[Federal Register Volume 61, Number 113 (Tuesday, June 11, 1996)]
[Notices]
[Pages 29582-29583]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-14711]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37274; File No. SR-PSE-96-08]


Self-Regulatory Organizations; the Pacific Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change Relating to Amendments 
to Exchange Constitution Article III, Section 2(c)

June 4, 1996.

I. Introduction

    On March 28, 1996, the Pacific Stock Exchange, Inc. (``PSE'' 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 amend Exchange Constitution 
Article II, Section 2(c).
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    \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. 37083 (April 8, 1996), 61 FR 16515 (April 15, 
1996). No comments were received on the proposal.

II. Background

    Prior to 1973, the Exchange had no rule in place regarding 
conflicts of interest on the Board of Governors. In 1973, a simplified 
version of the current rule was added to the PSE Constitution, which 
read as follows:

    No two or more Governors for a common or overlapping term may be 
associated either as partners, stockholders or otherwise in the same 
member firm or in a partnership or corporation which is affiliated 
with the same member firm.

    In 1983, the rule expanded the definition of associates to include 
officers and directors,\3\ and attempted to define more clearly an 
``indirect association'' between Governors, by using two specific tests 
that are set forth in the current rule.\4\ The experience of PSE 
management and the PSE Board of Governors, however, in interpreting and 
applying the current rule has been that the language is too cumbersome 
and specific to achieve the intended purpose of eliminating conflicts. 
The existing rule limits the Exchange's authority to force a governor 
off the Board only in limited circumstances.
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    \3\ See Securities Exchange Act Release No. 19406 (Feb. 17, 
1983), 48 FR 8385 (Feb. 28, 1983) (order approving File No. SR-PSE-
82-16).
    \4\ See PSE Const., Art. III, Sec. 2(c).
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    A task force was created to review the current rule and to examine 
alternatives that might work better to avoid conflicts on both the 
Board of Governors and the Exchange committees. The task force 
consisted of nine members as follows: four Governors (including a 
public governor, a specialist, an options floor broker and an allied 
member), two options clearing firm officials, the chairman of the 
Options Floor Trading Committee, the chairman of the Equity Floor 
Trading Committee, and the chairman of the Ethics and Business Conduct 
Committee. The task force concluded that the current language was 
unnecessarily specific, and therefore was too restrictive on the 
Board's power

[[Page 29583]]

to determine whether a conflict existed. After review, the task force 
noted that most of the other exchanges used broad and general 
language,\5\ or no language at all, with the understanding that the 
boards of each exchange follow the spirit of a general policy of 
avoiding conflicts of interest. The task force approved the proposed 
rule, which is intended to provide the PSE Board with more flexibility 
in determining when a conflict exists and with the authority to take 
appropriate action when such conflicts arise.
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    \5\ See Amex Const. Art. 3, Para. 9022; CBOE Const. Art. 4, 
para. 1033.
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III. Description of Proposal

    The PSE, accordingly, proposes to amend its rules to authorize the 
Exchange to remove a governor from the Board, if no resignation is 
received, in cases where the Board determines that an affiliation or 
association between Governors of the Board creates a conflict of 
interest. Moreover, the proposed rule provides that care shall be taken 
to have the various interests of the membership represented on the 
Board of Governors.
    The PSE states that the proposal is designed to provide the 
Exchange with the added flexibility and authority necessary to assure 
that the Board of Governors is comprised of members representative of 
the public interests while ensuring that an affiliation or association 
between two or more governors does not create a conflict of interest.

IV. 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\ In particular, 
the Commission believes the proposal is consistent with the Section 
6(b)(1) requirement that the exchange be organized so as to be able to 
carry out the purposes of the Act. The proposal also is consistent with 
the Section 6(b)(3) requirement that the rules of the exchange assure a 
fair representation of its members in the selection of its directors 
and administration of its affairs and provides that one or more 
directors must be representative of issuers and investors and not be 
associated with a member of the exchange, broker, or dealer. Lastly, 
the proposal is consistent with the Section 6(b)(5) requirement 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.
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    \6\ 15 U.S.C. 78f(b).
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    The Commission believes that the PSE's proposal to authorize the 
Exchange to remove a Governor from the Board, if no resignation is 
received, when, in the opinion of the Board, an affiliation or 
association between Governors creates a conflict of interest while 
ensuring that various interests of the membership are represented on 
the Board is appropriate and will make the PSE's rules consistent with 
those that are applicable on other exchanges.
    The Commission believes that the current rule prevents the Board 
from resolving conflicts of interest arising among Governors in certain 
situations in that it limits the Exchange's authority to force a 
governor off the Board only in limited circumstances. As a result, the 
Exchange is precluded from addressing various conflicts of interest 
that arise from an affiliation or association between Governors of the 
Board that can result in a lack of independence among the Board of 
Governors. This situation may affect the Board's ability to effectuate 
proper oversight of the Exchange's business. In this regard, the 
Commission supports the PSE's proposal which gives the Exchange the 
authority to remove a governor from the Board when any conflicts of 
interest arise due to an affiliation or association between Governors 
of the Board. The Commission notes that the proposal appropriately 
gives the Exchange the requisite authority to promote and ensure the 
independence of the Board of Governors, which should result in a more 
impartial decision making process.
    The Commission also believes that a diversified Board, which no 
single membership group could dominate, would better represent the 
interests of all of the PSE's constituencies. Towards this end, the PSE 
proposal appropriately promotes and ensures the diversity of Board 
representation among the different categories of member firms and the 
public in that it requires the Exchange to exhibit care to have various 
interests of the membership represented on the Board of Governors.
    Finally, the Commission believes that the PSE proposal promotes a 
Board of Governors representative of various independent interests that 
would be more likely to enforce the rules of the Act and of the 
Exchange.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\7\ that the proposed rule change (SR-PSE-96-08) is approved.

    \7\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-14711 Filed 6-10-96; 8:45 am]
BILLING CODE 8010-01-M