April 4, 2001



Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609

Re: File No. S7-03-01
SEC Release No. 34-43860
Proposed SEC Rule 19b-6

Dear Mr. Katz:

We comment here upon proposed SEC Rule 19b-6, described in SEC Release 34-43860 (Jan. 19, 2001), contained in SEC File No. S7-03-01 (the "Release"). Citations to the Release within this letter refer to the 34-page version of it which appears on the SEC's website.

Preliminary Observations

By abbreviating or eliminating the public comment process for most categories of SRO rules, the Commission would not "foster investor protection," as the Release assumes, at p. 2. In exchange for the competitive benefits theoretically to be achieved by allowing exchanges to adopt rules 30 days sooner, the SEC would deprive itself of the potential prior input about such rules from knowledgeable persons in the brokerage industry, the investing public, the competing SROs and even the SEC's own staff.

Among the rules of greatest importance to the public interest is the category of regulation which the Release calls the "trading rules." Included in this category are rules on the "use of or access to an order entry, routing, or execution system; memberproprietary trading; display of quotations; market maker activities; trading units; order types; odd lot differentials; priority of orders, bids and offers, but not handling of customer orders, including limit orders . . . disagreements on executions; obligations of specialists to maintain fair and orderly markets . . . and trading activities of specialists and lead market makers." Release at p. 6. The Release assumes this to be a list of technical regulations of little or no significance to the investing public at large. But to some of our clients, who are public investors, and to a large segment of the general public, these rules are the most important classification of all, especially those relating to the firmness of quotations on the SROs' automatic trading and quotation systems.

The Release assumes that by abbreviating or eliminating the public comment process, along with the attendant 30-day comment period, the SEC would improve the competitiveness of the SROs in relation to the Alternative Trading Systems ("ATSs"), "in order to accommodate changes in the marketplace and the need of SROs for greater certainty." Release at p. 3. In reality, the reduction of SEC and public scrutiny over SRO rule proposals would make the SROs less competitive. Fairer, better regulated markets are more reliable to the investing public, and therefore more competitive, than those of an SRO whose rules could be changed with the stroke of a pen.

The Release seems to confuse, (a) the possible competitive impact of a 30-day comment period, with (b) the competitive impact of the rules themselves. When an SRO has kept a rule in effect for many years, another 30 days would never be a competitive hardship. Most SROs take far longer than 30 days just to develop a rule, and as the SEC's Release notes in some detail, there have been "past problems with SROs submitting unclear and internally inconsistent rule filings." Release at p. 4. In short, the 30-day public review process is extremely brief in comparison to the much longer process which takes place within the SRO itself.

By suggesting that the SROs should include with their filings "written comments received by the SRO," the Release seems to assume that all SROs make a habit of widely canvassing for public comments, and that they effectively collect them. On the contrary, there is no unified database whereby rule proposals by the SROs are conveniently assembled for comment. Nor is there any statutory requirement for SROs to collect such comments, nor any statutory period for the solicitation of comments. Even the most assiduous commentator could not monitor daily the websites of many different SROs even to know what rule changes were under consideration, in contrast to the present system whereby SRO rule proposals are published in the readily accessible Federal Register, with a clear invitation for public comments and the assurance that such comments will at least be considered.

SEC Request for Specific Comment

At p. 7 of the Release, the Commission proposes three issues for specific comment. Those are set forth below, followed by our comments.

1. Is the definition of a trading rule appropriate? Is it over-inclusive or under-inclusive?

The definition is inappropriate, because the category of "trading rule" - which the Release seems to construe as purely mechanical and of negligible public interest - touches upon areas which are vital to the public interest, as discussed above.

To a trading participant who is not a member of an SRO, there is no aspect of the marketplace which is more important than whether an order submitted by a member of the public will be treated fairly, or whether the published bids and offers of SRO market makers will be honored, or whether completed trades will be broken. Nor is there any area of regulation more susceptible to abuse of the public trust than the class of "trading rules."

2. Should proposed rule changes that are considered non-controversial or that govern trading rules become operative immediately or should the operative date be suspended for sixty-days to allow the Commission to abrogate those proposed rule changes without disrupting the operation of the SROs?

The category of the "non-controversial" rule is of questionable validity. Without submitting a rule proposal for public comment, the SEC cannot reliably determine whether or not it is controversial. Controversy is a product of public comment, and the potential gap in perceptions about potential controversy is evident, within the Release itself, at pp. 5-6, wherein the SEC proposes automatic effectiveness for the entire category of so-called "trading rules."

Should the SEC determine, however, to recognize so-called "non-controversial" rules as a category of SRO rules which may be adopted without public comment, the Commission should preserve at least that vestigial public protection inherent in the proposed 60-day abrogation period.

3. What other types of proposed rule changes should the Commission consider making eligible for immediate effectiveness? For example, should it include listing standards, new products, or position limits? Would investors and market participants continue to be adequately protected if other types of rule changes were included?

At least one of the regulatory areas which the Release assumes to be of routine mechanical significance, that of "Trading Rules," is of great importance to some of our clients. We could well imagine that other regulatory categories would be of equal sensitivity to persons in other sectors of the public and of the securities industry.

The SEC should not categorically exclude from public comment an entire class of rule-making. If done at all, this should be handled on a case-by-case basis. Public comment should be invited whenever possible, and there should be a strong presumption against its elimination. We would suggest that if an SRO seeks to shorten or eliminate the period for public comment, it should bear the burden of proving, to the satisfaction of the Commission, that the SRO has effectively sought public comments (which the SEC should review), and that there is a special need for expedited treatment, subject to a 60-day abrogation period.


Proposed SEC Rule 19b-6 would disfavor the public interest, and would weaken the mechanisms of SEC oversight. The proposed should be rejected, or at least modified along the lines suggested above.

Respectfully submitted,

George Brunelle