[Federal Register Volume 69, Number 27 (Tuesday, February 10, 2004)]
[Notices]
[Pages 6361-6364]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-2813]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49181; File No. SR-Phlx-2004-06]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Relating to Member Organizations' Security Requirements

February 3, 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 January 23, 2004, 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 the Exchange 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 amend Phlx Rules 909 and 972. The amendment to 
Phlx Rule 909 would create an additional method for member 
organizations to provide security to the Exchange for the payment of 
any claims owed to the Exchange, Stock Clearing Corporation of 
Philadelphia (``SCCP''), and other Exchange members or member 
organizations (the ``Security Requirement''). The amendments to Phlx 
Rule 972 would extend the time available to member organizations to 
meet the Security Requirement following the transition of the Exchange 
from a non-stock to a stock corporation (the ``Demutualization'').\3\ 
The amendments to Phlx Rule 972 would also correct two cross-references 
contained in that rule.
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    \3\ See Securities Exchange Act Release No. 49098 (January 16, 
2004), 69 FR 3974 (January 27, 2004) (SR-Phlx-2003-73).
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    The text of the proposed rule change is below. Proposed new 
language is italicized; deletions are in brackets.
* * * * *

Rule 909. Security for Exchange Fees and Other Claims

    (a) Each member organization, and all applicants for registration 
as such shall, except as provided below, be required to provide (and 
maintain) security to the Exchange for the payment of any claims

[[Page 6362]]

owed to the Exchange, Stock Clearing Corporation of Philadelphia 
(``SCCP''), and to Exchange members and/or other member organizations. 
If the member organization maintains excess net capital of at least the 
amount established by the Exchange and published by the Exchange from 
time to time (the ``Excess Net Capital Test''), then no guaranty or 
deposit shall be required; provided that, if at the end of any calendar 
month a member organization has less than such amount of excess net 
capital, then it shall within 30 calendar days of the end of such month 
deliver to the Exchange security as provided in Rule 909(a)(i) or (ii); 
provided, further, that any member organization relying upon the Excess 
Net Capital Test shall deliver to the Membership Services Department of 
the Exchange each quarter a FOCUS report, and shall promptly advise the 
Membership Services Department if such member organization's excess net 
capital at any time falls below such minimum established by the 
Exchange. If the member organization does not satisfy the Excess Net 
Capital Test, then the member organization shall provide security to 
the Exchange in one of the following forms:
    (i) An acceptable guaranty by a clearing member organization 
acceptable to the Exchange guaranteeing the payment by such member 
organization of any claims, or if acceptable to the Exchange, a 
security agreement among the Exchange, SCCP and the member 
organization, in form and substance satisfactory to the Exchange, duly 
executed and delivered by the member organization, whereby the member 
organization shall create in favor of the Exchange, to secure payment 
of any claims owed by the member organization to the Exchange, SCCP, 
and to Exchange members and/or other member organizations, a valid 
first priority perfected lien on and continuing security interest in so 
much of the funds and other property of the member organization 
(including without limitation all securities, security entitlements, 
financial assets, investment property and other property and assets) 
held from time to time in the margin account of the member organization 
maintained with SCCP as shall then exceed the required margin amount 
(as such term is used in the Margin Account Agreement then in effect 
between SCCP and the member organization); or
    (ii) A deposit with the Exchange in an amount not to exceed 
$50,000, as established by the Exchange with prior notice, to be held, 
together with all other such deposits made pursuant to this rule, in a 
segregated account, the proceeds of which may be applied by the 
Exchange in the same manner as proceeds from transfers of 
participations under Section 15-3 of the By-Laws (as if references in 
such Section 15-3 to ``foreign currency options participant'' were to 
``member organization''). Such deposit may be invested by the Exchange 
in United States government obligations or any other investments which 
provide safety and liquidity of the principal invested, interest or 
income on which deposit shall be paid periodically by the Exchange to 
such member organization.
    (b) No change.
* * * * *

Rule 972. Continuation of Status After the Merger

    Each member (including, without limitation, each holder of an 
equity trading permit), inactive nominee and member organization 
holding such status immediately prior to the effective time of the 
Merger and that, at such time, is not subject to any suspension of such 
status shall, from and after the Merger, maintain such status as a 
member, inactive nominee or member organization and in the case of 
members, shall be permit holders and issued a permit, provided that 
such member, inactive nominee and member organization shall provide to 
the Admissions Committee and the Exchange: (x) not later than 15 days 
following the Merger,[: The security required by Rule 909 (unless the 
member organization has obtained an exemption under Rule 909(c));] the 
form to be filed by the member organization's qualifying permit holder 
pursuant to Rule 921(a)[;] and the designation of the member 
organization's Member Organization Representative pursuant to Rule 
921(b) in the form prescribed by the Exchange; and (y) not later than 
45 days following the Merger, the security required by Rule 909 (unless 
the member organization has obtained an exemption under Rule 909).
    The consequences of a failure to furnish within such period:
    (a) The security required by Rule 909 (unless the member 
organization has obtained an exemption under Rule 909[(c)]) and/or the 
form to be filed by the member organization's qualifying permit holder 
pursuant to Rule 921(a) shall be the immediate suspension of the member 
organization's status as such; and
    (b) The designation of the member organization's Member 
Organization Representative pursuant to Rule 921(b) shall be as 
provided in Rule 921(c) (as if the [30 day] period specified therein 
shall have elapsed).
    Any member or member organization of the Exchange prior to the 
Merger that, as of the effective date of the Merger, has been suspended 
shall not be issued a permit or shall not be deemed a member 
organization, as the case may be, automatically upon the Merger. If the 
member or member organization shall cure any delinquency within 30 days 
of the Merger, then the foregoing provisions of this Rule 972 shall 
apply (but as if the dates specified therein run from the date of the 
cure of any delinquency, rather than the date of the Merger); 
otherwise, such prior members and member organizations must reapply for 
a permit, or registration as a member organization, as the case may be, 
as if they were new applicants for admission or registration.
    For the avoidance of doubt, foreign currency options participants 
and participant organizations, as well as approved lessors of foreign 
currency options participations holding such status prior to the Merger 
will continue to hold such status following the Merger.
* * * * *

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 had 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 to facilitate the 
administration of new Phlx Rules 909 and 972, which were recently 
adopted as part of the Exchange's Demutualization. The Exchange 
believes that the minor changes proposed in this filing make it easier 
for the Exchange to administer the new rules because they allow more 
time to comply, in the case of Phlx Rule 972, and because they add an 
additional method of compliance in the case of Phlx Rule 909. The 
purpose of the proposed amendment to Phlx Rule 909

[[Page 6363]]

is to provide Phlx member organizations with an additional method by 
which they may satisfy the Security Requirement, which was omitted from 
the original draft. Phlx Rule 909 provides that the Security 
Requirement may be satisfied by a member organization in one of three 
ways: (1) By maintaining excess net capital in an amount specified by 
the Exchange; (2) by providing an acceptable guaranty by a clearing 
member organization guaranteeing the payment of any claims against the 
member organization; or (3) by maintaining a deposit with the Exchange 
in an amount not to exceed $50,000.
    The current proposal would add a fourth method by which a member 
organization may satisfy the Security Requirement. Specifically, the 
proposed amendment to Phlx Rule 909 would allow a member organization 
to satisfy the Security Requirement by entering into an acceptable 
agreement among the Exchange, SCCP \4\ and the member organization (a 
``Security Agreement''), which would establish and assign to the 
Exchange a first priority perfected lien on and continuing security 
interest in the excess margin funds held in such member organization's 
SCCP margin account.\5\ Should a member organization elect to provide 
security to the Exchange in the form of a Security Agreement, any 
outstanding claims by the Exchange, SCCP or other Exchange members or 
member organizations would be satisfied against the excess margin funds 
in the Phlx member organization's SCCP margin account. The Exchange had 
intended to capture this form of security when drafting the provision 
in Phlx Rule 909 covering an acceptable guaranty by a clearing member 
organization, but omitted to capture SCCP specifically.\6\ Accordingly, 
this new method of meeting the Security Requirement is a variation of 
an existing method, particularly because many member organizations 
doing business on the equity floor do not have a relationship with a 
``clearing member organization;'' their ``clearing'' relationship is 
instead with SCCP.
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    \4\ SCCP, a subsidiary of Phlx, is a registered clearing agency.
    \5\ See SCCP, Phlx Rule 9.
    \6\ Although SCCP is a corporate member, under Phlx By-Law 
Article XII, Sections 12-2 and 12-4, it is neither a member 
organization nor even a broker-dealer, and thus technically does not 
comply with the existing language of Phlx Rule 909(a)(i).
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    The purpose of the proposed amendments to Phlx Rule 972 is to 
extend the time member organizations have to satisfy the Security 
Requirement following the closing of Demutualization and to correct two 
cross-references contained in Phlx Rule 972. Phlx Rule 972 requires 
member organizations to satisfy the Security Requirement within 15 days 
following the closing of Demutualization in order for member 
organizations to avoid suspension. The Exchange is proposing to extend 
the 15-day time period to 45 days. The Exchange believes that the 
extension of time will provide member organizations with sufficient 
time to process and complete the tasks necessary to meet the Security 
Requirement and avoid suspension.
    Finally, Phlx Rule 972 contains two cross-references that are 
incorrect. First, Phlx Rule 909(c) is referred to in Phlx Rule 972(a). 
The cross-reference should simply be to Phlx Rule 909. Second, Phlx 
Rule 972(b) refers to a 30-day period from Phlx Rule 921(c). That 30-
day reference is incorrect (it is a 60-day period in Phlx Rule 921(c)). 
The reference should simply refer to the ``period'' in Phlx Rule 
921(c).
2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) of the Act \7\ in general, and furthers the objectives of section 
6(b)(5) of the Act \8\ in particular, in that it promotes just and 
equitable principles of trade, removes impediments to and perfects the 
mechanisms of a free and open market, and in general, protects 
investors and the public interest by offering member organizations 
another method to satisfy the Security Requirement, by allowing member 
organizations more time to comply with the Security Requirement and by 
correcting cross-references in Phlx Rule 972.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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

    The Phlx neither solicited nor received written comments with 
respect to the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become immediately effective pursuant 
to section 19(b)(3)(A)(iii) \9\ of the Act and Rule 19b-4(f)(6) \10\ 
under the Act because it effects a change that: (i) Does not 
significantly affect the protection of investors or the public 
interest; (ii) does not impose any significant burden on competition; 
and (iii) by its terms, does not become operative for 30 days after the 
date of the filing, or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest.
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    \9\ 15 U.S.C. Section 78s(b)(3)(A)(iii).
    \10\ 17 CFR 240.19b-4(f)(6).
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    The Exchange has requested that the Commission waive the thirty day 
pre-operative waiting period and the five business day pre-filing 
period, in order to facilitate member organization compliance with new 
Phlx Rule 909.
    The Commission believes that it is consistent with the protection 
of investors and the public interest to accelerate the operative date 
of the proposal and waive the pre-filing requirement.\11\ The 
Commission believes that such acceleration and waiver would provide 
member organizations with a somewhat greater period of time to satisfy 
the Security Requirement and help facilitate compliance with new Phlx 
Rule 909. For this reason, the Commission designates that the proposal 
become operative immediately and that the five business day pre-filing 
period be waived. At any time within sixty days after the filing of the 
proposed rule change, the Commission may summarily abrogate this rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
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    \11\ For purposes of accelerating the operative date of the 
proposed rule and waiving the five-day pre-filing period, the 
Commission notes that it has also considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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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-Phlx-2004-06. This file number should be included on the 
subject line

[[Page 6364]]

if e-mail is used. To help the Commission process and review 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 Phlx. All 
submissions should refer to file number SR-Phlx-2004-06 and should be 
submitted by March 2, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-2813 Filed 2-9-04; 8:45 am]
BILLING CODE 8010-01-P