[Federal Register Volume 69, Number 36 (Tuesday, February 24, 2004)]
[Notices]
[Pages 8510-8511]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-3886]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49264; File No. SR-PCX-2003-49]


Self-Regulatory Organizations; Order Approving 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

February 17, 2004.

I. Introduction

    On September 16, 2003 the Pacific Exchange, Inc. (``PCX'' 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 eliminate the Information Barrier requirement 
set forth in PCXE Rule 7.26 for certain Market Makers. On December 16, 
2003, PCX amended the proposed rule change.\3\ The proposed rule 
change, as amended, was published for comment in the Federal Register 
on January 12, 2004.\4\ No comment letters were received on the 
proposal. This order approves the proposed rule change.
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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 Amendment No. 1 replaced and superseded the 
PCX's original filing in its entirety.
    \4\ Securities Exchange Act Release No. 49018 (January 5, 2004), 
69 FR 01771.
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II. Description of the Proposal

    The Information Barrier requirements set forth in PCXE Rule 7.26 
are designed to provide safeguards to prevent the use or communication 
of material non-public information by market making firms (and 
affiliated broker-dealers) to inappropriately benefit 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. 
PCX believes that such barriers help to ensure that market making firms 
do not illegally take advantage of or communicate such information to 
benefit their 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 
PCXE Rule 7.26 do not apply.\5\ Nevertheless, PCXE 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, the PCX proposes to eliminate 
this requirement in the limited circumstances where a market making 
firm and its affiliated broker-dealer neither 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 PCXE Rule 7.26

[[Page 8511]]

would apply. Furthermore, this limited modification would not alter or 
adjust any other obligation imposed on Market Makers, 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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III. Discussion

    The Commission finds that the proposed rule change, as amended, is 
consistent with the Act and the rules and regulations promulgated 
thereunder applicable to a national securities exchange \7\ and, in 
particular, with the requirements of Section 6(b)(5) of the Act.\8\ 
Specifically, the Commission finds that approval of the proposed rule 
change, as amended, is consistent with the Act in that it is designed 
to promote just and equitable principles of trade; 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.
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    \7\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition and capital 
formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change would amend PCXE Rule 7.26 to carve an 
exception where, even though a firm is registered as a Market Maker, or 
is an affiliated broker-dealer, it has no customer accounts, and 
engages solely in proprietary trading. The Commission believes that it 
is not necessary for a Market Maker, or its affiliated broker-dealer, 
that fits this limited exception, to be required to maintain an 
information barrier between the market making and other business 
activities. The Commission believes it is reasonable to remove a 
requirement that could become unduly burdensome, since the Market 
Maker, or its affiliated broker-dealers, is not engaged in activities 
that would inappropriately benefit other business activities within the 
firm. Furthermore, the Commission believes that the modification of 
PXCE Rule 7.26 may remove impediments that could hinder competition 
between a Market Maker fitting the limited exception, or its affiliated 
broker-dealer, and those Market Makers engaged in broader businesses. 
However, the Commission notes that, if in the future these Market 
Makers, or their affiliated broker-dealers, engage in other business 
activities, such as investment banking or options market making, or 
maintain customer accounts, solicit or accept public customer orders, 
the Commission expects that the Exchange will require compliance with 
the Information Barrier requirements of PCXE Rule 7.26.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and, in particular, with Section 6(b)(5).\9\
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    \9\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-PCX-2003-49), as amended, is 
approved.
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    \10\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-3886 Filed 2-23-04; 8:45 am]
BILLING CODE 8010-01-P