[Federal Register Volume 59, Number 243 (Tuesday, December 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31209]


[[Page Unknown]]

[Federal Register: December 20, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35091; File No. SR-Phlx-94-66]

 

Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. To Adopt a Monthly Examinations Fee

December 12, 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 
2,1994, the Philadelphia Stock Exchange, Inc. (``Phlx'' 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 Phlx, pursuant to Rule 19b-4 of the Act, proposes to adopt an 
examinations fee applicable to Phlx member and participant 
organizations for which the Exchange is the Designated Examining 
Authority (``DEA''), effective January 1, 1995. The following Phlx 
member/participant organizations would be exempt from the examinations 
fee: (1) Inactive organizations; (2) organizations that operate from 
the Exchange's trading floors; (3) organizations for any month where 
they incur transaction or clearing fees charged directly to them by the 
Exchange or by its registered clearing subsidiary, provided that the 
fees exceed the examinations fee for that month;\1\ and (4) 
organizations affiliated with an organization exempt from this fee due 
to the second or third category.\2\
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    \1\The $1,000 threshold is required in order for a firm to be 
exempt from the examinations fee. For example, a firm with $600 in 
transaction fees for a month is required to pay the full amount of 
the $1,000 examinations fee. See letter from Gerald D. O'Connell, 
First Vice President, PHLX, to Glen Barrentine, Branch Chief, SEC, 
dated December 12, 1994 (``Letter'').
    \2\Affiliated firms, which are exempt if affiliated with an 
exempt organization, are permitted to aggregate their respective 
transaction fees to meet the $1,000 threshold, i.e., each firm is 
not required to meet a separate threshold. See Letter, supra note 1.
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    Affiliation includes an organization that is a wholly owned 
subsidiary of, as well as an organization controlled by or under common 
control with, an ``exempt'' member or participant organization. An 
inactive organization is one which had no securities-related 
transaction revenue, as determined by semi-annual FOCUS reports, as 
long as the organization continues to have no revenue each month.\3\ In 
order to compensate for the extensive staff time and costs associated 
with examining off-floor firms who are not active participants in Phlx 
markets, the Exchange is proposing to amend its fee schedule by 
adopting a $1,000 per month examination fee.
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    \3\A FOCUS report, Securities and Exchange Commission Form X-
17A-5, Financial and Operational Combined Uniform Single Report, is 
required by SEC Rule 17a-5 and Phlx Rule 703(c)(i).
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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 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 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
    Commission Rule 15b2-2(b) requires that broker-dealers designated 
to a self-regulatory organization (``SRO'') be examined for compliance 
with applicable financial responsibility rules within six months of 
registration with the Commission. In addition, the examining SRO must 
conduct an examination within 12 months of Commission registration to 
review compliance with all other Commission rules. Thereafter, 
examinations are conducted on a periodic basis. In accordance with 
Commission rules, the Phlx administers an examinations program 
conducting reviews of organizations for which the Exchange is the DEA. 
The examinations focus on an organization's compliance with applicable 
financial and record keeping requirements, including net capital, books 
and record maintenance, Regulation T and financial reporting, of the 
Phlx as well as the Commission.
    The Examinations Department incurs certain costs in the course of 
conducting these examinations, including travel and staff costs. Of 
course, such costs rise when the offices of the organization being 
reviewed are located outside of the Philadelphia area. Staff time 
required to conduct an examination is substantially longer when the 
businesses of the firm are atypical of those firms for which the Phlx 
has historically served as DEA. Because of the familiarity that 
inherently results from repeatedly conducting similar examinations, 
Phlx Examinations staff has accumulated substantial experience 
regarding where to focus and locate information revealing potential 
areas of concern.
    However, the Exchange is currently the DEA for approximately one 
dozen firms that engage in Phlx-atypical businesses from remote 
locations. The Phlx is the DEA for firms located in other geographic 
regions, which do not transact business on the Exchange, and trade 
products not available on the Phlx. For instance, a Chicago-based firm 
conducting proprietary trades in government securities and a 
Connecticut-based firm engaged in convertible debt securities arbitrage 
are examples of atypical Phlx firms. The heightened costs, which 
include both money as well as valuable staff time, may be due to an 
atypically lengthy examination, travel and specific training regarding 
non-Phlx trading instruments.
    In addition to actual costs incurred in conducting required 
examinations, the Exchange notes that, as the DEA for a firm, the Phlx, 
similar to other SROs, also frequently performs an advisory role 
respecting the regulatory obligations of its member/participant firms. 
This ``service'' function may take the form of answering telephone 
calls and other questions of such firms regarding Exchange and 
Commission rules, as well as the types of procedures such firm should 
have in place. Initially, becoming a member/participant firm of the 
Phlx, the Exchange assists in the firm's set-up of its financials and 
communicates with the firm, providing sample forms and general 
guidance. Thereafter, a firm may require periodic follow-up advice. 
These advisory costs to the Exchange of serving as the DEA are greater 
for the Phlx-atypical firms.
    However, these heightened costs may be offset by transaction 
charges and related revenues received by the Exchange if such firms 
trade in Phlx markets. In reviewing these costs, the Exchange notes 
that Phlx member/participant organizations may be required to pay 
various fees and transaction charges, which usually constitute a large 
part of the revenue collected by the Exchange. Organization not trading 
on the Phlx escape these fees, while the Exchange remains obligated to 
administer various regulatory functions, including costlier 
examinations. In the area of examinations, the factor of staff time is 
particularly pronounced.
    In some cases, these firms do not engage in business on the Phlx, 
and, consequently, the heightened costs are not offset by revenues 
derived from these firms. Without this income source, the Exchange has 
determined to adopt an examinations fee in order to alleviate certain 
costs of conducting examinations. Currently, the Phlx does not charge 
an examinations or DEA fee, noting, in contrast, that most other SROs 
in the U.S. impose direct examinations fees.\4\ For the above reasons, 
therefore, the Phlx is proposing such a fee for those organizations for 
which it serves as DEA--with certain exceptions. The proposed 
examinations fee would apply primarily to those member and participant 
organizations which do not execute trades on the Phlx.
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    \4\The Chicago Board Options Exchange imposes a fee equal to 
$.40 per $1,000 in gross revenues. Other exchanges similarly impose 
revenue-based examinations fees.
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    In order to fairly allocate the proposed examinations fee, the 
Exchange has determined to exempt those member and participant 
organizations that actively trade on the Exchange, thereby 
counterbalancing examination costs with transaction fees. Organizations 
that for any month incur transaction or clearing fees charged directly 
to them by the Exchange or by its registered clearing subsidiary would 
be exempt from the fee, provided that the fees exceed the examinations 
fee for that month. Inactive organizations would be exempt because 
examinations are not customarily conducted for such organizations. 
Compliance with the inactive status will be determined by gross 
securities-related transaction revenues reported on the organization's 
most recent semi-annual FOCUS report. In addition, the organization 
must continue to lack such revenues, as determined monthly, in order to 
be exempt from the examinations fee.
    Similarly, a member or participant organization that is wholly 
owned by, controlled by, or under common control with an organization 
operating from the Phlx trading floor or generating counterbalancing 
Phlx transaction or clearing fees would be exempt from this fee, 
because the affiliated organization is generating transaction or 
clearing fees to help offset examinations costs.
2. Statutory Basis
    The proposed rule change is consistent with Section 6 of the Act in 
general, and in particular, with Section 6(b)(4), in that it provides 
for the equitable allocation of reasonable dues, fees and other charges 
among its members and issuers and other persons using its facilities. 
The Exchange believes that the proposed examinations fee of $1,000 per 
month is reasonable in view of the Exchange's costs in conducting 
examinations of non-Phlx-trading organizations, especially in terms of 
staff time.
    The Exchange also believes that structuring the fee to exempt 
organizations that transact business on the Exchange represents an 
equitable allocation of the Exchange's examination costs among members 
by focusing on those member organizations that generally do not 
otherwise continually contribute to compensating for, and usually, in 
fact, increase Exchange examination costs. The Exchange notes that the 
fee becomes effective January 1, 1995.

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

    The Phlx does not believe that the proposed rule change will impose 
any inappropriate burden on competition.

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

    No written comments were either solicited or received.

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

    The foregoing rule change establishes or changes a due, fee, or 
other charge imposed by the Exchange and therefore has become effective 
pursuant to Section 19(b)(3)(A) of the Act and subparagraph (e) of Rule 
19b-4 thereunder. At any time within 60 days of the filing of such 
proposed rule change, the Commission may summarily abrogate such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

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 Phlx. All 
submissions should refer to File No. SR-Phlx-94-66 and should be 
submitted by January 10, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-31209 Filed 12-19-94; 8:45 am]
BILLING CODE 8010-01-M