[Federal Register Volume 67, Number 131 (Tuesday, July 9, 2002)]
[Notices]
[Pages 45577-45579]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-17131]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46128; File No. SR-PCX-2002-26]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Pacific Exchange, Inc. 
Relating to Maintenance of Books and Records

June 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 April 22, 2002, the Pacific Exchange, Inc. (``PCX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'' or 
``SEC'') the proposed rule change as described in Items I, II and III 
below, which items have been prepared by the Exchange. PCX submitted 
Amendment No. 1 to the proposed rule change on June 11, 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\ In Amendment No. 1, the Exchange: (1) stated that the 
proposed rule change was being filed pursuant to Section 19(b)(2) of 
the Act and requested accelerated effectiveness; (2) revised 
typographical errors in the proposed rule text; (3) added the 
parenthetical (including any interpretation relating thereto) to 
proposed PCX Rule 4.20(a); and (4) clarified that the phrase 
``contra organization'' in proposed PCX Rule 4.20(b) is an industry 
term of art that also means counter party. See letter from Mai S. 
Shiver, Senior Attorney, Regulatory Policy, PCX, to Nancy J. Sanow, 
Assistant Director, Division of Market Regulation (``Division''), 
Commission, dated June 10, 2002 (``Amendment No. 1''). PCX further 
clarified that the phrase ``contra organization'' refers to the 
clearing firm. Telephone call between Mai S. Shiver, Senior 
Attorney, Regulatory Policy, PCX, and Jennifer Lewis, Attorney, 
Division, Commission, on June 19, 2002.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PCX proposes new rules, PCX Rule 4.20 and 4.21, in order to 
codify the existing obligations of Members and Member Organizations to 
keep and preserve books and records. The text of the proposed rule 
change is below. Proposed new language is italicized; deleted language 
is in brackets.

Books and Records

    Rule 4.20(a) [Reserved.] Each Member and Member Organization must 
make, keep current and preserve such books and records as the Exchange 
may prescribe and as may be prescribed by the Securities Exchange Act 
of 1934 and the rules and regulations thereunder (including any 
interpretation relating thereto) as though such Members or Member 
Organization were a broker or dealer registered with the SEC pursuant 
to Section 15 of the Exchange Act. No Member or Member Organization may 
refuse to make available to the Exchange such books, records or other 
information as may be called for under the Rules or as may be requested 
in connection with an Exchange investigation.
Commentary:
    .01 The following Exchange Rules contain specific requirements with 
regard to the maintenance, retention and furnishing of books, records 
and

[[Page 45578]]

other information: Rules 1.16, 2.1, 2.4, 2.6, 2.7, 2.8, 2.10, 2.11, 
2.12, 2.15, 2.18, 4.9, 4.10, 4.20, 4.21, 4.25, 6.14, 6.15, 6.16, 6.17, 
6.18, 6.19, 6.39, 6.41, 6.46, 6.68, 6.69, 9.2, 9.17 and 9.18. The 
foregoing list is not intended to be exhaustive and Members and Member 
Organizations must comply with applicable record keeping and reporting 
requirements regardless of whether they are listed here.
* * * * *
Daily Position Statements
    Rule 4.20(b) Each Member and Member Organization must receive daily 
position statements with respect to securities held by the Options 
Clearing Corporation or any member thereof, the DTCC or any similar 
clearing organization and must reconcile securities and money balances 
at least once per month by comparing those position statements against 
the Member or Member Organization's books and records. Each Member or 
Member Organization must promptly report any differences to the contra 
organization. A Member or Member Organization who processes 
transactions through the Member or Member Organization's clearing 
firm's clearance account may utilize those clearance account records to 
satisfy this record keeping requirement provided that: (i) the Member 
Organization clearing firm complies with the provisions of SEC Rules 
17a-3(b)(2) and 17a-4(i); (ii) the Member or Member Organization 
maintains those clearance account records pertaining to the daily 
activity and total position in each series of options; and (iii) the 
Member or Member Organization reconciles any discrepancies between the 
clearance account records and any financial reports that the Member or 
Member Organization is required to maintain pursuant to Rule 4.20(a). 
Each Member and Member Organization must maintain reports that evidence 
reconciliation for at least six years, the first two years in an easily 
accessible place.
Error Accounts
    Rule 4.21(a) Each Member or Member Organization [whose principal 
business is] which conducts business as a floor broker on the Exchange 
and who is not self-clearing must establish and maintain an account 
with a clearing member of the Exchange, for the sole purpose of 
carrying positions resulting from bona fide errors made in the course 
of its floor brokerage business. With respect to options floor brokers 
only, such an account for option transactions must be maintained with a 
clearing member [an entity] that is also a member of the Options 
Clearing Corporation.
    (b) Each such Member or Member Organization which conducts business 
as a floor broker must make available to the Exchange, upon request, 
accurate and complete records of all trades cleared in such Member or 
Member Organization's error account. These records must include the 
audit trail data elements prescribed below:
    (1) name or identifying symbol of the security;
    (2) number of shares or quantity of security;
    (3) transaction price;
    (4) time of trade execution;
    (5) executing broker badge number, or alpha symbol as may be used 
from time to time, in regard to its side of the contract;
    (6) executing broker badge number, or alpha symbol as may be used 
from time to time, of the contra side to the contract;
    (7) clearing firm number, or alpha symbol as may be used from time 
to time, in regard to its side of the contract;
    (8) clearing firm number, or alpha symbol as may be used from time 
to time, in regard to the contra side of the contract;
    (9) designation of whether the account for which the order was 
executed was that of a Member or Member Organization;
    (10) the nature and amount of the error;
    (11) the Member or Member Organization that cleared the error trade 
on the Member's or Member Organization's behalf;
    (12) an explanation of the means by which the Member or Member 
Organization resolved the error;
    (13) the aggregate amount of liability that the Member or Member 
Organization incurred and: (i) had outstanding as of the time each such 
error trade entry was recorded or (ii) had cleared by other Members or 
Member Organizations.

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 PCX 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 PCX 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, Exchange rules obligate Members and Member Organizations 
to make, keep current, and preserve certain books and records.\4\ In 
addition, the Exchange relies on the Commission's comprehensive books 
and records rules, Rule 17a-3 \5\ and Rule 17a-4 \6\ of the Act, as the 
basis of its authority to require Members and Member Organizations to 
maintain and retain books and records not covered under the Exchange's 
express rules.
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    \4\ See, e.g., PCX Rule 2.4 (Restrictions on Member Activities); 
PCX Rule 2.10 (Customer Statements); PCX Rule 4.25 (Supervision--
Written Procedures); and PCX Rule 6.14 (General Comparison and 
Clearance Rules).
    \5\ 17 CFR 240.17a-3.
    \6\ 17 CFR 240.17a-4.
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    The Exchange now proposes to adopt a new rule to codify books and 
records requirement and to make clear to Members and Member 
Organizations that the Commission's comprehensive books and records 
rule applies to all Members and Member Organizations. The Exchange also 
proposes to codify its policies with respect to maintenance of daily 
position statements and error account information.
    As proposed, the new rule would require all Members and Member 
Organizations to make, keep current, and preserve such books and 
records as the Exchange may prescribe and as those that may be 
prescribed by the Act and the rules and regulations thereunder 
(including any interpretation relating thereto). The proposed rule 
further provides that no Member or Member Organization may refuse to 
make available to the Exchange such books, records or other information 
as may be called for under the PCX rules or as may be requested in 
connection with an Exchange investigation.
    With respect to maintaining daily position statements, the proposed 
rule provides that each Member and Member Organization must receive 
daily position statements with respect to securities held by the 
Options Clearing Corporation or any member thereof, the DTCC or any 
similar clearing organization and must reconcile securities and money 
balances at least once per month by comparing those position statements 
against the Member or Member Organization's books and records. The 
proposed rule provides that a Member or Member Organization who 
processes transactions through the Member or Member Organization's

[[Page 45579]]

clearing firm's clearance account may utilize those clearance account 
records to satisfy this record keeping requirement provided that: (i) 
the Member Organization clearing firm complies with the provisions of 
Rules 17a-3(b)(2) \7\ and 17a-4(i) \8\ of the Act; (ii) the Member or 
Member Organization maintains those clearance account records 
pertaining to the daily activity and total position in each series of 
options; and (iii) the Member or Member Organization reconciles any 
discrepancies between the clearance account records and any financial 
reports that the Member or Member Organization is required to maintain. 
As proposed, each Member and Member Organization would be required to 
maintain reports that evidence reconciliation for at least six years, 
the first two years in an easily accessible place.
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    \7\ 17 CFR 240.17a-3(b)(2).
    \8\ 17 CFR 240.17a-4(i).
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    Regarding error accounts, the proposed rule provides that each 
Member or Member Organization which conducts business as a floor broker 
must make available to the Exchange, upon request, accurate and 
complete records of all trades cleared in such Member or Member 
Organization's error account. The proposed rule would also require that 
the error account records include certain audit trail data elements 
including, for example, name of the security, quantity and the nature 
and amount of the error.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act,\9\ in general, and furthers the objectives of Section 
6(b)(5),\10\ in particular, because it is designed to promote just and 
equitable principles of trade, prevent fraudulent and manipulative acts 
and practices, and protect investors and the public interest.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 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 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

    Written comments on the proposed rule change were neither solicited 
nor received.

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 self-regulatory organization consents, the Commission will:
    (A) By order approve such rule change, 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 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 such 
filing will also be available for inspection and copying at the 
principal office of the PCX. All submissions should refer to File No. 
SR-PCX-2002-26 and should be submitted by July 30, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-17131 Filed 7-8-02; 8:45 am]
BILLING CODE 8010-01-P