[Federal Register Volume 62, Number 17 (Monday, January 27, 1997)]
[Notices]
[Pages 3931-3935]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1818]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38182; File No. SR-BSE-96-13]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Boston 
Stock Exchange, Inc. Relating to Its Specialist Performance Evaluation 
Program

January 17, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 6, 1997,\3\ the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II 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 and to 
grant accelerated approval to the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On January 6 and January 10, 1997, the BSE filed Amendment 
Nos. 1 and 2, respectively, with the Commission, the substance of 
which have been incorporated into this notice.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The BSE seeks a twelve-month extension of its Specialist 
Performance Evaluation Program (``SPEP'').\4\
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    \4\ The Commission initially approved the BSE's SPEP pilot 
program in Securities Exchange Act Release No. 22993 (March 10, 
1986), 51 FR 8298 (March 14, 1986) (File No. SR-BSE-84-04). The 
Commission subsequently extended the pilot program in Securities 
Exchange Act Release Nos. 26162 (October 6, 1988), 53 FR 40301 
(October 14, 1988) (File No. SR-BSE-87-06); 27656 (January 30, 
1990), 55 FR 4296 (February 7, 1990) (File No. SR-BSE-90-01); 28919 
(February 26, 1991), 56 FR 9990 (March 8, 1991) (File No. SR-BSE-91-
01); and 30401 (February 24, 1992), 57 FR 7413 (March 2, 1992) (File 
No. SR-BSE-92-01). The BSE was permitted to incorporate objective 
measures of specialist performance into its pilot program in 
Securities Exchange Act Release No. 31890 (February 19, 1993), 58 FR 
11647 (February 26, 1993) (File No. SR-BSE-92-04) (``February 1993 
Approval Order''), at which point the initial pilot program ceased 
to exit as a separate program. The current pilot program was 
subsequently extended in Securities Exchange Act Release Nos. 33341, 
(December 15, 1993) 58 FR 67875 (December 22, 1993) (``December 1993 
Approval Order''); 35187 (December 30, 1994), 60 FR 2406 (January 9, 
1995); and 36668 (January 2, 1996), 61 FR 672 (January 9, 1996) 
(January 1996 Approval Order) (Pilot extended until December 31, 
1996).
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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 III 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
    The purpose of the proposed rule change is to request an extension 
of the Exchange's SPEP pilot program. The evaluation program, using the 
BEACON

[[Page 3932]]

system,\5\ looks at all incoming orders routed to a specialist for 
execution. A record of all action on these orders is accumulated in a 
separate file from which four calculations are run.
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    \5\ BEACON is the BSE's automated order-routing and execution 
system. BEACON provides a guarantee of execution for market and 
marketable limit orders up to and including 1,299 shares. In 
addition, BEACON can be used to transmit orders not subject to 
automatic execution. See BSE Rules, Ch. XXXIII, Secs. 2654-55.
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    Section criteria for eligible orders include regular buy and sell 
market and marketable limit orders only. Orders marked buy minus or 
sell plus are excluded, as are crosses and all orders with qualifiers 
(e.q., market-on-close, stop, stop limit, all or none, etc.). The order 
entry date must equal the order execution date.
    For each of the measures, including the Specialist Performance 
Evaluation Questionnaire (``SPEQ''), a ten point scale will be applied 
to a range of scores. Based on the raw score for each measure, the 
respective specialist will receive an associated score between one and 
ten points, which will be weighted as indicated for each measure.
    The first measure is Turnaround Time, which calculates the average 
number of seconds for all eligible orders based on the number of 
seconds between the receipt of a guaranteed market or marketable limit 
order in BEACON (i.e., for 1299 shares or less) and the execution, 
partial execution, stopping or cancellation of the order. An order that 
is moved from the auto-ex screen to the manual screen will accumulate 
time until executed, partially executed, stopped or cancelled. This 
calculation will not be in effect until the individual stock has opened 
on the primary market. Certain situations, such as trading halts and 
periods where the BEACON system is off auto-ex floorwide, will result 
in blocks of time being excluded from the calculation. A specialist who 
averaged a raw score of twenty-five (25) seconds will receive seven 
points because it falls in the twenty-one (21) to twenty-five (25) 
second range. This calculation will comprise 20% of the overall 
evaluation program.

                             Turnaround Time                            
------------------------------------------------------------------------
                        Time in seconds                          Points 
------------------------------------------------------------------------
1-10..........................................................        10
11-15.........................................................         9
16-20.........................................................         8
21-25.........................................................         7
26-30.........................................................         6
31-35.........................................................         5
36-40.........................................................         4
41-45.........................................................         3
46-50.........................................................         2
51 and up.....................................................         1
------------------------------------------------------------------------

    The second measure is Holding Orders Without Action, which measures 
the number of market and marketable limit orders (all sizes included) 
\6\ that are held without action for greater than twenty-five (25) 
seconds. As in the Turnaround Time calculation, a stop, cancellation, 
execution or partial execution stops the clock. The same exclusions 
which apply in the Turnaround Time calculation also apply here.\7\ 
Thus, if a specialist receives a total of 100 market and marketable 
limit orders and holds ten of them for more than twenty-five seconds, 
his or her raw score of 10% would receive nine points as it falls in 
the six to ten percent range. This calculation will comprise 5% of the 
overall evaluation program.
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    \6\ Unlike Turnaround Time, Holding Orders Without Action is not 
limited to those orders guaranteed automatic execution through 
BEACON.
    \7\ The Holding Orders Without Action calculation will not be in 
effect until the individual stock has opened on the primary market. 
In addition, certain situations, such as trading halts and periods 
where the BEACON system is off auto-ex floorwide, will result in 
blocks of time being excluded from the Holding Orders Without Action 
calculation. See December 1993 Approval Order.

                      Holding Orders Without Action                     
------------------------------------------------------------------------
                     Percentage of orders                        Points 
------------------------------------------------------------------------
0-5...........................................................        10
6-10..........................................................         9
11-15.........................................................         8
16-20.........................................................         7
21-25.........................................................         6
26-30.........................................................         5
31-35.........................................................         4
36-40.........................................................         3
41-45.........................................................         2
46 and up.....................................................         1
------------------------------------------------------------------------

    This third measure is Trading Between the Quote, which measures the 
number of market and marketable limit orders that are executed between 
the best consolidated bid and offer where the spread is greater than 
\1/8\th. Thus, if a specialist receives ten market and marketable limit 
orders where the spread between the best consolidated bid and offer is 
greater than \1/8\th, and such specialist executes five of the orders 
between the bid and offer, his or her raw score would be 50% and would 
receive nine points as it falls in the 46 to 50 percent range. This 
calculation will comprise 35% of the overall evaluation program.

                        Trading Between the Quote                       
------------------------------------------------------------------------
                     Percentage of orders                        Points 
------------------------------------------------------------------------
51 and up.....................................................        10
46-50.........................................................         9
41-45.........................................................         8
36-40.........................................................         7
31-35.........................................................         6
26-30.........................................................         5
21-25.........................................................         4
16-20.........................................................         3
11-15.........................................................         2
0-10..........................................................         1
------------------------------------------------------------------------

    The fourth measure is Executions in Size Greater than BBO, which 
measures the number of market and marketable limit orders which exceed 
the BBO size and are executed in a size larger than the BBO size. Thus, 
if a specialist receives a total of ten market and marketable limit 
orders which exceed the BBO size and executes nine of the orders in 
sizes larger than the BBO size, his or her raw score would be 90% and 
would receive eight points as it falls in the 86 to 90 percent range. 
This calculation will comprise 35% of the overall evaluation program.

                   Executions in Size Greater Than BBO                  
------------------------------------------------------------------------
                     Percentage of orders                        Points 
------------------------------------------------------------------------
96-100........................................................        10
91-95.........................................................         9
86-90.........................................................         8
81-85.........................................................         7
76-80.........................................................         6
71-75.........................................................         5
66-70.........................................................         4
61-65.........................................................         3
56-50.........................................................         2
55 and below..................................................         1
------------------------------------------------------------------------

    The fifth measure is the SPEQ.\8\ The minimum acceptable raw score 
for each question is 4.5. Thus, if a specialist receives a raw score of 
4.5 for each question for a weighted raw score (based on the weights 
for each question within the questionnaire) of 50.0052, he or she would 
receive four points as it falls in the 50 to 54 weighted score range. 
The questionnaire will comprise 5% of the overall evaluation program.
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    \8\ Several changes were made to the SPEQ in view of the 
adoption of the objective measures which have made some questions 
obsolete. See the January 1996 Approval Order.

                              Questionnaire                             
------------------------------------------------------------------------
                      Weighted raw score                         Points 
------------------------------------------------------------------------
83 and above..................................................        10
77-82.........................................................         9
72-76.........................................................         8
66-71.........................................................         7

[[Page 3933]]

                                                                        
61-65.........................................................         6
55-60.........................................................         5
50-54.........................................................         4
44-49.........................................................         3
38-43.........................................................         2
37 and below..................................................         1
------------------------------------------------------------------------

    Using the examples from each measure above, the following weighted 
point totals would result in an overall program score of 8.0:

------------------------------------------------------------------------
                                                                Weighted
                       Measure                         Points    points 
------------------------------------------------------------------------
Turnaround Time (20%)...............................        7       1.40
Holding Orders Without Action (5%)..................        9       0.45
Trading Between the Quote (35%).....................        9       3.15
Executions in Size  BBO (35%)............        8       2.80
Questionnaire (5%)..................................        4       0.20
                                                              ----------
                                                      .......       8.00
------------------------------------------------------------------------

    Any specialist who is deficient \9\ in any one of the objective 
measures for any review period will be required to appear before the 
Performance Improvement Action Committee (``PIAC'') to discuss ways of 
improving performance. If performance does not improve in the 
subsequent period, the specialist will appear before the Market 
Performance Committee (``MPC'') for appropriate action, as described 
below.\10\
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    \9\ A specialist is deficient in any measure if he or she scores 
below the minimum adequate performance thresholds set forth below. 
See infra text accompanying note 10.
    \10\ The SEC notes that, in the event a specialist's performance 
does not improve, the Supplemental Material to the SPEP authorizes 
the MPC to take the following actions: suspending the specialist's 
trading account privilege, suspending his or her alternate 
specialist account privilege, or reallocating his or her specialty 
stocks. See BSE Rules, Ch. XV, para. 2156.10-2156.60.
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    Any specialist who falls below the threshold level for the overall 
evaluation program for any review period will be required to appear 
before the MPC, which will take action to address the deficient 
performance as provided for in the Supplemental Material to the 
SPEP.\11\ A specialist who is ranked in the bottom 10% of the overall 
evaluation program but who is above the threshold level for the overall 
program will be subject to staff review to determine if there is 
sufficient reason to warrant informing the PIAC of potential 
performance problems.
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    \11\ See supra note 8.
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    The following threshold scores have been set at which a specialist 
will be deemed to have adequately performed: \12\

    \12\ A specialist who receives a score that is below a minimum 
adequate performance threshold will be deemed to be deficient in 
that measure. See supra note 7.
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Overall Evaluation Score--at or above weighted score of 6.70
Turnaround Time--below 21.0 seconds (8 points)
Holding Orders Without Action--below 21.0% (7 points)
Trading Between the Quote--at or above 31.0% (6 points)
Executions in Size > BBO--at or above 81.0% (7 points)
Questionnaire--at or above weighted score of 50.0 (4 points)

    Due to the subjectiveness of the questionnaire, a specialist who is 
deficient on the questionnaire alone will be subject to review by 
Exchange staff to determine if there is sufficient reason to warrant 
informing the PIAC of potential performance problems. However, a 
deficient score on the questionnaire may result in a performance 
improvement action when it lowers the overall program score below 6.70.
    The Exchange requests an extension of the current pilot program 
through December 31, 1997. This approximate twelve-month period will 
enable the Exchange to further evaluate the appropriateness of the 
measures and their respective weights, as well as the effectiveness of 
the overall evaluation program.
2. Statutory Basis
    Section 6(b)(5) of the Act \13\ is the basis of the proposed rule 
change in that the SPEP results weigh heavily in stock allocation 
decisions and, as a result, specialists are encouraged to improve their 
market quality and administrative duties, thereby promoting just and 
equitable principles of trade and aiding in the perfection of a free 
and open market and a national market system.
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    \13\ 15 U.S.C. 78f(b)(5).
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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.

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

    No written comments were either solicited or received.

III. 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, N.W., Washington, D.C. 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 provision 
of 5 U.S.C. 552, will be available for inspection and copying at the 
Commission's Public Reference Room. 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-BSE-96-13 and 
should be submitted by February 18, 1997.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission believes that specialists play a crucial role in 
providing stability, liquidity, and continuity to the trading of 
stocks. Among the obligations imposed upon specialists by the Exchange, 
and by the Act and the rules promulgated thereunder, is the maintenance 
of fair and orderly markets in their designated securities.\14\ To 
ensure that specialists fulfill these obligations, it is important that 
the Exchange conduct effective oversight of their performance. The 
BSE's SPEP is critical to this oversight.
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    \14\ Rule 11b-1, 17 CFR 240.11b-1; BSE Rules Ch. XV, para. 
2155.01.
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    In its 1993 order approving the incorporation of objective measures 
of performance,\15\ the Commission asked the Exchange to monitor the 
effectiveness of the amended SPEP. Specifically, the Commission 
requested information about the number of specialists who fell below 
acceptable levels of performance for each objective measure, the 
questionnaire and the overall program; and about the specific measures 
in which each such specialist was deficient. The Commission also 
requested information about the number of specialists who, as a result 
of each condition for review, were referred to the PIAC and/or the MPC; 
and about the type of action taken with respect to each such deficient 
specialist. In September

[[Page 3934]]

1993, October 1994, December 1995 and January 1997, the BSE submitted 
to the Commission monitoring reports regarding its amended SPEP. The 
reports describe the BSE's experience with the pilot program during 
1993, 1994, 1994 and the first two periods of 1996.
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    \15\ For a description of the Commission's rationale for 
approving the incorporation of objective measures of performance 
into the BSE's SPEP on a pilot basis, see February 1993 Approval 
Order, supra note 3. The discussion in the aforementioned order is 
incorporated by reference into this order.
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    In its January 1996 Approval Order extending the pilot program, the 
Commission set forth concerns with the pilot program. The Commission 
reviewed the BSE's experience with its minimum adequate performance 
thresholds and noted that the acceptable levels of performance had not 
been revised since the beginning of the pilot and should be reviewed. 
The Commission also stated that taking the SPEP as a whole, most 
potential performance problems needed to be brought to the attention of 
the appropriate committee and that the BSE should examine its SPEP to 
ensure that adequate corrective actions are taken with respect to each 
deficient specialist. The BSE addressed these concerns and certain 
changes to the SPEP were approved by the Commission, as discussed in 
more detail below. However, the Commission believes that the Exchange 
should continue to monitor these concerns.
    In terms of the overall scope of the SPEP, the Commission continues 
to believe that objective measures, together with a floor broker 
questionnaire, should generate sufficiently detailed information to 
enable the Exchange to make accurate assessments of specialist 
performance. In this regard, the objective criteria have been useful in 
identifying how well specialist carry out certain aspects (i.e., 
timeliness of execution, price improvement and market depth) of their 
responsibilities as specialists. In conclusion, although the Commission 
believes the BSE should evaluate means to strengthen its performance 
oversight program, the pilot has been a positive first step towards 
developing a more effective SPEP. Accordingly, the Commission believes 
that it is appropriate to extend the pilot program for an approximate 
twelve-month period, expiring December 31, 1997.
    This period will allow the Exchange to respond to the Commission's 
continuing concerns about the SPEP. First, the Commission expects the 
BSE to continue to evaluate the incorporation of additional objective 
criteria,\16\ so that the Exchange can conduct a thorough analysis of 
specialist performance.\17\ At the same time, the BSE should continue 
to assess whether each measure, as well as the questionnaire, is 
assigned an appropriate weight.\18\ In addition, the Commission expects 
the Exchange to continue to conduct an on-going examination of its 
minimum adequate performance thresholds, in order to ensure that they 
continue to be set at appropriate levels.\19\ The Commission also 
continues to believe that relative performance rankings that subject 
the bottom 10% of all specialist units to review by an Exchange 
committee are an important part of an effective evaluation program. The 
BSE should continue to closely monitor the conditions for review and 
should take steps to ensure that all specialists whose performance is 
deficient and/or diverges widely from the best units will be subject to 
meaningful review. In the Commission's opinion, a meaningful review 
process would ensure that adequate corrective actions are taken with 
respect to each deficient specialist.\20\ The Commission would have 
difficulty granting permanent approval to a SPEP that did not include a 
satisfactory response to the concerns described above.
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    \16\ The Commission notes that in a previous rule change 
proposal, the Exchange stated it was currently engaged in an effort 
to develop other measures of performance for inclusion in the SPEP 
and hoped to file for modification to the program in the near 
future. See Securities Exchange Act Release No. 37581 (August 19, 
1996), 61 FR 43797 (August 26, 1996) (August 1996 Release). No new 
objective performance measures have been added at this time.
    \17\ For example, the BSE could develop additional measures of 
market depth, such as how often the specialist's quote exceeds 500 
shares or how often the BSE quote, in size, is larger than the BBO 
(excluding quotes for 100 shares). Another possible objective 
criteria could measure quote performance (i.e., how often the BSE 
specialist's quote, in price, is alone at or tied with the BBO).
    \18\ The Commission had recommended in its January 1996 Approval 
Order that the BSE consider either having only one measure out of 
the Turnaround Time and Holding Orders Without Action categories or 
reducing the weights of the existing measures, which together 
accounted for 30% of the current SPEP, because of the substantial 
overlap between those two measures. In response to this 
recommendation, the BSE did reduce the weights of these two measures 
to 25% of the overall program. In addition, the decrease in these 
two categories, as well as a decrease in the weight of the SPEQ to 
5%, enabled the Exchange to increase the weight of each of the other 
objective criteria from 25% to 35%. See August 1996 Release.
    \19\ In response to this recommendation, which was also included 
in the January 1996 Approval Order, the BSE revised some of the 
minimum adequate performance levels. The revised levels provide a 
higher benchmark for acceptable specialist performance on the 
Exchange, which in turn benefits the execution of public orders on 
the BSE and further the protection of investors. See August 1996 
Release.
    \20\ In response to these comments, the BSE revised its review 
process by tightening the standards for committee review for 
substandard specialist performance both in the overall program and 
in individual measures. The criteria for PIAC review for substandard 
performance in any one objective measure was reduced from two out of 
three consecutive review periods to any one review period. The 
criteria for MPC review of substandard performance in any one 
objective measure was reduced from three out of four consecutive 
review periods to two out of three consecutive review periods, while 
MPC review for substandard overall performance was reduced from two 
out of three consecutive review periods to any one review period. 
See August 1996 Release.
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    The Commission therefore requests that the BSE submit a report to 
the Commission, by September 17, 1997, describing its experience with 
the pilot. At a minimum, this report should contain data, for the last 
review period of 1996 and the first two review periods of 1997, on (1) 
the number of specialists who fell below acceptable levels of 
performance for each objective measure,\21\ the questionnaire and the 
overall program, and the specific measures in which each such 
specialist was deficient; (2) the number of specialists who, as a 
result of the objective measures, appeared before the PIAC for informal 
counseling; (3) the number of such specialists then referred to the MPC 
and the type of action taken; (4) the number of specialists who, as a 
result of the overall program, appeared before the MPC and the type of 
action taken; (5) the number of specialists who, as a result of the 
questionnaire or falling in the bottom 10% were referred by the 
Exchange staff to the PIAC and the type of action taken (this should 
include the number of specialists then referred to the MPC and the type 
of action taken by that Committee); and (6) a list of stocks 
reallocated due to substandard performance and the particular unit 
involved. The report also should discuss the specific action taken by 
the BSE to develop additional objective measures and address the other 
concerns noted above. Any requests to modify this pilot, to extend its 
effectiveness or to seek permanent approval for the SPEP should be 
submitted to the Commission by September 17, 1997, as a proposed rule 
change pursuant to Section 19(b) of the Act.
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    \21\ For each objective measure, the Commission also requests 
that the BSE provide the mean and median scores.
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    For the reasons discussed above, the Commission finds that the 
BSE's proposal to extend its SPEP pilot program until December 31, 1997 
is consistent with the requirements of Sections 6 and 11 of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange. Specifically, the Commission finds that the 
proposed rule change is consistent with the Section 6(b)(5) \22\ 
requirement that the rules of the

[[Page 3935]]

Exchange be designed to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest.
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    \22\ 15 U.S.C. 78f(b)(5).
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    Further, the Commission finds that the proposal is consistent with 
Section 11(b) of the Act \23\ and Rule 11b-1 thereunder \24\ which 
allow securities exchanges to promulgate rules relating to specialists 
in order to maintain fair and orderly markets and to remove impediments 
to and perfect the mechanism of a national market system.
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    \23\ 15 U.S.C. 78k(b).
    \23\ 17 CFR 240.11b-1.
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register. This will permit the pilot 
program to continue and allow the BSE time to consider improvements to 
its program. In addition, the rule change that implemented the pilot 
program was published in the Federal Register for the full comment 
period, and no comments were received.\25\ Accordingly, the Commission 
believes that it is consistent with the Act to accelerate approval of 
the proposed rule change.
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    \25\ See February 1993 Approval Order, supra note 3.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\26\ that the proposed rule change (File No. SR-BSE-96-13) is hereby 
approved on a pilot basis until December 31, 1997.

    \26\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-1818 Filed 1-24-97; 8:45 am]
BILLING CODE 8010-01-M