Release No. 34-17574

February 25, 1981

Regulation of Specialists

ACTION: Final rules.

SUMMARY: The Commission is amending Rule 11b-1 under the Securities Exchange Act of 1934 to eliminate duplicative requirements with respect to exchange rule changes relating to specialists and to clarify its application to options as well as stock specialists.

EFFECTIVE DATE: March 31, 1981.

FOR FURTHER INFORMATION CONTACT: Susan M. Wilk, Esq., Division of Market Regulation, Securities and Exchange Commission, Room 338, 500 North Capitol Street, Washington, D.C. 20549 (202) 272-2841.

SUPPLEMENTARY INFORMATION: Rule 11b-1 17 CFR 240.11b-1, adopted by the Commission in November 1964, ¹ pursuant to Section 11(b) of the Securities Exchange Act ("Act"), ² provides for the registration of specialists on national securities exchanges and prescribes certain minimum requirements concerning their regulation. Subsections (a)(1) of the rule, which the Commission is amending, and (a)(3) which the Commission is deleting, require that national securities exchanges file copies of their rules and rule changes relating to specialists with the Commission and set forth procedures for the Commission to follow in disapproving such rules or rule changes. As these procedures currently are prescribed by Section 19(b) of the Act, 15 U.S.C. 78(b), and by Rule 19b-4 17 CFR 240.19b-4 thereunder, such provisions are unnecessary in Rule 11b-1. Thus, the Commission is deleting those provisions.

Subsections (a)(2)(iv) and (b) of the rule, which the Commission is amending, currently refer to the responsibilities of a specialist with respect to the "stock or stocks" in which he is registered, while all other references in the rule are to "securities" activities. The Commission has determined to adopt a technical amendment to Rule 11b-1 which changes the terms "stock or stocks" to "securities" to clarify the applicability of the rule to options specialists ³ on all national securities exchanges. ⁴ This has been the Commissions long-standing interpretation of Rule 11b-1, and the use of the word "securities" will accurately reflect this interpretation and will resolve any existing ambiguity as to the applicability of the rule to options exchanges.

The amendment has been adopted without comment pursuant to Section 553(b) of the Administrative Procedure Act ("APA"). ⁵ The Commission has determined that good cause exists for an exception from the publication requirements of the APA in that the amendments are technical amendments to existing rules and are adopted to eliminate unnecessary provisions and to clarify the existing interpretation by the Commission that options specialists come within the scope of the rule. As the amendments will not alter the existing regulatory framework, nor impose any burdens upon the regulated parties, the Commission has determined that a comment period is unnecessary. Therefore, the amendments qualify for an exception and may be adopted in final form without being proposed for comment.

For the reasons stated above, the Commission finds that the proposed amendment is appropriate in the public interest, for the protection of investors, and otherwise in furtherance of the purposes of the Act. Accordingly, the Commission, acting pursuant to its authority under Section 23(a)(1) of the Act, ⁶ hereby amends Part 240 of Chapter II of Title 17 of the Code of Federal Regulations by revising paragraphs (a)(1) and (a)(2)(iv), deleting paragraph (a)(3), and revising paragraph (b) of §240.11b-1 as follows:

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

§240.11b-1 Regulation of specialists.

(a)(1) The rules of a national securities exchange may permit a member of such exchange to register as a specialist and to act as a dealer.

(2) * * *

(iv) Provisions stating the responsibilities of a specialist acting as a broker in securities in which he is registered; and

(v) * * *

(b) If after appropriate notice and opportunity for hearing the Commission finds that a member of a national securities exchange registered with such exchange as a specialist in specified securities has, for any account in which he, his member organization, or any participant therein has any beneficial interest, direct or indirect, effected transactions in such securities which were not part of a course of dealings reasonably necessary to permit such specialist to maintain a fair and orderly market, or to act as an odd-lot dealer, in the securities in which he is registered and were not effected in a manner consistent with the rules adopted by such exchange pursuant to paragraph (a)(2)(iii) of this section, the Commission may by order direct such exchange to cancel, or to suspend for such period as the Commission may determine, such specialists registration in one or more of the securities in which such specialist is registered: Provided, however, If such exchange has itself suspended or cancelled such specialists registration in one or more of the securities in which such specialist is registered, no further sanction shall be imposed pursuant to this paragraph (b) except in a case where the Commission finds substantial or continued misconduct by a specialist; And provided, further, That the provisions of this paragraph (b) shall not apply to a member of a national securities exchange exempted pursuant to the provisions of paragraph (d) of this section.

* * * * *

By the Commission.

²15 U.S.C. 78k(b).

³The term "specialist" also includes any market maker deemed to be or treated as a specialist for purposes of the Act by an exchange.

⁴Rule 11b-1 was adopted in 1964, nine years before options were permitted to be traded on a national securities exchange. Accordingly, while certain national securities exchanges, including the Philadelphia and Pacific Stock Exchanges, were exempted from its provisions at that time, the Commission did not intend and has never interpreted these exemptions to extend to the options programs of these national securities exchanges. In this regard, no national securities exchange has made an application pursuant to Section 11(c) of the Act to exempt its options program from the requirements of Rule 11b-1, nor is the Commission currently inclined to grant such an application. In any event, all of the options exchanges currently have rules designed to comply with the requirements of Rule 11b-1.

⁵5 U.S.C. 551 et seq. Section 553(b) provides that an agency must publish general notice of proposed rule making in the Federal Register, unless at least one of two possible exemptions is available. The exceptions extend to: (1) "interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice;" and (2) situations "when the agency for good cause finds... that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest."

⁶15 U.S.C. 78w(a)(1).