[Federal Register Volume 62, Number 168 (Friday, August 29, 1997)]
[Notices]
[Pages 45902-45904]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23048]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38955; File No. SR-PCX-97-12]


Self-Regulatory Organizations; Pacific Exchange, Inc.; Order 
Approving Proposed Rule Change Modifying Rules on Disclosure of 
Financial Arrangements of Members and Notice of Filing and Order 
Granting Accelerated Approval of Amendment Thereto

August 20, 1997.

I. Introduction

    On April 23, 1997, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange''), filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') pursuant to Section 19(b)(1) of the

[[Page 45903]]

Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change modifying rules on disclosure of 
financial arrangements of Members. The proposed rule change was 
published for comment in Securities Exchange Act Release No. 38623 (May 
13, 1997), 62 FR 27640 (May 20, 1997). The Commission received no 
comments on the proposal. On June 27, 1997, the Exchange amended the 
proposed rule change (``Amendment No. 1'') to clarify certain aspects 
of the filing.\3\ This order approves the proposed rule change and 
grants accelerated approval to Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Letter from Michael D. Pierson, Senior Attorney, Regulatory 
Policy, PCX, to Margaret J. Blake, Division of Market Regulation, 
Commission (June 27, 1997).
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II. Description of the Proposal

    The Exchange is proposing to make various changes to the PCX Rule 
4.18, ``Disclosure of Financial Arrangements of Members.'' Currently, 
Rule 4.18(a) requires disclosure of financial arrangements between 
Members only. In its filing, the Exchange proposed amending Rule 
4.18(a) to require that a Market Maker, Floor Broker, Specialist or 
Member Organization that enters into a financial arrangement with any 
other Member or Non-Member shall disclose to the Exchange the name of 
such Member or Non-Member and the terms of the arrangement.
    Second, Subsection (a) currently defines ``financial arrangement'' 
for purposes of Rule 4.18 as ``(1) the direct financing of a Member's 
dealing upon the Exchange; or (2) any direct equity investment or 
profit sharing arrangement; or (3) any consideration over the amount of 
$5,000.00 that constitutes a gift, loan, salary or bonus.'' The 
Exchange is proposing to clarify and expand the third clause to 
provide: ``any consideration over the amount of $5,000.00, including, 
but not limited to, gifts, loans, annual salaries or bonuses.''
    Third, the Exchange is proposing to eliminate Subsection (b), which 
currently provides that each market Maker shall inform the Exchange 
immediately of the intention of any party (1) to change any financial 
arrangement as defined in this Rule; or (2) to issue a margin call. It 
further provides that on a form prescribed by the Exchange, a Market 
Maker shall submit to the Exchange a monthly report of his use or 
extension of credit pursuant to this Section.
    Fourth, the Exchange is proposing to eliminate Subsection (c), 
which provides that the disclosure of financial arrangements pursuant 
to this Rule shall be the responsibility of all parties involved.
    Finally, Subsection (d) currently provides that unless otherwise 
agreed, an Exchange Member shall submit to the Exchange notification of 
the initiation or termination of financial arrangements within ten 
business days of the effective date of such arrangements. It further 
provides that failure to disclose the terms of any financial 
arrangement to the Financial Compliance Department may result in 
disciplinary action by the Exchange. The Exchange is proposing to 
modify subsection (d) to provide that Exchange Members with financial 
arrangements must submit to the Exchange notification of the 
initiation, modification or termination of such financial arrangements 
within ten business days of the effective date of such arrangements or 
within such shorter period of time as the Exchange may require.\4\ It 
further states that failure to disclose the terms of such financial 
arrangements to the Exchange may result in disciplinary action. The 
Exchange believes that the proposal is consistent with Section 6(b) of 
the Act, and Section 6(b)(5) of the Act \5\ in particular, in that it 
promotes just and equitable principles of trade and protects investors 
and the public interest.
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    \4\ See supra note 3.
    \5\ 15 U.S.C. 78f(b)(5).
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III. Discussion

    The Commission believes PCX's proposed rule change is consistent 
with Section 6(b)(5) of the Act.\6\ Section 6(b)(5) requires, among 
other things, that the rules of an exchange be designed to promote just 
and equitable principles of trade, and, in general, to further investor 
protection and the public interest.\7\
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    \6\ 15 U.S.C. 78f(b)(5).
    \7\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    PCX proposes requiring disclosure of financial arrangements between 
Members and Non-Members. The Commission believes it is appropriate to 
require reporting of financial arrangements between Members and Non-
Members, as such arrangements may be significant and if left unreported 
will have an impact on the Exchange's ability to monitor the financial 
status of Members.
    The Commission believes that the Exchange's proposal to change the 
definition of ``financial arrangement'' to include ``any consideration 
over the amount of $5,000.00, including, but not limited to, gifts, 
loans, annual salaries or bonuses'' is reasonable. The Commission 
believes that expanding and clarifying the definition will ensure that 
certain arrangements, previously outside of the enumerated items in the 
definition of financial arrangement, will now be included, resulting in 
more accurate monitoring of Member financial arrangements.
    The Exchange is proposing to eliminate Rule 4.18(b) which currently 
provides that Market Makers must inform the Exchange of the intention 
of any party to change financial arrangements or to issue a margin 
call. The Commission believes that elimination of this subsection is 
reasonable as Members are already required to provide notification of 
changes to financial arrangements after they occur pursuant to 4.18(b) 
as amended. The Commission believes that pre-notification of such 
changes is unnecessary and wasteful of Exchange resources. The 
Commission also believes it is appropriate to eliminate the requirement 
that a Market Maker notify the Exchange of the intention of any party 
to issue a margin call. Based on the Exchange's representations, the 
Commission believes that requirement is unnecessary, as the Exchange 
currently receives prompt notification from a clearing Member whenever 
a Market Maker's trading account liquidates to a deficit.\8\ Exchange 
clearing Members also provide the Exchange with capital information on 
lead Market Makers on a daily basis. For these reasons the Commission 
believes the notification by Market Makers of the intention of any 
party to issue a margin call is uninformative and therefore 
unnecessary.
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    \8\ See supra note 3.
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    The Commission believes the elimination of subsection 4.18(c), 
providing that the disclosure of financial arrangements pursuant to the 
rule is the responsibility of all parties involved, is reasonable. The 
Commission believes that this requirement is stated clearly in Rule 
4.18(a), and is therefore redundant.
    Finally, the Commission believes the Exchange's proposal requiring 
Exchange Members with financial arrangements to submit to the Exchange 
notification of the initiation, modification or termination of such 
financial arrangements within ten business days of the effective date 
of such arrangements or within such shorter period of time as the 
Exchange may

[[Page 45904]]

require, is reasonable.\9\ The proposal sets forth an absolute time 
frame within which information must be provided to the Exchange, while 
allowing the Exchange a certain level of flexibility in acquiring 
information in certain instances. The Commission believes such 
flexibility is necessary for adequate oversight of Member financial 
arrangements and will allow the Exchange to obtain information 
immediately, if necessary. The Commission further believes that it is 
reasonable for the Exchange to have the authority to subject Members to 
disciplinary action where they have failed to disclose the terms of 
financial arrangements to the Exchange. The Commission believes that 
such disclosure is necessary for appropriate monitoring of Market Maker 
activity. The Commission believes that the proposal will promote 
investor protection, as failure to disclose such arrangements could 
result in reliance on inaccurate information to the detriment of the 
Exchange and its Members.
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    \9\ See supra note 3.
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    The Commission finds good cause to approve Amendment No. 1 to the 
filing prior to the 30th day after the publication of the notice of 
filing because the Amendment does not affect the substantive rights of 
Members and accelerated approval will facilitate the uninterrupted 
implementation of the proposed rule change.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1. Persons making written submission 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 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 changes 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 Room. Copies of the filing will also be 
available at the principal office of the Exchange. All submissions 
should refer to File No. SR-PCX-97-12 and should be submitted by 
September 19, 1997.

V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change and Amendment No. 1 are consistent with the Act and the 
rules and regulations thereunder applicable to the PCX, and in 
particular Section 6(b)(5).
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (File No. SR-PCX-97-12) be and 
hereby is approved, and that Amendment No. 1 filed thereto be and 
hereby is approved on an accelerated basis.

    \10\ 15 U.S.C. 78s(b)(2).
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    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-23048 Filed 8-28-97; 8:45 am]
BILLING CODE 8010-01-M