[Federal Register Volume 67, Number 186 (Wednesday, September 25, 2002)]
[Notices]
[Pages 60273-60276]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-24292]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46505; File No. SR-Phlx-2001-104]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Philadelphia Stock Exchange, 
Inc. Relating to Clerks on the Exchange's Options Floor

September 17, 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 December 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 the Phlx. On June 27, 
2002, the Phlx submitted Amendment No. 1 to the proposed rule 
change.\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 Richard S. Rudolph, Director and Counsel, 
Phlx, to Nancy J. Sanow, Assistant Director, Division of Market 
Regulation (``Division''), Commission, dated June 26, 2002 
(``Amendment No. 1''). In Amendment No. 1, the Phlx: (1) Made 
technical and clarifying changes to the proposed rule text; (2) 
added proposed Commentaries .01 and .02 to proposed Phlx Rule 1090 
to define and set forth additional requirements for Stock Execution 
Clerks and Specialist Clerks; and (3) provided additional clarifying 
explanations with respect to the proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to adopt Exchange Rule 1090, Clerks, which would 
define and set forth permitted and prohibited activities of Clerks on 
the Exchange's Options Floor.

[[Page 60274]]

    Below is the text of the proposed rule change. Proposed new 
language is italicized.
* * * * *
    Rule 1090. The term ``Clerk'' means any registered on-floor person 
employed by or associated with a member, member organization, 
participant, or participant organization who is not a member and is not 
eligible to effect transactions on the Options Floor as a Specialist, 
Registered Options Trader, or Floor Broker. For purposes of this Rule, 
an Inactive Nominee shall be deemed a Clerk.
    (a) Badges. While on the trading floor, Clerks shall display 
prominently at all times the badge(s) supplied to them by the Exchange.
    (b) Conduct on the Trading Floor. Clerks shall be primarily located 
at a post assigned to their employer or assigned to their employer's 
clearing firm unless such Clerk is:
    (i) entering or leaving the trading floor;
    (ii) transmitting, correcting, or checking the status of an order 
or reporting or correcting an executed trade;
    (iii) supervising other Clerks of his member organization if he is 
identified as a supervisor on the registration form submitted to the 
Exchange's Membership Services Department.
    (c) Registration Requirements. A member or member organization who 
employs a Clerk that performs any function other than a solely clerical 
or ministerial function shall, prior to the time such Clerk performs 
any function as a Clerk, (i) comply with the registration 
requirement(s) set forth in Exchange Rule 604, where applicable; (ii) 
disclose in detail to the Exchange, on an annual basis, the specific 
nature of such additional function(s); and (iii) submit to the Exchange 
written supervisory procedures relating to such Clerk's activities in 
accordance with Exchange Rule 748.
    (d) Clerks' Use of Vendor Quote Terminals, DOT, and Other Order-
Entry Devices. A Clerk may enter an order under the direction of a 
member by way of a vendor quote terminal, DOT machine, or any other 
order entry device.

Commentary

.01 Stock Execution Clerks

    (a) Definition. A Stock Execution Clerk is any person other than a 
Specialist Clerk on the Exchange Floor who functions as an intermediary 
in a transaction (A) consummated on the Exchange; (B) entered verbally 
for execution other than on the Exchange; or (C) entered into a third 
party system designed to execute transactions other than on the 
Exchange.
    (b) Registration Requirements. Any member or member organization 
engaged as a Stock Execution Clerk shall register as such with the 
Exchange's Membership Services Department. A Stock Execution Clerk that 
performs any function other than a solely clerical or ministerial 
function shall, prior to performing any function as a Stock Execution 
Clerk, (i) comply with the registration requirement(s) set forth in 
Exchange Rule 604, where applicable; (ii) disclose in detail to the 
Exchange, on an annual basis, the specific nature of such additional 
function(s); and (iii) in accordance with Exchange Rule 748, submit to 
the Exchange written supervisory procedures relating to such member or 
member organization's activities as a Stock Execution Clerk.
    (c) Clearing. All transactions by Stock Execution Clerks shall be 
carried by an NASD member firm. Members and member organizations that 
function as Stock Execution Clerks shall determine whether their 
activities as Stock Execution Clerks require them to be registered as 
NASD members as provided in the Securities Exchange Act of 1934, as 
amended, and the rules and regulations thereunder.
    (d) Limitations. No Stock Execution Clerk shall: (i) act as an 
intermediary in any transaction other than under the direct supervision 
of a member; (ii) enter into any clearing transaction or participate in 
any clearing process; (iii) have discretion or independent authority 
over any account or transaction.

.02 Specialist Clerks

    (a) Definition. A Specialist Clerk is any on-floor person, not a 
member of the Exchange, employed by or associated with a member or 
member organization registered as a specialist.
    (b) Registration Requirements. Any member or member organization 
that employs a Specialist Clerk shall register such Specialist Clerk 
with the Exchange's Membership Services Department. A Specialist Clerk 
that performs any function other than a solely clerical or ministerial 
function shall, prior to performing any function as a Specialist Clerk, 
(i) comply with the registration requirement(s) set forth in Exchange 
Rule 604, where applicable; (ii) disclose in detail to the Exchange, on 
an annual basis, the specific nature of such additional function(s); 
and (iii) in accordance with Exchange Rule 748, submit to the Exchange 
written supervisory procedures relating to such Specialist Clerk's 
activities.
    (c) Conduct on the trading floor. A Specialist Clerk is permitted 
to communicate verbal market information (i.e., bid, offer, and size) 
in response to requests for such information, provided that such 
information is communicated under the direct supervision of his or her 
member employer. A Specialist Clerk may consummate electronic 
transactions under the express direction of his or her member employer 
by matching bids and offers. Such bids and offers and transactions 
effected under the supervision of a member employer are binding as if 
made by the member employer.
* * * * *

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 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 Phlx proposes to define and set forth permitted and prohibited 
activities of Clerks on the Exchange's Options Floor.
a. Definition
    Proposed Phlx Rule 1090 would define a Clerk as any registered on-
floor person employed by or associated with a member, member 
organization, participant, or participant organization who is not a 
member and is not eligible to effect transactions on the Options Floor 
as a Specialist, Registered Options Trader, or Floor Broker. The 
purpose of this definition is to identify a category of all persons 
that are not members of the Exchange and who are not eligible to effect 
transactions, but are located on the Exchange's Options Floor.\4\ Under 
proposed Phlx Rule 1090, Clerks would not be eligible to effect 
transactions on

[[Page 60275]]

the Exchange Options Floor, except in the specific circumstances set 
forth in proposed Commentary .02 (c) to proposed Phlx Rule 1090 
relating to the matching of electronic bids and offers by a Specialist 
Clerk under the express direction of his or her employer.
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    \4\ The Exchange notes that only Exchange members may bid for 
and offer securities in the open market on the Exchange Floor. See 
Exchange Rule 104.
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    Finally, the Exchange proposes that in order for the proposed rule 
to apply to all categories of registered persons located on the 
Exchange's Options Floor that are generally not eligible to effect 
transactions, Inactive Nominees would be deemed to be Clerks for 
purposes of the proposed rule.\5\
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    \5\ See Exchange Rule 21, which provides that the term 
``Inactive Nominee'' shall mean a natural person associated with and 
designated by a member organization whom has applied for and been 
approved by the Admissions Committee for such status and is 
registered as such with the Office of the Secretary. An Inactive 
Nominee shall have no rights or privileges of membership unless and 
until the Inactive Nominee becomes a member of the Exchange pursuant 
to the By-Laws and Rules of the Exchange. An Inactive Nominee merely 
stands ready to assume legal title to a membership upon notice by 
the member organization to the Office of the Secretary to be 
transferred intra-firm on an expedited basis.
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b. Badges
    The Exchange proposes to require that Clerks, while on the trading 
floor, display prominently at all times the badge(s) supplied to them 
by the Exchange. The purpose of this provision is to ensure that 
Exchange members are made aware of the identity of all Clerks on the 
Options Floor, and that Exchange members seeking to effect transactions 
with other members are able to ascertain the status of those other 
members with whom they may enter into on-floor transactions.\6\
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    \6\ Regulation 3 under Exchange Rule 60 requires persons on the 
Exchange's Options Floor to wear identification badges chest high in 
full view, and the badges must accurately reflect the respective 
person's associations and dual affiliations.
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    With respect to Inactive Nominees, the Phlx notes that the 
Exchange's Membership Services Department currently issues nonmember 
badges to Inactive Nominees, who are ineligible to effect transactions 
on the Options Floor. The Exchange's Membership Services Department 
also issues member badges to activated persons who are eligible to 
effect transactions on the Options Floor. All badges are issued on a 
daily basis. The Phlx believes that a further purpose of the badge 
requirement is to facilitate the Exchange's Market Surveillance 
Department in ascertaining the function of on-floor persons, and to 
surveil for violations of Exchange rules accordingly. \7\
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    \7\ The Exchange represents that it currently does not provide 
badges to Clerks based on the type of Clerk (i.e., Specialist 
Clerks, Stock Execution Clerk). The Exchange does, however, provide 
different badges for Clerks and for members permitted to trade on 
the Phlx floor. The ``member'' badge includes a red square symbol 
that identifies such member as eligible to enter into transactions 
on the Exchange floor. Clerk badges do not include such a symbol. 
Inactive Nominees on the options trading floor are required to wear 
and display badges identifying them as nonmembers. See Amendment No. 
1, note 3, supra.
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c. Conduct on the Trading Floor
    The Exchange proposes that a Specialist Clerk \8\ would be 
permitted to consummate electronic transactions under the express 
direction of his or her member employer by matching electronic bids and 
offers. The purpose of this provision is to enable Clerks employed by 
specialists on the Options Floor to assist in matching electronic bids 
and offers once electronic orders become due for execution. According 
to the Exchange, such activity, generally administrative in nature, 
does not involve actual bidding or offering of securities, and could 
only be carried out by a Specialist Clerk under the direct supervision 
of his or her employer member. In no circumstance would any Clerk be 
allowed to consummate a face-to-face transaction with an Exchange 
member.\9\ In order to ensure that transactions effected by Specialist 
Clerks matching electronic bids and offers are binding on members, the 
Exchange proposes to require that bids and offers and transactions 
effected by Specialist Clerks under the supervision of a member are 
binding as if made by the member employer.
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    \8\ A Specialist Clerk is any on-floor person, not a member of 
the Exchange, employed by or associated with a member or member 
organization registered as a specialist. See proposed Phlx Rule 
1090, Commentary .02(a).
    \9\ Exchange Option Floor Procedure Advice (``OFPA'') F-23 
provides that Clerks, other than Specialist Clerks, are prohibited 
from maintaining a sustained presence in the trading crowd. In 
addition, Clerks are prohibited from requesting market quotations 
from a Specialist or ROT, except that a Specialist Clerk, under the 
supervision of a Specialist, may request the crowd's market in order 
to update disseminated markets or ascertain parity/priority splits 
in relation to the execution of an order. A sustained presence is 
defined as a period of time beyond such time that, under the 
prevailing circumstances, is needed by the Clerk to complete the 
allowable business function which brought the Clerk to that crowd in 
the first place.
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    The Exchange also proposes to require that Clerks be primarily 
located at a post assigned to their employer or assigned to their 
employer's clearing firm unless a Clerk is entering or leaving the 
trading floor; transmitting, correcting, or checking the status of an 
order or reporting or correcting an executed trade; and/or supervising 
other Clerks of his member organization if he or she is identified as a 
supervisor on the registration form submitted to the Exchange's 
Membership Services Department. The Exchange believes that this 
provision should facilitate the Exchange's Market Surveillance 
Department in ascertaining the function of Clerks on the Options Floor 
and ensure that Clerks are not in a position on the Options Floor to 
enter into transactions in securities with Exchange members without 
appropriate member employer supervision.
    With respect to appropriate member employer supervision, the 
Exchange proposes to allow a Clerk to enter an order under the 
direction of a member via a vendor quote terminal, Designated Order 
Turnaround (``DOT'') System machine, or any other order entry device. 
Such a Clerk would not have discretion over orders entered, nor be 
permitted to bid and/or offer through the use of an order entry device 
without the express direction of a member.\10\
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    \10\ For example, a Registered Options Trader (``ROT'') that 
instructs a Clerk to enter an order via an electronic order entry 
device would be required to specify whether the order is a buy or 
sell order; the number of contracts; whether it is a day good till 
canceled order; whether it is a market or limit order; and the 
account number. A member employer instructing his or her employee 
Clerk would be required to provide the same express direction.
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d. Stock Execution Clerks
    The proposed rule change would define a Stock Execution Clerk would 
be defined as any person, other than a Specialist Clerk on the Exchange 
Floor, who functions as an intermediary in a transaction (i) 
consummated on the Exchange; (ii) entered verbally for execution other 
than on the Exchange; or (iii) entered into a third party system 
designed to execute transactions other than on the Exchange.
    According to the Exchange, a Stock Execution Clerk provides a 
service to Exchange members on the Options Floor by accepting orders 
for the purchase and sale of securities underlying options 
transactions. Once such orders are accepted, the Stock Execution Clerk 
forwards such orders to the appropriate marketplace for execution. The 
transactions executed are typically hedging transactions in underlying 
stocks for Exchange specialists and ROTs. The Exchange believes that 
the proposed rule would assist the Exchange in regulating the business 
activities of its members and member organizations that function as 
Stock Execution Clerks.
    The Exchange proposes to require any member or member organization 
engaged as a Stock Execution Clerk to register as such with the 
Exchange's Membership Services Department. A Stock Execution Clerk that 
performs any function other than a solely clerical or ministerial 
function shall, prior to

[[Page 60276]]

performing any function as a Stock Execution Clerk, comply with the 
registration requirement(s) set forth in Exchange Rule 604, where 
applicable, disclose in detail to the Exchange, on an annual basis, the 
specific nature of such additional function(s), and submit to the 
Exchange written supervisory procedures relating to such activities as 
a Stock Execution Clerk in accordance with Exchange Rule 748. The 
Exchange believes that this provision would serve to assist the 
Exchange in regulating Stock Execution Clerks, and would subject 
Exchange members and member organizations to possible disciplinary 
action for failure to supervise their employee Stock Execution Clerks.
    The Exchange proposes to require that Stock Execution Clerks clear 
transactions through an NASD member firm, and determine whether their 
activities as Stock Execution Clerks require them to be registered as 
NASD members.\11\ The purpose of this provision is to ensure that the 
activities of Stock Execution Clerks are conducted consistently with 
the Act and the rules and regulations thereunder. According to the 
Exchange, the ability of the Exchange's Market Surveillance Department 
to surveil the activities of Stock Execution Clerks on an exchange 
floor other than its own is limited. The Exchange believes that this is 
the primary reason for the Commission's rule requiring NASD membership 
(and compliance with NASD rules, subject to NASD disciplinary 
jurisdiction), except in limited circumstances.
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    \11\ Section 15(b)(8) of the Act requires every broker-dealer 
registered with the Commission to become a member of the NASD unless 
the broker-dealer effects transactions in securities solely on a 
national securities exchange of which it is a member. 15 U.S.C. 
78o(b)(8). Section 15(b)(9) of the Act provides the Commission with 
authority to exempt any class of broker-dealers from the requirement 
to become a member of the NASD. 15 U.S.C. 78o(b)(9). Rule 15b9-1 
under the Act exempts members of a national securities exchange from 
becoming a member of the NASD if the entity (i) carries no customer 
accounts; and (ii) earns no more than $1,000 annual gross income 
from securities transactions carried out otherwise than on an 
exchange of which it is a member. The gross income limitation does 
not apply to income derived from transactions (A) for the dealer's 
own account with or through another registered broker or dealer; or 
(B) through the Intermarket Trading System. 17 CFR 240.15b9-1.
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    Finally, the Exchange proposes to provide that no Stock Execution 
Clerk may act as an intermediary in any transaction other than under 
the direct supervision of a member; enter into any clearing transaction 
or participate in any clearing process; nor have discretion or 
independent authority over any account or transaction. The purpose of 
this provision is to ensure that Stock Execution Clerks would not 
perform duties customarily performed by a Registered Representative 
(necessitating NASD Series 7 qualification) \12\ and to ensure that 
Stock Execution Clerks comply with applicable federal securities 
laws.\13\
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    \12\ Exchange Rule 604(a) provides that no member organization 
shall permit any natural persons to conduct a public business or 
duties customarily performed by a registered representative unless 
such person is registered and qualified as a Registered 
Representative. Exchange Rule 604(a)(ii) provides that a person is 
deemed to be a qualified Registered Representative if he or she 
maintains an effective Series 7 ``Full Registration/General 
Securities Representative'' registration or an equivalent 
predecessor of this examination/registration.
    \13\ Telephone conversation between Richard S. Rudolph, Director 
and Counsel, Phlx, and Frank N. Genco, Attorney, Division, 
Commission.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act,\14\ in general, and furthers the 
objectives of section 6(b)(5) of the Act,\15\ in particular, in that it 
is designed to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, to protect the 
investors and the public interest, and to promote just and equitable 
principles of trade by regulating the conduct of Clerks on the 
Exchange's Options Floor.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Phlx 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 either solicited or 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 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-2001-104 and should be 
submitted by October 16, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-24292 Filed 9-24-02; 8:45 am]
BILLING CODE 8010-01-P