[Federal Register Volume 61, Number 5 (Monday, January 8, 1996)]
[Notices]
[Pages 568-569]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-180]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36660; File No. SR-Phlx-95-73]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change Relating to New
Organizational Structures for Members
December 29, 1995.
On October 4, 1995, the Philadelphia Stock Exchange, Inc. (``Phlx''
or ``Exchange'') submitted to the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to include within the definition of ``member
firm'' found in the Phlx By-Laws and rules entities with organizational
structures essentially similar to partnerships and corporations and to
make the provisions in its By-Laws and rules that pertain to partners
of partnership member firms applicable to those persons performing
similar functions in non-partnership member firms. On October 11, 1995,
the Exchange submitted to the Commission Amendment No. 1 to the
proposed rule change,\3\ and on November 1, 1995, the Exchange
submitted Amendment No. 2 to the proposed rule change.\4\
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from Murray L. Ross, Secretary, Phlx, to Glen
Barrentine, Senior Counsel, SEC, dated October 2, 1995. Amendment
No. 1 renumbered the rule filing.
\4\ See Letter from Murray L. Ross, Secretary, Phlx, to Glen
Barrentine, Senior Counsel, SEC, dated October 25, 1995. See infra
note 8 and text accompanying note 11 for a description of Amendment
No. 2.
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The proposed rule change and Amendment Nos. 1 and 2 were published
for comment in Securities Exchange Act Release No. 36482 (November 14,
1995), 60 FR 58126 (November 24, 1995). No comments were received on
the proposal.
Recently, Pennsylvania law and the laws of 46 other jurisdictions
have recognized the existence of new legal entities such as limited
liability companies (``LLCs''),\5\ limited liability partnerships
(``LLPs''),\6\ and business trusts.\7\ As of February 5, 1995,
Pennsylvania has authorized the existence of LLCs and LLPs. Presently,
the Exchange's By-Laws and Rules recognize two types of member
organizations: partnerships under the term ``member firm'' and
corporations under the term ``member corporation.''
\5\ An LLC combines various characteristics of both corporations
and partnerships. For example, an LLC is a non-corporate entity
under which neither the owners nor those managing the business are
personally liable for the entity's obligations, however, the LLC is
treated as a pass-through entity for federal income tax purposes.
See Robert R. Keatinge et al., The Limited Liability Company: A
Study of the Emerging Entity, 47 Bus. Law. 378 (1992).
\6\ An LLP differs from a traditional partnership entity in two
significant ways. First, in an LLP the liability of a partner or the
partnership is no longer joint and several among the partners;
instead, a partner generally will be personally liable only for his
or her own conduct and that of those under his or her direct
supervision. Second, an LLP is treated as a pass-through entity for
federal income tax purposes. See Sharon Kanovsky, LLPs: A New Form
of Organization, 25 Tax Advisor 409 (1994).
\7\ The term ``business trust'' is generally used to describe a
trust in which the managers are principals and the shareholders are
cestuis que trust. Its essential attribute is that property is
placed in the hands of trustees who manage and deal with it for the
use and benefit of beneficiaries. Black's Law Dictionary 180 (5th
ed. 1979).
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The proposed rule change would allow the Exchange to recognize
these new legal entities as Phlx member firms by amending the
definitions of ``member firm'' found in Article I, Section 1-1(c) of
the By-Laws and Rule 3 to encompass organizations that are essentially
similar to member firms including, but not limited to, LLCs, LLPs, and
business trusts.
The Exchange also proposes to amend Article I, Section 1-1(c) and
Rule 3 to make provisions in the Phlx By-Laws and rules that pertain to
general, special or limited partners in partnership member firms
applicable, as appropriate, to those persons who perform essentially
similar functions as such partners in non-partnership member firms.\8\
\8\ Amendment No. 2 added this provision to the proposed rule
change. Amendment No. 2 also withdrew a proposed change to Rule 902
that would have required a member intending to form a non-
partnership member firm to submit certain specified documentation to
the Exchange, as the proposed change to Rule 3 gives the Exchange
the authority to require the submission of such documentation under
the current Rule 902. Amendment No. 2 also included additional
minimum requirements to be satisfied before LLCs, LLPs, business
trusts, or other organizations with characteristics of partnerships
or corporations could be approved as Phlx members. See note 11 and
accompanying text.
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The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, with the requirements of Section 6(b).\9\ Specifically, the
Commission believes that the proposed rule change is consistent with
Section 6(b)(2) of the
[[Page 569]]
Act, which requires the rules of an exchange, subject to the provisions
of Section 6(c) of the Act,\10\ to ensure that any registered broker or
dealer or natural person associated with a registered broker or dealer
may become a member of the exchange and any person may become
associated with a member thereof.
\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(c).
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The Phlx currently allows individuals, partnerships, and
corporations to become members of the Exchange. The proposed rule
change would allow entities with new organizational structures similar
to partnerships and corporations to become Exchange member firms. As in
the case of an individual, partnership, or corporation applying for
membership, the new entity will be subject to all other requirements
for membership approval.
The Commission also believes that the proposed rule change
reasonably balances the Exchange's interest in having the flexibility
to approve entities with new organizational structures for Exchange
membership with the regulatory interests in protecting the financial
and structural integrity of a member firm. For example, although the
proposed rule change permits the Exchange to approve LLCs, LLPs,
business trusts, or other organizational structures with
characteristics of corporations or partnerships as member firms, the
Phlx will review each Exchange member organization application on a
case-by-case basis, and prior to approving any such entity for
membership, the Exchange must be satisfied that: (1) Such entity would
be structured in such a format that would qualify as a broker or dealer
registered with the Commission pursuant to the Act; (2) the Phlx would
legally have appropriate jurisdiction over such entity; and (3) the
permanency of such entity's capital is consistent with that required of
other member firms. \11\
\11\ See Amendment No. 2, supra note 4.
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Finally, the Commission believes that, consistent with Section
6(d)(1) of the Act, the proposed rule change will enhance the
Exchange's ability to enforce compliance by its members and persons
associated with its members with the rules of the Exchange by making
provisions in the Phlx By-Laws and rules that pertain to general,
special or limited partners in partnership member firms applicable, as
appropriate, to those persons who perform essentially similar functions
as such partners in non-partnership member firms.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the proposed rule change (SR-Phlx-95-73), as amended, is
approved.
\12\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority. \13\
\13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-180 Filed 1-5-96; 8:45 am]
BILLING CODE 8010-01-M