[Federal Register Volume 61, Number 60 (Wednesday, March 27, 1996)]
[Notices]
[Pages 13559-13563]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7392]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36998; File No. SR-Phlx-95-77]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change and Notice of Filing 
and Order Granting Accelerated Approval to Amendment Nos. 1 and 2 
Relating to the Rules of the Allocation, Evaluation and Securities 
Committee

March 21, 1996.

I. Introduction

    On December 22, 1995, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``SEC'' or ``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 update its By-Laws and rules 
relating to the Allocation, Evaluation and Securities Committee.

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 36752 (Jan. 22, 1996), 61 FR 2557 (Jan. 26, 
1996). No comments were received on the proposal.

[[Page 13560]]

    On March 11, 1996, the Exchange submitted Amendment Nos. 1 \3\ and 
2 \4\ to the proposed rule change. This order approves the proposed 
rule change, including Amendment Nos. 1 and 2 on an accelerated basis.

    \3\ See letter from Michele Weisbaum, Associate General Counsel, 
to Glen Barrentine, Senior Counsel, SEC, dated March 7, 1996. 
Amendment No. 1 amends Rule 500(a) to require that the six public 
members of the allocation panel be evenly divided between options 
and equity persons and adds new Commentary .01 to Rule 500 to 
require the Committee chairman to appoint extra panelists with 
relevant expertise if the alphabetically chosen allocation panel 
members and core committee members do not have such knowledge. 
Amendment No. 1 also withdraws portions of the filing to be 
reproposed in a related filing pending with the Commission (SR-Phlx-
95-91) and adds a reference to the Foreign Currency Options 
Committee in paragraph (c) to By-Law Article X, Section 10-7.
    \4\ See letter from Michelle Weisbaum, Associated General 
Counsel, to Jennifer Choi, Attorney, Division of Market-Regulation, 
SEC, dated March 8, 1996. Amendment No. 2 submits in this filing an 
amendment to Phlx Rule 515(b) that was originally submitted in File 
No. SR-Phlx-95-91. Amended Phlx Rule 515(b) would refer to the new 
allocation reviews to be conducted within 90 days.
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II. Description of Proposal

    The Exchange proposes to update the Exchange's by-Laws and 500 
Series of rules relating to the Allocation, Evaluation and Securities 
Committee (``Committee''). Specifically, Rules 500, 501, 505, 506, 508, 
511 and 515 are being amended in addition to By-Law Article X, Section 
10-7.

Composition of Allocation, Evaluation and Securities Committee

    Currently, Phlx By-Laws require the committee to consist of not 
less than nine members, but do not specify a maximum member 
requirement. Moreover, Phlx By-Laws require that at least but not more 
than the minimum number of its members required to constitute a 
majority of all its members be composed of persons who conduct a public 
securities business. The balance of the Committee is to be composed of 
persons who are active on the equity trading floor as specialists or 
floor brokers and also persons who are active on the options trading 
floor as specialists, registered options traders or floor brokers.
    The Exchange proposes to amend By-Law Article X, Section 10-7 and 
Phlx Rule 500 to revise the Committee size and structure. The By-Law 
section would continue to require a minimum of nine members on the 
Committee, but would be amended so that a quorum will always be five 
members. The Committee would be composed of members from the core 
committee and the allocation panel. The core committee members are to 
serve a three-year term and may not serve for more than two consecutive 
terms. Members of the allocation panel are to serve for a one-year 
term. Amended Phlx Rule 500 would specify the compositions of the 
Committee, core committee, and the allocation panel.
    Under new Phlx Rule 500(b), the Committee is to consist of the five 
member core committee and four members of the allocation panel 
appointed for each meeting on a rotating alphabetical basis. In 
situations where none of such nine members have particular knowledge of 
an issue being discussed, the Chairman of the Committee is required to 
invite extra members of the allocation panel with the relevant 
knowledge or expertise. Moreover, any member of the core committee and 
the allocation panel may attend and vote at any meeting of the 
Committee. Finally, at every meeting in which specialist privileges are 
to be allocated, at least one core committee member who conducts a 
public securities business and one other core committee member must be 
in attendance and not be recused from voting.
    Amended Phlx Rule 500(a) would require that the core committee be 
composed of three persons who conduct a public securities business, one 
person who is active on the equity trading floor as a specialist or 
floor broker and one person who is active on the options trading floor 
as a specialist, registered options trader, or floor broker. Rule 
500(a) would also require that the allocation panel be composed of six 
persons who conduct a public securities business, five persons who are 
active on the equity trading floor as a specialist or floor broker, 
five persons who are active on the options trading floor as a 
specialist, registered options trader or floor broker, and four persons 
who are active on the foreign currency options trading floor as a 
specialist, registered options trader or floor broker. The six members 
of the allocation panel who conduct a public securities business would 
be divided equally between options and equity persons.

Specialist Appointment

    Currently, under Phlx Rule 501, an application to become a 
specialist unit must include the unit's plan to respond to 
extraordinary circumstances such as the temporary or permanent loss of 
the head or key assistant specialist or the sudden influx of order flow 
in the assigned issue. The Exchange is proposing to amend this rule to 
require instead that an application specify the unit's back up 
arrangements endorsed by the parties providing such support. Moreover, 
amended Phlx Rule 501(b) would require an application for an individual 
to act as a specialist to include an account of the abilities and 
background of the applicant. Finally, amended Phlx Rule 501(d) would 
require that the specialist unit notify promptly the Exchange staff and 
the Committee in writing of any change in registration information and 
any material change in the application for any assigned issue once an 
applicant is approved by the Committee as a specialist unit.

Allocation, Reallocation and Transfer of Issues

    Currently, the equity book or options class may be registered in 
either the name of the unit, the individual acting as specialist, or 
jointly in the name of the unit and the specialist (``Registrant''). 
There is no requirement in the rules that the Registrant be an Exchange 
member or approved specialist.
    The Exchange is proposing to amend Phlx Rule 505 to require 
specifically that all Registrants be Exchange members and approved 
specialists. Moreover, the Exchange proposes to require equity books or 
options classes that are subject to a lease to be registered in the 
name of the Registrant and the name of the unit performing specialist 
duties be noted on the registration form.

Allocation Application

    Currently, Phlx Rule 506 states that applicants for allocation of 
securities may make and the Committee may request personal appearances. 
The Exchange proposes to amend Rule 506 so that the Committee would 
request personal appearances when there are five or more applicants for 
an allocation. The amended rule, however, would provide that the 
failure to appear would not disqualify an applicant.
    Currently, under Phlx Rule 508, a specialist does not have to seek 
Committee approval when it proposes to transfer all of its specialist 
privileges, but it must do so to transfer less than all of its 
privileges. The Exchange proposes to amend Rule 508 to require all 
proposed transfers and leases of specialist privileges be subject to 
prior Committee approval.
    The Exchange also proposes to add Commentary .01 to Rule 508 to 
impose a 45-day moratorium on trading floor location moves when option 
specialist privileges are transferred except that the Options Committee 
may shorten this time period if necessary.

[[Page 13561]]


Specialist Performance Evaluation \5\

    Under Phlx Rule 511 as proposed to be amended, the Committee, in 
addition to allocating new equity books and options classes and 
reallocating existing equity books and options classes, would approve 
transfers of existing equity books and options classes to applicants 
based on the results of the evaluations conducted pursuant to Rule 515 
and other such factors as the Committee deems appropriate. As a result, 
Phlx Rule 511 as proposed to be amended would apply the criteria 
currently set forth in the rule for making allocation and reallocation 
decisions to transfer decisions. The Exchange is also proposing to 
include among the factors that the Committee may consider in making 
such decisions the order flow commitments, any prior transfers of 
specialist privileges by the applicant and the reasons therefore.

    \5\ Concurrently, with this proposed rule change, the Exchange 
has submitted File No. SR-Phlx-95-91, which proposes to revise the 
options specialist evaluation form and review procedure. See 
Securities Exchange Act Release No. 36776 (Jan. 26, 1996), 61 FR 
3748 (Feb. 1, 1996).
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    Currently, Rule 511(b) provides that all allocations are to be made 
initially on a temporary basis for a period up to 60 days within which 
time the Committee may conduct a special review. The Exchange proposes 
to increase the temporary allocation period to a period up to 90 days. 
At present, Phlx Rule 511 also provides for the Committee to conduct 
two kinds of reviews of specialist units; routine quarterly reviews and 
transfers and material changes reviews. Rule 511(c), as proposed to be 
amended, would continue to provide for routine quarterly reviews and 
proposed Rule 511(d)(2) would continue to provide for a special review 
in the event of a transfer or material change. In addition, proposed 
Rule 511(d)(1) would provide for a new special review after a new 
allocation.
    New Phlx Rule 511(d)(2) would require the Committee to commence a 
specialist review pursuant to Rule 515 within 60 days after a transfer 
(including a lease) of one or more equity books or options classes has 
become effective or when there has been a material change in the 
specialist unit. Moreover, in cases where a transfer has been effected, 
the Exchange proposes that the Committee would evaluate the performance 
of the Registrant and if the new unit's performance is below minimum 
standards, the unit would be given 30 days in which to improve its 
performance prior to beginning reallocation proceedings.
    For new allocations, new Phlx Rule 511(d)(1) would require the 
Committee to commence special reviews within 90 days after one or more 
equity books or options classes have been allocated. The new 
allocations reviews would take into account whether the Registrant is 
complying with the commitments that it made either orally at an 
appearance before the Committee or on its written application. If the 
Committee determines that the Registrant has not complied with any of 
the commitments that it made when applying for the equity book or 
options class including, but not limited to commitments regarding 
capital, personnel, order flow, and PACE, the Registrant would be 
afforded 30 days in which to comply with such commitments and if it 
does not do so, the Committee would institute proceedings to determine 
whether to remove and reallocate one or more securities.

Specialist Evaluations

    The Exchange proposes to amend Phlx Rule 515(b) to refer to the new 
allocation reviews to be conducted within 90 days after the Committee 
has allocated a security. This amendment is intended to make Rule 
515(b) consistent with amended Phlx Rule 511(d)(1).

Foreign Currency Options

    Finally, the Exchange proposes various amendments to the rules to 
include references to foreign currency options and the Foreign Currency 
Options Committee where appropriate.

III. Discussion

    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).\6\ The Commission 
believes the proposal is consistent with the Section 6(b)(5) 
requirements that the rules of an exchange be designed to promote just 
and equitable principles of trade, to prevent fraudulent and 
manipulative acts, and, in general, to protect investors and the public 
interest. Moreover, the Commission finds that the rule change is 
consistent with Section 11(b) of the Act \7\ and Rule 11b-1 
thereunder,\8\ which allow exchanges to promulgate rules relating to 
the specialists' obligations to maintain fair and orderly markets.

    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78k(b).
    \8\ 17 CFR 240.11b-1.
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    The Commission fully supports Phlx's effort to evaluate its current 
allocation policies and address issues that have arisen since the 
initial adoption of the policies in 1987.\9\ For the reasons set forth 
below, the Commission believes that the amended By-Law and rules 
relating to the Allocation, Evaluation and Securities Committee should 
enhance the Exchange's allocation process and protect investors and the 
public interest.

    \9\ The rules initially were approved by the Commission as an 
eight month pilot program on May 21, 1987. See Securities Exchange 
Act Release No. 24496 (May 21, 1987), 52 FR 20183 (May 29, 1987). On 
February 23, 1988, the pilot program was extended indefinitely until 
further action was taken by the Commission. See Securities Exchange 
Act Release No. 25388 (Feb. 23, 1988), 53 FR 6725 (Mar. 2, 1988). 
The rules were permanently approved on June 26, 1991. See Securities 
Exchange Act Release No. 29369 (June 26, 1991), 56 FR 30604 (July 3, 
1991).
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    Specialists play a crucial role in providing stability, liquidity 
and continuity in the trading of securities. Among the obligations 
imposed upon specialists by the Exchange, and by the Act and the rules 
thereunder, is the maintenance of fair and orderly markets in their 
designated securities. To ensure that specialists fulfill these 
obligations, it is important that the Exchange develop and maintain 
securities allocation procedures and policies that ensure that 
securities are allocated in an equitable and fair manner and that all 
specialists have a fair opportunity for allocations based on 
established criteria and procedures. To this end, the Commission 
believes that meaningful and effective allocation policies would 
improve the allocation system.
    The Commission believes that amending the composition of the 
Committee should provide an opportunity for expertise and objectivity 
\10\ on the Committee, which in turn, should promote suitable matches 
between specialist units and the securities to be allocated. The 
Commission believes that the amended quorum requirement would enable 
the Committee to meet and make decisions

[[Page 13562]]
as necessary on short notice while still ensuring that various 
interests are represented at the meetings so that such decisions are 
made fairly.

    \10\ The Exchange has represented to the Commission that the 
Exchange applies Phlx By-Law Article IV, Section 4-8, which provides 
that ``no person shall participate in the adjudication of any matter 
in which he is personally interested,'' to the conduct of all 
standing committee, subcommittee, hearing panel and panel members. 
In this regard, the Exchange assures the Commission that no member 
of the Allocation, Evaluation and Securities Committee or any 
subcommittee or panel thereof may participate in the deliberation 
and/or voting on any award or reallocation of a book or options 
class in which such member or his affiliated firm will have an 
interest in the outcome. See letter from William W. Uchimoto, First 
Vice President and General Counsel, Phlx, to Jennifer S. Choi, 
Attorney, Division of Market Regulation, SEC, dated March 20, 1996.
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    With respect to the Committee, core committee and the allocation 
panel, the Commission believes that the proposed compositions would 
adequately represent the options and equity floors and the public 
business perspective of the Exchange as well as ensure that no one 
group dominates the committees. The Committee is to be composed of the 
five member core committee and four members of the allocation panel 
appointed for each meeting on a rotating basis. In situations where the 
Committee does not represent or adequately represent constituencies 
that are affected or interested in the issues being discussed at a 
particular meeting, the Chairman of the Committee would invite extra 
members of the allocation panel with the relevant knowledge and 
expertise. Moreover, any member would always have the option of 
attending and voting at any meeting. Conducting each meeting with a 
combination of persons with the relevant expertise and those with 
differing perspectives should contribute to an opportunity for a fair 
and equitable resolution of issues. Finally, the requirement that at 
least two core committee members (including one conducting a public 
securities business) be part of the quorum would ensure a minimum level 
of experience at every meeting.
    The Commission believes that the Exchange's proposal to require the 
applications for specialist appointments to specify the unit's back up 
arrangement endorsed by the parties providing such support and the 
abilities and background of the applicant would help ensure that the 
Committee evaluates an application with the relevant information. 
Moreover, the proposal that the specialist unit notify promptly the 
Exchange staff and the Committee in writing of any change in 
registration information and any material change in the application for 
any assigned issue would assist the Exchange in determining whether a 
particular specialist unit continues to be capable of performing its 
specialist functions.
    The Exchange also proposes to amend Rule 506 so that the Committee 
would request personal appearances before it when there are five or 
more applicants for an allocation. The Commission does not believe this 
requirement would be too onerous on the applicants, especially because 
the failure to appear would not disqualify an applicant.
    The Exchange also proposes to require that all proposed transfers 
and leases of specialist privileges be subject to prior Committee 
approval. The Commission believes that this amendment would allow the 
Exchange to monitor the transfers and leases of specialist privileges 
more carefully and consider the qualifications of proposed transferees 
and lessees before the specialist privileges are transferred or leased. 
This prior review would enable the Exchange to reject those units or 
specialists that the Exchange believes are not qualified for such 
responsibilities.
    The Exchange also proposes to amend Phlx Rule 511 to require the 
Committee to approve transfers of existing equity books and options 
classes to applicants based on the results of the evaluations conducted 
pursuant to Rule 515 and other factors that the Committee may deem 
appropriate. The Commission believes that evaluating transfers of 
securities based on criteria already being used for allocating new 
securities and reallocating existing securities is appropriate because 
the concerns in allocating new securities and reallocating existing 
securities are equally applicable to transfers of existing securities.
    With respect to transfer of option specialist privileges, the 
Exchange proposed a 45-day moratorium on trading floor locations moves 
although the Options Committee may shorten this time period if 
necessary. The Commission believes that this alternative is reasonable 
to give staff and traders in the crowd time to prepare for the move.
    The Exchange also proposes to extend the period for which 
allocations are temporarily made to 90 days. This extension of time 
would allow the Exchange more time to evaluate whether an allocation 
was appropriate made.
    The Exchange also amends the Transfer and Material Changes Reviews 
and proposes a new type of ``special review.'' For transfers and 
material changes, amended Rule 511(d)(2) would require the Committee to 
commence a specialist review pursuant to Rule 515 within 60 days after 
a lease as well as a transfer or when there has been a material change 
in the specialist unit. The Commission believes that this proposal 
would provide the Exchange with an opportunity to review leases as well 
as transfers of specialist privileges to promote an efficient 
allocation program. In situations where a transfer has been effected, 
the Exchange proposes that the Committee evaluate the performance of 
the unit, which must improve its performance within 30 days if it falls 
below minimum standards. The Commission believes that this allowance of 
time to improve performance is reasonable.
    The Exchange also proposes to conduct reviews of new allocations 
within 90 days after the security has been allocated by the Committee. 
The Committee would evaluate the unit based on the representation it 
made either orally at an appearance before the Committee or on its 
written application. The unit would be given 30 days to comply with the 
representations it made before the Committee would institute 
proceedings to determine whether to reallocate the securities. The 
Commission believes that the proposal would provide the Exchange with a 
reasonable time period to evaluate the performance of the specialist 
unit and that it is appropriate to evaluate the unit based on the 
representations it made either orally or in writing to the Committee.
    The Commission finds good cause for approving Amendment Nos. 1 and 
2 to the proposed rule change prior to the thirtieth day after the date 
of publication of notice of filing thereof. Amendment No. 1 assures the 
Commission that the Committee would have adequate representation and 
expertise to conduct each meeting efficiently and reach resolutions to 
issues fairly and withdraws certain amendments that are to be refiled 
in a related rule filing.\11\ Amendment No. 2 also includes in this 
filing a proposed rule change (originally submitted in File No. SR-
Phlx-95-91) that references another rule that is being amended in this 
filing. These amendments to the proposal strengthen the Phlx's 
allocation policies. In addition, the Exchange's original proposal was 
published in the Federal Register for the full statutory period and no 
comments were received.\12\ Based on the above, the Commission finds 
that there is good cause, consistent with Section 6(b)(5) of the Act, 
to accelerate approval of Amendment Nos. 1 and 2.

    \11\ Certain proposals were withdrawn from this filing to be 
reproposed in a relating filing pending with the Commission (File 
No. SR-Phlx-95-91) because the substance of the rule proposals is 
being proposed in the other filing.
    \12\ See Securities Exchange Act Release No. 36752 (Jan. 22, 
1996), 61 FR 2557 (Jan. 26, 1996).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment Nos. 1 and 2. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, 
D.C. 20549. Copies of the submission, all subsequent

[[Page 13563]]
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, N.W., Washington, D.C. 20549. 
Copies of such filing will also be available for inspection and copying 
at the principal office of the Exchange. All submissions should refer 
to File No. SR-Phlx-95-77 and should be submitted by April 17, 1996.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-Phlx-95-77) is approved.

    \13\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\

    \14\ 17 cFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-7392 Filed 3-26-96; 8:45 am]
BILLING CODE 8010-01-M