[Federal Register Volume 64, Number 5 (Friday, January 8, 1999)]
[Notices]
[Pages 1263-1264]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-413]



[[Page 1263]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40870; File No. SR-Phlx-98-53]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment No. 
1 Thereto by the Philadelphia Stock Exchange, Inc. Relating to 
Mandatory Year 2000 Testing

December 31, 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 December 8, 1998, as amended on December 28, 1998,\3\ the 
Philadelphia Stock Exchange, Inc. (``Phlx'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I and II below, which Items have been 
prepared by the Exchange. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons 
and to approve the proposal and Amendment No. 1 thereto on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Richard Rudolph, Counsel, Phlx, to Michael 
Walinskas, Deputy Associate Director, Division of Market Regulation 
(``Division''), Commission, dated December 23, 1998. The original 
filing was not noticed in the Federal Register.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Phlx proposals make it mandatory for all Phlx members and 
participants to participate in Year 2000 testing. Specifically, 
proposed Rule 650 would provide mandatory participation and reporting 
in a manner and frequency prescribed by the Exchange, and would exempt 
certain members from participation as set forth in detail below.
    The complete text of proposed Rule 650 is below. Proposed new 
language is italicized.
* * * * *

Rule 650

Mandatory Participation in Year 2000 Testing

    Rule 650. Each member and member organization shall participate 
in testing of computer and computer related systems designed to 
prepare for the Year 2000 century date change in a manner and 
frequency prescribed by the Exchange, and shall provide to the 
Exchange reports related to such testing in a reasonably prompt 
fashion as requested by the Exchange. Any member or member 
organization which is subject to this rule and determined by the 
Exchange to be in violation of this rule may be subject to 
disciplinary action pursuant to the Exchange's rules.

Commentary

    01. The Exchange may exempt a member or member firm from this 
requirement if that member cannot be accommodated in the testing 
schedule by the organization conducting the test or if the member 
does not employ computers in its business or for other good reasons 
determined by the Exchange.

II. Self-Regulatory Organization's Statement of the Terms of 
Substance of 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 it 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
    For some time, the securities industry, including the Phlx, has 
been considering proper systems preparation in order to avoid potential 
computer problems associated with the approach of the Year 2000. The 
primary concern worldwide is that computer systems may incorrectly 
read, for example, the date ``01/01/00'' to be the year 1900, or some 
other incorrect date, causing problems with interest payments, loan 
delinquencies, failures in tracking date and time information regarding 
trades, and other yet unknown problems.
    The concern has been addressed by the Exchange in stages, including 
both internal and external ``BETA'' testing. The next stage involves 
industry-wide testing of computer systems. Test participants are to 
include, among others, exchanges, registered clearing agencies and 
depositories, data processors and broker-dealers. To facilitate testing 
on an integrated, industry-wide basis, the Securities Industry 
Association (``SIA'') has undertaken to coordinate these efforts. 
Already, connectivity/format testing sessions, consisting of order 
entry/front end data from member firms to exchanges, and extended 
point-to-point testing sessions, consisting of exchanges executing mock 
orders and passing matched trade files to the utilities for clearance 
and settlement processing, is scheduled and being implemented. Phlx is 
participating in all phases of this testing, and proposes to mandate 
participation from members and member organizations.
    The first industry-wide testing session involving processing of 
test scripts for order processing/order execution and reporting (using 
dummy security symbols and production clearing numbers) from member 
firms to exchanges, exchanges to utilities, and utilities to member 
firms, is scheduled to take place on Saturday, March 6, 1999. In order 
for a member firm to qualify to participate in the March 6, 1999 test 
session, they must participate in the scheduled connectivity and point-
to-point testing sessions leading up to the March 6 date.
    The rule is proposed to authorize the Exchange to require that 
members and member organizations participate in testing of computer 
systems in a manner and frequency as may be prescribed by the Exchange. 
The scope of the mandated test participation includes, but is not 
limited to, point-to-point testing, connectivity testing, and industry-
wide testing conducted by the SIA (including prerequisite testing for 
schedules industry-wide testing), and other testing which may be 
required by the Exchange.
    The rule contemplates that the Exchange may exempt a member from 
this requirement if that member cannot be accommodated in the testing 
schedule by the organization conducting the test or if the member does 
not employ computers in its business, or for other good reasons 
determined by the Exchange.
    A member or member organization that is not exempt from 
participation and nonetheless fails to participate in the tests or 
fails to file any reports required by the Exchange may be subject to 
disciplinary action pursuant to the Exchange's rules.\4\ Such reports 
may include, inter alia, reports required of broker-dealers subject to 
the Net Capital Rule relating to systems preparedness for the Year 
2000, pursuant to amended Exchange Act Rule 17a-5.
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    \4\ Proposed Rule 605 specifically states that any member or 
member organization determined by the Exchange to be in violation of 
the rule may be subject to disciplinary action pursuant to the 
Exchange's rules. While disciplinary action is implied as a 
consequence of any Exchange rule violation, proposed Rule 605 
includes this clause in order to remain consistent with similar 
rules proposed by other exchanges, on which this proposed rule is 
based.

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[[Page 1264]]

2. Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act \5\ in general, and in particular, with 
Section 6(b)(5),\6\ in that it is designed to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, as well as to 
protect investors and the public interest by enhancing efficiency 
through automation in the market and protecting the public through Year 
2000 preparedness along with the securities industry.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
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B. Self Regulatory Organization's Statement on Burden on Competition

    The Phlx does not believe that the proposed rule change will impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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 with respect 
to the proposed rule change.

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

    After careful consideration, the Commission has concluded, for the 
reasons set forth below, that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder. Mandating Year 2000 testing and reporting is consistent 
with Section 6(b)(5) of the Act, among other aspects, requires that the 
rules of an exchange promote just and equitable principles of trade, 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, and remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system. The Commission believes that the proposed rule change will 
facilitate the Phlx's and member firms' efforts to ensure the 
securities markets' continued smooth operation during the period 
leading up to and beyond January 1, 2000.
    The Exchange has requested that the Commission approve the proposed 
rule change prior to the 30th day after the date of publication of 
notice of the filing in the Federal Register because the Exchange 
believes that the proposed rule change is necessary for the protection 
of investors and the safeguarding of the securities of investors, and 
that current participation in testing for the prevention of Year 2000 
failures is critical during the next year. The Commission finds good 
cause for approving the proposed rule change prior to the 30th day 
after the date of pubication of notice of the filing in the Federal 
Register. It is vital that self-regulatory organizations (``SROs'') 
such as the Phlx have the authority to mandate that their member firms 
participate in Year 2000 testing and that they report test results (and 
other Year 2000 informatin) to the SROs. The proposed rule change will 
help Phlx participate in coordinating Year 2000 testing, including 
industry-wide testing, and in remediating any potential Year 2000 
problems. This, in turn, will help ensure that the industry-wide tests 
and the Phlx's Year 2000 efforts are successful. The proposed rule 
change will also help the Phlx work with its member firms, the SIA, and 
other SROs to minimize any possible disruptions the Year 2000 may 
cause.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, vies 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, 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 Section, 450 Fifth Street, NW, 
Washington, DC 20549. 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-98-53 and should be 
submitted by January 29, 1999.

V. Commission

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\7\ that the proposed rule change (SR-Phlx-98-53) and Amendment No. 1 
thereto is thereby approved on an accelerated basis.\8\
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    \7\ 15 U.S.C. 78s(b)(2).
    \8\ In approving the proposal, the Commission has considered the 
rule's impact on efficiency, competition and capital formation, 15 
U.S.C. 78c(f).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-413 Filed 1-7-99; 8:45 am]
BILLING CODE 8010-01-M