[Federal Register Volume 68, Number 188 (Monday, September 29, 2003)]
[Notices]
[Pages 56031-56034]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-24501]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48515; File No. SR-Phlx-2003-10]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. Relating to Remote 
Primary Specialists

September 22, 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 February 26, 2003, the Philadelphia Stock Exchange, Inc. 
(``Phlx'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which the Phlx has prepared. 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 Phlx proposes to adopt a policy to permit primary specialists 
to trade on a remote basis in limited circumstances. Specifically, Phlx 
proposes to amend Phlx Rules 444, 460, 517, 522 and 523, and to adopt 
new Phlx Rule 524. The text of the proposed rule change is set

[[Page 56032]]

forth below. New text is italicized; deleted text is bracketed.
* * * * *

Rule 444. Wire Connections Between Exchange and Members' Offices

    Rule 444. No member or member organization shall establish or 
maintain any telephonic or other wire connection between his or its 
office and the Exchange except with the approval of the Committee. The 
Committee may grant or withhold such approval, and may without being 
obliged to assign any reason or cause for its action cause to be 
disconnected any such connection. In order to facilitate communications 
remote specialists (whether competing or primary) shall be required to 
have and maintain e-mail capability acceptable to the Exchange at 
remote locations.

Rule 460. Procedures for Competing Specialists

    (a) Application--No change.
    (b) Obligations--No change.
    (c) Withdrawal
    If a competing specialist seeks to withdraw from acting as such in 
a security, it should so notify the Committee at least three business 
days prior to the desired effective date of such withdrawal. Withdrawal 
by a competing specialist bars that Competing Specialist from applying 
to trade [compete in] that same security as a primary or competing 
specialist for 90 days following the effective date of withdrawal. If 
the EAES Committee determines that extraordinary circumstances exist, 
it may waive the 90 day period. When the primary specialist requests to 
withdraw from a security, it shall be posted for reallocation by the 
EAES Committee. In the interim, if the EAES Committee is satisfied that 
a competing specialist can continue to maintain a fair and orderly 
market in such security, the competing specialist shall serve as the 
interim primary specialist until the security has been reallocated. 
Where there is more that one competing specialist in the security, [a] 
an interim primary specialist shall be selected from among the 
competing specialists by the EAES Committee until reallocation. A 
remote specialist may be selected as an interim primary specialist only 
where there is no non-remote competing specialist in the security who 
can continue to maintain a fair and orderly market in such security as 
interim primary specialist.
    (d) Competing Markets in a Security--No change.

Competing and Remote Specialist

    Rule 517. Rules governing the approval of trading as a competing 
specialist [and as a remote competing specialist ]are set forth in 460, 
Procedures for Competing Specialists. Rules governing the approval of 
trading as a remote specialist are set forth in [and] Rule 461, PACE 
Remote Specialist.[, respectively, and] Rules 460 and 461 are 
incorporated by reference herein. Rules 500 through 599 shall apply 
both to the specialist selected by the Committee following solicitation 
of applications under Rule 506(a) to serve as primary specialist and to 
any competing specialist approved under Rule 460, except that, subject 
to Rules 522 and 523 below, the primary specialist shall determine 
whether a security shall be PACE registered. Applications for 
allocation of competing specialist privileges pursuant to Rule 460 
shall contain the information required in Rule 506(b), and competing 
specialist privileges may be terminated on the same basis that primary 
specialist privileges may be removed and reallocated.
    Rule 522. When a Registrant (as defined in Rule 505) notifies the 
Exchange, the [The] Committee shall institute reallocation proceedings 
with respect to any security voluntarily removed from PACE by its 
Registrant. The original Registrant shall not be reallocated the 
security once another applicant, which may be a remote specialist unit, 
commits to trading the security on PACE. Should no applicant commit to 
trading the security on PACE, the Committee shall allocate the security 
pursuant to Rules 506 and 511; provided, however, that if the original 
Registrant has applied to retain the security it shall be awarded the 
allocation. The Committee shall not allocate the security to a remote 
specialist unit if, following solicitation, any non-remote specialist 
unit applicant (other than the original Registrant) commits to trading 
the security on PACE.
    Rule 523. The Committee shall institute reallocation proceedings 
for primary specialist privileges with respect to any non-PACE traded 
security should any applicant commit to trading that security as the 
primary specialist unit on PACE. The existing Registrant (as defined in 
Rule 505) shall retain primary specialist privileges in the security if 
it commits to trading the security on PACE as the primary specialist 
unit; provided, however, that the Committee may from time to time 
determine that, for specified periods, the existing Registrant shall 
not retain primary specialist privileges in the security in the event 
an applicant commits to trade the security on PACE as the primary 
specialist unit. A remote specialist unit may make the commitment to 
trade the security on PACE as a primary specialist.
    Rule 524
    A remote specialist unit may be allocated primary specialist 
privileges to trade any security that had previously been solicited or 
allocated by the Exchange but which is currently not allocated.
* * * * *

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 Phlx 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 Phlx 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
a. Background
    On December 21, 2001, the Commission approved Phlx Rule 460, which 
was designed to establish a framework pursuant to which multiple 
specialists could trade on the equity trading floor of the Phlx.\3\ 
Prior to the adoption of Phlx Rule 460, there was one specialist unit 
(``Primary Specialist'') for each equity security traded on the floor. 
The Primary Specialist was approved by the Phlx's Equity Allocation, 
Evaluation and Securities Committee (the ``EAES Committee'') \4\ 
pursuant to Phlx Rule 506(a) and Phlx Rule 511(b). Those rules 
generally provide for the allocation of equity securities (commonly 
called ``books'') to particular specialist units, which consist of 
specialists and other staff.\5\
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    \3\ See Securities Exchange Act Release No. 45183 (December 21, 
2001), 67 FR 118 (January 2, 2002) (SR-Phlx-2001-97).
    \4\ See Phlx By-Law Article 10-6 and Phlx Rule 500.
    \5\ See Phlx Rule 501.
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    Phlx Rule 460 currently provides that approved specialist units may 
apply to trade one or more securities as Competing Specialists. Each 
Competing

[[Page 56033]]

Specialist has the same affirmative and negative obligations under Phlx 
Rule 203 as are imposed on the Primary Specialist. There must be a 
Primary Specialist in a security in order for there to be Competing 
Specialists in that security.\6\
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    \6\ A Phlx specialist may trade some securities on a primary 
basis and other securities on a competing basis, or may trade all 
its securities on either a primary or a competing basis.
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    The Primary Specialist determines whether a security will trade on 
or off the Phlx's PACE system.\7\ If the Primary Specialist determines 
that the security will trade on PACE, then all Competing Specialists 
must trade that security on PACE.\8\ As stated in the proposed rule 
change filing to adopt Phlx Rule 460, the EAES Committee does not 
approve any application by a specialist to act as a Competing 
Specialist in any security that is not traded on the Phlx's PACE 
System.\9\ The Phlx does not permit Competing Specialists to trade a 
security off the PACE system if the Primary Specialist has elected to 
remove the security from PACE. In such circumstances, Competing 
Specialists may no longer trade the security, whether on or off the 
PACE system, unless the security is reallocated to another specialist 
willing to place the security back on the PACE system.
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    \7\ PACE is the electronic order routing, delivery execution and 
reporting system used to access the Phlx Equity Floor. See Phlx 
Rules 229 and 229A.
    \8\ If the Primary Specialist elects to take the security off 
the PACE system, the security is subject to reallocation to another 
specialist unit willing to trade the security on the PACE system. 
See Phlx Rule 520-523.
    \9\ The Phlx noted that pursuant to Phlx Rule 522 any security 
not traded on the PACE system may be reallocated to a specialist 
that is willing to trade the security on PACE. Thus, if a security 
is unavailable to be traded by a Competing Specialist because it is 
not on PACE, any specialist unit which otherwise may have applied to 
trade the security as a Competing Specialist may apply to trade the 
security as the Primary Specialist pursuant to Phlx Rule 522. 
Thereafter, the former Primary Specialist may apply to be a 
Competing Specialist. See, supra n.4.
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    On December 21, 2001, the Commission also approved Phlx Rule 461 in 
connection with the commencement of the Phlx's remote competing 
specialist program.\10\ Pursuant to Phlx Rule 461 PACE terminals and 
related equipment may be provided to member organizations for trading 
by qualified remote Competing Specialists. In the proposed rule change 
filed with the Commission to adopt Phlx Rule 461, the Phlx stated that 
the Primary Specialist may not operate remotely. The Phlx noted, 
however, that it might at a future time file a proposed rule change to 
permit the Primary Specialist to trade from a remote location. This 
filing is intended to do so, in the limited circumstances listed below.
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    \10\ See Phlx Rule 461 and Securities Exchange Act Release No. 
45184 (December 21, 2001), 67 FR 622 (January 4, 2002) (approving 
SR-Phlx-2001-98).
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b. Proposed Rule Amendments
    The Phlx proposes to permit the EAES Committee to allow Primary 
Specialists, trading on PACE from a remote location, to trade issues 
that are currently traded by specialists off PACE (``non-PACE 
issues''). The proposal would also permit a remote specialist, acting 
as primary specialist, to trade issues not traded on the Phlx at all 
(i.e., where there currently is not an assigned specialist and the 
issue is on the inactive-eligible list).\11\
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    \11\ The inactive-eligible list consists of securities, which 
qualify for listing, or unlisted trading privileges on Phlx but 
which are not allocated to any specialist.
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    Under the proposed rule change, a specialist could be approved to 
trade securities as a Primary Specialist from a remote location, but 
only in the following limited circumstances: (a) where the securities 
are allocated on an interim basis pending reallocation, (b) where the 
security is voluntarily removed from PACE by the current specialist, 
(c) with respect to a non-PACE traded security, if another applicant 
commits to trading the security on PACE, and (d) where the security 
that has previously been allocated or solicited is currently not 
allocated to any specialist (i.e., securities on the inactive-eligible 
list). A specialist would not be permitted to ``move'' equity 
securities to trade remotely on a primary basis.
c. Rule Changes
    Phlx Rule 460. Proposed Phlx Rule 460 states that a remote 
specialist may be selected as the interim Primary Specialist (until the 
security has been reallocated) only where there is not a non-remote 
Competing Specialist in the security that is able to maintain a fair 
and orderly market in the security. Phlx Rule 460 would give the EAES 
Committee authority to waive the 90 day reapplication bar in 
extraordinary circumstances in the event that a Competing Specialist 
withdraws from a security.\12\
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    \12\ Phlx Rule 460 currently provides that ``[w]ithdrawal by a 
competing specialist bars that Competing Specialist from applying to 
compete in that same security for 90 days following the effective 
date of withdrawal.''
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    Phlx Rule 517. Proposed Phlx Rule 517 has been revised to clarify 
that Phlx Rule 460 provides procedures for Competing Specialists and 
that Phlx Rule 461 provides procedures for remote specialists. It has 
also been revised to clarify that a Primary Specialist's decision to 
trade a security on PACE is subject to the reallocation provisions of 
Phlx Rules 522 and 523, such that any decision by a Primary Specialist 
to trade a security on PACE may result in that security being 
reallocated to another specialist.
    Phlx Rule 522. Phlx Rule 522 currently provides that the EAES 
Committee shall institute reallocation proceedings with respect to any 
security voluntarily removed from PACE. This rule applies when a 
specialist first removes a security from PACE.\13\ The proposed rule 
would permit a remote specialist unit to commit to trade a security on 
PACE as a Primary Specialist and therefore be awarded the Primary 
Specialist allocation under these circumstances, unless any non-remote 
specialist unit applicant (other than the original Registrant) commits 
to trading the security on PACE. Accordingly, if there is a qualified 
non-remote applicant, the EAES Committee should allocate Primary 
Specialist privileges to such non-remote applicant.
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    \13\ In contrast, Phlx Rule 523 applies where a security has 
been off PACE for some time.
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    Phlx Rule 523. Phlx Rule 523 currently provides that the EAES 
Committee shall institute reallocation proceedings for Primary 
Specialist privileges with respect to any non-PACE traded security 
should any applicant commit to trading that security as the Primary 
Specialist on PACE.\14\ This rule applies where a specialist has been 
trading a security off PACE. Phlx Rule 523 also applies in cases where 
the specialist has removed the security from PACE and/or soliciting for 
specialist applicants to trade the security on PACE pursuant to Phlx 
Rule 522 did not result in a reallocation. Under the current rule, if 
the existing specialist commits to trading the security on PACE as the 
Primary Specialist, the Primary Specialist shall retain Primary 
Specialist privileges regardless of other applicants, except that the 
EAES Committee may from time to time determine that, for specified 
periods, the existing Primary Specialist shall not retain such 
privileges in the event an applicant commits to trade the security on 
PACE.
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    \14\ When reallocation proceedings are commenced pursuant to 
Phlx Rule 522, the EAES Committee solicits specialist applications 
to take over Primary Specialist privileges in the security in 
question. By contrast, the EAES Committee, respecting reallocation 
proceedings pursuant to Phlx Rule 523, has not required a 
solicitation memorandum to be distributed.
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    The proposed revisions to Phlx Rule 523 provides that a remote 
specialist unit may make the commitment to trade the security on PACE 
as a Primary

[[Page 56034]]

Specialist. In terms of timing, the remote specialist may do so days or 
years after the security has been removed from PACE by the existing 
specialist. Thus, a remote specialist can be awarded Primary Specialist 
privileges in a security even if an on-floor specialist wants Primary 
Specialist privileges because, like securities on the inactive-eligible 
list, floor-based specialists have already had the opportunity to 
commit to trade the security on PACE.
    Phlx Rule 524. Phlx Rule 524 would provide that a remote specialist 
unit may be allocated Primary Specialist privileges to trade any 
security that had previously been solicited or allocated by the Phlx, 
but is currently not allocated to any specialist. In this situation, 
the EAES Committee would consider any remote specialist applicant.\15\
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    \15\ Like Phlx Rule 523, Phlx Rule 524 would not require a 
solicitation memo to be distributed by the EAES Committee.
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    Phlx Rule 444. Phlx Rule 444 concerns the establishment and 
maintenance of telephonic or other wire connections between member's 
offices and the Phlx. The proposed new language would add a requirement 
that remote specialist units, whether primary or competing, maintain e-
mail capability. The purpose of this requirement is to improve 
communication among specialists and between specialists and the Phlx.
2. Statutory Basis
    The Phlx believes that its proposal is consistent with Section 6(b) 
of the Act \16\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \17\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, 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, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest. The Phlx believes that 
offering Primary Specialist the opportunity to trade from an approved 
remote location may result in a greater number of securities being 
traded on PACE (because there may be specialists willing to trade a 
security on PACE, but only remotely), thereby benefiting investors 
using the PACE system. Additionally, the Phlx believes that the 
establishment of an e-mail requirement and the rule changes proposed 
herein are consistent with the efficient operation of the remote 
specialist program and will benefit investors.
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    \16\ 15 U.S.C. 78(f)(b).
    \17\ 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

    The Phlx did not solicit or receive written comment concerning the 
proposal.

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 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 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 
Phlx. All submissions should refer to File No. SR-Phlx-2003-10 and 
should be submitted by October 20, 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. 03-24501 Filed 9-26-03; 8:45 am]
BILLING CODE 8010-01-P