[Federal Register Volume 66, Number 39 (Tuesday, February 27, 2001)]
[Notices]
[Pages 12579-12581]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-4751]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43972; File No. SR-Phlx-00-48]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc., Relating to Telephone 
Use on the Options Floor

February 15, 2001.

I. Introduction

    On June 16, 2000, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change establishing rules on telephone use on the options 
floor. The Exchange filed Amendment No. 1 to the proposed rule change 
on December 1, 2000.\3\ The Federal Register published the proposed 
rule change, as amended, for comment on December 28, 2000.\4\ The 
Commission received no comments on the proposal. This order approves 
the proposal, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Exchange submitted a new Form 19b-4, which replaced and 
superseded the original filing (``Amendment No. 1''). Amendment No. 
1 amended the purpose section of the proposed rule change to provide 
a description of provisions governing floor brokers, registered 
options traders, general access phones, and exchange liability. 
Amendment No. 1 also clarified that registration and maintenance of 
registration records is handled through the Exchange's Membership 
Services Department. Finally, Amendment No. 1 amended proposed Phlx 
Rule 606(e)(3) to include specialists.
    \4\ Securities Exchange Act Release No. 43740 (December 19, 
2000), 65 FR 82437.
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II. Description of Proposal

    The Phlx proposes to amend Exchange Rule 606 to establish rules and 
procedures for telephone use on the Phlx's options floor.\5\ The 
proposed rule contemplates that certain types of telephones (i.e., 
cellular phones) may be used for personal purposes.\6\ The proposed 
rule would limit the use of telephones on the options floor for 
business purposes, depending on the category of user (specialist, 
registered options trader (``ROT''), floor broker, or clerk).
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    \5\ The proposal will also be set forth in new Options Floor 
Procedure Advice (``OFPA'') F-31.
    \6\ All categories of users are permitted to make and receive 
personal phone calls, subject to existing prohibitions when 
necessary because of electronic interference. Telephone calls 
between Rick Rudolf, Counsel, Phlx, and Sonia Patton, Staff 
Attorney, Commission (December 18, 2000).
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    The proposed rule change would require members and member 
organizations to register by category of user any new telephone to be 
used on the options floor prior to use. Registration and maintenance of 
registration records would be handled through the Exchange's Membership 
Services Department. If there is a change in the category of user, the 
telephone must be re-registered with the Exchange. At the time of 
registration, the user must sign a statement that the user is aware of 
and understands the rules governing the use of telephones on the 
options floor. The Exchange believes that this should facilitate record 
keeping and also should enhance the ability of the Exchange's Market 
Surveillance Department to investigate potential violations of the 
rule.
    The proposed rule also would provide that no person on the options 
floor may use any device, including, but not limited to, intercoms, 
walkie-talkies, and similar devices, for the purpose of maintaining an 
open line of communication whereby a person not located in a trading 
crown may continuously monitor the activities of that crowd.
    The proposed rule specifies the capacity and functionality 
permitted for use of telephones on the options floor. Specifically, 
proposed Phlx 606(e)(2) provides that no wireless telephone on the 
options floor may have an output of more than one watt.
    The purpose of this provision is to minimize the possibility of 
radio frequency or other interference with the systems of the Exchange 
of those of other members.\7\
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    \7\ Currently, Exchange Rule 606(b)(2) prohibits members, member 
organizations and any person associated with a member organization 
from establishing or maintaining any telephonic, electronic or 
wireless transmitting system or device, and from operating any other 
equipment on the Options Floor, that creates radio frequency or 
other interference with the systems of the Exchange or other 
members.

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[[Page 12580]]

    The proposed rule sets forth specific guidelines for each category 
of user on the options floor. Proposed Phlx Rule 606(e)(3) would 
provide that specialists and ROTs on the trading floor may use their 
own cellular and cordless phones to place calls to any person at any 
location (whether on or off the options floor).\8\ Any telephonic order 
entered from off the options floor must be placed with a person located 
in a floor broker booth.
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    \8\ Specialists are also permitted to receive incoming calls, 
but cannot receive orders from the trading crowd. The Phlx has also 
noted that there is nothing in their rules that would prohibit 
specialists from using their phones to solicit orders, as long as 
the solicitations are consistent with Phlx Rule 1064(c). Telephone 
call between Rick Rudolf, Counsel, Phlx, and Sonia Patton, Staff 
Attorney, Commission (December 18, 2000).
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    Proposed Phlx Rule 606(e)(4) would allow floor brokers to use 
cellular and cordless phones, but only to communicate with persons 
located on the options floor. The proposed rule would prohibit floor 
brokers from receiving telephonic orders while in the trading crowd. 
Orders phoned to floor brokers must be received at the floor broker's 
booth.\9\
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    \9\ Someone from the floor broker's booth would be permitted to 
call a floor broker to request the broker come and pick up an order 
from the booth. Telephone call between Rick Rudolf, Counsel, Phlx, 
and Sonia Patton, Staff Attorney, Commission (December 18, 2000)
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    Proposed Phlx Rule 606(e)(5) would provide that floor broker clerks 
and stock execution clerks are subject to the same terms and conditions 
on telephone use as floor brokers.
    Proposed Phlx Rule 606(e)(6) states that the general access in-
house telephones located outside of the trading post areas may be used 
by any member, clerk or floor broker to communicate with persons 
located on the options floor or within the Exchange complex.
    Proposed Phlx Rule 606(e)(7) would require members to maintain all 
cellular or cordless telephone records for at least one year, and 
provides the Exchange the right to inspect and/or examine these 
records.
    Finally, proposed Phlx Rule 606(e)(8) states that the Exchange 
assumes no liability to members or member organizations due to 
conflicts between telephones in use on the options floor or due to 
electronic interference problems resulting from the use of telephones 
on the trading floor.
    Proposed OFPA F-31 contains the same provisions as proposed Rule 
Phlx 606(e) in order to facilitate on-floor reference to the Exchange's 
regulations regarding on-floor communications devices.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\10\ In 
particular, the Commission finds that the proposed rule change meets 
the requirements of section 6(b)(5) of the Act,\11\ which states that, 
among other things, the rules of an exchange must be designed to 
facilitate securities transactions and to remove impediments to and 
perfect the mechanism of a free and open market, and to protect 
investors and the public interest. Specifically, the Commission finds 
that the requirements of the proposed rule governing the use of 
telephones on the options floor and the proposed restrictions on each 
category of user are reasonable and consistent with the maintenance of 
fair and orderly markets.
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    \10\ In approving this rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78f(b)(5).
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    Proposed Phlx Rule 606(e)(3) contains restrictions on telephone use 
by specialists and ROTs. The rule permits specialists and ROTs to use 
their own cellular or cordless phones to place calls to any person at 
any location. However, ROTs located off of the trading floor may not 
place an order by calling a floor broker, or a specialist, located in 
the trading crowd. Any telephonic order entered from off of the trading 
floor must be placed with the member firm booth. Because specialists 
and ROTs generally do not deal directly with public customers, the 
Commission does not believe that allowing specialists and ROTs to 
communicate with persons located off of the trading floor raises the 
same regulatory concerns discussed below regarding floor brokers. As a 
result, the Commission finds that it is consistent with the Act to 
allow specialists and ROTs to use cellular and cordless phones to call 
locations off of the trading floor. In addition, the Commission 
believes that it is reasonable and consistent with the Act to require 
orders entered off of the trading floor to be placed with a member firm 
booth.
    Proposed Phlx Rule 606(e)(4) permits floor brokers to use cellular 
and cordless phones, but only to communicate with persons located on 
the options floor. The rule also requires all orders phoned to floor 
brokers to be received initially at the floor broker's booth and states 
that floor brokers may not receive telephonic orders while in the 
trading crowd, except from their booth. The Commission believes that 
the Exchange's prohibition on the use of telephones by floor brokers to 
call locations off of the floor or to receive orders from off of the 
floor is justified by legitimate regulatory concerns. Specifically, the 
Phlx must ensure compliance with rules requiring that members who 
accept orders directly from public customers are qualified to do so. 
Accordingly, this prohibition helps to provide adequate surveillance 
over this activity be requiring all orders to be taken at the member 
firm booth and by restricting outside phone calls. In addition, 
preventing floor brokers from directly accessing market information 
that might only be available on the floor of the exchange trading the 
securities underlying the options trading on the Phlx, helps to 
alleviate concerns about frontrunning and other forms of market 
manipulation. The proposal also helps to prevent persons located off of 
the trading floor from having virtually direct access to the trading 
crowd and receiving certain time and place advantages over other 
customers. Moreover, the Commission believes that requiring orders to 
be initially received at the floor broker's booth, where it is recorded 
before being forwarded to a floor broker in the crowd, should help to 
ensure that there is a record of each telephonic order if a trading 
problem or dispute arises.
    Proposed Phlx rule 606(e)(5) provides that floor broker clerks and 
stock execution clerks are subject to the same terms and conditions on 
telephone use as floor brokers. In addition, the Exchange's Options 
Committee reserves the right to prohibit clerks from using cellular or 
cordless phones on the floor if necessary due to electronic 
interference or capacity problems. For the reasons discussed above 
regarding telephone use by floor brokers, the Commission finds that the 
proposed restrictions on clerks are reasonable and consistent with the 
Act.
    Moreover, the Commission finds that the registration requirements 
set forth in proposed Phlx Rule 606(e)(1) and the record retention 
requirements set forth in proposed Phlx Rule 606(e)(7) are reasonable, 
consistent with the Act, and should assist the Exchange in monitoring 
for compliance with the proposed rule change. The Commission also finds 
that the limits on capacity and functionality set forth in proposed 
Phlx Rule 606(e)(2) should help to ensure that phones used on the 
options floor do not cause interference with each other or with 
Exchange systems.
    Finally, the Commission believes that the proposed amendments to 
the Exchange's minor rule violation plan are

[[Page 12581]]

reasonable and provide fair procedures for appropriately disciplining 
members and member organizations for minor rule violations that warrant 
some type of punitive measure, but for which a full disciplinary 
hearing would be an inappropriate waste or resources because of the 
minor nature of the violation. The Commission believes that the 
proposed change to the existing fine schedule is appropriate and should 
serve to discourage violations of the Exchange's telephone policy.
    The Commission supports the Exchange's efforts to codify policies 
on telephone use to give its membership adequate notice of what conduct 
is prohibited. while supporting the Exchange's efforts to monitor and 
regulate communications on its options floor, the Commission expects 
the Phlx to ensure that Phlx Rule 606(e) is not used to limit access to 
services offered by the Exchange and is not applied in a manner that is 
inconsistent with the Act. Specifically, the Commission expects that 
Phlx Rule 606(e) will not be interpreted in a manner that permits 
unfair discrimination between customers, issuers, brokers, or dealers 
or imposes any unnecessary or inappropriate burden on competition, or 
is otherwise used to limit member access to Exchange services.

IV. Conclusion

    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-PHLX-00-48), as amended, is 
approved.
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    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-4751 Filed 2-26-01; 8:45 am]
BILLING CODE 8010-01-M