[Federal Register Volume 65, Number 171 (Friday, September 1, 2000)]
[Notices]
[Pages 53253-53257]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-22482]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43212; File No. SR-Phlx-00-03]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendments No. 1 and 2 by the Philadelphia Stock Exchange, 
Inc. Relating to the Issuance of Equity Trading Permits

August 25, 200.
    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 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 240.19b-4.
    \3\ On May 30, 2000, the Exchange submitted a new Form 19b-4, 
which replaces and supersedes the original filing in its entirety 
(``Amendment No. 1'').
    \4\ See Letter from Carla Behnfeldt, Counsel, Phlx, to Sonia 
Patton, Staff Attorney, Division of Market Regulation, Commission, 
dated July 11, 2000 (``Amendment 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 notice. The substance of Amendment No. 2 has been 
incorporated into 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 rules to provide for the 
issuance of

[[Page 53254]]

Equity Trading Permits (``ETPs''). The text of proposed Rule 23 is as 
follows. All language is being added.

Rule 23

Equity Trading Permits--

    (a) Classes of Equity Trading Permits. Two classes of Equity 
Trading Permits (``ETPs'') may be issued by the Exchange to 
applicants pursuant to resolution of the Board of Governors for such 
fee as may be established from time to time by the Board. The two 
classes of ETPs shall be Regular ETPs and Off-Floor ETPs, which are 
collectively referred to as ETPs.
    (b) Requirement for Issuance. An ETP holder must be at least the 
minimum age of majority required to be responsible for his contracts 
in each jurisdiction in which he conducts business, and must meet 
all qualifications that are required for membership in the Exchange. 
Applications must be approved by the Exchange, and applicants who 
are not Exchange members must be admitted by the Exchange. The 
admissions process for applicants who are not members of the 
Exchange will be the same as that required for membership applicants 
for admission, and the decision to grant or deny an application for 
admission shall be made by the Admissions Committee under its 
established procedures. No person whose application for an ETP has 
been approved by the Exchange shall be admitted to the privileges 
thereof until he shall have signed a pledge to abide by the By-laws 
and rules of the Exchange as the same have been or shall be from 
time to time amended and by all rules, regulations, requirements, 
orders, directions or decisions adopted or made in accordance 
therewith and submit to the Exchange's disciplinary jurisdiction.
    (c) Rights of ETP Holders. Except as may be otherwise set forth 
in this Rule 23 or in other Rules or effective Commission filings, 
and ETP holder shall have the right to transact business on the 
floor of the Exchange to the same extent and in the same manner as a 
member of the Exchange without options privileges and shall be 
deemed to have the same rights and obligations as a member without 
options privileges. An ETP holder shall not be entitled to vote in 
any election or on any amendment to the By-laws or on any other 
matter, to petition or to be counted as part of a quorum at meetings 
of members, or to share in any distribution of the assets or funds 
of the Exchange in the event of any voluntary or involuntary 
liquidation, dissolution, or winding up of the affairs of the 
Exchange, or to purchase options privileges. ETP holders are 
eligible to serve on the Board of Governors and on Exchange 
committees if elected or appointed and subject to existing 
qualification requirements for service, to the same extent as 
members. Specialist members who elect to sell or lease their 
memberships in favor of Regular ETPs shall continue to be 
specialists in their allocated securities.
    (d) Limitation on Rights of Off-Floor ETP Holders. An Off-Floor 
ETP holder may, if accompanied by a regular member, visit the Floor 
of the Exchange but shall not have the privilege of transacting 
business thereon. An Off-Floor ETP holder shall be authorized to 
maintain electronic or telephonic access to (i) the floor facilities 
of a member or member organization or a Regular ETP holder, (ii) the 
Philadelphia Stock Exchange Automated Communication and Execution 
System (``PACE'') and (iii) such other automated trading systems of 
the Exchange as may be made available to members of the Exchange 
without options privileges.
    (e) Obligations of ETP Holders. An ETP holder shall be subject 
to such obligations and duties (including the payment of fees and 
charges of the Exchange) as may be imposed on Exchange members from 
time to time, provided that ETP holder shall not be subject to 
annual membership dues, technology fees or capital assessments. All 
provisions of the Certificate of Incorporation, By-laws and the 
rules, regulations, requirements, orders, directions and decisions 
adopted or made in accordance therewith which by their terms are 
applicable to Exchange members shall be deemed to also apply to ETP 
holders unless the application thereof shall be inconsistent with 
the provisions of this Rule 23. All references in such documents to 
``non-members'' shall not be construed to apply to ETP holders.
    (f) Transferability of ETPs. An ETP may not be transferred by 
lease, sale, gift, involuntary transfer, or any other means or as 
collateral to secure any obligation, except that an ETP may be 
transferred within the holder's ETP organization to (i) an 
individual who has applied for and been approved by the Admissions 
Committee as an ETP holder, or (ii) to an ``inactive nominee'' who 
is registered as such with the Exchange.
    (g) ETP Organizations. An individual ETP holder who is 
associated with a broker-dealer shall qualify such broker-dealer as 
an ETP firm or an ETP corporation (either, an ``ETP organization''). 
Except as may be otherwise set forth in this Rule 23 or in other 
Rules or effective Commission filings, an ETP organization shall 
have the same rights and obligations as a member organization of the 
Exchange. If the ETP pursuant to which an ETP organization is thus 
qualified shall terminate, such organization is thus qualified shall 
terminate, such organization shall cease to be an ETP organization 
of the Exchange. Every applicant whose fees are to be paid by such 
ETP organization shall file, along with his or her ETP application, 
an agreement between the ETP applicant and the ETP organization (an 
``ETP Use Agreement'') which provides that the ETP organization may 
direct the transfer of the ETP to another qualified individual 
within the ETP organization and that the ETP holder may not object 
to such transfer.
    (h) Termination of ETPs.
    (i) By the Exchange. An ETP holder may be suspended or expelled 
on the same basis as a member. The Exchange reserves the right to 
amend the terms of, to discontinue offering or to terminate existing 
ETPs of one or more classes at any time upon thirty days written 
notice.
    (ii) By the ETP Holder. An ETP holder must provide the Exchange 
thirty days written notice prior to termination of the ETP. Notice 
of intent to terminate an ETP shall be given by the Exchange to the 
membership in the same manner as notice of a proposed transfer of a 
membership.
    (iii) Effect of Termination. The ETP holder and the ETP 
organization shall remain liable for all obligations incurred as an 
ETP holder or ETP organization until they are discharged. The 
Exchange may draw upon any security provided pursuant to Rule 23(i) 
for the payment of any such obligations at any time if they remain 
unpaid as of the date of termination. Upon the termination of an 
ETP, all rights and privileges granted pursuant thereto shall 
terminate.
    (i) Security For Exchange Fees and Other Claims.
    (i) Each ETP organization shall be required to provide security 
to the Exchange for the payment of any claims pursuant to By-law 15-
3 upon termination of any ETP issued to an individual affiliated 
with the ETP organization, as though such security were the proceeds 
for the sale of a membership. This security may consist of:
    (A) a deposit with the Exchange in the amount of $50,000 to be 
held, together with all other such deposits made pursuant to this 
rule, in a segregated account, and which may be invested by the 
Exchange in United States government obligations or any other 
investments which provide safety and liquidity of the principal 
invested, interest or income on which deposit shall be paid 
periodically by the Exchange to such ETP organization;
    (B) an acceptable letter of credit from a financial institution 
acceptable to the Exchange, in the amount of $50,000, proceeds of 
which may be applied by the Exchange upon termination of any ETP 
issued to an individual affiliated with such ETP organization in the 
same manner as proceeds of membership sales under By-law 15-3; or
    (C) an acceptable guaranty by a financial institution acceptable 
to the Exchange guaranteeing the payment by the ETP organization, 
upon termination of any ETP issued to any individual affiliated with 
such organization, of any claims listed in By-law 15-3 up to 
$50,000.
    (ii) The security required to be provided pursuant to this rule 
shall not be calculated based upon the number of ETPs issued to 
affiliates of the ETP organization, but shall be the same regardless 
of the number of such ETPs issued to its affiliates. At such time as 
no ETP holders remain associated with the ETP organization, any 
remaining security shall be released to the ETP organization 
following payment of claims pursuant to By-law 15-3 and upon 
execution by the ETP holder and ETP organization of releases 
satisfactory to the Board of Governors.
    (iii) The obligation to provide security pursuant to this rule 
shall not apply to member organizations or ETP organizations which 
have been in good standing at the Exchange for the previous year. 
Any security provided pursuant to this Rule 23(i) shall be returned 
at such time as the member organization or ETP organization shall 
have been in good standing for one year.

[[Page 53255]]

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.

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

1. Purpose

    The Exchange proposes to adopt new Rule 23 relating to the 
issuance by the Exchange of ETPs. Specifically, Rule 23 would govern 
the terms and conditions of ETPs, which are intended to confer 
access privileges to the Exchange's equity trading floor.\5\The 
purpose of the proposed rule change is to reduce the cost of access 
to the Exchange's equity trading floor and to attract additional 
order flow and new business and services.
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    \5\ In connection with the proposed rule change, the Exchange is 
also proposing new Article Twenty-First to the Exchange's 
Certificate of Incorporation to authorize the issuance of permits to 
conduct business on the Exchange. See SR-Phlx-00-02. The 
effectiveness of the proposed rule change is contingent upon the 
Commission's approval of SR-Phlx-00-02 and the filing of the 
amendment of the Exchange's Certificate of Incorporation with the 
Delaware Secretary of State. The Exchange is also proposing to amend 
its schedule of dues, fees, and charges to provide that the 
Exchange's existing application fee and initiation fee apply to 
ETPs, and to impose monthly ETP fees. See SR-Phlx-00-04. Finally, 
Stock Clearing Corporation of Philadelphia (``SCCP'') has proposed a 
change to its certificate of incorporation and to SCCP Rule 3 
pursuant to which SCCP may treat ETP holders as Phlx members for 
purposes of clearing services it provides. See SR-SCCP-00-01.
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    Proposed Rule 23 establishes two classes of ETPs. Regular Equity 
Trading Permits (``Regular ETPs'') authorize their holders to trade 
equity securities on any facility of the Exchange, in any capacity 
permitted to members, including as a specialist. Off-Floor Equity 
Trading Permits (``Off-Floor ETPs'') allow holders electronic and 
telephonic access, but not physical access, to the Exchange floor.
    Proposed Rule 23(a) provides that the two clases of ETPs may be 
issued by the Exchange to applicants pursuant to resolution of the 
Board of governors (``Board'') for such fee as may be established 
from time to time by the Board.\6\
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    \6\ The Phlx Board approved the issuance of ETPs pursuant to 
Rule 23, as well as monthly ETP fees, on October 27, 1999. SR-Phlx-
00-04, filed contemporaneously with this filing, requests Commission 
approval of these fees.
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    Proposed Rule 23(b) requires an ETP holder to be at least the 
minimum age of majority required to be responsible for his contracts 
in each jurisdiction in which he conducts business, and to meet all 
qualifications required for Exchange membership. It also requires 
ETP applications to be approved by the Exchange. The application 
process for applicants who are not members of the Exchange would 
also include an admissions determination by the Exchange's 
Admissions Committee. The Exchange notes that ETP applicants who are 
members of the Exchange when they apply for an ETP would have 
already received a favorable admissions determination by the 
Exchange's Admissions Committee. With respect to ETP applicants who 
are not Exchange members, the admissions process would be the same 
as that currently required in connection with membership applicants, 
and the decision to grant or deny an applicant for admission as the 
ETP holder would be made by the Admissions Committee under its 
established procedures.\7\Proposed Rule 23(b) also requires the 
applicant to sign a pledge to abide by the By-laws and rules of the 
Exchange and to submit to the Exchange's disciplinary jurisdiction.
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    \7\ Phlx Rule 901, Denial of and Conditions of Membership, sets 
forth certain criteria for membership decisions which would also 
apply to any determination to issue an ETP to an applicant who is 
not already a Phlx member.
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    Proposed Rule 23(c) provides that, except as may be otherwise 
set forth in Rule 23 or in other rules of the Exchange or effective 
Commission filings, and ETP holder will have the right to transact 
business on the floor of the Exchange to the same extent and in the 
same manner, and would be deemed to have the same rights and 
obligations, as a member of the Exchange without options 
privileges.\8\ It also establishes that an ETP holder would not be 
entitled by virtue of the ETP to vote in any election or on any 
amendment to the By-laws or an any other matter, or to petition or 
to be counted as part of a quorum at meetings of members. ETP 
holders would, however, be eligible to serve on the Board of 
Governors and on Exchange committees if elected or appointed and 
subject to existing qualification requirements for service, to the 
same extent as members. Because an ETP confers no equity interest in 
Exchange assets or property, Rule 23(c) establishes clearly that an 
ETP would not entitle its holder to share in any distribution of the 
assets or funds of the Exchange in the event of any voluntary or 
involuntary liquidation, dissolution, or winding up of the affairs 
of the Exchange, or to purchase options privileges. Finally, Rule 
23(c) provides that specialist members who elect to sell or lease 
their memberships in favor of Regular ETPs would continue to be 
specialists in their allocated securities.
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    \8\ The Commission has in the past approved the Exchange's 
issuance of Foreign Currency Options Participations (``FCO 
Participations''). Like holders of FCO Participations, ETP holders 
would generally be subject to Phlx's rules and By-laws but would be 
entitled to all the rights and privileges granted to Phlx members. 
See Securities Exchange Act Release No. 19134 (Oct. 14, 1982), 47 FR 
46949 (Oct. 21, 1982).
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    Proposed Rule 23(d) establishes the rights of holders of Off-
Floor ETPs. An Off-Floor ETP holder would be able, if accompanied by 
a regular member, to visit the floor of the Exchange, but we would 
not have the privilege of transacting business on it. Consequently, 
and Off-Floor ETP holder would have the same rights as a Regular ETP 
holder. I particular, an Off-Floor ETP holder be eligible to apply 
for specialist privileges. With this exception, an Off-Floor ETP 
holder would be authorized, for the purpose of trading equity 
securities, to maintain electronic or telephonic access to (i) the 
floor facilities on the equities floor of the Exchange of a member 
or member organization or a Regulator ETP holder, (ii) the 
Philadelphia Stock Exchange Automated Communication and Execution 
System (``PACE''),\9\ and (iii) such other automated trading systems 
of the Exchange as may be made available to members of the Exchange 
without options privileges.
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    \9\ PACE is the Exchange's automatic order routing and execution 
system on the equity trading floor. PACE accepts orders for manual 
and automatic execution in accordance with the provisions of Rule 
229, which governs the PACE System and defines its objectives and 
parameters.
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    Proposed Rule 23(e) establishes the ability of the Exchange to 
impose fees and charges on EIP holders. An EIP holder would be 
subject to the same obligations and duties (including the payment of 
Exchange fees and charges) imposed on Exchange members, except that 
EIP holders would not be charged annual membership dues, technology 
fees, or any capital assessments that could be imposed in the 
future.\10\ Rule 23(e) establishes that all provisions of the 
Exchange's Certificate of Incorporation and By-laws, and the rules, 
regulations, requirements, orders, directions and decisions adopted 
pursuant to them which by their terms are applicable to Exchange 
members would also apply to EPT holders unless their application is 
inconsistent with the provisions of Rule 23. Likewise, all 
references in such documents to ``non-members'' would not be 
construed to apply to ETP holders. Consistent with proposed Rule 
23(e), Phlx intends to charge a $200 application fee for every ETP 
application made by members and non-members. Non-member applicants 
for ETPs would also be required to complete the same admissions 
process required by the Exchange for membership applicants, and 
would be charged the $1,500 initiation fee upon issuance of the ETP 
just as members are charged this fee upon election to membership. 
After an ETP is issued, its holder would be subject to the same fees 
as Phlx members (except as otherwise noted in proposed Rule 23(e)) 
in addition to a monthly ETP fee.\11\
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    \10\ In particular, they would not be subject by virtue of the 
ETP to the Exchange's $1,500 capital funding fee. See Securities 
Exchange Act Release No. 42993 (June 29, 2000), 65 FR 42415 (July 
10, 2000). Fees proposed to be assessed by the Exchange with respect 
to ETPs are described in SR-Phlx-00-04.
    \11\ See SR-Phlx-00-04, filed concurrently with this proposed 
rule change, which requests approval of monthly ETP fees.
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    Proposed Rule 23(f) makes clear that, unlike a membership, an 
ETP may not be transferred by lease, sale, gift, involuntary 
transfer, or any other means or as collateral to secure any 
obligation, except that an ETP may be transferred within the 
holder's ETP organization to (i) an individual who has applied for 
and been approved by the

[[Page 53256]]

Admissions Committee as an ETP holder, or (ii) an ``inactive 
nominee'' registered as such with the Exchange.
    Proposed rule 23(g) provides that an individual ETP holder 
associated with a broker-dealer would be required to qualify such 
broker-dealer as an ETP firm or an ETP corporation just as a member 
would register it as a member firm or member corporation under 
current Exchange rules.\12\ Except to the extent otherwise set forth 
in Rule 23 or in other Exchange rules or effective Commission 
filings, an ETP organization would have the same rights and 
obligations as a member organization of the Exchange. The 
organization would cease to be an ETP organization of the Exchange 
upon termination of the ETP pursuant to which the ETP organization 
is qualified.
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    \12\ Like Exchange members, an ETP holder would be required to 
be associated with a registered broker-dealer.
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    Proposed Rule 23(g) also requires every ETP applicant whose fees 
are to be paid by such ETP organization to file, along with his or 
her ETP application, an agreement between the ETP applicant and the 
ETP organization (an ``ETP Use Agreement'') providing that the ETP 
organization may direct the transfer of the ETP to another qualified 
individual within the ETP organization and the EPT holder may not 
object to such transfer. The ETP Use Agreement is in some respects 
analogous to the A-B-C Agreement provided for in Exchange Rule 930 
pursuant to which a member contributes the use of a membership to 
the membership organization. Like the A-B-C Agreement provided for 
in Rule 940, the ETP Use Agreement would restrict the use of the ETP 
by its holder in the event of the holder's termination of his 
association with the ETP organization.\13\
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    \13\ The A-B-C Agreement contains additional provisions arising 
from the division of equitable and legal title to membership, a 
concept which is inapplicable to ETPs.
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    Proposed Rule 23(h) permits the Exchange to suspend or expel an 
individual ETP holder on the same basis as a member. It also permits 
the Exchange to amend the terms of, to discontinue offering or to 
terminate existing ETPs of one or more classes at any time upon 
thirty days written notice. Similarly, proposed Rule 23(h) requires 
an ETP holder to provide the Exchange thirty days written notice 
prior to termination of the ETP. The Exchange is required to provide 
notice of an ETP's termination to the membership in the same manner 
it provides notice of a proposed transfer of a membership. The ETP 
holder would remain liable for all obligations incurred as an ETP 
holder until these obligations are discharged, and the Exchange is 
authorized to draw upon any security provided pursuant to Rule 
23(i), discussed below, for the payment of such obligations at any 
time if they remain unpaid as of the date of termination.
    Proposed Rule 23(i) requires ETP organizations to provide 
acceptable security for payment of any claims pursuant to By-law 15-
3 upon termination of an ETP. The security requirement may be met, 
at the option of the ETP organization, by providing a letter of 
credit or other guaranty acceptable to the Exchange, or by 
depositing $50,000 with the Exchange to be held in a segregated 
account with all other such deposits and held by the Exchange as 
security.\14\ The security required is the same for each ETP 
organization, regardless of the number of ETPs issued to its 
associated persons, and is unrelated to any security requirement 
established by SCCP.\15\ The requirement does not apply to member 
organizations or ETP organizations that have been in good standing 
at the Exchange for the previous year. Consequently, ETP 
organizations in good standing for one year after providing such 
security will be entitled to its return, subject to any prior or 
pending claims. Finally, proposed Rule 23(i) makes clear that at 
such time as no ETP holders remain associated with the ETP 
organization, the Exchange shall release any remaining security 
following payment of claims pursuant to By-law 15-3 and upon 
execution by the ETP holder and ETP organization of releases 
satisfactory to the Board of Governors.
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    \14\ The Exchange does not believe that filing with the 
Commission for approval of each determination it makes regarding the 
acceptability of a particular form of or issuer of a letter of 
credit or guaranty will be required. Nevertheless, the Exchange 
currently intends that financial institutions that are approved to 
issue letters of credit as margin for foreign currency options 
pursuant to existing Phlx Rule 722(h) will be acceptable 
institutions for purposes of issuing guarantees or letters of credit 
under proposed Rule 23(i).
    \15\ See SCCP Rule 4.
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    The Exchange expects to first undertake the ETP offering by 
distributing an informational circular and an ETP Application Form 
to be completed and returned to the Exchange together with payment 
of the Exchange's application fee.\16\ In addition to the ETP 
Application Form, applicants who are not Exchange members will be 
required to supply to the Admissions Committee all information 
required for that Committee to make an admissions determination 
under its established procedures, as discussed above.
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    \16\ The Exchange will not accept ETP Applications or 
application fees until the ETP proposal is approved by the 
Commission. It may, however, circulate informational circulars 
regarding the proposed ETP program prior to such approval. Further, 
the Exchange may elect to commence offering Regular ETPs prior to 
offering Off-Floor ETPs, in which case the ETP Application Forms 
would be modified accordingly by deleting the reference to Off-Floor 
ETPs, which reference would be reinserted when Off-Floor ETPs are 
made available by the Exchange.
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2. Statutory Basis

    The proposed rule change is consistent with section 6(b) of the 
Act \17\ in general, and furthers the objectives of section 6(b)(5) 
\18\ 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. 
Specifically, the proposed rule change will increase the range of 
options available to persons seeking access to the Exchange's equity 
floor. ETPs should help facilitate transactions by allowing more 
broker-dealers direct access to the Phlx equity market and 
attracting greater order flow. The proposal is intended to enhance 
the depth and liquidity of the Phlx equity market by bringing 
additional capital and market participants to the trading floor. 
Providing holders of ETPs with direct access to the Phlx equity 
floor should assist public customers in getting the best execution 
of their orders by providing them with additional firms through 
which orders to the Phlx can be routed.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 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 or unnecessary burden on competition. On 
the contrary, the Exchange believes that the proposed rule change 
will enhance competition among Exchange members and between the 
Exchange and other markets.

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 from members, 
participants, or others on proposed Rule 23, the Exchange issued a 
circular dated September 27, 1999 that announced certain action 
taken at the September 1999 Phlx Board meeting. These actions 
included approval of changes to Phlx's Certificate of Incorporation 
authorizing permits and invited telephone comments to the Chairman 
of the Board. The Exchange also issued a circular dated October 28, 
1999, announcing Board approval of proposed Rule 23. 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.\19\ A number of comments were

[[Page 53257]]

critical of the proposal without stating the basis of the 
criticism.\20\ The principal substantive comments are discussed 
below.
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    \19\ Letter dated October 4, 1999 from Isabelle Benton (``Benton 
Letter''); Letter dated October 16, 1999 from Mark F. Desiderio, 
Esq. 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 
(``Snyder 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 
Taylor (``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.
    \20\ See e.g. PBL Letter (stating without elaboration that 
issuing ETPs is flawed on both business and legal grounds).
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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 the issuance of permits.\21\ Certain 
commenters predicted lawsuits against the Exchange if ETPs were 
issued,\22\ and one commenter stated that a campaign to hurt one 
lessor in particular has ``blinded'' people.\23\ Another commenter 
suggested that if they are issued, ETPs should be ``phased in.''\24\ 
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 it'' can deal in 
securities.
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    \21\ See Benton Letter, Elwell Letter, First and Second Green 
Letters, Janney Letter, Snyder Letter dated July 20, 1999, Taylor 
Letter, Wayne Letter, and First and Second Leff E-mails.
    \22\ See Benton Letter, Wayne Letter, and First Kramer E-mail.
    \23\ See Second Kramer E-mail.
    \24\ See Taylor Letter and Taylor E-mail.
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    The Petition submitted by George E. Snyder 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,\25\ and another stated that creation of ETPs requires a 
membership vote. \26\ 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'' \27\ rather than seat owners under Phlx's Certificate 
Incorporation and By-laws. \28\
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    \25\ See Second Green Letter.
    \26\ See Liang Letter.
    \27\ In this instance, the term ``member'' refers to the holder 
of legal title of the seat.
    \28\ 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-law do not permit the creation of ETPs, and 
that creation of ETPs requires a By-law amendment. \29\ The Exchange 
believes that the Certificate of Incorporation already permits ETPs, 
and that a By-law amendment is therefore not required. \30\ 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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    \29\ See Liang Letter.
    \30\ 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 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 its finds such longer period 
to be appropriate and publishes its reasons for so finding or (ii) 
as to which the Phlx 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-00-03 and should be 
submitted by September 22, 2000. 
    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-22482 Filed 8-31-00; 8:45 am]
BILLING CODE 8010-01-M