[Federal Register Volume 67, Number 85 (Thursday, May 2, 2002)]
[Notices]
[Pages 22144-22146]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-10869]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45824; File No. SR-Phlx-2001-63]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1 and 2 Thereto by the Philadelphia Stock 
Exchange, Inc. Relating to New Product Allocations

April 25, 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 June 18, 2001, 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 Phlx. On February 28, 
2002, Phlx submitted Amendment No. 1 to the proposed rule change.\3\ On 
April 5, 2002, Phlx submitted Amendment No. 2 to the proposed rule 
change.\4\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, 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 Linda C. Christie, Counsel, Phlx, to Nancy 
J. Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated February 26, 2002 (``Amendment No. 
1''). In Amendment No. 1, Phlx: (1) proposed a definition of ``new 
product''; (2) proposed a definition of ``operating company'' for 
purposes of the proposed rule change; (3) described the Exchange's 
current criteria for its Equity Allocation, Evaluation and 
Securities Committee's and the Options Allocation, Evaluation and 
Securities Committee's (collectively ``Committees'') consideration 
when allocating equity books and options classes and that these 
criteria would still apply if the proposed changes are approved; (4) 
represented that a specialist unit must be an eligible specialist 
unit to be allocated a new product under the proposed changes; (5) 
asserted that Phlx Rule 1023 may operate to prevent specialist from 
entering into certain types of business transactions; and (6) 
elaborated on the purpose behind the proposed changes involving 
licensing or acquisition of an index, trademark, tradename, patent, 
or other intellectual property.
    \4\ See letter from Linda C. Christie, Counsel, Phlx, to Nancy 
J. Sanow, Assistant Director, Division, Commission, dated April 4, 
2002 (``Amendment No. 2''). In Amendment No. 2, Phlx removed rule 
text stating that the proposed changes would take effect 
notwithstanding anything to the contrary in Phlx Rules 500 through 
526 and amended rule text to clarify that the proposed definition of 
new product would only apply for purposes of proposed Phlx Rule 
511(b).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Phlx proposes to amend Phlx Rule 511(b), Allocations, to permit the 
Committees to allocate a new product to a specialist unit that develops 
such new product or is instrumental in developing or bringing such new 
product to the Exchange without soliciting applications from any other 
specialist units.
    The proposal would also permit the Committees, as a condition to 
allocating a book for any equity, option, or futures product that 
involves the licensing or other acquisition of an index, trademark, 
tradename, patent or other intellectual property, to: (1) Require a 
specialist unit to indemnify the Exchange and/or any third party 
against any potential liabilities associated with the product; (2) 
require a specialist unit to agree to pay the Exchange and/or any third 
party any amounts related to the product or use of the product; and (3) 
enter into any necessary agreements or undertakings with the Exchange 
and/or third party concerning the intellectual property, however, no 
such agreement or undertaking may confer any ownership or proprietary 
rights upon the specialist unit with respect to the intellectual 
property or the book.
    The text of the proposed rule change follows. Additions are 
italicized.
* * * * *
Specialist Performance Evaluation
Rule 511
    (a) No change.
    (b) Allocations.
* * * * *
    (i) New \5\ Product Specialist Unit Allocation. When an eligible 
specialist

[[Page 22145]]

unit develops or is instrumental in developing or bringing a new 
product to the Exchange, the Committee may consider such fact as a 
conclusive factor in the allocation of the new product and may allocate 
the new product to such specialist unit without soliciting any other 
specialist units pursuant to Rule 506. For the purposes of this rule, a 
new product is anything other than common stock of an operating 
company, or options or futures on common stock of an operating company 
or straight debt of an operating company. An operating company, for 
purposes of this definition, is any issuer other than one which is or 
holds itself out as being engaged solely in the business of investing 
in securities; provided that operating company shall include any issuer 
referred to in Sections 3(b), 3(c)(2)(A), 3(c)(3), 3(c)(5), 3(c)(6), 
3(c)(8) or 3(c)(9) of the Investment Company Act of 1940 or Rules 3a-2, 
3a-5 and 3a-6 thereunder (17 CFR 270. 3a-2; 17 CFR 270.3a-5 and 17 CFR 
270.3a-6, respectively).
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    \5\ The Commission notes that the proposed rule text will follow 
the current text of Phlx Rule 511(b). Telephone conversation between 
Linda S. Christie, Counsel, Phlx, and Frank N. Genco, Division, 
Commission, on April 19, 2002.
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    (ii) Licensing or Other Acquisition of a Product. In the case of 
any equity, options or futures product that involves the licensing or 
other acquisition of an index, trademark, tradename, patent or other 
intellectual property, the Committee may, as a condition of allocating 
the book, require a specialist unit (i) to indemnify and hold harmless 
the Exchange and/or any third party against any potential liabilities 
associated therewith and/or (ii) to pay or undertake to pay the 
Exchange and/or any third party any amounts related to the licensing of 
the product or any amounts related to the use of intellectual property; 
and/or (iii) to enter into any agreement or undertakings with the 
Exchange and/or any third party otherwise concerning the intellectual 
property; provided that no such agreement or undertaking shall confer 
upon such specialist unit any proprietary or ownership rights with 
respect to such intellectual property or the book.
    (c) No change.
* * * * *

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, as 
amended, 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
    Currently, Phlx Rule 511(b) provides, among other things, certain 
criteria for the Committees' consideration when allocating equity books 
and option classes to specialist units.\6\ The criteria include: the 
number and type of securities in which the applicant is currently 
registered; the personnel, capital, and other resources of the 
applicant; and the results of the evaluations of specialists conducted 
pursuant to Phlx Rule 515. Additionally, Phlx Rule 506(b) requires an 
allocation application to be submitted in writing to the Exchange's 
designated staff and shall include, at a minimum, the name and 
background of the head specialist and assistant specialist(s), and the 
units experience and capitalization demonstrating an ability to trade 
the particular equity book or options class sought. The Committee may 
also require that an application include other information such as 
system/execution levels and guarantees. In addition, the designated 
Exchange staff person will provide to the Committee any other 
information that the Committee deems relevant.\7\
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    \6\ Pursuant to Phlx Rule 501, Specialist Appointment, in order 
for a member organization to establish a specialist unit, an 
application by a member organization must be submitted and approved 
by the Committee. The application must include, among other things, 
the identity of the person who will act as head specialist, as well 
as those individuals who will act as assistant specialist. The 
application must also include the following: (1) the identity of the 
unit's staff positions and who will occupy those positions; (2) the 
unit's clearing arrangements; (3) the unit's capital structure, 
including any lines of credit; and (4) the unit's back-up 
arrangements endorsed by both parties providing the following 
support: a back-up specialist unit not associated with the 
specialist unit to provide staffing when necessary, and a substitute 
specialist unit not associated with the specialist unit (which may 
be the same as the back-up specialist unit), which shall serve as a 
substitute specialist unit in the event that the specialist unit is 
unable to perform the duties of a specialist. In short, the Exchange 
represents that securities can only be allocated to approved 
specialist units, even under this proposal.
    \7\ The Exchange represents that the Committees will continue to 
consider the same or similar criteria when allocating new products 
under the proposed rule change.
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    Phlx Rule 506(a) states in relevant part, ``When an equity book or 
option class is to be allocated or reallocated by the Committee, the 
Committee will solicit applications from all eligible specialist 
units.'' The proposal would give the Committees the ability to 
eliminate the requirement to solicit applications for a book if a 
specialist unit meets the proposed criteria respecting a particular new 
product. The Exchange represents that such specialist would, of course, 
have to be an eligible specialist unit. The proposal would also permit 
the Committees to require specialists to pay certain licensing fees, 
indemnify the Exchange and/or any third party, and enter into 
agreements regarding new product allocations.
    (a) New Product Specialist Allocation.
    The first aspect of the proposal would permit the Committees to 
allocate a new product \8\ to a specialist unit that develops a new 
product or is instrumental in developing or bringing a new product to 
the Exchange without soliciting applications from other specialist 
units. The Exchange believes that it is appropriate to modify the 
allocation process for specialist units meeting the proposed criteria 
for a new product. The purpose of the proposal is to provide an 
incentive and encourage specialist units to develop and bring new 
products to the Exchange floor, thereby increasing the amount of new 
investment products the Exchange may offer to the investing public. 
Further, the Exchange believes that the willingness of specialist units 
to invest the capital and other necessary resources associated with 
developing a new product or bringing a new product to the Exchange are 
factors the Committees should have the ability to consider as 
conclusive in allocating a new product. Although Phlx Rule 511(b) 
generally permits the Committee to consider various relevant factors, 
including product development, under the proposal, the Committee would 
be able (but not required) to view product development as a conclusive 
factor.
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    \8\ Phlx proposes to define a new product for purposes of Phlx 
Rule 511(b)(i) as anything other than common stock of an operating 
company, or options or futures on common stock of an operating 
company or straight debt of an operating company.
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    (b) Licensing or Other Acquisition of a Product.
    The second aspect of this proposal would permit the Committee to 
require certain indemnifications and agreements regarding payment and 
intellectual property.\9\ Specifically, the proposed rule would permit 
the Committees to require a specialist unit allocated any equity, 
option or futures

[[Page 22146]]

product that involves the licensing or other acquisition of an index, 
trademark, tradename, patent or other intellectual property to: (1) 
Indemnify and hold harmless the Exchange and/or any third party against 
any potential liabilities associated with the product; (2) agree to pay 
the Exchange and/or any third party any amounts related to the 
licensing of the product or use of intellectual property; and (3) enter 
into any agreements or undertakings with the Exchange and/or third 
party concerning the intellectual property; provided that no such 
agreement or undertaking shall confer upon such specialist any 
proprietary or ownership rights with respect to the intellectual 
property or the book.\10\ The Exchange believes that this, in turn, 
should cause the specialist unit to have a stronger financial stake in 
the success of the product, which may foster more aggressive marketing 
and market making.
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    \9\ Phlx notes that Phlx Rule 1023 may operate to prevent a 
specialist from entering into certain business transactions.
    \10\ If a specialist unit is unwilling to abide by these 
provisions, the Exchange would be able to solicit applications from 
other specialist units.
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    The Exchange believes that the proposal balances the interests of 
the Exchange and the specialist units by encouraging the specialist 
units to actively participate and support the development and marketing 
of equity, options, and futures products. From a business standpoint, 
many products often involve strategic risks and rewards. The Exchange 
represents that the costs involved can be both burdensome and complex, 
including legal, audit, consulting, and marketing costs, as well as 
serious opportunity costs. Further, the liability and intellectual 
property issues can be equally complex. Thus, by helping to defray 
costs to the Exchange, assure that appropriate agreements are executed, 
and address issues related to intellectual property, the proposal is 
also intended to enable the Exchange to more readily list new products.
2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with Section 6(b) of the Act,\11\ in general, and furthers 
the objectives of Section 6(b)(5) of the Act,\12\ in particular, in 
that it is designed to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect the 
investors and the public interest, because the benefit of allocating a 
new product without solicitation is limited to those specialist units 
that develop a new product or are instrumental in developing or 
bringing a new product to the Exchange. Further, the proposed rule 
change, as amended, is designed to encourage specialist units to bring 
new products to the floor, thereby, increasing the amount of new 
products available to the investing public.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change, as 
amended, will impose any 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 solicited or received with respect to the 
proposed rule change, as amended.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the Exchange consents, the Commission will:
    (A) by order approve such proposed rule change, as amended; 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, as 
amended, 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 the filing will also be available for 
inspection and copying at the principal offices of the Exchange. All 
submissions should refer to File No. SR-Phlx-2001-63 and should be 
submitted by May 23, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-10869 Filed 5-1-02; 8:45 am]
BILLING CODE 8010-01-P