[Federal Register Volume 67, Number 139 (Friday, July 19, 2002)]
[Notices]
[Pages 47592-47594]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-18226]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46193; File No. SR-PCX-2002-35]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Pacific Exchange, Inc. 
Relating to Housekeeping and Technical Amendments to PCXE Rules in 
Order to Incorporate Those Rules Into the New PCXE Rules Governing the 
Archipelago Exchange Facility

July 12, 2002.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on June 14, 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. 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, through its wholly owned subsidiary, PCX Equities, 
Inc. (``PCXE''), proposes to make various housekeeping and technical 
changes to certain previously approved PCXE rules in order to 
incorporate those rules into the new PCXE rules governing the 
Archipelago Exchange (``ArcaEx'') facility. The text of the proposed 
rule change is available at the Exchange and at the Commission.

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 parts of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    1. Purpose
    On October 25, 2001, the Commission approved a proposed rule change 
by the PCX to establish ArcaEx, a new electronic trading facility of 
PCXE.\3\ ArcaEx is a fully electronic securities trading facility for 
use by Equity Trading Permit (``ETP'') Holders and their customers. PCX 
and PCXE are responsible for all regulatory functions related to the 
facility, and Archipelago Exchange, L.L.C., a subsidiary of Archipelago 
Holdings, L.L.C., is responsible for the business of the facility to 
the extent that these activities are not inconsistent with the 
regulatory and oversight functions of PCX and PCXE. ArcaEx commenced 
operations on March 22, 2002, replacing the PCXE's traditional trading 
floor facilities.
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    \3\ See Securities Exchange Act Release No. 44983 (October 25, 
2001), 66 FR 55225 (November 1, 2001) (Order approving File No. SR-
PCX-00-25) (``ArcaEx Approval Order'').
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    With this filing, PCX proposes to make various housekeeping and 
technical changes to certain previously approved PCXE rules in order to 
incorporate those rules into the new PCXE rules governing ArcaEx. A 
summary of the proposed changes to the text of the PCXE rules are 
explained below.
a. Audit Committee Requirements for Listed Companies
    The Exchange proposes to amend PCXE Rule 5.3(b) by adding language 
regarding audit committee requirements for listed domestic issuers. The 
rule change requires listed companies to adopt formal written charters 
and establishes composition requirements for audit committees including 
expertise and independence criteria for committee members. The SEC 
previously approved the proposed rule text on February 7, 2001.\4\ The 
Exchange is proposing to incorporate the rule change into the new set 
of rules governing the ArcaEx facility.
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    \4\ See Securities Exchange Act Release No. 43941 (February 7, 
2001), 66 FR 10545 (February 15, 2001) (Order approving File No. SR-
PCX-00-40).
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b. Supervisory Procedures
    The Exchange proposes to add PCXE Rule 6.18 relating to Supervisory 
Procedures. Under this proposed rule, each ETP Holder must establish 
and maintain a supervisory system to supervise the activities of its 
associated persons and the operations of its business. The SEC 
published the original rule filing on January 8, 2001.\5\ The Exchange 
is proposing to incorporate the rule change into the new set of rules 
governing the ArcaEx facility. In addition, the Exchange proposes to 
make technical changes to the rule text as originally approved by the 
Commission by deleting references to the terms ``Equity ASAP Holder'' 
and ``ETP Firm.'' These membership categories are no longer applicable 
under ArcaEx's market structure.\6\
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    \5\ See Securities Exchange Act Release No. 43817 (January 8, 
2001), 66 FR 3636 (January 16, 2001) (SR-PCX-00-43).
    \6\ See Securities Exchange Act Release No. 43608 (November 21, 
2000), 65 FR 78822 (December 15, 2000) (SR-PCX-00-25) (``ArcaEx 
Proposing Release'').
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c. Trust Issued Receipts
    On April 16, 2001, the SEC approved an Exchange rule proposal to 
adopt generic listing requirements for Trust Issued Receipts 
(``TIRs'').\7\ The Exchange is proposing to incorporate the rule change 
into the new set of rules governing the ArcaEx facility. The proposed 
listing and maintenance standards for securities on TIRs are set forth 
respectively in Commentary .01 to PCXE Rule 8.200(a), and in Rule 
8.200(d). Also, minor conforming word changes have been made to reflect 
the simplified membership structure under ArcaEx.\8\
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    \7\ See Securities Exchange Act Release No. 44182 (April 16, 
2001), 66 FR 21798 (May 1, 2001) (Order approving File No. SR-PCX-
2001-01).
    \8\ See ArcaEx Proposing Release, supra note 6.
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d. Electronic Mail Addresses
    The Exchange proposes to incorporate into the new PCXE rules for 
ArcaEx a provision requiring all ETP Holders to establish and maintain 
an Internet electronic mail account with the PCXE. The SEC published 
the original rule filing on January 29, 2001.\9\ The Exchange proposes 
to renumber former PCXE Rule 2.26 as new PCXE Rule 2.23, and is also 
modifying the rule text by eliminating references to ``Equity ASAP 
Holder'' and ``ETP Firm'' because these membership categories are no 
longer applicable under ArcaEx's market structure.\10\
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    \9\ See securities Exchange Act Release No. 43898 (January 29, 
2001), 66 FR 8832 (February 2, 2001) (SR-PCX-01-02).
    \10\ See ArcaEx Proposing Release, supra note 6.

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[[Page 47593]]

e. Exchange-Traded Funds (``ETFs'')
    On July 12, 2001, the SEC approved an Exchange rule proposal to 
adopt generic listing requirements for Investment Company Units 
(``ICUs'') and Portfolio Depositary Receipts (``PDRs'') (collectively 
known as ETFs).\11\ The rules allow PCXE to begin trading qualifying 
products pursuant to Rule 19b-4(e) under the Act without submitting a 
formal rule filing to the SEC. The Exchange's current rules for the 
initial and continued listing of ICUs and PDRs are set forth in PCXE 
Rules 5.2(j)(3)\12\ and 8.100, respectively. The Exchange proposes to 
incorporate the rule changes using the same numbering sequence into the 
new set of rules governing the ArcaEx facility. Also, minor conforming 
changes to the text have been made to reflect the simplified membership 
structure of ArcaEx.\13\
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    \11\ See Securities Exchange Act Release No. 44551 (July 12, 
2001) 66 FR 37716 (July 19, 2001) (Order approving File No. SR-PCX-
2001-14).
    \12\ The Exchange's definition of a ``Unit'' and the listing 
maintenance requirements for ICUs are contained in existing PCXE 
Rules 5.1(b)(15) and 5.5(g)(1), respectively.
    \13\ See ArcaEx Proposing Release, supra note 6.
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f. Minor Rule Plan Amendments
    On July 27, 2001, the SEC approved an Exchange rule proposal 
increasing the fines for violations of certain rules under the PCXE's 
Minor Rule Plan.\14\ The Exchange is proposing to incorporate the 
increased Minor Rule Plan fines into the new set of rules governing the 
ArcaEx facility. However, the Exchange notes that the Minor Rule Plan 
fines for violations relating to floor trading and specialists (e.g., 
admission to and conduct on the trading floor) have not been included 
in the proposed rules because they are not applicable to the ArcaEx 
trading environment.
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    \14\ See Securities Exchange Act Release No. 44611 (July 27, 
2001) 66 FR 40771 (August 3, 2001) (Order approving File No. SR-PCX-
2001-19).
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g. Conversion to Decimals
    The Exchange proposes to incorporate into the new PCXE rules for 
ArcaEx several technical revisions to its equities trading rules in 
order to eliminate references to fractional pricing. The SEC published 
the rule filing on November 19, 2001.\15\ Minor word changes and 
revisions in the numbering of the rules have been made to conform the 
proposed rules to the new PCXE rules for ArcaEx. In addition, the 
changes made to former PCXE Rule 7.12 (Firm Quotations) and Rule 7.70 
(Pacific Computerized Order Access System (``P/COAST'')) have been 
omitted from inclusion in the new PCXE rules. PCXE Rule 7.12 has been 
replaced in its entirety with new PCXE Rule 7.17. Also, with the 
elimination of trading floor and the introduction of the ArcaEx trading 
system, Rule 7.70 relating to P/COAST becomes obsolete.
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    \15\ See Securities Exchange Act Release No. 45077 (November 19, 
2001), 66 FR 59280 (November 27, 2001) (SR-PCX-2001-39).
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h. Intermarket Trading System (``ITS'')
    The Exchange proposes to amend PCXE Rule 7.55(b)(2)(F), formerly 
Rule 7.66(b)(2)(F), to conform to the seventeenth amendment to the 
restated ITS Plan.\16\ Presently, Rule 7.55(b)(2)(F) provides that the 
sender of an ITS commitment may designate a time period during which a 
commitment will be irrevocable following acceptance by the ITS system. 
The ITS Plan provides for three irrevocable time-period options 
consisting of 30-seconds, one minute, and two minutes. Accordingly, the 
Exchange is proposing to replace the current language in subsection 
(b)(2)(F), which states that there are ``two'' irrevocable time-period 
options, with the word ``three'' thereby making the rule text 
consistent with the ITS Plan. The SEC published the original rule 
filing on March 19, 2002.\17\ The Exchange is proposing to incorporate 
the rule change into the new set of rules governing the ArcaEx 
facility. In addition, the Exchange proposes to make technical changes 
to the rule text as originally approved by the Commission by deleting 
references to the terms ``Equity ASAP Holder'' and ``ETP Firm.'' These 
membership categories are no longer applicable under ArcaEx's market 
structure.\18\
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    \16\ See Securities Exchange Act Release No. 44903 (October 3, 
2001), 66 FR 52159 (October 12, 2001) (Order approving Seventeenth 
Amendment to the ITS Plan).
    \17\ See Securities Exchange Act Release No. 45595 (March 19, 
2002), 67 FR 14759 (March 27, 2002) (SR-PCX-2002-07).
    \18\ See ArcaEx Proposing Release, supra note 6.
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i. Trading Hours for ICUs and PDRs
    Prior to the implementation of ArcaEx, the Exchange's trading hours 
for series of ICUs and PDRs were between 6:30 a.m. and 1:30 p.m. (PT), 
as set forth in PCXE Rule 5.2(j)(3), Commentary .01(f) and Rule 8.100, 
Commentary .01(f), respectively. With this filing, the Exchange is 
proposing to change its trading hours for ICUs and PDRs to conform to 
the trading sessions of ArcaEx.
    ArcaEx has three trading sessions each day the PCXE is open for 
business: The Opening Session (5 a.m. to 6:30 a.m. (PT)), the Core 
Trading Session (6:30 a.m. to 1 p.m. (PT)) and the Late Trading Session 
(1 p.m. to 5 p.m. (PT)).\19\ Because ArcaEx operates the Opening and 
Late Trading Sessions outside of the traditional trading hours, the 
PCXE requires ETP Holders to provide certain customer disclosures.\20\ 
In particular, no ETP Holder can accept an order from a non-ETP Holder 
for execution in the Opening or Late Trading Session without disclosing 
to such non-ETP Holder that:
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    \19\ See PCXE Rule 7.34(a) (description of the ArcaEx trading 
sessions).
    \20\ See PCXE Rule 7.34(e) (description of the required customer 
disclosures).
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    (1) Except for market orders eligible for execution during the 
Market Order Auction, Limited Price Orders are the only orders that are 
eligible for execution during the Opening and Late Trading Sessions;
    (2) An order must be designated specifically for trading in the 
Opening and/or Late Trading Session to be eligible for trading in the 
Opening and/or Late Trading Session; and
    (3) Extended hours trading involves material trading risks, 
including the possibility of lower liquidity, high volatility, changing 
prices, unlinked markets, an exaggerated effect from news 
announcements, wider spreads and any other relevant risk.
    These disclosures are designed to ensure that participants in the 
Opening or Late Trading Sessions understand the potential risks of that 
participation. Currently, several electronic trading systems provide 
investors the opportunity to trade these securities outside the regular 
trading hours. The PCX believes that the proposed rule amendment will 
enhance competition by providing investors with an alternative forum 
through which to trade these products. In addition, the Exchange 
believes that its proposal to expand PCXE's trading hours for ICUs and 
PDRs is consistent with the business hours for operating ArcaEx.\21\
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    \21\ See ArcaEx Approval Order, supra note 3.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \22\ in general, and furthers the 
objectives of Section 6(b)(5) \23\ in particular, 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 information with respect to, and 
facilitating transactions in securities, and, in general, to protect 
investors and the public interest.
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    \22\ 15 U.S.C. 78f(b).
    \23\ 15 U.S.C. 78f(b)(5).

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[[Page 47594]]

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 not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    The proposed rule change has become effective pursuant to Section 
19(b)(3)(A)(iii) of the Act \24\ and subparagraph (f)(3) of Rule 19b-4 
thereunder \25\ because it is concerned solely with the administration 
of the Exchange. 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.
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    \24\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \25\ 17 CFR 240.19b-4(f)(3).
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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, N.W., Washington, D.C. 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 
PCX. All submissions should refer to File No. SR-PCX-2002-35 and should 
be submitted by August 9, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-18226 Filed 7-18-02; 8:45 am]
BILLING CODE 8010-01-P