Release No. 34-7465

November 23, 1964 

Exchange Act Release No. 7465, Adoption of Reg. §240.11b-1.

On September 24, 1964, in Securities Exchange Act Release No. 7432, the Securities and Exchange Commission announced that it had under consideration a proposal to adopt a rule under the Securities Exchange Act of 1934 ("Exchange Act") regulating the conduct of specialists on national securities exchanges.  The background of the proposal is discussed in that release.

The Commission has considered the comments and suggestions received on the proposal and has adopted Rule 11b-1 in the form stated below, effective January 4, 1965.

Summary of Rule 11b-1

Specialists are exchange members who "specialize" in particular securities traded on the floor of an exchange.  They act as brokers, executing orders entrusted to them by other brokers on behalf of the latter's customers, and they also purchase or sell securities as principal for their own account (dealer transactions) to assist in the maintenance of a fair and orderly market in the securities in which they specialize.

Paragraph (a)(1) of Rule 11b-1 provides that national securities exchanges may register members as specialists and permit them to act as dealers.  Under Paragraph (a)(2), if an exchange permits its specialists to act as dealers, the rules of such an exchange must meet certain standards.  The rules must include adequate minimum capital requirements; a requirement that a specialist affirmatively engage in a course of dealings for his own account to assist in the maintenance, so far as practicable, of a fair and orderly market; restrictions limiting a specialist's dealer transactions to those reasonably necessary to permit him to maintain a fair and orderly market; provisions setting forth the brokerage responsibilities of a specialist; and procedures which will provide for effective and systematic surveillance of the activities of specialists.

Paragraph (a)(3) of Rule 11b-1 requires exchanges not exempted from the rule to file with the Commission copies of their rules in the areas covered by Paragraph (a)(2), and provides that the Commission may disapprove any change or addition to such rules in accordance with the procedure prescribed in Paragraph (a)(3) of the rule.  Under this procedure, the Commission must give an exchange written notice, within 30 days after filing, of its intention t determine whether or not a change or addition in its specialist rules should be disapproved.  The exchange proposing such a change or addition has 60 days thereafter to present evidence or argument and the Commission may, after consideration of all relevant material presented in writing or at a hearing, enter an order disapproving such change or addition if it finds that it is inadequate to achieve the purposes set forth in Paragraph (a)(2) of the rule or is inconsistent with the public interest or the protection of investors.

Paragraph (b) of Rule 11b-1 permits the Commission to institute proceedings, under certain circumstances, to require an exchange to cancel or suspend a specialist's registration in one or more of his specialty securities if he engages in transactions which are not part of a course of dealings reasonably necessary to permit him to maintain a fair and orderly market or to act as an odd-lot dealer in such securities.

Paragraph (c) of Rule 11b-1 defines the term "rules" of an exchange broadly to include its constitution, articles of incorporation, by-laws, or rules or instruments corresponding thereto, and its stated policies.  Paragraph (d) of the rule provides for an exemption from the various provisions of the rule for national securities exchanges complying with the provisions of Section 11(c) of the Exchange Act.

Purpose of Rule 11b-1

Section 11(a) of the Exchange Act authorizes the Commission to prescribe such rules and regulations as it deems necessary or appropriate in the public interest or for the protection of investors to regulate or prevent transactions on the floor of an exchange by members for their own account.  That section also permits the Commission to make exceptions from such rules for transactions by specialists which meet the standards contained in Section 11(b).  Under the latter section, if a specialist is permitted by rules and regulations of the Commission to act as a dealer, such rules and regulations "shall restrict his dealings so far as practicable to those reasonably necessary to permit him to maintain a fair and orderly market."  Rule 11b-1, as complemented by the rules of the exchanges, will provide a comprehensive system for the regulation of specialists in compliance with this statutory mandate.

 Securities Exchange Act Release No. 7432 describes a series of changes in the rules, policies and procedures of the New York and American Stock Exchanges governing specialists that will take effect concurrently with the effectiveness of Rule 11b-1.  As detailed in Release No. 7432, these changes in exchange rules are designed to improve the dealer performance of specialists, to ameliorate various problems arising because the specialist is permitted to exercise the functions of both broker and dealer, and to provide for more effective surveillance of specialists' activities.  The Commission expects that the rules, policies and procedures of the New York Stock Exchange and the American Stock Exchange, as so modified and expanded, will meet the standards described in Paragraph (a)(2) of Rule 11b-1.

Rule 11b-1 and the changes in the rules, policies and procedures of the New York and American Stock Exchanges governing specialists have been developed upon the basis of an intensive study of the specialists system made by the Commission's Special Study of Securities Markets ¹ and in subsequent discussion between the Commission and the respective exchanges on the Special Study recommendations.  The Commission believes that these measures constitute an effective basis for the regulation and surveillance of specialist activities on the New York and American Stock Exchanges.  However, the effectiveness of these measures depends in great part upon the manner in which the exchanges exercise their self-regulatory responsibilities.  If experience indicates that the regulatory approach incorporated in Rule 11b-1 is unworkable or should be modified, the Commission is not precluded from exercising its broad rule-making power under Section 11(b) and will make such regulatory changes as may be necessary or desirable.

In accordance with the provisions of Paragraph (d) of Rule 11b-1, the Commission proposes to exempt the following national securities exchanges having specialist systems from the provisions of Rule 11b-1:  Boston Stock Exchange, Cincinnati Stock Exchange, Detroit Stock Exchange, Midwest Stock Exchange, National Stock Exchange, Pacific Coast Stock Exchange, Philadelphia--Baltimore--Washington Stock Exchange and Pittsburgh Stock Exchange.  The exemption is based upon the limited volume of transactions on these exchanges and the fact that the Commission has not made any studies of the structure of regional exchange specialist systems.

Statutory Basis

[Text of rule admitted]

By the Commission.

¹  See Report of the Special Study of Securities Markets, Pt. 2, pp. 57-171.