[Federal Register Volume 69, Number 7 (Monday, January 12, 2004)]
[Notices]
[Pages 1771-1773]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-523]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49018; File No. SR-PCX-2003-49]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 by the Pacific Exchange, Inc. Eliminating 
the Requirement that Market Makers With No Public Accounts and Who Do 
Not Solicit Public Accounts, Maintain Certain Information Barriers

January 5, 2004.
    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 September 16, 2003, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange''), through its subsidiary, PCX Equities,

[[Page 1772]]

Inc. (``PCXE''), 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 PCX. On December 
16, 2003, the Exchange amended the proposal.\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 December 15, 2003 letter from Steven B. Matlin, Senior 
Counsel, Regulatory Policy, PCX, to Nancy J. Sanow, Assistant 
Director, Division of Market Regulation, Commission, and attachment 
(``Amendment No.1''). Amendment No. 1 replaces and supersedes the 
original proposed rule change in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange, through PCXE, proposes to eliminate the Information 
Barrier requirement set forth in PCXE Rule 7.26 in the limited 
circumstances where a Market Maker, which also functions as a General 
Authorized Trader,\4\ engages solely in proprietary trading and does 
not, under any circumstance, maintain customer accounts or solicit or 
accept orders from or on behalf of public customers. The text of the 
proposed rule change is available at the PCX and at the Commission.
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    \4\ See PCXE Rule 1.1(o) (definition of ``General Authorized 
Trader'').
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, PCX 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. PCX 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 Information Barrier requirements set forth in PCXE Rule 7.26 
provide critical safeguards to prevent the use or communication of 
material non-public information by market making firms (and affiliated 
broker-dealers) to inappropriately benefit other business activities in 
which they may engage, such as investment banking or options market 
making. Such information could relate to, for example, the Market 
Maker's customer and directed order flow or other information obtained 
by the Market Maker in the course of its business. Such barriers help 
to ensure that market making firms do not illegally take advantage of 
or communicate such information to benefit their other business 
activities, to the detriment of investors, customers, issuers and the 
integrity of the market.
    For business reasons, certain registered Market Makers, or broker-
dealers with which such Market Makers are affiliated, engage solely in 
proprietary trading. Accordingly, such firms do not maintain public 
customer accounts or solicit or accept orders or funds (and hence, 
would not accept directed order flow) from or on behalf of public 
customers, including broker-dealers and other securities firms. Under 
such circumstances, because the market making firm does not engage in 
any other business activities that may benefit from information 
obtained by the Market Maker in the course of the firm's market making 
activities, the Exchange believes that the concerns noted above which 
form the basis for the Information Barrier requirements set forth in 
Rule 7.26 do not apply. \5\ Nevertheless, Rule 7.26 would require such 
a firm to develop and implement Information Barriers.
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    \5\ The proposed rule change is designed to accommodate the 
needs of these market makers. The current rule did not foresee the 
business conditions that currently exist which necessitate this 
change.
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    Under such circumstances, the Exchange believes that an Information 
Barrier requirement is not necessary and would impose an undue burden 
on the market making firm. Accordingly, this rule filing proposes to 
eliminate this requirement in the limited circumstances where a market 
making firm and its affiliated broker-dealer do not maintain public 
customer accounts, nor solicit or accept public customer orders, 
including from broker-dealers and other securities firms (and does not 
accept directed order flow or utilize any order type which presupposes 
the participation of public customers), and engage solely in 
proprietary trading. The Exchange believes that this limited 
modification is consistent with the purposes of the rule. However, if 
the market making firm or its affiliated broker-dealer subsequently 
decides to maintain public customer accounts or solicit public customer 
accounts (and directed order flow or order types which presuppose the 
participation of public customers), then the requirements of Rule 7.26 
would apply. Further, this limited modification would not alter or 
adjust any other obligation imposed on Market Markers, including those 
set forth in PCXE Rules 7.21 (Obligations of Market Maker Authorized 
Traders) \6\ and 7.23 (General Obligations of Market Makers).
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    \6\ See PCXE Rule 1.1(v) (definition of ``Market Maker 
Authorized Trader'').
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2. Statutory Basis
    The Exchange believes that the proposal furthers the objectives of 
Section 6(b)(5) of the Act \7\ in that it is designed to promote just 
and equitable principles of trade and to protect investors and the 
public interest.
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    \7\ 15 U.S.C. 78(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The PCX does not believe that the proposed rule change will impose 
any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received with respect 
to the proposed rule change.

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, 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. 
Comments may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-PCX-2003-49. This file number should be included on the 
subject line if e-mail is used. To help the

[[Page 1773]]

Commission process and review your comments more efficiently, comments 
should be sent in hardcopy or by e-mail but not by both methods. 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 
PCX. All submissions should refer to File No. SR-PCX-2003-49 and should 
be submitted by February 2, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-523 Filed 1-9-04; 8:45 am]
BILLING CODE 8010-01-P