[Federal Register Volume 62, Number 236 (Tuesday, December 9, 1997)]
[Notices]
[Pages 64903-64905]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-32103]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39382; File No. SR-Phlx-97-50]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Relating To Adopting a Definition of ``Foreign Broker-
Dealer'' Into Its Options Rules

December 2, 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 November 3, 1997,\3\ the Philadelphia Stock Exchange, Inc. 
(``Phlx'') or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the Exchange. The Exchange has designated the proposed rule change 
as constituting a ``non-controversial'' rule change under paragraph 
(e)(6) of Rule 19b-4 under the Act which renders the proposal effective 
upon receipt of this filing by the Commission.\4\ 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. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On November 28, 1997, the Philadelphia Stock Exchange, Inc. 
amended the filing to clarify its intent that the rule filing be 
deemed effective upon filing pursuant to Rule 19b-4(e)(6)(iii). See 
letter from J. Keith Kessel, Counsel, Philadelphia Stock Exchange, 
Inc., to Mignon McLemore, Esquire, Division of Market Regulation, 
SEC, dated November 24, 1997.
    \4\ The Exchange has represented that this proposed rule change: 
(i) Will not significantly affect the protection of investors or the 
public interest; (ii) will not impose any significant burden on 
competition, and (iii) will not become operative for 30 days after 
the date of this filing. The Exchange did not provide the required 
five business day advance notice to the Commission of its intent to 
file this proposed rule change, as required by Rule 19b-4(e)(6) 
under the Act. However, the Commission has determined to waive the 
pre-filing requirement. See supra note 3.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx is proposing to adopt a definition of ``foreign broker-
dealer,'' which will treat such broker-dealers like their U.S. broker-
dealer counterparts, thus precluding foreign broker-dealers from 
receiving treatment as customers under the various option rules.
    In accordance with the foregoing, the Phlx is proposing to adopt 
Rule 1000(b)(41) to define the term ``foreign broker-dealer'' as 
follows:

    The term ``foreign broker-dealer'' means any person or entity 
that is registered, authorized or licensed, or required to be, by a 
foreign governmental agency or foreign regulatory organization to 
perform the function of a broker or a dealer in securities, or both. 
The terms ``broker'' or ``dealer'' mean the same as set out in 
Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934, 
as amended, provided that a broker or dealer may be a bank.\5\ For 
purposes of Rules 1014, 1015, 1033 and 1080, the term broker-dealer 
includes foreign broker-dealers, which are not public customers.
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    \5\ Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act 
of 1934 provide:
    ``(4) The term ``broker'' means any person engaged in the 
business of effecting transactions in securities for the account of 
others, but does not include a bank.''
    ``(5) The term ``dealer'' means any person engaged in the 
business of buying and selling securities for his own account, 
through a broker or otherwise, but does not include a bank, or any 
person insofar as he buys or sells securities for his own account, 
either individually or in some fiduciary capacity, but not as a part 
of a regular business.''
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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 Exchange 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

[[Page 64904]]

places specified in Item IV below. The Exchange 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

    The Phlx is proposing to amend its option rules by adopting a 
definition of ``foreign broker-dealer'' to ensure that foreign broker-
dealer orders shall receive the same treatment as U.S. broker-dealer 
orders for option orders on the Exchange, as opposed to customer 
treatment. The definition has been designed to provide an objective 
standard for the enforcement of applicable option rules and to 
substantially resemble the Pacific Exchange's definition.\6\
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    \6\ See Securities Exchange Act Release No. 38420, (March 19, 
1997); 62 FR 14488, (March 26, 1997) (order approving SR-PSE-96-46).
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    By ensuring that foreign broker-dealers receive the same treatment 
as U.S. broker-dealers, this proposed rule change shall consequently 
ensure that forging broker-dealers are not afforded a competitive 
advantage solely because they are registered outside of the U.S.\7\ For 
instance, both foreign and U.S. broker-dealers would not receive 
customer treatment as specified in Rule 1015 \8\ regarding Quotation 
Guarantees, in Rule 1014 \9\ and the concept of priority/parity 
contemplated therein regarding Obligations and Restrictions Applicable 
to Specialists and Registered Options Traders, in Rule 1033(a) \10\ 
regarding Size of Bid/Offer and 10-up Guarantee, and in Rule 1080 \11\ 
regarding the Phlx Automated Options Market (AUTOM) and Automatic 
Executive System (AUTO-X).
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    \7\ A non-broker-dealer customer executing a trade through a 
foreign broker-dealer shall receive treatment as a customer.
    \8\ Rule 1015(a)(viii) provides in relevant part that ``floor 
brokers must make reasonable efforts to ascertain whether each order 
entrusted to them is for the account of a customer or a broker-
dealer. If it is ascertained that the order is for the account of a 
broker-dealer, the responsible floor broker must advise the crowd of 
that fact prior to bidding/offering.''
    \9\ Rule 1014(g)(i) provides in relevant part that ``for 
purposes of this rule, an account type is either a controlled 
account or a customer account. A controlled account includes any 
account controlled by or under common control with a member broker-
dealer. Orders of controlled accounts must yield priority to 
customer orders, but not to other controlled account orders.
    \10\ Rule 1033(a) provides in relevant part that ``the Exchange 
may require that specialists and ROTs be responsible for ensuring 
that public orders are filled to a minimum depth of ten contracts at 
the best quoted bid or offer.''
    \11\ Rule 1080(b)(i) provides in relevant part that ``for 
purposes of AUTOM, an agency order is an order entered on behalf of 
a public customer, and does not include any order entered for the 
account of a broker-dealer or any account in which a broker-dealer 
has any direct or indirect interest.'' Rule 1080(c) provides in 
relevant part that ``AUTO-X is a feature of AUTOM that automatically 
executes public customer market orders up to the number of contracts 
permitted by the Exchange. AUTOM orders not eligible for AUTO-X are 
executed manually.''
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    In consideration of the globalization of these securities markets, 
the customer trading and protection rules should be consistently 
applied so that foreign broker-dealers trading options on the Phlx do 
not have an unfair competitive advantage over U.S. broker-dealers. 
Based upon the objective nature of the proposed definition, the Phlx 
will be able to verify whether a person or entity is registered, 
authorized or licensed by a foreign governmental agency or a foreign 
regulatory organization to operate as a broker-dealer. Furthermore, as 
a member of Intermarket Surveillance Group (``ISG''), the Phlx may 
obtain information from other ISG members regarding the accounts of 
persons or entities entering orders for execution on the Phlx, 
including whether the order is that of a broker-dealer or a customer. 
The Phlx may also obtain information from foreign exchanges and foreign 
regulatory authorities with whom the Phlx either has an effective 
surveillance sharing agreement or from a foreign exchange or regulatory 
authority that is subject to a memorandum of understanding with the 
Commission that would require, upon appropriate request, that those 
entities provide such information to the Exchange.
    By restricting foreign broker-dealers from receiving volume 
guarantees and gaining access to the automatic execution system, the 
Phlx seeks to ensure that such broker-dealers do not exhaust such 
procedures or facilities, which were intended for customers. Likewise, 
allowing Registered Options Traders (``ROTs'') to retain priority over 
or have parity with both foreign and U.S. broker-dealers will enhance 
ROTs' ability to fulfill their market making responsibilities.
    The proposed rule change is consistent with Section 6 of the Act in 
general, and in particular, with Section 6(b)(5), in that it is 
designed to promote just and equitable principles of trade, prevent 
fraudulent and manipulative acts and practices, remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system, protect investors and the public interest, as well as, 
prevent the unfair discrimination among customers, issuers, brokers or 
dealers. Furthermore, the proposed rule change is designed to be 
consistent with Section 11A(a)(1)(C)(ii) of the Act in that it will 
promote fair competition among brokers and dealers and markets other 
than exchange markets.

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

    The Phlx does not believe that the proposed rule chance will impose 
any inappropriate burden on competition.

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

    Written comments were neither solicited nor received.

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

    This proposed rule change has been filed by the Exchange as a 
``noncontroversial'' rule change pursuant to paragraph (e)(6) of Rule 
19b-4.\12\ Consequently, the rule change shall become operative 30 days 
after the date of filing, or such shorter time as the Commission may 
designate, if the change (1) does not significantly affect the 
projection of investors of the public interest and (2) does not impose 
any significant burden on competition, pursuant to Section 
19(b)(3)(A)(iii) of the Act \13\ and subparagraph (e)(6) of Rule 19b-4 
thereunder.
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    \12\ 17 CFR 240.19b-4(e)(6).
    \13\ 15 U.S.C. 78s(b)(3)(A)(iii).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.
    Because the foregoing proposed rule change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) does not become operative for 30 days from November 28, 1997, 
the date on which it was filed,\14\ it has become effective pursuant to 
Section 19(b)(3)(A) of the Act and Rule 19b-4(e)(6) thereunder.
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    \14\ The thirty day delayed implementation date is triggered 
from the most recent amendment to the filing. See Securities 
Exchange Act Release No. 35123 (Dec. 20, 1994); 59 FR 66602 (Dec. 
28, 1994).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors,

[[Page 64905]]

or otherwise in furtherance of the purposes of the Act.

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, 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 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 Room, 450 Fifth Street, NW, Washington, 
DC 20549. Copies of such filing will also be available for inspection 
and copying at the principal office of the Phlx. All submissions should 
refer to File No. SR-Phlx-97-50 and should be submitted by December 30, 
1997.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-32103 Filed 12-8-97; 8:45 am]
BILLING CODE 8010-01-M