[Federal Register Volume 66, Number 234 (Wednesday, December 5, 2001)]
[Notices]
[Pages 63277-63278]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-30139]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45114; File No. SR-Phlx-2001-38]


Self-Regulatory Organizations; Order Granting Approval to 
Proposed Rule Change, and Amendment No. 1 Thereto, by the Philadelphia 
Stock Exchange, Inc. Relating to the Definition of a Controlled Account

November 28, 2001.

I. Introduction

    On March 12, 2001, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with 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 related to the definition of a controlled account. 
On August 16, 2001, the Exchange filed Amendment No. 1 to the proposed 
rule change.\3\ The proposed rule change was published for comment in 
the Federal Register on September 18, 2001.\4\ This order approves the 
proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Richard S. Rudolph, Counsel, Phlx, to Nancy 
J. Sanow, Senior Special Counsel, Division of Market Regulation, 
Commission, dated August 15, 2001 (``Amendment No. 1'').
    \4\ See Securities Exchange Act Release No. 44809 (September 18, 
2001), 66 FR 49056 (September 25, 2001).
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II. Description of the Proposed Rule Change

    The Phlx proposes to amend the definition of controlled accounts 
under Phlx Rule 1014(g)(i) and Option Floor Procedure Advice 
(``Advice'') B-6. The proposed rule change would also make 
corresponding amendments to Phlx Rule 1014(g)(i) and Advice B-6 
pertaining to the requirements to circle the ``yield'' field on order 
tickets. This proposed rule change has been filed in response to the 
Ordering Instituting Public Administrative Proceeding Pursuant to 
section 19(h)(1) of the Securities Exchange Act Release No. 43268 
(September 11, 2000) and Administrative Proceeding File 3-10282 (the 
``Order''). Under Section IV.B.j of the Order, the Exchange is required 
to codify market maker practices pertaining to the allocation of 
orders.
    Currently, Phlx Rule 1014(g) defines the term controlled account to 
include ``any account controlled by or under common control with a 
member broker-dealer.'' Phlx Option Specialists, Registered Options 
Traders (``ROTs'') and other ``firm proprietary'' accounts (if for the 
account of a member broker-dealer) are included in this definition. 
Under the rule, if an account is not a controlled account, it is 
considered a customer account. Thus all other accounts, including non-
member broker-dealer accounts, are considered customer accounts. Except 
for specialists and ROTs closing in-person, controlled accounts must 
yield priority to customer accounts. Presently, member broker-dealers 
are required to yield priority to non-member broker-dealer accounts 
because such accounts are considered customer accounts under the rule 
language. However, Phlx Rule 1014(g) has been interpreted to yield the 
priority of non-member broker-dealer orders to ``true'' customer 
orders, and treat non-member broker-dealer orders on par with member 
broker-dealer orders on the floor of the Exchange. This proposed rule 
change would codify the floor's interpretation of the term ``controlled 
account.''
    Specifically, the proposed rule change would amend the controlled 
account definition to include a non-member broker-dealer account. Thus, 
non-member broker-dealers would be required to yield priority to public 
customer orders, and be treated on par with orders for accounts of 
member broker-dealers. For instance, currently, where both a customer 
and a non-member broker-dealer order bid for 100 contracts at the same 
time and at the same price, the customer and the non-member broker-
dealer would each be entitled to 50 contracts of an incoming order to 
sell 100 contracts under the rule. However, under the proposed rule 
change, the customer's bid would have priority over the non-member 
broker-dealer and would receive the entire execution of an incoming 
sell order for 100 contracts at that price. In addition, under the 
proposed rule change, where a non-member broker-dealer and a ROT both 
bid for 100 contracts at the same time and at the same price, the ROT 
and the non-member broker-dealer would each be entitled to 50 contracts 
as opposed to the result under the current rule in which the non-member 
broker-dealer would have priority and be entitled to the entire 
execution of the incoming sell order for 100 contracts.
    In addition, the proposed rule change would amend Advice B-6 to 
clarify that there is no requirement to circle the ``yield'' field on 
market maker order tickets because unlike customer order tickets, the 
tickets used for orders by ROTs and other exchanges' market makers (due 
to the processing needs of clearing firms), do not have such a 
category. This amendment would make

[[Page 63278]]

Advice B-6 consistent with the expanded definition of controlled 
account under the proposed rule change. Currently, specialists and ROTs 
closing-in person are not required to circle the yield field; this 
requirement would not change. Other controlled accounts would still be 
required to circle the yield field.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the Act and the rules and regulations under 
the Act applicable to a national securities exchange.\5\ In particular, 
the proposed rule change is consistent with sections 6(b)(5) and 
6(b)(8) of the Act.\6\ The Commission finds that proposed rule change 
is consistent with the requirements of section 6(b)(5) of the Act \7\ 
because the proposed rule change is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and to remove impediments to and perfect the 
mechanism of a free and open market, and, in general, to protect 
investors and the public interest. The Commission also finds that the 
proposed rule change is consistent with section 6(b)(5) of the Act 
because the proposed rule change is not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers. 
Further, the Commission finds that the proposed rule change is 
consistent with section 6(b)(8) of the Act \8\ because the proposed 
rule change does not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. In particular, 
the Commission finds that it is consistent with sections 6(b)(5) and 
6(b)(8) of the Act \9\ to treat non-member broker-dealers and member 
broker-dealers similarly by generally requiring that orders for such 
accounts yield to customer orders. In this regard, this rule is similar 
to protections offered to customer orders in other contexts. Further, 
the Commission finds that parity between orders for non-member broker-
dealers and member broker-dealers, except for members (i.e., 
specialists and ROTs) that close in-person, is appropriate and 
consistent with the Act.
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    \5\ In approving this proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \6\ 15 U.S.C. 78f(b)(5) and 78f(b)(8).
    \7\ 15 U.S.C. 78f(b)(5).
    \8\ 15 U.S.C. 78f(b)(8).
    \9\ 15 U.S.C. 78f(b)(5) and 78f(b)(8).
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    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-Phlx-2001-38), as amended, 
is approved.

    \10\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-30139 Filed 12-4-01; 8:45 am]
BILLING CODE 8010-01-M