[Federal Register Volume 67, Number 43 (Tuesday, March 5, 2002)]
[Notices]
[Pages 10029-10032]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-5145]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45480; File No. SR-Phlx-2002-10]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Establishing Fees for Equity Trading Permit Holders

February 26, 2002.
    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 February 6, 2002, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') 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 from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend its schedule of dues, fees and 
charges to: (1) Adopt new fees applicable to holders of equity trading 
permits (``ETPs'') and ETP organizations; \3\ (2) establish that 
certain fees, dues and charges currently applicable to members and 
member organizations will also be applicable to ETP holders and ETP 
organizations; and (3) amend the Exchange's member credit program to 
provide that monthly fees charged to ETP holders and ETP organizations 
are credit-eligible, and to clarify certain aspects of the Exchange's 
member credit program as it applies to ETPs.\4\ The text of the 
proposed rule change is available at the Phlx's Office of the Secretary 
and at the Commission.
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    \3\ The Exchange defines an ETP organization as a broker-dealer 
whose associated person has qualified the firm as an ``ETP 
organization'' pursuant to Exchange Rule 23(g).
    \4\ The fees proposed herein would be applicable to ETP holders, 
which, according to the Exchange, are members although they are not 
entitled to certain rights under Delaware corporate law. See 
Securities Exchange Act Release No. 45254 (January 9, 2002), 67 FR 
2720 (January 18, 2002) (SR-Phlx-00-03, Amendment 3, footnote 1). 
Therefore, the fees that are proposed herein to be imposed on ETP 
holders are member fees. Hence, this proposed rule change is 
effective on filing pursuant to Section 19(b)(3)(A) of the Act and 
Rule 19b-4(f)(2) thereunder.
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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 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
    On January 9, 2002, the Commission approved a proposed rule change 
to adopt Exchange Rule 23, which provides for ETPs.\5\ Specifically, 
Exchange Rule 23(a) provides that the Exchange shall issue up to 75 
ETPs outstanding from time to time. The Exchange anticipates commencing 
an ETP program in the near future. Accordingly, the purpose of the 
proposed rule change is to: (1) Establish that certain fees, dues and 
charges currently applicable to members and member organizations will 
be applicable to ETP holders and ETP organizations under Exchange Rule 
23; (2) adopt new fees applicable to members by virtue of being ETP 
holders and to ETP organizations; and (3) amend the Exchange's member 
credit program to provide that monthly fees charged to ETP holders and 
ETP organizations are

[[Page 10030]]

credit'eligible and to clarify certain aspects of the Exchange's member 
credit program as it applies to ETPs. Therefore, the Exchange proposes 
to amend Appendix A to the Exchange's Schedule of Dues, Fees and 
Charges to reflect the changes discussed herein.\6\
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    \5\ See Securities Exchange Act Release No. 45254 (January 9, 
2002), 67 FR 2720 (January 18, 2002)(approving SR-Phlx-00-02 and SR-
Phlx-00-03). The Exchange notes, as a preliminary matter, that ETPs 
are not required in order to trade equities on the Exchange. ETPs 
are simply being made available pursuant to Exchange Rule 23 as an 
alternative to owning or leasing a membership on terms and 
conditions that reflect the Exchange's reasonable business judgment.
    \6\ The Exchange states that it intends to separately file a 
proposed rule change to adopt an Application Fee for applicants for 
ETPs.
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    As discussed further below, the purpose of the proposed rule change 
is to generate revenue for the Exchange in order to enable it to 
provide a marketplace for its members and ETP holders. The Exchange 
anticipates that in permitting ETP Monthly Fees to be ``credit 
eligible,'' ETPs would become more attractive because they would enable 
ETP organizations, which are also member organizations, to maximize the 
value of the monthly member credits extended to their qualified 
members.\7\ In addition, the Exchange believes that making ETP Monthly 
Fees ``credit-eligible'' should free up funds for trading activity on 
the Exchange that would otherwise be used for the payment of such fees.
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    \7\ The term ``qualified member'' is defined in the notice 
adopting the member credit for 36 months. See Securities Exchange 
Act Release No. 44292 (May 11, 2001), 66 FR 27715 (May 18, 2001). 
The term includes Phlx members who own the membership by which they 
are a member (``member owners'') and certain other categories of 
members described in the notice.
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A. Applicability of Existing Member/Member Organization Fees and 
Charges

    Inapplicable Existing Fees. Exchange Rule 23(e) provides that an 
ETP holder shall be subject to the Exchange's fees and other charges, 
as applicable, provided that an ETP holder shall not be subject to 
annual membership dues, technology fees or capital assessments. 
Additionally, the Exchange would not charge its current $1500.00 
Initiation Fee to new ETP holders, whether or not they were previously 
members, Foreign Currency Option (``FCO'') participants or approved 
lessors.\8\
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    \8\ The Exchange proposes to add a footnote to the fee schedule 
to provide that the Exchange's existing Initiation Fee would not be 
imposed on ETP holders. For members, the Initiation Fee is 
applicable upon admission to membership and is thus a member fee. 
See Securities Exchange Act Release No. 20651 (February 14, 1984), 
49 FR 6817 (February 23, 1984). The Exchange proposes a different 
initiation fee, discussed below (the ``ETP Organization Initiation 
Fee''), with respect to ETP organizations.
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    The Exchange also proposes to add clarifying language to its fee 
schedule with respect to the Trading Floor Personnel Registration Fee, 
which is imposed on member/participant organizations for individuals 
who are employed by such member/participant organizations and who work 
on the Exchange's trading floor, such as clerks, interns, stock 
execution clerks and other associated persons, but who are not 
registered as members or participants. The Exchange proposes to add 
language to a footnote in order to clarify that this fee is not to be 
billed to ETP organizations with respect to its ETP holders who work on 
the Exchange's trading floor.
    Applicable Existing Fees. Except as indicated above, all other 
Exchange fees and charges applicable to Exchange members and member 
organizations would apply to ETP holders and ETP organizations.\9\ 
However, ETP organizations, which are also member organizations by 
virtue of holding memberships, and which are subject to fees and 
charges assessed against member organizations, would not also be 
assessed such fees and charges a second time in their separate capacity 
as ETP organizations.\10\
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    \9\ See supra, note 4.
    \10\ Exchange Rule 23(g) provides that ``[a]n individual ETP 
holder who is associated with a broker-dealer shall qualify such 
broker-dealer as an ETP firm or ETP corporation (either, an `ETP 
Organization')''. Since it is possible that an existing member 
organization may have associated persons who are members at the same 
time it has associated persons who are ETP holders, it is possible 
that a firm will be both a member organization and an ETP 
organization at the same time. Fees currently assessed on ``member 
organizations'' (such as the Examinations Fee) would not be assessed 
twice because of this dual status.
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B. New Fees Not Applicable to Current Members

    The Exchange proposes to adopt a number of new fees which are to be 
applicable to ETP holders and ETP organizations.
1. ETP Monthly Fees
    The Exchange proposes an Off-Floor ETP Fee, a Regular ETP RCS Fee, 
a Regular ETP 3-Seat Fee, and a Regular ETP Fee (collectively, the 
``ETP Monthly Fees'') as described below.
    Off-Floor ETP Fee. An Off-Floor ETP Fee of $500.00 per month would 
be charged for Off-Floor ETP holders.
    Regular ETP RCS Fee. A Regular ETP RCS Fee of $1,000.00 per month 
would be charged in lieu of the Regular ETP Fee for ETP holders whose 
Exchange business is limited to operating as a remote competing 
specialist.\11\
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    \11\ See Exchange Rule 461, PACE Remote Specialist; See also, 
Securities Exchange Act Release No. 45184 (December 21, 2001) 67 FR 
622 (January 4, 2002) (approving SR-Phlx-2001-98).
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    Regular ETP 3-Seat Fee. A Regular ETP 3-Seat Fee of $1,350.00 per 
month would be charged for Regular ETP holders and ETP organizations in 
lieu of the Regular ETP Fee if the ETP organization has at all times at 
least three associated persons who are members of the Exchange by 
virtue of a membership, whether owned or leased.\12\ For every 3 
memberships, up to 3 ETPs would qualify for this lower rate.
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    \12\ The Exchange states that these members would not need to 
conduct business on the Exchange's physical trading floor and need 
not be ``qualified members'' as that term is defined for purposes of 
the Exchange's member credit program.
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    Regular ETP Fee. A Regular ETP Fee of $3,500.00 per month would be 
charged for Regular ETP holders and ETP organizations, which are not 
eligible for the lower Regular ETP 3-Seat Fee or Regular ETP RCS Fee.
2. Other New Fees
    ETP Organization Initiation Fee. A non-recurring ETP Organization 
Initiation Fee of $1,000.00 would be charged for an ETP organization 
when it is first qualified as such if it is not, at the time it first 
becomes so qualified, an FCO participant organization or member 
organization. For instance, if an existing member organization seeks an 
ETP, then no such fee applies because that member organization has 
already paid a membership-related Initiation Fee. At the same time, a 
completely new organization which gets an ETP and thereby becomes an 
ETP organization must pay this fee. The Exchange intends for this fee 
to cover the Exchange's expenses associated with a new firm commencing 
Exchange business.\13\
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    \13\ Like the Exchange's current Initiation Fee, the proposed 
ETP Organization Initiation Fee would apply after the organization 
has become an ETP Organization and is thus imposed on a ``member'' 
organization.
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    ETP Intra-Firm Transfer Fee. Finally, the Exchange proposes that a 
$500.00 fee would apply to intra-firm transfers of ETPs.\14\
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    \14\ The Exchange states that ETPs are not transferable except 
within the ETP organization as provided in Exchange Rule 23(f).
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C. Credit-Eligibility of ETP Monthly Fees

    ETP holders would not, by virtue of the ETP, be holders of 
equitable title to Exchange memberships and thus would not be subject, 
by virtue of the ETP, to the Exchange's $1,500.00 capital funding 
fee.\15\ Furthermore, an ETP holder who is also an owner of an Exchange 
membership would not be entitled, by virtue of the ETP, to the monthly 
credit of up to $1,000.00 to be applied against certain fees, dues, 
charges and other amounts owed to the Exchange in connection with the 
ETP.\16\

[[Page 10031]]

(These dues, fees and charges are identified on the Exchange's fee 
schedule by a mark which ``denotes fee eligible for monthly credit of 
up to $1,000.'')
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    \15\ Exchange membership owners (also referred to as seat 
owners) are assessed a monthly capital funding fee of $1,500.00. See 
Securities Exchange Act Release No. 42993 (June 29, 2000), 65 FR 132 
(July 10, 2000).
    \16\ See Securities Exchange Act Release No. 44292 (May 11, 
2001), 66 FR 27715 (May 18, 2001). However, consistent with the 
Exchange's current general practice of invoicing the member 
organization rather than the member, thus aggregating the members' 
credit-eligible fees, a member organization which is also an ETP 
organization may include credit-eligible charges incurred by an ETP 
holder in the total amount that the member organization may offset 
with member credits. At no time shall the aggregate amount of member 
credits available to the member organization exceed $1,000.00 per 
membership per month.
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    The Exchange is proposing that the ETP Monthly Fees be made 
``credit-eligible'' so that a member organization's aggregate monthly 
member credits may be applied to them.\17\
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    \17\ The Exchange notes that this would represent a change to 
the currently-approved member credit program, which excepted ``any 
fees paid by equity trading permit holders respecting any trading 
permits the Exchange may issue'' from the definition of ``credit-
eligible fees''. See Securities Exchange Act Release No. 44292 (May 
11, 2001), 66 FR 27715 (May 18, 2001).
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(2) Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act,\18\ in general, and furthers the 
objectives of Section 6(b)(4),\19\ in particular, in that it provides 
for the equitable allocation of reasonable dues, fees, and other 
charges among its members. Also for the reasons described below, the 
Exchange believes that the application of the fees, dues and charges as 
described herein to ETP holders and ETP organizations is consistent 
with the requirement of Section 6(b)(5) of the Act,\20\ which requires 
that the rules of the Exchange not be designed to permit unfair 
discrimination between customers, issuers, brokers or dealers.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(4).
    \20\ 15 U.S.C. 78f(b)(5).
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1. ETP Monthly Fees
    By assessing ETP Monthly Fees, the Exchange states that it is 
requiring ETP holders to make an economic contribution to the Exchange, 
as members and holders of equitable title have done in the past and 
continue to do. The Exchange believes that this economic contribution 
is reasonable and equitable in view of the fact that the Exchange 
provides the benefits of an Exchange marketplace to both members and 
ETP holders alike.
    In light of the limitations on the number of ETPs the Exchange 
currently has authority to issue under Rule 23(a) (i.e., 75), and the 
Exchange's prudential concerns relating to the potential effect on 
membership prices if existing members in large numbers were to choose 
to sell their seats to acquire permits, the Exchange has chosen to 
establish a fee structure for ETPs that the Exchange believes will 
allow the benefit of the program to the Exchange to be maximized while 
treating various constituencies fairly.
    Off-Floor ETP Monthly Fees. The Exchange states that it wants to 
encourage order flow providers to send business to the Exchange. An 
Off-Floor ETP Monthly Fee of only $500.00 is designed to provide an 
incentive (or, stated otherwise, to remove the disincentive of a high 
access fee) to send order flow to the Exchange. Under Exchange Rule 23, 
the Exchange business of Off-Floor ETP holders is limited to the 
provision of order flow. Off-Floor ETP holders are not eligible to do 
business on the Exchange's physical trading floor and are not eligible 
to conduct a specialist business. Because an Off-Floor ETP holder's 
trading rights are circumscribed in this respect, and because an ETP 
holder operating from the Exchange floor would be able to take 
advantage of more Exchange facilities, utilizing Exchange resources and 
benefiting from the advantages floor presence affords, the Exchange 
believes that it is fair to charge less for Off-Floor ETP holders' 
trading rights than for trading rights which may be exercised by a 
Regular ETP holder, either at the Regular ETP Fee rate, the Regular ETP 
RCS Fee rate, or the Regular ETP 3-Seat Fee rate, as applicable.
    Regular ETP RCS Fee. The Exchange states that it also wants to 
encourage the success of its Remote Competing Specialist Initiative 
program (``RCSI''), and is offering a lower fee than will be available 
to on-floor ETP holders to remote specialists in order to induce 
broker-dealers to participate in the RCSI program as remote 
specialists. The Exchange represents that the availability of a Regular 
ETP RCS Fee rate which is lower than the Regular ETP Fee rate or the 
Regular ETP 3-Seat Fee rate is designed to accomplish what the Exchange 
believes is a reasonable and legitimate business objective. The monthly 
Regular ETP RCS Fee also reflects the fact that remote specialists will 
not take up space and resources on the Phlx trading floor or use floor 
services to the same extent as Phlx floor-based specialists. The 
Exchange believes that it is fair that remote competing specialists be 
permitted to acquire trading rights at less cost than an ETP holder 
trading on the Exchange floor and utilizing Exchange resources and 
benefiting from the advantages floor presence affords.
    Regular ETP 3-Seat Fee and Regular ETP Fee. The Exchange also 
represents that a goal of the ETP program is to make ETPs available to 
the Exchange's existing floor members without causing a drastic decline 
in seat values. The Exchange believes that the requirement that 
existing members retain 3 seats in order to qualify for the lower 
Regular ETP 3-Seat Fee will allow the Exchange to do this while 
creating a disincentive for members to sell all their memberships and 
replace them with ETPs.
    The Exchange recognizes that seat owners who are not themselves 
members traditionally have, while benefiting from their memberships, 
also made contributions to the Exchange by making it possible for 
certain members (in particular, lessee-members) to trade without the 
member being first required to make a large capital investment in an 
Exchange membership. In creating the ETP program, the Exchange 
represents that it has carefully considered the effects on memberships, 
and has similarly done so respecting the fee structure proposed herein. 
Specifically, the Exchange states that its business strategy includes a 
concern not to unnecessarily create a sudden and drastic dislocation in 
seat prices. Accordingly, the lower Regular ETP 3-Seat Fee is designed 
to permit some of the ETPs to be issued to existing floor members while 
creating an incentive for firms which choose to take advantage of ETPs 
to cause legal title to 3 memberships to be retained by its members. 
The Exchange believes that making 3 ETPs available at the reduced ETP 
3-Seat Fee for each 3 memberships a member organization maintains will 
result in the optimal mix of Exchange members and ETP holders.
    The Exchange states that SROs have filed exchange fee and credit 
arrangements that do not treat all members (or other persons covered by 
Sections 6(b)(4) and (5)) equally, such as credits and discounts based 
on transaction volume, fees based upon the usage by certain members of 
equipment or other services or resources of an exchange, and fee 
structures that distinguish among the various activities of persons and 
firms.\21\ Such measures

[[Page 10032]]

are designed to promote and encourage certain behaviors.\22\ In the 
case of the Regular ETP 3-Seat Fee, this fee is being made available as 
an alternative to the Regular ETP Fee to member organizations that are 
contributing to the value of Exchange memberships. The Exchange, in its 
business judgment, believes that to a certain degree the value of 
Exchange memberships is important to the well-being of the Exchange as 
a whole. The Exchange believes that the Regular ETP 3-Seat Fee is 
reasonably designed to further those interests and is available to any 
ETP organization by changing the manner in which it secures trading 
rights on the Exchange and the number of memberships it maintains.
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    \21\ See, e.g., Securities Exchange Act Release No. 44292 (May 
11, 2001), 66 FR 27715 (May 18, 2001) (adopting a monthly credit of 
up to $1,000 to qualified members for an aggregate period of 36 
months). The Exchange clarified that SRO fee filings made pursuant 
to Section 19(b)(3)(A) of the Act are noticed, and not approved, by 
the Commission, but are rather effective upon filing with the 
Commission. See telephone conversation between Carla Behnfeldt, 
Director, Phlx, and Florence Harmon, Senior Special Counsel, 
Division of Market Regulation (``Division''), Commission, on 
February 26, 2002.
    \22\ The Exchange clarified certain language regarding its views 
on the effects of such fees. See telephone conversation between 
Carla Behnfeldt, Director, Phlx, and Florence Harmon, Senior Special 
Counsel, Division, Commission, on February 26, 2002.
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2. Other Fees
    With respect to the applicability and inapplicability of the 
existing fees to ETP holders and ETP organizations, the Exchange 
represents that the proposal is reasonable and equitable because the 
Exchange believes that the proposal generally treats ETP holders/
organizations the same as other members/member organizations doing 
business on the Exchange in terms of fees assessed on the basis of 
transactions or the use of particular Exchange facilities or services. 
For instance, ETP holders executing transactions on the equity floor 
will be subject to equity transaction fees such as the equity 
transaction value charge. Similarly, ETP holders who utilize post space 
will be subject to post fees. By extending the applicability of fees 
currently applicable to existing members and member organizations 
(except as provided herein) to ETP holders and ETP organizations, the 
Exchange believes that ETP holders and ETP organizations be treated 
equally with members and member organizations doing business on the 
Exchange in terms of fees assessed on the basis of transactions or the 
use of particular Exchange facilities or services.
    The Exchange believes that the one-time $1,000.00 ETP Organization 
Initiation Fee is fair and equitable. By assessing a one-time $1,000.00 
ETP Organization Initiation Fee for new ETP organizations (and by not 
assessing the $1,500.00 Initiation Fee for new ETP holders) the 
Exchange states that it is affording ETP organizations new to the 
Exchange an initial comparative fee advantage relative to new members 
associated with member organizations. The Exchange believes this 
advantage is reasonable, however, in that it is designed to result in 
an optimal mix of ETPs and memberships as determined by the Exchange in 
the exercise of its reasonable business judgment. This comparative 
initial advantage is also reflective of the fact that ETP holders will 
not have voting privileges and that ETPs will not be transferable, 
except intra-firm to the extent permitted by Exchange Rule 23.
    The Exchange proposes a $500.00 ETP Intra-Firm Transfer Fee be 
charged in the context of ETP transfers, which do not involve the 
transfer of legal or equitable title. ETP transfers are permitted on an 
intra-firm basis to the extent provided in Exchange Rule 23. The 
Exchange believes that this transfer fee is reasonable and equitable 
because the Exchange would devote administrative resources to ETP 
transfers as it currently does with transfers of legal and equitable 
title to memberships.
3. Credit-Eligibility
    With respect to the credit eligibility of ETP Monthly Fees, the 
Exchange believes that this aspect of the proposal is reasonable and 
equitable, because ETP Monthly Fees will be ``credit-eligible'' across-
the-board, such that any member organization which incurs them may 
apply any available member credits to them. By making the ETP Monthly 
Fees ``credit-eligible'' the Exchange intends to enhance the 
attractiveness of ETPs, which the Exchange believes is an appropriate, 
nondiscriminatory business strategy.

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

    The foregoing rule change establishes or changes a due, fee, or 
charge imposed by the Exchange and, therefore, has become effective 
upon filing pursuant to section 19(b)(3)(A)(ii) of the Act \23\ and 
Rule 19b-4(f)(2) hereunder.\24\ At any time within 60 days of the 
filing of such proposed rule change, the Commission may summarily 
abrogate such rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purpose of 
the Act.
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    \23\ 15 U.S.C. 78(s)(b)(3)(A)(ii).
    \24\ 17 CFR 240.19b-4(f)(2).
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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 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 Section. Copies of such filing will also 
be available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-Phlx-2002-10 and 
should be submitted by March 26, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-5145 Filed 3-4-02; 8:45 am]
BILLING CODE 8010-01-P