[Federal Register: June 5, 2002 (Volume 67, Number 108)]
[Notices]               
[Page 38689-38690]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05jn02-71]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46003; File No. S7-17-00]

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

May 30, 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\
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    \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'').
    \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).
    \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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    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 effecting transactions on options exchanges that participate in 
the Linkage Plan would be excepted from the disclosure requirements of 
the Trade-Through Disclosure Rule.
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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).
    \5\ 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 must 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).
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    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 Options Exchanges have informed the 
Commission that they are completing the process of evaluating their 
internal systems to determine the extent 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\
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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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    In addition, on March 27, 2002, the Commission issued an Order 
temporarily exempting for 90 days broker-dealers from compliance with 
the Trade-Through Disclosure Rule.\7\ At that time, the Commission 
stated that it would consider a further extension of the 90-day 
temporary exemption at the time it considered a proposal to repeal the 
Trade-Through Disclosure Rule, which it directed the staff to 
develop.\8\ Today, the Commission has separately proposed a repeal of 
the Trade-Through Disclosure Rule.\9\
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    \7\ Securities Exchange Act Release No. 45654 (March 27, 2002), 
67 FR 15637 (April 2, 2002).
    \8\ Id.
    \9\ Securities Exchange Act Release No. 46002 (May 30, 2002).
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    Today, the Commission also approved amendments to the Linkage Plan, 
proposed by the Options Exchanges on April 15, 2002, that 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.\10\ The amendment also 
requires the Options Exchanges to implement the linkage in two phases 
by specified dates.\11\ As a result of the Commission's approval of the 
amendments to the Linkage Plan, 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 `` has been 
accomplished.
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    \10\ Securities Exchange Act Release No. 46001 (May 30, 2002).
    \11\ Id. The first phase will 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 will begin full 
intermarket testing of the first phase by December 1, 2002, and will 
implement this phase no later than February 1, 2003. The second 
phase will comprise the remaining elements of the linkage. The 
exchanges will begin testing of this second phase by March 1, 2003, 
and will implement this phase no later than April 30, 2003.
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    The Commission, therefore, believes it is appropriate in the public 
interest and consistent with the protection of investors at this time 
to temporarily

[[Page 38690]]

exempt until January 1, 2003 broker-dealers from the requirements of 
the Trade-Through Disclosure Rule while the Commission receives and 
considers comments on the proposed repeal of the Trade-Through 
Disclosure Rule.
    Accordingly, It is ordered, pursuant to section 36 of the Act,\12\ 
that broker-dealers are exempt from compliance with the Trade-Through 
Disclosure Rule until January 1, 2003.
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    \12\ 15 U.S.C. 78mm.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-14012 Filed 6-4-02; 8:45 am]
BILLING CODE 8010-01-P