[Federal Register Volume 63, Number 195 (Thursday, October 8, 1998)]
[Notices]
[Pages 54177-54180]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-27000]



[[Page 54177]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40517; File No. SR-Phlx-98-28]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the 
Philadelphia Stock Exchange, Inc. Relating to Its Arbitration Program

October 1, 1998.
    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 July 15, 1998, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change. The proposed rule change, as 
amended, is described in Items I and II below, which Items have been 
prepared by the Phlx. The Phlx submitted Amendment No. 1 to its 
proposal on August 12, 1998,\3\ Amendment No. 2 on September 1, 
1998,\4\ Amendment No. 3 on September 24, 1998,\5\ Amendment No. 4 on 
September 29, 1998,\6\ and Amendment No. 5 on October 1, 1998.\7\ The 
Commission is publishing this notice and order to solicit comments on 
the proposed rule change from interested persons and to grant 
accelerated approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange proposes to (1) eliminate 
its arbitration program after all open cases are closed by 
submitting a rule filing to the Commission deleting Rule 950, except 
for those provisions regarding the transfer of its arbitration 
program to the National Association of Securities Dealers, Inc. 
(``NASD''); (2) discipline members who fail to abide by the NASD 
arbitration procedures; (3) disclose the names of arbitrators; and 
(4) combine the customer and member arbitration programs with 
respect to the selection of arbitrators. See Letter from Nandita 
Yagnik, Counsel, Phlx, to Michael Walinskas, Deputy Associate 
Director, Division of Market Regulation (``Division''), Commission, 
dated August 11, 1998 (``Amendment No. 1'').
    \4\ In Amendment No. 2, the Exchange (1) clarifies that disputes 
arising under Section 8 of Phlx rule 950 also are subject to the 
Code of Arbitration Procedure of the NASD (``Code''); (2) clarifies 
that the proposed rule change is consistent with Section 6(b) of the 
Act, because the proposal provides an alternative forum for members 
as well as investors to arbitrate disputes; (3) makes a technical 
change to its rule language in Section 16 of Rule 950; and (4) seeks 
accelerated approval of the proposed rule change. See Letter from 
Nandita Yagnik, Counsel, Phlx, to Michael Walinskas, Deputy 
Associate Director, Division, Commission, dated August 27, 1998 
(``Amendment No. 2''). In a telephone conversation on September 1, 
1998, the Exchange confirmed that Section 15 of rule 950 should not 
have been amended notwithstanding the revision to the Rule made in 
Amendment No. 2, because it only applies to public customers. 
Telephone conversation between Nandita Yagnik, Counsel, Phlx, and 
Terri Evans, Attorney, Division, Commission, on September 1, 1998.
    \5\ In Amendment No. 3, the Exchange clarified that the Exchange 
and NASD have reached an agreement regarding the transfer of 
arbitration cases, but have not entered into a contract regarding 
the transfer of cases. See Letter from Nandita Yagnik, Counsel, 
Phlx, to Katherine England, Assistant Director, Division, 
Commission, dated September 21, 1998 (``Amendment No. 3'').
    \6\ In Amendment No. 4, the Exchange revised the date on which 
arbitration cases would be transferred to the NASD from September 1, 
1998 to October 1, 1998, and clarified that participants also are 
subject to NASD arbitration procedures. See Letter from Nandita 
Yagnik, Counsel, Phlx, to Katherine England, Assistant Director, 
Division, Commission, dated September 28, 1998 (``Amendment No. 
4'').
    \7\ In Amendment No. 5, the Exchange made a technical change to 
Exchange Rule 44 reflecting the October 1, 1998, transfer date. See 
Letter from Nandita Yagnik, Counsel, Phlx, to Katherine England, 
Assistant Director, Division, Commission, dated September 30, 1998 
(``Amendment No. 5'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Phlx proposes to amend Phlx Rule 950, Arbitration, as part of 
the cessation of the Exchange's arbitration program. Specifically, the 
Phlx proposes to amend Phlx Rule 950 to state that every member, member 
organization, member corporation,\8\ participant \9\ and participant 
organization as defined by Exchange rules (and hereinafter referred to 
as ``members'') shall be subject to the Code for every claim, dispute, 
or controversy arising out of or in connection with the securities 
business of any such member of the Exchange, including disputes 
outlined in Section 1, Section 6, and Section 8 of Phlx Rule 950.\10\ 
For purposes of Rule 950, each member will be subject to and required 
to abide by the Code as if such member were a ``member'' of the NASD.
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    \8\ This term was inadvertently omitted in Amendment No. 3, 
supra note 5. However, the Exchange confirmed that member 
corporations are subject to the Code. Telephone conversation between 
Nandita Yagnik, Counsel, Phlx, and Terri Evans, Attorney, Division, 
Commission, on September 30, 1998.
    \9\ This term inadvertently omitted in Amendment No. 3, supra 
note 5. However, the Exchange clarified that participants are 
subject to the Code. See Amendment No. 4, supra note 6.
    \10\ See Amendment No. 2 supra note 4 (clarifying that disputes 
arising under Section 8 are subject to the Code).
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    In addition to the foregoing, the Phlx also proposes to amend Rule 
950 to combine the customer and member arbitration programs such that 
arbitrators for member cases will be drawn from the same pool as 
arbitrators for customer cases. This amendment is necessary to resolve 
cases already pending with the Phlx.\11\
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    \11\ See Amendment No. 1, supra note 3.
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    The complete text of the proposed rule change is as follows [new 
text is italicized; deleted text is bracketed]:

ARBITRATION

Rule 950

* * * * *

Composition and Appointment of Panels

    Sec. 3. Public customer controversies shall be heard as provided in 
Section 9 or Section 15, as applicable. [Member controversies shall be 
heard by a panel of Committee persons composed of on-floor and off-
floor persons, who shall be appointed to serve on such panels by the 
Director of Arbitration in alphabetical rotation. The Committee shall 
consist of a pool of 25 persons, 15 members or persons associated with 
on-floor member and/or participant organizations and 10 members or 
persons associated with off-floor member and/or participant 
organizations. The Director of Arbitration shall appoint persons in an 
alphabetical rotation until a panel is composed. The Director of 
Arbitration shall fill a vacancy by appointing another person who is 
next in alphabetical rotation. A member controversy panel shall consist 
of not fewer than five (5) Committee persons where the amount in 
controversy does not exceed $100,000. Where the amount in a member 
controversy exceeds $100,000, a panel shall consist of not fewer than 
seven (7) Committee persons. In order for a pre-hearing conference or a 
hearing on the merits to be conducted, not more than two Committee 
persons may be absent from a proceeding from either a five (5) or a 
seven (7) member appointed panel. The panel chairman shall be 
designated by a majority of the panel.] In member controversies, the 
Director of Arbitration shall appoint an arbitration panel which 
consists of no fewer than three (3) arbitrators, all of whom shall be 
from the securities industry.
* * * * *

Composition of Panel

    Sec. 16. The individuals who shall serve on a particular [public 
customer arbitration] panel shall be determined by the Director of 
Arbitration. The Director of Arbitration may name the chairman of the 
panel.

Notice of Selection of Arbitrators

    Sec. 17. The Director of Arbitration shall inform the parties of 
the arbitrators' names and employment histories for the past ten (10) 
years, as well as information disclosed pursuant

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to Section 19, at least fifteen (15) business days prior to the date 
fixed for the first hearing session. A party may make further inquiry 
of the Director of Arbitration concerning an arbitrator's background. 
In the event that prior to the first hearing session, any arbitrator 
should become disqualified, resign, die, refuse or otherwise be unable 
to perform as an arbitrator, the Director of Arbitration shall appoint 
a replacement arbitrator to fill the vacancy on the panel [with respect 
to a public customer arbitration (with respect to a member controversy, 
the replacement arbitrator will be the next committee member in the 
alphabetical rotation)]. The Director of Arbitration shall inform the 
parties as soon as possible of the name and employment history of the 
replacement arbitrator for the past ten years, as well as information 
disclosed pursuant to Section 19. A party may make further inquiry of 
the Director of Arbitration concerning the replacement arbitrator's 
background and within the time remaining prior to the first hearing 
session or the five (5) day period provided under Section 18, whichever 
is shorter, may exercise its right to challenge the replacement 
arbitrator as provided in Section 18.
* * * * *

Disqualification or Other Disability of Arbitrators

    Sec. 20. In the event that any arbitrator, after the commencement 
of the first hearing session but prior to the rendition of the award, 
should become disqualified, resign, die, refuse or otherwise be unable 
to perform as an arbitrator, the remaining arbitrator(s) shall continue 
with the hearing and determination of the controversy, unless such 
continuation is objected to by any party within five (5) business days 
of notification of the vacancy on the panel. Upon objection, the 
Director of Arbitration shall appoint a replacement arbitrator to fill 
the vacancy [in public customer controversies. With respect to member 
controversies, the next committee member in the alphabetical rotation 
shall be appointed to fill the vacancy]. The Director of Arbitration 
shall inform the parties as soon as possible of the name and employment 
history of the replacement arbitrator for the past ten years, as well 
as information disclosed pursuant to Section 19. A party may make 
further inquiry of the Director of Arbitration concerning the 
replacement arbitrator's background and within the time remaining prior 
to the next scheduled hearing session or the five (5) day period 
provided under Section 18, whichever is shorter, may exercise its right 
to challenge the replacement arbitrator as provided in Section 18.
* * * * *

Awards

    Sec. 37. (a) All awards shall be in writing and signed by a 
majority of the arbitrators or in such manner as is required by 
applicable law [with respect to public controversies. With respect to 
member controversies, the Chairman of the panel will certify the 
decision of the panel in writing]. Such awards may be entered as a 
judgment in any court of competent jurisdiction.
    (b)-(e) No change.
    (f) All awards [involving public customers] and their contents[, 
excluding the names of the arbitrators,] shall be made publicly 
available. A party to an arbitration [involving a public customer] may 
request that the Director of Arbitration provide copies of all awards 
rendered by the arbitrator(s) chosen to decide its case. A party 
wishing to obtain such information must notify the Director of 
Arbitration within three (3) business days of receipt of notification 
of the identity of the person(s) named to the panel.
* * * * *

Arbitration Claims Filed on or After October 1, 1998

    Sec. 43. The Exchange will not accept any new arbitration claims 
filed on or after October 1, 1998.

NASD Jurisdiction Over Arbitrations Against PHLX Members

    Sec. 44. As of October 1, 1998, every member, member organization, 
member corporation, participant or participant organization (as defined 
by Exchange rules and hereinafter referred to as ``members'') shall be 
subject to the Code of Arbitration Procedure of the National 
Association of Securities Dealers, Inc. (``NASD'') for every claim, 
dispute, or controversy, arising out of or in connection with the 
securities business of any member of the Exchange, including disputes 
outlined in Section 1, Section 6 and Section 8 of this Rule. For the 
purposes of this Rule, each member shall be subject to, and shall abide 
by, the NASD Code of Arbitration Procedure as if such member were a 
``member'' of the NASD.

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 its received on the proposed rule change. The 
text of these statements may be examined at the 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

1. Purpose
    The Exchange has determined that it is no longer willing to operate 
an arbitration program because of the costs associated with such a 
program. The Exchange has determined that effective October 1, 1998, no 
new arbitration claims will be accepted, thereby ceasing the 
arbitration program. The Exchange will continue to provide arbitration 
facilities for the parties involved in those cases that were filed 
prior to such date, but will discontinue its arbitration program when 
all such cases have been closed.\12\
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    \12\ Parties to cases that were filed prior to the 
implementation of this proposal, may, by mutual consent, determine 
to withdraw their claims and resubmit their claims to another forum, 
such as the NASD. In appropriate cases (e.g., where no arbitrator 
has been assigned), the Phlx will encourage them to do so by 
refunding applicable fees. Following the closure of open cases, the 
Phlx will submit a filing to the Commission eliminating all 
provisions contained under Phlx Rule 950, except for those 
provisions regarding the transfer of the program to the NASD. See 
Amendment No. 1, supra note 3.
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    The NASD agrees that it will accept arbitration claims from and 
against Phlx members after the date of October 1, 1998;\13\ therefore, 
the Phlx is amending its Rule 950 to provide that every member, member 
organization, member corporation,\14\ participant \15\ and participant 
organization shall be subject to the Code for every claim, dispute, or 
controversy arising out of or in connection with the securities 
business of any member of the Exchange, including disputes outlined in 
Section 1, Section 6 and Section 8 of Phlx Rule 950.\16\ For purposes 
of Rule 950, each member shall be subject to and shall abide by the 
Code as if such member were a ``member'' of the NASD. In

[[Page 54179]]

return, the Exchange will cover the costs incurred by the NASD in 
transferring data,\17\ including data to be made available to the 
public, into the NASD's arbitration and disclosure programs.\18\ The 
parties to any such arbitration matter, however, would be responsible 
to the NASD for payment of the NASD's arbitration fees. The Exchange 
also is proposing to amend Section 37(f) of Rule 950 to make the names 
of arbitrators in customer arbitration awards publicly available, in 
order to facilitate the NASD's administration of the arbitration 
claims.\19\
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    \13\ See Amendment No. 3, supra note 5.
    \14\ This term was inadvertently omitted in Amendment No.3, 
supra note 5. However, the Exchange confirmed that member 
corporations are subject to the Code. Telephone conversation between 
Nandita Yagnik, Counsel, Phlx, and Terri Evans, Attorney, Division, 
Commission, on September 20, 1998.
    \15\ This term was inadvertently omitted in Amendment No. 3, 
supra note 5. However, the Exchange clarified that participants are 
subject to the Code. See Amendment No. 4, surpa note 6.
    \16\ See Amendment No. 2, supra note 4.
    \17\ In Amendment No. 3, supra note 5, the Exchange amended this 
language by deleting the reference to a contract with the NASD and 
by limiting costs payable by Phlx to those costs incurred in 
transferring data regarding Phlx arbitrators. The latter change was 
unintentional. The Phlx intends to cover costs incurred in 
transferring all data from Phlx to NASD, not just costs associated 
with transferring data regarding Phlx arbitrators. Therefore, 
notwithstanding Amendment No. 3, this sentence has been revised to 
reflect Phlx's agreement with the NASD. Telephone conversation 
between Nandita Yagnik, Counsel, Phlx, and Terri Evans, Attorney, 
Division, Commission, on September 30, 1998.
    \18\ See Amendment No. 3, supra note 5.
    \19\ See Amendment No. 1, supra note 3.
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    Because Rule 950, Section 44, requires NASD arbitration and 
subjects Phlx members to the Code, failure to pay a NASD arbitration 
award and failure to submit to NASD arbitration would be consider a 
violation of Phlx Rule 950. Such violations would be subject to 
disciplinary action under Phlx rules.\20\
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    \20\ The failure to abide by the NASD arbitration procedures by 
a Phlx member would trigger the disciplinary process (investigation 
and action pursuant to Phlx Rules 960). For example, failure to pay 
an arbitration award rendered pursuant to the Code would constitute 
a violation of Phlx Rule 950, because proposed Rule 950, Section 44, 
subjects Phlx members to the Code. Id. The Exchange intends to 
notify its members of the filing and approval of the proposal.
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    In addition to terminating its arbitration program, the Exchange 
proposes to amend Rule 950 to combine the customer and member 
arbitration programs such that arbitrators for member cases will be 
drawn from the same pool as arbitrators for customer cases.\21\ This is 
necessary in order to arbitrate already pending member cases. The 
arbitrator pool for member cases was disbanded by a proposed rule 
change to Phlx By-Law provisions which changed the Arbitration 
Committee from an arbitration pool to an advisory committee.\22\
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    \21\ Id.
    \22\ See Letter from Edith Hallahan, Vice President & Associate 
General Counsel, Phlx, to Michael Walinskas, Deputy Associate 
Director, Division, Commission, dated August 7, 1998 (regarding (i) 
withdrawal of SR-Phlx-98-06, which provided for, in part, the 
combination of customer and member arbitration programs, and (ii) 
inclusion of such provisions in SR-Phlx-98-28); Amendment No. 1, 
supra note 3; and Securities Exchange Act Release No. 38960 (August 
22, 1997), 62 FR 45904 (August 29, 1997) (order granting approval to 
proposed rule change relating to amendments to certificate of 
incorporation and by-laws of the Exchange).
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2. Statutory Basis
    The Phlx believes that the proposed rule change is consistent with 
Section 6(b) of the Act \23\ in general, and Section 6(b)(5) of the Act 
\24\ in particular, because the proposal provides an alternative forum 
for investors and members \25\ to arbitrate disputes in light of the 
cessation of the Exchange's arbitration program.
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    \23\ 15 U.S.C. 78f(b).
    \24\ 15 U.S.C. 78f(b)(5).
    \25\ See Amendment No. 2, supra note 4.
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B. Self-Regulatory Organization's Statement on the 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 written comments were solicited or received at the time of the 
filing.

III. 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 submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW, Washington, D.C. 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 in Washington, DC. 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 
number SR-Phlx-98-28 and should be submitted by October 29, 1998.

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

    The Commission believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act.\26\ Specifically, the 
Commission believes the proposal is consistent with Section 6(b)(5) of 
the Act,\27\ which requires an exchange to have rules designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and, in general, to protect investors and the public interest.\28\ In 
particular, the Commission believes that the proposed rule change 
eliminating the Phlx's arbitration program and referring cases to the 
NASD for arbitration will help protect investors and the public 
interest by ensuring there is a fair arbitration forum available for 
all Phlx arbitration claims.
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    \26\ 15 U.S.C. 78f(b).
    \27\ 15 U.S.C. 78f(b)(5).
    \28\ 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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    The Commission believes that it is consistent with the Act to allow 
the Phlx to send its arbitration cases to the NASD for arbitration, in 
part because the Phlx is no longer willing to operate the program due 
to the costs associated with running the program. The Commission also 
believes that procedurally the proposed rule change should adequately 
ensure that all arbitration cases that would be subject to Phlx's 
arbitration process will be provided for under the NASD arbitration 
program, by viture Phlx members being deemed ``members'' of the NASD 
for purposes of arbitrating any claims involving the securities 
business of any members of Phlx.\29\ The proposed rule change 
accomplishes this by subject Phlx members, as of October 1, 1998, to 
the NASD's Code for ``every claim, dispute, or controversy, arising out 
of or in connection with the securities business of any member of the 
Exchange, including disputes outlined in Section 1, Section 6 and 
Section 8'' of Phlx Rule 950. In addition, the proposed rule change 
requires that Phlx members abide by the NASD's Code as

[[Page 54180]]

if they were members of the NASD for purposes of arbitration.
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    \29\ The Commission notes that the Phlx will cover the costs 
incurred by the NASD in transferring data, including data to be made 
available to the public, into the NASD's arbitration and disclosure 
programs. The parties to any such arbitration matter, however, would 
be responsible to the NASD for payment of the NASD's arbitration 
fees.
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    In addition, the Commission believes that the proposed rule change 
adequately provides for the enforcement of Phlx Rule 950, Section 44, 
because Phlx will continue to be responsible for the enforcement and 
disciplining of members regarding arbitration. A Phlx member's failure 
to pay an arbitration award rendered pursuant to the NASD's Code would 
constitute a violation of Phlx Rule 950, Section 44, since it is that 
rule, as amended, that subjects Phlx members to the NASD's Code. 
Similarly, a Phlx member's refusal to submit to arbitration pursuant to 
the NASD's Code would constitute a violation of Phlx Rule 950, Section 
44.
    Finally, the Phlx provides adequate measures for the transition 
from the Phlx arbitration forum to the NASD arbitration form. Even 
though the Phlx will no longer accept any new claims filed with the 
arbitration program as of October 1, 1998, it will continue to operate 
its program in order to administer its current, open cases and any new 
claims received prior to October 1, 1998. The Exchange will then 
discontinue its arbitration program when all such cases have been 
closed.\30\
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    \30\ The Commission notes that the Exchange has stated that at 
that time it will submit a filing to the Commission to delete 
provisions of Rule 950, except for those provisions regarding the 
transfer of its arbitration program to the NASD. The Commission 
notes that Phlx should also not delete the part of the Phlx Rule 
950, Section 39, which generally provides that it may be deemed 
conduct inconsistent with just and equitable principles of trade for 
a member, member organization or person associated with a member to 
fail to arbitration on demand, fail to appear or to produce any 
document in his possession or control as directed, or fail to honor 
an award of arbitrators properly rendered when required by Rule 950.
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    The Commission also believes that the proposed rule change 
combining the customer and member arbitration programs helps protect 
the public interest by focusing the Exchange's arbitration efforts on 
its existing arbitration docket, including arbitrations involving 
member controversies. The Commission believes that the proposed rule 
change provides a fair procedure for members to arbitrate any dispute 
claim or controversy arising out of or in connection with the 
securities business and further notes that the proposed rule change is 
necessary in order to arbitrate pending member cases.
    The Exchange has requested that the Commission approve the proposal 
prior to the thirtieth day after the date of publication of notice of 
the proposal in the Federal Register. The Commission finds good cause 
for approving the proposed rule change prior to the thirtieth day after 
the date of publication of notice thereof in the Federal Register, 
because the Commission believes that the proposed rule change will 
allow for fair arbitration of all member arbitration claims and will 
facilitate the processing of the Exchange's remaining arbitration cases 
by permitting both public customers and members to arbitrate their 
disputes.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\31\ that the proposed rule change (SR-Phlx-98-28), as amended, is 
approved on an accelerated basis.

    \31\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-27000 Filed 10-7-98; 8:45 am]
BILLING CODE 8010-01-M