[Federal Register Volume 62, Number 132 (Thursday, July 10, 1997)]
[Notices]
[Pages 37109-37111]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-17984]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38809; File No. SR-PHLX-97-31]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. Proposing Amendments to 
Its Certificate of Incorporation and By-Laws

July 1, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on June 25, 1999, the 
Philadelphia Stock Exchange, Inc. (``PHLX'' or Exchange'') filed with 
the Securities and Exchange 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.
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PHLX hereby proposes amendments to its Certificate of 
Incorporation and By-Laws. A Table of Contents that provides a section-
by-section description of the proposed amendments and the text of the 
proposed amendments are available at the places specified in Item IV 
below.

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 section A, B, and C below, of the 
most significant aspects of such statement.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    PHLX hereby proposes amendments to its Certificate of Incorporation 
and By-Laws that are designed to promote an enhanced governance 
structure for the Exchange. These reforms were based upon 
recommendations made by a Special Committee appointed by the PHLX Board 
to review and make recommendations regarding the Exchange's governance 
structure, including the operations of the Exchange and the composition 
of its Board, committees and other entities involved in the governance 
of the Exchange.
    The Special Committee on Governance was organized in December 1996, 
Irving M. Pollack, a former SEC Commissioner, was appointed to chair 
the Committee. the other members of the Committee were: J. Cater Beese, 
Jr., a former SEC Commissioner, member of the PHLX Board and Chairman 
of Alex. Brown International; Ronald K. Brandes, a public member of the 
PHLX Board and Managing Director of Braddis Associates, Inc.; James 
Dimon, President and Chief Operating Officer of Travelers Group and 
Chairman and Chief Executive Officer of Smith Barney, Inc.; Joseph 
Grano, Jr., President of PaineWebber, Inc.; Stephen H. Hanke, a public 
member of the PHLX Board and Professor of Applied Economics at Johns 
Hopkins University's Department of Economics; Peter R. Kellogg, Chief 
Executive Officer and Senior Partner of Spear Leeds & Kellogg; Leon M. 
Schochet, a member of the PHLX Board and an Investment Limited Partner 
of J.C. Bradford & Co.; Michael D. Waber, President of Fairview 
Trading, Inc., and John F. Wallace, Chairman of the PHLX Board and 
President of Wallace Securities Corp.
    On March 4, 1997, the Securities and Exchange Commission's Office 
of Compliance Inspections and Examinations (``OCIE'') issued a report 
based on a special examination of the Exchange (``OCIE Report''). The 
OCIE Report specifically recommended an increase in public Governor 
representation to at least fifty percent (50%) of PHLX Board 
composition, including non-industry Governors, among other governance 
reforms. On March 7, 1997, SEC Chairman Arthur

[[Page 37110]]

Levitt personally addressed the PHLX Board of Governors to underscore 
the critical need to implement the recommended reforms expeditiously. 
Thereafter, the PHLX Board unanimously adopted a resolution committed 
to implement a series of major governance initiatives, including the 
Commission's recommendation regarding public and non-industry Governor 
representation on the PHLX Board.
    On April 4, 1997, the Governance Committee issued its report 
entitled ``The Report to the Board of Governors by the Special 
Committee on Governance of the Philadelphia Stock Exchange, Inc.'' 
(``Governance Report''). The Governance Report was based upon 
comprehensive interviews with members, staff and others, significant 
document review and numerous Committee meetings. The Governance Report 
made a number of recommendations that would require amendments to the 
Exchange's By-Laws to implement such recommendations, including 
combining the position of Chairman of the Board of Governors with that 
of the Chief Executive Officer; reducing the size of the Board and 
increasing the number and proportion of non-industry and public 
Governors; restructuring the Board's key committees; revising the 
charters of certain committees; and establishing essential new 
committees.
    On April 14, 1997, the Board adopted the Governance Report's 
recommendations with minimal changes. Thereafter, the Exchange's Legal 
Department, with assistance of the Governance Committee's counsel, 
drafted the proposed amendments to the Exchange's Certificate of 
Incorporation and By-Laws that will implement the recommendations. The 
Commission staff had been provided with the draft amendments. On May 
21, 1997, the Board approved the draft amendments with certain minimal 
changes. Thereafter, with the PHLX Board's strong endorsement, the 
amendments were announced to the membership in accordance with Exchange 
By-Law Article XXII, Section 22-2.
    As no written request was made for requesting a special meeting of 
the Exchange membership to consider the amendments, the PHLX Board on 
June 18, 1997 unanimously approved the proposed amendments for filing 
with the Commission.
    Two of the most significant proposed changes to the By-Laws are 
reducing the size of the Board from 30 to 22 Governors and changing the 
composition of the Board to 11 non- industry Governors, of whom at 
least 5 shall be public Governors: 10 industry Governors; and a 
Chairman of the Board who will be the full time, paid Chief Executive 
Officer of the Exchange.\2\
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    \2\ See By-Law Article IV, Section 4-1 and By-Law Article V, 
Section 5-1. Various other amendments to the By-Laws have been made 
in connection with these changes. For instance, references to 
``President'' have been changed to refer to the ``Chief Executive 
Officer'' or ``Chairman of the Board'' and revisions to the number 
of Board members necessary to effect certain Board actions have been 
made, e.g., in most cases where the affirmative vote of 15 of the 
current 30 Governors was required, the By-Law is changed to state 
that a majority vote is required.
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    The proposed By-Law amendments make significant changes to the 
Nominating Committee's charter. The amendments specify that a majority 
of the Committee be non-industry Governors and authorize the Committee 
to select non-industry and public Governors, nominees for industry 
Governor, committee chairs, and the Nominating Committee's successors, 
and to fill vacancies on the Board, all subject to Board approval.\3\
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    \3\ See By-Law Article III, Section 3-5.
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    The proposed By-Law amendments specify the composition of the 10 
industry Governors as follows: 2 Equity Floor industry Governors, 1 
Equity Options Floor Specialist Governor and 1 Equity Options Floor 
Registered Options Trader Governor (all of whom shall work on the 
Exchange Floor or be a general partner, executive officer or member 
associated with a member organization primarily engaged in business on 
the Exchange Floor); 1 Equity Options Floor Broker Governor (who shall 
work on the Equity Options Floor); and 5 Off-Floor Governors.\4\ Except 
for the Chairman of the Board, all Governors are subject to term limits 
of two consecutive three year terms.\5\
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    \4\ See By-Law Article IV, Section 4-1.
    \5\ See By-Law Article IV, Section 4-3.
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    The manner in which the Vice Chairmen of the Board are selected 
also has been changed. Instead of the Vice Chairmen being elected by 
the membership, the Board will now appoint the Off-Floor Vice Chairman 
from among the Off-Floor Governors, and the On-Floor Vice Chairman from 
among the On-Floor Governors. If there is a contest for On-Floor Vice 
Chairman, a membership election will be held solely for the On-Floor 
Vice Chairman.\6\
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    \6\ See By-Law Article IV, Section 4-2.
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    The number of members required to file independent Governor 
nominations is proposed to be increased from 10 to 50 members for an 
individual nomination, and 30 to 75 members for nominating an entire 
slate or portion thereof.\7\
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    \7\ See By-Law Article III, Section 3-7.
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    Substantial amendments relating to the Exchange's standing 
committees, including adding new standing committees of Automation, 
Compensation and Quality of Markets; reducing the size of standing 
committees to no more than 9 members except for floor committees, which 
may have no more than 12 members; requiring the committee chair and at 
least one other member to be a Governor; and revising the charter and 
composition of certain existing committees, all which have been 
proposed for By-Law Article X. Of particular note, the Executive 
Committee will be authorized, with Board approval, to appoint committee 
members other than committee chairs, and to act on behalf of the Board 
when the Board is not in session.\8\ The Audit Committee will be 
composed of 3 public Governors and the Committee's charter will be 
significantly expanded to authorize the Committee's inquiries into all 
aspects of the Exchange's operations and finances, including regulatory 
matters.\9\
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    \8\ See By-Law Article X, Section 10-14.
    \9\ See By-Law Article X, Section 10-9.
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    The Arbitration Committee's composition has been reduced from 25 to 
4 members and member controversies will be handled in the same fashion 
as public customer controversies.\10\
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    \10\ See By-Law Article X, Section 10-8.
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    Business Conduct Committee (``BCC'') appeals will be taken directly 
to the Board as the Disciplinary Review Committee is proposed to be 
eliminated.\11\ The Exchange Enforcement staff will be entitled to 
petition the Board to appeal a BCC decision.\12\
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    \11\ See By-Law Article X, Section 10-11.
    \12\ See By-Law Article XI, Section 11-3.
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    Board Advisory Committees that hear appeals of standing committee 
decisions and are composed of 3 Governors, will now include at least 1 
public Governor.\13\
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    \13\ See By-Law Article XI, Sections 11-1 and 11-2.
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    Certain provisions of the PHLX Certificate of Incorporation and By-
Laws are being proposed to be adopted and/or amended in order to 
attract qualified candidates to serve on the PHLX Board and committees, 
and to clarify the responsibilities and obligations of those who are 
appointed. In this regard, new Article XVIII to the PHLX Certificate of 
Incorporation is being proposed in order to limit liability of PHLX 
Governors, as permitted under the Delaware General Corporation Law. 
Additionally, current By-Law Article IV, Section 4-18, is proposed to 
be replaced entirely by a

[[Page 37111]]

provision that provides broad and comprehensive indemnification 
coverage and rights to Governors, committee members and officers of the 
Exchange, and provides discretionary authority for the Board to 
indemnify agents and employees of the Exchange.
    By-Law Article IV, Section 4-8, is proposed to be amended so that 
no person shall participate in the ``determination'' as opposed to 
``adjudication'' of any matter in which he is personally interested. 
This change would expand the coverage of this provision, which pertains 
to disqualification of Governors from participation in Board actions. 
Additionally, Article XIV of the PHLX Certificate of Incorporation is 
proposed to be replaced in its entirety with a current provision of the 
Delaware General Corporation Law regarding contracts and transactions 
entered into by the PHLX in which a Governor, director, or officer has 
a financial interest.
    A number of other revisions to the By-Laws are proposed for the 
sake of organization or accuracy. For instance, the term 
``Corporation'' has been changed throughout the By-Laws to 
``Exchange,'' and By-Law Articles VI and VII regarding Vice Chairmen of 
the Board of Governors and Officers of the Corporation are being 
deleted in their entirety with the relevant sections being moved into 
Article V.
    The proposed rule change is consistent with Section 6(b)(3) of the 
Act in that more Governors shall be representative of investors and not 
associated with a member of the Exchange, broker or dealer while 
promoting the opportunity to assure fair representation of PHLX members 
in the selection of nominees for Governors and the administration of 
the affairs of the Exchange. In addition, it is consistent with Section 
6(b)(5) of the Act as it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade and in general to protect investors and the public 
interest.

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

    The PHLX does not believe that the proposed rule change will result 
in any burden on competition.

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

    In accordance with PHLX By-Law Article XXII, Section 22-2, the 
membership was notified of the proposed amendment by Memorandum dated 
June 4, 1997 and no written request was filed within the 10 day period 
allowed by the By-Law. Thereafter, on June 18, 1997, a membership 
petition was received by the Board pursuant to PHLX By-Law Article 
XXII, Section 22-1, which offered, in writing, certain proposed 
amendments to the By-Laws. This petition currently is being held by the 
PHLX Secretary pending completion of certain revisions to the proposed 
amendments by the petitioners, after which such amendments will be 
submitted to the membership for vote thereon.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the PHLX consents, the Commission will:
    (A) By order approve such proposed rule change, or,
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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, 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 provisions 
of 5 U.S.C. 552, will be available for inspection and copying in 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 above-
mentioned self-regulatory organization. All submissions should refer to 
File Number SR-PHLX-97-31 and should be submitted by August 1, 1997.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 C.F.R. 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 97-17984 Filed 7-9-97; 8:45 am]
BILLING CODE 8010-01-M