Rule 460.10, in part, restricts a specialist or his
member organization or any other member, allied member or approved
person in such member organization or officer or employee thereof,
from engaging in:
“any business transaction (including
loans, etc.) with any company in whose stock the specialist is
registered....This prohibition on business transactions shall
not apply, however, to the receipt of routine business services,
goods, materials, or insurance, on terms that would be generally
available.”
The rule is
intended to ensure that specialists and their affiliates do not
enter into a control relationship with an issuer in whose security
the specialist is registered such that the specialist’s or
affiliate’s status may create conflicts of interest with respect to
the specialist’s affirmative and negative obligations to maintain a
fair and orderly market in the security.
Currently, Rule 460.20 provides an exemption from Rule
460.10 to an approved person entitled to a Rule 98 exemption with
respect to business transactions with issuers. The Exchange has
added an exemption in a new section, 460.25, from the restriction on
business transactions between a specialist or his member
organization or any other member, allied member or approved person
in such member organization or officer or employee thereof and the
sponsor of any Exchange Traded Funds (“ETFs”) the specialist is
registered in. For purposes of the Rule, Investment Company Units
(defined in paragraph 703.16 of the Exchange’s Listed Company
Manual), Trust Issued Receipts, such as HOLDRs, (defined in NYSE
Rule 1200), and derivative instruments based on one or more
securities, currencies or commodities are collectively referred to
as Exchange-Traded Funds or “ETFs”.
Amended Rule 460.25 rule allows business transactions
between a specialist or his member organization or any other member,
allied member or approved person in such member organization or
officer or employee thereof and the sponsor of the ETF. Generally,
the sponsor of an ETF is responsible for establishing the trust that
issues the ETF shares, the registration of the ETF shares with the
Securities and Exchange Commission and the filing of required
periodic reports. The trustee is responsible for the day-to-day
administration of the trust, including keeping the trust’s
operational records. While the Sponsor generally oversees the
performance of the trustee and the trust’s principal service
providers, it does not exercise day-to-day oversight over the
trustee or such service providers.
The amended rule provides that any fee or other
compensation paid in connection with the business transaction to a
specialist or his member organization or any other member, allied
member or approved person in such member organization or officer or
employee thereof not have any relationship to the trading price or
daily trading volume of the ETF. This will further diminish any
potential ability for a specialist or his member organization or any
other member, allied member or approved person in such member
organization or officer or employee thereof to unduly influence
trading for its own benefit and from faithfully fulfilling its
specialist obligations in maintaining fair and orderly markets. It
is also designed to prevent the ETF sponsor from unduly influencing
its specialist or his member organization or any other member,
allied member or approved person in such member organization or
officer or employee thereof.
Finally, a specialist or his member organization or any
other member, allied member or approved person in such member
organization or officer or employee thereof must notify and provide
a full description to the Exchange of any business transaction or
relationship, except those of a routine and generally available
nature as described in Rule 460.10, it may have with any sponsor of
an ETF that it is registered as specialist in.
Rule 460 as amended is attached as Exhibit A.
Questions concerning this
memorandum may be addressed to Donald Siemer, Director, Market
Surveillance, at 212-656-6940 or David Matta, Principal Rule
Counsel, Market Surveillance, at
212-656-4717.
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