[Federal Register Volume 59, Number 52 (Thursday, March 17, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-6245]


[[Page Unknown]]

[Federal Register: March 17, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33751; File No. SR-PSE-93-36]

 

Self-Regulatory Organizations; Pacific Stock Exchange; Notice of 
Proposed Rule Change Relating to Chinese Wall Procedures for 
Specialists and Specialist Firms

March 10, 1994.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on December 
29, 1993, the Pacific Stock Exchange, Inc. (``PSE'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
items have been prepared by the self-regulatory organization. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PSE is proposing to adopt a set of Chinese Wall procedures 
relating to Exchange specialists and specialist firms. The test of the 
proposed rule change is as follows:

    Rule 4.19(a). A functional separation must be established (1) 
between a specialist firm and any associated approved person; and 
(2) between a specialist and any associated integrated member 
organization. The approved person or integrated member organization 
(collectively referred to as an ``affiliated upstairs firm'') must 
establish functional separation (a ``Chinese Wall'') as appropriate 
to its operation and further establish, maintain and enforce written 
procedures reasonably designed to prevent the misuse of material, 
non-public information, which includes review of employee and 
proprietary trading, memorization and documentation of procedures, 
substantive supervision of interdepartmental communications by the 
Exchange specialist firm's Compliance Department and procedures 
concerning proprietary trading when the firm is in possession of 
material, non-public information. The Exchange specialist firm or 
associated integrated member organization must obtain the prior 
written approval of the Exchange that it has complied with the 
requirements above in establishing functional separation as 
appropriate to the operation and that it has established proper 
compliance and audit procedures to ensure the maintenance of the 
functional separation. A copy of these Chinese Wall procedures, and 
any amendments thereto, must be filed with the Exchange's Financial 
Compliance Department.
    (b) The following are the minimum procedural and maintenance 
requirements:
    (1) The specialist's book must be kept confidential in 
accordance with Rule 5.29(d).
    (2) The affiliated upstairs firm can have no influence on 
specific specialist trading decisions.
    (3) Material, non-public corporate or market information 
obtained by the affiliated upstairs firm from the issuer may not be 
made available to the specialist.
    (4) Clearing and margin financing information regarding the 
specialist may be routed only to employees engaged in such work and 
managerial employees engaged in overseeing operations of the 
affiliated upstairs firm and specialist entities.
    (c) Information that may be made available to others.
    (1) A broker associated with an affiliated upstairs firm may 
make available to the specialist only the market information that he 
or she would make available to an unaffiliated specialist in the 
normal course of his or her trading and ``market probing'' activity.
    (2) A specialist may make known to a broker associated with an 
affiliated upstairs firm only has the information about market 
conditions in specialty stocks that he or she would make available 
in the normal course of specializing to any other broker and in the 
same manner as it would make such information available to any other 
broker. The specialist may make such market information available 
only upon request of the broker of the affiliated upstairs firm and 
may not provide such information on its own initiative.
    (3) An affiliated upstairs firm can popularize a specialty stock 
provided it makes adequate disclosure about the existence of 
possible conflicts of interest.
    (d) A specialist who becomes privy to material, non-public 
information must communicate that fact promptly to his or her firm's 
compliance officer or other designated official. The specialist 
shall seek guidance from the compliance officer or other designated 
official as to what procedures the specialist should follow after 
receipt of such information or such other action that should be 
taken. Appropriate records shall be maintained by the compliance 
officer or other designated official. The record should include a 
summary of the information received by the specialist and a 
description of the action taken by the compliance officer or other 
designated official. If the ``book'' is given up to another member 
of the specialist firm who is not in possession of the information 
or an independent specialist firm, the book must be transferred in a 
neutral fashion to ensure that the transfer itself does not disclose 
the material, non-public information and the Exchange must be 
immediately informed and a record kept of the time the specialist 
reacquired the book reflecting acknowledgement by the compliance 
officer that the reacquisition was appropriate.
    (e) The Exchange has established the following procedures to 
monitor compliance with this rule:
    (1) Examination of the Chinese Wall procedures established by 
Exchange specialist firms.
    (2) Surveillance of proprietary trades effected by an affiliated 
upstairs firm and its affiliated specialist or specialist firm.
    Accordingly, the Exchange will conduct periodic examinations of 
the specialist firm's Chinese Wall procedures to ensure that a 
functional separation between the affiliated upstairs firm and the 
specialist or specialist firm has been created and thereafter 
maintained. The Exchange will also monitor the trading activities of 
affiliated upstairs firms and affiliated specialists in the firms' 
specialty stock in order to monitor the possible trading while in 
possession of material, non-public information through the periodic 
review of trade and comparison reports generated by the Exchange,

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth is Sections A, B, and C below, of the 
most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to require approved 
persons or integrated member organizations to establish functional 
separation as appropriate to their operations and further establish, 
maintain and enforce written procedures reasonably designed to prevent 
the misuse of material, non-public information. The proposed rule 
further requires that a copy of such procedures be provided to the 
Exchange for review and approval, and sets forth specific guidelines 
for member firms to follow in adopting, maintaining and enforcing 
Chinese Wall procedures.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Act, in general, and Section 6(b)(5), in particular, in that it is 
designed to promote just and equitable principles of trade and to 
protect investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying at the 
Commission's Public Reference Section, 450 Fifth Street, NW., 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of the PSE. All 
submissions should refer to File No. SR-PSE-93-36 and should be 
submitted by April 7, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-6245 Filed 3-16-94; 8:45 am]
BILLING CODE 8010-01-M