[Federal Register Volume 63, Number 202 (Tuesday, October 20, 1998)]
[Notices]
[Pages 56056-56058]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28001]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40541; File No. SR-PHLX-98-04]


Self-Regulatory Organizations; Proposed Rule Change by the 
Philadelphia Stock Exchange, Inc. Amending Rule 783, Report of 
Financial Arrangements and Floor Procedure Advice F-11, Splitting 
Orders

October 9, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on April 27, 1998, the Philadelphia Stock Exchange, Inc. (``PHLX'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. On October 2, 1998, the PHLX submitted Amendment No. 1 to the 
proposed rule change.\3\ 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\ 17 CFR 240.19b-4.
    \3\ Letter from Nandita Yagnik, Esquire, PHLX, to Michael 
Walinskas, Deputy Associate Director, Division of Market Regulation, 
SEC dated September 30, 1998. In Amendment No. 1, the PHLX added a 
requirement that members, member organizations, participants and 
participant organizations disclose loans and financial arrangements 
with non-members.
---------------------------------------------------------------------------

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

    The Exchange proposes to amend its financial arrangements rule, 
Rule 783, to require that members, member organizations, foreign 
currency options (``FCO'') participants, participant organizations and 
general partners or voting stockholders thereof report to the Exchange 
financial arrangements for amounts greater than $5,000. In addition, 
the Exchange proposes to amend Options Floor Procedure Advice 
(``Advice'') F-11 \4\ regarding the Splitting of Orders by adding that 
dually and financially affiliated Registered Option Traders (``ROTs'') 
will be treated

[[Page 56057]]

as one interest in the trading crowd. The fine schedule for failing to 
report dual or financial affiliations is also proposed to be increased 
from $100.00 to $500.00 for the first offense; $250.00 to $1,000.00 for 
the second offense; and from $500.00 to a sanction discretionary with 
the Business Conduct Committee for the third offense and thereafter. A 
corresponding change to the minor rule plan is also proposed. The 
proposed rule language is attached as Exhibit A.
---------------------------------------------------------------------------

    \4\ The PHLX's minor rule violation enforcement and reporting 
plan (``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 violation not exceeding $2,500 are deemed not 
final, thereby permitting periodic; as opposed to immediate, 
reporting.
---------------------------------------------------------------------------

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

    Currently, PHLX Rule 783 requires that members and member 
organizations report to the Exchange the obtaining and making of a loan 
over $2,500, including loans to non-members. Paragraph (b) provides 
exceptions for certain member-to-member loans. The Exchange proposes to 
amend Rule 783 to require that all members, member organizations, FCO 
participants and participant organization as well as general partners 
or voting stockholders thereof, report financial arrangements with 
other members, member organizations, FCO participants and participant 
organizations, general partners or voting stockholders or persons 
associated therewith, or non-members.
    Included in the proposed definition of financial arrangements is 
any consideration over $5,000 that constitutes a loan, gift, salary or 
bonus; the direct financing of a member or participant organization 
(except clearing arrangements); \5\ any direct equity investment or 
profit sharing arrangement; and the guarantee of a trading account 
(except a clearing arrangement). Proposed exceptions to the rule are 
outlined in proposed paragraph (c) of PHLX Rule 783. The amended rule 
would not apply to stock loan arrangements \6\ or transactions between 
members affiliated with the same member organization or participants 
affiliated with the same participant organization or transaction in 
publicly traded securities of a member organization. All parties 
involved in the financial arrangement are required to notify the 
Exchange of eligible financial arrangements within ten (10) business 
days of the effective date of such arrangements. In the event of 
termination of the financial arrangement, the parties involved must 
similarly notify the Exchange of the termination. Thus, the purpose of 
the proposal is to revise Rule 783 to focus on prompt and complete 
reporting of financial arrangements of members.
---------------------------------------------------------------------------

    \5\ Clearing arrangements are defined as those arrangements in 
which a company acts as an intermediary in making payments, 
deliveries or both in connection with transactions in securities, or 
who provides facilities for comparison of data respecting the terms 
of settlement of securities.
    \6\ A stock loan arrangement shall mean an agreement for the 
lending and borrowing of securities and shall include a securities 
contract or other agreement, including related terms, for the 
transfer of securities against the transfer of funds, securities, or 
other collateral, with simultaneous agreement by the transferee to 
transfer to the transferor against the transfer of funds, 
securities, or other collateral upon notice, at date certain, upon 
demand, the same or substituted securities.
---------------------------------------------------------------------------

    In addition, the PHLX proposes to amend Advice F-11 such that 
dually affiliated and financially affiliated ROTs would be treated as 
one interest for the purpose of splitting an order in the trading 
crowd. Currently, Advice F-11 requires ROTs of the same firm when 
bidding or offering at the same price and for the same option to be 
treated as one interest for the purpose of splitting an order in the 
trading crowd. Advice F-11 prevents one firm from garnering all of the 
executions in a particular option. The proposal would extend the Advice 
to dually and financially affiliated ROTs further ensuring fairness in 
the order splitting process. Advice F-11 defines ``dually affiliated'' 
as those ROTs required to report pursuant to Exchange Rule 793; \7\ and 
``financially affiliated'' as those ROTs required to report pursuant to 
Exchange Rule 783. The Exchange also proposes to increase fines for 
failure to report dual or financial affiliations from $100.00 to 
$500.00 for the first offense; from $250.00 to $1,000.00 for the second 
offense; and from $500.00 to a sanction discretionary with the Business 
Conduct Committee for the third offense and thereafter.
---------------------------------------------------------------------------

    \7\ PHLX Rule 793 requires persons who are general or limited 
partners, or an officer, director, stockholder or associated person 
of more than one member or participant organization or who are 
affiliated in any manner with a non-member, or non-participant 
organization which is engaged in the securities business, to 
disclose this affiliation in writing and to have such affiliation 
approved in writing by the member or participant organization.
---------------------------------------------------------------------------

    In summary, requiring disclosure of financial arrangements between 
members and participant organizations is intended to increase the 
ability of the Exchange to monitor the financial status of its own 
membership. In addition, notification is intended to facilitate 
monitoring by the Exchange and to prevent the splitting of orders in 
the trading crowd between members who are either dually or financially 
affiliated.
    Thus, the PHLX believes that the proposed rule change is consistent 
with Section 6 of the Act and more specifically with Section 6(b)(5) in 
that it promotes just and equitable principles of trade and protects 
investors and the public interest by revising the Exchange's financial 
arrangement rule and strengthening the trade splitting provision.

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 written comments were either solicited or received.

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

    Within 35 days of the 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:
    (A) by order approve the proposed rule change, or
    (B) 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 submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., 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

[[Page 56058]]

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. Copies of the filing will also be available for 
inspection and copying at the PHLX's principal offices. All submissions 
should refer to File No. SR-PHLX-98-04 and should be submitted by 
November 10, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
---------------------------------------------------------------------------

    \8\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.

Exhibit A

    Additions are italicized, deletions are bracketed.

Report of Financial Arrangements

    Rule 783. (a) Financial Arrangements--Each member, member 
organization, participant, participant organization, general partner 
or voting shareholder therein shall report to the Exchange, 
forthwith [upon the obtaining or the making thereof;
    (a) Each loan in the amount of $2,500 or more (whether of cash 
or securities) obtained by such member, member organization, general 
partner or voting shareholder;] in a form prescribed by the 
Exchange, any financial arrangement entered into, either directly or 
indirectly, with another member or member organization, participant 
or participant organization or general partner, voting shareholder, 
or any associated person thereof or a non-member. For the purposes 
of this rule, a financial arrangement shall be defined as:
    1. the direct financing of a member or participant 
organization's dealings upon the Exchange with the exception of 
clearing arrangements;
    2. any direct equity investment or profit sharing arrangement;
    3. any consideration over the amount of $5,000 that constitutes 
a gift, loan, salary, or bonus; and
    4. the guarantee of a trading account with the exception of 
clearing arrangements.
    (b) The disclosure of such financial arrangements shall be the 
responsibility of all members involved. The member or participant 
organization shall submit to the Exchange notification of the 
initiation or termination of such financial arrangements within ten 
(10) business days of the effective date of such arrangements. The 
notice of termination will constitute the end of the financial 
arrangement.

[Exceptions

    (b) Each loan in the amount of $2,500 or more (whether in cash 
or securities) to any member, member organization, general partner 
or voting stockholder made by a member, member organization, general 
partner or voting stockholder, provided however, that no report 
shall be required with respect to:
    (1) Any loan fully secured by readily marketable collateral so 
long as such loan remains secured;
    (2) Any loan of securities made by the borrower for the purpose 
of effecting delivery against a sale where money payment equivalent 
to the market value of the securities is made to the lender and such 
contract is marked approximately to the market;
    (3) Any loan on a life insurance policy which is not in excess 
of the cash surrender value of such policy;
    (4) Any loan obtained from a bank, trust company, monied 
corporation, or fiduciary on the security of real estate;
    (5) Any loan transaction between members, general partners, or 
voting stockholders in the same member organizations.]
    (c) Nothing in this rule would require the reporting of 
agreements for the lending and borrowing of securities, financial 
arrangements between members affiliated with the same member 
organization or participants affiliated with the same participant 
organization or transactions in publicly traded securities of a 
member organization.

Supplementary Material

    .01 As used herein, an agreement for the lending and borrowing 
of securities shall mean a securities contract or other agreement, 
including related terms, for the transfer of securities against the 
transfer of funds, securities or other collateral, with a 
simultaneous agreement by the transferee to transfer to the 
transferor against the transfer of funds, securities, or other 
collateral, upon notice, at a date certain, upon demand, the same or 
substituted securities.

F-11  Splitting Orders

    ROTs of the same firm, dually affiliated or financially 
affiliated ROTs, when bidding or offering at the same price for the 
same option, are to be treated as one interest for purpose of 
splitting an order in the trading crowd.
    For the purposes of this Advice, dually affiliated ROTs are ROTs 
required to report dual affiliations pursuant to Rule 793 and 
financially affiliated ROTs are ROTs required to report financial 
arrangements pursuant to Rule 783.

                              Fine Schedule
            Implemented on a one year running calendar basis
F-11
1st Occurrence...................    [$100.00]  $500.00
2nd Occurrence...................    [$250.00]  $1,000.000 Sanction is
                                                 Discretionary with the
                                                 Business Conduct
                                                 Committee
3rd Occurrence...................    [$500.00]
[4th Occurrence and thereafter...  ...........  Sanction is
                                                 Discretionary with the
                                                 Business Conduct
                                                 Committee]
------------------------------------------------------------------------

[FR Doc. 98-28001 Filed 10-19-98; 8:45 am]
BILLING CODE 8010-01-M