[Federal Register Volume 67, Number 109 (Thursday, June 6, 2002)]
[Notices]
[Pages 39093-39095]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-14140]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45996; File No. SR-Phlx-2002-13]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the Philadelphia Stock Exchange, Inc. Relating to Security Required for 
and Termination of Equity Trading Permits

May 29, 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 March 1, 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 and 
II below, which Items have been prepared by the Exchange. The Exchange 
filed Amendment No. 1 on April 2, 2002.\3\ 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 Carla Behnfeldt, Director, Legal Department 
New Product Development Group, Phlx, to Christopher Solgan, Law 
Clerk, Division of Market Regulation (``Division''), Commission, 
dated April 2, 2002 (``Amendment No. 1''). In Amendment No. 1, the 
Exchange amended the propose rule text to reflect amendments made 
under SR-Phlx-2002-19 filed pursuant to Section 19(b)(3)(a)(ii) of 
the Act and Rule 19b-4(f)(2) thereunder. In addition, the Exchange 
requested that, rather than being filed pursuant to Section 
19(b)(3)(A)(ii) of the Act, under which it was originally filed, 
that the proposed rule change now be filed pursuant to Section 
19(b)(3)(iii) of the Act and Rule 19b-4(b)(6) thereunder.
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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 paragraph (i) of Exchange Rule 23, 
Equity Trading Permits (``ETPs''), to provide that ETP organizations, 
which are also member organizations holding equitable title to a 
membership, would not be required to provide the required security and 
to add new subsection (i)(iv) of Exchange Rule 23 to provide that the 
proceeds of any transfer of a membership by a member organization may 
be applied by the Exchange to satisfy any claims of the Exchange, Stock 
Clearing Corporation of Philadelphia (``SCCP''), or other member firms 
of the Exchange as described in Exchange By-Law 15-3 against the member 
organization's ETP holders. The Exchange also proposes to amend 
Exchange Rule 50, Late Charge, in order to allow the Exchange to 
terminate an ETP 14 days after the ETP holder is suspended. The text of 
the proposed rule change appears below. New text is in italics; 
deletions are in [brackets].

Rule 23

Equity Trading Permits.
    (a)-(h) No Change.
    (i) Security For Exchange Fees and Other Claims.
    (i) Each ETP organization (except any ETP organization which is 
also a member organization holding equitable title to a membership, 
legal title to which is held by an associated person of such member 
organization) shall be required to provide security to the Exchange for 
the payment of any claims owed to the Exchange, to Stock Clearing 
Corporation of Philadelphia, and to other member firms of the Exchange, 
upon termination of any ETP issued to an individual affiliated with the 
ETP organization, as though such security were the proceeds from the 
transfer of a membership. This security may consist of:
    (A) a deposit with the Exchange in the amount of $50,000 to be 
held, together with all other such deposits made pursuant to this rule, 
in a segregated account, the proceeds of which may be applied by the 
Exchange upon termination of any ETP issued to an individual affiliated 
with such ETP organization in the same manner as proceeds of membership 
transfers under By-Law 15-3, and which may be invested by the Exchange 
in United States government obligations or any other investments which 
provide safety and liquidity of the principal invested, interest or 
income on which deposit shall be paid periodically by the Exchange to 
such ETP organization;
    (B) an acceptable letter of credit from a financial institution 
acceptable to the Exchange, in the amount of $50,000, proceeds of which 
may be applied by the Exchange upon termination of any ETP issued to an 
individual affiliated with such ETP organization in the same manner as 
proceeds of membership transfers under By-Law 15-3; or;
    (C) an acceptable guaranty by a financial institution acceptable to 
the Exchange guaranteeing the payment by the ETP organization, upon 
termination of any ETP issued to any individual affiliated with such 
organization, of any claims listed in By-Law 15-3 up to $50,000.
    (ii) The security required to be provided pursuant to this rule 
shall not be calculated based upon the number of ETPs issued to 
affiliates of the ETP organization, but shall be the same amount 
regardless of the number of such ETPs issued to its affiliates. At such 
time as no ETP holders remain associated with the ETP organization, the 
proceeds of any remaining security may be applied by the Exchange in 
the same manner as proceeds of membership transfers under By-Law 15-3, 
and upon execution by the ETP holder and ETP organization of releases 
satisfactory to the Board of Governors.
    (iii) The obligation to provide security pursuant to this rule 
shall not apply to ETP organizations which have been in good standing 
at the Exchange as member organizations, participant organizations, or 
ETP organizations for the previous year. Any security provided pursuant 
to this Rule 23(i) shall be returned at such time as the ETP 
organization shall have been in good standing as either a member 
organization, participant organization, or an ETP organization for one 
year.
    (iv) The proceeds of any transfer of a membership by a member 
organization may be applied by the Exchange to satisfy any claims of 
the Exchange, Stock Clearing Corporation of Philadelphia, or other 
member firms of the Exchange as described in By-Law 15-3 against the 
member organization's ETP holders.

Rule 50. Late Charge

    There shall be imposed upon any member, member organization, 
participant or participant organization or an employee thereof using 
the facilities or services of the Exchange, or enjoying any of the 
privileges therein, a late charge for dues, foreign currency options 
users' fees, fees, other charges, fines, and/or other monetary 
sanctions or other monies due and owed the Exchange and not paid within 
thirty (30) days after date of original invoice. The late charge is set 
at a rate of one and one half percent (1.5%) simple interest for each 
thirty-day period or fraction thereof, calculated on a daily basis, 
during which accounts payable to the Exchange remain outstanding. An 
account is not subject to a late charge until the unpaid balance 
remains outstanding at least thirty-one (31) days. The Finance 
Committee or its designee may waive the amount of the late charge, or a 
portion thereof, if the

[[Page 39094]]

amount falls within guidelines established by the Board of Governors. 
If any member, or member organization, participant or participant 
organization or an employee thereof shall fail to pay such fines and/or 
other monetary sanctions, or other monies due and owed the Exchange, 
including late charges, within fifty (50) days from the date of the 
original invoice, the Controller shall notify the Finance Committee, 
which shall take such action as it deems appropriate. Should such 
amounts due exceed $10,000, the Finance Committee shall refer the 
matter to the Board of Governors which shall take such action as it or 
its designee deems appropriate, including, after due notice, suspending 
the member, member organization, participant or participant 
organization or employee thereof until payment of the entire 
outstanding account balance is made in full to the Exchange of such 
member's or member organization's entire outstanding account balance of 
all dues, fees, fines, or other charges imposed by the Exchange. If all 
amounts due and owing to the Exchange, Stock Clearing Corporation of 
Philadelphia (``SCCP'') and other member firms of the Exchange with 
respect to an equity trading permit (``ETP'') are not paid to the 
Exchange, SCCP or to the relevant member firm of the Exchange, as the 
case may be, within 14 days following suspension of the ETP, the Board 
of Governors or its designee may terminate the ETP.

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 III 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
    The purpose of the proposed rule change is to amend paragraph (i) 
of Exchange Rule 23, Equity Trading Permits, and to amend Exchange Rule 
50, Late Charge, in order to make changes to conform to the Exchange's 
current business plan respecting ETPs.\4\
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    \4\ Exchange Rule 23, which provides for ETPs, was approved by 
the Commission on January 9, 2002. 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).
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Exchange Rule 23(i)

    Exchange Rule 23(i) requires ETP organizations to provide security 
for the payment of certain claims owed by ETP holders upon termination 
of any ETP issued to an individual affiliated with the ETP 
organization, as though such security were proceeds from the transfer 
of a membership. The security is in the amount of $50,000 and may take 
the form of a letter of credit, a guaranty by an acceptable financial 
institution, or a cash deposit. Exchange Rule 23(i)(i)(A) and (B) 
provide that the proceeds of the cash deposit or letter of credit shall 
be applied in the same manner as proceeds of membership transfers under 
Exchange By-Law 15-3. Likewise, Exchange Rule 23(i)(i)(C) provides that 
the guaranty must be made by a financial institution acceptable to the 
Exchange and must guaranty payment by the ETP organization of any 
claims listed in Exchange By-Law 15-3 up to $50,000.\5\ The security 
requirement of Exchange Rule 23(i) does not apply to ETP organizations 
which have been in good standing at the Exchange as member 
organizations, participant organizations or ETP organizations for the 
previous year.\6\
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    \5\ Exchange By-Law 15-3, Disposition of Proceeds of Sale of 
Membership, provides that upon certain transfers of a membership, 
the proceeds thereof shall be applied to certain amounts owed to the 
Exchange, to SCCP or Options Clearing Corporation, and to other 
members or member firms of the Exchange.
    \6\ For purposes of Rule 23(i)(iii), a member organization, 
participant organization or ETP organization will be considered to 
have been in good standing for the past year if (1) it has been a 
member organization, participant organization or ETP organization 
for the past year; (2) it is not currently suspended and has not 
been suspended at any time during the previous year; and (3) it is 
not currently in arrears respecting Exchange dues, fees, charges, 
fines or other monies due and owed to the Exchange, has not been 
delinquent in the payment of any such amounts more than three times 
in the past year, and has not been more than 30 days in arrears with 
respect to such amounts at any time during the past year. Telephone 
conversation between Carla Behnfeldt, Director, Legal Department, 
New Product Development Group, Phlx, Florence Harmon, Senior Special 
Counsel, Division, Commission and Christopher Solgan, Law Clerk, 
Division, Commission on May 24, 2002.
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    The Exchange states that the proposed amendment to Exchange Rule 
23(i)(i) would narrow the applicability of the security requirement. 
ETP organizations, which are also member organizations holding 
equitable title to a membership (as opposed to conducting Exchange 
business solely with ETPs), legal title to which is held by an 
associated person of such member organization, would not be required to 
provide the security. Additionally, proposed subsection (i)(iv) of 
Exchange Rule 23 would provide that the proceeds of any transfer of a 
membership by a member organization may be applied by the Exchange to 
satisfy any claims of the Exchange, SCCP or other member firms of the 
Exchange as described in Exchange By-Law 15-3 against the member 
organization's ETP holders.
    Finally, the Exchange proposes to make a clarifying change to the 
first sentence of subparagraph (i) of Exchange Rule 23(i) so as to 
conform that sentence to sections (A), (B) and (C) of Exchange Rule 
23(i)(i). Specifically, the proposed amendments to the first sentence 
of Exchange Rule 23(i) would clarify that the security is intended to 
cover payment of any claims owed to SCCP and to other member firms of 
the Exchange, in addition to payment of any claims owed to the Exchange 
itself.

Exchange Rule 50

    The purpose of the proposed amendment to Exchange Rule 50 is to 
allow the Board of Governors or its designee to terminate an ETP 14 
days after the ETP holder is suspended. Pursuant to Exchange Rule 
23(a), the Exchange has authority to issue up to 75 ETPs outstanding 
from time to time. Exchange Rule 23(h) provides that an ETP holder may 
be suspended or expelled on the same basis as a member. The Exchange 
believes that it is necessary for it to have the ability to terminate 
an ETP that has been suspended, so that the Exchange may re-issue the 
ETP to another applicant. The Exchange believes that this is 
particularly important because the Exchange is limited to having only 
75 ETPs outstanding from time to time pursuant to Exchange Rule 23(a). 
According to the Exchange, this proposed amendment to Exchange Rule 50 
is intended to provide for this termination right.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\7\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\8\ in that it is designed to 
promote just and equitable principles of trade; to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing

[[Page 39095]]

information with respect to, and facilitating transactions in 
securities; to remove impediments to and perfect the mechanism of a 
free and open market and a national market system; and, in general, to 
protect investors and the public interest; and is not designed to 
permit unfair discrimination between customers, issuers, brokers or 
dealers for the reasons set forth below.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Exchange believes that the proposed elimination 
of the security requirement for certain member organizations under 
Exchange Rule 23(i)(i) should enhance the attractiveness of ETPs to 
those organizations. The language proposed to be added to Exchange Rule 
23(i) in proposed subsection (iv) would provide, with respect to such 
member organizations, that the proceeds of any transfer of a membership 
by a member organization may be applied by the Exchange to satisfy any 
claims of the Exchange, SCCP or other member firms of the Exchange as 
described in Exchange By-Law 15-3 against the member organization's ETP 
holders. In view of the availability of membership proceeds, the 
Exchange believes that it is fair and appropriate not to require such 
member organizations to provide the same security under Exchange Rule 
23(i) as required by ETP organizations without a membership subject to 
Exchange By-Law 15-3.
    In addition, the Exchange believes that the proposed amendment to 
Exchange Rule 50 to enable the Exchange to terminate an ETP 14 days 
following suspension, and thus allowing it to reissue the ETP to 
another applicant who may use it to trade would enhance liquidity on 
the Exchange. By permitting the Exchange to terminate ETPs 14 days 
following suspension, the Exchange believes that this amendment should 
enable it to offer more competitive markets than would be possible if 
ETPs were permitted to remain in a state of suspension, without trading 
activity, for a lengthier period of time.

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 solicited or received with respect to the 
proposed rule change.

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

    The foregoing rule change, as amended, has become effective 
pursuant to Section 19(b)(3)(A) of the Act \9\ and subparagraph (f)(6) 
of Rule 19b-4 \10\ thereunder because it does not: (i) significantly 
affect the protection of investors or the public interest; (ii) impose 
any significant burden on competition; (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate; and the Exchange has given the Commission 
written notice of its intention to file the proposed rule change at 
least five business days prior to filing. 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 purposes of 
the Act.\11\ Lastly, the Commission notes that the Exchange has 
requested that the Commission waive the 30-day operative date.\12\
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
    \11\ For purposes of calculating the 60-day abrogation date, the 
Commission considers the 60-day period to have commenced on April 2, 
2002, the date the Exchange filed Amendment No. 2.
    \12\ See Amendment No. 1, supra note 3. Because the Commission 
staff sought clarifications, which the Phlx gave on May 24, 2002, 
see supra note 6, the Commission notes that it has been more that 30 
days from when the Exchange submitted this filing and its 
publication in the Federal Register. Thus, the 30-day operative date 
has passed.
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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, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW, Washington, 
DC 20549-0609. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying at the Commission's Public Reference Room. 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-2002-13 and should be submitted by June 27, 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. 02-14140 Filed 6-5-02; 8:45 am]
BILLING CODE 8010-01-P