[Federal Register Volume 63, Number 51 (Tuesday, March 17, 1998)]
[Notices]
[Pages 13087-13090]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-6765]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39741; File No. SR-PHLX-98-03]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 to the Proposed Rule Change by the 
Philadelphia Stock Exchange, Inc., Relating to Disputes and Floor 
Official Rulings

March 11, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on January 22, 1998, 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 PHLX.\2\ The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ On March 3, 1998, the PHLX amended the filing. See Letter 
from Linda S. Christie, Counsel PHLX, to Yvonne Fraticelli Attorney, 
Office of Market Supervision, Division of Market Regulation, 
Commission, dated March 3, 1998 (``Amendment No. 1''). In Amendment 
No. 1, the PHLX modified the text of proposed PHLX Rule 124 to 
indicate that two options floor officials (rather than one floor 
official) may nullify a transaction if they determine that the 
transaction violated any of the following PHLX Rules: 1014, 
``Obligations and Restrictions Applicable to Specialists and ROTs;'' 
1015, ``Quotation Guarantees;'' 1017, ``Priority and Parity at 
Openings in Options;'' 1033, ``Bids and Offers--Premium;'' or 1080, 
``PHLX Automated Options Market (AUTOM) and Automatic Execution 
System (AUTO-X).'' The amendment also states that two equity floor 
officials (rather than one floor official) may nullify a transaction 
if they determine that the transaction violated any of the following 
PHLX Rules: 110, ``Bids and Offers--Precedence;'' 111, ``Bids and 
Offers Binding;'' 118, ``Bids and Offers Outside Best Bid and 
Offer;'' 119, ``Precedence of Highest Bid;'' 120, ``Precedence of 
Offers at Same Price;'' 126, `` `Crossing' Orders;'' 203, 
``Agreement of Specialists;'' 218, ``Customer's Order Receives 
Priority;'' 229, ``Philadelphia Stock Exchange Automated 
Communication and Execution System (PACE);'' 232, ``Handling Orders 
When the Primary Market is Not Open for Free Trading (EXP, PPS, GTX 
Orders);'' or 455; ``Short Sales.'' Originally, proposed PHLX Rule 
124 stated that a floor official may nullify an executed order on 
the Exchange floor. However, two proposed Floor Procedure Advices 
submitted as part of the proposal indicated that nullification of a 
transaction requires action by two floor officials. Amendment No. 1 
makes the text of proposed PHLX Rule 124 consistent with the two 
proposed Floor Procedure Advices by indicating that two floor 
officials, rather than one floor official, may nullify a transaction 
if the floor officials determine that the transaction violated one 
of the PHLX rules enumerated in the proposed Floor Procedure 
Advices.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The PHLX proposes to amend its rules by (1) replacing the current 
text of PHLX Rule 124, ``Disputes,'' with new text; and (2) adopting 
Floor Procedure Advice (``Advice'') F-27, ``Floor Official Rulings--
Options'' and Advice F-27, ``Floor Official Rulings--Equity,'' 
(together, the ``Advices''), which incorporate and expand upon the 
provisions of proposed PHLX Rule 124 and will appear in the PHLX's 
Floor Procedure Advice Handbook. Proposed PHLX Rule 124(a) will allow 
floor officials to resolve trading disputes occurring on and relating 
to the trading floor if the dispute is not settled by agreement between 
the interested members or by a vote of members with knowledge of the 
transaction. In resolving trading disputes, a floor official may direct 
the execution of an order on the floor or adjust the transaction terms 
or participants to an executed order. In addition, two floor officials 
may nullify a transaction under certain circumstances.\3\ Proposed PHLX 
Rule 124(b) states that all floor official rulings, including rulings 
made pursuant to PHLX Rule 60, ``Assessments for Breach of 
Regulations,'' and pursuant to the PHLX's minor rule violation 
enforcement and reporting plan (``minor rule plan''),\4\ are effective 
immediately and must be complied with promptly. Proposed PHLX Rule 
124(c) states that floor officials' rulings issued pursuant to the 
PHLX's Order and Decorum Regulations are reviewable pursuant to PHLX 
Rule 60, and floor officials' rulings issued pursuant to Floor 
Procedure Advices are reviewable pursuant to PHLX Rule 970. All other 
floor officials' rulings are reviewable pursuant to proposed PHLX Rule 
124(d), which addresses trading disputes. Among other things, the 
proposed Advices contain a conflict of interest provision which states 
that a floor official should not render a decision or authorize a 
citation where the floor official was involved in or affected by the 
dispute, or in any situation where the floor official is not able to 
objectively and fairly render a decision. The conflict of interest 
provision applies to all rulings by floor officials.
---------------------------------------------------------------------------

    \3\ See Amendment No. 1, supra note 2.
    \4\ See PHLX Rule 970, ``Floor Procedure Advice: Violations, 
Penalties, and Procedures.''
---------------------------------------------------------------------------

    Copies of the proposed rule change are available at the Office of 
the Secretary, PHLX, 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 PHLX 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 PHLX 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 PHLX proposes to codify its procedures regarding floor 
officials' rulings by replacing the current text of PHLX Rule 124 with 
a new PHLX Rule 124 and adopting two Advices, which will be published 
in the PHLX's Floor Procedure Advice handbook.
    PHLX Rule 124, as amended, will: (1) State that trading disputes 
not settled by the trading crowd may be referred to a PHLX floor 
official, define a floor official's duties, and establish procedures 
for reviewing floor officials' rulings in connection with trading 
disputes; and (2) require prompt compliance with all rulings by floor 
officials and establish a conflict of interest procedure applicable to 
all rulings by floor officials.
    Proposed PHLX Rule 124(a) provides that disputes occurring on and 
relating to the trading floor, if not settled by agreement between the 
interested members, shall be settled, if practicable,

[[Page 13088]]

by vote of the members knowing of the transaction; if not so settled, 
the disputes shall be settled by a floor official summoned to the 
trading crowd. In resolving trading disputes, floor officials may 
institute the course of action deemed to be most fair to all parties 
under the circumstances at the time. A floor official may direct the 
execution of an order on the floor or adjust the transaction terms or 
participants to an executed order. In addition, two floor officials may 
nullify an executed order on the floor under certain circumstances.\5\ 
The proposed Advices state that floor officials need not render 
decisions unless the request for a ruling is made within a reasonable 
period of time.
---------------------------------------------------------------------------

    \5\ See Amendment No. 1, supra note 2.
---------------------------------------------------------------------------

    Proposed PHLX Rule 124(b) states that all rulings rendered by floor 
officials are effective immediately and must be complied with promptly. 
Failure to comply promptly with a ruling concerning a trading dispute 
may result in a referral to the PHLX's Business Conduct Committee 
(``BCC''). Failure to comply with floor officials' rulings issued 
pursuant to the PHLX's Order and Decorum Regulations (PHLX Rule 60), or 
pursuant to Floor Procedure Advices (PHLX Rule 970), and not concerning 
a trading dispute, may result in an additional violation of that 
regulation or Floor Procedure Advice. For example, a first violation 
due to disorderly conduct that does not cease promptly after the 
violation is issued by a floor official would result in a second 
violation, also for disorderly conduct.
    Proposed PHLX Rule 124(c) identifies the procedures for review of 
floor officials' rulings. Specifically, proposed PHLX Rule 124(c) 
states that floor officials' rulings issued under the PHLX's Order and 
Decorum Regulations are reviewable pursuant to PHLX Rule 60. Floor 
officials' rulings issued under Floor Procedure Advices are reviewable 
pursuant to PHLX Rule 970. All other floor officials' rulings, 
including those regarding trading disputes, are reviewable pursuant to 
the procedures established in proposed PHLX Rule 124(d).
    Under proposed PHLX Rule 124(d), floor officials' rulings for 
options and foreign currency option (``FCO'') trading are reviewable by 
a minimum of three members of the appropriate Subcommittee on Rules and 
Rulings, a subcommittee of the standing floor committee, which shall be 
empowered by the standing floor committee to review such rulings, or 
the Chairperson of the standing committee (or his designee) if three 
Subcommittee members cannot be convened promptly. With respect to 
equity trading, floor officials' ruling are reviewable by a minimum of 
three members of the Floor Procedure Committee, or the Chairperson of 
the Floor Procedure Committee (or his designee) if three members cannot 
be convened promptly. This will be the designated Review Panel for 
floor officials' rulings.
    Proposed PHLX Rule 124(d) also allows the Exchange to establish the 
procedures for the submission of a request for a review of a floor 
official's ruling. Floor officials' rulings may be sustained, 
overturned, or modified by a majority vote of the Review Panel members 
present. In making the determination, the Review Panel may consider 
facts and circumstances not available to the ruling floor official as 
well as action taken by the parties in reliance on the floor official's 
ruling (e.g., cover, hedge, and related trading activity). Decisions of 
the Review Panel are final and may be appealed to the PHLX's Board of 
Governors as a final decision of the standing floor committee 
delegating such power, pursuant to PHLX By-Law Article XI, ``Appeals.''
    In codifying proposed PHLX Rule 124, the proposed Advices contain 
many of the same provisions as the proposed rule. In addition, the 
proposed Advices state that a floor official should not render a 
decision or authorize a citation where the floor official is not able 
to objectively and fairly render a decision. Floor officials are 
empowered to render rulings on the trading floor to resolve trading 
disputes occurring on and respecting activities on the trading floor. 
Floor officials shall endeavor to be prompt in rendering decisions. 
However, in any instance where a floor official has determined that the 
benefits of further discovery as to the facts and circumstances of any 
matter under review outweigh the monetary risks of a delayed ruling, 
the floor official may determine to delay rendering the ruling until 
such time as that further discovery is completed. In issuing decisions 
for the resolution of trading disputes, floor officials shall institute 
the course of action deemed by the ruling floor official to be most 
fair to all parties under the circumstances at the time.
    The proposed Advices also state that a floor official may direct 
the execution of an order on the floor, or adjust the transaction terms 
or participants to an executed order on the floor. However, two equity 
floor officials may nullify a transaction if they determine that the 
transaction violated any of the following PHLX Rules: 110, ``Bids and 
Offers--Precedence;'' 111, ``Bids and Offers Binding;'' 118, ``Bids and 
Offers Outside Best Bid and Offer;'' 119, ``Precedence of Highest 
Bid;'' 120, ``Precedence of Offers at Same Price,'' 126, ``Crossing'' 
Orders;'' 203, ``Agreement of Specialists;'' 218, ``Customer's Order 
Receives Priority;'' 229, ``Philadelphia Stock Exchange Automated 
Communication and Execution System (PACE);'' 232, ``Handling Orders 
When the Primary Market is Not Open for Free Trading (EXP, PPS, GTX 
Orders);'' or 455, ``Short Sales.''
    With respect to option or FCO trading, two floor officials may 
nullify a transaction if they determine the transaction violated any of 
the following PHLX Rules: 1014, ``Obligations and Restrictions 
Applicable to Specialists and ROTs;'' 1015, ``Quotation Guarantees;'' 
1017, ``Priority and Parity at Openings in Options,'' 1033, ``Bids and 
Offers-Premium;'' or 1080, ``PHLX Automated Options Market (AUTOM) and 
Automatic Execution System (AUTO-X).''
    The proposed Advices note that floor officials' rulings may be 
appealed and that requests for such review must be submitted to the 
Director of the PHLX's Market Surveillance Department (or his designee) 
within 15 minutes from the time the contested ruling was rendered. The 
reviewing committee shall endeavor to meet on the matter as soon as 
practicable after notice of a request for a review of the floor 
official's ruling. Neither floor officials' rulings or reviews of floor 
officials' rulings preclude a person from seeking redress from the 
Exchange's arbitration facilities.\6\
---------------------------------------------------------------------------

    \6\ See PHLX Rule 950, ``Arbitration.''
---------------------------------------------------------------------------

    In summary, the PHLX's proposal consists of amendments to PHLX Rule 
124 and the adoption of two versions of Advice F-27, one for equity 
trading and one for options and FCO trading. The text of proposed 
Advice F-27, applicable to the equity floor varies slightly from that 
dealing with options in that it contains references to specific equity, 
as opposed to option, trading rules. The proposed Advices will appear 
in the Exchange's Floor Procedure Advice handbook, although no fine 
schedule will apply. The trading floor membership will be notified of 
these procedures by way of a memorandum and the proposal will take 
effect upon notice to the membership.
    Current PHLX Rule 124 provides that disputes arising on bids or 
offers, if not settled by agreement between the interested members, 
shall be settled, if practicable, by votes of the members knowing of 
the transaction; if not so settled, the disputes will be settled by the 
appropriate floor standing

[[Page 13089]]

committee,\7\ whose authority to settle disputes derives from the 
Exchange's By-Laws.\8\ In practice, the FCO Committee and the Options 
Committee have delegated this authority to their respective 
Subcommittees on Rules and Rulings, and, further, to the floor 
officials who comprise those subcommittees.\9\ For equity trading, the 
Floor Procedure Committee, the standing committee, continues to settle 
disputes and the floor officials for that trading floor are Floor 
Procedure Committee members.
---------------------------------------------------------------------------

    \7\ The appropriate floor standing committee for the equity 
floor is the Floor Procedure Committee; the appropriate floor 
standing committee for the equity options and index options floor is 
the Options Committee; and the appropriate floor standing committee 
for the FCO floor is the FCO Committee.
    \8\ See PHLX By-Law Article X, ``Standing Committees,'' Sections 
10-16, ``Floor Procedure Committee;'' 10-17, ``FCO Committee;'' and 
10-19, ``Options Committee.''
    \9\ The authority to establish sub-committees appears in 
paragraph (b) of PHLX By-Law X, Section 10-3, ``Proceedings of 
Special and Standing Committees.''
---------------------------------------------------------------------------

    Currently, when a dispute arises in a trading crowd, a floor 
official may be summoned to resolve it. If a party to the dispute 
disagrees with a floor official's resolution, that party may request a 
review of the floor official's ruling. PHLX floor officials also may 
authorize citations for violations of Floor Procedure Advices pursuant 
to the PHLX's minor rule plan.\10\ In addition, floor officials may 
impose assessments for violations of the Exchange's Order and Decorum 
Regulations. Thus, the PHLX's proposal covers all floor official 
decisions, whether pertaining to Floor Procedure Advices, Order and 
Decorum Regulations, or trading disputes in general, except that the 
review process, set forth in proposed PHLX Rule 124(d), pertains only 
to trading disputes. The review process for violations of the Floor 
Procedure Advices pursuant to PHLX Rule 970 involves the PHLX's BCC 
Rule 60 governs the review process for violations of the PHLX's 
Regulations of Order and Decorum.
---------------------------------------------------------------------------

    \10\ The PHLX's minor rule plan, codified in PHLX Rule 970, 
contains Floor Procedure Advices with accompanying fine schedules. 
Rule 19d-1(c)(2) under the Act authorizes national securities 
exchanges to adopt minor rule violation plans for summary discipline 
and abbreviated reporting. Rule 19d-1(c)(1) under the Act requires 
prompt filing with the Commission of any final disciplinary action. 
However, minor rule violations not exceeding $2,500 are deemed not 
final, thereby permitting periodic, as opposed to immediate, 
reporting.
---------------------------------------------------------------------------

    The PHLX proposes to amend PHLX Rule 124 to incorporate the dispute 
procedures and the role of floor officials expressly into the rule to 
enable interested persons to refer directly to the Exchange's rule book 
for the provisions governing disputes. For the same reason, the PHLX 
proposes to adopt the Advices, so that the procedures for handling 
trading disputes and other rulings will appear in the Exchange's Floor 
Procedure Advice handbook.\11\
---------------------------------------------------------------------------

    \11\ The PHLX proposes no fine schedule for the proposed Advices 
such that the Exchange's minor rule plan is not impacted at this 
time.
---------------------------------------------------------------------------

    In codifying the role of floor officials and the procedure for 
issuing rulings, including the ability of floor officials to adjust, 
direct or nullify trades, the proposal also codifies the use of certain 
standing floor committees' Subcommittees on Rules and Rulings, 
comprised of floor officials, to review floor officials' trading 
dispute decisions, as explained above. The procedure for review of 
floor officials' rulings also is enumerated, including a 15-minute 
deadline for requesting a review and a guideline that the review take 
place as soon as practicable.\12\ With respect to the ability of two 
floor officials to nullify trades, the Exchange believes that listing 
specific rules should guide floor officials in deciding which 
situations warrant this measure.\13\ Thus, two versions of Advice F-27 
are proposed, one for the options and FCO floors and one for the equity 
floor, each specifically listing the rules that may trigger the need to 
nullify a trade. These rules predominately pertain to trading 
procedures and parity/priority principles.
---------------------------------------------------------------------------

    \12\ The PHLX notes that these deadlines would apply to the 
extent practicable under the circumstances, particularly if 
convening a Review Panel proves to be difficult due to the time of 
day, heavy trading volume, or scheduling conflicts. In addition, 
respecting options trading, for example, the obligations respecting 
the maintenance of a fair and orderly market contained in PHLX Rule 
1014, including market liquidity, as well as the due diligence 
requirements of PHLX Rule 1063 applicable to floor brokers, may 
prevail over the obligation of a floor official to provide a ruling 
or attend a review.
    \13\ The Exchange notes that the ability to nullify a 
transaction is similar to CBOE Rule 6.20, ``Admission to and Conduct 
on the Trading Floor,'' Interpretation and Policy .05.
---------------------------------------------------------------------------

2. Statutory Basis
    The PHLX believes that 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, and protect investors and the public interest. Specifically, 
the PHLX believes that the codification of the procedures respecting 
floor officials' rulings should promote fairness, certainty, and 
integrity in the process of resolving disputes. The Exchange believes 
that the proposal concerning floor officials' rulings also is 
consistent with Section 6(b)(6) of the Act as well as due process 
principles in that its members and associated persons shall be 
appropriately disciplined for violations of PHLX rules, in accordance 
with the proposed procedures respecting floor officials' rulings. In 
addition, floor officials' rulings may be appealed to a Review Panel, 
and, thereafter, to the PHLX's Board of Governors, consistent with PHLX 
By-Law XI, which authorizes appeals from standing committee decisions.

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

    The PHLX 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 comments were solicited or received.

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 self-regulatory organization consents, the Commission will by 
order approve such proposed rule change, or 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, including whether the proposed rule 
change is consistent with the Act. Persons making written submission's 
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

[[Page 13090]]

Room. 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-98-03 and should be submitted by April 7, 
1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-6765 Filed 3-16-98; 8:45 am]
BILLING CODE 8010-01-M