[Federal Register: June 5, 2002 (Volume 67, Number 108)]
[Proposed Rules]               
[Page 38610-38614]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05jn02-10]                         





Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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[[Page 38610]]



SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-46002; File No. S7-18-02]
RIN 3235-AI52

 
Repeal of Options Trade-Through Disclosure Rule

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or 
``Commission'') is proposing to repeal its rule that requires a broker-
dealer to disclose to its customer when the customer's order for listed 
options is executed at a price inferior to a better published quote, 
unless the transaction was effected on a market that is a participant 
in an intermarket options linkage plan approved by the Commission or 
the customer order was executed as part of a block trade, because the 
Commission preliminary believes that, due to changed circumstances, 
this rule is no longer needed.

DATES: Comments should be submitted on or before July 22, 2002.

ADDRESSES: All comments should be submitted in triplicate and addressed 
to Jonathan G. Katz, Secretary, U.S. Securities and Exhange Commission, 
450 Fifth Street, NW., Washington, DC 20549-0609. Comments also may be 
submitted electronically at the following e-mail address: rule-
comments@sec.gov. All comment letters should refer to File No. S7-18-
02; this file number should be included on the subject line if E-mail 
is used. Comment letters will be available for inspection and copying 
in the Commission's Public Reference Room at the same address. 
Electronically submitted comment letters will be posted on the 
Commission's Internet Web site (http://www.sec.gov). The Commission 
does not edit personal identifying information, such as names or e-mail 
addresses, from electronic submissions. Submit only the information you 
wish to make publicly available.

FOR FURTHER INFORMATION CONTACT: Deborah Flynn, Assistant Director, at 
(202) 942-0075, Patrick Joyce, Special Counsel, at (202) 942-0779, and 
Jennifer Lewis, Attorney, at (202) 942-7951, Division of Market 
Regulation, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-1001.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Discussion of Proposed Repeal of the Trade-Through Disclosure 
Rule
    A. Background
    B. Commission's Response to Intermarket Trade-Throughs of 
Customer Orders in the Options Markets
    C. Amendments to the Linkage Plan
II. Request for Comment
III. Paperwork Reduction Act
IV. Costs and Benefits of the Proposed Repeal of the Trade-Through 
Disclosure Rule
    A. Costs
    B. Benefits
V. Consideration of the Burden on Competition, and Promotion of 
Efficiency, Competition and Capital Formation
VI. Initial Regulatory Flexibility Analysis
    A. Reasons for the Proposed Action
    B. Objectives and Legal Basis
    C. Small Entities Subject to the Rules
    D. Reporting, Recordkeeping, and other Compliance Requirements
    E. Duplicative, Overlapping, or Conflicting Federal Rules
    F. Significant Alternatives
    G. Solicitation of Comments
VII. Statutory Authority

I. Discussion of Proposed Repeal of the Trade-Through Disclosure 
Rule

A.Background

    Section 11A of the Securities Exchange Act of 1934 (``Exchange 
Act'')\1\ sets forth Congress findings concerning the establishment of 
a national market system. Congress found that it was in the public 
interest, and appropriate for the protection of investors and the 
maintenance of fair and orderly markets, to assure the availability of 
quote and transaction information to brokers, dealers, and investors 
and ``the practicability of brokers executing investors'' orders in the 
best market.''\2\ Congress believed that linking all of the markets for 
qualified securities would ``foster efficiency, enhance competition, 
increase the information available to brokers, dealers, and investors, 
facilitate the offsetting of investors' orders, and contribute to best 
execution of such orders.''\3\
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    \1\ 15 U.S.C. 78k-1.
    \2\ Section 11A(a)(1)(C) of the Exchange Act, 15 U.S.C. 78k-
1(a)(1)(C).
    \3\ Section 11A(a)(1)(D) of the Exchange Act, 15 U.S.C. 78k-
1(a)(1)(D).
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    Recognizing that there were significant differences among the 
markets for various types of securities, Congress granted the 
Commission broad powers to implement a national market system without 
forcing all securities markets into a single mold.\4\ Accordingly, the 
Commission recognized and classified markets, firms, and securities as 
appropriate or necessary in the public interest or for the protection 
of investors.\5\
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    \4\ Senate Committee on Banking, Housing, and Urban Affairs, 
Report to Accompany S. 249, S. Rep. 94-75, 94th Cong., 1st Sess. 7 
(1975) (``Senate Report''). See also Committee of Conference, Report 
to Accompany S. 249, H.R. Rep. No. 94-229, 94th Cong., 1st Sess. 2 
(1975) (``Conference Report''). The Committee of Conference stated 
that the unique characteristics of securities other than common 
stocks may require different treatment in a national market system.
    \5\ Section 11A(a)(2) of the Exchange Act authorizes the 
Commission to designate, by rule, securities qualified for trading 
in the national market system. 15 U.S.C. 78k-1(a)(2).
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    Many of the national market system initiatives were implemented in 
the equities markets at a time when standardized options trading was 
relatively new.\6\ Therefore, the Commission deferred applying many of 
the national market system initiatives to options to give options 
trading an opportunity to develop. With the onset of widespread 
multiple trading in options, beginning in August 1999, the Commission 
became increasingly concerned about customer orders that are sent to 
one exchange being executed at prices inferior to quotes published by 
another market. For that reason, the Commission took several actions 
described below, including adopting the

[[Page 38611]]

Trade-Through Disclosure Rule in November 2000.
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    \6\ The trading of standardized options on securities exchanges 
began in 1973 with the organization of the Chicago Board Options 
Exchange (``CBOE'') as a national securities exchange. See 
Securities Exchange Act Release No. 9985 (February 1, 1973), 1 
S.E.C. Doc. 11 (February 13, 1973). Currently, the American Stock 
Exchange (``Amex''), the CBOE, the International Securities Exchange 
(``ISE''), the Pacific Exchange (``PCX''), and the Philadelphia 
Stock Exchange (``Phlx'') (collectively, ``Options Exchanges'') are 
the only national securities exchanges that trade standardized 
options.
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B. Commission's Response to Intermarket Trade-Throughs of Customer 
Orders in the Options Markets

    Because of concerns about the increasing likelihood of intermarket 
trade-throughs of customer orders in the options markets following the 
widespread expansion of multiple trading, in October 1999 the 
Commission ordered the Options Exchanges to work together to file a 
national market system plan for linking the options markets.\7\ To 
comply with this order, Amex, CBOE, and ISE submitted identical linkage 
plans, and Phlx and PCX each submitted its own plan.
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    \7\ Securities Exchange Act Release No. 42029 (October 19, 
1999), 64 FR 57674 (October 26, 1999). The Commission Order directed 
Amex, CBOE, PCX, and Phlx to act jointly in discussing, developing, 
and submitting for Commission approval an intermarket linkage plan 
for multiply traded options. The Commission also requested ISE, 
which had applied with the Commission to become a registered 
national exchange, to participate with the four options exchanges in 
developing an intermarket linkage plan. The Commission granted the 
ISE's registration as a national securities exchange for options 
trading on February 24, 2000. See Securities Exchange Act Release 
No. 42455, 65 FR 11387 (March 2, 2000).
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    The Commission approved the plan filed by Amex, CBOE, and ISE in 
July 2000 (``Linkage Plan'').\8\ Although PCX and Phlx subsequently 
joined the Linkage Plan,\9\ the Commission did not mandate their 
participation in the Linkage Plan or require that any exchange that was 
a participant remain one.\10\ However, to encourage market participants 
to obtain the best price for customer orders across markets without 
requiring that markets join the Linkage Plan, the Commission instead 
proposed,\11\ and later adopted,\12\ Rule 11Ac1-7 under the Exchange 
Act,\13\ the ``Trade-Through Disclosure Rule.'' Rule 11Ac1-7 was 
adopted to encourage the Options Exchanges to develop mechanisms to 
reduce the frequency of intermarket trade-throughs and to require 
market participants to disclose to their customers when their orders 
have been traded through.
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    \8\ See Securities Exchange Act Release No. 43086 (July 28, 
2000), 65 FR 48023 (August 4, 2000).
    \9\ 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).
    \10\ The Commission today is approving an amendment to the 
Linkage Plan proposed by the options exchanges that deletes the 
provision that permits any participant to withdraw after 30 days 
written notice and requires, instead, that a participant wishing to 
withdraw from the Linkage Plan first satisfy the Commission that it 
can accomplish, by alternative means, the same goals as the Linkage 
Plan of limiting trade-throughs of prices on other markets. 
Securities Exchange Act Release No. 46001 (May 30, 2002).
    \11\ Securities Exchange Act Release No. 43085 (July 28, 2000), 
65 FR 47918 (August 4, 2000) (``Proposing Release'').
    \12\ Securities Exchange Act Release No. 43591 (November 17, 
2000), 65 FR 75439 (December 1, 2000) (``Adopting Release'').
    \13\ 17 CFR 240.11Ac1-7.
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    The Trade-Through Disclosure Rule requires a broker to disclose to 
its customer when the customer's order for listed options has been 
executed at a price inferior to a better published quote (``intermarket 
trade-through''), and to disclose the better published quote available 
at the time.\14\ The Trade-Through Disclosure Rule provides, however, 
that a broker-dealer is not required to disclose this information to 
its customer if the transaction is effected on an exchange that 
participates in a Commission-approved linkage plan that includes 
provisions reasonably designed to limit trade-throughs of customer 
orders.\15\
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    \14\ Exchange Act Rule 11Ac1-7(b)(1), 17 CFR 240.11Ac1-7(b)(1). 
This disclosure, which must be made to the customer in writing at or 
before the completion of the transaction, may be included on the 
confirmation statement routinely sent to investors. Id.
    \15\ Exchange Act Rule 11Ac1-7(b)(2)(i), 17 CFR 240.11Ac1-
7(b)(2)(i). In the Adopting Release, the Commission noted that to 
reasonably limit trade-throughs of customer orders, a linkage plan 
must, at a minimum: (1) limit participants from trading through the 
quotes of all exchanges, including exchanges that are not 
participants in such plan; (2) require plan participants to actively 
surveil their markets for trades executed at prices inferior to 
those publicly quoted on other exchanges; and (3) make clear that 
the failure of a market with a better quote to complain within a 
specified period of time that its quote was traded through may 
affect potential liability, but does not signify that a trade-
through has not occurred. See Adopting Release, supra note .
    The Trade-Through Disclosure Rule specifically excludes block 
trades from coverage, Exchange Act Rule 11Ac1-7(b)(2)(ii), 17 CFR 
240.11Ac1-7(b)(2)(ii), and identifies several circumstances, such as 
OPRA delays and systems malfunctions, under which a trade executed 
at a price inferior to a published price on another market would not 
be considered an intermarket trade-through for purposes of the rule, 
Exchange Act Rule 11Ac1-7(b)(4), 17 CFR 240.11Ac1-7(b)(4).
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    Once implemented, the Linkage Plan would reasonably limit 
intermarket trade-throughs on each of the options markets,\16\ provided 
that the Options Exchanges remain participants in the Linkage Plan. If 
all of the Options Exchanges remained participants in the Linkage Plan, 
broker-dealers always would be excepted from the disclosure 
requirements of the Trade-Through Disclosure Rule. If, however, an 
exchange were to withdraw from the Linkage Plan, and did not 
participate in another linkage plan with provisions reasonably designed 
to limit intermarket trade-throughs, broker-dealers effecting 
transactions on such exchange would be required to provide their 
customers with information about intermarket trade-throughs and 
customers would, therefore, be better able to evaluate the quality of 
executions achieved by their brokers.\17\
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    \16\ The Linkage Plan, as approved by the Commission in July 
2000, was not reasonably designed to limit trade-throughs of 
customer orders. Accordingly, the Options Exchanges proposed and the 
Commission, in June 2001, approved an amendment to the Linkage Plan. 
Securities Exchange Act Release No. 44482 (June 27, 2001), 66 FR 
35470 (July 5, 2001).
    \17\ The initial compliance date of the Trade-Through Disclosure 
Rule was April 1, 2001. Because the Options Exchanges have not yet 
fully implemented the linkage, the Commission, at the request of 
broker-dealers, twice extended the compliance date of the Trade-
Through Disclosure Rule for broker-dealers, most recently until 
April 1, 2002. 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). On March 27, 2002, the Commission 
issued an order temporarily exempting for 90 days broker-dealers 
from compliance with the Trade-Through Disclosure Rule. Securities 
Exchange Act Release No. 45654 (March 27, 2002), 67 FR 15637 (April 
2, 2002). In conjunction with this proposal to repeal the Trade-
Through Disclosure Rule, the Commission today is extending for an 
additional 180 days the exemption from compliance with the Trade-
Through Disclosure Rule. Securities Exchange Act Release No. .46003 
(May 30, 2002).
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C. Amendments to the Linkage Plan

    On April 15, 2002, the Options Exchanges filed proposed amendments 
to the Linkage Plan,\18\ approved by the Commission today,\19\ to 
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. The amendments 
also require the Options Exchanges to implement the linkage in two 
phases by specified dates.\20\ These amendments establish clear 
deadlines by which a linkage must be implemented that reasonably limits 
trade-throughs of customer orders and requires each of the options 
exchanges to remain participants in the Linkage Plan, unless an 
alternative means is established for so limiting trade-throughs.\21\ 
The Commission

[[Page 38612]]

preliminarily believes that these amendments to the Linkage Plan render 
the Trade-Through Disclosure Rule unnecessary because all transactions 
would be executed on markets that reasonably limit trade-throughs of 
customer orders.
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    \18\ See Securities Exchange Act Release No. 45795 (April 22, 
2002), 67 FR 21302 (April 30, 2002).
    \19\ See supra note 10.
    \20\ Id.
    \21\ Under the terms of the implementation schedule, intermarket 
testing will begin on December 1, 2002 and the linkage will be fully 
implemented no later than April 30, 2003. Any failure on the part of 
the Options Exchanges to meet the deadlines for implementing the 
Linkage Plan would be a violation of Commission rules. Exchange Act 
Rule 11Aa3-2(d), 17 CFR 240.11Aa3-2(d).
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    Without these amendments to the Linkage Plan, nothing would have 
prevented an exchange from withdrawing from the Linkage Plan and 
trading through the quotes of any other exchange. In view of the 
amendments to the Linkage Plan approved today, however, the Commission 
preliminarily believes that the Trade-Through Disclosure Rule is no 
longer needed and, accordingly, the Commission is proposing that the 
Trade-Through Disclosure Rule be repealed.

II. Request for Comment

    The Commission invites comment from the public with respect to the 
proposed repeal of the Trade-Through Disclosure Rule described in this 
release. In particular, the Commission solicits comment on the 
following questions:
     Is the proposed repeal of the Trade-Through Disclosure 
Rule appropriate?
     Do the amendments to the Linkage Plan adequately address 
the concerns that resulted in the Commission's adoption of the Trade-
Through Disclosure Rule?
     Is retaining the Trade-Through Disclosure Rule necessary 
to provide an incentive for any new options exchange to join a 
qualified, Commission-approved linkage plan, or to find an alternative 
means acceptable to the Commission to the accomplish the same goals of 
limiting intermarket trade-throughs of customer orders?
    Commenters may also wish to discuss whether there are any reasons 
why the Commission should consider an approach other than the repeal of 
the Trade-Through Disclosure Rule.
     For instance, should the Commission exempt broker-dealers 
from compliance with the Trade-Through Disclosure Rule until such time 
as the participants have fully implemented the Linkage Plan?

III. Paperwork Reduction Act

    If an agency's proposed rule would require a ``collection of 
information,''\22\ the Paperwork Reduction Act of 1995 (``PRA'')\23\ 
requires the agency to obtain approval of the collection of information 
from the Office of Management and Budget (``OMB''). An agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information, unless it displays a currently valid OMB 
control number. The PRA does not apply in this instance because the 
proposed repeal of the Trade-Through Disclosure Rule would not impose 
recordkeeping or information collection requirements, or other 
collections of information that require the approval of OMB under the 
PRA. When the Commission adopted the Trade-Through Disclosure Rule, it 
estimated that broker-dealers complying with the Trade-Through 
Disclosure Rule would incur one-time paperwork costs of between 
$8,250,000 and $16,500,000, and that the total continuing paperwork 
burden of the disclosures required to be made by brokers would be 
``nominal'' because it would merely require a small amount of 
additional information on customer confirmation statements. If the 
Commission repeals the Trade-Through Disclosure Rule, both the one-time 
and continual costs of complying with the collection of information 
imposed by the Trade-Through Disclosure Rule would be eliminated.
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    \22\ See 44 U.S.C. 3502(3); 5 CFR 1320.3(c).
    \23\ 44 U.S.C. 3501 et seq.
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IV. Costs and Benefits of the Proposed Repeal of the Trade-Through 
Disclosure Rule

    As discussed above, the Commission is proposing to repeal the 
Trade-Through Disclosure Rule. The Trade-Through Disclosure Rule was 
intended to provide an incentive for the Options Exchanges and their 
members to develop mechanisms to reduce the frequency of intermarket 
trade-throughs, without mandating the form of mechanism employed. 
Further, the rule was designed to inform customers of intermarket 
trade-throughs, permitting them to select a broker-dealer that effects 
transactions on a market that participates in an approved linkage plan 
with provisions reasonably designed to limit customer trade-throughs. 
As discussed above, the Commission today approved amendments to the 
Linkage Plan, which establish implementation dates for the linkage and 
prevent an exchange from withdrawing from the Linkage Plan unless 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. Therefore, the Commission 
preliminarily believes the Trade-Through Disclosure Rule is no longer 
necessary and is proposing to repeal the rule.
    Under the Trade-Through Disclosure Rule, a broker-dealer is 
required to disclose to its customer in writing at or before the 
completion of the transaction when a trade-through has occurred, unless 
the trade was effected on a market that is a participant in a 
Commission-approved intermarket linkage plan that contains provisions 
reasonably designed to limit trade-throughs. The proposed repeal of the 
Trade-Through Disclosure Rule would eliminate this requirement for 
broker-dealers. No broker-dealers have yet been obligated to comply 
with the Trade-Through Disclosure Rule because initially, the effective 
date of the rule was extended by the Commission, and currently broker-
dealers have been temporarily exempted from compliance with the rule, 
to permit the Options Exchanges time to develop and implement the 
Linkage Plan.\24\
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    \24\ See supra note 17.
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    The Commission has identified below certain costs and benefits of 
the proposed repeal of the Trade-Through Disclosure Rule. The 
Commission requests comment on all aspects of this cost-benefit 
analysis, including identification of additional costs or benefits of 
the proposed changes. The Commission encourages commenters to identify 
or supply any relevant data concerning the costs or benefits of the 
proposed repeal of the Trade-Through Disclosure Rule.

A. Costs

    A trade-through is costly to an investor primarily because the 
investor receives an execution at a price that is not the best price 
available. A trade-through also has potential opportunity costs for the 
broker-dealer or customer responsible for the best quote because that 
quote or customer order does not receive the execution it would have if 
the order that was executed at a price inferior to the best quote were 
instead routed to it. Consequently, intermarket trade-throughs may 
increase the incidence of unexecuted customer limit orders.
    The Commission adopted the Trade-Through Disclosure Rule to 
encourage the Options Exchanges to develop mechanisms to reduce the 
frequency of intermarket trade-throughs and to require that market 
participants disclose to customers when their orders are traded-
through. The Trade-Through Disclosure Rule provides that a broker-
dealer is not required to disclose to customers when a customer's order 
has been executed at a price inferior to a better published quote if 
the transaction is effected on an exchange that participates in a 
Commission-approved linkage plan that is reasonably designed to limit 
trade-throughs of customer

[[Page 38613]]

orders. All of the Options Exchanges are currently participants in the 
Linkage Plan; therefore, once the Linkage Plan is implemented, all 
broker-dealers effecting options transactions for their customers on 
those exchanges would be excepted from the disclosure requirements of 
the Trade-Through Disclosure Rule.
    The repeal of the Trade-Through Disclosure Rule would mean that 
there would be no regulatory obligation that a broker-dealer inform its 
customer when the customer's order is executed at a price inferior to 
the best available price. The Commission notes, however, that the 
Commission today has approved amendments to the Linkage Plan that 
establish implementation dates and restrict the ability of exchanges to 
withdraw from the Linkage Plan, which will ensure that all options 
exchanges either remain in the Linkage Plan or find an alternative 
means acceptable to the Commission to accomplish the same goals as the 
Linkage Plan of limiting intermarket trade-throughs of customer orders. 
When adopting the Trade-Through Disclosure Rule, the Commission stated 
that investors would benefit from the Trade-Through Disclosure Rule 
because they would be informed when their orders are executed at a 
price inferior to the best available price. With that information, 
investors would have the opportunity to reduce the likelihood that 
their orders would be executed at a price inferior to a price displayed 
by another market by selecting broker-dealers that effect their 
transactions on markets that are participants in an approved linkage 
plan with provisions reasonably designed to limit trade-throughs. 
However, because the Commission preliminarily believes that the 
amendments to the Linkage Plan approved today will achieve the same 
goals as the Trade-Through Disclosure Rule, the costs to the investor 
of not receiving from its broker-dealer the disclosures required by the 
Trade-Through Disclosure Rule should be minimized.
    The Commission requests comment on the costs of the repeal of the 
Trade-Through Disclosure Rule. The Commission also requests commenters' 
views on the effect on investors of the proposed repeal of the Trade-
Through Disclosure Rule.

B. Benefits

    The proposed repeal of the Trade-Through Disclosure Rule would 
eliminate the possibility that broker-dealers would incur both one-time 
and ongoing costs to comply with the Trade-Through Disclosure Rule, 
such as one-time costs to modify existing systems. For example, the 
Trade-Through Disclosure Rule would impose one-time costs on broker-
dealers that must modify systems to provide the functionality to 
determine when trade-throughs have occurred and to issue notifications 
to customers of trade-throughs.
    In addition, the Trade-Through Disclosure Rule requires broker-
dealers to incur ongoing costs associated with the rule's requirement 
that broker-dealers provide customer notifications at or before the 
completion of the transaction. Under the Trade-Through Disclosure Rule, 
a broker-dealer may provide this disclosure to its customers in 
conjunction with the confirmation statements routinely sent to 
customers. The Commission notes, however, pursuant to the Trade-Through 
Disclosure Rule, an alternative to modifying customer confirmation 
statements is for broker-dealers to route orders to exchanges 
participating in an approved linkage plan. Although the Trade-Through 
Disclosure Rule does not require the implementation of such a plan, it 
does envision that an approved plan could be implemented. Currently, 
all five of the Options Exchanges are participants in an approved 
Linkage Plan, which contains provisions reasonably designed to limit 
the incidence of intermarket trade-throughs of customer orders. 
Therefore, arguably, any benefits that could be achieved by repealing 
the Trade-Through Disclosure Rule may be achieved even if the rule is 
not repealed provided the Linkage Plan is implemented in a manner 
consistent with the amendments approved by the Commission today.

V. Consideration of the Burden on Competition, and Promotion of 
Efficiency, Competition and Capital Formation

    Exchange Act Section 3(f) requires the Commission, when engaging in 
rulemaking that requires it to consider or determine whether an action 
is necessary or appropriate in the public interest, to consider whether 
the action will promote efficiency, competition, and capital 
formation.\25\ The Trade-Through Disclosure Rule was adopted to 
encourage the Options Exchanges to develop mechanisms to reduce trade-
throughs and to require market participants to disclose to customers 
when their orders have been traded through. The Commission notes that 
the proposed repeal of the Trade-Through Disclosure Rule should enhance 
efficiency because it would eliminate a disclosure requirement for 
broker-dealers, while the Linkage Plan would benefit investors because 
it is designed to limit trade-throughs of customer orders.
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    \25\ 15 U.S.C. 78c(f).
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    In addition, Exchange Act Section 23(a) requires the Commission, 
when adopting rules under the Exchange Act, to consider the anti-
competitive effects of any rule it adopts.\26\ Because the proposed 
repeal of the Trade-Through Disclosure Rule would apply equally to all 
relevant market participants, the Commission does not believe that the 
proposal would have any anti-competitive effects. The Commission 
requests comment on any anti-competitive effects of the proposal.
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    \26\ 15 U.S.C. 78w(a).
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VI. Initial Regulatory Flexibility Analysis

    This Initial Regulatory Flexibility Analysis (``IRFA'') has been 
prepared in accordance with the Regulatory Flexibility Act.\27\ It 
relates to the proposed repeal of Exchange Act Rule 11Ac1-7.
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    \27\ 5 U.S.C. 601. Pursuant to 5 U.S.C. 603 when an agency is 
engaged in a proposed rulemaking, ``the agency shall prepare and 
make available for public comment an initial regulatory flexibility 
analysis.''
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    The proposed repeal of the Trade-Through Disclosure Rule, Rule 
11Ac1-7, would eliminate the requirement that a broker-dealer disclose 
to its customer when a trade-through has occurred unless the trade was 
effected on a market that participates in an approved linkage plan that 
includes provisions reasonably designed to limit customers' orders from 
being executed at prices that trade through better published price 
(``intermarket trade-throughs'').

A. Reasons for the Proposed Action

    The Trade-Through Disclosure Rule was implemented to provide an 
incentive to the Options Exchanges and their members to develop 
mechanisms to reduce the frequency of intermarket trade-throughs and to 
inform customers of trade-throughs. Because the Options Exchanges have 
proposed to amend the Linkage Plan to restrict the ability of exchanges 
to withdraw from the Linkage Plan, absent an alternative means 
acceptable to the Commission by which the exchange can achieve the same 
goals as the Linkage Plan of limiting intermarket trade-throughs, the 
Commission preliminarily believes that the Trade-Through Disclosure 
Rule is no longer necessary.

B. Objectives and Legal Basis

    As noted above, the proposed repeal of the Trade-Through Disclosure 
Rule is

[[Page 38614]]

intended to eliminate the requirement that broker-dealers disclose to 
their customers when a customer's order for listed options has been 
executed at a price inferior to a better published quote.
    The Commission is proposing to repeal the Trade-Through Disclosure 
Rule under the authority set forth in Exchange Act Sections 3(b), 15, 
11A, 17, and 23(a).

C. Small Entities Subject to the Rules

    Commission rules generally define a broker-dealer as a small entity 
for purposes of the Exchange Act and the Regulatory Flexibility Act if 
the broker-dealer had a total capital (net worth plus subordinated 
liabilities) of less than $500,000 on the date in the prior fiscal year 
as of which its audited financial statements were prepared, and it is 
not affiliated with any person (other than a natural person) that is 
not a small entity.\28\ The Commission estimates that as of December 
31, 2000, approximately 900 Commission-registered broker-dealers were 
small entities under the Regulatory Flexibility Act.\29\ However, the 
Commission estimates that none of the 900 registered broker-dealers 
that would be considered small entities for purposes of the statute 
regularly represent options orders on behalf of their customers. As of 
December 31, 2000, data indicates that only one broker-dealer that was 
a small entity was an options specialist or market maker.
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    \28\ 17 CFR 240.0-10(c).
    \29\ The Commission's estimate of 900 small entities includes 
all of the registered broker-dealers that do not have relationships 
with clearing firms.
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    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, the Commission is also requesting information regarding 
the potential impact of the proposed repeal of the Trade-Through 
Disclosure Rule on the economy on an annual basis. Commenters should 
provide empirical data to support their views.

D. Reporting, Recordkeeping, and other Compliance Requirements

    The Trade-Through Disclosure Rule requires a broker-dealer to 
disclose to its customer when its order has been executed at a price 
inferior to a published price on another exchange, unless the options 
trade is executed on an exchange that participates in an approved 
linkage plan that has rules reasonably designed to limit intermarket 
trade-throughs. The proposed repeal of the Trade-Through Disclosure 
Rule would eliminate this requirement.

E. Duplicative, Overlapping, or Conflicting Federal Rules

    The Commission believes there are no rules that duplicate, overlap, 
or conflict with the proposed repeal of the Trade-Through Disclosure 
Rule.

F. Significant Alternatives

    The Regulatory Flexibility Act directs the Commission to consider 
significant alternatives that would accomplish the stated objective, 
while minimizing any significant adverse impact on small entity 
issuers. In connection with the proposed repeal of the Trade-Through 
Disclosure Rule, the Commission considered the application of the 
proposed repeal of the Trade-Through Disclosure Rule to small entities.
    The Commission believes that the application of the proposed repeal 
of the Trade-Through Disclosure Rule to small entities would achieve 
the primary goal of limiting trade-throughs or providing information to 
customers when their orders are traded-through.

G. Solicitation of Comments

    The Commission encourages the submission of comments with respect 
to any aspect of this IRFA. In particular, the Commission requests 
comments regarding: (1) The number of small entities that may be 
affected by the proposed repeal of the Trade-Through Disclosure Rule; 
(2) the existence or nature of the potential impact of the proposed 
repeal of the Trade-Through Disclosure Rule on small entities discussed 
in the analysis; and (3) how to quantify the impact of the proposed 
repeal of the Trade-Through Disclosure Rule. Commenters are asked to 
describe the nature of any impact and provide empirical data supporting 
the extent of the impact. Such comments will be considered in the 
preparation of the Final Regulatory Flexibility Analysis, if the 
proposed rules are adopted, and will be placed in the same public file 
as comments on the proposed repeal of the Trade-Through Disclosure 
Rule.

VII. Statutory Authority

    We are proposing to repeal the Trade-Through Disclosure Rule 
pursuant to our authority under Exchange Act Sections 3(b), 15, 11A, 
17, and 23(a).

List of Subjects in 17 CFR Part 240

    Brokers, Brokers-dealers, Fraud, Issuers, Reporting and 
recordkeeping requirements, Securities.

    For the reasons set out in the preamble, Title 17, Chapter II of 
the Code of Federal Regulations is proposed to be amended as set forth 
below.

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *


Sec. 240.11Ac1-7  [Removed]

    2. Section 240.11Ac1-7 is removed.

    Dated: May 30, 2002.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-14010 Filed 6-4-02; 8:45 am]
BILLING CODE 8010-01-P