[Federal Register Volume 65, Number 171 (Friday, September 1, 2000)]
[Notices]
[Pages 53251-53253]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-22481]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43211; File No. SR-Phlx-00-02]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendments No. 1 and 2 by the Philadelphia Stock Exchange, 
Inc. Amending Its Certificate of Incorporation To Authorize the 
Issuance of Trading Permits

August 25, 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 January 12, 2000, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. The Exchange filed amendments to the proposed rule change on 
May 30, 2000 \3\ and July 12, 2000.\4\ The substance of these 
amendments has been incorporated into this filing. The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19-4.
    \3\ Letter from Carla Behnfeldt, Counsel, Phlx, to Sonia Patton, 
Staff Attorney, Division of Market Regulation (``Division''), 
Commission, dated May 25, 2000 (``Amendment No. 1''). Amendment No. 
1 clarifies that the Exchange would be required to file a proposed 
rule change with the Commission to the extent required by Section 
19(b) of the Act if it adopts by board resolution rules governing 
permits to conduct business on the Exchange. Amendment No. 1 also 
revises Section III.C. of the proposed rule change to include 
comments received from members on trading permits.
    \4\ Letter from Carla Behnfeldt, Counsel, Phlx, to Sonia Patton, 
Staff Attorney, Division, Commission, dated July 11, 2000 
(``Amendemnt No. 2''). Amendment No. 2 makes certain clarifying 
changes to the Exchange's summary of comments received from members, 
participants, and others set forth in Section II.C. of this filing.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend its Certificate of Incorporation to 
add a new article authorizing the Board of Governors to issue trading 
permits. The text of the proposed new article is as follows:

    TWENTY-FIRST: In addition to all other powers granted to the 
Board of Governors by law, this Certificate of Incorporation or 
otherwise, the Board of Governors shall have the power to issue 
permits to conduct business on the securities exchange provided by 
the Corporation, and to adopt by

[[Page 53252]]

resolution or to set forth in the Rules of the Board of Governors 
such rules with respect to permits as the Board may from time to 
time determine to be advisable, including, without limitation, rules 
governing the terms and conditions of permits and the number 
thereof, the transferability or non-transferability of permits, the 
qualifications that must be met for a person or entity (whether a 
member or a non-member of the Corporation) to be issued a permit, 
and the dues and other charges to be paid to the Corporation in 
connection with such permits. The Board of Governors may authorize 
any committee thereof or the Chairman of the Board of Governors to 
exercise any powers of the Board of Governors with respect to 
permits.

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

    In its filing with the Commission, the Phlx included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Phlx has prepared summaries, set forth in sections 
A, B and C below, of the most significant aspects of such statements.

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

1. Purpose
    The Exchange proposes to amend its Certificate of Incorporation by 
adding a new Article Twenty-First (``Article Twenty-First'') that 
authorizes the Exchange's Board of Governors (``Board'') to issue 
trading permits. Specifically, Article Twenty-First authorizes the 
Board to issue permits to conduct business on the Exchange, and to 
adopt rules or resolutions governing these permits.\5\ Specifically, 
Article Twenty-First authorizes the Board to adopt rules governing, 
among other things, the terms, conditions, number, and transferability 
of permits, the qualifications that members and non-members must meet 
to be issued a permit, and the dues and other charges to be paid to the 
Exchange in connection with the permits. Article Twenty-First also 
permits the Board to authorize the Chairman of the Board or any Board 
committee to exercise any powers of the Board with respect to the 
permits.
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    \5\ The Exchange acknowledges that any such action undertaken 
pursuant to Board resolution and not proposed to be set forth in the 
rules of the Exchange would nonetheless be filed with the Commission 
to the extent required pursuant to Section 19(b) of the Act and 
Commission rules thereunder.
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    Article Twenty-First is intended to give the Board the flexibility 
to create a means, other than the purchase or lease of an Exchange 
membership, for qualified persons to acquire trading rights on the 
Exchange. The Exchange's Certificate of Incorporation provides that the 
purpose of the Exchange is to ``act as and to provide a securities 
exchange where the [Exchange's] members and other persons authorized by 
it can [do business]'' \6\ Proposed Article Twenty-First makes clear 
that such ``other persons'' authorized to do business at the Exchange 
include holders of trading permits authorized by the Board.
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    \6\ Phlx Certificate of Incorporation, Article Third (emphasis 
added). The Exchange notes that the Commission has previously 
approved the issuance by the Exchange of foreign currency options 
participations (``FCO Participations'') pursuant to which both 
Exchange members and non-members may trade foreign currency options 
on the Exchange. See Securities Exchange Act Release No. 19134 (Oct. 
14, 1982), 47 FR 46949 (Oct. 21, 1982).
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2. Statutory Basis
    The proposed rule change is consistent with section 6(b) of the Act 
\7\ in general, and furthers the objectives of section 6(b)(5) \8\ in 
particular, in that it is designed 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. The 
proposed rule change is not designed to permit unfair discrimination 
between customers, issuers, brokers or dealers and will permit the 
Board to provide greater access to the Exchange through trading permits 
that do not require a lease of a membership or a significant initial 
investment of capital to purchase a membership.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Phlx does not believe that the proposed rule change will impose 
any inappropriate burden on competition. By lowering the cost of access 
to the Exchange, the proposed rule change is intended to permit 
increased participation in the market and therefore promote 
competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Although written comments were not solicited regarding Article 
Twenty-First, the Exchange issued a circular dated September 27, 1999, 
which announced certain action taken at the September 22, 1999 Phlx 
Board meeting, including the approval of changes to the Certificate of 
Incorporation authorizing trading permits. That circular invited 
telephone comments to be made to the Chairman.\9\ The Exchange also 
issued a circular dated October 28, 1999, announcing Board approval of 
Rule 23 governing the terms and conditions of proposed equity trading 
permits (``ETPs'').
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    \9\ One individual addressed the topic of permits at the Board's 
September 22, 1999 meeting, and thereafter provided those comments 
to the Exchange in written form at the Exchange's request.
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    The Exchange received 17 written comments concerning the concept of 
trading permits generally and equity trading permits in particular, 
including one undated petition received on November 12, 1999, from 19 
owners and members.\10\ A number of comments were critical of the 
proposal without stating the basis of the criticism.\11\ The principal 
substantive comments are discussed below.\12\
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    \10\ Letter dated October 4, 1999 from Isabelle Benton (``Benton 
Letter''); Letter dated October 16, 1999 from Mark F. Desiderio, to 
the Commission (``Desiderio Letter''); Letter dated October 4, 1999 
from Doris D. Elwell to Chairman Arthur Levitt, Commission (``Elwell 
Letter''); Letter dated October 28, 1999 from Harry Green (``First 
Green Letter''); Letter dated November 3, 1999 from Harry Green 
(``Second Green Letter''); Letter dated October 1, 1999 from Karen 
D. Janney (``Janney Letter''); E-mail dated July 8, 1999 from 
William J. Kramer (``First Kramer E-mail''); E-mail dated October 6, 
1999 from William J. Kramer (``Second Kramer E-mail''); E-mail dated 
August 17, 1999 from Robert Leff (``First Leff E-mail''); E-mail 
dated December 16, 1999, from Robert Leff (``Second Leff E-mail''); 
Letter dated September 23, 1999 from PBL Partners, LLC (``PBL 
Letter''); Letter dated September 28, 1999 from George E. Snyder III 
(``Synder Letter''); Undated petition received on November 12, 1999, 
from George E. Snyder III and 18 other owners and members 
(``Petition''); Letter dated July 20, 1999 from Stephen J. Taylor 
Jr. (``Taylor Letter''); E-mail dated August 24, 1999 from Steve 
Tayolr (``Taylor E-mail''); Letter dated July 22, 1999 from Matthew 
D. Wayne, Esq. (``Wayne Letter''); and Letter dated September 23, 
1999, enclosing an outline of remarks delivered by Matthew D. Wayne 
on behalf of Paul Liang at the September 22, 1999 Phlx Board of 
Governors meeting (``Liang Letter''). A number of these written 
comments dealt generally with both trading permits and the 
Exchange's proposed capital funding fee and were filed with the 
Commission on October 27, 1999 in connection with SR-Phlx-99-43, the 
Exchange's original proposed rule change regarding the capital 
funding fee. See Securities Exchange Act Release No. 42405 (Feb. 8, 
2000), 65 FR 8226 (Feb. 17, 2000). The Commission granted permanent 
approval to the capital funding fee on June 29, 2000. See Securities 
Exchange Act Release No. 42993 (June 29, 2000), 65 FR 42415 (July 
10, 2000).
    \11\ See e.g. PBL Letter (stating without elaboration that 
issuing ETPs is flawed on both business and legal grounds).
    \12\ See supra, note 3.
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    The majority of the commenters were seat owners predicting, and 
objecting to, a decline in seat prices and dilution in the value of 
memberships as a result of

[[Page 53253]]

the issuance of permits.\13\ Certain commenters predicted lawsuits 
against the Exchange if ETPs were issued,\14\ and one commenter stated 
that a campaign to hurt one lessor in particular has ``blinded'' 
people.\15\ Another commenter suggested that if they are issued, ETPs 
should be ``phased in.'' \16\ The Exchange has determined in its 
business judgment, however, that the potential benefits to the Exchange 
of the trading permits, including the potential for increased access 
and enhanced competition on the trading floor and the opportunity to 
attract additional order flow and new business, justify any possible 
dilution of memberships and may, in the longer term, result in higher 
prices for regular memberships. The Exchange is also of the view that 
the benefits of the ETP program to the Exchange are such that a 
phasing-in approach would not be desirable. The Exchange further 
believes that it is proceeding appropriately with respect to ETPs and 
that any lawsuit of the kind alluded to by certain commenters would be 
groundless. The Exchange believes that ETPs are in the best interests 
of the Exchange and its membership as a whole (including both lessee 
members and lessor owners), and notes that the Exchange's stated 
purpose in Article Third of its Certificate of Incorporation is ``[t]o 
act as and to provide a securities exchange where [its] members and 
other persons authorized by it'' can deal in securities.
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    \13\ See Benton Letter, Elwell Letter, First and Second Green 
Letters, Janney Letter, Synder Letter dated July 20, 1999, Taylor 
Letter, Wayne Letter, and First and Second Leff E-mails.
    \14\ See Benton Letter, Wayne Letter, and First Kramer E-mail.
    \15\ See Second Kramer E-mail.
    \16\ See Taylor Letter and Taylor E-mail.
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    The Petition submitted by George E. Synder III demanded that any 
proposed rules regarding the issuance of trading permits be put to a 
vote of owner-members. One comment letter stated that seat owners 
should be eligible to vote on all issues that come before the 
membership,\17\ and another stated that creation of ETPs requires a 
membership vote.\18\ However, neither the Certificate of Incorporation 
nor the By-laws require a vote to be taken by either seat owners or 
members on the subject of issuance of trading permits. Further, 
practically all voting rights are vested in ``members'' \19\ rather 
than seat owners under Phlx's Certificate of Incorporation and By-
laws.\20\
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    \17\ See Second Green Letter.
    \18\ See Liang Letter.
    \19\ In this instance, the term ``member'' refers to the holder 
of legal title of the seat.
    \20\ See Article Thirteenth of the Exchange's Certificate of 
Incorporation and Phlx By-law Article XII, Section 12-6. Seat owners 
(i.e., holders of ``equitable'' title to an Exchange membership) are 
entitled to vote in any decision relating to a compromise or 
arrangement between the Phlx and its creditors or its members, or 
relating to a reorganization of the Phlx. Other voting rights belong 
to the members (i.e., holders of legal title to an Exchange 
membership).
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    One commenter stated that the Exchange's Certificate of 
Incorporation and By-laws do not permit the creation of ETPs, and that 
creation of ETPs requires a By-law amendment.\21\ The Exchange believes 
that the Certificate of Incorporation already permits ETPs, and that a 
By-law amendment is therefore not required.\22\ The Exchange notes that 
the amendment to the Certificate of Incorporation proposed in Article 
Twenty-First would clearly authorize permits in any event and would 
supersede any inconsistent provision in the By-laws as a matter of 
basic corporate law.
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    \21\ See Liang Letter.
    \22\ As noted above, the Exchange's stated purpose in Article 
Third of its Certificate of Incorporation is ``[t]o act as and to 
provide a securities exchange where [its] members and other persons 
authorized by it'' can deal in securities. Phlx's Foreign Currency 
Options Participants, for example, have traded on the Exchange since 
the early 1980's.
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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 Exchange 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 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. 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-00-02 and should 
be submitted by September 22, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-22481 Filed 8-31-00; 8:45 am]
BILLING CODE 8010-01-M