[Federal Register Volume 67, Number 125 (Friday, June 28, 2002)]
[Notices]
[Pages 43693-43694]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-16347]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46098; File No. SR-PCX-2002-11]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Pacific Exchange, Inc. To Limit the Number of Exchange 
Memberships That Any Person, Associated Person, or Group of Associated 
Persons May Own

June 20, 2002.

I. Introduction

    On February 6, 2002, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934

[[Page 43694]]

(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
limit the number of exchange memberships that any person, associated 
person, or group of associated persons may own. The proposed rule 
change was published for comment in the Federal Register on April 30, 
2002.\3\ The Commission received three comments on the proposed rule 
change.\4\ In addition, the PCX submitted one letter in response to 
comments.\5\ This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 45793 (April 22, 2002), 
67 FR 21315 (April 30, 2002).
    \4\ Letters from Paul Liang, Managing Member, PBL Partners, LLC, 
to Jonathan G. Katz, Secretary, Commission, dated March 8, 2002 
(``Liang Letter''); David J. Stern, Esquire, to Jonathan G. Katz, 
Secretary, Commission, dated March 20, 2002 (``Stern Letter''); and 
Craig Kinda, Seat Owner, to Jonathan G. Katz, Secretary, Commission, 
dated March 22, 2002 (``Kinda Letter'').
    \5\ Letter from Michael T. Lempres, Executive Vice President, 
General Counsel, and Corporate Secretary, PCX, to Ms. Nancy J. 
Sanow, Assistant Director, Division of Market Regulation, 
Commission, dated May 31, 2002 (``PCX Letter'').
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II. Description of Proposal

    The rule change adopts PCX Rule 1.21(d), which will limit to 15% 
the number of Exchange memberships that any person, associated person, 
or group of associated persons may directly or indirectly beneficially 
own, or control the voting rights of. In addition, the rule change 
permits exceptions to the 15% limit if they are expressly authorized by 
the Exchange's Board of Governors (``Board'') through a two-thirds 
majority of those Governors voting at a meeting at which a quorum is 
present, provided that such authorization must be approved by not less 
than a majority of all Governors. In its filing, the Exchange 
represented that it currently has 552 authorized PCX memberships and 
that the seat ownership limit under the rule change would be 82.

III. Summary of Comments and Response to Comments

    As noted above, the Commission received three comment letters 
regarding the proposed rule change. All of the commenters opposed the 
rule change. In addition, the PCX submitted a letter in response to 
comments.
    All of the commenters asserted that the proposed rule change would 
entrench the PCX's current management, which the commenters maintain is 
responsible for a drop in the value of PCX memberships. In addition, 
two commenters asserted that the PCX has not fulfilled a promise to 
stabilize seat prices after the sale of its equity floor to 
Archipelago.\6\ Two commenters expressed concerns over the PCX's 
continuation of the collection of payment for order flow and the 
reinstatement of a monthly assessment of $750.00 on empty seats.\7\ One 
commenter also expressed concern about being forced to sell seats at a 
loss in order to comply with the proposed rule change.\8\
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    \6\ Liang Letter and Stern Letter.
    \7\ Liang Letter and Stern Letter.
    \8\ Stern Letter.
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    In response, the PCX pointed out that all of the comments were 
submitted on behalf of persons who own Exchange seats as an investment 
and do not trade securities on the exchange. With respect to the 
comments regarding payment for order flow, the monthly assessment, and 
stabilizing seat prices after the Archipelago transaction, the PCX 
stated that such concerns are not relevant to whether the proposed rule 
change should be approved.
    Two commenters asserted that the exception provision was vague 
because it gives the Board discretion to grant exceptions to the 15% 
limit without specifying conditions for those exceptions.\9\ In 
response, the PCX asserted that the Board has a legal obligation to 
fairly and legitimately exercise its authority considering the best 
interest of the Exchange. The PCX also asserted that the Board would 
not be permitted to arbitrarily enforce or waive any Exchange rule for 
the sole benefit or detriment of one group or individual.
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    \9\ Liang Letter, Stern Letter.
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    One commenter maintained that the proposed rule change would impose 
a change that would fundamentally affect the rights of owners without 
the same 75% majority vote required to change PCX Constitution. In 
response, the PCX asserted that the proposed rule change amends PCX 
Rules and not the PCX Constitution.\10\ The PCX cited Article XVII, 
Section 1 of the PCX Constitution, which states that ``The Board of 
Governors may from time to time amend the Rules of this Exchange by 
affirmative vote of not less than a majority of the Governors voting at 
a meeting at which a quorum is present.''
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    \10\ PCX Letter.
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    The PCX represented that the proposal should assure that the 
Exchange's memberships do not become unduly concentrated and subject to 
domination by a particular member or member organization's own 
interest. In addition, the PCX stated that the proposed rule change is 
designed to promote just and equitable principles of trade and to 
protect investors and the public interest.

IV. Discussion

    After careful consideration of the proposal, all the comments, and 
the response to comments, the Commission has determined to approve the 
proposed rule change. The Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\11\ In particular, the Commission believes that the proposed 
rule change is consistent with section 6(b)(5) of the Act,\12\ which 
provides, among other things, that the Exchange's rules be designed to 
promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest. In addition, the Commission 
believes that the proposed rule change is consistent with the 
requirement of section 6(b)(3) of the Act \13\ that the Exchange's 
rules assure a fair representation of its members in the selection of 
its directors and administration of its affairs.
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    \11\ In approving the proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ 15 U.S.C. 78f(b)(3).
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    The Commission agrees with the PCX that the rule change should 
prevent PCX's memberships from becoming overly concentrated in any one 
person or group of persons. As a result, the rule change should prevent 
a person or group of persons from exercising undue control over the 
affairs of the Exchange.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-PCX-2002-11) be, and hereby 
is, approved.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-16347 Filed 6-27-02; 8:45 am]
BILLING CODE 8010-01-P