[Federal Register Volume 62, Number 241 (Tuesday, December 16, 1997)]
[Notices]
[Pages 65840-65841]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-32756]



[[Page 65840]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39413; File No. SR-PCX-97-37]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment 
Nos. 1 and 2 Thereto by the Pacific Exchange, Inc. Relating to Market 
Maker Outside Trading Accounts

    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 September 9, 1997, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission (``SEC 
`` or ``Commission'') the proposed rule change as described in Items I 
and II below, which Items have been prepared by the self-regulatory 
organization. On October 31, 1997, the Exchange submitted Amendment No. 
1 \3\ and on November 6, 1997, the Exchange submitted Amendment No. 2 
\4\ to the proposed rule change. 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, 
as amended.
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Michael D. Pierson, Senior Attorney, PCX to 
David S. Sieradzki, Attorney, SEC, dated October 29, 1997 
(``Amendment No. 1''). Amendment No. 1 clarifies what types of 
transactions the clearing firm must report to the Exchange under 
Rule 6.39(b). In addition, Amendment No. 1 adds language to Rule 
6.39(b) that requires Market Makers to report executed orders, upon 
the request of the Exchange, in instances where the clearing firm 
does not report executed orders.
    \4\ See letter from Michael D. Pierson, Senior Attorney, PCX to 
David S. Sieradzki, Attorney, SEC, dated November 5, 1997 
(``Amendment No. 2''). In Amendment No. 2, the Exchange represents 
that it will issue a regulatory circular to Members and Member Firms 
stating that all of the specific order information currently 
contained in Rule 6.39(b) will continue to be required to be 
reported pursuant to the Rule. In addition, the Exchange 
acknowledges that if it seeks to eliminate the required reporting of 
any specific information, such a change would require a rule filing 
pursuant to Section 19(b) of the Act. Finally, Amendment No. 2 makes 
a minor, non-substantive change to the Rule.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to amend its rules to eliminate the 
current requirements of routine submission by Market Makers of 
information relating to non-market-maker trading accounts (or 
``outside'' accounts). The text of the proposed rule change is 
available at the Office of the Secretary, PCX, and at the Commission.

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 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 Exchange is proposing to amend its Rule 6.39, ``Securities 
Accounts and Orders of Market Makers.'' Specifically, the Exchange is 
amending Rule 6.39(a) regarding the identification of accounts, to 
eliminate the need for routine submission by Market Makers of 
information on non-market-maker trading accounts or ``outside 
accounts.'' Currently, Exchange Market Makers are required to identify 
and report to the Exchange all accounts in which the Market Maker may 
engage in stock, option and securities trading, directly or indirectly, 
or over which it has investment discretion. The Rule in its current 
form is broad enough to require Market Makers to report professional 
trading accounts held at clearing firms, as well as outside personal 
accounts such as brokerage accounts. The rule change will require 
Market Makers to report outside account information only when requested 
by the Exchange. The Exchange also proposes amending Rule 6.39(b) 
regarding the reporting of Market Maker orders. Currently, each Market 
Maker is required to report to the Exchange every order entered into by 
that Market Maker within the specifications of the Rule. The Exchange 
proposes amending Rule 6.39(b) to require the clearing firm that 
maintains the Market Maker's trading account, rather than the Market 
Maker personally, to report executed order information to the Exchange. 
The Exchange believes it is appropriate to limit the required order 
information to ``executed'' orders only, based upon its position that 
only marginal surveillance benefits are derived from gathering 
unexecuted order information on a routine basis.
    Under the proposal, the Market Maker will be held responsible for 
the reporting requirements only if the clearing firm is not reporting 
executed order information to the Exchange and/or if the Exchange has 
requested that the Market Maker provide the information. Furthermore, 
the proposed rule change will clarify that this reporting requirement 
applies to all accounts carried for Market Makers who are the subject 
of a clearing firm Letter of Guarantee issued to the Exchange pursuant 
to Rule 6.36.
    The clearing firm thus will be the primary source for the reporting 
of Market Maker-executed order information to the Exchange. However, 
all firms that represent and execute market-maker orders will continue 
to be responsible for maintaining and retaining executed and unexecuted 
order information as required by Rules 17a-3 and 17a-4 under the Act 
and by Exchange Rule 6.68.
    Finally, in an effort to improve reporting and move toward 
electronic reporting in the future, the Exchange proposed to eliminate 
from Rule 6.39(b) the existing description of specific order 
information required to be reported.\5\
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    \5\ This provision states that the report pertaining to orders 
must include the terms of each order, identification of the 
brokerage firms through which the orders were entered, the times of 
entry or cancellation, the time report of execution were received 
and, if all or part of the order was executed, the quality and 
execution price. The Exchange will continue to require the reporting 
of this information, but pursuant to a Regulatory Circular. See 
Amendment No. 2, supra note 4.
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2. Statutory Basis
    The basis under the Act for the proposed rule change is the Section 
6(b)(5) \6\ requirement that an Exchange have rules that are designed 
to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market 
and, in general, to protect investors and the public interest.
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    \6\ 15 U.S.C. Sec. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The PCX does not believe that the proposed rule change 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

    No written comments were solicited or received with respect to the 
proposed rule change.

[[Page 65841]]

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

    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) of the Act.\7\ 
Specifically, the Commission believes the proposal is consistent with 
the Section 6(b)(5) \8\ requirements 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.\9\
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    \7\ 15 U.S.C. Sec. 78f(b).
    \8\ 15 U.S.C. Sec. 78f(b)(5).
    \9\ In approving this rule change, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. Sec. 78c(f).
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    The Commission believes that the PCX's proposal to allow market-
makers to provide outside account information upon request by the 
Exchange rather than providing such information on a routine basis is a 
reasonable revision to the Exchange's market-maker account reporting 
procedures. This conclusion is based on the Exchange's representation 
that outside account information provides little benefit to the 
Exchange's surveillance programs unless special circumstances exist. 
The Commission believes that the ability of the Exchange to request 
outside account information upon request should help preserve the 
Exchange's ability to conduct adequate surveillance.
    The Commission believes that PCX's proposal to make a Market 
Maker's clearing firm the primary responsible source for reporting 
market-maker executed order information to the Exchange is a reasonable 
means of streamlining the order reporting process. Accordingly, the 
proposed change should result in more effective and efficient reporting 
of market-maker accounts and executed order information to the 
Exchange, thus promoting just and equitable principles of trade, 
perfecting the mechanism of a free and open national market system, and 
furthering investor protection and the public interest.
    The Commission believes it is appropriate to limit the required 
submitted order information to ``executed'' orders only, based on PCX's 
representation that only minimal surveillance benefits are gained by 
gathering unexecuted order information on a routine basis. Where the 
clearing firm is not reporting the information to the Exchange and if 
the Exchange requests that the market-maker provide the information, 
the market-maker will be responsible for reporting executed order 
information. Moreover, while the clearing firm is the primary source 
for the reporting of market-maker executed order information, the firms 
representing and executing market-maker orders will continue to be 
responsible for maintaining and retaining executed and unexecuted order 
information pursuant to Rules 17a-3 \10\ and 17a-4 \11\ of the Act and 
Exchange Rule 6.68. These provisions offer further assurance that 
executed order information will be reported and records of executed and 
unexecuted orders will be maintained.
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    \10\ 17 CFR 240.17a-3.
    \11\ 17 CFR 240.17a-4.
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    The Commission believes that the PCX's proposal to eliminate the 
existing description of specific order information required to be 
reported pursuant to Rule 6.39(b) \12\ will provide the Exchange with 
greater flexibility in adding reporting requirements as needed. The 
Commission notes that the Exchange has agreed to issue a regulatory 
circular to its members reflecting that all of the specific order 
information currently contained in Rule 6.39(b) will continue to be 
required to be reported pursuant to the Rule.\13\ If the PCX in the 
future seeks to eliminate the required reporting of any of the specific 
information, such a change would require the submission of a rule 
filing pursuant to Section 19(b) of the Act.\14\
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    \12\ See supra note 5.
    \13\ See Amendment No. 2, supra note 4.
    \14\ Id.
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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 of filing thereof in the Federal Register. The proposal, as 
amended, is virtually identical to a proposal by the Chicago Board 
Options Exchange approved by the Commission on February 13, 1997, 
following a full notice period during which no comments were 
received.\15\
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    \15\ See Securities Exchange Act Release No. 38286 (Feb. 13, 
1997), 62 FR 8287 (Feb. 24, 1997) (order approving File No. SR-CBOE-
96-70).
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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. Sec. 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-PCX-97-37 and 
should be submitted by January 6, 1998.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-PCX-97-37) is approved.

    \16\ 15 U.S.C. Sec. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 97-32756 Filed 12-15-97; 8:45 am]
BILLING CODE 8010-01-M