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Notice

Order Granting Temporary Exemption for Broken-Dealers from the Trade-Through Disclosure Rule

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Start Preamble March 27, 2002.

In July 2000, the Commission approved an intermarket linkage plan, in which all five options exchanges [1] are currently participants (“Linkage Plan”).[2] Also in July 2000, the Commission proposed, and in November 2000 adopted, Rule 11Ac1-7 (“Trade-Through Disclosure Rule”) under the Securities Exchange Act of 1934 (“Exchange Act”).[3]

The Trade-Through Disclosure Rule requires a broker-dealer to disclose to a customer when the customer's order for a listed option is executed at a price inferior to the best-published quote (“intermarket trade-through”), and to disclose the better published quote available at that time. However, a broker-dealer is not required to disclose to its customer an intermarket trade-through if the broker-dealer effects the transaction on an exchange that participates in an approved linkage plan that includes provisions reasonably designed to limit customers' orders from being executed at prices that trade through a better published price. In addition, broker-dealers are not required to provide the disclosure required by the rule if the customer's order is executed as part of a block trade. Once implemented, the Linkage Plan would reasonably limit intermarket trade-throughs on each of the options markets,[4] provided that the Options Exchanges remain participants in the Linkage Plan.[5] Under these circumstances, broker-dealers would be excepted from the disclosure requirements of the Trade-Through Disclosure Rule.

To date, the options exchanges have taken steps to implement the Linkage Plan. Specifically, the options exchanges have selected The Options Clearing Corporation (“OCC”) to be the linkage provider and have worked closely with OCC to develop the technical requirements related to the linkage's central core or “hub” to and from which all linkage orders would be routed. The Commission understands that the options exchanges are completing the process of evaluating their internal systems to determine the Start Printed Page 15638extent of modification necessary to integrate their systems into the central hub and beginning to modify those systems.

The Commission has twice extended the compliance date of the Trade-Through Disclosure Rule for broker-dealers, most recently until April 1, 2002, because of its reluctance to impose on broker-dealers the costs of complying with the disclosure requirements of the rule while the Options Exchanges are working to implement the Linkage Plan, which would render such disclosures unnecessary.[6] Recently the Options Exchanges, in a letter dated March 15, 2002 to Chairman Pitt, committed to implement the linkage in two phases by specified dates.[7] The first phase would comprise those elements of the linkage that are necessary to send and receive orders required under the Linkage Plan to be automatically executed by the exchange receiving the order. The Options Exchanges committed to begin full intermarket testing of the first phase by December 1, 2002, and to implement this phase no later than February 1, 2003. The second phase would comprise the remaining elements of the linkage. The exchanges commit to begin testing of this second phase by March 1, 2003, and to implement this phase no later than April 30, 2003. The Options Exchanges also committed to file with the Commission an amendment to the Linkage Plan that would incorporate this testing and implementation timetable.[8]

In addition, the Options Exchanges agreed to file an amendment to the Linkage Plan that would permit an exchange to withdraw from participation in the Linkage Plan only if it can satisfy the Commission that it can accomplish, by alternative means, the same goals as the Linkage Plan of limiting intermarket trade-throughs of prices on other markets.[9] The Options Exchanges are currently working on amendments to the Linkage Plan that would be approved by each of their boards and filed with the Commission by April 15, 2002. If the Commission approves the amendments to the Linkage Plan,[10] the principal purpose of the Trade-Through Disclosure Rule “ to require customers” orders to be executed on exchanges that participate in a linkage that limits intermarket trade-throughs or, in the alternative, to provide customers with additional information about the execution of their orders “ would be accomplished.

Accordingly, the Commission believes that it is appropriate in the public interest and consistent with the protection of investors at this time to temporarily exempt broker-dealers from the requirements of the Trade-Through Disclosure Rule. Moreover, in light of the expressed intent of the Options Exchanges to file amendments to the Linkage Plan so that no exchange may withdraw from its obligations to limit trade-throughs of prices on other markets without an alternative means to achieve this same goal, the Commission has directed the staff to develop a proposal so that the Commission may consider repeal of the Trade-Through Disclosure Rule. At the time the Commission considers the proposal to repeal the Trade-Through Disclosure Rule it has directed staff to develop, it will consider a further extension of this temporary exemption.

Accordingly,

It is ordered, pursuant to section 36 of the Exchange Act,[11] that broker-dealers are exempt from compliance with the Trade-Through Disclosure Rule until July 1, 2002.

Start Signature

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

1.  The exchanges currently trading options are the American Stock Exchange (“Amex”), the Chicago Board Options Exchange (“CBOE”), the International Securities Exchange (“ISE”), the Pacific Exchange (“PCX”), and the Philadelphia Stock Exchange (“Phlx”) (collectively, “Options Exchanges”).

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2.  See Securities Exchange Act Release No. 43086 (July 28, 2000), 65 FR 48023 (August 4, 2000). The Linkage Plan approved by the Commission in July 2000 is the plan filed by the Amex, CBOE, and ISE. Subsequently, the PCX and Phlx joined the Linkage Plan. See Securities Exchange Act Release Nos. 43310 (September 20, 2000), 65 FR 58583 (September 29, 2000) (approving an amendment to the Linkage Plan adding the PCX as a participant); and 43311 (September 20, 2000), 65 FR 58584 (September 29, 2000) (approving an amendment to the Linkage Plan adding the Phlx as a participant).

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3.  17 CFR 240.11Ac1-7. See also Securities Exchange Act Release Nos. 43591 (November 17, 2000), 65 FR 75439 (December 1, 2000); and 43085 (July 28, 2000), 65 FR 47918 (August 4, 2000).

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4.  The Commission approved an amendment to the previously-approved Linkage Plan that would permit broker-dealers executing orders on participating exchanges to satisfy the exception to the disclosure requirements of the Trade-Through Disclosure Rule. Securities Exchange Act Release No. 44482 (June 27, 2001), 66 FR 35470 (July 5, 2001).

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5.  The Linkage Plan permits an exchange to withdraw from participation in the Linkage Plan with 30 days written notice.

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6.  See Securities Exchange Act Release Nos. 44078 (March 15, 2001), 66 FR 15792 (March 21, 2001); and 44852 (September 26, 2001), 66 FR 50103 (October 2, 2001).

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7.  See Letter from the Options Exchanges to Harvey L. Pitt, Chairman, Securities and Exchange Commission, dated March 15, 2002.

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8.  See Exchange Act Rule 11Aa3-2(d), 17 CFR 11Aa3-2(d).

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10.  The Commission must publish any amendment to the Linkage Plan filed by the Options Exchanges and provide interested persons an opportunity to submit written comments. See Exchange Act Rule 11Aa3-2(c)(1), 17 CFR 11Aa3-2(c)(1). A proposed amendment may be put into effect summarily upon publication of notice, on a temporary basis not to exceed 120 days, if the Commission finds that such action is necessary or appropriate in the public interest, for the protection of investors or the maintenance of fair and orderly markets, to remove impediments to, and perfect mechanisms of, a national market system or otherwise in furtherance of the purposes of the Exchange Act. See Exchange Act Rule 11Aa3-2(c)(4), 17 CFR 11Aa3-2(c)(4). Within 120 days of publication of notice of filing of an amendment to the Linkage Plan, the Commission must approve the amendment, with such changes or subject to such conditions as the Commission may deem necessary or appropriate, if it finds that such amendment is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system, or otherwise in furtherance of the purposes of the Exchange Act. See Exchange Act Rule 11Aa3-2(c)(2), 17 CFR 11Aa3-2(c)(2).

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[FR Doc. 02-7902 Filed 4-1-02; 8:45 am]

BILLING CODE 8010-01-P