Price Participation Points;
Specialist SAPI requirements and algorithm certifications (see proposed NYSE Alternext Rule 104);
ID Track (see proposed NYSE Alternext Rules 54 and 103, and NYSE Information Memo 08-18);
Percentage orders (see proposed NYSE Alternext Rule 123A.30);
The Open and Close including pre-opening notifications (see proposed NYSE Alternext Rule 15), mandatory indications and openings and trading halts (see proposed NYSE Alternext Rule 123D), openings under extreme market volatility (see proposed NYSE Alternext Rule 48), etc;
Floor communications (see proposed NYSE Alternext Rule 36);
Errors and erroneous reports (see proposed NYSE Alternext Rules 134 and 411(a));
Floor Official approval requirements regarding tape corrections, widening of depth guidelines, and non-regular way trading;
Display Book Freeze Mode - specialists will be actively monitored regarding their use of implicit and explicit freezes;
Specialist parity (see proposed NYSE Alternext Rules 104 and 108);
"One and two point" rule (see proposed NYSE Alternext Rule 79A.30);
Floor Member Continuing Education and delivery via the Learning Management System (see proposed NYSE Alternext Rule 103A);
Interest in pools, options and single stock futures (see proposed NYSE Alternext Rule 105);
Ensure that clearing trades are printed to the Tape (see proposed NYSE Alternext Rule 128A.10);
Post trade allocation (see proposed NYSE Alternext Rule 90);
Limit on Close and Market on Close orders (see proposed NYSE Alternext Rule 123C);
Block crosses outside the prevailing quotation (see proposed NYSE Alternext Rule 127);
Crossing orders (see proposed NYSE Alternext Rule 76);
Blue Line Trading allowing an "upstairs" trading desk on the Floor except for proprietary trading (see proposed NYSE Alternext Rules 54 and 70, and NYSE Information Memo 07-77);
Depth Guidelines. Each NYSE Atlernext stock will have one individual Depth Guideline that is recalculated each day based on its previous closing price, its current volatility (the average of the previous forty daily consolidated high/low ranges), and a weighting factor that compares the stock's current volatility to the volatility of all other stocks. See NYSE Member Education Bulletin 2007-16;
NYSE currently provides specialist firms' compliance officers with Display Book Log Extract ("DLE") data to facilitate firms' ability to build surveillance for their compliance programs. Such firms must use the DLE data to develop robust surveillance capabilities; and,
NYSE Floor-related systems and requirements such as Front End Systemic Capture (FESC) (see proposed NYSE Alternext Rule 123), Order Tracking System (see proposed NYSE Alternext Rules 123 and 132), and Crossing Sessions (see proposed NYSE Alternext Rules 900 - 907).

All Amex members and member organizations should familiarize themselves with all applicable NYSE rules, pending rule changes, Information Memos, Member Education Bulletins, and Rule Interpretations, available on the NYSE website, under the Regulation tab.

Staff Contacts

If you have any questions pertaining to this Notice, please contact David De Gregorio, Chief Counsel, NYSE Market Surveillance, at (212) 656-4166 or Claudia Crowley, Amex Chief Regulatory Officer, at (212) 306-2432.

¹ Transferring Floor-Based Equities Members should also review the proposed rule changes relating to the implementation of the NYSE's new market model, as set forth in SR-NYSE-2008-46 (Amendment 1), since it is anticipated that such changes will be applied to NYSE Alternext. Likewise, SR-NYSE-2008-45, a proposal to redefine specialist operations and alter applicable information barrier structuring, should be reviewed as well. It is anticipated that once these proposals are approved by the SEC, separate filings will be submitted to the SEC pursuant to Section 19(b) of the Securities Exchange Act of 1934, to make such conforming amendments to NYSE Alternext rules.

² The acquisition will be effected through a series of mergers, and is subject to completion of certain conditions including approval of the Securities and Exchange Commission. See, generally, SR-Amex-2008-62.

³ This list, including references to rules, Information Memos and Member Education Bulletins, is not exhaustive, but provided for informational purposes. It is the responsibility of each Transferring Floor-Based Equities Member to ensure that its WSPs address any and all applicable compliance areas.