[Federal Register Volume 68, Number 7 (Friday, January 10, 2003)]
[Notices]
[Pages 1500-1505]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-460]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47118; File No. SR-Phlx-2002-34]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 and No. 2 thereto by the Philadelphia Stock 
Exchange, Inc. to Adopt a Seat Transaction Policy and Add Supplementary 
Material to Phlx Rule 708

January 2, 2003.
    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 June 21, 2002, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III, below, which Items have been prepared by the 
Exchange. On December 16, 2002, the Exchange filed Amendment No. 1 to 
the proposed rule change.\3\ On December 27, 2002, the Exchange filed 
Amendment No. 2 to the proposed rule change.\4\ 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 John Dayton, Assistant Secretary and 
Counsel, Phlx, to Florence Harmon, Senior Special Counsel, Division 
of Market Regulation (``Division''), Commission, dated December 13, 
2002 (``Amendment No.1''). Amendment No. 1 replaces Phlx's original 
proposal in its entirety.
    \4\ See letter from John Dayton, Assistant Secretary and 
Counsel, Phlx, to Florence Harmon, Senior Special Counsel, Division 
of Market Regulation (``Division''), Commission, dated December 27, 
2002 (``Amendment No. 2''). Amendment No. 2 makes certain technical 
changes 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 Exchange proposes to adopt a Seat Transaction Policy for 
Governors, Committee Members and Associated Member Organizations 
(``Seat Transaction Policy'' or the ``Policy''), described in further 
detail below, which, if approved, will form a part of the Exchange's 
Code of Conduct for Governors and Committee Members (the ``Governance 
Members Code of Conduct''), which prohibits Exchange Governors, 
Committee Members and Member Firms associated with them from engaging 
in purchases or sales of Exchange ``Seats'' (as further defined below), 
except in accordance with the Policy. The Policy generally restricts 
such Seat Transactions if a Governance Member is in possession of 
Material Confidential Information \5\ of the Exchange, except in 
accordance with the procedures set forth in the Policy. In addition, 
the Exchange proposes to amend Phlx Rule 708, Acts Detrimental to the 
Interest and Welfare of the Exchange, by adding commentary that 
provides notice to members and member organizations that any violation 
of the Exchange's Seat Transaction Policy constitutes a violation of 
Phlx Rule 708. Below is the text of the proposed rule change. Proposed 
new language is in italics.
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    \5\ See definition of Material Confidential Information, below.
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* * * * *

Philadelphia Stock Exchange

Code of Conduct for Board Members and Committee Members

    Articles I. thru IV. No change.

Article V. Seat Transaction Policy for Governors and Committee Members

Chinese Wall

    A Chinese Wall, also known as an Information Barrier, is an 
internal written policy of an Exchange or PBOT member firm or member 
organization that is designed to prevent the disclosure by a Governor 
or Committee Member associated with such Exchange or PBOT member firm 
or member organization, or FCO Participant or FCO Participant 
Organization (collectively, ``Member Organizations''), of non-public, 
confidential or otherwise sensitive Exchange or PBOT information 
possessed by such Governor or Committee Member to any third party, 
including, without limitation, any employee, agent, associated person, 
representative or consultant of such Member Organization, as the case 
may be.

Material Confidential Information

    Material Confidential Information includes any information that is 
proprietary to the Exchange, which a reasonable person would consider 
significant or important when purchasing or selling a Seat.

Seat Transaction

    A transaction pursuant to which a Covered Person or a Member 
Organization purchases or sells a Seat.

Special Committee on Seat Transactions

    The Special Committee on Governor and Committee Member Seat 
Transactions (``Special Committee'') is a Special Committee of the 
Board having jurisdiction over all Seat Transactions by Covered Persons 
or Member Organizations.

Window Period

    A Window Period is a period of time, imposed by the Special 
Committee on Seat Transactions, during which a Covered Person or 
associated Member Organization may not engage in a Seat Transaction, 
such as a period of time prior to the announcement of new products to 
be traded on the Exchange, prior to the announcement of a corporate 
transaction involving the Exchange, prior to the announcement of 
certain regulatory actions affecting the Exchange, prior to the 
announcement of an increase or decrease in fees to be paid by the 
Exchange members, or prior to the announcement of any significant 
action by the Board of Governors or any Committee.

1. Responsibility for Compliance

    (a) Each Covered Person \6\ bears personal responsibility for 
complying with this Seat Transaction Policy. Each Member Organization 
associated with a Covered Person must also comply with this Seat 
Transaction Policy. Where a

[[Page 1501]]

Covered Person serves as a principal, director or officer of a Member 
Organization, any Seat Transaction by that Member Organization, without 
more, has the potential for violating the duties described in this Code 
of Conduct. Seat Transactions by such Member Organizations are subject 
to review by the Special Committee.
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    \6\ As used in the Seat Transaction Policy, ``Covered Person'' 
shall mean any person who serves the Exchange as a Board Member or 
as a Committee Member.
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    (b) If the Special Committee permits the Covered Person or Member 
Organization to proceed with a transaction, in accordance with the 
procedures provided herein, the Covered Person and/or Member 
Organization nonetheless retains ultimate responsibility for 
determining whether to proceed with the Seat Transaction and what their 
disclosure obligations are to the other party in the Seat Transaction. 
The decision of the Special Committee is for the sole benefit of the 
Exchange, and is not intended to insulate the Covered Person or Member 
Organization from responsibility for their conduct in connection with a 
Seat Transaction under any applicable law. This Seat Transaction Policy 
is limited to whether the Covered Person or Member Organization's 
conduct complies with this Code of Conduct and does not purport to 
affect the rights and obligations of Covered Persons, Member 
Organizations and others under applicable law and/or contract.

2. Authority to Review Seat Transactions for Compliance with Code of 
Conduct

    The Board of Governors has established a Special Committee on Seat 
Transactions (``Special Committee''), which shall have full authority 
to review Seat Transactions by Covered Persons and associated Member 
Organizations. Every Covered Person and any associated Member 
Organization shall cooperate fully with any such review. The Special 
Committee may initiate a review of a Seat Transaction at the request of 
the Covered Person or associated Member Organization prior to the 
consummation of the Seat Transaction. The Special Committee may also 
initiate a review of a Seat Transaction at the direction of the Board 
of Governors, the Executive Committee, or on its own initiative.

3. Special Committee Procedures

    (a) The Special Committee shall have three members, all of whom are 
Governors and at least one of whom is a Public Governor. The Special 
Committee's decisions are governed by Section 10-3(a) of the Phlx By-
Laws. In addition, the Board of Governors directs that at least one of 
the members making any quorum be a Public Governor. At the time a Seat 
Transaction is contemplated, a Covered Person is obliged to notify the 
Board of Governors by contacting, in writing, the General Counsel, 
Deputy General Counsel, Corporate Secretary, or Assistant Secretary of 
any pending Seat Transaction. The Special Committee shall convene 
promptly after such notification to review the Seat Transaction. The 
Special Committee shall make all reasonable efforts to respond to the 
Covered Person rapidly and within a time frame requested by the Covered 
Person. It is understood that in some cases the Special Committee will 
be asked to review a Seat Transaction within 24 hours of notification 
by the Covered Person. In any case, the Special Committee must either 
render a decision, conduct an interview with the Covered Person, or 
request additional information from the Covered Person within 15 
business days from the time of request. If the Special Committee 
conducts an interview with the Covered Person or requests additional 
information from the Covered Person, then the Special Committee must 
render a decision within 30 business days from the later to occur of 
(i) the interview, or (ii) if further information is requested by the 
Special Committee; all requested information is supplied to the Special 
Committee, provided that a Covered Person may waive compliance with 
these deadlines. The Special Committee shall render its decision, in 
writing, to the Covered Person or Member Organization, as well as to 
the Board of Governors, in regard to whether the proposed Seat 
Transaction complies with this Seat Transaction Policy and the Code of 
Conduct. All decisions of the Special Committee may be appealed to the 
Board of Governors by an aggrieved Covered Person or Member 
Organization by written notice filed with the Corporate Secretary 
within thirty (30) days of such Special Committee decision.
    (b) The Special Committee is authorized to interview the Covered 
Person and others in the associated Member Organization involved in a 
Seat Transaction. The Special Committee shall determine whether the 
information in the possession of the Covered Person or Member 
Organization is Confidential Information as defined in the Code of 
Conduct. The Special Committee shall then determine whether such 
Confidential Information is Material Confidential Information. The 
Special Committee shall determine whether any Material Confidential 
Information must be disclosed in connection with the Seat Transaction 
and, if so, what Material Confidential Information should be disclosed. 
The Special Committee shall also determine whether an agreement 
protecting the confidentiality of such Material Confidential 
Information and which names the Exchange as an intended third-party 
beneficiary should be in place between the Covered Person or the Member 
Organization and the other party to the Seat Transaction prior to the 
disclosure. The Special Committee is authorized to develop general 
standards and procedures in connection with its evaluation of Seat 
Transactions by Covered Persons.
    (c) If the Special Committee determines that Material Confidential 
Information should not be disclosed, it may prohibit the Covered Person 
or Member Organization from proceeding with the transaction until such 
time as the Material Confidential Information is no longer confidential 
or material or until such time as the Material Confidential Information 
may be disclosed. The determination by the Special Committee 
(including, without limitation, the Special Committee's views 
concerning the sufficiency or insufficiency of a Member Organization's 
Chinese Wall arrangements for purposes of this policy, as described in 
section 4 below) is in no way a legal determination as to whether the 
Confidential Information is material from the point of view of federal 
or state law (e.g., under the federal securities laws or state common 
law concerning fraud or misrepresentation) or whether the Covered 
Person or Member Organization would have any liability to a party other 
than the Exchange for proceeding with a Seat Transaction. Covered 
Persons and Member Organizations should be reminded that they should 
consult with their own counsel about all matters arising from Seat 
Transactions when the Covered Person is in possession of Confidential 
Information.

4. Scope of Special Committee's Jurisdiction

    The Special Committee is authorized to render binding decisions 
regarding Seat Transactions where a Covered Person or an associated 
Member Organization is involved. The Special Committee's determination 
shall be limited to: (1) Whether a Seat Transaction may proceed without 
any disclosure of Material Confidential Information; (2) whether the 
Member Organization involved in the Seat Transaction has a ``Chinese 
Wall'' or information barrier in place to prevent disclosure of 
Material Confidential Information and, if so, whether such

[[Page 1502]]

``Chinese Wall'' or information barrier should be regarded as being 
sufficient to justify the Special Committee to permit a Member 
Organization or person affiliated therewith, who is not a Covered 
Person and who is not in possession of Material Confidential 
Information to proceed with the Seat Transaction; (3) whether the Seat 
Transaction may proceed only after approved disclosures of Material 
Confidential Information to the other party in the Seat Transaction 
and, in such event, whether a confidentiality agreement is needed to 
protect any Material Confidential Information from being disclosed; or 
(4) whether the Seat Transaction can not proceed at the current time or 
during certain Window Periods established by the Special Committee.

5. Consequences of Violations of Seat Transaction Policy

    Violations of this Seat Transaction Policy will result in 
appropriate disciplinary action in accordance with Exchange Rules 
(which may include, without limitation, Phlx Rule 708). In addition, 
where it has been determined that applicable laws, rules or regulations 
may have been violated in connection with a violation of this Seat 
Transaction Policy, appropriate disciplinary action may include legal 
action by the Exchange or PBOT or the referral of the matter to an 
appropriate governmental agency.

6. Right of Appeal of Special Committee Decisions

    Decisions of the Special Committee may be appealed by the Covered 
Person or associated Member Organization to the Board of Governors as 
if such decision were rendered by a Standing Committee of the Board of 
Governors, in accordance with Phlx By-Laws 11-1(a) and 11-2. The 
decision on review by the advisory committee on appeals of the Board of 
Governors pursuant to Phlx By-Law 11-2 shall constitute a final 
decision by the Exchange, upon the acceptance by the Board of Governors 
of the advisory opinion of such advisory committee on appeals.
* * * * *

Rule 708. Acts Detrimental to the Interest or Welfare of the Exchange

    A member, member organization, or person associated with or 
employed by a member or member organization shall not engage in acts 
detrimental to the interest or welfare of the Exchange.
    Commentary:
    .01 Acts which could be deemed detrimental to the interest or 
welfare of the Exchange include, but are not limited to, the following:
    (a) thru (e) No change.
    (f) any action by a member of the Board of Governors or any 
Exchange Committee, or by any member organization associated with such 
member, which contravenes the Seat Transaction Policy contained in 
Article V of the Code of Conduct for Governors and Committee Members.
* * * * *

II. Self-Regulatory Organization's Statement Regarding 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 purpose of the proposed rule change is (i) To amend the 
Exchange's Code of Conduct for Governors and Committee Members, by 
adopting a Seat Transaction Policy, which generally prohibits members 
of the Phlx Board of Governors or of any Exchange Committee (a 
``Governance Member'') \7\ and any Phlx member firm or corporation 
associated with such Governance Member (a ``Member Organization'') from 
engaging in purchases or sales of Exchange memberships, except in 
compliance with the Policy, and (ii) to codify the Exchange's policy 
that a violation of the Exchange's Seat Transaction Policy by a 
Governance Member or any Member Organization constitutes a violation of 
Phlx Rule 708, Acts Detrimental to the Interest and Welfare of the 
Exchange, and such conduct is therefore subject to disciplinary action 
by the Exchange.\8\
    The proposed rule change would establish procedures for the 
purchase or sale \9\ of a Phlx membership, foreign currency option 
(``FCO'') participation, or Philadelphia Board of Trade (``PBOT'') 
membership (each an ``Exchange Seat'' or a ``Seat''), by a Governance 
Member or Member Organization. In general, the Policy prohibits such 
Seat Transactions while such Governance Member or Member Organization 
possesses ``Material Confidential Information'' of the Exchange except 
insofar as such transaction complies with the Policy. In addition, 
proposed commentary to Phlx Rule 708 would make clear that violations 
of the Policy may constitute an act detrimental to the interests and 
welfare of the Exchange and therefore that rule. Accordingly, both the 
Seat Transaction Policy and the proposed amendment of commentary to 
Phlx Rule 708 would, pursuant to Phlx By-Laws 18-1 and 18-3, expressly 
allow the Exchange to bring a disciplinary action, as appropriate, 
against Governance Members and Member Organizations for violations of 
the Seat Transaction Policy. Neither the Seat Transaction Policy nor 
the proposed amendment of Phlx Rule 708, Commentary .01 would apply to 
Exchange members other than Governors, Committee Members and their 
associated Member Organizations.
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    \7\ The Exchange notes that the Policy uses the term ``Covered 
Person'' instead of the term ``Governance Member,'' which is used 
here. These terms are synonymous.
    \8\ The Exchange notes that Phlx Rule 708, as well as Phlx Rule 
707 (pertaining to just and equitable principles of trade), could 
apply to a wide variety of situations. The specific scenarios listed 
in the commentary to Phlx Rules 707 and 708 are intended to 
illustrate some, but not all, of the situations that violate these 
Rules. As stated in the Commission's order approving Phlx Rule 708, 
the Exchange has determined, for various reasons, to list certain 
conduct that violates Phlx Rule 708, but not others. See Exchange 
Act Release No. 33850 (April 1, 1994), 59 FR 16874 (April 8, 1994) 
(File No. SR-Phlx-93-53). Similarly, the Exchange also notes that it 
has previously amended the commentary to Phlx Rule 707 in order to 
add certain violations of the Phlx Code of Conduct to the non-
exclusive list of potential violations of Phlx Rule 707. See, e.g., 
Exchange Release No. 43739 (December 19, 2000) 65 FR 82440 (December 
28, 2000) (File No. SR-Phlx-00-94) (order approving proposal to 
prohibit members, member organizations, and persons associated with 
or employed by a member or member organization from engaging in 
harassment or other improper behavior in connection with listing or 
competitive practices).
    \9\ The Governance Members Code of Conduct provisions described 
herein would only address the purchase or sale of a Seat, not other 
transactions involving Seats, such as lease transactions.
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Background
    The Exchange adopted the Seat Transaction Policy as an amendment to 
the Governance Members Code of Conduct. The Seat Transaction Policy 
recognizes that Governance Members may be subject to conflicting duties 
whenever they engage in a transaction to purchase or sell an Exchange 
Seat.
    On the one hand, a Governance Member, or a Member Organization for 
which such Governor is an officer or director, must own or lease an 
Exchange

[[Page 1503]]

Seat to conduct business on the Exchange. Governance Members and Member 
Organizations may also purchase an Exchange Seat in order to lease it 
to third persons with the expectation of lease income and appreciation 
in the value of the Exchange Seat itself. However, as a result of their 
governance positions on the Board or on an Exchange Committee, 
Governance Members may learn Material Confidential Information 
regarding the Exchange that may affect the value of all Exchange Seats, 
or the value of particular Exchange Seats. As defined in the Seat 
Transaction Policy, Material Confidential Information is confidential 
and proprietary to the Exchange and may not, under the Governance 
Members Code of Conduct, Exchange policy, and applicable law, be 
disclosed or used for personal gain.
    On the other hand, the Exchange notes that failure to disclose 
Material Confidential Information to a potential purchaser or seller of 
an Exchange Seat could expose the Governance Member and/or Member 
Organization to liability to the potential purchaser or seller under 
state law. Any time a Governance Member purchases or sells an Exchange 
Seat while the Governance Member possesses such Material Confidential 
Information, the Exchange states that the Governance Member and (as a 
consequence of information sharing by such Governance Member with other 
persons at his/her associated Member Organization) Member Organization 
could be exposed to disciplinary action, liability, and disrepute. The 
Exchange states that such conduct by the Governance Member or Member 
Organization could also expose the Exchange to disrepute.
    Therefore, the Exchange adopted the Seat Transaction Policy in 
order to resolve the tension between a Governance Member's and/or 
Member Organization's legitimate business needs to purchase or sell 
Exchange Seats from time to time and the Exchange's legitimate business 
interest in preventing disclosure of Material Confidential Information 
to anyone involved in a Seat Transaction.
    The Exchange notes that in many cases, disclosure of Material 
Confidential Information to the other purchaser or seller in the Seat 
Transaction would put the Governance Member or Member Organization and 
the buyer or seller on equal footing in order to negotiate a fair price 
for the Seat--and could in some cases be legally required in order to 
avoid liability to the party with whom the Governance Member or Member 
Organization is dealing. However, Governance Members are required by 
the Governance Members Code of Conduct to keep Material Confidential 
Information confidential. The Exchange states that the Seat Transaction 
Policy is designed to accommodate both of these interests by allowing a 
Special Committee to review the facts surrounding a seat transaction 
and, if necessary, to impose conditions on the seat transaction in 
order to prevent or limit disclosure of Material Confidential 
Information of the Exchange to third parties.
Seat Transaction Policy
    In Articles V.1 and V.2 of the proposed Seat Transaction Policy, 
the Exchange proposes to create a new Special Committee (the ``Special 
Committee'') of the Board of Governors that would oversee Seat 
Transactions by Governance Members and Member Organizations.\10\ 
Article V.3 would provide that the Special Committee, which is to be 
composed of three members, all of whom are Governors and at least one 
of whom is a Public Governor, would be responsible for examining the 
facts of each proposed Seat Transaction by a Governance Member or 
Member Organization.\11\ Article V.4 of the Seat Transaction Policy 
empowers the Special Committee to prohibit any Governance Member or 
Member Organization from entering into a Seat Transaction while they 
possess Material Confidential Information of the Exchange.
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    \10\ If the entire Special Committee cannot be convened, the 
Special Committee may proceed with a quorum of its members or may 
proceed with substituted members appointed by the Board of Governors 
or the Board's Executive Committee. By-law Article X, section 10-
3(a) sets the quorum of the Special Committee as the majority of its 
members then in office. A quorum of the Special Committee, 
therefore, is two members. In addition to the quorum requirements in 
By-law Article X, section 10-3(a), the Board directs that at least 
one of the members making a quorum be a Public Governor. The Special 
Committee could take action, pursuant to By-law Article X, section 
10-3(a), if a majority of those voting at a meeting at which a 
quorum is present vote in favor of the motion at hand, provided at 
least two vote. The Board of Governors or the Board's Executive 
Committee could appoint substituted members to the Special 
Committee, as needed. By-law Article IV, Section 4-4(b)(xix) 
empowers the Board to designate and appoint special committees, such 
as the one at hand. The Board may appoint additional Governors to 
the Special Committee to fill-in for absent Governors. In addition, 
the Board's Executive Committee, by resolution of the Board passed 
on December 11, 2002, may appoint Governors to the Special Committee 
to fill-in for absent Governors.
    \11\ The members of the Special Committee are subject to the 
conflict avoidance and recusal provisions that are in By-law Article 
IV, Section 4-8 and in the Governance Member Code of Conduct, 
Article III.6.
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    Article V.3 of the Seat Transaction Policy further provides that 
the Special Committee may impose certain specified restrictions upon a 
Seat Transaction to prevent potential misuse or disclosure of Material 
Confidential Information by the Governance Member or Member 
Organization,\12\ or by the person or firm on the other side of the 
Seat Transaction. As proposed, the Special Committee would determine 
whether it is appropriate for such Material Confidential Information to 
be disclosed by the Governance Member or Member Organization in 
connection with a proposed Seat Transaction. The Special Committee 
would also require that a confidentiality agreement be established 
between the Governance Member or Member Organization and the person on 
the other side of the Seat Transaction. If such a confidentiality 
agreement is required, the Seat Transaction Policy would require that 
the Exchange be named as an intended third-party beneficiary of the 
agreement.
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    \12\ The Exchange states that the Seat Transaction Policy 
recognizes that it may not in all instances be appropriate to 
attribute Material Confidential Information possessed by a 
Governance Member to the entire Member Organization for which he/she 
serves as an officer or director. Consistent with the policies of 
the federal securities laws (see, e.g., Rule 14e-3 under the Act, 17 
CFR 240.14e-3, and Phlx Rule 1020(f)), the Policy authorizes the 
Special Committee to review any information barriers that a Member 
Organization may have established to restrict the flow of Material 
Confidential Information within its organization and to take the 
existence of such information barriers into account when reviewing a 
proposed Seat Transaction.
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    Proposed Article V.4 provides that, the Special Committee may 
prohibit any Governance Member or Member Organization from consummating 
a Seat Transaction under conditions contrary to the conditions set 
forth by the Special Committee, or during certain ``window 
periods''\13\ specified by the Special Committee.
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    \13\ An example of a ``window period'' during which Seat 
Transactions may be prohibited is prior to the announcement of a 
significant transaction involving the Exchange.
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Governance Member Responsibilities
    Proposed Article V.3(a) requires that at the time a Seat 
Transaction is contemplated, the Governance Member or Member 
Organization notify the Board of Governors by notifying certain 
Exchange officers.\14\ Article V.3(a) further requires that the Special 
Committee convene promptly after such

[[Page 1504]]

notification to review the proposed Seat Transaction. Understanding 
that the Governance Member or Member Organization may need to act 
quickly in order to consummate a Seat Transaction, Article V.3(a) of 
the Seat Transaction Policy mandates the Special Committee to make all 
reasonable efforts to respond to the Governance Member or Member 
Organization rapidly and within a time frame requested by such person. 
The Seat Transaction Policy therefore anticipates that, in certain 
cases, the Special Committee will be asked to review a Seat Transaction 
within 24 hours of notification of the Board of Governors by the 
Governance Member or Member Organization. In any case, the Special 
Committee must either render a decision, conduct an interview with the 
Governance Member, or request additional information from the 
Governance Member within 15 business days from the time of request. If 
the Special Committee conducts an interview with the Governance Member 
or requests additional information from the Governance Member, than the 
Special Committee must render a decision within 30 business days from 
the later to occur of (i) the interview or, (ii) if further information 
is requested by the Special Committee, all requested information is 
supplied to the Special Committee; provided that a Governance Member 
may waive compliance with these deadlines.
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    \14\ Except to the extent that the Special Committee excuses a 
Governance Member or Member Organization as provided in the next 
sentence, this is mandatory in respect of all Seat Transactions by 
Governance Members and their Member Organizations. However, the 
Special Committee could excuse the Governance Member or Member 
Organization from this disclosure requirement if the Special 
Committee determines that all or certain future disclosures are 
rendered unnecessary by the implementation and operation of the 
information barriers described in footnote 12, above.
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Special Committee Procedures
    Article V.4 of the Seat Transaction Policy requires the Special 
Committee to render a binding written decision to the Governance Member 
or Member Organization, as well as to the Board of Governors, regarding 
whether the proposed Seat Transaction complies with the Seat 
Transaction Policy. Articles V.3 and V.4 provide further procedures to 
be followed by the Special Committee in reviewing Seat Transactions. An 
aggrieved Governance Member or Member Organization may appeal decisions 
of the Special Committee to the Board of Governors consistent with 
Article XI of the Phlx By-Laws, by filing a written notice with the 
Secretary of the Exchange within thirty (30) days of the Special 
Committee's decision.
    Proposed Articles V.3(d) and V.4 specify the remedies that the 
Special Committee may impose in the event it determines that a 
Governance Member or Member organization possess Material Confidential 
Information at the time of a Seat Transaction. These remedies include 
(i) prohibiting the Seat Transaction until such time as the Material 
Confidential Information is no longer confidential; (ii) requiring that 
Material Confidential Information be disclosed to the other party, but 
only after a non-disclosure agreement between the parties is in place; 
and (iii) disallowing the Seat Transaction to proceed, but only during 
certain ``window periods'' established by the Special Committee.
Disciplinary Consequences
    Under amended Phlx Rule 708, the Exchange proposes to provide 
notice to Governance Members and Member Organizations that the failure 
by any Governance Member or Member Organization to comply with the Seat 
Transaction Policy constitutes a violation of Phlx Rule 708, Acts 
Detrimental to the Interest and Welfare of the Exchange, and would 
thereby subject such Governance Member or Member Organization to 
disciplinary action by the Exchange pursuant to Phlx By-Laws 18-1 and 
18-3.\15\ The Exchange states that Article V.3(b) of the Seat 
Transaction Policy makes clear that any determination by the Special 
Committee is for the sole benefit of the Exchange and is limited to the 
question whether a Governance Member or Member Organization's conduct 
complies with the Governance Member Code of Conduct. The Special 
Committee's decisions do not constitute legal advice and are not 
intended to affect the rights and obligations of Governance Members and 
Member Organizations under any applicable law or under any contract 
with third parties, including purchasers or sellers of Exchange Seats.
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    \15\ The Exchange notes that conduct that violates the Seat 
Transaction Policy could also violate various laws and that no 
inference should be drawn that the Exchange's remedies for violative 
conduct are limited to disciplinary action under By-Laws 18-1 and 
18-3. However, the Exchange notes that Seats have never been 
regarded as ``securities'' for purposes of the federal securities 
laws. Therefore, Seat Transactions would not be subject to the 
provisions of the federal securities laws prohibiting deceptive and 
manipulative practices ``in connection with the sale of 
securities.'' (See, e.g., Section 10 of the Act, 15 U.S.C. 78j, and 
Rule 10b-5 under the Act, 17 CFR 240.10b-5.) See Ferreri v. Goldberg 
Securities, Inc., 1989 WL 11073, 2-3 (E.D. Pa. 1989)(``it is the 
view of this Court that plaintiff's two [Seats] do not constitute 
`securities'''); letter to Clifford Lefebvre, Esq., Baker, Nelson & 
Williams from John Heneghan, Deputy Chief Counsel, Office of the 
Chief Counsel, Commission dated March 12, 1973; letter to European 
Mercantile Exchange Limited from Brian Lynch, Attorney-Adviser, 
Division of Corporation Finance, Commission dated October 11, 1988; 
letter to American Stock Exchange--NASD from Michael Hyatte, Special 
Counsel, Division of Corporation Finance, Commission, dated July 10, 
1998.
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2. Statutory Basis
    The Phlx believes that the proposed rule change, as amended, is 
consistent with the provisions of section 6 of the Act,\16\ in general, 
and in particular, with sections 6(b)(3) and 6(b)(5) of the Act,\17\ in 
that it is designed to regulate fairly and in the public interest the 
administration of the Exchange; with section 6(b)(5), in that it is 
designed to prevent fraudulent and manipulative acts and practices; and 
with section 6(b)(6), in that it is designed to appropriately 
discipline members for violation of the rules of the Exchange. 
Specifically, the Phlx believes that the Seat Transaction Policy, as 
specified in the Governance Members Code of Conduct, and Rule 708, as 
amended, should discourage fraudulent and manipulative acts and 
practices in connection with the purchase or sale of Exchange Seats by 
Governance Members, who owe a fiduciary duty to the Exchange and its 
members, and by Member Organizations, which are each prohibited from 
taking actions that are detrimental to the interests or welfare of the 
Exchange.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(3) and (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 Phlx consents, the Commission will:
    (A) By order approve such proposed 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

[[Page 1505]]

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 Phlx. All 
submissions should refer to File No. SR-Phlx-2002-34 and should be 
submitted by January 31, 2003.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-460 Filed 1-9-03; 8:45 am]
BILLING CODE 8010-01-P