[Federal Register Volume 64, Number 245 (Wednesday, December 22, 1999)]
[Notices]
[Pages 71839-71842]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-33176]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42235; File No. SR-PCX-99-33]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Pacific 
Exchange, Inc. Relating to the Composition of the PCX Board of 
Governors

December 14, 1999.
    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 August 27, 1999, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
On November 19, 1999, the Exchange submitted Amendment No. 1 to the 
proposed rule change.\3\ On December 2, 1999, the Exchange submitted 
Amendment No. 2 to the proposed rule change.\4\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons and is issuing this order approving 
the amended proposed rule change on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Letter from Michael D. Pierson, Director Regulatory Policy, 
PCX, to Sharon M. Lawson, Division of Market Regulation 
(``Division''), SEC, dated November 18, 1999 (``Amendment No. 1''). 
In Amendment No. 1, the Exchange defined the terms ``office member'' 
and ``office allied member,'' which are used in Article III, Section 
2(b) of the Exchange Constitution. The Exchange stated that it 
intends to codify these definitions in the PCX Constitution by the 
summer of 2000. In addition, the Exchange explained that it intends 
to stagger the implementation of the revised structure of the Board 
of Governors (``Board''). As a result, two new public governors will 
be added in the 2000 term. In addition two additional public 
governors will attend meetings of the PCX Board in a non-voting 
advisory capacity during the 2000 term. The Exchange explained that 
this should enable them to familiarize themselves with the business 
of the Exchange. Finally, the Exchange clarified the use and 
composition of three classes of governors elected to the Board and 
clarified that full implementation of the changes shall be reflected 
on the PCX's 2001 Board.
    \4\ Letter from Robert Pacileo, Staff Attorney, PCX to Sharon M. 
Lawson, Division, SEC, dated December 1, 1999. In Amendment No. 2, 
the Exchange added Commentary .01 to Article III, Section 2(b) to 
explain the staggered implementation of the fifty percent public 
governor requirement. In addition, the Exchange deleted its proposal 
to require a minimum of five floor members on the Board at all 
times. Finally, Amendment No. 2 corrected an incorrect statement in 
Amendment No. 1, which provided that the Board will have nine non-
public elected members under the proposal when in fact it will 
consist of ten.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The PCX proposes to modify its Constitution to provide that fifty 
percent of the Exchange's Board will be representatives of the public. 
The text of the proposed rule change, as amended, follows. Additions 
are italicized; deletions are bracketed.

PCX CONSTITUTION

* * * * *

Article II

GOVERNMENT
Board of Governors
    Sec. 1(a). The government of the Exchange shall be vested in a 
Board of Governors (herein sometimes called ``the Board'') consisting 
of twenty-one elected Governors, and the Chairman of the Board [and the 
President of the Exchange], provided that [seven] eleven of the elected 
Governors shall be representatives of the public and shall

[[Page 71840]]

not be, or be affiliated with, a broker or dealer in securities. If at 
any time the position of the Chairman [or President] is unfilled by a 
person duly appointed to such position by the Board of Governors, the 
number of members of the Board of Governors shall be deemed to be 
reduced accordingly until such position or positions are filled. The 
Board shall hold regular and special meetings at such times and at such 
places as it may determine. Notice of meetings of the Board shall be 
given as provided in Section 8 of this Article II. The Board may act on 
any matter affecting or concerning this Exchange, except as otherwise 
provided by the Certificate of Incorporation or this Constitution. 
Except where a larger vote is required under any provisions of the 
Certificate of Incorporation or this Constitution, the Board may act on 
any matter within its jurisdiction by vote of not less than a majority 
of the Governors voting at a meeting at which a quorum is present or by 
written consent of a majority of all Governors.
* * * * *
Chairman of the Board of Governors and President
    Sec. 2(a). The Chairman of the Board of Governors and the President 
of the Exchange shall be appointed by the Board of Governors to serve 
at its pleasure and for such compensation as it may from time to time 
fix. Neither the Chairman of the Board nor the President shall engage 
in any other business during his or her incumbency except with approval 
of the Board, and acceptance of the office shall be deemed to be 
agreement to uphold the Constitution and Rules of the Exchange. The 
Chairman of the Board and the President of the Exchange shall be 
members, ex officio, of all committees of the Exchange except the 
Nominating Committee. [The President shall be a member of the Board of 
Governors.]
* * * * *

Article III

ELECTIONS, MEETINGS, TERMS OF OFFICE, PROXIES
Annual Election of Governors
    Sec. 2(a). The elected Governors shall be divided into three 
classes, each [two] of which shall be composed of seven Governors. [, 
and one of which shall be composed of six Governors.] The seven [six] 
Governors composing Class I shall have terms expiring at the Annual 
Meeting in 2002 [1993], and the terms of Governors in Class I shall 
expire each three years thereafter. The seven Governors composing Class 
II shall have terms expiring at the Annual Meeting in 2003 [1994], and 
the terms of Governors in Class II shall expire each three years 
thereafter. The seven Governors composing Class III shall have terms 
expiring at the Annual Meeting in 2004 [1995], and the terms of 
Governors in Class III shall expire each three years thereafter. Also 
at each Annual Meeting, the Vice Chairman elect shall become Vice 
Chairman and a Vice Chairman elect shall be elected to serve for one 
year from the date of election, and until his or her successor is 
elected and qualified. The Vice Chairman elect shall be one of the 
Governors presently in office with at least two years remaining in his 
or her term, or one of the newly elected Governors.
Eligibility of Governors
    Sec. 2(b). Any member, allied member or person who is an officer or 
director of the parent or subsidiary corporation of a member firm, or a 
general partner in a partnership which owns or is wholly owned by a 
member firm, or an officer or director of a member firm or of a 
participant firm or any subsidiary of the Exchange performing 
depository or clearing functions, or an officer, director or general 
partner of the parent or a subsidiary corporation of such clearing 
member firm or depository participant firm or any person not affiliated 
with a broker or dealer in securities is eligible to be elected as a 
member of the Board of Governors. Of the Governors in each of the 
classes specified in Sec. 2(a) above, at least one shall be a member of 
the Exchange, at least [two] one shall be an office member[s] or office 
allied member[s] of the Exchange, and [one] at least three shall be [a] 
representatives of the public and shall not be, or be affiliated with, 
a broker or dealer in securities. There shall be at least two floor 
members on the Board at all times.

Commentary

    .01 Pursuant to a letter from the Commission's director of Market 
Regulation dated June 10, 1999, the Exchange will stagger 
implementation of the fifty-percent public governors over a two-year 
period. The Exchange will add two new public governors, for a total of 
nine public governors, in the year 2000. The Exchange will add two new 
governors, for a total of eleven public governors, in the year 2001. 
Beginning in year 2001, there will be 11 representatives of the public 
on the Board at all times.

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 it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III 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
A. Introduction
    The PCX \5\ proposes to amend Article II, Sections 1(a) and 2(a), 
and Article III, Sections 2(a) and 2(b) of the PCX Constitution to 
increase the number of public representatives on the PCX Board of 
Governors (``Board'') to fifty percent.\6\ The Exchange believes that 
this change will make the Board more balanced, fair and effective.\7\ 
The Exchange is also proposing to remove the President of the Exchange 
from the Board.
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    \5\ The PCX is a non-stock membership corporation registered in 
the State of Delaware. Its corporate structure and the general 
parameters of its corporate governance are defined in the PCX 
Certificate of Incorporation. The Exchange's By-laws, composed of 
the PCS Constitution and PCX Rules, contain the specific 
requirements for the composition of the Board, PCX Committees and 
the daily operations of the Exchange.
    \6\ The Exchange will partially implement this rule change in 
January 2000 at the annual election of PCX Governors, as prescribed 
by proposed Commentary .01 to Article III, Section 2(b), of the PCX 
Constitution. Full implementation will conclude with the January 
2001 Board elections.
    \7\ The Exchange notes that in 1997, it took an initial step 
towards a more balanced Board composition by increasing, from six to 
seven, the number of public representatives on the Board, and also 
by increasing, from one to two, the number of public governors 
permitted to serve on the Exchange's Executive Committee. See 
Exchange Act Release No. 38945 (August 18, 1997), 62 FR 44999 
(August 25, 1997). In its approval order, the Commission stated that 
``significant representation by public governors on the Board is 
desirable and should ensure better protection of public investors 
and the public interest. Public governors are likely to have little 
or no stake in internal Exchange politics, and, if carefully 
selected, public governors should bring diverse experience and 
increased ethical sensitivity to the Board, thus enhancing the 
confidence of members and of the public in the Exchange's ability to 
govern its members appropriately.''
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B. Number of Public Governors
    Pursuant to Article II, section 1(a) of the PCX Constitution, the 
current Board

[[Page 71841]]

consist of twenty elected Governors, the Chairman of the Board and the 
President of the Exchange. The twenty elected Governors currently 
include seven representatives of the public.\8\
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    \8\ A representative of the public is an individual who is not 
affiliated with a broker or dealer in securities. PCX Const., Art. 
II, Section 1(a). The Exchange notes that it considers ``public 
representatives'' to be persons who are not employed in the 
securities industry, and that in the recent past, the Exchange's 
appointments of public representatives to the Board has been 
generally consistent with this meaning. See infra note 16.
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    The Exchange proposes to modify Article II, sections 1(a) to 
increase the total number of governors on the Board to twenty-one 
elected governors, of which at least eleven shall be representatives of 
the public. The eleven public governors will equal fifty percent of the 
twenty-two governors (``Governors''), who include twenty-one governors 
elected by PCX members plus the Chairman of the Board, who is appointed 
by the Board.\9\
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    \9\ As described above, the revised structure including eleven 
public representatives will be staggered so that in 2000 the PCX 
Board will consist of nine public governors and in 2001 the PCX 
Board will consist of the required eleven public governors. During 
the 2000 Board term, there will be nine elected public governors and 
two non-elected, non-voting advisory public governors who will stand 
for election in 2001.
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C. President of the Exchange

    The Exchange proposes to change Article II, sections 1(a) and 2(a) 
of the Constitution by removing the President of the Exchange from the 
Board. The Exchange proposes this change to accommodate the increase in 
the number of public governors. The Exchange notes that the Exchange's 
President can attend Board meetings and participate without being a 
voting member of the Board.

D. Eligibility of Governors

    The Exchange proposes to amend Article III, section 2(b) of the PCX 
Constitution, relating to the eligibility of Governors. As amended, 
this provision will require that, of the Governors in each of the 
classes specified in Section 2(a),\10\ at least one shall be a member 
of the Exchange, at least one shall be an office member or office 
allied member of the Exchange,\11\ and at least three shall be 
representatives of the public.\12\ The Exchange proposes this rule 
change to make Article II, section 1(a) consistent with Article III, 
section 2(b), which sets minimum requirements for the composition of 
the Board.
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    \10\ PCX Constitution, Article III, Section 2(a) currently 
states that ``[t]he elected Governors shall be divided into three 
classes, two of which shall be composed of seven Governors, and one 
of which shall be composed of six Governors.''
    \11\ In Amendment No. 1, the Exchange defined an office member 
as a natural person in whose name a membership is held and who does 
not exercise trading privileges on a floor of the Exchange on behalf 
of the member organization and defined an office allied member as an 
allied member (as defined in PCX Constitution, Article V, Section 6) 
who does not conduct business while on a floor of the Exchange on 
behalf of the member organization. See supra note 3.
    \12\ This provision currently states, in relevant part, that 
``at least one shall be a member of the Exchange, at least two shall 
be office members or office allied members of the Exchange, and one 
shall be a representative of the public.''
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2. Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b)\13\ of the Act, in general, and furthers the objectives of 
Section 6(b)(3)\14\ in particular, because it is designed to assure a 
fair representation of its members in the selection of its directors 
and administration of its affairs and to assure that one or more 
directors shall be representatives of issuers and investors and not be 
associated with a member of the Exchange, broker, or dealer.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(3).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the amended 
proposed rule change is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, SEC, 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 Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the PCX. All 
submissions should refer to File No. SR-PCX-99-33 and should be 
submitted by January 12, 2000.

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

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\15\ In particular, the Commission finds that the 
proposal is consistent with the requirements of Sections 6(b)(1), 
6(b)(3) and 6(b)(5) of the Act.\16\
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    \15\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \16\ 15 U.S.C. 78f(b)(1), 78f(b)(3) and 15 U.S.C. 78f(b)(5), 
respectively.
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    Section 6(b)(3) of the Act provides, among other things, that one 
or more directors of an exchange shall be representative of issuers and 
investors and not associated with a member of the exchange, broker, or 
dealer. The Commission believes that representation of the public on 
exchange governing bodies that have decision-making authority is 
critical to ensuring that the exchange works to protect the public 
interest.\17\ Further, public representation helps to ensure that no 
single group of investors has the ability to systematically 
disadvantage other market participants through the exchange governance 
process.
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    \17\ See Exchange Act Release No. 40760 (December 8, 1998), 63 
FR 70884 (December 22, 1998).
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    The proposed change amends the composition of the PCX Board by 
increasing the number of public directors from seven to eleven. As a 
result, public governors will comprise fifty percent of the Board. The 
Commission believes that increasing the number of public governors 
should substantially further the public's interest and voice on the 
Board, consistent with Section 6(b)(3). Public governors should bring 
knowledge of the interests of investors to the governance of the 
Exchange and should balance the composition of the Board. The 
Commission further believes that public governors possess a unique 
perspective, which should enhance the ability of the Board to address 
Exchange issues in a non-discriminatory fashion. In this way, the 
public governors may help to prevent unfair discrimination between 
customers, issuers, brokers, or

[[Page 71842]]

dealers in the administration of the Exchange, and protect investors 
and the public interest, consistent with Section 6(b)(5).
    Section 6(b)(1) of the Act requires that an exchange be so 
organized and have the capacity to carry out the purposes of the Act. 
The Commission believes that increasing public representation on the 
PCX Board will also further Section 6(b)(1) of the Act by enabling the 
Exchange to discharge its regulatory responsibilities and fairly 
enforce compliance by its members with its rules, the Act and the rules 
thereunder.
    The proposed composition of the Board also furthers Section 6(b)(1) 
and 6(b)(3) of the Act because it helps to ensure that each member 
constituency is adequately represented in the governing process of the 
Exchange.\18\ A national securities exchange has many self-regulatory 
functions, such as, among other things, the discipline of members. 
Recognizing and providing each member community with representation on 
the governing Board should protect the members' interests from unfair 
or uneven assertions of regulatory authority. Further fifty-percent 
public representation should ensure that the interests of one group of 
members will not dominate the Exchange and that investor interests will 
be represented on the Board.
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    \18\ Each class of governors provides for a minimum of one 
upstairs firm and one floor member. The Exchange should consider 
codifying a maximum number of member representation on the Board so 
that no member constituency can dominate the Board.
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    The Commission further believes that the PCX's current application 
of its definition of public representative is consistent with the 
requirements of the Act. The current definition, which is not amended 
by this proposal, states that a public representative is a person who 
is not a broker-dealer in securities or affiliated with a broker-dealer 
in securities. This definition, however, permits other securities 
industry participants to be public governors. The Exchange stated that 
the recent past appointments of public representatives have usually not 
included persons employed in the securities industry.\19\ The 
Commission encourages the Exchange to codify this practice by amending 
its definition of public representatives to exclude those persons that 
may have an affiliation with the securities industry.\20\
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    \19\ Conversation between Kathryn Beck, General Counsel, 
Exchange, and Mandy S. Cohen, Special Counsel, Division of Market 
Regulation, Commission on November 23, 1999. See supra note 7.
    \20\ The Commission notes that the National Association of 
Securities Dealers (``NASD'') and the Chicago Stock Exchange 
(``CHX'') currently classify their board members as industry/member, 
non-industry--which would be comparable to the PCX definition of 
public, and public--which is defined as persons that have no 
material business relationship with a broker or dealer or the 
Association or the Exchange, as the case may be. See NASD By-laws 
Article I; CHX Constitution, Sections 2 and 10.
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    To assist in the transition to eleven public representatives of the 
Board, the Exchange proposes to have only 9 public governors on the 
Board in 2000. Two additional public governors will be nominated in 
2000 who will stand for election in 2001. During 2000, these governors 
will attend Board meetings in a non-voting, advisory capacity. The 
Commission believes that this proposed change should help to ensure a 
smooth transition to the amended Board composition. This should provide 
the new public governors with exposure to the unique issues of the 
securities industry in general, as well as the specific issues that the 
PCX faces before they are expected to participate in the governance of 
the Exchange.
    The Commission notes that the requirement to have eleven public 
representatives on the Board will not be fully implemented until 2001 
as a result of PCX's desire to implement the change in two steps. 
Nevertheless, the Exchange is required, pursuant to its Constitution, 
to ensure that there are eleven public governors on its Board beginning 
in the year 2001. The Commission therefore expects PCX to have fifty-
percent public representation on its Board as of 2001.
    In summary, for the reasons discussed above, the Commission 
believes that the change to fifty-percent public governors should 
further improve oversight of the Exchange, which should benefit all 
investors. The Commission continues to urge the PCX to codify its 
application of the definition of public governor.
    The Commission finds good cause to accelerate approval of the 
proposed rule change as amended prior to the thirtieth day after 
publication in the Federal Register. The Commission believes that the 
proposed rule change provides significant benefits to investors and the 
members of the Exchange, as discussed above. By increasing the number 
of public governors on the PCX Board, the PCX should be governed by a 
more balanced corporate body.
    The Commission notes that the PCX is required to begin its election 
process for the 2000 election to be held during the annual meeting in 
January. The Commission believes that it is in the public interest to 
have the first phase of the staggered implementation of the proposed 
changes in place for the next election. Further, since the first phase 
of the implementation has a direct correlation to the full 
implementation of the proposed rule change by 2001, the Commission 
believes that it is in the public interest to approve the entire 
proposed rule change on an accelerated basis. The two non-voting 
advisory public governors will be nominated in 2000 and will then stand 
for election to the 2001 Board. Therefore, the Commission believes that 
good cause exists, consistent with Sections 6(b)(1), (b)(3), and (b)(5) 
\21\ and 19(b) \22\ of the Act, to approve the proposed rule change, as 
amended, on an accelerated basis.
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    \21\ 15 U.S.C. 78f(b)(1); 15 U.S.C. 78f(b)93); 15 U.S.C. 
78f(b)(5).
    \22\ 15 U.S.C. 78s.
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V. Conclusion

    It is Therefore Ordered, pursuant to Section 19(b)(2) of the Act 
\23\ that the proposed rule change, as amended, (SR-PCX-99-33) is 
approved.

    \23\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-33176 Filed 12-21-99; 8:45 am]
BILLING CODE 8010-01-M