[Federal Register Volume 65, Number 132 (Monday, July 10, 2000)]
[Notices]
[Pages 42415-42417]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-17335]



[[Page 42415]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42993; File No. SR-Phlx-99-51]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Granting Approval of Proposed Rule Change and Notice of Filing 
and Order Granting Accelerated Approval of Amendment No. 1 to Proposed 
Rule Change Assessing a $1,500 Monthly Capital Funding Fee on a 
Permanent Basis

June 29, 2000.

I. Introduction

    On November 26, 1999, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' 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 assess seat owners a monthly 
capital funding fee of $1,500 per seat owned for a period of 36 months 
(``permanent fee proposal''). The proposed rule change was published 
for comment in the Federal Register on February 17, 2000.\3\ The 
Commission received twenty-two comment letters from fourteen commenters 
regarding the proposal. \4\ On May 19, 2000, the Phlx filed Amendment 
No. 1 to the proposal. \5\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 42405 (February 8, 
2000), 65 FR 8226. The capital funding fee was originally proposed 
on October 1, 1999, in SR-Phlx-99-43. See Securities Exchange Act 
Release No. 42058 (October 22 1999), 64 FR 58878 (December 15, 
1999). However, on November 17, 1999, the Exchange withdrew SR-Phlx-
99-43. This proposed rule change replaces SR-Phlx-99-43.
    \4\ See Section III below for a discussion of the comment 
letters. The comments received in response to SR-Phlx-99-43 are 
included, to the extent relevant, in the discussion contained in 
Section III.
    \5\ See Letter from Cindy Hoekstra, Attorney, Phlx, to Nancy 
Sanow, Assistant Director, Division of Market Regulation, 
Commission, dated May 18, 2000 (Amendment No. 1). In Amendment No. 
1, the Phlx represents that it believes that assessing the capital 
funding fee on the Exchange's seat owners is appropriate under 
Delaware law. The Phlx's arguments are more fully described below.
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    During the pendency of the permanent fee proposal, the Commission 
approved another proposed rule to implement the fee on a pilot basis. 
Specifically, on January 5, 2000, the Commission granted accelerated 
approval of the capital funding fee on a three-month pilot basis. \6\ 
On April 24, 2000, a proposed rule change extending the pilot program 
until July 6, 2000 became immediately effective under Section 
19(b)(3)(A) of the Act. \7\
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    \6\ See Securities Exchange Act Release No. 42318 (January 5, 
2000), 65 FR 2216 (January 13, 2000) (SR-Phlx-99-49).
    \7\ See 15 U.S.C. 78s(b)(3)(A); Securities Exchange Act Release 
No. 42714 (April 24, 2000), 65 FR 25782 (May 3, 2000) (SR-Phlx-00-
29).
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    This order approves the permanent fee proposal, accelerates 
approval of Amendment No. 1, and solicits comments from interested 
persons on that Amendment.

II. Description of the Proposal

a. The Original Filing

    The Phlx proposed to amend its schedule of dues, fees, and charges 
to charge a monthly capital funding fee of $1,500 per Exchange seat to 
seat owners \8\ for a period of 36 months. The Phlx represents that the 
capital funding fee will be imposed on each of the 505 Exchange seat 
owners on the last business day of the calendar month. In order to be 
charged the fee, a seat owner must own a seat on the last business day 
of the month preceding the month that is being billed. Thus, at the 
beginning of each month, the seat owner will be billed for that entire 
month. \9\ The Exchange represents that it intends to segregate the 
funds generated from the $1,500 fee from Phlx's general funds.
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    \8\ The term ``owner'' is defined in Phlx's Certificate of 
Incorporation as ``any person or entity who or which is a holder of 
equitable title to a membership in the Phlx.'' See Phlx's 
Certificate of Incorporation, Article Twentieth; Securities Exchange 
Act Release No. 42773 (May 11, 2000) 65 FR 31622 (May 18, 2000) 
(approving proposal to add definition of ``owner'' to Certificate of 
Incorporation). Although the term ``seat owner'' is not defined in 
the Phlx's By-Laws or Certificate of Incorporation, the term 
``seat'' refers to a membership in the Phlx. Telephone conservation 
between Maria Chidsey, Attorney, Division of Market Regulation, 
Commission, and Bob Ackerman, Senior Vice President, Chief 
Regulatory Officer, Phlx (January 5, 2000).
    \9\ For example, owners of record on September 30 will be billed 
$1,500 for the month of October.
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    The Phlx represents that the capital funding fee is a part of its 
long-term financing plan.\10\ The fee will be charged for 36 
consecutive months beginning on July 6, 2000. This monthly fee will 
provide funding for technological improvements and other capital 
needs.\11\ Specifically, it is intended to fund capital purchasers, 
including hardware for capacity upgrades, development efforts for 
decimalization, and trading floor expansion. The Phlx also represents 
that revenue raised from the fee will be utilized over a three-year 
period, after which time the Phlx intends to reevaluate its financing 
plan to determine whether to continue assessing the fee. The Phlx 
represents that the revenue generated from the fee will assist it in 
remaining competitive in the capital markets environment. The Exchange 
reserves the right to suspend the fee or to cease charging it 
altogether at any time.
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    \10\ The other part of that financing plan is a credit to 
qualified members against certain member fees, dues, and other 
amounts owned to the Phlx. On May 15, 2000, a proposed rule change 
implementing that credit on a six-month pilot basis became 
immediately effective under Section 19(b)(3)(A) of the Act. See 
Securities Exchange Act Release No. 42791 (May 16, 2000), 65 FR 
33606 (May 24, 2000) (SR-Phlx-00-44).
    \11\ This fee is distinguished from the Exchange's technology 
fee in that the technology fee was intended to cover system software 
modifications, Year 2000 modifications, specific system development 
(maintenance) costs, SIAC and OPRA communication charges, and 
ongoing system maintenance charges. The technology fee became 
effective upon filing in March 1997. See Securities Exchange Act 
Release No. 38394 (March 12, 1997), 62 FR 13204 (March 19, 1997) 
(SR-Phlx-97-09).
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b. Amendment No. 1

    In Amendment No. 1, the Phlx represents that it is a Delaware non-
stock corporation, and states that it believes that assessing the 
capital funding fee on the owners of the Exchange's 505 memberships is 
appropriate under Delaware law. Amendment No. 1 states that Section 
102(a)(4) of the Delaware General Corporation Law (``DGCL'') provides 
that the certificate of incorporation or by-laws of a non-stock 
corporation shall state the ``conditions of membership of such 
corporations.'' \12\ The Phlx represents that its Certificate 
Incorporation authorizes its Board of Governors to impose fees on the 
owners of the Exchange's memberships, including owners who are lessors 
of memberships.\13\ The Phlx asserts that its By-Laws already impose 
various fees on lessors of memberships and other persons and entities 
that own equitable title to Exchange memberships.\14\
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    \12\ See Amendment No. 1, at 5.
    \13\ The Phlx cites Article Twentieth of its Certificate of 
Incorporation, which authorizes the Board of Governors to impose 
fees on ``owners [and] lessors and lessees of memberships.'' See 
Amendment No. 1, at fn. 9.
    \14\ The Phlx cites Section 12-8 of its By-Laws, as authorizing 
the Board of Governors to assess initiation, application, and 
transfer-of-title fees on lessors. See Amendent No. 1, at fn. 10.
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    Amendment No. 1 further states that, under Section 102(a)(3) of the 
DGCL, the certificate of incorporation of a Delaware corporation must 
state the ``nature of the business or purposes to be conducted or 
promoted'' by the corporation. The Phlx represents that Article Third 
of its Certificate of Incorporation provides that the nature of the 
business and the objects and purposes of the Exchange include the 
authority:


[[Page 42416]]


    To act as and to provide a securities exchange where the 
corporation's members and other persons authorized by it can buy, 
sell, pledge, exchange, trade and deal in any article of commerce, 
including, without limitation, stocks, bonds, and other securities * 
* * and generally to operate as and perform all of the functions of 
a national securities exchange.\15\

    \15\ See Amendment No. 1, at 6.
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    The Exchange also represents that Section 121(a) of the DGCL gives 
a corporation and its director's broad powers to conduct the operations 
and achieve the objects and purposes of the corporation. In addition to 
powers expressly granted by law or the certificate of incorporation, 
the corporation and its directors may exercise ``any powers incidental 
thereto, so far as such powers and privileges are necessary or 
convenient to the conduct, promotion or attainment of the business or 
purposes set forth in its certificate of incorporation.'' Further, the 
Phlx asserts that under Section 141(a) of the DGCL, a corporation's 
board of directors has the legal obligation to manage the business and 
affairs of the corporation.
    Based on these provisions of the DGCL and the nature and purpose of 
the Exchange, the Exchange maintains that it has the general power to 
assess a fee on the owners of Exchange seats and that the capital 
funding fee is an appropriate exercise of that power. The Phlx 
represents that the owners of the 505 memberships on the Exchange 
benefit both from the value of their seats and from doing business on 
the Exchange's facilities (either directly or through agents or lessees 
who pay fees to owners). Under these circumstances, the Exchange 
asserts that it believes that assessing the capital funding fee on 
owners is warranted.

III. Summary of Comments

    The Commission received twenty-two comment letters from fourteen 
commenters regarding the proposed rule change. All of the commenters 
opposed the proposed rule change. Although the comments specifically 
expressed concern about the capital funding fee, they also expressed 
general disapproval of the Phlx financing plan, which consists of the 
capital funding fee and the monthly credit of up to $1,000 for 
qualified members. The monthly credit is available to members who own 
their memberships (``member-owners'') and other members who are so 
closely connected to the owners that the Phlx believes they should be 
treated as member-owners (collectively, ``qualified members'').\16\
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    \16\ See supra note 10. For an explanation of the credit, see 
Securities Exchange Act Release No. 42791 (May 16, 2000), 65 FR 
33606 (May 24, 2000).
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    One commenter raised concerns that the capital funding fee in 
conjunction with the credit would be an inequitable allocation of fees, 
dues and other charges.\17\ Seven other commenters \18\ also expressed 
concerns that the Phlx financing plan would inequitably assess fees on 
seat owners. One of those seven commenters complained that his income 
from the seat he owned would be substantially reduced after paying the 
capital funding fee.\19\
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    \17\ See Letter from Mark Desiderio to Jonathan G. Katz, 
Secretary, Commission, dated October 16, 2000 (``Letter from 
Desiderio'').
    \18\ See Letters from: Harry Green to Jonathan G. Katz, 
Secretary, Commission, dated November 30, 1999, and December 21, 
1999 (``Letters from Green''); Gilbert Goldstein to Jonathan G. 
Katz, Secretary, Commission, dated December 23, 1999 (``Letter from 
Goldstein''); George Nassar to Jonathan G. Katz, Secretary, 
Commission, dated December 17, 1999 (``Letter from Nassar''); 
Stanley Miller to Jonathan G. Katz, Secretary, Commission, dated 
January 3, 2000 (``Letter from Miller''); Michel Mesirov to Jonathan 
G. Katz, Secretary, Commission, dated October 15, 1999, and December 
20, 1999 (``Letters from M. Mesirov''); Matthew Wayne, Vanacso, 
Wayne & Genelly, to Jonathan G. Katz, Secretary, Commission, dated 
October 15, 1999 and December 17, 1999 (``Letters from Wayne''); and 
William Kramer to Jonathan G. Katz, Secretary, Commission, undated 
(``Letter from Kramer'').
    \19\ See Letter from Miller.
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    Several commenters argued that the $1,500 capital funding fee is 
excessive and lacks justification. One commenter stated that the amount 
of the fee is an excessive initial sum. \20\ Another characterized the 
fee as an onerous financial burden on seat owners. He argued that the 
fee is unjustified because of the vague purpose of providing 
technological improvements and other capital needs.\21\ Four commenters 
argued that the Phlx should consider other means of raising capital and 
reducing expenses, such as reducing salaries, bonuses, entertainment 
costs, and other operating costs.\22\
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    \20\ See Letter from Doris Elwell to Arthur Levitt, Chairman, 
Commission, dated October 4, 1999 (``Letter from Elwell'').
    \21\ See Letter from Desiderio.
    \22\ See Letters from Goldstein; Elwell; Letter from Karen 
Janney to Arthur Levitt, Chairman, Commission, undated (``Letter 
from Janney''); and Letters from Richard Mesirov to Jonathan G. 
Katz, Secretary, Commission, dated October 15, 1999 and December 20, 
1999 (``Letters from R. Mesirov'').
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    Four commenters expressed concern that the management of the 
Exchange was not serving the best interests of members, customers, seat 
owners, or the public.\23\ One commenter requested that he be appointed 
to the Board of Governors of the Phlx.\24\ Another commenter complained 
specifically about the actions and management decisions of the Chairman 
of the Phlx.\25\
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    \23\ See Letters from: Green; Paul Liang to Jonathan G. Katz, 
Secretary, Commission, dated October 15, 1999, and to Arthur Levitt, 
Chairman, Commission, dated October 25, 1999 (``Letters from 
Liang''); Charles Hayes to Jonathan G. Katz, Secretary, Commission, 
dated December 16, 1999 (``Letter from Hayes''); and Steven Taylor 
to Jonathan G. Katz, Secretary, Commission, dated October 19, 1999 
and to the Honorable Senators Mitch McConnell, Richard Durbin, and 
Peter Fitzgerald (forwarded to Arthur Levitt, Chairman, Commission), 
dated November 29, 1999, January 13, 2000, and February 13, 2000) 
(``Letters from Taylor'').
    \24\ See Letter from Liang.
    \25\ See Letter from Taylor.
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    Several commenters stated that the Phlx is attempting to reduce the 
value of seats on the Exchange, thus jeopardizing the future of the 
Exchange.\26\ One such commenter argued that there is too much 
volatility in the seat prices and complained that the Phlx is 
deliberately attempting to dilute the value of the seats.\27\
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    \26\ See Letters from Miller, Green, Desiderio, M. Mesirov, 
Wayne, Liang, and Elwell.
    \27\ See Letter from M. Mesirov.
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IV. Discussion

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
under the Act applicable to a national securities exchange. In 
particular, the Commission believes the proposed rule change is 
consistent with the requirement of Section 6(b)(4) \28\ that the rules 
of an exchange provide for the equitable allocation of reasonable fees, 
dues, and other charges among its members and issuers and other persons 
using its facilities; and the requirement of Section 6(b)(5) \29\ that 
the rules of the exchange are not designed to permit unfair 
discrimination between customers, issuers, brokers or dealers.\30\
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    \28\ 15 U.S.C. 78f(b)(4).
    \29\ 15 U.S.C. 78f(b)(5).
    \30\ In approving this proposed rule change, the Commission has 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
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    The Commission finds that the Phlx's capital funding fee is 
consistent with the Act because it is an across-the-board assessment on 
all seat owners intended to raise revenues to provide capital 
improvements to the Exchange. The capital funding fee is assessed 
uniformly to each seat owner per seat owned. Thus, it conforms to the 
requirements in the Act that the rules of the exchange provide for the 
equitable allocation of reasonable fees, dues, and other charges among 
its members and issuers and other persons using its facilities; and are 
not designed to permit

[[Page 42417]]

unfair discrimination between customers, issuers, brokers, or 
dealers.\31\
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    \31\ 15 U.S.C. 78f(b)(4), (b)(5).
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    We note the concern expressed by several commenters that the Phlx 
financing plan treats owner-lessors unfairly and thus contravenes 
Sections 6(b)(4) and 6(b)(5) of the Act. These concerns, however, are 
addressed to the credit and not to the fee. As discussed above, the 
credit is currently being implemented on a six-month pilot basis; the 
Commission will consider the commenters' concerns in determining 
whether to approve the credit on a permanent basis. The Commission does 
not believe that these concerns apply to the fee, which is an across-
the-board assessment against all seat owners. Thus, the fee does not 
appear to raise concerns about unfair treatment of owner-lessors under 
the Act.
    Other commenters contend that the proposed fee is unnecessary and 
excessive. The Exchange represents that to compete in the current 
capital market environment, the Exchange needs funding to make 
technological and capital improvements, and that the revenues raised 
from this fee will be used to fund those technological and capital 
improvements. The Exchange also represents that the owners of the 505 
memberships on the Exchange benefit both from the value of their seats 
and from doing business on the Exchange's facilities (either directly 
or through agents or lessees who pay fees to owners). The Commission 
finds these representations to be persuasive. The rapid changes 
occurring in the options markets, including the trend towards greater 
automation of trading and increased competition among options markets--
as evidenced by the move last fall to multiply trade options previously 
traded by only one exchange and the commencement of operations by the 
International Securities Exchange--have put pressure on all markets to 
evolve and compete. The Phlx believes that it needs this capital 
funding fee to make technological and capital improvements in this 
competitive environment, and the Commission sees no reason to second-
guess the decision of the Phlx's properly constituted Board of 
Governors. Accordingly, the Commission finds that this proposed fee is 
reasonable and, as stated above, is equitably allocated.\32\
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    \32\ See 15 U.S.C. 78f(b)(4). The Commission has separately 
considered whether seat owners are ``members'' or ``other persons 
using [the] facilities [of the Exchange]'' under Section 6(b)(4) of 
the Act. 15 U.S.C. 78f(b)(4). Not all seat owners are ``members'' 
under Section 3(a)(3) of the Act or under Exchange Rules. See 15 
U.S.C. 78c(a)(3); Phlx Certificate of Incorporation, Article 20 and 
Phlx Rules of Board of Governors, Rules 3, 5, 17, and 18; and 
telephone conversation between Marla Chidsey, Attorney, Division of 
Market Regulation, Commission, and Bob Ackerman, Senior Vice 
President, Chief Regulatory Officer, Phlx (January 5, 2000). If seat 
owners are not ``members'' of the Exchange, they may be ``other 
persons using [the] facilities [of the Exchange].'' If so, the 
Commission believes Phlx's proposal equitably allocates the capital 
funding fee by assessing the fee against all seat owners across-the-
board. If, on the other hand, seat owners are not ``other persons 
using [the] facilities [of the Exchange],'' the Commission is not 
required under Section 6(b)(4) of the Act to find that the capital 
funding fee is equitably allocated. 15 U.S.C. 78f(b)(4). Under 
either analysis, the capital funding fee is consistent with the Act.
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    The Commission is not required under Section 19(b)(2) of the Act to 
find that a proposed rule change by a self-regulatory organization is 
lawful under state corporation law; in approving this proposal, the 
commission is relying on the Phlx's representation that it has the 
general power under applicable provisions of Delaware law to assess a 
fee on the owners of Exchange seats, and that the capital funding fee 
is an appropriate exercise of that power. The Commission has not 
independently evaluated the accuracy of Phlx's representations about 
Delaware law.
    In addition, the Commission funds good cause for approving 
Amendment No. 1 to the proposal prior to the thirtieth day after the 
date of publication of notice and filing thereof in the Federal 
Register pursuant to Section 19(b)(2) of the Act.\33\ Amendment No. 1 
does not fundamentally change the operation or scope of the capital 
funding fee; matters such as who will be subject to the fee, the amount 
of the fee, and when the fee will be charged remain unchanged by 
Amendment No. 1. Instead, Amendment No. 1 provides additional 
representations and justification concerning the Phlx's authority to 
assess the fee on seat owners under applicable provisions of Delaware 
law. Further, the capital funding fee has been operational on a pilot 
program basis. That pilot program expires on July 6, 2000. Absent 
approval of Amendment No. 1, the Phlx's ability to collect the fees 
would lapse because the pilot program will expire. In view of the 
Commission's finding that the proposed rule change is consistent with 
the Act, it believes that the Phlx should be able to assess this fee on 
an uninterrupted basis so that it may raise the revenue it needs to 
make technological and capital improvements.
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    \33\ 15 U.S.C. 78s(b)(2).
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    In the Commission's view, Amendment No. 1 constitutes appropriate 
and necessary justification for the proposed rule change, but raises no 
new or novel issues under the federal securities laws. Accordingly, the 
Commission finds good cause, consistent with Sections 6(b)(4),\34\ 
6(b)(5),\35\ and 19(b)(2) \36\ of the Act to accelerate approval of 
Amendment No. 1 to the proposed rule change.
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    \34\ 15 U.S.C. 78f(b)(4).
    \35\ 15 U.S.C. 78f(b)(5).
    \36\ 15 U.S.C. 78s(b)(2).
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V. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning whether Amendment No. 1 to the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. 
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, 450 Fifth Street, NW, Washington, 
DC 20549. Copies of such filing will also be available for inspection 
and copying at the principal office of the Phlx. All submissions should 
refer to File No. SR-Phlx-99-51 and should be submitted by July 31, 
2000.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\37\ that the proposed rule change (SR-Phlx-99-51) is approved and 
that Amendment No. 1 to the proposed rule change is approved on an 
accelerated basis.
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    \37\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 00-17335 Filed 7-7-00; 8:45 am]
BILLING CODE 8010-01-M