[Federal Register Volume 66, Number 39 (Tuesday, February 27, 2001)]
[Notices]
[Pages 12582-12583]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-4754]



[[Page 12582]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43987; File No. SR-Phlx-99-50]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Amendment No. 1 Amending the 
Exchange's Certificate of Incorporation

February 20, 2001.

I. Introduction

    On November 23, 1999, 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 and Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change. The Phlx filed an amendment to 
the proposal on December 28, 2000.\3\ The proposed rule change was 
published for comment in the Federal Register on January 16, 2001. The 
Commission did not receive any comment letters with respect to the 
proposal. This order approves the Exchange's proposal.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Cynthia Hoekstra, Counsel, Phlx, to Nancy 
Sanow, Assistant Director, Division of Market Regulation, 
Commission, dated December 27, 2000 (``Amendment No. 1''). In 
Amendment No. 1, the Phlx represented that the Phlx's Board has the 
authority to adopt Article Nineteenth pursuant to Delaware corporate 
law, Pennsylvania contract law, and the Exchange's Certificate of 
Incorporation, by-laws, and rules.
---------------------------------------------------------------------------

II. Description of the Proposal

A. The Original Filing

    The Phlx proposed to amend its Certificate of Incorporation to add 
Article Nineteenth, relating to the leasing of memberships.\4\ A 
complete copy of the text of Article Nineteenth is available at the 
Office of the Secretary, the Phlx, and at the Commission.
---------------------------------------------------------------------------

    \4\ In connection with this proposed rule change, the Commission 
approved a proposed rule change that adopted Article Twentieth. See 
Securities Exchange Act Release No. 42317 (January 5, 2000), 65 FR 
2215 (January 13, 2000) (SR-Phlx-99-48). Article Twentieth provides, 
in part, that the Exchange's Board of Governors (``Board'') shall 
have the power to assess such fees, dues, and other charges upon 
members, lessors and lessees of memberships and holders of permits 
(or any of them) as the Board may from time to time adopt by 
resolution or set forth in the Rules of the Board. On May 11, 2000 
the Commission approved a proposed rule change, which amended 
Article Twentieth to include the words ``owner'' and ``member 
organization'' and to define the word ``owner'' to clarify the 
original intent of Article Twentieth. See Securities Exchange Act 
Release No. 42773 (May 11, 2000), 65 FR 31622 (May 18,2000) SR-Phlx-
00-30).
---------------------------------------------------------------------------

    Proposed Article Nineteenth provides that, in addition to all other 
powers granted to the Board by law, the Certificate of Incorporation or 
otherwise, the Board shall have the power to determine whether, and 
under what terms and conditions, memberships may be leased, and to 
adopt by resolution or to set forth in the Rules of the Board such 
rules with respect to lease agreements, lessors and lessees as the 
Board may from time to time determine to be advisable. Such rules may 
include rules regulating and setting forth the rights and obligations 
of lessors and lessees, the required terms of lease agreements, and the 
fees, dues, and other charges required to be paid by lessors and 
lessees (or either of them) to the Exchange in connection with, and for 
the privilege of, leasing memberships. In addition, proposed Article 
Nineteenth provides that the Board shall have the power to adopt rules 
relating to the suspension or termination of any or all lease 
agreements with respect to memberships, to issue provisional trading 
privileges on such terms as the Board shall determine to members whose 
lease agreements are suspended or terminated, and to amend, alter, or 
repeal any or all of the Rules of the Board with respect to any of the 
foregoing matters.

B. Amendment No. 1

    As a non-stock corporation organized under the Delaware General 
Corporation Law (``DGCL''), the Exchange represented in Amendment No. 1 
that it has ample authority to adopt proposed Article Nineteenth. 
Because the Exchange's Certificate of Incorporation does not require 
member approval to adopt a charter amendment, proposed Article 
Nineteenth may be adopted by the Board of Governors without approval by 
the members of the Exchange (including lessees of memberships) or the 
owners of memberships (including lessors of memberships). 8 Del. C. 
Sec. 242(b)(3).\5\ Therefore, the Exchange's Board adopted Article 
Nineteenth in accordance with section 242.
---------------------------------------------------------------------------

    \5\ Section 242 of the DGCL permits the board of a non-stock 
corporation to adopt amendments to the corporation's Certificate of 
Incorporation.
---------------------------------------------------------------------------

    Furthermore, section 141(j) of the DGCL empowers the Board to 
direct the business and affairs of the Exchange, and the Exchange's by-
laws give the Board broad power to adopt rules of the Exchange. 8 Del. 
C. Sec. 141(j); \6\ By-Law Art. IV, Sec. 4-4. In addition, existing 
Article Third of the Phlx Certificate of Incorporation gives the 
Exchange authority to do all things necessary to run a national 
securities exchange.\7\ Numerous provisions of the Exchange's by-laws 
and rules already address matters similar to those addressed by 
proposed Article Nineteenth.\8\ Therefore, the adoption of Article 
Nineteenth falls within the broad authority expressly conferred by 
Delaware law and existing provisions under the Phlx Certificate of 
Incorporation.
---------------------------------------------------------------------------

    \6\ See also 8 Del. C. Sec. 121(a) (providing that in addition 
to powers expressly granted by law or the Certificate of 
Incorporation, the corporation and its directors may exercise ``any 
powers incidental thereto, so far as such powers and privileges are 
necessary or convenient to the conduct, promotion or attainment of 
the business or purposes set forth in its certificate of 
incorporation'').
    \7\ Article Third states, in part, that the Exchange may operate 
as and perform all functions of a national securities exchange and 
engage in any lawful act or activity for which corporations may be 
organized under the DGCL.
    \8\ See, e.g., By-Law Art. XV, Sec. 15-1(a) (providing that a 
membership may be leased in accordance with such rules as the Board 
may adopt); Rule 930 (setting forth required terms of lease 
agreement and providing, among other things, that the Exchange may 
dispose of a membership subject to a lease agreement); Rule 960.1 
(providing that all members, member organizations and any persons 
associated with any member are subject to expulsion, suspension, 
termination as to activities at the Exchange or any other fitting 
sanction for violation of the Rules of the Exchange); see also 
Certificate of Incorporation, Article Twentieth (giving Board 
plenary authority to assess fees, dues and other charges and to 
impose penalties, including cancellation of a membership and 
forfeiture of all rights as a lessor or lessee, for nonpayment).
---------------------------------------------------------------------------

    Pursuant to Article Nineteenth, the Board would have the authority 
to make rules that impact lease arrangements, including adopting rules 
relating to the termination of lease agreements. As discussed, the 
Exchange's Certificate of Incorporation, by-laws and rules already 
include several provisions addressing such authority.\9\ Moreover, the 
Exchange's by-laws require lessors and lessees (as members) to pledge 
to abide by the rules as they may be amended from time to time.\10\
---------------------------------------------------------------------------

    \9\ See, e.g., Certificate of Incorporation, Article Thirteenth 
(lessor entitled to vote on compromise or arrangement); Certificate 
of Incorporation, Article Seventeenth (lessor entitled to receive 
any distribution of assets upon liquidation); By-Law Article I, 
Section 1-1 (defining lessor and lessee); By-Law Article XII, 
Section 12-8 (authorizing lessor application fee as fixed from time 
to time by the Board, lessor initiation fee and fee upon transfer of 
equitable title to a membership); and Rule 930 (setting forth 
required terms of lease agreements).
    \10\ See Exchange By-Law Article XII, Section 12-9. As a 
condition of the right to lease their seats, lessors agree ``to 
abide by the [Exchange's] By-Laws as they have or shall be from time 
to time amended, and by all rules and regulations adopted pursuant 
to the By-Laws.'' Lessees, as members, likewise make the same 
commitment.
---------------------------------------------------------------------------

    The Exchange further represents that proposed Article Nineteenth is 
also permissible as a matter of Pennsylvania contract law. The 
provisions of Article Nineteenth authorizing the adoption of rules 
affecting lease agreements between

[[Page 12583]]

lessors and lessees are lawful because, under the terms of its 
relationships with both lessors and lessees, the Exchange has the right 
to adopt by-laws, rules, or regulations that affect those lessors and 
lessees. Pennsylvania law holds that a contracting party may lawfully 
exercise its own contractual rights against another party to the 
contract, even if doing so interferes with the terms of a separate 
agreement of the other party. Here, the potential suspension or 
termination of a lease agreement in accordance with the rules of the 
Exchange is permissible under the terms of the Exchange's separate 
agreements with each of the parties to the lease agreement.
    Both lessors and lessees (as members) agree respectively as a 
condition of approval of the right to lease seats and as a condition of 
approval for membership that the Exchange may effectuate changes to 
their lease agreements, including termination. As a condition of the 
right to lease their seats, lessors agree ``to abide by the 
[Exchange's] By-Laws as they have or shall be from time to time 
amended, and by all rules and regulations adopted pursuant to the By-
Laws.'' See By-Law Art. XII, Sec. 12-9(b). Lessees (as members) 
likewise make the same commitment. See id. at 12-9(a). By agreeing to 
abide by future by-laws, rules, and regulations, lessors and lessees 
necessarily grant permission to the Exchange to adopt rules pursuant to 
which their lease agreements may be suspended or terminated. Indeed, 
the Exchange has already repeatedly exercised its right to adopt rules 
and by-laws directly impacting lessors and lessees in a variety of 
rules, including Rule 930, which closely regulates the terms and 
conditions of lease agreements.\11\ Accordingly, Article Nineteenth, 
which would provide in express form the authorization for the adoption 
of rules suspending or terminating lease agreements, would simply 
authorize that which is countenanced by the terms of the Exchange's 
existing relationship with lessors and lessees, and is thereby 
permissible as a matter of Pennsylvania contract law.
---------------------------------------------------------------------------

    \11\ Other examples include By-Law Art. I, Sec. 1-1 (defining 
lessor and lessee); By-Law Art. XII, Sec. 12-1 (a member conducts 
business on the Exchange); By-Law Art. XII, Sec. 12-8 (authorizing 
lessor application fee, lessor initiation fee, and fees upon 
transfer of equitable title); By-Law Art. XIV, Secs. 14-1, 14-2, 14-
5 (the Exchange can impose charges on members, including penalties 
for non-payment of fees); By-Law Art. XV, Sec. 15-1 (the Exchange 
approves lessees); Rule 931 (the Exchange approves lessors); Rule 
960.1  et seq. (the Exchange may discipline members).
---------------------------------------------------------------------------

    Thus, the Exchange believes that proposed Article Nineteenth was 
properly adopted by the Exchange Board under Delaware law and is 
permissible as a matter of Pennsylvania contract law.

III. Discussion

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of section 6 of the Act 
\12\ and the rules and regulations thereunder applicable to a national 
securities exchange.\13\ In particular, the Commission finds the 
proposed rule change is consistent with section 6(b)(5) of the Act,\14\ 
in that it promotes just and equitable principles of trade and protects 
investors and the public interest.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78f.
    \13\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Phlx represented that it needs Article Nineteenth in order to 
give the Board the express authorization to adopt specific rules 
relating to the leasing of memberships, including suspending or 
terminating lease agreements. The Commission finds that the proposed 
rule change promotes just and equitable principles of trade and 
protects investors and the public interest because it enables the Board 
to determine whether, and under what terms and conditions, memberships 
can be leased. Furthermore, the Phlx acknowledges that any such rules 
or resolutions, which are adopted by the Board under Article 
Nineteenth, shall be filed with the Commission to the extent required 
pursuant to section 19(b) of the Act.\15\
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------

    The Commission is not required under section 19(b)(2) of the Act to 
find that a proposed rule change by a self-regulatory organization is 
lawful under state law. In approving this proposal, the Commission is 
relying on the Phlx's representation that it has the general power 
under applicable provisions of Delaware corporate law to adopt Article 
Nineteeth without the approval of members, or by owners, lessors, or 
lessees of memberships. Furthermore, the Commission is also relying on 
the Phlx's representation that, under the applicable powers of 
Pennsylvania contract law, the Phlx has the right to adopt by-laws, 
rules, or regulation that affect those lessors and lessees contractual 
relationships. The Commission has not independently evaluated the 
accuracy of Phlx's representations about Delaware or Pennsylvania law.
    Thus, the Commission finds that the proposed rule change is 
consistent with the Act.

IV. Conclusion

    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-Phlx-99-50), and Amendment 
No. 1 thereto, are approved.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(2).

    By the Commission, for the Division of Market Regulation, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

    \17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-4754 Filed 2-26-01; 8:45 am]
BILLING CODE 8010-01-M