[Federal Register Volume 64, Number 4 (Thursday, January 7, 1999)]
[Notices]
[Pages 1057-1058]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-302]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40863; File No. SR-PCX-98-52]


Self-Regulatory Organizations; Pacific Exchange, Inc; Order 
Granting Approval to Proposed Rule Change and Amendment No. 1 Thereto 
Relating to Amendments to Rule 2.6(e) on the Prevention of the Misuse 
of Material, Nonpublic Information

December 30, 1998.

I. Introduction

    On October 5, 1998, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission'') or ``SEC''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend PCX Rule 2.6(e) which 
relates to guidelines established for the prevention of the misuse of 
material, nonpublic information by members and member organizations. On 
November 3, 1998, the PCX filed an amendment to the proposed rule 
change.\3\ The Commission published the proposed rule change, as 
amended, for comment in the Federal Register on November 27, 1998.\4\ 
No comments were received. This order approves the proposal, as 
amended.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Robert Pacileo, Jr., Staff Attorney, PCX, to 
Kathy England, Assistant Director, Division of Market Regulation, 
Commission, dated October 29, 1998.
    \4\ Securities Exchange Act Release no. 40686 (November 18, 
1998), 63 FR 65626.
---------------------------------------------------------------------------

II. Description of the Proposal

    In 1993, the Commission approved a PCX proposal to adopt Rule 
2.6(e) relating to the establishment, maintenance and enforcement of 
procedures designed to prevent the misuse of material, nonpublic 
information under the Insider Trading and Securities Fraud Enforcement 
Act of 1988 (``ITSFEA'').\5\ The Exchange is proposing to amend the 
rule in several respects.
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 33171 (November 9, 
1993), 58 FR 60892 (November 18, 1993).
---------------------------------------------------------------------------

    First, the rule currently states: ``Members that are required, 
pursuant to Rule 2.6, ti file SEC Form X-17A-5 with the Exchange on an 
annual basis shall file contemporaneously with those submissions 
attestations signed by such members stating that the procedures 
mandated by this Rule have been established, enforced and maintained,'' 
The proposed rule change would state that only those organizations for 
which the exchange is the Designated Examining Authority are required 
to file ITSFEA compliance acknowledgments stating that the procedures 
mandated by this rule have been established, enforced and 
maintained.\6\
---------------------------------------------------------------------------

    \6\ The Exchange notes that this rule change is a codification 
of the existing practices of the Exchange.
---------------------------------------------------------------------------

    The rule currently defines associated person as ``any partner, 
officer, director or branch manager of a member (or any person 
occupying a similar status or performing similar functions), any person 
directly or indirectly controlling, controlled by or under common 
control with a member, or any employee of a member.'' The Exchange is 
proposing to change the definition to ``anyone who directly is engaged 
in the member or member organization's trading-related activities, 
including general partners, officers, directors, managers (or any 
person occupying a similar status or performing similar functions), any 
person directly or indirectly controlling, controlled by or under 
common control with a member,or any employee of the member or member 
organization.'' The rule change would exclude limited partners from 
this definition, unless the limited partners are directly involved in 
the member organization's trading-related activities.
    The Exchange further proposes to define ``employee'' as ``every 
person who is compensated directly or indirectly by the member or 
member organization for the solicitation or handling of business in 
securities, including individuals trading securities for the account of 
the member or member organization, whether such securities are dealt in 
on the exchange or dealt over-the-counter.'' \7\ Thus, independent 
contractors \8\ as well as actual employees will be subject to the 
requirements of the rule.
---------------------------------------------------------------------------

    \7\ The Commission approved a similar definition that the 
Philadelphia Stock Exchange proposed in 1997. See Securities 
Exchange Act Release No. 39178 (October 1, 1997), 62 FR 52804 
(October 9, 1997.)
    \8\ See, e.g., Letter from Douglas Scarff, Director, Division of 
Market Regulation, SEC to Gordon S. Macklin, President, National 
Association of Securities Dealers, Inc., dated June 18, 1982 
(clarifying the status of independent contractors under the Act).
---------------------------------------------------------------------------

    The Exchange proposes to delete superfluous language regarding 
record keeping in Commentary .03 of Rule 2.6(e). Finally, the Exchange 
proposes to clarify that an Exchange member who is a lessor of a 
membership, and is not registered and not required to register as a 
broker-dealer under Section 15 of the

[[Page 1058]]

Act, is not subject to the requirements of the rule.

III. Discussion

    After careful review, the Commission finds that the proposal to 
amend PCX Rule 2.6(e) is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange and in particular, with the requirements of Section 
6(b) of the Act.\9\ Specifically, the Commission finds that the 
proposed rule change is consistent with the Section 6(b)(5) requirement 
that the rules of an exchange be designated, among other things, 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.\10\ The Commission also believes that the 
proposed rule change is consistent with the Section 6(b)(1) requirement 
that an exchange have the capacity to enforce compliance by its members 
and persons associated with its members with the Act, the rules 
thereunder, and the rules of the exchange.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b).
    \10\ In approving this proposed rule change, the Commission 
notes that it has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The Commission believes that the proposed rule change is a 
reasonable means of streamlining the procedures designed to prevent the 
misuse of material, nonpublic information by PCX members. Accordingly, 
the proposed rule changes should result in more effective and efficient 
monitoring and enforcement of the PCX of compliance with Rule 2.6(e) by 
its members without compromising investor protection.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\11\ that the proposed rule change (SR-PCX-98-52) be, and hereby is, 
approved.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
---------------------------------------------------------------------------

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

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-302 Filed 1-6-99; 8:45 am]
BILLING CODE 8010-01-M