[Federal Register Volume 63, Number 93 (Thursday, May 14, 1998)]
[Notices]
[Pages 26836-26838]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-12809]



[[Page 26836]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39975; File No. SR-PHLX-98-03]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc., Relating to Trading 
Disputes and Floor Official Rulings

May 7, 1998.

I. Introduction

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ the Philadelphia Stock 
Exchange, Inc. (``PHLX'' or ``Exchange'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') a proposal to replace 
the current text of PHLX Rule 124, ``Disputes,'' with new text. In the 
filing, the PHLX also proposed to adopt Floor Procedure Advice 
(``Advice'') F-27, ``Floor Official Rulings--Options'' and F-27, 
``Floor Official Rulings--Equity'' (together, the ``Advices''), which 
incorporate and expand upon the provisions of PHLX Rule 124. On March 
3, 1998, the PHLX amended its proposal.\3\ Notice of the proposed rule 
change and Amendment No. 1 to the proposed rule change were published 
for comment in the Federal Register on March 17, 1998.\4\ No comments 
were received regarding the proposal. This order approves the proposed 
rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Linda S. Christie, Counsel, PHLX, to Yvonne 
Fraticelli, Attorney, Division of Market Regulation (``Division''), 
Commission, dated March 3, 1998 (``Amendment No. 1''). Amendment No. 
1 revises the text of PHLX Rule 124 to make the rule consistent with 
the Advices. Specifically, Amendment No. 1 modifies the text of 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).'' In addition, Amendment No. 1 indicates 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 Specialist;'' 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.''
    \4\ See Securities Exchange Act Release No. 39741 (March 11, 
1998), 63 FR 13087.
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II. Description of the Proposal

    The PHLX proposes to codify its current procedures regarding floor 
officials' rulings by replacing the text of PHLX Rule 124 \5\ with new 
text and adopting two Advices. The Advices will be published in the 
PHLX's Floor Procedure Advice handbook. According to the PHLX, the 
proposal will incorporate expressly into the PHLX's rules the 
Exchange's current procedures for resolving trading disputes and the 
role of floor officials in resolving trading disputes.
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    \5\ Currently, PHLX Rule 124 states that ``[d]isputes arising on 
bids or offers, if not settled by agreement between the members 
interested, shall be settled, if practicable, by vote of the members 
knowing of the transaction in question; if not so settled, they 
shall be settled by the Committee.'' The ``Committee'' is the 
applicable floor standing committee. The applicable standing 
committees are the Floor Procedure Committee for the equity floor; 
the Options Committee for the equity option floor and the index 
option floor; and the Foreign Currency Options (``FCO'') Committee 
for the FCO floor.
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    New PHLX Rule 124 also acknowledges that, in addition to resolving 
trading disputes, floor officials may issue citations for violations of 
Floor Procedure Advices pursuant to PHLX Rule 970, ``Floor Procedure 
Advices: Violations, Penalties, and Procedures,'' and for violations of 
the PHLX's order and decorum regulations, pursuant to PHLX Rule 60, 
``Assessments for Breach of Regulations.'' The PHLX's proposal contains 
two provisions applicable to all rulings by floor officials. First, the 
Advices set forth 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. Second, PHLX Rule 124(b) states that all 
rulings 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 a floor 
official's ruling issued pursuant to PHLX Rule 60 or PHLX Rule 970 may 
result in an additional violation of those rules. For example, a first 
violation for disorderly conduct that does not cease promptly after the 
floor official issues the violation will result in a second violation, 
also for disorderly conduct.
    The remaining provisions of new PHLX Rule 124 concern trading 
disputes. Specifically, new PHLX Rule 124(a) states that disputes 
occurring on and relating to the trading floor, if not settled by 
agreement between the interested members, shall be settled, if 
practicable, 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 a transaction if they determine that the 
transaction violated certain enumerated PHLX rules.\6\ The Advices 
state that floor officials need not render decisions unless the request 
for a ruling is made within a reasonable period of time.
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    \6\ See Amendment No. 1, supra note 3.
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    PHLX Rule 124(c) identifies the procedures for review of floor 
officials' rulings. Specifically, 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, and that floor 
officials' rulings issued under Floor Procedure Advices are reviewable 
pursuant to PHLX Rule 970. Floor officials' rulings in connection with 
trading disputes are reviewable pursuant to the procedures established 
in new PHLX Rule 124(d).
    Under PHLX Rule 124(d), floor officials' rulings for options and 
FCO trading are reviewable by a minimum of three members of the 
applicable Subcommittee on Rules and Rulings or by the Chairperson of 
the applicable standing committee \7\ (or his or her designee) if three 
Subcommittee members cannot be convened promptly. With respect to 
equity trading, floor officials' rulings are reviewable by a minimum of 
three members of the Floor Procedure Committee, or the Chairperson of 
the Floor Procedure Committee (or his or her designee) if three members 
cannot be convened promptly. This will be the designated review panel 
for floor officials' rulings.
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    \7\ See note 5, supra, for a description of the jurisdiction of 
the standing committee.
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    The Advices state that a member must submit a request for review of 
a floor official's ruling to the Director of the PHLX's Market 
Surveillance Department (or his or her designee) within 15 minutes from 
the time the contested ruling was rendered.\8\ Floor officials'

[[Page 26837]]

rulings may be sustained, overturned, or modified by a majority vote of 
the review panel members present.\9\ In making the determination, the 
review panel may consider facts and circumstances not available to the 
ruling floor official as well as actions 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 pursuant to PHLX By-Law Article XI, 
``Appeals.'' The PHLX notes that neither floor officials' rulings or 
reviews of floor officials' rulings preclude a person from seeking 
redress through the PHLX's arbitration facilities.\10\
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    \8\ The review panel will try to meet as soon as practicable 
after notice of a request for a review of a floor official's 
rulings. The PHLX notes, however, that this time frame will 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, the 
PHLX notes that, in connection with options trading, the obligations 
to maintain a fair and orderly market or the due diligence 
requirements of PHLX Rule 1063 may prevail over the obligation of a 
floor official to provide a ruling or attend a review.
    \9\ See PHLX rule 124(d).
    \10\ See PHLX Rule 950, ``Arbitration.''
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    The Advices reiterate the provisions in PHLX Rule 124 and provide 
additional details regarding the operation of PHLX Rule 124. Among 
other things, the Advices state that floor officials shall try to be 
prompt in rendering decisions. However, a floor official may delay 
rendering a ruling until discovery is completed if the floor official 
determines that the benefits of further discovery as to the facts and 
circumstances of the matter under review outweigh the monetary risks of 
a delayed ruling.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the Act and, in particular, with Section 6(b)(5) of the Act, in 
that the proposed rule change 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.\11\ According to the PHLX, the proposal codifies the 
Exchange's existing procedures for resolving trading disputes, 
including the role and authority of floor officials in resolving 
trading disputes and the means for appealing floor officials' 
decisions. By codifying the Exchange's procedures for resolving trading 
disputes, the Commission believes that the proposal will help to ensure 
that PHLX members are aware of the PHLX's rules governing the 
resolution of trading disputes and will facilitate compliance with 
those rules. In addition, the Commission believes that the trading 
dispute resolution procedures in PHLX Rule 124 and the Advices will 
help to ensure that the PHLX's markets function in a fair, orderly, and 
efficient manner.
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    \11\ See 15 U.S.C. 78f(b)(5). In approving this rule change, the 
Commission has considered the proposal's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
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    PHLX Rule 124(a) allows a member to summon a floor official to 
settle a dispute on the trading floor if neither the interested members 
or members with knowledge of the transaction are able to resolve the 
dispute. The Commission notes that the trading dispute resolution 
authority granted to floor officials under PHLX Rule 124 and the 
accompanying Advices is similar to the authority granted to floor 
officials under the rules of other securities exchanges.\12\
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    \12\ See e.g., NYSE Rule 75, ``Disputes as to Bids and Offers'' 
(allowing a floor official to settle disputes concerning bids or 
offers that are not settled by agreement between the interested 
members); and Amex Rule 22(c) (allowing a floor official to resolve 
market disputes submitted to him by members).
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    In addition, the Commission believes that several requirements in 
PHLX Rule 124 and the Advices will provide members and floor officials 
with guidance concerning the resolution of trading disputes and help to 
enhance the fairness, accuracy, and integrity of floor officials' 
decisions. In this regard, PHLX Rule 124(a) and the Advices require a 
floor official resolving a trading dispute to institute the course of 
action he or she deems to be most fair to all parties under the 
circumstances at the time. In addition, the Advices allow a floor 
official to delay rendering a ruling if the floor official believes 
that the benefits of further discovery concerning the facts and 
circumstances of a matter outweigh the monetary risks of a delayed 
ruling. The Advices also establish a conflict of interest provision 
applicable to all ruling by floor officials.\13\ Specifically, the 
Advices state that a floor official should not render a decision or 
authorize a citation when the floor official was involved in or 
affected by dispute, or in any situation where the floor official is 
not able to objectively and fairly render a decision.
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    \13\ As noted above, the conflict of interest provision applies 
to floor officials' actions pursuant to PHLX Rules 60 and 970, as 
well as to floor officials' rulings pursuant to PHLX Rule 124.
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    The Commission believes that the proposal will provide additional 
clarity to the process of resolving trading disputes by specifying the 
remedies available to floor officials resolving such disputes. In this 
regard, PHLX Rule 124(a) and the Advices state that a floor official 
resolving a trading dispute 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 if 
they conclude that the transaction violated any of the PHLX rules 
enumerated in PHLX Rule 124(a) \14\ and in the Advices. The Commission 
believes that permitting floor officials to nullify transactions only 
for violations of these enumerated rules will provide guidance to floor 
officials concerning the circumstances under which it may be 
appropriate to nullify a trade. In addition, requiring the approval of 
two floor officials to nullify a transaction will help to ensure that 
this remedy is used appropriately.\15\
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    \14\ See Amendment No. 1, supra note 3.
    \15\ The Commission notes that the rules of the Chicago Board 
Options Exchange, Inc. (``CBOE'') also permit two floor officials to 
nullify a transaction. Specifically, Interpretation and Policy .05 
to CBOE Rule 6.20, ``Admission to and Conduct on the Trading 
Floor,'' allows two floor officials to nullify a transaction or 
adjust its terms if they determine that the transaction violated any 
of the following CBOE rules: (1) 6.43 (manner of bidding and 
offering); (2) 6.45 (priority of bids and offers); (3) 6.46 
(transactions outside the book's last quoted range); (4) 6.47 
(priority on split price transactions); or (5) 8.51 (trading crowd 
firm disseminated market quotes).
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    The Commission believes that several provisions in new PHLX Rule 
124(b) and in the Advices will facilitate the enforcement of floor 
officials' rulings. In this regard, PHLX Rule 124(b) and the Advices 
indicate that all rulings by floor officials are effective immediately 
and must be complied with promptly. Moreover, PHLX Rule 124(b) and the 
Advices note that failure to comply with a floor official's ruling in a 
trading dispute may result in a referral to the PHLX's BCC, and failure 
to comply with rulings issued pursuant to PHLX Rule 60 or to Floor 
Procedure Advices may result in the finding of an additional violation 
of those rules.
    PHLX Rule 124 and the Advices also specify the procedures for 
requesting a ruling from a floor official and for appealing a floor 
official's ruling in connection with a trading dispute.\16\ As noted 
above, PHLX Rule 124(a) allows a member to summon a floor official to 
resolve a trading dispute. The Advices state that floor officials need 
not render a decision unless the request for a ruling was made within a 
reasonable period of time. In addition, the Advices indicate that a 
member must submit a request for review of a floor official's ruling to 
the PHLX's Director of Market Surveillance

[[Page 26838]]

(or his or her designee) within 15 minutes from the time the contested 
ruling was rendered.\17\ The Commission believes that these provisions 
will facilitate the prompt resolution of trading disputes while 
providing members with an adequate opportunity to obtain a ruling from 
a floor official or to appeal a floor official's ruling. In addition, 
the Commission notes that these procedures are described in the 
Advises, which will be readily available to members in the PHLX's Floor 
Procedure Handbook. Accordingly, the Commission believes that PHLX 
members will have sufficient notice of the Exchange's procedures for 
obtaining a ruling from a floor official and appealing a floor 
official's decision.
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    \16\ Floor officials' rulings issued pursuant to the PHLX's 
order and decorum regulations are reviewable pursuant to PHLX Rule 
60; floor officials' rulings issued pursuant to Floor Procedure 
Advices are reviewable pursuant to PHLX Rule 970. See PHLX Rule 
124(c).
    \17\ According to the PHLX, a ``reasonable period of time'' will 
depend on market and trading floor conditions (e.g., volume, systems 
functioning, and quotation updating). Floor officials will determine 
what constitutes a reasonable period of time for requesting a 
ruling. The PHLX believes that it is necessary to provide floor 
officials with flexibility in making this determination. Telephone 
conversation between Linda S. Christie, Counsel, PHLX, and Yvonne 
Fraticelli, Attorney, Division, Commission, on April 27, 1998.
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    Under PHLX Rule 124(d), a review panel, consisting of either three 
members of the applicable Subcommittee on Rules and Rulings (in the 
case of options trading) or three members of the Floor Procedure 
Committee (in the case of equity trading),\18\ may sustain, overturn or 
modify a floor official's ruling. In making its decision, the review 
panel may consider facts and circumstances not available to the ruling 
floor official and action taken by the parties in reliance on the floor 
official's ruling (e.g., cover, hedge, and related trading activity). A 
member may appeal the review panel's decision to the Exchange's Board 
of Governors pursuant to PHLX By-law Article XI. The Commission 
believes that these procedures will provide for prompt and effective 
review of floor officials' rulings in trading disputes and help to 
ensure that trading disputes are resolved fairly.
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    \18\ If three committee members cannot be convened promptly, the 
Chairperson of the applicable committee, or his or her designee, may 
review the ruling. See PHLX Rule 124(d).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-PHLX-98-03) is approved.

    \19\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-12809 Filed 5-13-98; 8:45 am]
BILLING CODE 8010-01-M