[Federal Register Volume 66, Number 136 (Monday, July 16, 2001)]
[Notices]
[Pages 37083-37085]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-17709]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44533; File No. SR-Phlx-00-20]


Self-Regulatory Organizations; Notice of Filing of Amendment No. 
1 to a Proposed Rule Change by the Philadelphia Stock Exchange, Inc. 
Relating to Trading Certain Over-the-Counter Securities

July 10, 2001.
    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 16, 2000, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') a proposed rule change regarding the 
trading of certain over-the-counter (``OTC'') securities. Notice of the 
proposed rule change was published in the Federal Register on December 
14, 2000.\3\ On May 14, 2001, the Exchange submitted Amendment No. 1 to 
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, 
as amended by Amendment No. 1, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 43692 (December 8, 
2000), 65 FR 78240.

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[[Page 37084]]

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Phlx proposes to trade certain OTC securities, Nasdaq National 
Market (``Nasdaq/NM'') securities, on the Exchange, pursuant to 
unlisted trading privileges (``UTP'') under Section 12(f) of the 
Act.\4\ As discussed in the original notice, minor changes to Phlx 
rules are necessary to accommodate such trading, including a revision 
to the term ``Nasdaq/NM securities,'' and the addition of a reference 
to handheld orders received from a floor broker on the floor of the 
Exchange to Phlx Rule 233(b).
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    \4\ 15 U.S.C. 78l.
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    In Amendment No. 1, the Exchange proposes to amend the application 
of the odd-lot rules to Nasdaq/NM securities and to add provisions 
relating to the allocation of Nasdaq/NM securities to specialist on a 
pilot basis. The text of the proposed rule change, including Amendment 
No. 1, is available at the Office of the Secretary, the Phlx, and at 
the Commission.

II. Self-Regulatory Organization's Statement Regarding 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

1. Purpose
    In 1992, the Commission approved on a pilot basis a Phlx proposal 
to permit the trading of Nasdaq/NM securities on the Exchange pursuant 
to UTP (``Phlx OTC/UTP Pilot Program'' or ``Pilot'').\5\ The Phlx began 
trading Nasdaq/NM securities pursuant to the Pilot in February 1993. 
The effectiveness of the Pilot was extended four times \6\ before the 
Phlx determined to cease trading such securities pending reorganization 
of its OTC/UTP program as a whole. The Phlx OTC/UTP Pilot Program 
expired on February 12, 1996. The Phlx intends to reinstate OTC/UTP 
trading in Nasdaq/NM securities in the near future, and, thus, seeks 
reinstatement of the Phlx OTC/UTP Pilot Program. Such reinstatement 
requires no changes to Phlx rules except as stated herein, since 
various rules implicated by OTC/UTP trading were amended in connection 
with the original Phlx OTC/UTP Pilot Program.
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    \5\See Securities Exchange Act Release No. 31672 (December 30, 
1992), 58 FR 3054 (January 7, 1993).
    \6\ Most recently, the Pilot was extended through February 12, 
1996. See Securities Exchange Act Release No. 36087 (August 10, 
1995), 60 FR 42637 (August 16, 1995).
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    Reinstatement of the Phlx OTC/UTP Pilot Program will enable the 
trading of Nasdaq/NM securities Phlx specialists. The Phlx proposes to 
reinstate the Pilot for a six-month period.\7\ Initially, Phlx 
specialists will be provided with quotation generation capability, as 
well as the ability to manually enter and execute orders through a 
separate system designed by a third party vendor, TradinGear, separate 
from the Exchange's PACE System.\8\
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    \7\ The current number of Nasdaq/NM securities that may be 
traded on an unlisted trading privileges basis is 1,000 securities. 
See Securities Exchange Act Release No. 41392 (May 12, 1999), 64 FR 
27839 (May 21, 1999).
    \8\ PACE is the Exchange's Automated Communication and Execution 
System. PACE provides a system for the automatic execution of orders 
on the Exchange equity floor under predetermined conditions. See 
generally Phlx Rule 229 which includes the ability, if available, to 
use PACE as an order delivery system for Nasdaq/NM securities.
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    In this regard, the Phlx proposes to trade these securities 
pursuant to its equity rules, where applicable. The following series of 
provisions that continue to appear in Phlx rules specifically reference 
Nasdaq/NM securities and are outlined more fully below. They include 
Phlx Rules 102; 105, Supplementary Material .01; 226; 233; 455 and 606.
     Phlx Rule 102: Specifies that all Nasdaq/NM securities 
transactions must be conducted during the applicable Exchange trading 
floor hours.
     Phlx Rule 105: Includes language requiring that in the 
event of unusual market conditions, as determined by the Floor 
Procedure Committee, quotations in a given issue will not be subject to 
firmness provided that the Exchange notifies the processor of Nasdaq/NM 
securities.
     Phlx Rule 226: Incorporates Nasdaq/NM securities into the 
rule dealing with round-lot orders.
     Phlx Rule 233: Enables the Exchange to trade Nasdaq/NM 
securities pursuant to UTP.
     Phlx Rule 455: Exempts Nasdaq/NM securities from the short 
sale rule.
     Phlx Rule 606: Enables access by telephone or any other 
such access as may be established between the Exchange and the Nasdaq 
system to the Phlx assigned specialist for any Nasdaq system market 
maker.
    In addition, the Exchange proposes to amend Phlx Rule 225 (``Odd 
Lot Orders in Nasdaq/NM Securities and Securities for Which the 
Exchange is the Primary Market'') to delete the reference to Nasdaq/NM 
securities. By deleting this reference, odd-lot orders for Nasdaq/NM 
securities will be governed by Phlx Rule 227 as amended (``Odd Lot 
Orders in Securities for Which Another Exchange is the Primary Market 
and in Nasdaq/NM Securities''), which states specifically, in new 
paragraph (b), the execution parameters for odd-lot market and limit 
orders in Nasdaq/NM Securities. According to proposed Phlx Rule 227(b), 
odd-lot market orders would be executed at a price equal to or better 
than the best bid disseminated pursuant to SEC Rule 11Ac1-1 \9\ on a 
sell order, or the best offer disseminated pursuant to SEC Rule 11Ac1-1 
\10\ on a buy order, which would be in effect at the time the order is 
presented at the specialist post. Odd-lot limit orders in Nasdaq/NM 
securities would be executed at the limit price or better when the 
consolidated best bid or offer disseminated pursuant to SEC Rule 11Ac1-
1 \11\ is at the limit price on a sell or buy order respectively.\12\
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    \9\ 17 CFR 240.11Ac1-1.
    \10\ Id.
    \11\ Id.
    \12\ For a similar rule, see Chicago Stock Exchange Article 
XXXI, Rule 9.
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    Finally, the Exchange proposes to add a new rule, Phlx Rule 516, 
which will govern the allocation of the Nasdaq/NM securities to 
specialists. Specifically, the proposed rule would permit the Equity 
Allocation, Evaluation and Securities Committee (``Committee'') to 
solicit and allocate each Nasdaq/NM security to a specialist on a six-
month pilot basis (or such shorter period as determined by the 
Committee). At the expiration of the pilot period, the Committee would 
resolicit specialists for the security. During the resolicitation 
period, the existing specialist would receive a preference in the 
allocation process.\13\ The allocation criteria of Phlx Rule 511(b) 
would apply to each applicant, however the 90-day evaluation procedure 
of Phlx Rule 511 would not automatically apply, but could be invoked by 
the Exchange in its discretion. This provision is intended to coincide 
with its vendor contract as well as enable the Committee to resolicit

[[Page 37085]]

such securities more widely, because this program represents a new 
business for the Exchange (albeit a re-entry) as well as a new 
technology platform.
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    \13\ This is similar to an existing Phlx provision respecting 
foreign currency option specialists who apply to trade their option 
during a different trading hours segment.
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2. Statutory Basis
    The Exchange believes that reinstatement of the Phlx OTC/UTP Pilot 
Program with the above-noted changes is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange, including sections 
6(b)(5),\14\ 11A \15\ and 12(f) \16\ of the Act. Specifically, the Phlx 
believes that the proposed rule change, as amended, is consistent with 
section 6(b)(5) \17\ of the Act, because permitting Phlx specialists to 
trade Nasdaq/NM securities should promote just and equitable principles 
of trade and facilitate transactions in securities, thereby removing 
impediments to and perfecting the mechanism of a free and open market 
in a manner consistent with the protection of investors and the public 
interest.
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    \14\ 15 U.S.C. 78f(b)(5).
    \15\ 15 U.S.C. 78k-1.
    \16\ 15 U.S.C. 78l.
    \17\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate burden on competition.

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

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
For Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the 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.\18\
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    \18\ The Commission notes that the Exchange has requested 
accelerated approval of Amendment No. 1 to the proposed rule change.
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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, as amended, 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-00-20 and should be submitted July 31, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-17709 Filed 7-13-01; 8:45 am]
BILLING CODE 8010-01-M