[Federal Register Volume 59, Number 92 (Friday, May 13, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-11702]


[[Page Unknown]]

[Federal Register: May 13, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34026; File No. SR-PSE-94-3]

 

Self-Regulatory Organizations; Filing of Proposed Rule Change by 
the Pacific Stock Exchange, Inc. Relating to Its Capital Requirements 
for Equity Specialists

May 9, 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 January 
14, 1994, 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. On March 
8, 1994, the PSE submitted to the Commission Amendment No. 1 to the 
proposed rule change.\1\ On April 1, 1994, the PSE submitted to the 
Commission Amendment No. 2 to the proposed rule change.\2\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\See letter from Michael D. Pierson, Senior Attorney, Market 
Regulation, PSE, to Louis A. Randazzo, Attorney, Office of 
Derivative and Exchange Oversight, SEC, dated March 4, 1994. 
Amendment No. 1 made various clarifying amendments to the proposed 
rule change.
    \2\See letter from Michael D. Pierson, Senior Attorney, Market 
Regulation, PSE, to Louis A. Randazzo, Attorney, Office of 
Derivative and Exchange Oversight, SEC, dated March 28, 1994. 
Amendment No. 2 made further clarifying amendments to the proposed 
rule change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PSE proposes to amend its rules relating to the capital 
requirements for specialists. The proposal states that if an Exchange 
specialist firm is subject to the Aggregate Indebtedness Requirement 
Under Rule 15c3-1,\3\ such firm must maintain a minimum net capital of 
not less than $200,000.\4\ The proposal establishes a lesser minimum 
net capital requirement for broker-dealers in specialist posts that are 
backed by more than one broker-dealer. Finally, the Exchange is 
proposing to amend its rules in response to recent amendments adopted 
by the Commission to its net capital rules for Exchange specialists.\5\
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    \3\The Aggregate Indebtedness Standard under Rule 15c3-1 states 
that no broker or dealer, other than one that elects the Alternative 
Standard, shall permit its aggregate indebtedness to all other 
persons to exceed 1500 percent of its net capital (or 800 percent of 
its net capital for 12 months after commencing business as a broker 
or dealer). See 17 CFR 240.15c3-1(a)(1)(i) (1993).
    \4\The term ``net capital'', as used in the PSE proposal, means 
net capital as defined by Commission Rule 15c3-1. Rule 15c3-1 
defines net capital as the net worth of a broker or dealer, adjusted 
by certain adjustments prescribed in Rule 15c3-1. See 17 CFR 
240.15c3-1(c)(2) (1993).
    \5\According to proposed PSE Rule 2.1, Commentary .03, the 
proposed amendments to Rules 2.1(b) and (c) will become effective on 
July 1, 1994. See Amendment No. 1, supra note 1.
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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 governing 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 in 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
    Pursuant to recent amendments to Commission Rule 15c3-1,\6\ on 
April 1, 1994, the Exchange's equity specialists became subject to the 
Commission's net capital rule.\7\ Accordingly, the Exchange is 
proposing to amend its rules to reflect the elimination of exemption 
from that Rule.\8\ The Exchange is also proposing to establish an 
additional requirement that its equity specialist firms that are 
subject to the Aggregate Indebtedness Requirement under Rule 15c3-1 
must maintain a minimum net capital of $200,000. Equity specialist 
firms subject to the Alternative Net Capital Requirement would be 
required to comply with subsection (a)(1)(ii) of Rule 15c3-1.\9\ The 
Exchange is also proposing further amendments to clarify these new 
requirements and to establish related procedures for specialist firms 
whose net capital falls below certain levels. The Exchange believes 
that the proposed amendments are appropriate to assure that the 
customers and creditors of its equity specialists are protected from 
monetary losses and delays in the event of a specialist's failure.
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    \6\17 CFR 240.15c3-1 (1993).
    \7\See Securities Exchange Act Release No. 32737 (August 11, 
1993), 58 FR 43555 (August 17, 1993).
    \8\On August 11, 1993, the Commission amended Rule 15c3-1, in 
part, to make the Commission's net capital rule applicable to 
certain specialists that are currently exempt from the rule (the 
amended Rule makes the Commission's net capital rule applicable to 
all specialists other than options market makers). See Securities 
Exchange Act Release No. 32737, supra note 7.
    \9\As of April 1, 1994, the Commission's net capital rule 
requires the Exchange's equity specialists to maintain net capital, 
under the aggregate indebtedness method, equal to a minimum of 
$100,000 ($75,000 until June 30, 1994) and, under the alternative 
method, equal to a minimum of $250,000 ($200,000 until July 1, 
1994). See Securities Exchange Act Release No. 32737, supra note 7. 
Rule 15c3-1(a)(1)(ii) contains the Alternative Standard, which 
states in part, that a broker or dealer shall not permit its net 
capital to be less than the greater of $250,000 or 2 percent of 
aggregate debit items computed in accordance with Exhibit A to Rule 
15c3-3. See 17 CFR 240.15c3-1(a)(1)(ii) (1993).
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    (a) Elimination of specialist exemption. The Exchange is proposing 
to amend PSE Rule 1.8(a), which currently identifies the following 
members as exempt from the Exchange's net capital rule: any floor 
broker, market maker in listed options, or specialist, registered with 
the Exchange in any such capacity, who is exempt from the minimum net 
capital requirements prescribed by Rule 2.1 (Capital Requirements). The 
Exchange is proposing to delete ``specialists'' from this list and to 
add ``lead market makers in listed options'' to the list.\10\ This 
amendment is intended to make the Exchange's rules conform to the 
recent amendments to the Commission's net capital rule.\11\
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    \10\In the Commission's release adopting amendments to Rule 
15c3-1 (the net capital rule), the Commission stated that it does 
not believe that it is necessary to apply the net capital rule to 
options market makers because, on an individual basis, they are not 
as integral to the proper functioning of the markets in their 
securities. The release further states that specialists other than 
options market makers perform several functions that options market 
makers do not, including the maintenance of a specialist's book 
containing a listing of all orders away from the current market 
price and the dissemination of accurate quotations in their 
speciality securities. Moreover, the exchanges that use options 
specialists look to a single specialist or specialist unit to handle 
all trade whereas options market makers compete with other market 
makers. See Securities Exchange Act Release No. 32737, supra note 7. 
Options lead market makers on the Exchange floor compete with other 
market makers for orders and do not maintain a specialist book 
containing a list of all orders away from the current market price. 
Accordingly, the Exchange believes that options lead market makers 
should be treated as options market makers that are exempt from 
Commission Rule 15c3-1 and therefore, have been exempted from the 
Exchange capital regulations.
    \11\The proposal also adds Commentary .04 to Rule 2.1, which 
states that members exempt from the provisions of subsections (b), 
(c) and (d) of Rule 2.1 are set forth in Rule 2.8(a).
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    (b) Specialist subject to aggregate indebtedness requirement. The 
Exchange is proposing to adopt a rule that, notwithstanding the 
requirements of the Commission's net capital rule, would require each 
of its specialist firms that are subject to the Aggregate Indebtedness 
Requirement of Rule 15c3-1 to maintain a minimum net capital of not 
less than $200,000. The proposed rule further provides that if at any 
time a specialist firm's net capital falls below $200,000, such firm 
shall promptly notify the Financial Compliance Department of the 
Exchange and, in addition, such firm shall not operate as a specialist 
with net capital of between $150,000 and $199,999 for more than 60 days 
unless such firm (a) obtains from the Vice President, Regulation, or a 
senior officer of the Exchange written consent to continue to operate 
as a specialist; and (b) takes corrective action including, but not 
limited to, actively seeking financing to correct its net capital 
deficiency.\12\
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    \12\Pursuant to amendments to the Commission's net capital rule, 
effective April 1, 1994, Exchange equity specialists became subject 
to the Commission's net capital rule. See Securities Exchange Act 
Release No. 32737, supra note 7. As a result, Exchange equity 
specialists are required to comply generally with the provisions of 
the Commission's early warning notification procedures as codified 
in Section 17a-11 under the Act.
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    The proposal further provides that if such a specialist firm's net 
capital falls below $150,000, such firm shall be subject to remedial 
action including, but not limited to, the loss of specialist 
privileges.
    With regard to joint accounts, the proposal provides that if a 
specialist post is backed by more than one broker-dealer, then each 
such broker-dealer subject to the Aggregate Indebtedness Requirement of 
Rule 15c3-1 must maintain a minimum net capital of $150,000. If at any 
time such a broker-dealer's net capital falls below $150,000, such 
broker-dealer shall promptly notify the Financial Compliance Department 
of the Exchange and, in addition, such broker-dealer shall not operate 
as a specialist with net capital between $120,000 and $149,999 for more 
than 60 days unless such firm (a) obtains from the Vice President, 
Regulation, or a senior officer of the Exchange written consent to 
continue to operated as a specialist; and (b) takes corrective action 
including, but not limited to, actively seeking financing to correct 
its net capital deficiency. In addition, if such broker-dealer's net 
capital falls below $120,000, such broker-dealer shall be subject to 
remedial action including, but not limited to, the loss of specialist 
privileges.
    (c) Specialists subject to the alternative net capital 
requirements. The Exchange is proposing to provide in its rules that 
specialist firms subject to the Alternative Net Capital Requirement 
must comply with the requirements of Rule 15c3-1(a)(1)(ii). The 
Exchange is further proposing to state that if a specialist post is 
backed by more than one broker-dealer then each such broker-dealer that 
is subject to the Alternative Net Capital Requirement must comply with 
the requirements of Rule 15c3-1(a)(1)(ii).
    (d) Other proposed changes. The Exchange is proposing to make the 
following additional changes to its rules on capital requirements for 
specialists: First, the Exchange is proposing to clarify its rules by 
providing in Rule 2.1 that the new net capital requirements will be in 
addition to the Specialist Post Capital requirement of Rule 2.2.\13\ 
Second, the proposal provides that the Exchange shall promptly notify 
the Equity Floor Trading Committee of any specialist firm's net capital 
deficiency and of any action taken by the Vice President, Regulation, 
or senior officer of the Exchange in connection therewith. Third, the 
proposal further provides that each specialist firm shall report its 
net capital to the Exchange in a form and manner prescribed by the 
Exchange.\14\
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    \13\Rule 2.2 provides, in part, that members registered as 
specialists shall at all times maintain for each specialist post a 
minimum of $150,000 in either cash or marketable securities or an 
amount equal to 25% of the sum of the market value of its securities 
positions, both long and short, whichever is greater.
    \14\The proposal also adds clarifying language to Rule 2.1(a), 
which states, among other things, that pursuant to the provisions of 
Rule 17a-11 under the Act, each member organization shall promptly 
notify the Commission if the member organization's net capital does 
not equal or exceed the appropriate minimum required by SEC Rule 
15c3-1 or if notice is otherwise required by SEC Rule 17a-11.
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(2) Statutory Basis
    The Exchange believes that 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 promotes just and equitable principles of trade 
and protects investor 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 other 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 Room, 450 Fifth Street, NW, Washington DC 
20549. Copies of the 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-94-3 and should be submitted by June 3, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-11702 Filed 5-12-94; 8:45 am]
BILLING CODE 8010-01-M