[Federal Register Volume 66, Number 168 (Wednesday, August 29, 2001)]
[Notices]
[Pages 45716-45720]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-21740]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44733; File No. SR-Phlx-99-52]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Philadelphia Stock Exchange, 
Inc. Adopting Rule 51, Enforcement of Capital Funding Fee

August 22, 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 December 6, 1999, 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 Phlx filed an amendment to the proposal 
on August 9, 2001. \3\ 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.
    \3\ See Letter from Cynthia Hoekstra, Counsel, Phlx, to Nancy 
Sanow, Assistant Director, dated August 8, 2001 (``Amendment No. 
1''). In Amendment No. 1 the Phlx represented that the proposed Rule 
51 complies with Delaware corporate law, Pennsylvania contract law, 
and the Exchange's Certificate of Incorporation, by-laws, and rules. 
In addition, the Phlx modified the timing of the enforcement 
procedures for failure to pay the capital funding fee and included a 
provision for equitable reversion.
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1. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

A. The Rule Language

    The Phlx proposes to adopt new Rule 51, enforcement of Capital 
Funding Fee, which relates to the ability of the Exchange to take 
certain specified

[[Page 45717]]

measures if an owner of a membership \4\ fails to pay (of have paid on 
its behalf) any capital funding fee imposed by the Exchange when due. 
\5\ New language in italics.
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    \4\ The term ``owner'' is defined as any person who or which is 
a holder of equitable title to a membership in the Exchange. See 
Exchange Certificate of Incorporation, Article Twentieth.
    \5\ On January 5, 2000, the Commission approved as a three-month 
pilot program, a capital funding fee applicable to owners of 
memberships. See Securities Exchange Act Release No. 42318 (January 
5, 2000), 65 FR 2216 (January 13, 2000) (SR-Phlx-99-49). On April 
24, 2000, the Commission approved the extension of the three-month 
pilot program until July 6, 2000. See Securities Exchange Act 
Release No. 42714 (April 24, 2000), 65 FR 25782 (May 3, 2000) (SR-
Phlx-00-29). Permanent approval of the capital funding fee was 
received on June 29, 2000. See Securities Exchange Act Release No. 
42993 (June 29, 2000), 65 FR 42415 (July 10, 2000) (SR-Phlx-99-51).
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Rule 51. Enforcement of Capital Funding Fee.

Notice and Late Charges

    (a) The Exchange shall issue invoices to each owner (for purposes 
of this Rule, an ``Obligor'') providing notice of the obligation to pay 
the capital funding fee within twenty days from the invoice date. If an 
Obligor fails to pay the Exchange the capital funding fee by the due 
date, the Exchange shall provide a written Late Notice of such failure 
(the ``Late Notice'') and, subject to subsection (b), impose a late 
charge at a monthly rate of 1 percent (simple interest) for each 
thirty-day period or fraction thereof, calculated on a daily basis, 
commencing with the twenty-first day. 

Waiver of Late Charges

    (b) The Finance Committee or its Designee may waive the amount of 
the late charge, or a portion thereof, if good cause is shown. 
    For purposes of this Rule, any determination of ``good cause'' 
shall be based upon the following factors: consideration of the 
lateness of the payment, the frequency of the late payments by a 
particular Obligor, the reason for the late payment, the amount 
outstanding, the existence and reasonableness of a payment plan 
proposed by the Obligor, and the financial hardship that the remedy 
would cause the Obligor.

Suspension of Obligor and Rights of Lessee

    (c) If an Obligor fails to pay any portion of the capital funding 
fee, including the late charge described in subsection (a) above, 
within 30 days after the date of the Late Notice, the Board of 
Governors (or, if authorized by the Board, a committee of the Board, 
the Chairman of the Board, or a Designee of the Board) (collectively, 
``the Board or its Designee''), shall suspend the right to trade or 
otherwise conduct business at the exchange, and suspend the Obligor's 
right to lease the relevant membership, subject to the ability of the 
current lessee to continue leasing to the extent provided in this 
paragraph and paragraph (d), below.
    The Exchange shall provide the lessee with notice of the provisions 
contained in subparagraphs (c)(i) and (c)(ii) and paragraph (d) below, 
at the same time it provides the Obligor with the Late Notice.
    Within 25 days after the date of the Late Notice, the Obligor may 
request in writing that the Board or its Designee postpone suspending 
the Obligor's rights, and the Board or its Designee postpone these 
remedies, with or without qualification, if it decides that good cause 
has been shown by the Oligor. The Obligor's rights shall not be deemed 
suspended pending consideration by the Exchange of the request.
    The Exchange shall provide the Obligor with notice that the Board 
or its Designee shall take any of the above-referenced action at the 
same time as it provides the Obligor with the Late Notice.

Lessee Elects to Pay Capital Funding Fee

    (i) For a period of up to three months from the date that the 
Obligor is suspended from the right to lease, the lessee may pay the 
capital funding fee plus any applicable late charges owed the Exchange 
by the Obligor in respect to that membership, and set off such amounts 
from the amounts due the Obligor in accordance with Rule 930(k).
    The lessee's authority to pay the capital funding fee pursuant to 
this Rule is without prejudice to any right of the Obligor or lessee to 
terminate the lease agreement for other reasons pursuant to its terms 
or Rule 930(e). Absent such termination, the existing lease agreement 
shall remain in effect for the months for which the capital funding fee 
charges are paid by the lessee pursuant to this subsection and shall 
then terminate unless the delinquency has been cured.

Lessee Does Not Elect to Pay Capital Funding Fee

    (ii) If the lessee does not elect to pay the capital funding fee, 
plus any applicable late charges, the lease agreement shall terminate 
30 days from the date of the Late Notice (absent earlier termination by 
the Obligor or lessee), notwithstanding the provisions in Rule 930(b) 
and (e) unless the delinquency has been fully cured. The lessee shall 
remit the amount of the capital funding fee plus late charges to the 
Exchange, up to the amount of his or her outstanding lease payment(s) 
due during this 30 day period, and set off such amount from the lease 
payment(s).

Temporary Trading Privileges

    (d) The lessee may apply in writing to the Exchange no later than 
10 days prior to the termination of the lease agreement pursuant to 
subparagraphs (c)(i) or (ii) above to continue trading under temporary 
trading privileges for a period of up to three months from the 
Obligor's suspension. The Exchange shall approve or disapprove a 
properly submitted application within 10 days of receiving the written 
application unless such approval violates Exchange rules or By-Laws or 
its Certificate of Incorporation.
    (i) If a lease agreement terminates while an application for 
temporary trading privileges is pending, the lessee may trade as though 
approval has been granted, but for no more than ten days after the 
Exchange received the application, pending the approval or disapproval 
by the Exchange of the application.
    (ii) The economic terms of the temporary trading privileges shall 
be at the current prevailing rate for lease agreements on the Exchange 
(as determined by the Board or its Designee). A lessee trading under 
temporary trading privileges continues the rights of a member, 
including the right to vote (if applicable) and the duty to continue 
paying to the Exchange any fees or dues otherwise applicable. While 
trading privileges are extended to the lessee, the Obligor shall be 
unable to lease the relevant membership.
    (iii) The lessee, while trading under temporary privileges, shall 
be subject to the obligations and entitled to the rights of a member, 
but shall not be entitled to any rights of an owner of a membership 
with respect to that membership.

Reversion of Equitable Title

    (e) If any portion of the capital funding fee in respect of a 
membership, including the late charge, is not paid (or payment of the 
late charge has not been waived or the obligation to pay has not been 
suspended as provided herein), within 30 days after the date of the 
Late Notice, the Obligor shall be notified by certified mail that the 
Board of its Designee shall authorize the reversion of equitable title 
for such membership to the Exchange, followed by sale of the equitable 
title for such membership by the Exchange, or any other action it

[[Page 45718]]

deems appropriate if the capital funding fee, including any applicable 
late charges, are not received by the Exchange within 90 days after the 
date of the original invoice or such longer period for which a lease 
agreement is in effect as a result of the election by a lessee to 
continue paying the capital funding fee as described in (c)(i) above.
    (i) The Obligor may request in writing at least 10 days before the 
90 day deadline identified above in subparagraph (e) that the Board or 
its Designee suspend these remedies or impose an alternate remedy 
proposed by the Obligor, and the Board or its Designee may do so if it 
decides that good cause is shown by the Obligor.
    (ii) If the Obligor has timely submitted a request for suspension 
of the sale of the Obligor's equitable title or for imposition of an 
alternate remedy, the Exchange shall not take steps to sell the 
Obligor's equitable title until the Board or its Designee decides the 
request in accordance with the guidelines for demonstrating good cause 
and provides written notice to the Obligor of its decision.
    (f) Any excess monies realized by the Exchange from the sale of the 
delinquent membership over all amounts owed to the Exchange and to 
others in accordance with the provisions provided in Exchange By-Law 
Article XV, Section 15-3 and, in the case of a membership that was 
subject to a lease, to the lessee (if the payments made by the lessee 
on behalf of the Obligor as described in paragraph (i) exceeded the 
monthly lease payment amounts), shall be paid to the Obligor.

Miscellaneous

    (g) For purposes of this Rule, any notices, applications, or 
requests to the Exchange or Board or its Designee by the Obligor or 
lessee must be received in writing by the Secretary of the Exchange 
during regular business hours.
    (h) The provisions and penalties authorized by this Rule shall be 
in addition to any other penalties, fines or other charges that may be 
assumed pursuant to Rule 50, the Exchange's By-Laws or otherwise.

B. Discussion of Authority

1. Authority Under Delaware Law
    The Exchange states that as a non-stock corporation organized under 
the Delaware General Corporation Law (``DGCL''), it has the authority 
to adopt proposed rule 51. The exchange states that Article Twentieth 
of its Certificate of Incorporation expressly empowers the Board of the 
Exchange to determine and assess penalties for nonpayment of fees, 
including cancellation of a membership and forfeiture of all rights as 
an owner, lessor, lessee or member. Article Twentieth provides:
    Twentieth: In addition to all other powers granted to the Board of 
Governors by law, this Certificate of Incorporation or otherwise, the 
Board of Governors shall have the power (i) to assess such fees, dues 
and other charges upon members, member organizations, owners (as 
defined below), lessors and lessees of memberships and holders of 
permits (or any of them) as the Board of Governors may from time to 
time adopt by resolution or set forth in the Rules of the Board of 
Governors, and (ii) to assess penalties for failure to pay any fees, 
dues or other charges owed to the Corporation, including, without 
limitation, cancellation of a membership or permit (which membership or 
permit may be reissued) and forfeiture of all rights as a member, 
member organization, owner (as defined below), lessor, lessee or holder 
of a permit. The Board of Governors may authorize any committee thereof 
or the Chairman of the Board of Governors to exercise any powers of the 
Board of Governors with respect to the assessment of fees, dues, other 
charges and penalties. The fees, dues, other charges and penalties 
authorized in accordance with this Article shall be in addition to any 
fees, dues, other charges or penalties imposed pursuant to any 
provision of the By-Laws of the Corporation. For purposes of this 
Certificate of Incorporation and (unless otherwise expressly stated 
therein) the rules of the Corporation and any schedule of fees, dues, 
other charges or penalties which the Corporation may establish, the 
term ``owner'' (whether or not capitalized) shall mean any person or 
entity who or which is a holder of equitable title to a membership in 
the Exchange.\6\
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    \6\ See Securities Exchange Act Release No. 42773 (May 11, 
2000), 65 FR 31622 (May 18, 2000) (SR-Phlx-00-30).
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    In addition, the Exchange represents that 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);\7\ By-Law Art. IV, 
Sec. 4-4.
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    \7\ 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''); Certificate of Incorporation Article Third 
(stating, 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).
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    The Exchange states that numerous provisions of the Exchange's by-
laws and rules already address matters similar to those addressed by 
proposed Rule 51.\8\ Moreover, the Exchange states that its by-laws 
require lessors and lessees (as members) to pledge to abide by the 
rules as they may be amended from time to time.\9\
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    \8\ See, e.g., By-Law Art. XIV Sec. 14-5 (providing that 
membership may be ``disposed of'' by Admissions Committee in certain 
circumstances for nonpayment of dues or fines); By-Law Art. XIV, 
Sec. 14-2 (authorizing Board to fix and impose charges upon members 
and member organizations); Rule 50 (authorizing suspension of 
members or member organizations for nonpayment of charges); 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 a 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).
    \9\ See By-Law Art. XII, Sec. 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.
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    Accordingly, under the DGCL and the Exchange's Certificate of 
Incorporation, by-laws and rules, the Board of Governors of the 
Exchange has the authority to adopt Rule 51.
2. Permissibility Under Pennsylvania Contract Law
    The Exchange contends that proposed Rule 51, relating to the 
suspension of a lessor's right to lease, termination of lease 
agreements, issuance of temporary trading privileges, and collection of 
fees from members and set off as described in Rule 930(k),\10\ is also 
permissible as a matter of Pennsylvania contract law for two primary 
reasons. First, the Exchange states that it may adopt by-laws, rules, 
or regulations that affect lessors and members pursuant to the express 
terms of its contractual relationships with the lessors and members and 
thus any interference with or alteration of extant lease agreements by 
proposed Rule 51 would be contractually permissible. Second, the 
Exchange states that it is a third party beneficiary of the lease 
agreements, and this status provides an additional contractual basis 
for the collection and set off provisions of proposed Rule 51. (The 
Exchange states that future lease agreements would of course be deemed

[[Page 45719]]

to incorporate the terms of Rule 930(k) within them, obviating any 
contract law question.)
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    \10\ See Securities Exchange Act Release No. 443865 (June 4, 
2001), 66 FR 30971 (June 8, 2001) (approving SR-Phlx-2001-45).
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a. Lease Terms Incorporate Relevant Terms of Exchange Articles of 
Incorporation, By-Laws, and Rules
    The Exchange represents that, under the terms and conditions 
pursuant to which the Exchange awards the privileges of membership and 
approves the right of an owner to lease a seat, it reserves the right 
to adopt authorized by-laws, rules, or regulations that affect those 
lessors and lessees, and, accordingly, any potential impact on lease 
agreements of Rule 51 would be contractually permissible.\11\ The 
Exchange states that 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. The Exchange represents 
that, 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). It 
argues that, 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 
affected.\12\ Accordingly, it argues that Rule 51, which would provide 
in express form the authorization for the alteration of or interference 
with lease agreements, would simply authorize that which is 
countenanced by the terms of the Exchange's existing relationships with 
lessors and lessees, and is thereby permissible as a matter of 
Pennsylvania contract law.
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    \11\ See footnote 9, supra, for various rules that are lawful in 
accordance with the conditions of membership and of the right to 
lease.
    \12\ We note that the Exchange has also previously explained to 
the Commission when proposing Article Nineteenth and Rule 930(k) 
that that Article and Rule are likewise consistent with Pennsylvania 
contract law for this same reason. See Securities Exchange Act 
Releases Nos. 43987 (February 20, 2001), 66 FR 12582 (February 27, 
2001) (SR-Phlx-99-50) and 43865 (June 4, 2001), 66 FR 30971 (June 8, 
2001) (SR-Phlx-2001-45).
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b. The Exchange Is a Third Party Beneficiary of All Lease Agreements
    Moreover, the Exchange states that it is already, as a matter of 
Pennsylvania law, a third party beneficiary of lease agreements and 
would as such be entitled to provide for collection of Exchange fees 
from a lessee upon the default of a lessor, and to permit set-off by 
the lessee. The Exchange states that Pennsylvania law provides that as 
a third party beneficiary the Exchange is entitled to enforce, in its 
own name, as a real party in interest, the rights that accrue to it 
under the lease agreement. Generally, a non-party to a contract is a 
third party beneficiary either (i) when the parties to contract express 
an intention in the contract itself to benefit the third party, or (ii) 
if the surrounding circumstances are sufficiently compelling that 
recognition of the beneficiary's right is appropriate to effectuate the 
intention of the parties, and the performance satisfies an obligation 
of the parties to pay money to the beneficiary or the circumstances 
indicate that the parties intend to give the beneficiary the benefit of 
the promised performance.
    Here, the Exchange argues that it is a third party beneficiary of 
lease agreements in accordance with the intention expressed in the 
lease agreements themselves. It states that Rule 930(c) already 
provides that the lease agreement ``shall require a lessee to pay the 
Corporation [the Exchange] * * * all applicable dues, fees, charges, 
and other debts arising from the use of membership.'' The Exchange 
represents that, as the purpose of the lease agreement is to permit the 
lessee the ``use of membership,'' proposed Rule 930(k) simply specifies 
the circumstances in which the Exchange, rather than requiring payment 
by the lessee of one such fee, is imposing the lesser obligation of 
allowing the payment by a lessee. The Exchange also states that 
likewise, many of the other mandatory terms of the lease agreements, 
imposed by Exchange rule, also manifest the parties' clear intent to 
make the Exchange a beneficiary. See Rule 930(a) (the Exchange must 
approve the transfer of membership); 930(d) (the lessee may not 
encumber legal title to the membership during the lease agreement); 
930(e) (legal title to the membership must be transferred to the lessor 
in accordance with the Exchange's by-laws upon the expiration of the 
lease agreement or other such event); and 930(j) (the Exchange may 
dispose of a membership subject to a lease agreement in accordance with 
its by-laws and rules).
    Moreover, the Exchange represents that, in addition to the intent 
manifested in the lease agreements, which is itself sufficient to 
render the Exchange a third party beneficiary, the circumstances 
surrounding the lease agreements independently compel the same 
conclusion. As noted, the Exchange states that the lease agreements are 
pursuant to Exchange rules, replete with references to the Exchange, 
see Rule 930, and reference to a third party in the contract itself is 
a strong indication that the party is a third party beneficiary. The 
Exchange also notes that it exercises numerous rights related to the 
lease agreements. The Exchange states that it approves lessors, as well 
as lessees. See Rule 931 (approval of lessors); and By-Law Art. XV, 
Sec. 15-1 (approval of lessees). The Exchange represents that it also 
requires lessors and lessees to abide by the Exchange's by-laws. See 
By-Law Art. XII, Secs. 12-9 (a), (b); and Rule 930(j). Indeed, the 
Exchange states that the purpose of the lease agreement is to permit 
trading on the Exchange. See By-Law Art. XII, Sec. 12-1 (a member 
conducts business on the Exchange). The Exchange also represents that 
it reserves the right to approve all transfers of membership pursuant 
to a lease agreement. Rule 930 (a), (d) and (e). Finally, as noted, the 
Exchange represents that Rule 930 already requires that lessees be 
responsible for payment to the Exchange of all applicable dues, fees, 
charges and other debts, and proposed Rule 51 identifies under what 
circumstances the lessee may, at his or her option, remit one such fee 
to the Exchange.\13\
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    \13\ Indeed, the Exchange may well be a constructive party to 
the lease agreement. While Pennsylvania courts have not had the 
opportunity to address the issue of constructive parties, there 
exists persuasive case law elsewhere that when the contracting 
parties, and a third party have a sufficiently intertwined business 
relationship, the third party is deemed to be a constructive party 
to the contract. Here, for the various reasons outlined in the text, 
the Exchange, lessors, and lessees, possess such an extraordinarily 
intertwined business relationship that the Exchange could be 
considered a constructive party to lease agreements. This would 
provide yet another alternative basis for the legal adequacy of the 
Exchange's provision for collection and set off in proposed Rule 51.
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    The Exchange argues that it is, accordingly, a third party 
beneficiary to the lease agreements with the right to allow the 
provision of payment of fees and set off in proposed Rule 51.
    Therefore, the Exchange states that, as a condition of membership 
and of the right to lease seats, the Exchange's adoption of Rule 51 is 
a permissible alternation or interference with extant lease agreements, 
and, as a third party beneficiary, the Exchange's provision for 
collection and set off in proposed Rule 51 are contractually 
permissible under Pennsylvania law.
    In sum, the Exchange contends that adoption by the Exchange of 
proposed Rule 51 would be consistent with applicable corporate 
governance and contract law.

[[Page 45720]]

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

    The Exchange states that the purpose of the proposed rule change is 
to adopt new Rule 51, which specifies what enforcement action may be 
taken against an owner for failure to pay any capital funding fee 
imposed by the Exchange. The Exchange represents that a new rule is 
required because existing Exchange rules do not comprehensively address 
situations in which owners, as opposed to members or member 
organizations, are required to pay the Exchange any fees. In addition, 
the Exchange states that capital funding fee invoices are sent out 
separately from other Exchange invoices and are subject to a different 
payment schedule. Therefore, the Exchange represents that the remedies 
of late payments that are addressed in current Exchange Rule 50 are not 
appropriate.\14\
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    \14\ See Phlx Rule 50, Late Charge.
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    In addition, the Exchange notes that proposed Rule 51 delineates 
the remedies that shall be taken by the Board if the capital funding 
fee is not paid. The Exchange notes that the rule allows for a variety 
of remedies ranging from the imposition of a late fee to reversion and 
sale by the Exchange of the equitable title to a membership. The 
Exchange notes that the remedies are set forth in such a way as to 
apply the less onerous remedies (i.e., like fees) first and the more 
serious remedies (i.e., suspension of right to trade or lease and 
reversion of membership) only after the Exchange has not received 
payment within 90 days after the date of the original time period (or 
such longer period as necessary if a lease is in effect as a result of 
the election by a lessee to continue paying the capital funding fee). 
The Exchange represents that, by allowing this graduated scale of 
remedies, the owners are put on notice as to what remedies will be 
imposed if payment is not received in a timely manner, with the more 
serious remedies being applied after a longer period of time. In 
addition, the Exchange represents that proposed Rule 51 delineates the 
Board's responsibilities and authority for handling instances when an 
owner fails to pay the capital funding fee when due. The Exchange 
states that the Rule is designed to protect innocent lessees from being 
unexpectedly dispossessed from their memberships and trading rights in 
the event of a nonpayment by their lessors. The Exchange represents, 
that, by electing to pay the capital funding fee on behalf of an owner, 
the lessee may continue trading under his/her existing membership for 
up to three months. The Exchange states that, at the end of this 
period, or in the event that the lessee elects not to pay the fee on 
behalf of the lessor, the lessee may apply for temporary trading 
privileges.
    The Exchange states that the amount and capital contribution 
structure of this fee are vastly different from other Exchange fees, as 
is the purpose. In fact, the Exchange represents that the Board 
determined that the enforcement mechanisms outlined in proposed Rule 51 
were necessary to effectuate the Exchange's capital funding fee, a 
central aspect of the Exchange's capital plan, for the continued 
viability and competitiveness of the Exchange.
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act,\15\ in general, and with Section 
6(b)(5),\16\ in particular because it promotes just and equitable 
principles of trade and protects investors and the public interest by 
providing an enforcement mechanism which should, in turn, ensure prompt 
payment of capital funding fees to the Exchange by an owner.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change will not 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 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, 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-99-52 and should be submitted by September 19, 2001.
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    \17\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
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pursuant to delegated authority.\17\

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-21740 Filed 8-28-01; 8:45 am]
BILLING CODE 8010-01-M