[Federal Register Volume 65, Number 61 (Wednesday, March 29, 2000)]
[Notices]
[Pages 16680-16683]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-7728]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42557; File No. SR-PCX-98-30]


Self-Regulatory Organizations; Pacific Exchange, Inc.; Order 
Granting Approval to Proposed Rule Change and Amendment No. 1 to the 
Proposed Rule Change and Notice of Filing and Order Granting 
Accelerated Approval to Amendments 2 and 3 to the Proposed Rule Change 
Relating to Telephone Use on the Options Floor

March 21, 2000.

I. Introduction

    On June 26, 1998, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to codify the Exchange's 
procedures and restrictions regarding telephone use on the Options 
Trading Floor. On November 12, 1998, the Exchange filed Amendment No. 1 
to the proposed rule change.\3\ The proposed rule change, including 
Amendment No. 1 was published for comment in the Federal Register on 
February 6, 1999.\4\ On August 4, 1999 and September 27, 1999, 
respectively, the Exchange filed Amendments 2 \5\ and 3 \6\ to the 
proposed rule change. No comments were received on the proposal. This 
order approves the proposal as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Robert Pacileo, Staff Attorney, Regulatory 
Policy, PCX, to David Sieradzki, Attorney, Division of Market 
Regulation, SEC, dated November 10, 1998 (``Amendment No. 1''). The 
substance of Amendment No. 1 is incorporated into this order.
    \4\ Securities Exchange Act Release No. 41018 (February 3, 
1999), 64 FR 7681.
    \5\ See letter from Michael D. Pierson, Director, Regulatory 
Policy, PCX, to David Sieradzki, Special Counsel, Division of Market 
Regulation, SEC, dated August 3, 1999 (``Amendment No. 2''). In 
Amendment No. 2, the Exchange clarifies that subsections (d)-(g) of 
Rule 6.2 are reserved for future use.
    \6\ See letter from Michael D. Pierson, Director, Regulatory 
Policy, PCX, to David Sieradzki, Special Counsel, Division of Market 
Regulation, SEC, dated September 24, 1999 (``Amendment No. 3''). In 
Amendment No. 3, the Exchange amends Rule 6.2(h)(6) to indicate that 
floor managers may not use the pit rep or LMM phones.
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II. Description of the Proposal

    The purpose of this proposal is to establish rules and procedures 
for telephone use on the Options Floor. Proposed Rule 6.2(h) sets 
guidelines for the use of telephones by market makers, Lead Market 
Makers (``LMMs''), floor brokers, clerks, and floor managers.
    The PCX is proposing to establish a formal rule requiring that 
Members and Member Firms must register, prior to use, any new telephone 
to be used on the Options Floor. Proposed Rule 6.2(h)(1) states that 
each phone registered with the Exchange must be registered by category 
of user (market maker, LMM, floor broker, clerk, or manager). If there 
is a change in the category of any user, the phone must be re-
registered with the Exchange. At the time of registration, Members and 
Member Firm representatives must sign a statement indicating that they 
are aware of and understand the rules governing the use of telephones 
on the Options Floor.
    The proposed Rule further states that no Member or Member Firm may 
employ any alternative communication device, including but not limited 
to e-mail, on the Options Floor without the prior approval of the 
Options Floor Trading Committee.

Capacity and Functionality

    Proposed Rule 6.2(h)(2) specifies the capacity and functionality 
permitted for the use of telephones on the Options Floor. The Rule 
states specifically that no wireless telephone used on the Options 
Floor may have an output greater than one watt and that no person on 
the Options Floor may use any device for the purpose of maintaining an 
open line of continuous communication whereby a person not located in 
the trading crowd may continuously monitor the activities in the 
trading crowd. This prohibition covers intercoms, walkie-talkies and 
any similar devices. The Rule does not permit speed-dialing features 
for Member phones.
    The proposed Rule states specific guidelines for each category of 
user on the Options Floor, as follows:

Market Makers and LMMs

    Proposed Rule 6.2(h)(3) states that market makers and LMMs may use 
their own cellular and cordless phones to place calls to any person at 
any location (whether on or off the Options Floor). The Rule also 
states that market makers and LMMs may use the pit rep and LMM 
telephones located at the trading posts only for the purpose of 
marketing option issues, responding to customer inquiries, or otherwise 
conducting Exchange business. No person other than a pit rep, market 
maker \7\ or an LMM may use the pit rep or LMM phones. This is to 
ensure that phones

[[Page 16681]]

will be accessible for customer inquiries and marketing.
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    \7\ See Amendment No. 1, supra note 3.
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    Proposed Rule 6.2(h)(3)(C) states that market makers located off 
the Options Floor may not place an order by calling a floor broker who 
is present in a trading crowd. Market makers located off the Options 
Floor may not otherwise place an order by calling the pit rep or LMM 
phone in the trading crowd. Proposed Rule 6.2(h)(3)(C) also states that 
any telephonic order entered from off the Options Floor must be placed 
with a person located in a member firm booth. According to the PCX, the 
purpose of this restriction is to facilitate adequate surveillance of 
telephonic orders and ensure that there is a record of the order in the 
event that a problem arises in connection with the order. The PCX also 
noted that the prohibition is consistent with Rule 6.85, Commentary 
.03, which requires verbal orders from market makers to be written up 
outside of the trading crowd.\8\
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    \8\ PCX Rule 6.85, Commentary .03 provides in part: ``When a 
Floor Broker receives a verbal order from a Market Maker, or when a 
Floor Broker is requested by a Market Maker to alter an order in his 
possession in any way, the Floor Broker shall immediately prepare an 
order ticket from outside the trading crowd and time-stamp it.''
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Floor Brokers

    Proposed Rule 6.2(h)(4)(A) states that floor brokers may use 
cellular and cordless phones, but only to communicate with persons 
located on the Options Floor. These phones may not include a call 
forwarding feature. According to the PCX, this portion of the proposed 
Rule codifies long-standing PCX policies regarding phone use by floor 
brokers, which are designed to ensure that orders are entered in a 
manner that allows for routine monitoring and surveillance by the 
Exchange. In addition, the Rule states that floor brokers are permitted 
to use headsets to communicate with persons located on the Options 
Floor, but if the Exchange determines that a floor broker is 
maintaining a continuous open line through the use of a headset, the 
floor broker will be prohibited from future use of any headset for a 
length of time to be determined by the Exchange.\9\
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    \9\ The Commission notes that a member would have the right to 
appeal any decision to suspend a member from using a headset 
pursuant to Exchange Rule 11.7, Hearings and Review of Committee 
Action.
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    Proposed Rule 6.2(h)(4)(B) provides that floor brokers may receive 
orders over their phones from any persons located on the Options Floor. 
Floor brokers who receive telephonic orders while in the trading crowd 
must step outside of the crowd, wirte up an order ticket and time stamp 
it before representing the order in the crowd. This is consistent with 
Rule 6.67(a) which requires orders to be in written form when taken to 
the trading post for attempted execution.\10\
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    \10\ See PCX Rule 6.67(a).
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    Proposed Rule 6.2(h)(4)(B) further provides that any telephonic 
order entered from off the Options Floor must be placed with a person 
located in a member firm booth. Proposed Rule 6.2(h)(4)(C) also 
prohibits the floor brokers from using the Pit Rep or LMM telephones 
under any circumstances. This is to ensure that telephones are 
available for marketing option issues, responding to customer 
inquiries, or otherwise conducting Exchange business relating to Market 
Makers and Lead Market Makers.

Clerks

    Proposed Rule 6.2(h)(5) states that Floor Broker Clerks and Stock 
Executions Clerks are subject to the same terms and conditions on 
telephone use as Floor brokers and that Market Maker Clerks are subject 
to the same terms and conditions on telephone use as Market Makers. 
Proposed Rule 6.2(h)(5)(D) further states that the Options Floor 
Trading Committee reserves the right to prohibit clerks from using 
cellular or cordless phones on the floor at any time that it is 
necessary due to electronic interference problems \11\ or capacity 
problems \12\ resulting from the number of such phones then in use on 
the Options Floor. In such circumstances, the Committee will first 
consider restricting the use of such phones by Market Maker Clerks, 
then by Stock Execution Clerks, and then finally, by Floor Broker 
Clerks.
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    \11\ The term ``electronic interference'' refers to a situation 
where, even though there are talk paths available, a user cannot get 
a good signal because of interference with monitors, static, or a 
bay station not working correctly. Amendment No. 1, supra note 3.
    \12\ The term ``capacity problems'' is used to describe a 
situation where a user cannot get a signal because no talk path is 
available on a bay station. Currently, there are 96 talk paths 
available. If all 96 talk paths are being used, the 97th user will 
be unable to get a signal because all talk paths are being used. 
Amendment No. 1, supra note 3.
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Floor Managers

    Proposed Rule 6.2(h)(6) states that Member Firm Floor Managers may 
use any telephone except the Pit Rep or LMM phones,\13\ including any 
cellular or cordless phones, for any business purpose relating to their 
management responsibilities.
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    \13\ See Amendment No. 3, supra note 6.
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General Access Phones, Telephone Records, and Exchange Liability

    Proposed Rule 6.2(h)(7) states that the general access phones 
located outside the trading areas may be used by any Member, Clerk, or 
Member Firm Floor Manager to communicate with persons on the Options 
Floor. Proposed Rule 6.2(h)(8) states that Members must maintain their 
cellular or cordless telephone records, including logs of calls placed, 
for a period of not less than one year. Further, the Exchange reserves 
the right to inspect such records pursuant to Rule 10.2. \14\
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    \14\ Exchange Rule 10.2(d) requires members, member 
organizations, and persons associated with members to cooperate with 
regulatory investigations; including, but not limited to, furnishing 
documentary materials.
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    Finally, proposed Rule 6.2(h)(9) states that the Exchange assumes 
no liability to Members or Member Firms due to conflicts between phones 
in use on the Options Floor or due to electronic interference problems 
resulting from the use of telephones on the Options Floor.

Minor Rule Plan

    Currently, the PCX Minor Rule Plan (``MPR'') includes as a minor 
rule violation, the unauthorized use of telephones located in the 
trading post areas.\15\ The PCX is proposing to change the language in 
the Rule to refer to the proposed rule on telephone use on the Options 
Trading Floor (Rule 6.2(h)). Specifically, the provision will now 
state: Floor Member or Member Firm employee violated rules on 
telephones on the Options Floor. In addition, the PCX is proposing to 
increase the fine amount for a third violation from $750.00 to 
$1,000.00 to better reflect the seriousness of a third violation within 
two years.\16\
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    \15\ Rule 19d-1(c)(2) under the Act authorizes national 
securities exchanges to adopt minor rule violation plans for the 
summary discipline and abbreviated reporting of minor rule 
violations by exchange members and member organizations. See 
Securities Exchange Act Release No. 21013 (June 1, 1984), 49 FR 
23828 (June 8, 1984) (order approving amendments to paragraph (c)(2) 
of Rule 19d-1 under the Act). Pursuant to PCX Rule 10.13, the 
Exchange may impose a fine on any member or member organization for 
any violation of an Exchange rule that has been deemed to be minor 
in nature and approved by the Commission for inclusion in the MRP. 
PCX Rule 10.13(h)-(j) sets forth the specific Exchange rules deemed 
to be minor in nature.
    \16\ As noted in PCX Rule 10.13(e), pursuant to Securities 
Exchange Act Release No. 30958, any person or organization found in 
violation of a minor rule under the MRP is not required to report 
such violation on SEC Form BD, provided that the sanction imposed 
consists of a fine not exceeding $2,500 and the sanctioned person or 
organization has not sought an adjudication, including a hearing, or 
otherwise exhausted the administrative remedies available with 
respect to the matter. Accordingly, any fine imposed in excess of 
$2,500 will be subject to reporting on SEC Form BD in addition to 
the immediate, rather than periodic, reporting requirement of 
Section 19(d)(1) of the Act. See Securities Exchange Act Release No. 
30280 (January 22, 1992), 57 FR 3452 (January 29, 1992) (noting that 
fines in excess of $2,500, assessed under New York Stock Exchange, 
Inc. (``NYSE'') Rule 476A, are not considered pursuant to the NYSE's 
minor rule violation plan and are thus subject to the current 
reporting requirements of Section 19(d)(1) of the Act.)

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[[Page 16682]]

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with Section 6 of the Act \17\ and the rules and regulations 
thereunder. In particular, the Commission believes that the proposal is 
consistent with the Section 6(b)(5) \18\ requirements that the rules of 
an exchange be designed to prevent fraudent ad manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest.\19\
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    \17\ 15 U.S.C. 78f.
    \18\ 15 U.S.C. 78f(b)(5).
    \19\ In approving the proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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    In determining to approve the proposal, the Commission notes that 
the telephone registration requirement in proposed Rule 6.2(h)(1) is 
consistent with PCX Rule 4.22,\20\ which requires Exchange approval of 
any electronic or telephonic communications devices on the floor of the 
Exchange. The Commission finds that it is resonable for the Exchange to 
limit the power and function of telephones used on the options floor to 
ensure that member telephones do not cause interference with each other 
or with Exchange systems. Further, to enable the Exchange to 
effectively monitor for abuses of its telephone usage restrictions, the 
Commission finds that it is reasonable for the Exchange, pursuant to 
proposed Rule 6.2(h)(8), to require Members to maintain cellular or 
cordless telephone records for a period not less than one year.
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    \20\ See Securities Exchange Act Release No. 40852 (December 29, 
1998), 64 FR 1058 (January 7, 1999) (Order approving PCX Rule 4.22 
in SR-PCX-98-16).
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    The PCX's proposed Rule contains restrictions regarding telephone 
use by market makers. Specifically, proposed Rule 6.2(h)(3)(A) permits 
market makers to use their cellular or cordless phones to call any 
location on or off of the trading floor. In addition, proposed Rule 
6.2(h)(3)(B) states that only market makers, pit reps and LMMs may use 
the pit rep and LMM phones. Rule 6.2(h)(3)(B) further provides that 
these phones may only be used for marketing options issues, responding 
to customer inquiries, and otherwise conducting Exchange business. 
Because market makers generally do not deal directly with public 
customers, the Commission does not believe that allowing market makers 
to communicate with locations off of the trading floor raises the same 
regulatory concerns discussed below regarding telephone use by floor 
brokers.\21\ As a result, the Commission finds that it is consistent 
with the Act for the Exchange to allow market makers to use cellular or 
cordless telephones to call locations off of the trading floor. The 
Commission also finds that it is reasonable and consistent with the 
maintenance of fair and orderly markets for the exchange to limit the 
availability of certain telephones to certain members to ensure that 
these telephones are available to members as needed to conduct Exchange 
business.
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    \21\ Telephone conversation between Michael D. Pierson, 
Director, Regulatory Policy, PCX, and David Sieradzki, Special 
Counsel, Division of Market Regulation, SEC, on March 15, 2000.
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    PCX proposed Rule 6.2(h)(3)(C) requires market makers placing 
orders from locations off of the trading floor do so at a member firm 
booth and not by calling a floor broker in the crowd or using the Pit 
Rep and LMM phones in the trading crowd. The proposed rule contains a 
similar restriction for floor brokers providing that all orders entered 
from locations off of e floor must be placed with a person in a member 
firm booth. This floor broker restriction is discussed in more detail 
below. For the reasons disscussed below, the Commission finds that it 
is reasonable and consistent with the Act for the Exchange to require 
orders being entered from locations off of the trading floor to be 
entered at a member firm booth.
    PCX proposed Rule 6.2(h)(4)(A) prohibits floor brokers from using 
cellular or cordless Telephones to communicate with persons located off 
of the trading floor. As discussed above, PCX proposed Rule 
6.2(h)(4)(B) requires telephonic orders entered from off of the trading 
floor to be entered at a member firm booth and not directly with a 
floor broker in the crowd. The Commission believes that the Exchange's 
prohibition on the use of telephones by floor brokers to call locations 
off of the floor or receive orders from off of the floor is justified 
by legitimate regulatory concerns. Specifically, the PCX must ensure 
compliance with rules requiring that members who accept orders directly 
from public customers, are qualified to do so. Accordingly, this 
proibition helps to provide adequate surveillance over this activity by 
requiring all orders to be taken at the member firm booth and 
restricting outside phone calls. In addition, preventing floor brokers 
from directly accessing market information that might only be available 
on the floor of the Exchange trading the securities underlying the 
options trading at the PCX helps to alleviate concerns about 
frontrunning and other forms of market manipulation. Finally, this 
prohibition also furthers the goal of preventing persons located off of 
the trading floor from having virtually direct access to the trading 
crowd and receiving certain time and place advantages over other 
customers.\22\
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    \22\ Securities Exchange Act Release No. 25842 (June 23, 1988), 
53 FR 24539 (June 29, 1988).
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    The PCX's proposed rule also contains restrictions involving floor 
broker's communications while in the trading crowd. Specifically, 
proposed Rule 6.2(h)(4)(A) prohibits a floor broker from maintaining a 
continuous open line with other locations on the floor through the use 
of a headset. In order for the Commission to approve such restrictions, 
it must find that they are consistent with the Act and do not impose an 
unnecessary burden on competition in violation of Section 6(b)(8) of 
the Act.\23\ The Commission finds that prohibiting floor brokers from 
using headsets to maintain a continuous open line with other locations 
on the floor is reasonable and consistent with the Act. As the 
commission has noted in the past, there is a marked difference between 
allowing non-members to communicate with members near the crowd and 
members actually in the trading crowd. The ability of a customer to 
communicate directly with a floor broker in the trading crowd would 
provide a significant advantage to that customer unlike the smaller 
advantage accruing from access to member firm booths on the trading 
floor.\24\ If the Exchange allowed floor brokers to maintain an open 
line with a member firm booth, it could result in allowing persons 
located off of trading virtually direct access to a trading crowd.
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    \23\ 15 U.S.C. 78f(b)(8).
    \24\ See supra note 22.
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    Pursuant to proposed Rule 6.2(h)(5) telephone use by market maker 
and floor broker clerks is subject to the same terms and conditions as 
market makers and floor brokers. In addition, telephone use by stock 
execution clerks is subject to the same terms and conditions as floor 
brokers. Finally, the Exchange's

[[Page 16683]]

Options Floor Trading Committee reserves the right to restrict the use 
of cellular or cordless telephones by clerks at any time that it is 
necessary due to capacity or interference problems. For the reasons 
expressed above regarding telephone usage by market makers and floor 
brokers, the Commission finds that the proposed restrictions on phone 
usage by clerks on the floor of the Exchange are reasonable and 
consistent with the Act.
    Proposed Rule 6.2(h)(6) provides that floor managers may use any 
phone except a Pit Rep or LMM phone,\25\ including cordless or cellular 
phones for any business purpose relating to their management 
responsibilities. The Exchange represents that, due to the nature of 
their job and responsibilities on the trading floor, it is important 
that floor managers be able to use any available phone to effectively 
carry out their management responsibilities.\26\ Based on this 
representation, the Commission finds this proposed rule reasonable and 
consistent with the Act.
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    \25\ See Amendment No. 3, supra note 6.
    \26\ Telephone conversation between Michael D. Pierson, 
Director, Regulatory Policy, PCX, and David Sieradzki, Special 
Counsel, Division of Market Regulation, SEC, on March 15, 2000.
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    The Commission supports the Exchange's efforts to codify existing 
Exchange policies to give its membership adequate notice of what 
conduct is prohibited. In regulating the PCX options trading floor and 
devising its structure, the Commission recognizes the PCX's right to 
restrict, under certain circumstances, the use of telephonic 
communications devices that are installed on its floor. While 
supporting the Exchange's efforts to monitor the types of 
communications that are on its options trading floor and regulate their 
use, the Commission expects the PCX to ensure that the rule being 
approved today is not used to limit access to services offered by the 
Exchange or applied in a manner inconsistent with Sections 6(b)(5)\27\ 
and 6(b)(8)\28\ of the Act.\29\ Specifically, the Commission expects 
that proposed Rule 6.2(h) will not be interpreted in a manner that 
permits unfair discrimination between customers, issuers, brokers, or 
dealers or imposes any unnecessary or inappropriate burden on 
competition, or is otherwise used to limit member access to Exchange 
services.
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    \27\ 15 U.S.C. 78f(b)(5).
    \28\ 15 U.S.C. 78f(b)(8).
    \29\ See e.g., William J. Higgins, 48 S.E.C. 713 (1987).
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    The Commission believes that the Exchange's proposed changes to its 
minor rule plan are reasonable and provide fair procedures for 
appropriately disciplining members and member organizations for minor 
rule violations that warrant some type of punitive measure, but for 
which a full disciplinary hearing would be an inappropriate waste of 
resources in light of the minor nature of the violation. The Commission 
notes that violations of the Exchange's telephone policy are objective 
and easily verifiable, and thus, lend themselves to the use of 
expedited proceedings. Specifically, the issue of whether a member has 
improperly used a telephone on the options floor may be determined 
objectively and adjudicated quickly without complicated evidentiary and 
interpretive inquiries. The Commission believes that the proposed 
change to the existing fine schedule is appropriate and should serve to 
discourage violations of the Exchange's telephone policy on its options 
trading floor.
    The Commission finds good cause for approving Amendment Nos. 2 and 
3 to the proposed rule change prior to the thirtieth day after the date 
of publication of notice of filing thereof in the Federal Register. 
Amendment Nos. 2 and 3 make technical, non-substantive changes to the 
proposal. As a result, the Commission does not believe that Amendment 
Nos. 2 and 3 raise any new regulatory issues. Further, the Commission 
notes that the original proposal was published for the full 21-day 
comment period and the Commission received no comments regarding the 
proposal. Accordingly, the Commission believes there is good cause, 
consistent with Sections 6(b)(5) and 19(b) \30\ of the Act, to approve 
Amendment Nos. 2 and 3 to the Exchange's proposal on an accelerated 
basis.
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    \30\ 15 U.S.C. 78f(b)(5) and 15 U.S.C. 78s(b).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendments 2 and 3, including whether the 
Amendments 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 at the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the above-mentioned exchange. All submissions 
should refer to File No. SR-PCX-98-30 and should be submitted by April 
19, 2000.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\31\ that the proposed rule change (SR-PCX-98-30), as amended, is 
approved.
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    \31\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-7728 Filed 3-28-00; 8:45 am]
BILLING CODE 8010-01-M