[Federal Register Volume 68, Number 45 (Friday, March 7, 2003)]
[Notices]
[Pages 11167-11168]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-5423]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47417; File No. SR-Phlx-2002-61]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendment No. 1 Thereto by the Philadelphia Stock Exchange, 
Inc. To Amend Options Floor Procedure Advice A-13 To Include Violations 
for Failure To Obtain Approval To Disengage the NBBO Feature in the 
Exchange's Minor Rule Plan

February 27, 2003.
    On October 4, 2002, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend Phlx Option Floor Procedure Advice 
(``OFPA'') A-13, Auto Execution Engagement/Disengagement 
Responsibility, to include in the Exchange's minor rule violation 
enforcement and reporting plan (``Minor Rule Plan'') \3\ violations for 
failure to obtain the necessary approvals prior to disengagement of the 
National Best Bid/Best Offer (``NBBO'') Feature of the Exchange's 
Automated Options Market System (``AUTOM'').\4\ The Exchange's NBBO 
Feature automatically executes orders at the NBBO for certain options 
designated by the Phlx's Options Committee as eligible for the NBBO 
Feature (``automatic step-up options''), provided that the NBBO does 
not differ from the specialist's bid or offer by more than the ``step 
up parameter.'' \5\ Currently, engagement and disengagement of the NBBO 
Feature is governed solely by Phlx Rule 1080(c)(i), and violations are 
referred to the Business Conduct Committee (``BCC'').
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Exchange's Minor Rule Plan, codified in Exchange Rule 
970, includes Floor Procedure Advices with accompanying fine 
schedules.
    \4\ AUTOM is the Exchange's electronic order delivery, routing, 
execution and reporting system, which provides for the automatic 
entry and routing of equity option and index option orders to the 
Exchange trading floor. Orders delivered through AUTOM may be 
executed manually, or certain orders are eligible for AUTOM's 
automatic execution feature, AUTO-X. Equity option and index option 
specialists are required by the Exchange to participate in AUTOM and 
its features and enhancements. Option orders entered by Exchange 
members into AUTOM are routed to the appropriate specialist unit on 
the Exchange trading floor.
    \5\ For a complete description of the NBBO Feature, see 
Securities Exchange Act Release No. 43684 (December 6, 2000), 65 FR 
78237 (December 14, 2000) (order partially approving SR-Phlx-00-93).
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    The Exchange proposed to amend OFPA A-13 to restate from Phlx Rule 
1080(c)(i) the conditions for using the NBBO Feature, including the 
requirement to obtain approval to disengage the NBBO Feature, and to 
include a fine schedule for failure to obtain such approval. 
Specifically, the proposed fine schedule is as follows: First 
occurrence, $250; second occurrence, $500; third occurrence, $1,000; 
fourth occurrence and thereafter, sanction discretionary with the BCC. 
The proposed fine schedule would be implemented on a one-year running 
basis. The BCC also would have discretion concerning sanctions for any 
violations should they be deemed egregious by the Exchange's 
Enforcement Department and referred directly to the BCC pursuant to 
Exchange Rule 960.2.
    On November 7, 2002, the Exchange submitted Amendment No. 1 to the 
proposed rule change.\6\ The proposed rule change, as amended, was 
published in the Federal Register on January 22, 2003.\7\ The 
Commission did not receive any comment letters on the proposed rule 
change. This order approves the proposed rule change, as amended.
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    \6\ See letter from Rick Rudolph, Director and Counsel, Phlx, to 
Jennifer Lewis, Commission, dated November 6, 2002 (``Amendment No. 
1''). In Amendment No. 1, Phlx fixed nonsubstantive typographical 
errors in its rule text, and added a cross-reference to Phlx Rule 
960.2 in the purpose section of its proposal.
    \7\ See Securities Exchange Act Release No. 47166 (January 10, 
2003), 68 FR 3077.
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    The Commission has carefully reviewed the proposal and finds that 
the proposed rule change, as amended, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange \8\ and, in particular, 
the requirements of section 6 of the Act \9\ and the rules and 
regulations thereunder. The Commission finds specifically that the 
proposed rule change is consistent with section 6(b)(6) of the Act \10\ 
in that it provides a procedure whereby member organizations can be 
disciplined appropriately in those instances when a rule violation is 
minor in nature, but a sanction more serious than an admonition letter 
is appropriate. Additionally, the Commission finds that the proposed 
rule change is consistent with the requirements of sections 6(b)(7)\11\ 
and 6(d)(1)\12\ of the Act. Section 6(b)(7) requires the rules of an 
exchange to be in accordance with the provisions of section 6(d) of the 
Act, and, in general, to provide a fair procedure for the disciplining 
of members and persons associated with members. Section 6(d)(1) 
requires an exchange to bring specific charges, notify such member or 
person of, and give him an opportunity to defend against, such charges, 
and keep a record, in any proceeding to determine whether a member or 
person associated with a member should be disciplined. Finally, the 
Commission finds the proposal is consistent with Rule 19d-1(c)(2) under 
the Act,\13\ which governs minor rule violations plans.
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    \8\ In approving this proposed rule change, the Commission notes 
that it has considered its impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(6).
    \11\ 15 U.S.C. 78f(b)(7).
    \12\ 15 U.S.C. 78f(d)(1).
    \13\ 17 CFR 240. 19d-1(c)(2).
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    In approving this proposal, the Commission in no way minimizes the 
importance of compliance with these rules, and all other rules subject 
to the imposition of fines under the Exchange's Minor Rule Plan. The 
Commission believes that the violation of any self-regulatory 
organization's rules, as well as Commission rules, is a serious matter. 
However, in an effort to provide the Exchange with greater flexibility 
in addressing certain violations, the Exchange's Minor Rule Plan 
provides a reasonable means to address rule violations that do not rise 
to the level of requiring formal disciplinary proceedings. The 
Commission expects that the Phlx will continue to conduct surveillance 
with due diligence, and make a determination based on its findings 
whether fines of more or less than the recommended amount are 
appropriate for violations of rules under the Exchange's Minor Rule 
Plan, on a case by case basis, or if a violation requires formal 
disciplinary action.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-Phlx-2002-61), as amended, 
is approved.
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    \14\ 15 U.S.C. 78s(b)(2).


[[Page 11168]]


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    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-5423 Filed 3-6-03; 8:45 am]
BILLING CODE 8010-01-P