[Federal Register Volume 65, Number 36 (Wednesday, February 23, 2000)]
[Notices]
[Pages 9027-9038]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-4221]


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SECURITIES AND EXCHANGE COMMISSION

(Release No. 34-42419; File No. SR-PCX-99-39, Amendment Nos. 1 and 2)


Self-Regulatory Organizations; Notice of Filing of Amendment Nos. 
1 and 2 to the Proposed Rule Change by the Pacific Exchange, Inc. 
Creating PCX Equities, Inc.

February 11, 2000.
    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 November 24, 1999, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') Amendment No. 1 to the proposed rule 
change, File No. SR-PCX-99-39 as described in Items I, II and III 
below, which Items have been prepared by the Exchange. \3\ The Exchange 
submitted the proposed rule change to the Commission on October 7, 
1999, which was published in the Federal Register on December 6, 1999 
(``Original Notice'') \4\ On January 10, 2000, the Exchange submitted 
Amendment No. 2 to the proposed rule change. \5\ The Commission is 
publishing this notice to solicit comments on Amendment Nos. 1 and 2 to 
the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1)
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Brandon Becker, Wilmer, Cutler, & Pickering, 
to Belinda Blaine, Associate Director, Division of Market Regulation 
(``Division''), Commission, dated November 24, 1999 (``Amendment No. 
1''). On January 10, 2000, the Exchange submitted the Form 19b-4 for 
Amendment No. 1 to the proposed rule change. See Letter from Kathryn 
Beck, Senior Vice President, General Counsel and Corporate 
Secretary, PCX, to Kelly Riley, Attorney, Division, dated January 7, 
2000. In Amendment No. 1, the Exchange submitted: (1) a letter 
amendment that changes provisions of the proposed rule language; (2) 
a summary of the proposed changes for implementing the PCX 
restructuring (Attachment No. 1 to Amendment No. 1); (3) a PCX 
Equities, Inc. Cross Reference Table (Attachment No. 2 to Amendment 
No. 1); and (4) The Plan of Delegation of Functions by the Pacific 
Exchange, Inc. to PCX Equities, Inc. (Attachment No. 4 to Amendment 
No. 1).
    \4\ See Securities Exchange Act Release No. 42178 (November 24, 
1999), 64 FR 68136.
    \5\ See Letter from Brandon Becker, Wilmer, Cutler & Pickering, 
to Nancy J. Sanow, Senior Special Counsel, Division, SEC, dated 
January 7, 2000 (``Amendment No. 2''). In Amendment No. 2, the 
Exchange submitted answers to questions posed by the Division and 
made substantive to the proposed rule language, as amended by 
Amendment No. 1.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    As described in the Original Notice, the PCX proposes to create a 
Delaware Stock corporation to be called PCX Equities, Inc. (``PCX 
Equities''), which will be a wholly-owned subsidiary of the PCX, and to 
transfer to PCX Equities all of the assets and liabilities that solely 
support the equities trading business and/or equities clearing business 
of the PCX. The PCX also proposes to authorize PCX Equities to issue 
Equity Trading Permits (``ETPs'') and Equity Automated Systems Access 
Permits (``Equity ASAPs'') that will entitle holders of the permits to 
trade equity securities at the new PCX Equities. PCX proposes to amend 
the Original Notice. The amended proposed rules for implementing the 
restructuring, including (1) the amended rules for PCX Equities, Inc.; 
(2) the amended rules for the PCX; and (3) the Plan of Delegation of 
Functions from the PCX Parent to PCX Equities, are available for 
inspection at the places specified in Item IV below.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its Original Notice 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. \6\ The Exchange has prepared summaries, set forth in sections 
A, B, and C below, of

[[Page 9028]]

the most significant aspects of Amendment Nos. 1 and 2 to the proposed 
rule change.
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    \6\ See supra note 4.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

 1. Purpose
    Summary of Proposed Rule Changes for Implementing the PCX 
Restructuring. The following summarizes the proposed PCX Equities rules 
as well as the proposed changes to the PCX Constitution and rules 
related to the restructuring of PCX. Part 1 contains a description of 
those rules proposed by PCX Equities to regulate the business conduct 
and practices of its ETP Holders, ETP Firms, Equity ASAP Holders, and 
associated persons. Detailed descriptions of those rules that reflect a 
significant departure from the pre-existing PCX Rules are provided. In 
addition, for proposed rules that are closely patterned after existing 
PCX rules, the Exchange indicates which PCX rule was the model and 
notes that only minor conforming word changes were made. Similarly, 
Part 2 provides a summary of changes to the PCX Constitution and Rules. 
The complete text of the proposed rules for PCX Equities and the 
changes to the PCX Constitution and Rules are available for inspection 
at the places specified in Item IV below.
    a. PCX Equities, Inc. Following the restructuring, PCX Equities 
will adopt, subject to certain revisions, the applicable trading rules 
and standards of the PCX as they relate to the current equity trading 
business. Proposed Rules 1 through 3, which relate to qualifications 
for ETPs, Equity ASAPs and corporate governance, and Rule 10, which 
relates to disciplinary procedures, reflect significant departures from 
existing PCX Rules. The remaining rules are substantially similar to 
the current rules, unless noted otherwise. A discussion of the proposed 
PCX Equities rules follows.
Rule 1--Definitions
    Proposed Rule 1 defines certain terms and references (e.g., ETP 
Holder) used throughout the rules, and is intended to ensure uniformity 
in the use of such terms. In conjunction with the restructuring and the 
issuance of the equity trading permits, the PCX has developed the 
following new terms and incorporated them into Proposed Rule 1:
    Proposed Rule 1.1(f)--The term ``Corporation'' shall mean PCX 
Equities, Inc., as described in the Corporation's Certificate of 
Incorporation and the PCX Equities Bylaws.
    Proposed Rule 1.1(i)--The term ``Equity ASAP'' shall refer to a 
permit issued by the Corporation for effecting approved securities 
transactions principally over an electronic or automated system access 
program such as P/COAST, or any other electronic or automated trading 
system approved by the Corporation. Except as contemplated by proposed 
Rule 2.16(a)(3), an Equity ASAP does not confer trading privileges on 
any other trading facility of the Corporation, including but not 
limited to the trading floor, and therefore does not confer an Equity 
ASAP Holder with rights to employ or utilize trading floor specialists 
or floor brokers.\7\
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    \7\ See Amendment No. 2, which clarifies the circumstances when 
Equity ASAPs may utilize floor traders to execute orders on the 
trading floor.
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    Proposed Rule 1.1(j)--The term ``Equity ASAP Holder'' shall refer 
to a sole proprietor, partnership, corporation, limited liability 
company or other organization, in good standing, that has been issued 
an Equity ASAP or an allied person of such an organization.\8\ An 
Equity ASAP Holder shall agree to be bound by the Certificate of 
Incorporation, Bylaws and Rules of the Corporation, and by all 
applicable rules and regulations of the SEC. An Equity ASAP Holder 
shall not have ownership or distribution rights in the Corporation. An 
Equity ASAP Holder will have limited voting rights to nominate two 
members to the Corporation's Board of Directors and one member to the 
Board of Governors of the PCX Parent. An Equity ASAP Holder will have 
status as a ``member'' of the PCX Parent as that term is defined in 
Section 3 of the Act.\9\
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    \8\ See Amendment No. 2.
    \9\ 15 U.S.C. 78c(3)(A).
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    Proposed Rule 1.1(k)--The term ``ETP'' shall refer to an Equity 
Trading Permit issued by the Corporation for effecting approved 
securities transactions on the Corporation's trading facilities. An ETP 
may be issued to a sole proprietor, partnership, corporation, limited 
liability company or other organization, which is a registered broker 
or dealer pursuant to Section 15 of the Act,\10\ and which has been 
approved by the Corporation. \11\
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    \10\ 15 U.S.C. 78o.
    \11\ See Amendment No. 2.
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    Proposed Rule 1.1(l)--The term ``ETP Holder'' shall refer to a 
natural person, in good standing, who has been issued an ETP, or has 
been named as a Nominee by an ETP Firm. An ETP Holder must be a 
registered broker or dealer pursuant to Section 15 of the Act,\12\ or a 
nominee or an associated person of a registered broker or dealer who 
has been approved by the Corporation to conduct business on the 
Corporation's trading facilities.\13\ An ETP Holder shall agree to be 
bound by the Certificate of Incorporation, Bylaws and Rules of the 
Corporation, and by all applicable rules and regulations of the SEC. An 
ETP Holder shall not have ownership or distribution rights in the 
Corporation. An ETP Holder will have limited voting rights to nominate 
two members to the Corporation's Board of Directors and one member to 
the Board of Governors of the PCX Parent. An ETP Holder will have 
status as a ``member'' of the PCX Parent as that term is defined in 
Section 3 of the Act.\14\
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    \12\ 15 U.S.C. 78o.
    \13\ Id.
    \14\ 15 U.S.C. 78c(3)(A).
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    Proposed Rule 1.1(m)--The term ``ETP Firm'' shall refer to a sole 
proprietorship, partnership, corporation, limited liability company or 
other organization in good standing who holds an ETP or upon whom an 
individual ETP Holder has conferred trading privileges on the 
Corporation's trading facilities pursuant to and in compliance with 
these Rules. An ETP Firm must be a registered broker or dealer pursuant 
to Section 15 of the Act. \15\ An ETP Firm shall agree to be bound by 
the Certificate of Incorporation, Bylaws and Rules of the Corporation 
and by all applicable rules and regulations of the SEC. An ETP Firm 
shall not have ownership or distribution rights in the Corporation. An 
ETP Firm will have limited voting rights to nominate two members to the 
Corporation's Board of Directors and one member to the Board of 
Governors of the PCX Parent. An ETP Firm will have status as a 
``member'' of the PCX Parent as that term is defined in Section 3 of 
the Act.\16\
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    \15\ 15 U.S.C. 78o.
    \16\ Id.
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    Proposed Rule 1.1(n)--The term ``Nominee'' shall mean an individual 
who is authorized by an ETP Firm, in accordance with proposed Rule 2.4, 
to conduct business on the Corporation's trading facilities and to 
represent such ETP Firm in all matters relating to the Corporation. As 
long as a nominee remains effective, the nominee will have status as a 
``member'' of the PCX Parent as that term is defined in Section 3 of 
the Act. \17\ A nominee shall agree to be bound by the Certificate of 
Incorporation, Bylaws and Rules of the

[[Page 9029]]

Corporation, and by all applicable rules and regulations of the SEC.
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    \17\ Id.
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    Proposed Rule 1.1(q)--The term ``PCX Parent'' shall refer to the 
Pacific Exchange, Inc., a Delaware corporation and national securities 
exchange as that term is defined by Section 6 of the Act.\18\ The PCX 
Parent is the sole shareholder of the Corporation.
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    \18\ 15 U.S.C. 78f.
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    Proposed Rule 1.1(s)--The terms ``self-regulatory organization'' or 
``SRO'' shall have the same meaning as set forth in the provisions of 
the Act relating to national securities exchanges.
    Proposed Rule 1.1(t)--The term ``Trading Facilities'' shall refer 
to the Corporation's Los Angeles and San Francisco trading floors, 
office space provided by the Corporation to ETP Holders and ETP Firms 
in connection with their floor trading activities, and any an all 
electronic or automatic systems access programs provided by the 
Corporation to ETP Holders, ETP Firms and Equity ASAP Holders.
    As noted above, ETP Holders and Equity ASAP Holders will not have 
ownership or distribution rights in PCX Equities. However, ETP Holders 
and Equity ASAP Holders will have limited voting rights and may 
nominate, in accordance with the procedures set forth in proposed Rule 
3.2(b)(2)(C), two members to the PCX Equities Board and one member to 
the PCX Board of Governors. Unlike current PCX Rule 1.14 governing ASAP 
members, Equity ASAP Holders will have these limited voting rights.
    In addition to the new terminology described above, PCX proposes to 
include in Proposed rule 1 the current PCX definitions for the terms 
set forth in the chart below. Subject to minor word changes reflecting 
the restructuring, the proposed rules in the chart below are 
substantially the same as the corresponding PCX rules.

 
------------------------------------------------------------------------
           Proposed new rule                     Current PCX rule
------------------------------------------------------------------------
Rule 1.1(a)--Affiliate.................  Rule 1.1(a)
Rule 1.1(b)--Allied Person.............  Rule 1.1(b)
Rule 1.1(c)--Approved Person...........  Rule 1.1(c)
Rule 1.1(d)--Associated................  Rule 1.1(d)
Person.................................  ...............................
Rule 1.1(e)--Control...................  Rule 1.1(e)
Rule 1.1(g)--Floor Trader..............  Rule 1.1(f)
Rule 1.1(h)--Good Standing.............  Rule 1.1(g)
Rule 1.1(o)--Non Resident..............  Rule 1.1(m)
Organization...........................  ...............................
Rule 1.1(p)--Parent....................  Rule 1.1(n)
Rule 1.1(r)--Person....................  Rule 1.1(o)
Rule 1.1(u)--Wholly Owned..............  Rule 1.1(p)
Subsidiary.............................  ...............................
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Rule 2--Equity Trading Permits and Equity ASAPs
    Proposed Rule 2 describes the application process, the 
qualification requirements and other requirements for holding an ETP on 
an Equity ASAP and is similar to the requirements and procedures now 
described in PCX Rule 1 and certain sections of the PCX Constitution. 
However, as the Exchange describes below, certain substantive changes 
have been made to reflect the characteristics of the new ETPs and 
Equity ASAPs. These substantive changes include the following:
    Proposed Rule 2.2--In accordance with proposed Rule 2.2, an ETP may 
be issued to an individual, partnership, corporation, limited liability 
company or other organization that is a registered broker-dealer. As 
discussed under the rule 1 section, an ETP will authorized its holder 
to trade equity securities on any facility of PCX Equities, including 
the trading floors, P/COAST or OptiMark, as a registered or competing 
specialist, floor broker, or order flow firm. An ETP will not confer 
any rights to trade on the options facilities. Any ETP Holder that 
wishes to trade options must be approved for an obtain a PCX membership 
pursuant to PCX's standard application procedures.
    Proposed Rule 2.3--In order to be consistent with the approach 
taken with respect to seat ownership, under proposed Rule 2.3(a), all 
firms that directly own ETPs are required to designate a natural person 
to hold their ETPs (i.e., the ``Nominee'' or the ``ETP Holder''). 
Accordingly, whenever an ETP confers the right to vote (e.g., election 
of the Nominating Committee, as discussed below), it is the ETP Holder, 
rather than the ETP Firm, which casts the vote. However, pursuant to 
proposed Rule 2.22(c) (as discussed below), the ETP Firm retains the 
right to replace the ETP Holder with another qualified nominee employed 
by the ETP Firm at any time. Therefore, since PCX Equities will use 
revocable proxies to conduct its votes, ETP Firms will be able to 
effectively control the voting process with respect to the ETPs they 
own in the same manner as PCX member firms control the voting process 
with respect to nominees today.
    Proposed Rules 2.4, 2.5 and 2.6--Proposed rules 2.4, 2.5 and 2.6 
would alter PCX's existing member approval process by authorizing the 
PCX Equities management--in place of a Membership Committee--to approve 
or reject ETP and Equity ASAP applicants. As described in rule 2.4(g), 
in the event that an application is rejected by PCX Equities, the 
applicant will have the opportunity to appeal the decision pursuant to 
proposed Rule 10. Furthermore, proposed Rule 2.5(b)(10) is being 
amended to reflect a new PCX Rule (current Rule 1.7(b)(9)) approved by 
the SEC on September 17, 1999 that will require off-floor traders for 
which PCX is the Designated Examining Authority to complete the Series 
7 Exam.\19\ Minor changes in terminology have been made to conform to 
the proposed restructuring.
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    \19\ See Securities Exchange Act Release No. 41881, 64 FR 51822 
(September 24, 1999). In Amendment No. 2, the Exchange amended 
proposed Rule 2.5(b)(10)(A-C) to reflect that the rule applies to 
Equity ASAPs as well as ETP Holers.
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    Proposed Rule 2.16--Under proposed Rule 2.16. an Equity ASAP Holder 
may route orders electronically to the PCX Equities' facilities (e.g., 
P/COAST). However, the Equity ASAP does not bestow on the holder the 
right to act in the capacity of a trading floor specialist

[[Page 9030]]

or floor broker. Like ETPs, Equity ASAPs will not confer any rights to 
trade on the options facilities. Any Equity ASAP Holder that wishes to 
trade options must be approved for an obtain a PCX membership pursuant 
to PCX's standard application procedures.
    Proposed Rule 2.21--Pursuant to proposed Rule 2.21, an ETP or 
Equity ASAP will terminate upon the occurrence of the permit holder's 
expulsion, suspension without reinstatement, death, declaration of 
incompetency, dissolution, winding up or other cessation of business. 
An ETP or Equity ASAP Holder whose trading privileges are terminated 
must be current in all filings and payments of dues, fees and charges. 
If the ETP or Equity ASAP Holder fails to be current as required, the 
Corporation retains jurisdiction over the permit holder until such time 
as the permit holder is current.
    In addition, when a Nominee of an ETP Firm ceases to be an employee 
of the ETP Firm, that person shall automatically cease to be a Nominee 
of the ETP Firm.\20\ In that event, the ETP Firm may nominate another 
employee as its nominee ETP Holder. An ETP Firm upon which trading 
privileges are conferred shall continue to be responsible for all 
obligations, including, without limitation, dues, fees, and charges 
imposed by or due to the Corporation.
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    \20\ See Amendment No. 2.
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    Proposed Rule 2.22--As described in proposed Rule 2.22(a) and (b), 
unlike current PCX memberships, ETPs and Equity ASAPs may not be 
purchased, sold or leased. Therefore, the PCX Rules 1.21 and 1.24 and 
sections of PCX Rules 1.22 and 1.23 relating to the purchase, sale, or 
lease of memberships have been deleted from the PCX Equities rules. 
Under proposed Rule 2.22(c), the only permissible transfers of ETPs are 
intra-firm transfers involving nominees employed by the same firm. A 
new nominee, unless he or she is a previously approved person or 
approved Allied Person of the ETP Firm, shall provide all information 
required for the Corporation to conduct an investigation of the nominee 
prior to his or her approval as a nominee.
    Other than the substantive changes discussed above and minor 
conforming word changes that reflect the restructuring, each section of 
proposed Rule 2 (except Rule 2.21 and Rule 2.22) is substantially the 
same as the relevant corresponding PCX Rule or Article. The table below 
sets forth which PCX Rule or Article was used as a model for each 
section of proposed Rule 2.

------------------------------------------------------------------------
           Proposed new rule                     Current PCX rule
------------------------------------------------------------------------
Rule 2.1--Securities Business..........  Rule 1.2
Rule 2.2(a)--Qualifications and          Rule 1.4; Constitution Article
 Application of Individual Applicants.    VIII, Sec 1(a)
Rule 2.3--Qualification of Firm          Rule 1.5
 Applicants.
Rule 2.4--Application Procedures.......  Rule 1.6
Rule 2.5--Denial of or Conditions to     Rule 1.7
 ETPs and Equity ASAPs.
Rule 2.6--Publication of Approved ETP    Rule 1.8
 and Equity ASAP Applications.
Rule 2.7--Revocable Privilege..........  Constitution Article VIII, Sec.
                                          1(b)
Rule 2.8--No Liability for Using         Constitution Article VI, Sec. 5
 Trading Facilities.
Rule 2.9--Corporation Not Bound by ETP   Constitution Article VIII, Sec.
 Holder, ETP Firm or Equity ASAP Holder   1(c)
 Agreements.
Rule 2.10--Only ETP Firms and Equity     Constitution Article VIII, Sec.
 ASAP Holders to Trade Under Firm Name.   1(d)
Rule 2.11--Sole Proprietors and          Rule 1.10
 Individual ETP Holders.
Rule 2.12--ETP Firms and Equity ASAP     Constitution Article VIII, Sec.
 Holders.                                 8(a)
Rule 2.13..............................  Constitution Article VIII, Sec.
                                          3(a)
Rule 2.14..............................  Rule 1.11, Constitution Article
                                          VIII, Sec. 3(c)-(e) and Sec.
                                          8(g)
Rule 2.15..............................  Rule 1.12
Rule 2.16--Terms and Conditions          Rule 1.14
 Relating to Equity ASAPs.
Rule 2.17--Responsibilities of Non-      Rule 1.16
 Resident Firms.
Rule 2.18--Amendments to ETP Firms and   Rule 1.17
 Equity ASAP Holder Documents.
Rule 2.19--ETP Charges.................  Rule 1.18
Rule 2.20--Exemption from Registration   Rule 1.19
 Requirements.
Rule 2.23--Employees of ETP Firms and    Rule 1.26
 Equity ASAP Holders Registration.
Rule 2.24--Trading Floor Employees of    Rule 1.27
 ETP Firms.
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Rule 3--Organization and Administration
    Proposed Rule 3 is divided into three parts: Part I sets forth the 
organization and governance structure of PCX Equities. Part II outlines 
the responsibilities and authority of PCX Equities in the 
administration, interpretation, and enforcement of rules governing the 
business conduct and practices of individuals and firms issued ETPs and 
Equity ASAPs.\21\ Part III addresses the obligations of ETP Holders, 
ETP Firms, and Equity ASAP Holders to pay dues, fees and charges as 
prescribed by the PCX Equities Board.
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    \21\ See Amendment No. 2.
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Part I--Committees
    Proposed Rules 3.1 through 3.3 regarding Equity and Board 
committees were drafted using current PCX Rules as a starting 
point.\22\ However, under the proposed rules, the use of a ``member'' 
committee structure will be substantially curtailed.
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    \22\ See PCX Rules 11.1(a)-(b); 11.2(a)-(b); 11.3--11.5; 
11.6(b); 11.8(d); and PCX Constitution Articles II-V.
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    Proposed Rule 3.1--Proposed Rule 3.1 states that the Board of 
Directors may establish (1) one or more Board committees consisting of 
one or more directors of the Corporation and (2) one or more Equity 
committees consisting of people other than directors. As discussed in 
more detail below, although the PCX Equities Board may establish 
additional Equity Committees under this proposed rule, the proposed 
Bylaws and Rules of PCX Equities currently envision only a Nominating

[[Page 9031]]

Committee and a Business Conduct Committee. Similarly, although the 
Board may establish additional Board Committees, the proposed rule 
currently contemplate only one--the Board Appeals Committee. Proposed 
Rule 3.2(a)--Proposed Rule 3.2(a) establishes the substantive and 
procedural rules for an Equity Committee conducting meetings and 
exercising its authority. In particular, proposed Rule 3.2(a), which is 
similar to existing PCX rules and procedures, discusses quorums, 
voting, conference call meetings, vacancies, the removal and 
resignation of committee members, eligibility for and appointment to 
Equity Committees, interested persons and subcommittees. Under the 
proposed rule, ETP Holders, Equity ASAP Holders and allied persons of 
ETP Firms or Equity ASAP Holders as well as public representatives may 
be appointed to serve on Equity Committees. No more than one person 
affiliated with the same ETP Firm or Equity ASAP Holder shall be 
eligible for service on the same Equity Committee. In a department from 
the PCX rules, proposed Rule 3.2(a) would vest authority in the Chief 
Executive Officer or such other designee of PCX Equities to appoint the 
members of Equity Committees (other than the Nominating Committee).
    Proposed rule 3.2(b)(1)--Proposed Rule 3.2(b)(1) describes the 
functions and authority of the Business Conduct Committee. PCX 
Equities' disciplinary process will be similar to the existing PCX 
disciplinary process and will be governed by a Business Conduct 
Committee. Pursuant to the proposed rule, the Business Conduct 
Committee would have the following functions and authority: (1) Examine 
the business conduct and financial condition of ETP Holders, ETP Firms, 
Equity ASAP Holders and associated persons; (2) conduct hearings and 
render decisions in summary disciplinary actions and proceedings; (3) 
impose appropriate sanctions of expulsion, suspension, fine, censure or 
any other fitting sanctions where the Committee finds that a violation 
within the disciplinary jurisdiction of the Corporation has been 
committed; and (4) require the production of detailed financial reports 
of an ETP Holder, ETP Firm or Equity ASAP Holder and such other 
operational reports as it may deem relevant.
    In addition, under this proposed rule, the Business Conduct 
Committee will have the authority to examine and subsequently suspend 
an ETP Firm, ETP Holder or Equity ASAP Holder if the person or entity 
is in violation of proposed Rule 4. Any such suspension is subject to 
review by the Board. Such review shall not operate as a stay of the 
suspension unless specifically allowed by the Board. A person or firm 
which experiences a reversal of the suspension imposed by the Committee 
shall be prohibited from instituting a lawsuit against the Corporation 
or the Committee members.
    Finally, decisions of the Business Conduct Committee or sanctions 
imposed by the Regulatory Staff relating to disciplinary proceedings 
may be appealed in accordance with proposed Rule 10.
    Proposed Rule 3.2(b)(2)--Proposed Rule 3.2(b)(2) describes the 
characteristics and functions of the Nominating Committee. 
Specifically, the Nominating Committee will have seven members 
consisting of six ETP Holders or Equity ASAP Holders and one public 
representative.
    Members of this Committee will be nominated in accordance with the 
procedures set forth in proposed Rule 2.3(b)(2). This rule states that, 
prior to the expiration of its term, the Nominating Committee shall 
publish a slate of six eligible nominees for the committee. ETP and 
Equity ASAP Holders may submit a petition to the Corporation in writing 
to nominate additional eligible candidates to fill the ETP/Equity ASAP 
positions. Upon written petition of 20 percent of the ETP and Equity 
ASAP Holders, the Nominating Committee shall nominate the additional 
candidates. The Chief Executive Officer shall appoint a person from the 
public to fill the public position on the Nominating Committee.
    If there are more than six nominees to fill the ETP/Equity ASAP 
Holder positions, the Nominating Committee shall submit the nominees to 
the ETP and Equity ASAP Holders for election. Each ETP and Equity ASAP 
Holder in good standing shall be permitted to vote for up to six 
nominees and the six nominees receiving the most votes shall fill the 
ETP/Equity ASAP positions. The Board of Directors shall decide tie 
votes. If there are only six nominees to fill the ETP/Equity ASAP 
Holder positions, those six nominees shall be deemed elected to the 
Nominating Committee.
    This Committee will nominate two nominees for the PCX Equities 
Board of Directors and one nominee for the PCX Board of Governors. In 
particular, the Nominating Committee shall publish the names of two ETP 
Holders, Equity ASAP Holders, or affiliated persons thereof, as its 
nominees for the Board of Directors of the Corporation and one ETP 
Holder, Equity ASAP Holder or person affiliated thereof as nominee for 
the PCX Board of Governors. The nominee for the PCX Board may be a 
person nominated to the PCX Equities Board. ETP and Equity ASAP Holders 
may submit a written petition to the Corporation to nominate additional 
eligible candidates to fill the ETP/Equity ASAP positions and, upon 
written petition of at least 20 percent of ETP and Equity ASAP Holders, 
the Nominating Committee shall also nominate the additional person(s). 
If there are three or more nominees for the Board of Directors and two 
or more nominees for the Board of Governors, the Nominating Committee 
shall submit the contested nomination(s) to the ETP and Equity ASAP 
Holders for selection. Each ETP and Equity ASAP Holder may select two 
nominees for contested seats on the Board of Directors and one nominee 
for contested seats on the Board of Governors. With respect to the 
contested positions, the two nominees for the Board of Directors and 
the nominee for the Board of Governors selected by the ETP and Equity 
ASAP Holders, shall be submitted by the Nominating Committee to the 
Board of Directors or the Board of Governors, as the case may be. 
Similarly, the Nominating Committee shall submit uncontested nominees 
to the Board of Directors or the Board of Governors,. The respective 
Board at its first meeting following the election shall decide tie 
votes.
    Proposed Rule 2.3--Under this proposed rule, each Equity Committee 
shall have such other powers and duties as delegated to it by the Board 
of Directors. Each Equity Committee is subject to the control, review, 
and supervision of the Board of Directors.
    Proposed Rule 3.3--The proposed rules envision only one Board 
Committee--the Board Appeals Committee. Under proposed Rule 3.3(a)(1), 
the PCX Equities Board may appoint one or more Appeals Committees to 
conduct reviews of matters subject to the applicable provisions of 
proposed Rules 3.2(b)(1)(C) or proposed Rule 10. The PCX Equities Board 
will determine the size of any Appeals Committee that it appoints, and 
an Appeals Committee may be composed of only one member. Each Appeals 
Committee will contain public directors. Subject to proposed Rule 10, 
decisions of the Board Appeals Committee shall constitute the final 
action of the Corporation, unless the PCX Board remands the 
proceedings.
Part II--Regulation
    As discussed in more detail below, proposed Rules 3.4 and 3.5 
describe the self-regulatory responsibilities of the PCX with regard to 
PCX Equities as well

[[Page 9032]]

as the PCX's delegation of authority to PCX Equities.\23\
---------------------------------------------------------------------------

    \23\ See also The Plan of Delegation of Functions by the Pacific 
Exchange, Inc. to PCX Equities, Inc., which is available for 
inspection and copying at the Commission and the PCX and was 
included as Attachment No. 4 to Amendment No. 1.
---------------------------------------------------------------------------

    Proposed Rule 3.4--As set forth in proposed Rule 3.4, the PCX 
Parent, as the registered SRO, shall have ultimate responsibility in 
the administration and enforcement of rules governing the operation of 
its subsidiary. Notwithstanding the delegation of authority to the 
subsidiary described in proposed Rule 3.5, PCX will be required to 
review and ratify any rule changes adopted by the PCX Equities Board 
before such rule change becomes final action.
    Proposed Rule 3.5--Under proposed Rule 3.5,\24\ except as otherwise 
provided in the Bylaws, Rules, and procedures of PCX Equities, the 
Chief Regulatory Officer or such other designated officer of PCX 
Equities will have the following delegated authority:
---------------------------------------------------------------------------

    \24\ See Amendment No. 2, which documents changes to the 
Original Notice and Amendment No. 1.
---------------------------------------------------------------------------

     To establish and interpret rules and regulations for ETP 
Holders, Equity ASAP Holders, ETP Firms or associated persons 
including, but not limited to trading rules, fees, access to and use of 
system facilities, and arbitration procedures.
     To determine regulatory and trading policies, including 
the development and adoption of necessary or appropriate rule changes, 
relating to the business conduct and trading activities of ETP Holders, 
Equity ASAP Holders, ETP Firms and associated persons. This includes, 
but is not limited to, the following: (1) arbitration of disputes 
between ETP Holders, Equity ASAP Holders, ETP Firms or associated 
persons arising from transactions on the facility; (2) financial 
responsibility; (3) clearance and settlement of securities transactions 
and other financial responsibility and operational matters affecting 
ETP Holders, Equity ASAPs, ETP Firms or associated persons in general; 
and (4) qualification requirements for ETP Holders, ETP Firms or Equity 
ASAP Holders and associated persons.
     To take necessary or appropriate action to assure 
compliance with the Rules and procedures of the Corporation, the 
federal securities laws, and other laws, rules and regulations that the 
Corporation has the authority to administer or enforce, through 
examination, surveillance, investigation, enforcement, disciplinary, 
and other programs.
     To administer programs and systems for the surveillance 
and enforcement of rules governing the conduct and trading activities 
of ETP Holders, Equity ASAP Holders, ETP Firms, and associated persons.
     To administer the Corporation's disciplinary programs, 
including investigations, adjudication of cases, and the imposition of 
fines and other sanctions.
     To examine and investigate ETP Holders, Equity ASAP 
Holders, ETP Firms and associated persons to determine if they have 
violated the Rules and procedures of the Corporation, the federal 
securities laws, and other laws, rules, and regulations that the 
Corporation has the authority to administer, interpret, or enforce.
     To place restrictions on the business activities of ETP 
Holders, Equity ASAP Holders, ETP Firms and associated persons 
consistent with the public interest, the protection of investors, and 
the federal securities laws.
     To conduct arbitrations, mediations and other dispute 
resolution programs.
     To appoint Trading Officials that shall be responsible for 
the general supervision of the conduct and dealings of ETP Holders, 
Equity ASAP Holders, ETP Firms and associated persons on the trading 
facility. These duties include, but are not limited to, the following: 
(1) arbitrate differences between ETP Holders, Equity ASAP Holders, ETP 
Firms or associated persons arising from transactions on the trading 
facility; (2) supervise all connections or means of communication with 
the trading facility, which may require the discontinuance of any such 
connection or means of communication that is deemed contrary to the 
welfare or interest of the Corporation; (3) issue a Floor Citation when 
it appears that a Minor Rule Plan violation has occurred as specified 
in Rule 10; (4) declare a ``fast market'' or invoke a trading halt in a 
security due to an influx of orders or other unusual market conditions 
or circumstances; (5) take such other actions as are deemed necessary 
in the interest of maintaining a fair and orderly market; and (6) 
supervise and regulate the operation of ITS, or any other application 
of the system during active openings, heavy trading and unusual 
situations.
     To administer or enforce policies and Rules of the 
Corporation (including federal and state regulations) governing the 
initial and continued listing or trading of securities on the 
Corporation.
    The aforementioned authority delegated to the Chief Regulatory 
Officer represents a significant departure from existing practice in 
that several of these responsibilities and functions currently reside 
with the Equities Floor Trading Committee.\25\ Following the 
restructuring, PCX Equities intends to dissolve the Equity Floor 
Trading Committee.
---------------------------------------------------------------------------

    \25\ See Article IV, Sec. 6(b) of the current PCX Constitution.
---------------------------------------------------------------------------

    Proposed Rule 3.6--Subject to minor word changes, proposed Rule 3.6 
regarding surveillance agreements is the same as existing PCX Rule 
14.1.
Part III--Dues, Fees and Fines
    Other than minor conforming word changes, proposed Rules 3.7 
through 3.9 are the same as the current PCX Constitution Article XIV, 
Section 1. Under these rules, the PCX Equities Board may impose 
reasonable fees, assessments, charges or fines to be paid by ETP 
Holders, ETP Firms or Equity ASAP Holders. Prior to implementing the 
restructuring, PCX will file with the Commission a rule proposal to 
change its Schedule of Fees and Charges for services provided by PCX 
Equities.
Rule 4--Capital Requirements, Financial Reports, and Margins
    Proposed Rule 4, which sets forth the net capital, financial 
reporting and margin requirements for ETP Holders, ETP Firms and Equity 
ASAP Holders, has been adapted from current PCX Rule 2. Only minor 
conforming changes in terminology have been made to the current PCX 
rules. In addition, because current PCX Rules 2.5 \26\ and 2.8(a) \27\ 
apply to options trading, the PCX has not incorporated those rules into 
proposed Rule 4.
---------------------------------------------------------------------------

    \26\ PCX Rule 2.5 states that ``[a] Clearing member issuing a 
Letter of Guarantee for one or more Market Makers must at all times 
be in compliance with the net capital requirements of the Options 
Clearing Corporation and with the capital requirements of securities 
laws as they may exist from time to time.''
    \27\ PCX Rule 2.8(a) states, in part, that ``[t]he following 
members are exempt from subsections (b), (c) and (d) of Rule 2.1: 
any Floor Broker, Market Maker in listed options, or Lead Market 
Maker in listed options, registered with the Exchange in any such 
capacity.
---------------------------------------------------------------------------

Rule 5--Listings
    Proposed Rule 5, which describes the requirements for listing, has 
been adapted from current PCX Rules 3.1 through 3.5. Other than minor 
conforming word changes made to reflect the circumstances of the 
restructuring, only two substantive changes have been made to PCX Rules 
3.1 through 3.5. The first substantive change involves the transfer of 
authority over listing issues from the Equity Listing Committee to the 
PCX Equities management. Under the proposed rules,

[[Page 9033]]

PCX Equities management will have the authority to: prescribe rules and 
procedures for listing securities; approve listing applications; and 
suspend dealings in, or remove securities from, listing. The Equity 
Listing Committee, which currently performs these functions for the 
PCX, will be dissolved once PCX Equities is formed.
    In addition, current PCX Rules 3.6 and 3.7, which govern the 
initial and continued listing of equity and index options, will not be 
incorporated into the proposed rules because they are not applicable to 
PCX Equities' business.
Rule 6--Business Conduct
    Proposed Rule 6 consolidates various equity-related rules that 
address business practices, ethical standards, and prohibited acts 
contained in the existing PCX Rules 2, 4 and 5 and the PCX 
Constitution. Other than minor conforming word changes that reflect the 
restructuring, each section of proposed Rule 6 is substantially the 
same as the relevant corresponding PCX rule or Article. The table below 
explains which PCX rule or Article was used as a model for each section 
of proposed Rule 6.

------------------------------------------------------------------------
           Proposed new rule                     Current PCX rule
------------------------------------------------------------------------
Rule 6.1--Adherence to Law.............  Constitution Article XI, Sec. 1
Rule 6.2--Prohibited Acts..............  Constitution Article XI, Sec.
                                          2(a)-(f)
Rule 6.3--Prevention of the Misuse of    Rule 2.6(e)
 Material, Nonpublic Information.
Rule 6.4--Rumors.......................  Rule 4.6(b)
Rule 6.5--Manipulation.................  Rule 4.6(a)
Rule 6.6--Front-running of Block         Rule 5.8(k)
 Transactions.
Rule 6.7--Limitations on Trading         Rules 4.5(a)-(c)
 Because of Customer Orders \28\.
Rule 6.8--Discretionary................  Rule 4.9
Rule 6.9--Excessive Trading............  Rule 4.4
Rule 6.10--Taking or Supplying           Rule 4.11
 Securities to Fill Customer's Order.
Rule 6.11--ETP Holders Holding Options.  Rules 4.7(a) and 4.8(b)
Rule 6.12--Disclosure of Financial       Rule 4.18(a)
 Arrangements.
Rule 6.13--Joint Accounts..............  Rule 4.10(a)-(b)
Rule 6.14--Disciplinary Action By Other  Rule 4.13
 Organizations.
Rule 6.15--Officers and Employees        Rule 4.17(a)
 Restricted.
Rule 6.16--Miscellaneous Prohibitions..  Rule 4.6(c)
------------------------------------------------------------------------
\28\ See Amendment No. 2, which deleted rule language proposed in
  another PCX filing (SR-PCX-99-11) that is currently pending with the
  Commission. This proposal now reflects the current language found in
  PCX Rule 4.5(a)-(c).

    Finally, current PCX Rule 4.19 will be omitted from inclusion in 
the proposed rules as it pertains to an exemption provided to short 
sales effected by options market makers in Nasdaq National Market 
securities.
Rule 7--Equities Trading
    Proposed Rule 7 is closely patterned after the PCX's existing 
equity trading rules. However, as discussed below, certain changes have 
made. First, the proposed rule reorganizes the PCX equity trading rules 
(primarily current PCX Rule 5) to make it easier to locate and 
understand those provisions. The proposed new rule consists of twelve 
sections:

Section 1. Definitions and General Provisions
Section 2. Admission to and Conduct on the Trading Floor
Section 3. Units of Trading, Bids, Offers and Quotations
Section 4. ETP Holders Acting as Brokers
Section 5. ETP Holders Acting as Specialists
Section 6. ETP Holders Acting as Odd-lot Dealers
Section 7. Trading Practices and Procedures
Section 8. Contracts in Securities
Section 9. Intermarket Trading System Plan
Section 10. Automatic Execution Systems
Section 11. Special Offerings
Section 12. Exchange Distributions

    In addition to the reorganizational changes,\29\ as described in 
more detail below, existing trading rules have been restated and 
clarified and obsolete references have been deleted.
---------------------------------------------------------------------------

    \29\ See Amendment No. 2.
---------------------------------------------------------------------------

    Proposed Rule 7.1--Several definitions and references contained in 
current PCX Rule 4.1 have been incorporated into proposed Rule 7.1(a). 
However, current PCX Rules 4.1(a)-(d) and (h) have not been 
incorporated into this new rule because the Exchange believes that 
these terms either do not apply to PCX Equities or are superfluous.\30\
---------------------------------------------------------------------------

    \30\ See, e.g., Rule 4.1(a) states that ``Exchange shall mean 
the Pacific Exchange, Inc., including all the operations of the 
Exchange and, when used with reference to the administration of any 
rule, means either the Board of Governors or the officer, employee 
or committee to whom appropriate authority to administer such rule 
has been delegated by the Board pursuant to the provisions of the 
Exchange Constitution.''
---------------------------------------------------------------------------

    Proposed Rule 7.8--Proposed Rule 7.8 which pertains to the 
admission to and conduct on the trading floor of ETP Holders, employees 
of ETP Firms, and visitors, clarifies existing PCX Rules 5.1(e) through 
(g) and 5.16(a), and codifies current policies and procedures. In 
addition, current PCX Rules 4.12, 5.1(a) and 5.1(c) and (d), which 
govern the activities of floor clerks, have been incorporated into this 
Rule 7.8 as commentaries.
    Proposed Rule 7.21--Proposed Rule 7.21 is adapted from current PCX 
Rule 4.21 (Floor Broker Error Accounts).
    Proposed Rule 7.22--The Exchange believes that proposed Rule 
7.22(d) adequately covers the appeals process for an applicant 
specialist that is denied appointment as a registered specialist by the 
Corporation. Therefore, current PCX Rules 5.27(h) through (k) are 
superfluous because any request for an appeal by an applicant 
specialist will be subject to the applicable provisions of proposed 
Rule 10.14.
    Proposed Rule 7.29--Proposed Rule 7.29 (current PCX Rule 5.37), 
relating to the evaluation of specialist performance, states that the 
Corporation, rather than the Equity Allocation Committee, will evaluate 
all registered specialists on a quarterly basis. Once the restructuring 
is effective, the Equity Allocation Committee will be dissolved and the 
Corporation will be responsible for allocating and reallocating issues 
and for evaluating and monitoring the performance of specialists.
    Proposed Rule 7.44--Proposed Rule 7.44 is adapted from current PCX 
Rule 4.20 (Chinese Wall Procedures for Specialists).
    Proposed Rule 7.47--Proposed Rule 7.47 is adapted from current PCX 
Rule

[[Page 9034]]

4.22 (Trading Halts Due to Extraordinary Market Volatility).
    Proposed Rule 7.51--Current PCX Constitution Article XI, Sections 
1(a) through (c), which relate to settlement of securities contracts, 
will be added as new Rule 7.51.
    Proposed Rule 7.54--Current PCX Rules 4.14 through 4.16 regarding 
marking to the market will be added as new Rule 7.54.
    Proposed Rule 7.71-7.78--Current PCX Rules 15.1 through 15.8 
regarding OptiMark will be added as new Rules 7.71 through 7.78.
    Other than the substantive changes discussed above and mirror 
conforming word changes that reflect the restructuring, each section of 
proposed Rule 7 is substantially the same as the relevant corresponding 
PCX rule or Article. The table below describes which PCX rule or 
Article was used as a model for each section of proposed Rule 7.

------------------------------------------------------------------------
           Proposed new rule                     Current PCX rule
------------------------------------------------------------------------
Rule 7.1--Definitions..................  Rule 4.1
Rule 7.2--Hours of Business............  Rule 4.2
Rule 7.3--Holidays.....................  Rule 4.3
Rule 7.4--Types of Orders..............  Rule 5.2(a) & (c)
Rule 7.5--Authority of Trading           Rule 5.15
 Officials.
Rule 7.6--Commissions..................  Rules 5.39-5.41
Rule 7.7--Ex-Dividend or Ex-Right Dates  Rule 5.7
Rule 7.8--Trading Floor Standards......  Rules 4.12, 5.1(a), (c)-(e),
                                          (g); 5.16(a); 6.2(c) [see also
                                          discussion in text]
Rule 7.9--Trading Units................  Rule 5.3(a)
Rule 7.10--Trading Differentials.......  Rule 5.3(b) & (c)
Rule 7.11--Transmission of Bids and      Rules 5.6(d) & (e)
 Offers.
Rule 7.12--Recognized Quotations.......  Rule 5.6(a) & (f)
Rule 7.13--Bid or Offer Deemed Regular   Rule 5.6(b)
 Way.
Rule 7.14--Trading in ``When Issued/     Rule 5.9(b)
 Distributed'' Securities.
Rule 7.15--Execution Price Binding.....  Rule 5.11(a)
Rule 7.16--Cancellation of Revisions in  Rule 5.11(b) & (c)
 Transactions.
Rule 7.17--Manner of Bidding and         Rule 5.5(a)
 Offering.
Rule 7.18--Types of Bids and Offers....  Rules 5.6(c); 5.9(a)
Rule 7.19--Priority and Precedence of    Rule 5.8(a)-(g), (i)
 Bids and Offers \31\.
Rule 7.20--Cabinet Dealings............  Rule 5.5(b) & (c)
Rule 7.21--Error Accounts..............  Rule 4.21
Rule 7.22--Registration of Specialist..  Rule 5.27
Rule 7.23--Registered Specialist's       Rule 5.28(f)
 Assistant.
Rule 7.24--Responsibilities of           Rule 5.28(c)-(e); Rule 5.29(f),
 Specialists \32\.                        (g), (j); 5.30(e)
Rule 7.25--Specialist's Coordination     Rule 5.30
 \33\.
Rule 7.26--Specialist Joint Accounts...  Rule 5.33(e)
Rule 7.27--Disclosure of Specialists'    Rule 5.29(d)
 Orders Prohibited \34\.
Rule 7.28--Dealings by Specialist......  Rule 5.33(a), (b), (h)
Rule 7.29--Evaluation of Specialist      Rule 5.37
 Performance.
Rule 7.30--Competing Specialist Program  Rule 5.35
 \35\.
Rule 7.31--Alternate Specialist........  Rule 5.36
Rule 7.32--Remote Trading Access         Rule 5.38
 Program \36\.
Rule 7.33--Members Acting as Odd Lot     Rules 5.34; 5.4
 Dealers.
Rule 7.34--Order Identification........  Rule 5.13(c) & (d)
Rule 7.35--Orders Requires to Be in      Rules 5.2(b), 5.8(h), 5.13(e),
 Written Form.                            5.28, 5.29(a), (b) & (h)
Rule 7.36--Record of Orders............  Rule 5.29(e)
Rule 7.37--Reporting Duties............  Rule 5.12
Rule 7.38--Confirmation of ``GTC''       Rule 5.29(c)
 Orders.
Rule 7.39--Reducing Orders Ex-Dividend.  Rule 5.29(i)
Rule 7.40--Short Sales.................  Rule 5.18
Rule 7.41--Crossing Orders.............  Rule 5.14
Rule 7.42--Primary Market Protection     Rule 5.32
 ``PMP''.
Rule 7.43--Stop Loss Orders............  Rule 5.8(j)
Rule 7.44--Chinese Wall Procedures for   Rule 4.20
 Specialists.
Rule 7.45--Stock Option Transactions...  Rule 5.33(d) & (f)
Rule 7.46--Trading Halats and            Rule 5.31
 Suspensions \37\.
Rule 7.47--Trading Halts Due to          Rule 4.22
 Extraordinary Market Volatility.
Rule 7.48--Arbitrage Prohibited........  Rule 5.10
Rule 7.49--Over-the-Counter Executions   Rules 5.43-5.49
 of Equity Securities Transactions.
Rule 7.50--Definitions and General       Rule 5.9(b)(3) & (4); Rule
 Provisions.                              5.13(i)
Rule 7.51--ETP and Equity ASAP           Constitution Article IX, Sec. 1
 Contracts.
Rule 7.52--Exchange of Tickets and       Rule 5.13(a)-(b), (f)-(h)
 Comparison.
Rule 7.53--Delivery of Securities......  Rule 5.9(c) & (d)
Rule 7.54--Marking to Market...........  Rules 4.14-4.16
Rule 7.55--Disagreement................  Rule 5.55
Rule 7.56--Suspension or Expulsion.....  Rule 5.56
Rule 7.57--Normal Buy-Ins..............  Rule 5.57
Rule 7.58--Re-transmission of Notice...  Rule 5.58
Rule 7.59--Notice on Less Than Full      Rule 5.59
 Amount.
Rule 7.60--Liability Where Contract      Rule 5.60
 Closed.
Rule 7.61--Notice of Closing...........  Rule 5.61

[[Page 9035]]

 
Rule 7.62--Duty of Member Giving Notice  Rule 5.62
 to Close.
Rule 7.63--Method of Closing...........  Rule 5.63
Rule 7.64--Buy-ins Where Securities in   Rule 5.64
 Transfer.
Rule 7.65--Over-the-Counter Securities.  Rule 5.65
Rule 7.66--Intermarket Trading System    Rule 5.20
 Plan.
Rule 7.67--ITS ``Trade-Throughs'' and    Rule 5.21
 ``Locked Markets''.
Rule 7.68--Block Trade Policy..........  Rule 5.22
Rule 7.69--Liability of Corporation      Rule 5.23
 Relating to Operation of ITS.
Rule 7.70--Pacific Computerized Order    Rule 5.25
 Access System (``P/COAST'') \38\.
Rule 7.71--Definitions.................  Rule 15.1
Rule 7.72--Access......................  Rule 15.2
Rule 7.73--Entry of Profiles and         Rule 15.3
 Generation of Orders.
Rule 7.74--Order Execution and           Rule 15.4
 Reporting.
Rule 7.75--Hours of Operation..........  Rule 15.5
Rule 7.76--Errors......................  Rule 15.6
Rule 7.77--Trading Suspensions and       Rule 15.7
 Halts.
Rule 7.78--Limitation of Liability.....  Rule 15.8
Rule 7.79--Approval....................  Rule 5.51
Rule 7.80--Exchange Distribution.......  Rule 5.53
------------------------------------------------------------------------
\31\ See Amendment No. 2, which deleted rule language proposed in other
  PCX filings (SR-PCX-99-06 and SR-PCX-99-07) that is currently pending
  with the Commission. This proposal now reflects the current language
  found in PCX Rule 5.8(a)-(g) and (i).
\32\ See Amendment No. 2, which deleted rule language proposed in
  another PCX filing (SR-PCX-99-11) that is currently pending with the
  Commission. This proposal now reflects the current language found in
  PCX Rule 5.28(c)-(e); Rule 5.29(f), (g), (j); and Rule 5.30(e).
\33\ See Amendment No. 2, which deleted rule language proposed in
  another PCX filing (SR-PCX-99-06) that is currently pending with the
  Commission. This proposal now reflects the current language found in
  PCX Rule 5.30.
\34\ See Amendment No. 2, which deleted rule language proposed in other
  PCX filings (SR-PCX-99-06 and SR-PCX-99-11) that is currently pending
  with the Commission.
\35\ See Amendment No. 2, which deleted rule language proposed in
  another PCX filing (SR-PCX-99-07) that is currently pending with the
  Commission. This proposal now reflects the current language found in
  PCX Rule 5.35.
\36\ See Amendment No. 2, which deleted rule language proposed in
  another PCX filing (SR-PCX-98-41) that is currently pending with the
  Commission. This proposal now reflects the current language found in
  PCX Rule 5.38.
\37\ See Amendment No. 2, which deleted rule language proposed in other
  PCX filings (SR-PCX-99-06 and SR-PCX-99-07) that is currently pending
  with the Commission. This proposal now reflects the current language
  found in PCX Rule 5.31.
\38\ See Amendment No. 2, which deleted rule language proposed in
  another PCX filing (SR-PCX-99-07) that is currently pending with the
  Commission. This proposal now reflects the current language found in
  PCX Rule 5.25.

Rule 8--Trading of Certain Equity Derivatives
    Proposed Rule 8, which describes the trading requirements for 
currency and index warrants and portfolio depositary receipts, is 
substantially the same as current PCX Rule 8, except for minor 
conforming word changes made to reflect the restructuring and the 
deletion of provisions relating to the trading of FLEX and Bounds 
options (current PCX Rules 8.100 and 8.200, respectively) because they 
are not applicable to PCX Equities' business.
Rule 9--Conducting Business with the Public
    Proposed Rule 9, which governs how ETP Holders, ETP Firms and 
Equity ASAP Holders must conduct business with the public, is patterned 
after existing PCX Rule 9. Except for minor changes in terminology, the 
proposed rule is substantially the same as the existing rule.
Rule 10--Disciplinary Proceedings, Other Hearings, and Appeals
    Proposed Rule 10 describes the disciplinary process for PCX 
Equities. PCX Equities' disciplinary process will be similar to the 
existing PCX disciplinary process (including summary sanction 
procedures under the Minor Rule Plan) and will be governed by the 
Business Conduct Committee. Therefore, aside from conforming word 
changes and the substantive changes discussed below, proposed Rule 10 
will be closely modeled after existing PCX Rule 10.
    The Business Conduct Committee will, in accordance with proposed 
Rule 3.2(b)(1)(A), have the following authority:
     To conduct hearings and render decisions in summary 
disciplinary actions and proceedings.
     To impose appropriate sanctions of expulsion, suspension, 
fine, censure or any other fitting sanctions where the Committee finds 
that a violation within the disciplinary jurisdiction of the 
Corporation has been committed.
     To examine the business conduct and financial condition of 
ETP Holders, ETP Firms, Equity ASAP Holders, and associated persons.
     To require the production of detailed financial reports of 
an ETP Holder, ETP Firm, or Equity ASAP Holder and such other 
operational reports as it may deem relevant.
     To suspend any ETP Holder, ETP Firm, or Equity ASAP Holder 
for failure to comply with the financial and reporting requirements in 
proposed Rule 4.
    Any disciplinary sanctions imposed by the Business Conduct 
committee may be appealed to the PCX Equities Board Appeals Committee. 
Decisions of the Board Appeals Committee may be appealed to the PCX 
Board of Governors and subsequently to the Commission.
    Proposed Rules 10.1 through 10.4 reflect several rule amendments 
previously approved by the PCX Board of Governors, which are now 
pending Commission approval.\39\ The pending amendments to the 
disciplinary proceedings propose to: (1) codify the independent 
function of the Regulatory Staff; (2) clarify what communications are 
improper in the context of pending investigations or disciplinary 
proceedings; (3) provide the Regulatory Staff with the ability to issue 
formal complaints for the alleged violations of Exchange rules; (4) 
permit qualified persons who are not members to serve on hearing 
panels; and (5) codify procedures relating to hearing panelists' 
conflicts of interest.
---------------------------------------------------------------------------

    \39\ See Exchange Act Release No. 42384 (February 3, 2000), 65 
FR 6675 (February 10, 2000) (File No. SR-PCX-99-10).
---------------------------------------------------------------------------

    Notwithstanding the above, the Exchange proposes to make additional

[[Page 9036]]

changes to its disciplinary rules before the implementation of the 
restructuring. Set forth below is a summary of the proposed substantive 
amendments to existing PCX Rule 10)
    Proposed Rule 10.4(a)--Restates that the Chief Regulatory Officer 
or such other delegee(s) will have the authority to review disciplinary 
proceedings and to determine whether there is probable cause to issue a 
formal complaint.
    Proposed Rule 10.4(c)--Former Rule 10.5 has been moved to new Rule 
10.4(c) and the reference to the Hearing Panel is replaced with 
Business Conduct Committee.
    Proposed Rule 10.5(a)--Permits the Business Conduct Committee to 
appoint one or more members to serve on the ``Conduct Panel'' with 
respect to disciplinary proceedings that are not resolved through the 
settlement process or summary proceeding.
    Proposed Rule 10.8(a)--Defines and clarifies the procedures and 
timetables for the respondent to follow when requesting the review of a 
decision by the Conduct Panel appointed by the Business Conduct 
Committee.\40\ The respondent may appeal to the Board at any time 
within fifteen calendar days after the decision has been served.
---------------------------------------------------------------------------

    \40\ The Exchange is proposing to make certain technical changes 
throughout the text of the proposed Rule 10 for clarification 
purposes (e.g., changing the reference to calendar days).
---------------------------------------------------------------------------

    Proposed Rule 10.8(b)--Provides that the Board Appeals Committee 
may appoint a Board Appeals Committee Panel (``Appeals Panel'') \41\ to 
review the decision rendered by the Conduct Panel. The composition of 
the Appeals Panel will be determined by the Board Appeal Committee in 
accordance with proposed Rule 3.3(a)(1)(A).
---------------------------------------------------------------------------

    \41\ The body conducting the review, either the Board Appeals 
Committee itself or the Appeals Panel is also referred to in the 
proposed rules as the Review Board.
---------------------------------------------------------------------------

    Proposed Rule 10.8(c)--Provides that decisions of the Board Appeals 
Committee may be appealed to the PCX Board of Governors. The PCX 
Board's review is confined to the issues raised by the respondent's 
written petition for review.
    Proposed Rule 10.8(d)--In reviewing the decision of the Board 
Appeals Committee, the PCX Board may, on its own initiative, order 
review of the decision after notice of such decision has been served on 
the respondent. If the PCX Board does not order review of the decision, 
the decision of the Appeals Panel will become final.
    Proposed Rules 10.12 and 10.13--The proposed rules relating to 
disciplinary action pursuant to the PCX Equities' Minor Rule Plan, as 
well as the summary sanction procedures, are substantially the same as 
current PCX Rules 10.13 and 10.14. However, the existing PCX provisions 
relating to options trading have not been included in the proposed 
rules because they are not applicable to PCX Equities' business.
    Proposed Rules 1.14(a)-(m)--Current PCX Rules 11.7(a)-(n) regarding 
appeals for non-disciplinary matters will be incorporated into proposed 
Rule 10.14. Proposed Rule 10.14 provides the procedures for persons 
aggrieved by any of the following actions taken by the Corporation to 
apply for an opportunity to be heard and to have the action reviewed. 
These actions are: (1) denial of an ETP or Equity ASAP; (2) the barring 
of any person from becoming associated with an ETP Firm or Equity ASAP 
Holder; (3) the suspension or cancellation of ETP or Equity ASAP 
trading privileges; (4) the prohibition or limitation of access to 
services provided by the Corporation, or the services of any ETP Firm 
or Equity ASAP Holder; or (5) denial of an applicant specialist for 
appointment as a registered specialist.
Rule 11--Expulsion, Suspension and Reinstatement
    Proposed Rule 11 clarifies, restates, and reorganizes existing PCX 
Rules and procedures regarding certain suspensions, cancellations, bars 
and prohibitions on access to the PCX Equities services and facilities. 
The following describes the proposed rules and how they differ from 
existing rules, where applicable.
    Proposed Rules 11.1(a)-(b)--Proposed Rules 11.1(a)-(b) incorporate 
a modified version of current PCX Constitution, Article X, Sections 
1(a) and (b). This rule requires an ETP Holder, ETP Firm or Equity ASAP 
Holder to give prompt written notice to the Corporation if it is 
expelled or suspended from any SRO, encounters financial difficulty or 
operating inadequacies, fails to perform contracts or becomes 
insolvent, or if any associated person of such ETP Firm or Equity ASAP 
Holder is similarly expelled or suspended by an SRO.
    Proposed Rules 11.2(a)-(b)--PCX has reorganized and simplified its 
rules relating to summary and non-summary disciplinary proceedings. The 
proposed rules have been adapted from NASD Rule 9510 Series and PCX 
Constitution, Article X, Section 2 and Article XI, Section 3(c). The 
proposed rules are intended to eliminate any potential ambiguities in 
the procedures related to summary and non-summary suspensions by 
expressly identifying the grounds for imposing such suspensions.
    Proposed Rule 11.2(c), Commentary .01--Proposed Rule 11.2(c) 
provides that action taken pursuant to Rule 11.2(a) shall also be 
subject to the applicable provisions of Rule 10.14. Furthermore, under 
proposed Commentary .01, the Corporation will be required to notify the 
Commission in the event that it determines to take summary action 
pursuant to Rule 11.2
    Proposed Rule 11.3--Proposed Rule 11.3 states that an ETP Holder, 
ETP Firm or Equity ASAP Holder, or associated person thereof loses all 
rights and trading privileges when those privileges are suspended or 
canceled by the Corporation. However, such person or organization shall 
remain subject to the disciplinary power of the Corporation.
    Proposed Rule 11.4--Proposed Rule 11.4 states that an ETP Holder, 
ETP Firm or Equity ASAP Holder, or associated person thereof whose 
trading privileges are suspended may be disciplined by the Corporation 
for any offense committed either before or after the announcement of 
the suspension.
    Proposed Rule 11.5--Other than minor word changes, proposed Rule 
11.5 is modeled closely after the current PCX Constitution, Article X, 
Section 3. Proposed Rule 11.5 states that a person or organization 
whose trading privileges have been suspended must immediately allow the 
Corporation to investigate its affairs.
    Proposed Rule 11.6--Other than minor word changes, proposed Rule 
11.6 is modeled closely after the current PCX Constitution, Article X, 
Section 4. Proposed Rule 11.6 describes the grounds for canceling 
trading privileges.
    Proposed Rule 11.7--Other than minor word changes, proposed Rule 
11.7 is modeled closely after the current PCX Constitution, Article X, 
Section 5. Proposed Rule 11.7 describes the reinstatement process after 
trading privileges have been suspended.
    Proposed Rule 11.8--Proposed Rule 11.8 provides that if any ETP 
Holder, ETP Firm, Equity ASAP Holder, or any associated person is 
suspended and fails or is unable to apply for reinstatement or fails to 
obtain reinstatement, trading privileges conferred by an ETP or Equity 
ASAP will terminate.
Rule 12--Arbitration
    Proposed Rule 12, the arbitration rule, has been patterned closely 
after current PCX Rule 12. Other than the changes discussed below, only 
minor changes in terminology have been made to conform the proposed 
rule to the circumstances of the proposed restructuring.
    The PCX notes that it is proposing to adopt new Rule 12.1, 
replacing current

[[Page 9037]]

Commentary .01. Proposed Rule 12.1 will define certain terms used in 
the context of this Rule, including the following:

    1. The term ``ETP'' shall mean both ETP and Equity ASAP permits.
    2. The terms ``service'' or ``serve'' shall mean effecting the 
delivery of a document to persons via first class mail, overnight 
delivery, hand delivery, or facsimile.
    3. The term ``associated person'' shall also include 
``affiliated'' person ``approved person'' and ``allied person.''
    4. The term ``Director of Arbitration'' shall mean any person 
appointed or designated by the Corporation's Chief Executive Officer 
to direct the Corporation's arbitration program.

    The Exchange is also proposing to renumber current Commentaries .02 
and .03 of Rule 12.1 as subsections (h) and (i), respectively. 
Commentary .01 of current PCX Rule 12.8(e) is being renumbered as 
12.9(g).
Rule 13--Liability of Directors and Corporation
    Proposed Rule 13 has been adapted from current PCX Rule 13. Only 
minor changes in terminology have been made to conform the rule to the 
proposed restructuring.
Equity Floor Procedure Advices
    This section of the proposed rules contains the various equity 
floor procedures and policies that have been adopted over time. These 
proposed rules have been adapted from the existing ones, which were 
previously approved by the Commission. These policies will apply to ETP 
Holders, ETP Firms, clerks or such other persons employed by ETP Firms 
that conduct business on the trading floor. Only minor changes in 
terminology have been made to the existing floor procedures and 
policies.
    b. Pacific Exchange, Inc. Constitution and Rules. Summarized below 
are the proposed amendments to the PCX Constitution and Rules. These 
changes primarily involve the deletion of equities-related language 
since the PCX Parent will only carry on the options trading business. 
Even though PCX Parent will have a separate set of rules applicable to 
options, it will continue to have ultimate responsibility in the 
administration and enforcement of rules governing the operation of PCX 
Equities.
    Rules of the Pacific Exchange, Inc. (``PCX Parent''). The current 
rules for the PCX are essentially the same except for the following 
rules that have been deleted because they pertain to the equities 
business:

Rule 2--Capital Requirements
    Rules 2.1(b)-(d)--Minimum Net Capital for Specialist Firms
    Rule 2.2--Specialist Post Capital
Rule 4--General Trading Rules
    Rule 4.5--Limitations on Members` Trading Because of Customers` 
Orders
    Rule 4.7--Members Holding Options
    Rule 4.8--Specialist (Report of Options)
    Rule 4.11--Taking or Supplying Securities Named in Order
    Rules 4.14-4.16--Marking to the Market
    Rule 4.20--Chinese Wall Procedures for Specialists
Rule 5--Equity Trading Rules \42\
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    \42\ The following equity trading rules are applicable to 
options trading and will be incorporated into PCX Rule 4. Current 
Rules 5.1(a) (Member Responsibility), 5.2(b) (Orders Read for 
Amount) and 5.8(g) (Special Situations) are proposed to be moved to 
new Rule 4.23 entitled ``Miscellaneous Provisions.'' Current Rules 
5.1(e)-(f) (prohibition of non-member trading) are proposed to be 
moved to new Rule 4.4, entitled ``Access to Trading Facilities.'' 
Current Rule 5.8(k) (rule on front-running of block transactions) is 
proposed to be renumbered Rule 4.7.
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    The text for the following equity rules will be deleted: Rules 
5.1(b)-(d), 5.1(g)-5.2(a), 5.2(c)-5.8(j), and 5.9-5.65.
Rule 10--Disciplinary Proceedings and Appeals
    Rules 10.13(i) and (k)(ii)--Minor Rule Plan: Equity Minor Trading 
Rule Violations
Rule 11--Committees of the Exchange
    Rules 11.9(a)-(c)--the Equity Listing, National Market System 
Advisory, and the Equity Marketing Committees have been deleted.
Rule 15--PCX Application of the OptiMark System
    The rules governing the OptiMark trading system have been removed 
and incorporated into proposed new Rules 7.71 through 7.78 for PCX 
Equities.
Equity Floor Procedure Advices
    Floor Procedure Advices 1-A through 3-A have been removed and 
incorporated into the proposed new rules for PCX Equities.

    The Exchange is also proposing to modify the text of several PCX 
rules so that they will be consistent with the operation of PCX 
Equities. First, the proposal would amend the text of current PCX Rule 
1.1(f) to clarify that ETPs and Equity ASAPs issued by PCX Equities 
will not confer any rights to trade on the options facilities.
    Second, the Exchange is proposing to eliminate references to the P/
COAST and OptiMark trading systems in PCX Rule 1.14(a). These trading 
systems are facilities of PCX Equities and access to such systems is 
restricted to ETP and Equity ASAP Holders.
    Third, the Exchange is proposing to retain its rules (current PCX 
Rule 3) relating to the initial and continued listing of equity 
securities. Since PCX Equities itself is not registered as a national 
securities exchange, the Exchange believes that equity securities will 
continue (for legal and regulatory purposes) to be listed on PCX 
Parent. Accordingly, the federal and state exchange exemptions 
applicable to listings on PCX Parent will continue to apply so as to 
mitigate any misconceptions regarding the existence of such exemptions, 
as well as the administration of the Exchange's listings program.
    Fourth, as discussed earlier, the proposed amendments pertaining to 
the rules and procedures for listing and delisting securities are also 
reflected in Rule 3.
    Constitution of Pacific Exchange, Inc. The proposed amendments to 
the PCX Constitution are as follows: First, Article I, Sections 1 and 
2, and Article II, Section 1(b) have been modified to reflect the 
separation of the equities operation (into PCX Equities) from the PCX 
Parent options business. As amended, the PCX Parent's principal place 
of business and the place of its annual meeting will be in San 
Francisco.
    Second, the Exchange proposes to amend Article III, Section 2(a) 
relating to the annual election of Governors.\43\ As amended, this 
provision will require that there be seven Governors in each of the 
three classes specified, and that such Governors comprising each class 
will have terms expiring at the Annual Meeting in 2002, 2003, and 2004, 
respectively. The Exchange proposes this rule change to make Article 
II, Section 1(a) consistent with Article III, Section 2(a), which sets 
minimum requirements for the composition of the Board of Governors.
---------------------------------------------------------------------------

    \43\ See Exchange Act Release No. 42235 (December 14, 1999), 64 
FR 71839 (December 22, 1999).
---------------------------------------------------------------------------

    Third, the Exchange proposes to amend Article III, Section 2(b) so 
that of the Governors in each of the classes specified in Article II, 
Section 2(a), at least one will be a member of the Exchange; at least 
one will be an office member or office allied member of the Exchange; 
and at least three will be representatives of the public.\44\ In 
addition, the Exchange proposes that at least one of the two floor 
members on the Board will be an ETP Holder, an Equity ASAP Holder or an 
Allied Person of an ETP Firm or an Equity ASAP Holder. The Exchange 
proposes these changes in order to codify a longstanding practice that 
is intended to

[[Page 9038]]

assure a balanced representation of both floor members and non-floor 
members among the industry representatives.
---------------------------------------------------------------------------

    \44\ Id.
---------------------------------------------------------------------------

    Fourth, the Exchange proposes to remove Sections 5(a)-(b) and 6(a)-
(b) of Article IV, as these provisions pertain to equity-related 
committees (i.e., the Equity Allocation Committee and the Equity Floor 
Trading Committee) and are not applicable to the PCX Parent's options 
business.
    Fifth, concurrent with the creation of PCX Equities, the Board of 
Governors is proposing to add Section 10 of Article VII to authorize 
the PCX Parent to buy, sell, or lease memberships as the Board of 
Governors may from time to time determine. Although the Board of 
Governors has no present intention of using this authority, it believes 
that this amendment is desirable because of the increased flexibility 
it will give to the Exchange.
    Finally, the Exchange proposes to remove Sections 1-3 of Article 
XV, as these provisions pertain to the equities clearing business. Upon 
effectiveness of the restructuring, PCX Parent will transfer its 
ownership interest in Pacific Clearing Corporation to PCX Equities.
    c. Plan of Delegation of Functions by the Pacific Exchange, Inc. to 
PCX Equities, Inc. The PCX approved a Plan of Delegation of Functions 
by the Pacific Exchange, Inc. to PCX Equities, Inc.\45\ The Plan states 
that the PCX, the registered national securities exchange, is the 
parent company of the wholly-owned subsidiary, PCX Equities. The Plan 
also sets forth the functions and authority of the PCX and the 
functions and authority, which the PCX delegates to the PCX Equities.
---------------------------------------------------------------------------

    \45\ See Attachment No. 4 to Amendment No. 1 to the proposed 
rule change.
---------------------------------------------------------------------------

2. Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) \46\ of the Act, in general, and furthers the objectives 
of Section 6(b)(5), \47\ in particular, in that it is designed to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, and to remove impediments and perfect the mechanisms of a 
free and open market and a national market system and to protect 
investors and the public interest.
---------------------------------------------------------------------------

    \46\ 15 U.S.C. 78f(b).
    \47\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    Within 35 days of the date of 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 such 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 Amendment Nos. 1 
and 2 are 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 20549-0609. 
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-99-39 and should 
be submitted by March 9, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\48\
---------------------------------------------------------------------------

    \1\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-4221 Filed 2-22-00; 8:45 am]
BILLING CODE 8010-01-M