[Federal Register Volume 65, Number 230 (Wednesday, November 29, 2000)]
[Notices]
[Pages 71187-71192]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-30380]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43567; File No. SR-Phlx-00-100]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Extending Its Pilot Program To Assess a Monthly Credit 
of up to $1,000 to Qualified Members

November 15, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder, \2\ notice is hereby given 
that on November 8, 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 Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Phlx, pursuant to Rule 19b-4 under the Act, proposes to extend 
its current pilot program that allows certain Exchange members to 
receive a monthly credit of up to $1,000.\3\ The credit will be applied 
against fees, dues, charges and other amounts as may from time to time 
be owed to the Exchange that month, except fines, late fees, out-of-
pocket expenses,\4\ pass-through costs,\5\ capital funding fees,\6\ 
payment for order flow fees,\7\ and any fees paid by equity trading 
permit holders in respect of any trading permits the Exchange may 
issue, (``credit-eligible fees'') \8\ by members who own the membership 
by which they are a member (``member-owners'') and certain other 
categories of members described below. The current pilot program became 
effective upon filing on May 16, 2000 and expires on November 16, 2000; 
\9\ the Exchange now proposes to extend the pilot program for an 
additional six-month period through May 16, 2001.
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    \3\ The extension of the pilot program incorporates three 
changes to the initial pilot program: (1) Payment for order flow 
fees are not eligible for inclusion in the credit, (2) daughters-in-
law and sons-in-law are now included in the definition of an 
immediate family member, and (3) the amount of the credit will be 
included on the member's invoice instead of the member submitting a 
credit form each month.
    \4\ Out-of-pocket expenses include charges for wireless 
telephone services, postage, ILX machines and Dow Jones News 
Service.
    \5\ Pass-through costs include charges for member health 
insurance and parcel delivery services.
    \6\ Capital funding fees are assessed on owners to provide 
funding for technological improvements and other capital needs. On 
June 29, 2000, the Commission approved the capital funding fee for a 
36 month period. See Securities Exchange Act Release No. 42993 (June 
29, 2000), 65 FR 42415 (July 10, 2000) (SR-Phlx-99-51).
    \7\ Payment for order flow fees are fees imposed on transactions 
by Phlx specialists and Registered Options Traders in the Top 120 
Options on the Phlx. See Securities Exchange Act Release Nos. 43177 
(August 18, 2000), 65 FR 51889 (August 25, 2000) (SR-Phlx-00-77); 
43480 (October 25, 2000) (SR-Phlx-00-86 and SR-Phlx-00-87); and 
43481 (October 25, 2000), 65 FR 66277 (November 3, 2000) (SR-Phlx-
00-88 and SR-Phlx-00-89).
    \8\ The credit-eligible fees are fees assessed on members and 
include transaction as well as trading floor fees. Transaction fees 
include equity transaction value charges, equity floor brokerage 
transaction fees, option comparison charges and option transaction 
charges. Trading floor fees include charges for trading post/booth, 
controller space, shelf space, transmission, execution/communication 
charge and floor facility fees. Fees assessed on foreign currency 
options participants are not considered credit-eligible fees.
    \9\ See Securities Exchange Act Release No. 42791 (May 16, 
2000), 65 FR 33606 (May 24, 2000). The credit is part of the 
Exchange's long-term financing plan, which includes the $1,500 
capital funding fee. See supra note 6.
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    In addition to member-owners, the credit may be applied against 
credit-

[[Page 71188]]

eligible fees incurred by the following persons, who are so closely 
connected to the owners that the Exchange believes they should be 
treated as member-owners: (1) All members who are parties to an A-B-C 
agreement \10\ with a member organization who owns that membership; or 
(2) all members who are lessees if: (a) The member is also an owner of 
a different membership; (b) the member is an immediate family member of 
the owner of that membership; \11\ (c) the member is associated with a 
member organization in which the owner has an interest of at least ten 
percent; (d) the member leases from an owner or a related entity of the 
owner who provides order flow to the Exchange through the member or 
member organization consisting of at least 5,000 equity trades over the 
preceding twelve months or 50,000 option contracts over the preceding 
twelve months; or (e) the member leases from a clearing firm or a 
related entity of the clearing firm that provides clearing services to 
the leasing member. The aforementioned categories (including member-
owners) are hereinafter referred to as ``qualified members.''
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    \10\ Pursuant to Phlx Rule 940, the parties to an A-B-C 
agreement are an employee, general partner, or officer and the 
member organization with which such person is associated. The member 
organization provides all or part of the funds for the purchase of a 
membership of which the legal title is placed in the member and the 
equitable title is placed in the member organization.
    \11\ Immediate family member is defined as a member's spouse, 
parents, stepmother, stepfather, mother-in-law, father-in-law, 
brothers, sons-in-law, brothers-in-law, stepbrothers, sisters, 
daughters-in-law, sisters-in-law, stepsisters, children, 
stepchildren and any other person living with the member for whom 
the member provides at least 50 percent of his/her financial support 
per year.
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    Specifically, the amount of credit-eligible fees owed to the 
Exchange shall be reduced on a monthly basis by an amount equal to: (1) 
$1,000 per month if such fees, dues, charges and other amounts are 
equal to or greater than $1,000, or (2) the amount of such fees, dues, 
charges and other amounts if such fees, dues, charges and other amounts 
are less that $1,000.\12\ Credits may not be carried over from one 
month to the next and only one credit of up to $1,000 is available per 
membership per month.
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    \12\ For example, if a member has $1,500 in credit-eligible fees 
for the month, such member is entitled to the full $1,000 credit. 
However, if the member has $600 in credit-eligible fees for the 
month, such member is entitled to a $600 credit.
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    Credits cannot be shared among members, except qualified members in 
the same member organization may aggregate their credits. The monthly 
credit of up to $1,000 will be applied against the invoice of the 
member or member organization with which the member is associated. 
However, in no event shall the aggregated credits exceed $1,000 per 
membership per month.
    Initially, any request to receive the credit was application 
driven, with each applicant submitting an Exchange form delineating the 
credit-eligible fees for that calendar month. To reduce the burden on 
members, the Exchange proposes to include the amount of the credit 
directly on a member's invoice, once it has been established that the 
member is eligible for the credit, in lieu of requiring the member to 
complete a credit form each month.\13\ A member's eligibility shall be 
determined by the opening of trading on the first business day of each 
month. The Exchange reserves the right to suspend the credit at any 
time.
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    \13\ The Exchange believes that placing the amount of credit on 
a member's invoice should reduce the burdens associated with 
completing the credit form each month. However, the Exchange may 
revert to the credit form process at a later date if it is 
determined that credits are more efficiently processed that way. If 
any changes are made to the credit form process, members will be 
given updated instructions as to how to apply for the credit.
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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 Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange 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 Purpose

1. Purpose
a. Introduction
    The purpose of the proposed rule change is to amend the Exchange's 
schedule of fees, dues, and charges to allow for a monthly credit of up 
to $1,000 to be applied against certain fees, dues, charges and other 
amounts, as defined above, owed to the Exchange by a qualified member 
of the Exchange.
    As more fully explained below, the Exchange believes that the 
proposed credit should provide qualified members with additional 
liquidity and an incentive for seat owners to trade on the Exchange. In 
turn, the Exchange believes that this will introduce additional 
liquidity into the marketplace to the benefit of the investing public.
    The Exchange believes that leasing of memberships by passive 
holders of equitable title to lessees who trade on the Exchange (e.g., 
members) does not necessarily promote the long-term interests of the 
Exchange. Although the practice of leasing by financial investors to 
members is permitted by the rules of the Exchange, and may provide an 
important means by which members can access trading rights on the 
Exchange, the Exchange believes that lessors who are passive financial 
investors have a limited stake and interest in the liquidity, 
technology or operations of the Exchange.
    Moreover, such lessors have limited practical ability to influence 
the affairs of the Exchange, because practically all voting rights are 
vested in ``members'' under Phlx's Certificate of Incorporation and By-
Laws.\14\
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    \14\ A lessor is 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. See e.g. 
Article Thirteen of the Exchange's Certificate of Incorporation and 
Phlx By-Law Article XII, Section 12-6.
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    The Exchange also believes that members who acquire membership and 
access trading on the Exchange by means of a lease may in many cases 
have a very limited stake in the well-being and survival of the 
Exchange. Although such members may have voting rights, they have no 
capital investment in their membership, and, because leases typically 
may be terminated on 30 days notice,\15\ they do not necessarily have 
the incentive to act in the long-term best interests of the Exchange.
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    \15\ See Phlx Rule 930(b).
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    Specifically, by terminating a lease with 30 days notice, lessees 
who do not have ``other'' business interests or relationships with the 
Exchange beyond the mere existence of a lease (such as those 
relationships enumerated in part b. below) may, and often do, leave the 
Exchange to trade on another exchange, perhaps seeking to trade a 
certain ``hot'' option or other product. Thus, their potential 
commitment to the Exchange's long-term well-being and survival is 
undercut by their easy ability to pursue business endeavors that 
further their own well-being. Further, although member-lessees may be 
appointed to certain Exchange committees and sub-committees, their 
motivation to devote the time to such service may be less, as is their 
incentive to make decisions focused on the long-term. Both daily and 
longer term, strategic decision-making could thus be affected.

[[Page 71189]]

    This sort-term commitment may also bear on the quality and quantity 
of liquidity provided on the Exchange. Building order flow commitments 
with order flow providers is a long-term endeavor, often requiring 
regular performance, evaluation, and most importantly, a relationship 
with the trading crowd providing liquidity. Thus, familiarity and 
consistency of crowd participation are an important marketing mechanism 
to order flow providers. Providing liquidity also involves a longer-
term view of sacrificing profit today for continued order flow, as well 
as acknowledging that not every order is a profitable one, but 
continuous order flow, spawned by ample liquidity, should, over time, 
provide more opportunity for additional order flow.
    Lessees that do not have other business interests or relationships 
(such as those referred to in part b. below) may also have a limited 
stake in the technology of the Exchange, including participation in any 
good use of technology, nor would they necessarily have an incentive to 
invest in the longer-term development of that technology. Such 
investment is not only financial, but also strategic. Such lessees may 
also have a limited stake in the operations of the Exchange, including 
the continued long-term refinement and upgrading of facilities, other 
equipment and the pricing of such operations. In sum, lessees, absent 
other factors tying them to the Exchange, may be less vested in the 
long-term success of the Exchange, in terms of a lesser incentive to 
create liquidity, invest in technology and be active in strategic and 
daily decision-making.
    In contrast, the Exchange is of the view that members who own their 
own memberships (and their functional equivalents, such as members who 
lease their memberships from close family members), and members who 
have certain other business or financial relationships with owners who 
are active on the Exchange (e.g., members who are associated with 
member organizations and hold their memberships pursuant to ``A-B-C 
agreements'') have a combination of financial incentives and voting 
rights (in some cases, indirectly via the owners with whom they are 
closely related or associated) to create liquidity on the Exchange, to 
invest in systems and compliance infrastructure, to be active in and 
informed about the decision-making processes of the Exchange, and 
otherwise to act in the Exchange's long-term best interests. By 
providing the credit described in this filing to these group of 
members, the Exchange expects to create economic incentives for owners 
to trade on the Exchange by actively using their memberships (or 
selling them to persons who would do so) and for members to organize 
their affairs in ways that, in the Exchange's view, properly align the 
interests of the members with the long-term interest of the Exchange. 
The Exchange also believes that the credit should help retain or create 
liquidity on the Exchange by freeing up funds that member-owners or 
their functional equivalents may otherwise be expending on credit-
eligible fees.\16\
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    \16\ The Exchange notes that, as part of its overall strategic 
financing plan, it separately instituted a $1,500 monthly capital 
funding fee upon all ``owners,'' regardless of their level of 
activity (if any) on the Exchange. See supra note 5. Although the 
credit is not available to offset all or any portion of the capital 
funding fee, the credit will enable member-owners and others 
eligible for the credit to defray a portion of the transaction and 
other fees charged by the Exchange (and that, in general, result 
from member activity on the Exchange), thereby effectively reducing, 
for member-owners and other eligible members the cost of trading on 
the Exchange. Therefore, the credit may also have the indirect 
effect of blunting the incremental economic burden of the capital 
funding fee for owners who are active and, directly or indirectly, 
trading on (or otherwise providing certain economic benefits to) the 
Exchange. In addition, the credit frees up funds for trading 
activity on the Exchange that would otherwise be used for the 
payment of credit-eligible Exchange fees.
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    Although the credit is available to some Exchange members and not 
others, it meets the criteria set forth in Sections 6(b)(4) \17\ and 
6(b)(5) \18\ of the Act because it: (1) Provides for `` * * * the 
equitable allocation of dues, fees and other charges among its members 
* * * and other persons using its facilities''; and (2) is not designed 
`` * * * to permit unfair discrimination between customers, issuers, 
brokers or dealers.'' Although the Exchange is not aware of precedents 
in which other exchanges have established fee or credit programs based 
upon ownership of seats or the connection between lessees and their 
lessors, as the Phlx proposes to adopt in this filing, the Commission 
has approved many exchange fee and credit arrangements that do not 
treat all members (or other persons covered by Sections 6(b)(4) \19\ 
and (5)) \20\ equally, such as credits and discounts based on 
transaction volume, fees based upon the usage by certain members of 
equipment or other services or resources of an exchange, and fee 
structures that distinguish among the various activities of persons and 
firms (e.g., specialists versus floor brokers, or specialists versus 
market makers). As with the proposed credit, such measures are designed 
to promote and encourage certain behaviors and/or discourage others. 
The Exchange believes that this is an appropriate, nondiscriminatory 
business strategy.
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    \17\ 15 U.S.C. 78f(b)(4).
    \18\ 15 U.S.C. 78f(b)(5).
    \19\ 15 U.S.C. 78f(b)(4).
    \20\ 15 U.S.C. 78f(b)(5).
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    As more fully articulated below, the Exchange believes that the 
credit is equitably distributed and not unfairly discriminatory, 
because it is based on legitimate, reasonable business interests of the 
Exchange, and is reasonably designed to further those interests. 
Moreover, it does not unfairly single out individuals or groups for 
personal or political reasons. To the contrary, any member may become 
eligible for the credit by changing the way in which such member 
finances his or her access to the Exchange by purchasing the membership 
or by changing the member's lease arrangement.
b. More Detailed Rationale Specifically Applied to the Various 
Eligibility Criteria
    i. Member-Owners. In many areas of economic life, businesses and 
governments establish incentives to encourage behavior that is deemed 
desirable. In the case of exchanges, volume discounts and credits 
encourage members to direct transaction volume and trading activity to 
the exchange; other fee structures are designed to deter excessive 
usage of exchange resources or to cause scarce resources to be 
allocated more efficiently (e.g., equipment service fees or fees 
relating to use of post/booth space on the floor).\21\ The Exchange, as 
a matter of policy, believes that owner-membership or its functional 
equivalents as described above, should be encouraged because:
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    \21\ See e.g., Securities Exchange Act Release Nos. 41748 
(August 16, 1999), 64 FR 46218 (August 24, 1999) (SR-CBOE-99-34); 
40496 (September 29, 1998), 63 FR 54175 (October 8, 1998) (SR-PCX-
98-42); and 41108 (February 25, 1999), (64 FR 10516 (March 4, 1999) 
(SR-BSE-99-2).
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    (A) Unlike passive, financial investors, owner-members risk their 
capital by their trading and other activities on the floor, thereby (in 
many cases) creating liquidity in our market and generating revenues 
for the Exchange, both directly through transaction-based revenues, and 
indirectly, by generating activity that results in tape revenues, such 
as under the Consolidated Tape Association (``CTA'') and Options Price 
Reporting Authority (``OPRA'') plans.\22\
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    \22\ The CTA Plan and the OPRA Plan were approved by the 
Commission as national market system plans under SEC Rule 11Aa3-2, 
17 CFR 240.11Aa3-2, governing the dissemination of market 
information for certain equity securities and options, respectively; 
these plans govern both the fees that can be charges for such 
information as well as the distribution of revenues derived from 
those fees among participants in these plans, including the 
Exchange.

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[[Page 71190]]

    Seat ownership is one aspect of Exchange ``investment'' and the 
actual use of that membership by the qualified member is a different 
form. Member-owners or their functional equivalents, have additional 
operational and market risks. For example, a qualified member who is 
also a specialist or market maker may have additional risks related to 
fluctuations in the securities market and order-processing errors in 
addition to market risks associated with seat ownership. Similarly, a 
qualified member who is also a specialist may have risks (in addition 
to seat risk) associated with the specialists' obligation to promote a 
fair and orderly market and, particularly, maintain the limit order 
book. Furthermore, in addition to any fees assessed on owners, 
qualified members also contribute to the Exchange by paying transaction 
fees, such as equity transaction value charges, equity floor brokerage 
transaction fees, option comparison charges and option transaction 
charges, and trading floor fees, such as trading post/booth, controller 
space, shelf space, transmission, execution/communication charges and 
floor facility fees.
    (B) Unlike members who lease their seats under typical lease 
arrangements that may be cancelled on 30 days' notice, member-owners 
have a significant capital investment at risk; and
    (C) Unlike owners that are not members, member-owners may have 
voting rights under the Exchange's by-laws, and may participate on 
certain Exchange committees. \23\
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    \23\ See supra note 14.
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    Because of their dual interest in preserving and increasing the 
value of their memberships, and in the technological, operational, and 
regulatory infrastructure that affects the present and future 
conditions of transacting business on or at the Exchange, the Exchange 
believes that member-owners have powerful incentives to create 
liquidity on the Exchange, and to participate responsibly in the 
business life of the Exchange through the exercise of voting rights, 
and through service on the Board and certain Exchange committees. The 
concept (and the underlying policy) of making the credit available to 
member-owners is not unlike that of the federal government in providing 
tax incentives to homeowners that are not available to renters. The 
long-term capital stake of the homeowner in his or her property 
promotes various behaviors that have social utility in that it fosters 
community-oriented behavior, and increases the prospect that the 
homeowner will make further socially useful investments in the property 
and in the neighborhood.
    The Exchange believes that similar principles are involved in the 
instant case. The ability to lease memberships has been available for 
many years. Over time, the equitable ownership of memberships by 
passive financial investors has become a very pervasive phenomenon at 
the Exchange, with 324 of the Exchange's 505 memberships being owned by 
such financial investors.\24\ Of those memberships owned by passive 
financial investors, approximately 48 memberships are currently dormant 
(neither used for active trading nor leased).\25\ Although the Exchange 
believes that leasing of memberships has a legitimate role in providing 
members a means of accessing trading rights on the Exchange, it also 
believes that the extent to which long-term capital investment is 
currently divorced from voting rights and trading interest is not 
healthy insofar as it relates to the long-term viability of the 
institution and its membership as a whole. The credit should create an 
incentive for owners to actively use their trading rights through 
membership and for members to reconsider the manner in which they 
finance their access to the Exchange. Furthermore, the Exchange 
believes that the credit will free up funds for those owners who are 
most likely to put their capital to work by trading and creating 
liquidity on the floor. The credit may also effectively (but 
indirectly) lessen the overall impact of the capital funding fee on 
those owners who are trading at the Exchange and (because the credit 
may be applied against transactional fees) create further incentives to 
trade.
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    \24\ As of March 31, 2000, 324 memberships were subject to lease 
agreements. This number may change on a monthly basis.
    \25\ As of March 31, 2000, 48 seats were dormant (neither used 
for active trading nor leased).
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    The Exchange notes that no member may claim that his or her lack of 
eligibility for the credit is unfair or discriminatory. Any member may 
obtain eligibility for the credit by changing his or her method of 
financing their access to the Exchange--e.g., by purchasing their 
membership and (if they choose) borrowing from third-party lenders to 
effect that purchase. Any owner may obtain eligibility for the credit 
by, for instance, becoming an Exchange member (if they qualify for this 
and subject to the procedures set forth in the Exchange's rules).
    ii. Members/Member Organizations with A-B-C Agreements. By 
definition, with respect to A-B-C agreements, there is a very close 
nexus between a member and the member organization with whom the member 
is associated; in general, the member is an employee of the member 
organization. This close connection is reflected in the fact that the 
member organization provides all or part of the funds for the purchase 
of the membership of which the legal title is placed in the member, 
while the equitable title remains with the member organization.\26\ In 
addition, the Exchange's By-Laws state, in part, that ``[a]n A-B-C-
Agreement is a contract between the member and member organization with 
which the member is associated in which a portion of the risk of 
fluctuations in the value of the membership shall rest with the member 
organization rather than with the member.''
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    \26\ See Phlx Rules 940 and 941.
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    Pursuant to the A-B-C agreement, the member contributes the use of 
the membership to the member organization and subjects the membership 
to the claims of the creditors of the member organization. Moreover, 
the member organization pays the dues, fees and other charges on behalf 
of the member. Thus, given this unique business relationship, owners 
who are member organizations have significant capital investment at 
risk and have a long-term interest in preserving and increasing the 
value of their membership, much like member-owners. For this reason, 
the Exchange is providing the credit to members who are parties to an 
A-B-C agreement with a member organization who owns that membership.
    iii. Lessees. As stated previously, although leasing arrangements 
are permitted, lessees, other than the five types of qualifying members 
discussed in detail below (``non-qualifying lessees''), may have a 
limited stake in the long-term well-being of the Exchange. In fact, 
non-qualifying lessees may lack the incentive to engage in certain 
types of behavior that promote the long-term best interests of the 
Exchange, including providing liquidity and investing in technology 
enhancements. Specifically, non-qualifying lessees who do not put their 
own (or a member with whom they have a close nexus) capital at risk 
with respect to a membership may provide liquidity or order flow with 
less of a long-term view and more of a focus on their current market 
risk only. This view may be at odds with behavior needed to

[[Page 71191]]

address long-term Exchange needs. These non-qualifying lessees who do 
not have the types of additional connections to owners on the Exchange 
described below, may only have the incentive to participate in a self-
focused way for their short-term benefit. If the credit were made 
available to all lessees, it would not serve its purpose as an 
inducement to promote owner-membership or other relationships to the 
Exchange that the Exchange believes are the most conducive to its 
continued health and success. Therefore, the Exchange is not making the 
credit available to all lessees. However, the Exchange is seeking to 
provide the credit to those qualified members whose relationship with 
the owners from whom they lease their seats is such that the Exchange 
believes they (either individually or indirectly when viewed in 
conjunction with their owners) have incentives properly aligned with 
the long-term interests of the Exchange.
(A) Members Who Are Lessees But Who Also Are Owners of Different 
Memberships
    Members who are lessees but who also are owners of a different 
membership should be accorded the same treatment as the traditional 
member-owners who were previously discussed. These members, who are 
also owners, have an interest in preserving and increasing the value of 
their membership as well as an interest in preserving and increasing 
the standard of technology and the operational and regulatory 
infrastructure that affects the present and future conditions of 
transacting business at the Exchange. As with traditional member-
owners, the Exchange believes that the credit will free up funds for 
those members who are also owners thereby encouraging them to put their 
capital to work by trading and creating liquidity on the floor. As 
previously discussed, the credit may also effectively (but indirectly) 
lessen the overall impact of the capital funding fee on those owners 
who are trading at the Exchange.
(B) Members Who Lease From Close Family Members
    At the Phlx, many member firms are family businesses, which choose 
to structure their operations with the owner being a relative (rather 
than that member) for tax or estate planning purposes. The Exchange 
believes that there is commonality of interest in property of close 
family members, thus affording the credit to members who lease from 
close family members. This concept is one that is widely accepted, 
especially in connection with rules relating to the securities industry 
and tax law. For example, Rule 16a-1(a)(2) \27\ under the Act defines 
the term ``beneficial owner'' to mean any person who, directly or 
indirectly, through any contract, arrangement, understanding, 
relationship or otherwise, has or shares a direct or indirect pecuniary 
interest in the equity securities. Indirect pecuniary interest is then 
defined to include securities held by members of a person's immediate 
family sharing the same household.\28\ In addition, Rule 701 under the 
Securities Act of 1933 (``Securities Act'')\29\ exempts from Section 5 
of the Securities Act \30\ certain offers and sales of securities under 
a written compensatory benefit plan established by the issuer for the 
participation of their employees and their family members who acquire 
such securities from such persons through gift or domestic relations 
orders. Family members are defined in Rule 701(c)(3) \31\ the same as 
``immediate family'' is defined in Rule 16a-1(e). \32\
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    \27\ 17 CFR 240.16a-1(a)(2).
    \28\ Immediate family is defined to mean any child, stepchild, 
grandchild, parent, stepparent, grandparent, spouse, sibling, 
mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-
in-law, or sister-in-law, and includes adoptive relationships. 17 
CFR 240.16a-1(e).
    \29\ 17 CFR 230.701.
    \30\ 15 U.S.C. 77e.
    \31\ 17 CFR 230.701(c)(3).
    \32\ 17 CFR 240.16a-1(e).
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    Tax laws also recognize the commonality of interest in property of 
close family members. For example, the Internal Revenue Code (``IRC'') 
recognizes the shared interests of family members by way of attributing 
the ownership of stock held by close family members to the taxpayer. 
\33\ The IRS treats stock owned by these close family members as owned 
by the taxpayer in determining the tax liability of the taxpayer in 
various situations.\34\
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    \33\ See 26 U.S.C. Section 318.
    \34\ See 26 U.S.C. Section 301 et seq.
    \35\ NASD Conduct Rule IM-2110-1. The Freeriding and Withholding 
Interpretation is based on the premise that NASD members have an 
obligation to make a bona fide distribution of securities of a 
public offering that trade at a premium in the secondary market.
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    A further example is the National Association of Securities 
Dealers, Inc. (``NASD'') Freeriding and Withholding Interpretation,\35\ 
which restricts sales by NASD members to accounts in which so-called 
``restricted persons'' have a beneficial interest. Such restrictions 
are also applicable, with some exceptions, to immediate family members 
of those restricted persons.
    The Exchange believes that it should not penalize members who 
choose to lease memberships from close family members, as it believes 
that these persons are the functional equivalents of member-owners, and 
the same rationale applies to giving the credit to these members as to 
member-owners.
(C) Members Who Are Associated With a Member Organization in Which the 
Owner Has an Interest of at Least Ten Percent
    Members who are lessees and are associated with a member 
organization in which the owner has at least a ten percent interest 
also should be eligible for the credit based on their closely aligned 
interests with the owner. The federal securities laws and rules of the 
securities industry have long recognized that a ten percent ownership 
interest is a significant capital investment. For example, Section 16 
of the Act \36\ requires any person who is the beneficial owner of more 
than ten percent of an equity security registered under Section 12 of 
the Act \37\ to file a statement with the Commission indicating his 
ownership interest. Section 16 \38\ also treats such beneficial owners 
as company insiders and limits their ability to realize ``short swing'' 
profits. In enacting Section 16,\39\ the Congress found that a ten 
percent owner was sufficiently involved in the affairs of the issuer to 
be treated as an insider.
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    \36\ 15 U.S.C. 78p.
    \37\ 15 U.S.C. 78L.
    \38\ 15 U.S.C. 78p.
    \39\ Id.
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    Moreover, for purposes of NASD Conduct Rule 2720, which restricts 
the ability of an NASD member to participate in the distribution of a 
public offering of its own securities or the securities of the member's 
parent or affiliate, a company is presumed to control a member (and 
this is an affiliate) if the company beneficially owns ten percent or 
more of the member firm. Finally, under the NASD's Freeriding and 
Withholding Interpretation \40\ an individual with a ten percent or 
more equity interest in an NASD member firm is deemed restricted by 
virtue of his ownership interest, and, thus, NASD member firms may not 
sell so-called ``hot issues'' to that individual.
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    \40\ See supra note 34.
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    In each of these examples, Congress or the NASD found that a ten 
percent owner is sufficiently involved in the affairs of the subject 
entity to be subject to the applicable restriction. A similar analysis 
is applicable with respect to owners of Phlx memberships who hold a ten 
percent or greater interest in the very member organization with which 
the lessee is associated. The interests of the owner, the member lessee 
and the member organization are sufficiently

[[Page 71192]]

aligned to allow the lessee member the benefit of the credit.
(D) Members Who Lease From Owners or Their Affiliates Who Provide Order 
Flow to the Exchange Member
    Similar to member-owners and other eligible members discussed 
above, members who lease from owners or their affiliates who provide 
order flow to the Exchange through the member or member organization 
have a direct contractual relationship with that owner. For example, a 
floor broker who executes orders entered by the owner from whom the 
member leases his or her seat has a fiduciary relationship with that 
owner. The member derives income, by way of commissions, from the order 
flow provider and the order flow provider, in turn, provides revenue to 
the Exchange mainly by way of transaction fees (and indirectly via tape 
revenues). Giving a credit to members in this situation should 
encourage the member to fully maximize the business relationship 
between the floor broker and order flow provider by encouraging the 
member to get more order flow, which in turn equates to an increase in 
fees paid by the floor broker to the Exchange. The Exchange believes 
that by extending the credit to this category of members who are 
closely associated with the owner, it is encouraging behavior that is 
beneficial to the long-term interests of the Exchange, e.g., providing 
more order flow.
(E) Members who Lease From a Clearing Firm or a Related Entity of the 
Clearing Firm That Provides Clearing Services to the Leasing Member
    Members who lease from a clearing firm or related entity of the 
clearing firm that provides clearing services to the leasing member 
should also be eligible to receive the credit. Members have a close 
connection to their clearing firms, or a related entity of the clearing 
firms, in that the clearing firms provide important and essential 
services by contractual agreement with such members; for instance, they 
guarantee members' trades. In addition, clearing firms lend money and 
extend credit; they also manage risk by way of tracking positions and 
other monitoring functions. Moreover, the clearing firm offers various 
ancillary services to the members, including stock executions services, 
office space and other business amenities. Therefore, given this close 
connection between the members and clearing firms or their affiliates, 
the Exchange believes that the credit is appropriate and should further 
their joint interest in the well-being of the Exchange.
2. Statutory Basis
    For these reasons, the Exchange believes that the proposed rule 
change is consistent with Section 6(b) of the Act,\41\ in general, and 
with Section 6(b)(4) \42\ in that it provides for the equitable 
allocation of reasonable dues, fees and other charges.
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    \41\ 15 U.S.C. 78f(b).
    \42\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change imposes no 
inappropriate burden on competition.

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

    Written comments were neither solicited nor received regarding an 
extension of the monthly credit.\43\
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    \43\ Written comments were received in connection with the 
initial proposed rule change relating to the credit, which is 
currently in effect. These comments are described in the previous 
Commission release noticing the filing and immediate effectiveness 
of the initial proposal. See Securities Exchange Act Release No. 
42791 (May 16, 2000) 65 FR 33606 (May 24, 2000) (SR-Phlx-00-44).
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III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    The Exchange has designated the proposed rule change as a fee 
change pursuant to Section 19(b)(3)(A)(ii) of the Act \44\ and Rule 
19b-4(f)(2) thereunder \45\ because it establishes a due, fee or other 
charge. Accordingly, the proposal will take effect upon filing with the 
Commission. At any time within 60 days of the filing of the proposed 
rule change, the Commission may summarily abrogate such rule change if 
it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
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    \44\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \45\ 17 CFR 240.19b-4(f)(2).
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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, 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-00-100, and should be submitted by December 
20, 2000.
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    \46\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\46\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-30380 Filed 11-29-00; 8:45 am]
BILLING CODE 8010-01-M