[Federal Register Volume 67, Number 13 (Friday, January 18, 2002)]
[Notices]
[Pages 2720-2725]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-1300]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45254; File Nos. SR-Phlx-00-02 and SR-Phlx-00-03]


Self-Regulatory Organizations; Order Granting Approval to 
Proposed Rule Changes by the Philadelphia Stock Exchange, Inc. Relating 
to Equity Trading Permits and Notice and Order Granting Accelerated 
Approval to Amendments No. 3 Thereto

January 9, 2002.

I. Introduction

    On January 12, 2000, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``SEC'' or ``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 to amend its Certificate of 
Incorporation to add a new article authorizing the Board of Governors 
to issue Equity Trading Permits (``ETPs'').\3\ The Exchange filed 
amendments to the proposed rule change on May 30, 2000 \4\ and July 12, 
2000.\5\ The proposed rule change was published for comment in the 
Federal Register on September 1, 2000.\6\ On December 17, 2001, the 
Exchange filed Amendment No. 3 to the proposal.\7\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ SR-Phlx-00-02.
    \4\ See Letter from Carla Behnfeldt, Counsel, Phlx, to Sonia 
Patton, Staff Attorney, Division of Market Regulation 
(``Division''), Commission, dated May 25, 2000.
    \5\ See Letter from Carla Behnfeldt, Counsel, Phlx, to Sonia 
Patton, Staff Attorney, Division, Commission, dated July 11, 2000.
    \6\ See Securities Exchange Act Release No. 43211 (August 25, 
2000), 65 FR 53251.
    \7\ See Letter from Mark I. Salvacion, Director and Counsel, 
Phlx, to Belinda Blaine, Associate Director, Division, Commission, 
dated December 14, 2001 (``Amendment No. 3 to SR-Phlx-00-02''). In 
Amendment No. 3, the Exchange amended the Certificate of 
Incorporation to: (1) Provide that permit holders may serve on, or 
nominate candidates for the Board of Governors or Committees; and 
(2) clarify that permit holders are not members of the Exchange for 
purposes of Delaware General Corporate Law (``DGCL'') and shall have 
no rights or privileges conferred upon members of a nonstock 
corporation solely by DGCL. In Amendment No. 3, the Exchange also 
represented that the Board of Governors will appoint a qualified ETP 
holder, or associated person thereof, to the Exchange's Business 
Conduct Committee at the next annual appointment of Business Conduct 
Committee members, presently scheduled for March 2002. Lastly, the 
Exchange stated that it has authorized the Board of Governors to 
issue only 75 permits.
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    Also on January 12, 2000, the Exchange submitted to the Commission, 
pursuant to Section 19(b)(1) of the Act \8\ and Rule 19b-4 
thereunder,\9\ a proposed

[[Page 2721]]

rule change to adopt a rule setting forth the terms and conditions of 
ownership of ETPs.\10\ The Exchange filed amendments to the proposed 
rule change on May 30, 2000 \11\ and July 12, 2000.\12\ The proposed 
rule change was published for comment in the Federal Register on 
September 1, 2000.\13\ On December 17, 2001, the Exchange filed 
Amendment No. 3 to the proposal.\14\
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    \8\ 15 U.S.C. 78s(b)(1).
    \9\ 17 CFR 240.19b-4.
    \10\ SR-Phlx-00-03.
    \11\ See Letter from Carla Behnfeldt, Counsel, Phlx, to Sonia 
Patton, Staff Attorney, Division, Commission, dated May 25, 2000.
    \12\ See Letter from Carla Behnfeldt, Counsel, Phlx, to Sonia 
Patton, Staff Attorney, Division, Commission, dated July 11, 2000.
    \13\ See Securities Exchange Act Release No. 43212 (August 25, 
2000), 65 FR 53253.
    \14\ See Letter from Mark I. Salvacion, Director and Counsel, 
Phlx, to Belinda Blaine, Associate Director, Division, Commission, 
dated December 14, 2001 (``Amendment No. 3 to SR-Phlx-00-03''). In 
Amendment No. 3, the Exchange: (1) Amended proposed Rule 23(a) to 
specify that it will issue a maximum of 75 ETPs; (2) deleted a 
provision in proposed Rule 23(b) which would have required that ETP 
holders be at least the minimum age of majority as it was 
inconsistent with a By-Law requirement that the those applying for 
exchange membership by twenty-one years of age; (3) expanded the 
language of proposed Rule 23(c) to clarify that ETP holders are 
deemed to be members for purposes of eligibility requirements to 
serve on the Board of Governors or Exchange Committees and for the 
purpose of nominating candidates for the Board; (4) amended proposed 
Rule 23(c) to clarify that permits issued by the Exchange are not 
``Regular'' or ``Convertible'' memberships of the Exchange, and are 
not members for purposes of DGCL and shall have no rights or 
privileges conferred on members of a nonstick corporation solely by 
DGCL; (5) amended proposed Rule 23(e) to clarify that ETP holders 
shall be subject certain Exchange fees and charges, but not to 
annual membership dues, technology fees or capital assessments; and 
(6) amended proposed Rule 239i) to clarify that ETP organizations 
will be required to post security with the Exchange, the proceeds of 
which may be applied by the Exchange upon termination of any ETP in 
the same manner as proceeds of membership transfers under Exchange 
By-Law 15-3.
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    The Commission received two comment letters regarding the 
proposals.\15\ This notice and order approves both proposed rule 
changes, as amended, and solicits comments from interested persons on 
Amendment No. 3 to each proposed rule change.
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    \15\ See letters from Matthew D. Wayne, Vanasco, Wayne & 
Genelly, to Jonathan G. Katz, Secretary, Commission, dated February 
25, 2000 (``Wayne Letter''), and William W. Uchimoto, Executive Vice 
President and General Counsel, Ashton Technology, to Jonathan G. 
Katz, Secretary, Commission, dated September 5, 2000 (``Ashton 
Letter''). These letters were sent in response to both proposed 
rules changes.
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II. Description of the Proposal

A. SR-Phlx-00-02

    The Exchange proposes to amend its Certificate of Incorporation by 
adding a new Article Twenty-First (``Article Twenty-First'') that 
authorizes the Exchange's Board of Governors (``Board'') to issue 
trading permits that would allow the holders of such permits to conduct 
business on the Exchange. Article Twenty-First also authorizes the 
Board to adopt rules governing, among other things, the terms, 
conditions, number, and transferability of permits, the qualifications 
that members and non-members must meet to be issued a permit, and the 
dues and other charges to be paid to the Exchange in connection with 
the permits.\16\
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    \16\ The Commission notes and the Exchange has acknowledged that 
any such action undertaken pursuant to Board resolution and not 
proposed to be set forth in the rules of the Exchange would 
nonetheless be filed with the Commission to the extent required 
pursuant to Section 19(b) of the Act and Commission rules 
thereunder.
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    Article Twenty-First permits the Board to authorize the Chairman of 
the Board or any Board committee to exercise any powers of the Board 
with respect to the permits. Article Twenty-First also provides that 
permit holders shall be eligible to serve on, or nominate candidates 
for election to, the Board or Committees thereof or other Exchange 
Committees referred to in the By-Law or Rules of the Exchange.\17\
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    \17\ See Amendment No. 3 to SR-Phlx-00-03, supra note 6.
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    Article Twenty-First is intended to give the Board the flexibility 
to create a means, other than the purchase or lease of an Exchange 
membership, for qualified persons to acquire trading rights on the 
Exchange. The Exchange's Certificate of Incorporation provides that the 
purpose of the Exchange is to ``act as and to provide a securities 
exchange where the [Exchange's] members and other persons authorized by 
it can [do business].'' \18\ In Article Twenty-First, the Exchange 
makes clear that such ``other persons'' authorized to do business at 
the Exchange includes holders of trading permits authorized by the 
Board.
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    \18\ Phlx Certificate of Incorporation, Article Third (emphasis 
added). The Exchange notes that the Commission has previously 
approved the issuance by the Exchange of foreign currency options 
participations (``FCO Participations'') pursuant to which both 
Exchange members and non-members may trade foreign currency options 
on the Exchange. See Securities Exchange Act Release No. 19134 
(October 14, 1982), 47 FR 46949 (October 21, 1982).
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B. Phlx-00-03

    Phlx Rule 23 will govern the terms and conditions of ETPs, which 
are intended to confer access privileges to the Exchange's equity 
trading floor.\19\ Phlx Rule 23 establishes two classes of ETPs. 
Regular Equity Trading Permits (``Regular ETPs'') authorize their 
holders to trade equity securities on any facility of the Exchange, in 
any capacity permitted to members, including as a specialist. Off-Floor 
Equity Trading Permits (``Off-Floor ETPs'') allow holders electronic 
and telephonic access, but not physical access, to the Exchange floor.
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    \19\ The Exchange has a proposal pending with the Commission to 
amend its schedule of dues, fees, and charges to provide that the 
Exchange's existing application fee and initiation fee apply to 
ETPs, and to impose monthly ETP fees. See SR-Phlx-00-04. Finally, 
Stock Clearing Corporation of Philadelphia (``SCCP'') has proposed a 
change to its certificate of incorporation and to SCCP Rule 3 
pursuant to which SCCP may treat ETP holders as Phlx members for 
purposes of clearing services it provides. See Securities Exchange 
Act Release No. 45255 (January 9, 2002) (SR-SCCP-00-01).
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    Phlx Rule 23(a) provides that the two classes of ETPs may be issued 
by the Exchange to applicants pursuant to resolution of the Board of 
Governors (``Board'') for such fee as may be established from time to 
time by the Board. The Exchange may issue a maximum of 75 ETPs.\20\
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    \20\ See Amendment No. 3 to SR-Phlx-00-03, supra note 14.
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    Phlx Rule 23(b) requires ETP applications to be approved by the 
Exchange. The application process for applicants who are not members of 
the Exchange would also include an admissions determination by the 
Exchange's Admissions Committee. ETP applicants who are members of the 
Exchange when they apply for an ETP would have already received a 
favorable admissions determination by the Exchange's Admissions 
Committee. With respect to ETP applicants who are not Exchange members, 
the admissions process would be the same as that currently required in 
connection with membership applicants, and the decision to grant or 
deny an application for admission as an ETP holder would be made by the 
Admissions Committee under its established procedures.\21\ Phlx Rule 
23(b) also requires the applicant to sign a pledge to abide by the By-
Laws and rules of the Exchange and to submit to the Exchange's 
disciplinary jurisdiction.
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    \21\ Phlx Rule 901, Denial of and Conditions to Membership, sets 
forth certain criteria for membership decisions which would also 
apply to any determination to issue an ETP to an applicant who is 
not already a Phlx member.
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    Phlx Rule 23(c) provides that, except as may be otherwise set forth 
in the Rule or in other rules of the Exchange or effective Commission 
filings, an ETP holder will have the right to transact business on the 
floor of the Exchange to the same extent and in the same manner, and 
would be deemed to have the same rights and obligations, as a member of 
the Exchange without options privileges.\22\ It also establishes

[[Page 2722]]

that an ETP holder will not be entitled by virtue of the ETP to vote in 
any election or on any amendment to the By-Laws or on any other matter, 
or to petition or to be counted as part of a quorum at meetings of 
members. ETP holders will, however, be eligible to serve on, and 
nominate candidates for, the Board of Governors and Exchange committees 
if elected or appointed and subject to existing qualification 
requirements for service, to the same extent as members.\23\ Because an 
ETP confers no equity interest in Exchange assets or property, Phlx 
Rule 23(c) establishes clearly that an ETP will not entitle its holder 
to share in any distribution of the assets or funds of the Exchange in 
the event of any voluntary or involuntary liquidation, dissolution, or 
winding up of the affairs of the Exchange, or to purchase options 
privileges. Finally, Phlx Rule 23(c) provides that specialist members 
who elect to sell or lease their memberships in favor of Regular ETPs 
would continue to be specialists in their allocated securities.
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    \22\ The Commission has in the past approved the Exchange's 
issuance of Foreign Currency Options Participations (``FCO 
Participations''). Like holders of FCO Participations, ETP holders 
would generally be subject to Phlx's rules and By-Laws but would not 
be entitled to all the rights an privileges granted to Phlx members. 
See Securities Exchange Act Release No. 19134 (Oct. 14, 1982), 47 FR 
46949 (Oct. 21, 1982).
    \23\ ETP holders will be deemed to be ``members'' and ETP 
organizations will be deemed to be ``member organizations'' for the 
purpose of eligibility to serve on the Board or Exchange Committees, 
and nominate candidates for the Board. However, ETP holders shall 
only have such rights, privileges, and obligations as are expressly 
set forth in the Certificate of Incorporation, Rule 23, or 
resolutions of the Board. References in Exchange Rules, By-Laws or 
the Certificate of Incorporation to ``members'' shall includes ETP 
holders. See Amendment No. 3 to SR-Phlx-00-03, supra note 14.
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    Phlx Rule 23(d) establishes the rights of holders of Off-Floor 
ETPs. An Off-Floor ETP holder will be able, if accompanied by a regular 
member, to visit the floor of the Exchange, but will not have the 
privilege of transacting business on it. Consequently, an Off-Floor ETP 
holder will not be eligible to apply for specialist privileges. With 
this exception, an Off-Floor ETP holder will have the same rights as a 
Regular ETP holder. In particular, an Off-Floor ETP holder will be 
authorized, for the purpose of trading equity securities, to maintain 
electronic or telephonic access to (i) the floor facilities on the 
equities floor of the Exchange of a member or member organization or a 
Regular ETP holder, (ii) the Philadelphia Stock Exchange Automated 
Communication and Execution System (``PACE''),\24\ and (iii) such other 
automated trading systems of the Exchange as may be made available to 
members of the Exchange without options privileges.
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    \24\ PACE is the Exchange's automatic order routing and 
execution system on the equity trading floor. PACE accepts orders 
for manual and automatic execution in accordance with the provisions 
of Rule 229, which governs the PACE System and defines its 
objectives and parameters.
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    Phlx Rule 23(e) establishes the ability of the Exchange to impose 
fees and charges on ETP holders. An ETP holder will be subject to the 
same obligations and duties (including the payment of Exchange fees and 
charges) imposed on Exchange members, except that ETP holders will not 
be charged annual membership dues, technology fees, or any capital 
assessments that could be imposed in the future.\25\ Phlx Rule 23(e) 
establishes that all provisions of the Exchange's Certificate of 
Incorporation and By-Laws, and the rules, regulations, requirements, 
orders, directions and decisions adopted pursuant to them which by 
their terms are applicable to Exchange members will also apply to ETP 
holders unless their application is inconsistent with the provisions of 
Rule 23. Likewise, all references in such documents to ``non-members'' 
will not be construed to apply to ETP holders. Consistent with Phlx 
Rule 23(e), the Exchange intends to charge a $200 application fee for 
every ETP application made by members and non-members. Non-member 
applicants for ETPs will also be required to complete the same 
admissions process required by the Exchange for membership applicants, 
and will be charged the $1,500 initiation fee upon issuance of the ETP 
just as members are charged this fee upon election to membership. After 
an ETP is issued, its holder will be subject to the same fees as Phlx 
members (except as otherwise noted in Phlx Rule 23(e)) in addition to a 
monthly ETP fee.
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    \25\ In particular, they will not be subject by virtue of the 
ETP to the Exchange's $1,500 capital funding fee. See Securities 
Exchange Act Release No. 42993 (June 29, 2000), 65 FR 42415 (July 
10, 2000). Fees proposed to be assessed by the Exchange with respect 
to ETPs are described in SR-Phlx-00-04. See Amendment No. 3 to SR-
Phlx-00-03, supra note 14.
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    Phlx Rule 23(f) makes clear that, unlike a membership, an ETP may 
not be transferred by lease, sale, gift, involuntary transfer, or any 
other means or as collateral to secure any obligation, except that an 
ETP may be transferred within the holder's ETP organization to (i) an 
individual who has applied for and been approved by the Admissions 
Committee as an ETP holder, or (ii) an ``inactive nominee'' registered 
as such with the Exchange.
    Phlx Rule 23(g) provides that an individual ETP holder associated 
with a broker-dealer will be required to qualify such broker-dealer as 
an ETP firm or an ETP corporation just as a member would register it as 
a member firm or member corporation under current Exchange rules.\26\ 
Except to the extent otherwise set forth in Phlx rule 23 or in other 
Exchange rules or effective Commission filings, an ETP organization 
will have the same rights and obligations as a member organization of 
the Exchange. The organization would cease to be an ETP organization of 
the Exchange upon termination of the ETP pursuant to which the ETP 
organization is qualified.
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    \26\ Like Exchange members, an ETP holder will be required to be 
associated with a registered broker-dealer.
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    Phlx Rule 23(g) also requires every ETP applicant whose fees are to 
be paid by such ETP organization to file, along with his or her ETP 
application, an agreement between the ETP applicant and the ETP 
organization (an ``ETP Use Agreement'') providing that the ETP 
organization may direct the transfer of the ETP to another qualified 
individual within the ETP organization and that the ETP holder may not 
object to such transfer. The ETP Use Agreement is in some respects 
analogous to the A-B-C Agreement provided for in Exchange Rule 930 
pursuant to which a member contributes the use of a membership to the 
membership organization. Like the A-B-C Agreement provided for in Rule 
940, the ETP Use Agreement would restrict the use of the ETP by its 
holder in the event of the holder's termination of his association with 
the ETP organization.\27\
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    \27\ The A-B-C Agreement contains additional provisions arising 
from the division of equitable and legal title to membership, a 
concept which is inapplicable to ETPs.
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    Phlx Rule 23(h) permits the Exchange to suspend or expel an 
individual ETP holder on the same basis as a member. It also permits 
the Exchange to amend the terms of, to discontinue offering or to 
terminate existing ETPs of one or more classes at any time upon thirty 
days written notice. Similarly, Phlx Rule 23(h) requires an ETP holder 
to provide the Exchange thirty days written notice prior to termination 
of the ETP. The Exchange is required to provide notice of an ETP's 
termination to the membership in the same manner it provides notice of 
a proposed transfer of a membership. The ETP holder will remain liable 
for all obligations incurred as an ETP holder until these obligations 
are discharged, and the Exchange is authorized to draw upon any 
security provided pursuant to Rule 23(i), discussed below, for the 
payment of such obligations at any time if they remain unpaid as of the 
date of termination.

[[Page 2723]]

    Phlx Rule 23(i) requires ETP organizations to provide acceptable 
security for payment of any claims pursuant to By-Law 15-3 upon 
termination of an ETP. The proceeds of the posted security may be 
applied by the Exchange upon termination of any ETP in the same manner 
as proceeds of membership transfers under By-law 
15-3.\28\ The security requirement may be met, at the option of the ATP 
organization, by providing a letter of credit or other guaranty 
acceptable to the Exchange, or by depositing $50,000 with the Exchange 
to be held in a segregated account with all other such deposits and 
held by the Exchange as security. The security required is the same for 
each ETP organization, regardless of the number of ETPs issued to its 
associated persons, and is unrelated to any security requirement 
established by SCCP.\29\ The requirement does not apply to member 
organizations or ETP organizations that have been in good standing at 
the Exchange for the previous year. Consequently, ETP organizations in 
good standing for one year after providing such security will be 
entitled to its return, subject to any prior or appending claims. 
Finally, Phlx Rule 23(i) makes clear that at such time as no ETP 
holders remain associated with the ETP organization, the Exchange shall 
release any remaining security following payment of claims pursuant by 
By-Law 15-3 and upon execution by the ETP holder and ETP organization 
of releases satisfactory to the Board of Governors.
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    \28\ See Amendment No. 3 to SR-Phlx-00-03, supra note 14.
    \29\ See SCCP Rule 4.
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    The Exchange expects to first undertake the ETP offering by 
distributing an informational circular and an ETP Application Form to 
be completed and returned to the Exchange together with payment of the 
Exchange's application fee. In addition to the ETP Application Form, 
applicants who are not Exchange members will be required to supply to 
the Admissions Committee all information required for that Committee to 
make an admissions determination under its established procedures, as 
discussed above.

III. Summary of Comments

    The Commission received two comment letters in response to the 
proposed rule changes.\30\ One commenter expressed general support for 
the proposal, stating that it would place the Phlx ``in a pro-
competitive position with other exchanges that have reduced the cost of 
access to electronic trading facilities.'' \31\ The other commenter, 
however, challenged the Phlx's authority to authorize the Board to 
issue trading permits without a membership vote, and stated that the 
purpose of the proposal was to harm persons who lease seats to members 
wishing to trade on the Phlx Floor (``Lessors'').\32\
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    \30\ See supra note 7.
    \31\ See Ashton Letter.
    \32\ See Wayne Letter.
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    The commenter argued that the Phlx Certificate of Incorporation 
contemplates a fixed number of membership seats, possession of which 
gives a person or entity access and trading rights to the Phlx trading 
floor. Issues relating to membership seats, including different classes 
of members, are governed by the Exchange's By-Laws, according to the 
commenter. The commenter goes on to argue that the proposed ETPs are 
``de facto membership seats,'' and thus should be governed by the By-
Laws, a change to which requires a membership vote, not the Certificate 
of Incorporation. The commenter describes the addition of a new article 
to the Certificate of Incorporation to create the ETPs as an attempt by 
the Exchange to do an end-run around its By-Laws, and avoid a full 
membership vote on the proposal.\33\
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    \33\ The commenter contends that, ``[t]he PHLX is well aware 
that if the full membership were presented with the issue of trading 
permits as a proposed amendment to the By-Laws, the membership would 
reject the proposal.'' See Wayne Letter.
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    The Exchange, however, believes that the Certificate of 
Incorporation already permits ETPs, and that an amendment of the 
Exchange's By-Laws is not required. Further, the Exchange believes that 
the proposed amendment to the Certificate of Incorporation authorizes 
ETPs in any event and supersedes any inconsistent provision in the By-
Laws as a matter of basic corporate law.
    The Wayne Letter also contends that the Exchange's proposal to 
create ETPs is part of ``a methodical plan to destroy both Lessors and 
the value of PHLX membership seats.'' The commenter states that 
``[t]hrough the proposed trading permits, the PHLX is attempting to 
divert seat rental income from Lessors directly to the Exchange,'' and 
that it is the intention of the Board that if the proposal is approved, 
persons wishing to trade on the Exchange will purchase a permit rather 
than lease a seat. The commenter states that the Board owes a fiduciary 
duty to Lessors, which prohibits it from competing directly against 
Lessors in this manner.
    The Exchange has considered this comment and stated that its 
business judgment the potential benefits to the Exchange of the trading 
permits, including the potential for increased access and enhance 
competition on the trading floor and the opportunity to attract 
additional order flow and new business, justify any possible dilution 
of memberships and may, in the longer term, result in higher prices for 
regular memberships. The Exchange believes that ETPs are in the best 
interests of the Exchange and its membership as a whole (including both 
lessee members and lessor owners), and notes that the Exchange's stated 
purpose in Article Third of its Certificate of Incorporation is ``[t]o 
act as and to provide a securities exchange where [its] members and 
other persons authorized by it'' can deal in securities.

IV. Discussion

    After careful review, the Commission finds that the proposed rule 
changes are consistent with the requirements of the Act and the rules 
and regulations thereunder applicable to a national securities 
exchange.\34\ In particular, the Commission finds that the proposed 
rule changes further the objectives of Sections 6(b)(2), 6(b)(3), and 
6(b)(5).\35\
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    \34\ In approving this rule, the Commission has considered the 
proposed rules' impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f). In addition, the Commission notes that 
its approval of this proposed rule change only extends to the 
applicable Exchange Act finding under Section 6(b). 15 U.S.C. 
78f(b).
    \35\ 15 U.S.C. 78f(b)(2), (3) and (5).
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    The Commission believes that the proposed rule changes are 
consistent with Section 6(b)(5) of the Act \36\ and are not designed to 
permit unfair discrimination between customers, issuers, brokers or 
dealers. The Commission finds that ETPs may help facilitate 
transactions by allowing more broker-dealers direct access to the Phlx 
market and attracting greater order flow consistent with Section 
6(b)(2) of the Act.\37\
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    \36\ 15 U.S.C. 78f(b)(5).
    \37\ 15 U.S.C. 78f(b)(2).
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    In addition, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(3) of the Act.\38\ The Commission notes 
that the Exchange's Board can issue no more than 75 ETPs,\39\ which is 
not significant in relation to the number of regular members on the 
Exchange.\40\ The Commission also notes that the Phlx is a member-
controlled exchange, which includes 52 members using a

[[Page 2724]]

membership on the equity floor, whose interests are represented on the 
Nominating and Election Commission and Business Conduct Commission, and 
that the Phlx has committed to appointing a qualified ETP holder, or 
associated person thereof, to the Exchange's Business Conduct Committee 
at the next annual appointment of Business Conduct Committee 
members.\41\ Finally, the Commission notes that any disciplinary or 
trading rules affecting these members are subject to the rule filing 
process, which requires that proposed rules be submitted to the 
Commission for consideration and approval.
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    \38\ 15 U.S.C. 78f(b)(3).
    \39\ See Amendments No. 3 to SR-Phlx-00-02 and SR-Phlx-00-03, 
supra notes 7 and 14.
    \40\ There are 505 regular members of the Exchange. If the Phlx 
wanted to issue more than 75 ETPs, it would have to amend its 
Certificate of Incorporation and By-Laws to provide for fair 
representation of these ETPs.
    \41\ See Amendments No. 3 to SR-Phlx-00-02 and SR-Phlx-00-03, 
supra notes 7 and 14. The Act requires an Exchange to ``assure a 
fair representation of its members in the selection of its directors 
and administration of its affairs * * *.'' See Section 6(b)(3) of 
the Act, 15 U.S.C. 78f(b)(3). This requirement serves to ensure that 
an exchange is administered in a way that is equitable to all those 
who trade on the Exchange. In approving this proposed rule change, 
the Commission notes that the Exchange may not issue more than a 
significant number of ETPs in relationship to their 505 Regular 
Memberships. Also, the Commission Notes that the Exchange currently 
has 52 members using a membership on the equity floor. These members 
are eligible to serve on the Nominating and Election Committee and 
the Business Conduct Committee, and currently such a member serves 
on each Committee. The Exchange has also committed to appointing a 
qualified ETP holder to the Business Conduct Committee. Telephone 
conversation between Edith Hallahan, First Vice President and Deputy 
General Counsel, Phlx, and Florence Harmon, Senior Special Counsel, 
Division, Commission, on January 9, 2002.
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V. Amendment No. 3

A. SR-Phlx-00-02

    The Commission finds good cause for approving Amendment No. 3 to 
SR-Phlx-00-02 prior to the thirtieth day after the date of publication 
of notice thereof in the Federal Register. In Amendment No. 3, the 
Exchange amended the Certificate of Incorporation to provide that the 
permit holders may serve on, or nominate candidates for the Board or 
Committees. The Amendment also added language to the Certificate of 
Incorporation which clarified that permit holders are not members of 
the Exchange for purposes of DGCL and shall have no rights or 
privileges conferred upon members of a nonstock corporation solely by 
DGCL. In addition to making changes to the language of the Certificate 
of Incorporation, the Exchange represented that the Board of Governors 
will appoint a qualified ETP holder, or associated person thereof, to 
the Exchange's Business Conduct Committee at the next annual 
appointment of Business Conduct Committee members, presently scheduled 
for March 2002, and that it has authorized the Board to issue only 75 
permits.
    The Commission finds that the Exchange's proposed changes and 
representations made in Amendment No. 3 further strengthen and clarify 
the proposed rule change and raise no new regulatory issues. The 
Commission believes that permitting ETP holders to serve on the Board 
or Committees, and nominate candidates for the Board, is appropriate 
and furthers the objectives of Section 6(b)(3) of the Act, which states 
that the rules of the exchange must assure a fair representation of its 
members in the selection of its directors and administration of its 
affairs.\42\ These goals are also furthered by the Exchange's 
commitment to place an ETP holder on the Business Conduct Committee.
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    \42\ 15 U.S.C. 78f(b)(3).
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    Therefore, the Commission finds that granting accelerated approval 
to Amendment No. 3 is appropriate and consistent with Section 19(b)(2) 
of the Act.\43\
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    \43\ 15 U.S.C. 78f(b)(2).
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B. SR-Phlx-00-03

    The Commission finds good cause for approving Amendment No. 3 to 
SR-Phlx-00-03 prior to the thirtieth day after the date of publication 
of notice thereof in the Federal Register. In Amendment No. 3, the 
Exchange amended Rule 23(a) to provide that the Exchange may issue a 
maximum of 75 ETPs.
    Amendment No. 3 also clarified in proposed Rule 23(c) that ETPs 
holders are deemed to be members for purposes of eligibility 
requirements to serve on the Board or Exchange Committees and for the 
purpose of nominating candidates for the Board. The Commission believes 
that permitting ETP holders to serve on, and nominate candidates for, 
the Board or Committees is appropriate and furthers the objectives of 
Section 6(b)(3) of the Act, which states that the rules of the exchange 
must assure a fair representation of its members in the selection of 
its directors and administration of its affairs.\44\
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    \44\ 15 U.S.C. 78f(b)(3).
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    In addition, Amendment No. 3 added language to proposed Rule 23(c) 
to clarify that ETPs issued by the Exchange are not ``Regular 
Memberships'' or ``Convertible Memberships'' of the Exchange, and that 
ETP holders are not members of the Exchange for purposes of DGCL, and 
shall have no rights or privileges conferred upon members of a nonstock 
corporation solely by the DGCL. The amendment clarifies the status of 
ETPs and ETP holders.
    Amendment No. 3 also added language to proposed Rule 23(i) to make 
clear that ETP organizations will be required to post security with the 
Exchange, the proceeds of which may be applied by the Exchange upon 
termination of any ETP in the same manner as proceeds of membership 
transfers under Exchange By-Law 15-3. Exchange By-Law 15-3 provides 
that the proceeds from the transfer of a membership shall be applied by 
the Exchange to satisfy existing claims against such member. Again, the 
Commission believes that this change is merely to clarify the procedure 
that will be followed in the event an ETP is terminated.
    Finally, Amendment No. 3 makes technical non-substantive changes to 
the proposal to ensure internal consistency exists in the Exchange 
rules.
    The Commission finds that the Exchange's proposed changes in 
Amendment No. 3 further strengthen and clarify the proposed rule 
change. Therefore, the Commission finds that granting accelerated 
approval to Amendment No. 3 is appropriate and consistent with Section 
19(b)(2) of the Act.\45\
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    \45\ 15 U.S.C. 78s(b)(2).
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VI. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment Nos. 3, including whether the proposed 
amendments are 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 amendment that are 
filed with the Commission, and all written communications relating to 
the amendment 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 at the 
Commission's Public Reference Room. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
Phlx.
    All submissions should refer to File Nos. SR-Phlx-00-02 and SR-
Phlx-00-03 and should be submitted by February 8, 2002.

[[Page 2725]]

VII. Conclusion

    For all of the aforementioned reasons, the Commission finds that 
the proposed rule changes are consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to a national 
securities exchange.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\46\ that he proposed rule changes (SR-Phlx-00-02 and SR-Phlx-00-
03), as amended, are approved.
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    \46\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\47\
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    \47\ 17 CFR 200.3-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-1300 Filed 1-17-02; 8:45 am]
BILLING CODE 8010-01-M