[Federal Register Volume 69, Number 60 (Monday, March 29, 2004)]
[Notices]
[Pages 16305-16316]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-6817]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49451; File No. SR-PCX-2004-08]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Exchange, Inc. Relating to the Demutualization of 
the Pacific Exchange, Inc.

March 19, 2004.
    Pursuant to Section 19(b)(1) of the Securities Act of 1934 
(``Act'') \1\ and PCX Rule 19b-4 thereunder,\2\ notice is hereby given 
that on February 10, 2004, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') 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 Exchange. The 
Commission is publishing this notice to

[[Page 16306]]

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 PCX Rule Change

    PCX is proposing to convert the ownership of the existing Exchange 
from a non-stock, not-for-profit membership corporation into a for-
profit stock corporation, and to convert the options trading rights of 
current PCX seats to Option Trading Permits (``OTPs'').\3\ To effect 
this demutualization, a newly-formed Delaware stock corporation called 
PCX Holdings, Inc. (``PCX Holdings'' or ``Holding Member'') would 
become a holding company for a newly-created non-stock subsidiary (the 
``reorganized PCX'' or ``reorganized Exchange'') \4\ and its other 
operating subsidiaries. The proposal includes new governing documents 
and rules relating to the Board of Directors of PCX Holdings and the 
reorganized Exchange, proposed rule changes to the committee structure 
of the reorganized Exchange, and certain other proposed rules by the 
reorganized Exchange to regulate the business conduct and practices of 
persons and entities issued OTPs.
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    \3\ See proposed PCX Rule 1.1(p) (definition of Options Trading 
Permit (``OTP'')); see also proposed PCX Rule 1.1(q) (definition of 
``OTP Holder'') and proposed PCX Rule 1.1(r) (definition of ``OTP 
Firm'').
    \4\ For purposes of this filing, where the context requires 
differentiation between PCX before the demutualization and PCX after 
the demutualization, the existing membership organization is 
referred to as the ``current PCX'' or ``current Exchange,'' and the 
new entity, which will be a wholly-owned subsidiary of PCX Holdings, 
is referred to as the ``reorganized PCX'' or the ``reorganized 
Exchange.''
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    The proposed rule changes for implementing the demutualization, 
including: (A) The Rules for the reorganized Exchange; (B) the 
Certificate of Incorporation for PCX Holdings; (C) the Bylaws for PCX 
Holdings; (D) the Certificate of Incorporation for the reorganized 
Exchange; and (E) the Bylaws for the reorganized Exchange, are 
collectively referred to herein as the ``proposed rule change'' and are 
available for viewing on the Commission's Web site, http://www.sec.gov, 
and at PCX and the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed PCX 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 
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 PCX Rule Change

1. Purpose
    a. Overview of the Proposed Plan of Demutualization. The current 
PCX, a Delaware non-stock corporation, proposes a plan to 
``demutualize,'' whereby it will be reorganized as a subsidiary of a 
for-profit stock corporation, the stockholders of which will initially 
be the current owners of the outstanding authorized memberships of the 
current Exchange. To effect the demutualization, a newly-formed 
Delaware stock corporation called PCX Holdings will become a holding 
company for the reorganized Exchange and its other operating 
subsidiaries. PCX Holdings has formed a wholly-owned subsidiary solely 
for the purpose of completing the merger, which will merge with and 
into the current PCX. This surviving entity, the reorganized Exchange, 
will be a wholly-owned subsidiary of PCX Holdings. The reorganized PCX, 
a non-stock corporation, will operate the options business of the 
current PCX and will have a separate Board of Directors. The 
reorganized PCX will retain the self-regulatory organization function 
for the options business as well as its equities business subsidiary, 
PCX Equities, Inc. (``PCX Equities'' or ``PCXE''). The proposed 
demutualization will not affect PCXE's operations, governance 
structure, or rules.
    Prior to the merger, the current Exchange will undergo a 
recapitalization whereby it will convert each of its 552 outstanding 
authorized memberships into two separate components: (1) A Class A 
membership interest representing each member's ownership interest in 
the current Exchange; and (2) a Class B membership interest 
representing options trading privileges on the current Exchange. As a 
result of the demutualization, current PCX members will receive one 
thousand (1,000) shares of voting common stock in PCX Holdings in 
exchange for their Class A membership interest and, in addition, will 
receive a trading permit in the reorganized PCX in place of the Class B 
membership interest.
    The common stock of PCX Holdings will represent an equity interest 
in the company and will have the traditional features of common stock, 
including dividend,\5\ voting, and liquidation rights. Holders of 
common stock will be entitled to vote on all matters submitted to the 
stockholders for a vote, including the election of the Board of 
Directors of PCX Holdings, extraordinary transactions such as a merger, 
consolidation, dissolution or sale of all or substantially all of the 
assets of PCX Holdings, and certain changes to the Bylaws of PCX 
Holdings.
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    \5\ PCX notes that it does not currently anticipate that PCX 
Holdings will pay dividends on its common stock in the immediate 
future. In the event that a dividend is declared, any revenues 
received by PCX Holdings or the reorganized PCX from regulatory fees 
or regulatory penalties will be applied only to fund the legal, 
regulatory, and surveillance operations of the reorganized PCX, and 
will not be used to pay dividends to the holders of PCX Holdings 
common stock.
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    b. Purpose of the Proposed Plan of Demutualization. PCX believes 
that by restructuring its business as a stock corporation with business 
control and management vested in a Board of Directors, the entity will 
have greater flexibility to develop and execute strategies designed to 
improve its competitive position than it has under the current 
membership-cooperative structure. Furthermore, PCX anticipates that by 
restructuring as a stock corporation, PCX management will be better 
able to respond quickly to competitive pressures and to make changes to 
its operations as market conditions warrant, without diminishing the 
integrity of its regulatory programs.
    Following the completion of the demutualization, the holders of 
common stock of PCX Holdings will retain, through their ownership of 
stock, their economic interest in its operating subsidiaries and 
ultimately will benefit from any improvement in the financial health of 
these entities resulting from the demutualization.
    c. Corporate Structure. i. PCX Holdings, Inc. Following the 
completion of the demutualization, PCX Holdings will be a for-profit 
stock corporation and will act as a holding company for the reorganized 
Exchange and its operating subsidiaries. PCX Holdings will provide 
management and corporate support to its subsidiaries. PCX Holdings, as 
the sole member of the reorganized PCX, will have the right to elect 
the Board of Directors of the reorganized PCX \6\ and will have the 
right to vote on any proposal to merge the reorganized PCX with a third 
party, to sell a significant amount of its assets to a third party, or 
to dissolve or liquidate the reorganized PCX. The proposed Certificate 
of Incorporation and Bylaws of PCX

[[Page 16307]]

Holdings will govern the activities of PCX Holdings.
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    \6\ This right is subject to Trading Permit Holders' right to 
nominate their candidates.
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    A. Board of Directors. The Board of Directors of PCX Holdings shall 
consist of not less than seven (7) nor more than twelve (12) members, 
with the Board of Directors currently contemplated to consist of 
initially of nine (9) members, including the Chief Executive Officer 
(``CEO'') of PCX Holdings and at least five (5) persons who shall not 
have any material business relationship with PCX Holdings or its 
affiliates, other than as an OTP Holder on the reorganized PCX. The 
authorized number of directors shall be as determined from time to time 
upon the majority approval of the full Board of Directors. The CEO of 
PCX Holdings may be designated Chairman of the Board.
    The current PCX Nominating Committee has consulted with the CEO of 
the current PCX and proposed a slate of Directors for the initial 
Board. This slate was part of the demutualization package sent to the 
members for a vote and will be put in place once the demutualization 
becomes effective. The PCX Holdings Nominating Committee will nominate 
subsequent Directors to the Board of Directors. The Nominating 
Committee shall nominate Directors for election at the annual meeting 
of stockholders. Such nominations shall comply with the Bylaws of PCX 
Holdings. The Chairman of the Board of Directors of PCX Holdings shall 
appoint the members of the PCX Holdings Nominating Committee.
    The Board of Directors of PCX Holdings shall appoint the Chairman 
of the Board by majority vote. The Board of Directors shall be divided 
into three classes and serve in staggered terms of three years, as set 
forth in the Certificate of Incorporation. Each Director shall hold 
office until the expiration of the Director's term. If, however, there 
remains a vacancy on the Board of Directors (for example, the Director 
is not re-elected and the Director's successor is not elected or 
qualified), the Director shall continue to serve until his or her 
successor is elected and qualified or until his or her earlier death, 
resignation or removal. A Director may serve for any number of terms, 
consecutive or otherwise. Directors need not be stockholders of PCX 
Holdings.
    B. Committees of PCX Holdings Board of Directors. PCX Holdings 
shall have a Board Audit Committee, Compensation Committee, and 
Nominating Committee. The Board of Directors of PCX Holdings may, by 
resolution passed by a majority of the Directors in office, establish 
one or more additional committees (``PCX Holdings Board Committees''). 
Any such PCX Holdings Board Committee, to the extent provided in the 
resolution of the Board, shall have and may exercise all the power and 
authority of the Board of Directors for direction and supervision of 
the management of the business and affairs of PCX Holdings. No such PCX 
Holdings Board Committee, however, shall have power or authority to 
amend the Certificate of Incorporation or the Bylaws, adopt an 
agreement of merger or consolidation, recommend to the stockholders the 
sale, lease, or exchange of all or substantially all of PCX Holdings' 
property and assets, recommend to the stockholders a dissolution of PCX 
Holdings or a revocation of a dissolution, elect a Director or elect or 
remove an officer, and unless the resolution expressly so provides, no 
such committee shall have the power or authority to declare a dividend 
or to authorize the issuance of stock.
    C. Management. The officers of PCX Holdings shall include the 
Chairman of the Board of Directors, CEO, Secretary, and such other 
officers as are desirable for the conduct of the business of the 
corporation in the opinion of the CEO. The Chairman of the Board of 
Directors shall appoint officers of PCX Holdings, other than the 
Chairman of the Board of Directors and the CEO. The same person may 
hold any two or more offices. The officers of PCX Holdings will manage 
the business and affairs of PCX Holdings, subject to the oversight of 
the Board of Directors.
    D. Shareholder Restrictions. The Certificate of Incorporation and 
Bylaws of PCX Holdings place certain restrictions on the ability to 
transfer and own the stock of PCX Holdings. For a period of 30 days 
following the effective date of the demutualization, PCX Holdings 
stockholders will not be permitted to sell their shares unless the 
Board of Directors of PCX Holdings waives the transfer restriction. 
Regardless of whether such transfer restriction is waived, PCX Holdings 
stockholders will remain subject to the ownership and voting 
concentration limits and minimum lot transfer provisions described 
below.
    No person may own shares constituting more than forty percent (40%) 
of the outstanding shares of capital stock of PCX Holdings. This 
provision can be waived by an amendment to the Bylaws of PCX Holdings 
approved by the Board, subject to the Board having determined that such 
person is not subject to any applicable ``statutory disqualification'' 
(within the meaning of Section 3(a)(39) of the Act),\7\ and the 
amendment being approved by the Commission. No trading permit holder of 
the reorganized PCX or equities trading permit holder of PCX Equities 
may own shares constituting more than twenty percent (20%) of the 
outstanding shares of common stock of PCX Holdings. Any person that at 
any time owns five percent (5%) or more of then outstanding shares of 
capital stock, who has the right to vote in the election of the Board 
of Directors of PCX Holdings, shall, immediately upon so owning five 
percent (5%) or more of the then outstanding shares of such stock, give 
the Board of Directors of PCX Holdings written notice of such 
ownership.\8\
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    \7\ 15 U.S.C. 78c(a)(39).
    \8\ See PCX Holdings Certificate of Incorporation, Article IX, 
Section 1(b)(iii).
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    No person may possess the right to vote shares representing more 
than twenty percent (20%) of the issued and outstanding capital stock 
of PCX Holdings. This provision can be waived by an amendment to the 
Bylaws of PCX Holdings approved by the Board of Directors, subject to 
the Board of Directors having determined that such person is not 
subject to any applicable ``statutory disqualification'' (within the 
meaning of Section 3(a)(39) of the Act),\9\ and the amendment being 
approved by the Commission.
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    \9\ 15 U.S.C. 78c(a)(39).
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    Shares acquired in violation of the transfer restrictions and 
voting and ownership concentration limits shall be treated by PCX 
Holdings as owned by the transferor for all purposes, including, 
without limitation voting, payment of dividends, and distributions.\10\ 
Shares acquired in violation of the transfer restrictions and voting 
and ownership concentration limits may be redeemed by PCX Holdings at a 
price equal to the par value thereof, upon the approval of the PCX 
Holdings Board of Directors.
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    \10\ See PCX Holdings Certificate of Incorporation, Article IX, 
Section 2.
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    Unless otherwise approved by the CEO of PCX Holdings, transfers of 
shares of the capital stock of PCX Holdings may be made only in minimum 
lots of 1,000 shares for a period of one year after the demutualization 
and thereafter in minimum lots of 100 shares. Holders of PCX Holdings 
capital stock will have no redemption or preemptive rights. However, 
PCX Holdings may redeem shares of its capital stock acquired in 
violation of the transfer restrictions and ownership and voting 
concentration limits contained in its Certificate of Incorporation for 
a price per share equal

[[Page 16308]]

to the par value thereof, upon the approval of the PCX Holdings Board 
of Directors and the Commission.
    In the case of transactions relating to PCX Holdings, a merger, 
consolidation, sale of all or substantially all of the assets, or 
dissolution must be approved by an affirmative vote of at least a 
majority of the outstanding shares.
    A merger, asset sale, or other business combination with a person 
who, together with affiliates and associates, owns or controls fifteen 
percent (15%) or more of the voting stock of PCX Holdings (``interested 
stockholder'') during the three-year period after the date that the 
person became an interested stockholder will require approval by at 
least two-thirds of the outstanding voting stock of PCX Holdings, which 
is not owned by the interested stockholder, and the prior approval of 
the Board of Directors of PCX Holdings,\11\ unless upon consummation of 
the transaction which results in the person becoming an interested 
stockholder, such interested stockholder owned at least 85% of the 
voting stock of PCX Holdings outstanding at the time the transaction 
commences, excluding certain shares.\12\
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    \11\ See PCX Holdings Bylaws, Article 2, Section 6(b).
    \12\ PCX represents that this provision is consistent with 
Section 203 of Title 8 of the Delaware Code. Del. Code, Title 8, 
section 203. Telephone conversation between Mai Shiver, Acting 
Director and Senior Counsel, PCX, and Frank N. Genco, Attorney, 
Division, Commission, on March 3, 2004.
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    PCX Holdings shall give due regard to the preservation of the 
independence of the self-regulatory function of the reorganized PCX and 
to its obligations to investors and the general public and shall not 
take any actions which would interfere with the effectuation of any 
decisions by the Board of Directors of the reorganized PCX relating to 
its regulatory functions or the structure of the market which it 
regulates or which would interfere with the ability of the reorganized 
PCX to carry out its responsibilities under the Act. All books and 
records and the information contained therein of the reorganized PCX 
reflecting confidential information pertaining to the self-regulatory 
function of the reorganized PCX, which shall come into the possession 
of PCX Holdings, shall be retained in confidence by PCX Holdings and 
its Board of Directors, officers, employees, and agents, and shall not 
be used for any non-regulatory purposes.\13\
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    \13\ See PCX Holdings Bylaws, Article 3, Section 15.
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    ii. Reorganized PCX. The reorganized PCX will be a wholly-owned 
subsidiary of PCX Holdings that will continue to be a non-stock 
membership corporation with its own Board of Directors. PCX Holdings 
will be the sole member of, and, as such, will have one hundred percent 
(100%) voting control over the reorganized PCX. The reorganized PCX 
will retain the self-regulatory organization function with respect to 
the members of the current Exchange. PCX Equities will continue to be a 
wholly-owned subsidiary of the reorganized PCX. OTP Holders (as well as 
Exchange Trading Permit (``ETP'') Holders of PCX Equities) will have 
the right to representation on the Board of Directors of the 
reorganized PCX. The Board of Directors of the reorganized PCX will 
also have the right to amend the Bylaws of the reorganized PCX.
    A. Governing Documents and PCX Rules. The proposed Certificate of 
Incorporation, Bylaws, and PCX Rules will govern the activities of the 
reorganized PCX. Proposed PCX Rules 1 through 3 relate to 
qualifications for OTPs and corporate governance. A detailed 
description of the proposed new rules for the reorganized PCX is 
provided in Section 5 of this notice. The proposed reorganized PCX 
Rules and Bylaws will reflect the status of the reorganized PCX as a 
wholly-owned subsidiary of PCX Holdings, under management of the 
reorganized PCX Board of Directors and its designated officers with 
self-regulation pursuant to PCX's registration under Section 6 of the 
Act.\14\
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    \14\ 15 U.S.C. 78f.
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    B. Board of Directors. The Board of Directors shall consist of not 
less than eight (8) or more than twelve (12) Directors, with the Board 
of Directors to consist initially of ten (10) Directors, including the 
CEO of PCX Holdings. The authorized number of Directors shall be as 
determined from time to time by the Board of Directors. At least fifty 
percent (50%) of the Directors will be persons from the public and will 
not be, or be affiliated with, a broker-dealer in securities or 
employed by, or involved in any material business relationship with, 
the reorganized PCX or its affiliates (``Public Directors'').\15\ At 
least twenty percent (20%) of the Directors shall consist of 
individuals nominated by the trading permit holders, with at least one 
Director nominated by the ETP Holders \16\ of PCX Equities, Inc. and 
with at least one Director nominated by the OTP Holders of the 
reorganized PCX (collectively the ``Permit Holder Directors''). The 
exact number of Public Directors and Permit Holder Directors shall be 
determined from time to time by the Board of Directors, subject to the 
percentage restrictions described in proposed Article III, Section 
3.02(a) of the reorganized PCX's Bylaws. The term of office of a 
Director shall not be affected by any decrease in the authorized number 
of Directors.
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    \15\ See PCX Bylaws, Article 3, Section 2(a).
    \16\ See PCXE PCX Rule 1.1(n) (definition of ``ETP Holder'').
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    The initial Directors of the reorganized Exchange shall consist of 
individuals nominated by the Nominating Committee of the current PCX in 
consultation with the CEO and shall be approved by the Board of 
Governors of the current PCX. At the first annual meeting and at each 
subsequent annual meeting of the Holding Member,\17\ except as 
otherwise provided by the reorganized PCX's Bylaws, the Holding Member 
shall elect Directors to serve until the next annual meeting or until 
their successors are elected and qualified. The Board of Directors 
shall appoint the Chairman of the Board by majority vote.
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    \17\ The reorganized PCX is a non-stock corporation consisting 
of a sole member, PCX Holdings.
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    Each Director shall hold office for a term that expires at the 
annual meeting of the Holding Member following his or her election, 
provided that if he or she is not re-elected and his or her successor 
is not elected and qualified at the meeting and there remains a vacancy 
on the Board of Directors, he or she shall continue to serve until his 
or her successor is elected and qualified or until his or her earlier 
death, resignation, or removal. A Director may serve for any number of 
terms, consecutive or otherwise.
    C. Committees of the Board of Directors. The reorganized PCX Board 
Committees shall consist of the following: (1) A Board Appeals 
Committee; (2) a Regulatory Oversight Committee; (3) an Audit 
Committee; and (4) Compensation Committee. The Board of Directors may, 
by resolution passed by a majority of the Directors in office, 
establish one or more additional committees (``Board Committees''), 
each committee to consist of one or more Directors. Each Board 
Committee shall be comprised of at least fifty percent (50%) Public 
Directors. Each Board Committee, to the extent provided in the 
resolution of the Board creating the committee, shall have and may 
exercise all of the power and authority of the Board of Directors for 
direction and supervision of the management of the business and affairs 
of the Exchange, and may authorize the seal of the Exchange to be 
affixed to all papers that may require it. No Board Committee, however, 
shall have power or authority to amend the Certification of

[[Page 16309]]

Incorporation or the Bylaws, adopt an agreement of merger or 
consolidation, recommend to the Holding Member the sale, lease or 
exchange of all or substantially all of the Exchange's property and 
assets, recommend to the Holding Member a dissolution of the Exchange 
or a revocation of a dissolution, elect a Director, or elect or remove 
an officer; and unless the resolution expressly so provides, no Board 
Committee shall have the power or authority to declare a dividend or to 
authorize the issuance of membership interests.
    D. Nominating Committee. After the formation of the initial Board 
of Directors, the Nominating Committee of the Board of Directors of PCX 
Holdings will nominate Directors for election to the Board of Directors 
of the reorganized PCX at the annual meeting of the Holding Member. 
Such nominations shall comply with the Bylaws and Rules of the 
reorganized PCX. The reorganized PCX Nominating Committee will nominate 
the OTP Holder nominee(s) to the Board of Directors. The selection 
process for the OTP Holder nominee(s) differs from the selection 
process for the ETP Holder nominee.\18\ Specifically, after the 
nomination by petition period has closed, the Board of Directors of PCX 
Holdings shall have ten (10) business days to object to the nomination 
of any or all of the OTP Holder nominee(s). The Board of Directors of 
PCX Holdings may, in its sole discretion, object to the nomination of 
any or all of the OTP Holder nominee(s) if the nominee(s) have been 
disciplined by any securities self-regulatory organization or the 
nominee would be subject to statutory disqualification within the 
meaning of Section 3(a)(39) of the Act.\19\ Any nominee who is objected 
to by the Board of Directors of PCX Holdings is not eligible to be 
considered as a nominee or petition candidate until the expiration of 
the current term of the Board of Directors. If the Board of Directors 
of PCX Holdings objects to all of the proposed nominees, the Nominating 
Committee shall publish the name of an eligible alternative nominee by 
the later of ten (10) business days after the Board of Directors of PCX 
Holdings notifies the Secretary of the reorganized Exchange of their 
objection to the proposed nominee(s) or sixty-five days prior to the 
expiration of the term of the Directors. If the Board of Directors of 
PCX Holdings objects to all of the original nominees, the above defined 
process shall continue with all of the same deadlines until the 
Nominating Committee nominates a nominee that is not objected to by the 
Board of Directors of PCX Holdings.
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    \18\ PCX represents that the ETP Nominee will be appointed to 
the reorganized PCX Board of Directors as required by the PCX/PCXE 
Shareholder Voting Agreement.
    \19\ 15 U.S.C. 78c(a)(39).
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    According to PCX, the purposes for allowing the Board of Directors 
of PCX Holdings to object to an OTP Holder nominee(s) are: (1) To 
accord PCX Holdings, as sole member of the reorganized PCX, the voting 
rights normally provided to a member of a membership organization; and 
(2) to provide the Board of Directors of PCX Holdings the ability to 
object to the nomination of particular individuals that, for various 
reasons, would be inappropriate as a director of a self-regulatory 
organization. PCX represents that, in both of the above circumstances, 
OTP Holders will still be afforded ``fair'' representation as required 
under the Act because, as a result of the process described above, a 
representative nominated by the OTP Holders will be selected.
    E. Management. The Board of Directors shall elect such officers of 
the reorganized PCX, as it deems appropriate, which must include a 
Secretary, and which may include a President, a CEO, and, upon the 
recommendation of the CEO, any other officers as are desirable for the 
conduct of the business of the corporation. Any two or more offices may 
be held by the same person. The officers of the reorganized PCX will 
manage the business and affairs of the Exchange, subject to the 
oversight of the Board of Directors, and, in some cases, the approval 
of PCX Holdings as the sole member.\20\
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    \20\ According to the Exchange, under Delaware law events such 
as the sale of all or substantially all assets, a merger, or 
liquidation of the reorganized PCX may require the approval of the 
Board of Directors of PCX Holdings. Telephone conversation between 
Mai Shiver, Acting Director and Senior Counsel, and Steve Matlin, 
Senior Counsel, PCX, and Nancy J. Sanow, Assistant Director, and 
Frank N. Genco, Attorney, Division, Commission, on March 17, 2004 
(``Telephone Conversation on March 17, 2004'').
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    F. Disciplinary Process. The reorganized PCX will retain the self-
regulatory organization function for the options business of the PCX as 
well as its equities business subsidiary, PCX Equities. The proposed 
demutualization will not affect PCXE's current disciplinary process. 
The reorganized PCX's disciplinary process will be the same as the 
existing PCX disciplinary process and will be governed by an Ethics and 
Business Conduct Committee (``EBCC''). The reorganized PCX Board of 
Directors or a designee of the reorganized PCX will appoint the EBCC. 
The EBCC shall be made up primarily of OTP Holders and Allied Persons 
\21\ of an OTP Firm. At least one member of the public shall serve on 
the EBCC.\22\
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    \21\ Allied Person is defined in proposed PCX Rule 1.1(b) as an 
individual, who is: (1) An employee of an OTP Firm who controls such 
firm; (2) an employee of an OTP Firm corporation who is a director 
or principal executive officer of such corporation; (3) an employee 
of an OTP Firm limited liability company who is a manager or a 
principal executive officer of such limited liability company; or 
(4) a general partner in an OTP Firm partnership.
    \22\ PCX represents that committees involved in the disciplinary 
process will remain unaffected by the demutualization.
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    The Chief Regulatory Officer of the reorganized PCX or his or her 
staff will authorize the initiation of disciplinary actions and 
proceedings. As is presently the case, the EBCC will conduct hearings, 
render decisions, and impose sanctions. Decisions of the EBCC may be 
appealed for review to a Board Appeals Committee, which will be 
appointed by the reorganized PCX's Board of Directors and will include 
public members, the OTP representative(s), and the ETP 
representative(s) of the Board of Directors. Decisions of the Board 
Appeals Committee shall be subject to the review of the reorganized 
PCX's Board of Directors.
    G. Other Committees. The proposed Bylaws and Rules of the 
reorganized PCX envision three Options committees--the Nominating 
Committee, the Ethics and Business Conduct Committee, and the OTP 
Advisory Committee.\23\ However, the Board of Directors may, by 
resolution passed by a majority of directors in the office, establish 
other Options committees, if it deems it appropriate. Except for the 
Nominating Committee, the Board of Directors of the reorganized PCX 
will appoint the members of all Options Committees for terms of one 
year. The CEO of the reorganized PCX will appoint the Chair and Vice 
Chair of each Options Committee. OTP Holders and public representatives 
may be appointed to serve on Options Committees.
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    \23\ The OTP Advisory Committee shall act in an advisory 
capacity regarding rule changes related to disciplinary matters and 
trading rules. See proposed PCX Rule 3.2(b)(3).
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    H. Options Listings and Delistings. The management of the 
reorganized PCX will make all decisions with respect to listing and 
delisting options and related products in accordance with rules and 
standards comparable to those set forth in the current PCX Rules and 
used by the Option Listing Committee of the current PCX.
    I. Regulation/Disciplinary Process. Following the demutualization, 
the

[[Page 16310]]

reorganized PCX will operate as a national securities exchange 
registered under Section 6 of the Act.\24\ For purposes of the Act, OTP 
Holders and OTP Firms will be deemed ``members'' of the reorganized 
PCX.
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    \24\ 15 U.S.C. 78f.
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    As a registered national securities exchange and self-regulatory 
organization, the reorganized PCX will continue to carry out its 
statutory responsibilities to enforce compliance by OTP Holders and OTP 
Firms (including ETP Holders of its equities business subsidiary, PCX 
Equities) with the provisions of the federal securities laws and the 
applicable Rules of the reorganized PCX and PCX Equities. As the 
registered self-regulatory organization, the reorganized PCX will 
continue to have ultimate responsibility for the administration and 
enforcement of rules governing the options and equities business 
operations.
    The reorganized PCX will continue to be required to approve any 
changes to the Rules and governing documents of PCX Equities and to 
file any such changes with the Commission pursuant to section 19(b) of 
the Act \25\ and Rule 19b-4 thereunder.\26\
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78s(b).
    \26\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    J. National Market System Plans. PCX currently is a participant in 
various national market system (``NMS'') plans, including the 
Consolidated Tape Association (``CTA'') Plan, the Consolidated 
Quotation System (``CQS'') Plan, the Intermarket Trading System 
(``ITS'') Plan, the Options Price Reporting Authority (``OPRA''), the 
Options Intermarket Linkage (``Linkage'') Plan, and the Reporting Plan 
for Nasdaq-Listed Securities Traded on Exchanges on an Unlisted Trading 
Privileges Basis (``Nasdaq UTP'') Plan.\27\ These plans are joint 
industry plans entered into by self-regulatory organizations for the 
purpose of addressing last sale reporting, quotation reporting, 
intermarket equities trading, options price reporting, and intermarket 
options trading, respectively. Following the completion of the 
demutualization, the reorganized PCX, in its continuing role as the 
self-regulatory organization, will continue to serve as the voting 
member of these NMS plans. For those plans that relate to equity 
trading (i.e., the CTA Plan, the CQS Plan, the ITS Plan, and the Nasdaq 
UTP Plan) a PCX Equities representative will continue to serve as the 
reorganized PCX's representative with respect to dealing with these 
plans.\28\ Similarly, the reorganized PCX expects that, a 
representative of the reorganized PCX will serve as its representative 
with respect to NMS plans that relate to options trading (i.e., OPRA 
and Linkage).
---------------------------------------------------------------------------

    \27\ Telephone conversation between Mai Shiver, Acting Director 
and Senior Counsel, PCX, and Frank N. Genco, Attorney, Division, 
Commission, on March 3, 2004, confirming that PCX is a participant 
in the Nasdaq UTP Plan.
    \28\ Id.
---------------------------------------------------------------------------

    iii. PCX Equities. PCX Equities will be a wholly-owned stock 
subsidiary of the reorganized PCX. The proposed demutualization will 
not affect PCXE's operations, governance structure, or rules.
    A. Agreements Between the Current PCX and PCX Equities. Currently, 
the PCX options operations and equities operations share certain 
infrastructure and personnel. After the completion of the 
demutualization, these shared assets will continue to be owned by the 
reorganized PCX and the shared personnel will continue to be employed 
by the reorganized PCX. In each case, however, PCX Equities will have 
access to those resources through inter-company agreements with the 
reorganized PCX. In particular, the reorganized PCX will continue to 
provide PCX Equities with certain management and support services and 
staff. The services provided are for administration, membership, 
technology, finance, accounting, human resources, and legal services. 
PCX represents that the agreement between the reorganized PCX and PCX 
Equities will allocate charges for these services and staff between the 
reorganized PCX and PCX Equities.
    d. Option Trading Permits.
    i. Privileges Conferred by OTPs. The reorganized PCX will be 
authorized to issue OTPs that will entitle holders of the permits to 
trade options on the options trading facilities of the reorganized PCX, 
including the options trading floor, POETS,\29\ PCX Plus,\30\ or any 
other systems approved by the Board of Directors, as a Market Maker, 
Floor Broker or order-flow firm. OTP Holders may engage in trading of 
options in the same manner as currently practiced by PCX Members who 
trade on the options trading facility.\31\
---------------------------------------------------------------------------

    \29\ Currently, PCX operates an electronic order routing and 
execution system called Pacific Options Exchange Trading System 
(``POETS''), and several other peripheral systems including the 
Pacific Options Processing System (``POPS'') and the Floor Broker 
Hand Held trading system, in conjunction with traditional open 
outcry trading with Floor Brokers and competing Market Makers.
    \30\ PCX Plus is the Exchange's electronic order delivery, 
execution, and reporting system for designated option issues through 
which orders and quotes with size of members are consolidated for 
execution and/or display. This trading system includes the 
electronic communications network that enables registered Market 
Makers to enter orders/quotes with size and execute transactions 
from remote locations or the trading floor. See Securities Act 
Release No. 47838 (May 13, 2003), 68 FR 27129 (May 19, 2003) (order 
approving File No. SR-PCX-2002-36).
    \31\ PCX intends to simplify its membership rules by eliminating 
Automated System Access Privileges (``ASAPs''). ASAPs refer to a 
permit issued by the Exchange for effecting option transactions 
principally over an electronic or automated system such as POETS. 
Under current PCX Rule 1.14, an ASAP member that wishes to obtain 
electronic access to the Options Floor must be a registered broker-
dealer and approved by the Membership Committee. To date, the 
Exchange has issued no ASAPs. Because the reorganized PCX proposes 
to issue OTPs, there will no longer be a need for two separate 
membership categories. Therefore, PCX represents that the rules 
related to ASAPs will be rescinded.
---------------------------------------------------------------------------

    An OTP does not grant its holder any right to trade securities on 
PCX Equities. Any OTP Holder that wishes to trade securities on PCX 
Equities must be approved for, and obtain an ETP pursuant to, the 
PCXE's application procedures.
    OTP Holders will have limited voting rights and may nominate, 
through the Nominating Committee or by petition, at least one member to 
the reorganized PCX Board of Directors.
    OTP Holders will hold six of the seven positions on the Nominating 
Committee. Subsequent nominations to the Nominating Committee will be 
made by the sitting Nominating Committee. The seventh position on the 
Nominating Committee will be a person from the public selected by the 
CEO of the reorganized PCX.
    OTP Holders will not have any distribution or other ownership 
rights in reorganized PCX or PCX Holdings by virtue of their status as 
OTP Holders.
    ii. Number of OTPs. There will be no limit on the number of OTPs 
issued by the reorganized PCX.
    iii. Qualification for OTPs. The reorganized PCX will commence 
issuing OTPs once the demutualization is completed. Persons or entities 
that are registered broker-dealers and are not existing PCX members may 
be granted trading privileges on the reorganized PCX through an 
application process. OTP qualifications will be substantially the same 
as the current requirements for PCX membership.
    The application process for applicants who are not current PCX 
members will be the same as is now required by PCX. The decision to 
grant or deny an application for trading privileges will be made by 
officers of the reorganized PCX (there will be no Membership Committee) 
and the denial of an application will be appealable to the reorganized 
PCX Board Appeals Committee.
    iv. Non-transferability of OTPs. OTPs will not be transferable by 
sale or lease,

[[Page 16311]]

but they may be transferred by a firm holding an OTP between 
individuals within the same firm in accordance with the Rules of the 
reorganized PCX.
    v. Cost of OTPs. Pursuant to the requirements of Section 19 of the 
Act,\32\ PCX intends to set forth in a separate rule filing the fees 
for an OTP that will be assessed.
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 78s.
---------------------------------------------------------------------------

    e. Proposed PCX Rules of the Reorganized PCX. PCX represents that 
the majority of the rules proposed to regulate the business conduct and 
practices of its OTP Holders, OTP Firms, and associated persons are 
closely patterned on PCX's existing rules (with the exception of 
proposed PCX Rules 1 through 3). The proposed rules contain changes to 
reflect the new structure whereby trading permits will be issued to 
persons or entities conducting business on the reorganized PCX. 
Detailed descriptions are provided with respect to those rules that 
reflect a significant departure from the current PCX Rules. In 
addition, for those proposed rules that are closely patterned after 
existing PCX Rules, the PCX indicates which PCX Rules were the model 
and notes that only minor conforming word changes and clean-up 
corrections were made.
    i. Summary of Proposed PCX Rules. Following the demutualization, 
the reorganized PCX will adopt, subject to certain revisions, the 
applicable trading rules and standards of the current PCX as they 
relate to the current options trading business. Proposed PCX Rules 1 
through 3, which relate to definitions, qualifications for OTPs and 
corporate governance, reflect significant departures from existing PCX 
Rules. The remaining rules are substantially similar to the current 
rules, unless noted otherwise. A discussion of the proposed rules 
follows.
    A. PCX Rule 1--Definitions. Proposed PCX Rule 1 defines certain 
terms and references (e.g., OTP Holder) used throughout the rules, and 
is intended to ensure uniformity in the use of such terms. In 
conjunction with the demutualization and the issuance of the Option 
Trading Permits, the PCX has developed the following new terms and 
incorporated them into Proposed PCX Rule 1.
    Proposed PCX Rule 1.1(h)--The term ``Exchange'' shall mean the 
reorganized PCX, a Delaware corporation as described in the company's 
Certificate of Incorporation and Bylaws. The reorganized Exchange is a 
national securities exchange as that term is defined by Section 6 of 
the Act.\33\
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78f.
---------------------------------------------------------------------------

    Proposed PCX Rule 1.1(n)--The term ``Nominee'' means an individual 
who is authorized by an OTP Firm, in accordance with proposed PCX Rule 
2.4, to conduct business on the Exchange's Trading Facilities and to 
represent such OTP Firm in all matters relating to the Exchange. As 
long as a Nominee remains effective, the Nominee will have status as a 
``member'' of the Pacific Exchange, as that term is defined in Section 
3 of the Act.\34\ A Nominee shall agree to be bound by the Bylaws and 
Rules of the Exchange, and by all applicable rules and regulations of 
the Commission.
---------------------------------------------------------------------------

    \34\ 15 U.S.C. 78c.
---------------------------------------------------------------------------

    Proposed PCX Rule 1.1(p)--The term ``OTP'' shall refer to an 
Options Trading Permit issued by the Exchange for effecting approved 
securities transactions on the Exchange's Trading Facilities. An OTP 
may be issued to a sole proprietor, partnership, corporation, limited 
liability company, or other organization which is a registered broker 
or dealer pursuant to Section 15 of the Act,\35\ and which has been 
approved by the Exchange.
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78o.
---------------------------------------------------------------------------

    Proposed PCX Rule 1.1(q)--The term ``OTP Holder'' shall refer to a 
natural person, in good standing, who has been issued an OTP, or has 
been named as a Nominee. An OTP Holder must be a registered broker or 
dealer pursuant to Section 15 of the Act,\36\ or a Nominee or an 
associated person of a registered broker or dealer that has been 
approved by the Exchange to conduct business on the Exchange's Trading 
Facilities. An OTP Holder shall agree to be bound by the Bylaws and 
Rules of the Exchange, and by all applicable rules and regulations of 
the Commission. An OTP Holder shall not have ownership or distribution 
rights in the Exchange. An OTP Holder will have limited voting rights 
to nominate an OTP Holder to the Exchange's Board of Directors pursuant 
to proposed PCX Rule 3.2(b)(2)(C). An OTP Holder will have status as a 
``member'' of the Pacific Exchange, as that term is defined in Section 
3 of the Act.\37\
---------------------------------------------------------------------------

    \36\ 15 U.S.C. 78o.
    \37\ 15 U.S.C. 78c.
---------------------------------------------------------------------------

    Proposed PCX Rule 1.1(r)--The term ``OTP Firm'' shall refer to a 
sole proprietorship, partnership, corporation, limited liability 
company, or other organization in good standing who holds an OTP or 
upon whom an individual OTP Holder has conferred trading privileges on 
the Exchange's Trading Facilities pursuant to and in compliance with 
these rules. An OTP Firm must be a registered broker or dealer pursuant 
to Section 15 of the Act.\38\ An OTP Firm shall agree to be bound by 
the Certificate of Incorporation, Bylaws, and PCX Rules of the 
Exchange, and by all applicable rules and regulations of the 
Commission. An OTP Firm shall not have ownership or distribution rights 
in the Exchange. An OTP Firm will have limited voting rights to 
nominate an OTP Holder to the Exchange's Board of Directors pursuant to 
proposed PCX Rule 3.2(b)(2)(C). An OTP Firm will have status as a 
``member'' of the current PCX, as that term is defined in Section 3 of 
the Act.\39\
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78o.
    \39\ 15 U.S.C. 78c.
---------------------------------------------------------------------------

    Proposed PCX Rule 1.1(y)--The terms ``self-regulatory 
organization'' and ``SRO'' shall have the same meaning as set forth in 
the provisions of the Act relating to national securities exchanges.
    Proposed PCX Rule 1.1(aa)--The term ``Trading Facilities'' shall 
refer to the Exchange's facilities for the trading of options, office 
space provided by the Exchange to OTP Holders and OTP Firms in 
connection with their floor trading activities, and any and all 
electronic or automated order execution systems and reporting services 
provided by the Exchange to OTP Holders and OTP Firms.
    B. PCX Rule 2--Option Trading Permits. Proposed PCX Rule 2, which 
describes the application process, the qualification requirements and 
other requirements for holding an OTP, are similar to the requirements 
and procedures now described in current PCX Rule 1 and certain sections 
of the current PCX Constitution. However, as we describe below, certain 
substantive changes have been made to reflect the characteristics of 
the new OTPs. These substantive changes include the following:
    Proposed PCX Rule 2.2--In accordance with proposed PCX Rule 2.2, an 
OTP may be issued to an individual, partnership, corporation, limited 
liability company, or other organization that is a registered broker-
dealer. As discussed under proposed Section 1.1(p) of PCX Rule 1, an 
OTP will authorize its holder to trade options on any facility of the 
reorganized PCX, including the options trading floor, POETS, or PCX 
Plus, as a registered Market Maker, Floor Broker, or order flow firm. 
An OTP will not confer any rights to trade on the Archipelago Exchange, 
the equities trading facility of PCX Equities. Any OTP Holder that 
wishes to trade securities on the Archipelago Exchange must be approved 
for and obtain a PCXE ETP

[[Page 16312]]

pursuant to PCXE's standard application procedures.
    Proposed PCX Rule 2.3--In order to be consistent with the approach 
taken with respect to seat ownership, under proposed PCX Rule 2.3(b), 
all firms that directly own OTPs are required to designate a natural 
person to hold their OTPs (i.e., the OTP Holder). Accordingly, whenever 
an OTP confers the right to vote (e.g., election of the Nominating 
Committee, as discussed below), it is the OTP Holder, rather than the 
OTP Firm, which casts the vote. However, pursuant to proposed PCX Rule 
2.21(c) (as discussed below), the OTP Firm retains the right to replace 
the OTP Holder with another qualified Nominee employed by the OTP Firm 
at any time. Therefore, since the reorganized PCX will use revocable 
proxies to conduct its votes, OTP Firms will be able to effectively 
control the voting process with respect to the OTPs that they own in 
the same manner as PCX member firms control the voting process with 
respect to Nominees today.
    Proposed PCX Rules 2.4, 2.5, and 2.6--Proposed PCX Rules 2.4, 2.5, 
and 2.6 would alter PCX's existing member approval process by 
authorizing the reorganized PCX management--in place of a Membership 
Committee--to approve or reject OTP applicants. As described in 
proposed PCX Rule 2.4(g), in the event that the Exchange rejects an 
application, the applicant will have the opportunity to appeal the 
decision to the Exchange's Board Appeals Committee pursuant to proposed 
PCX Rule 10. Minor changes in terminology have been made to conform 
with the proposed restructuring.
    Proposed PCX Rule 2.21--As described in proposed PCX Rule 2.21(a) 
and (b), unlike current PCX memberships, OTPs may not be purchased, 
sold or leased. Therefore, proposed PCX Rules 1.21 and 1.24 and 
sections of proposed PCX Rules 1.22 and 1.23 relating to the purchase, 
sale, or lease of memberships have been deleted from the reorganized 
PCX Rules. Under proposed PCX Rule 2.21(c), the only permissible 
transfers of OTPs are intra-firm transfers involving Nominees employed 
by the same firm. A new Nominee, unless he or she is a previously 
approved person or approved Allied Person of the OTP Firm, shall 
provide all information required for the Exchange to conduct an 
investigation of the Nominee prior to his or her approval as a Nominee.
    Proposed PCX Rule 2.22--Pursuant to proposed PCX Rule 2.22, an OTP 
will terminate upon the occurrence of the permit holder's expulsion, 
suspension without reinstatement, death, declaration of incompetence, 
dissolution, winding up, or other cessation of business. An OTP Holder 
whose trading privileges are terminated must be current in all filings 
and payments of dues, fees, and charges. If the OTP Holder fails to be 
current as required, the Exchange retains jurisdiction over the permit 
holder until such time as the permit holder is current. In addition, an 
OTP that confers trading privileges on an OTP Firm will terminate when 
the named OTP Holder ceases to be an employee of the OTP Firm. In that 
event, the OTP Firm may nominate another employee as its Nominee OTP 
Holder. An OTP Firm upon which trading privileges are conferred shall 
continue to be responsible for all obligations, including, without 
limitation, dues, fees, and charges imposed by or due to the Exchange.
    PCX represents that, other than the substantive changes discussed 
above and minor conforming word changes that reflect the 
demutualization, each section of proposed PCX Rule 2 (except PCX Rule 
2.21 and PCX Rule 2.22) is substantially the same as a relevant 
corresponding PCX Rule or Article.
    C. PCX Rule 3--Organization and Administration
    Proposed PCX Rule 3 sets forth the organization and governance 
structure of the reorganized PCX. Proposed PCX Rules 3.1 through 3.3 
regarding Options and Board Committees were drafted using current PCX 
and PCXE Rules as a starting point.\40\ Under the proposed rules, the 
use of a ``member'' committee structure will be substantially reduced.
---------------------------------------------------------------------------

    \40\ See PCX Rules 11.1(a)-(b), 11.2(a)-(b), 11.3-11.5, 11.6(b); 
11.8(d), PCX Constitution Articles II-IV, and PCXE PCX Rule 3.
---------------------------------------------------------------------------

    Proposed PCX Rule 3.1--Proposed PCX Rule 3.1 states that the Board 
of Directors may establish: (1) One or more Board committees consisting 
of one or more Directors of the Exchange; and (2) one or more Options 
committees consisting of people other than Directors. As discussed in 
more detail below, although the reorganized PCX Board may establish 
additional Options Committees under this proposed rule, the proposed 
Bylaws and Rules of the reorganized PCX currently envision only a 
Nominating Committee, Ethics and Business Conduct Committee, and OTP 
Advisory Committee. Similarly, although the Board may establish 
additional Board Committees, the proposed rules currently envision only 
a Board Appeals Committee, Regulatory Oversight Committee, Audit 
Committee, and Compensation Committee.
    Proposed PCX Rule 3.2(a)--Proposed PCX Rule 3.2(a) establishes the 
substantive and procedural rules for an Options Committee conducting 
meetings and exercising its authority. In particular, proposed PCX Rule 
3.2(a), which is similar to existing PCX and PCXE rules and procedures, 
discusses quorums, voting, conference call meetings, vacancies, the 
removal and resignation of committee members, and eligibility for and 
appointment to Options Committees, interested persons and 
subcommittees.
    Under the proposed rule, OTP Holders and Allied Persons \41\ of OTP 
Firms as well as public representatives may be appointed to serve on 
Options Committees. No more than one person affiliated with the same 
OTP Firm shall be eligible for service on the same Options Committee. 
Proposed PCX Rule 3.2(a) would vest authority in the Board of Directors 
or such other designee of the reorganized PCX to appoint the members of 
Options Committees (other than the Nominating Committee). The CEO or 
such other designee of the reorganized PCX shall appoint the Chair and 
Vice Chair of each Options Committee (other than the Nominating 
Committee).
---------------------------------------------------------------------------

    \41\ See supra note 18.
---------------------------------------------------------------------------

    Proposed PCX Rule 3.2(b)(1)--Proposed PCX Rule 3.2(b)(1) describes 
the functions and authority of the Ethics and Business Conduct 
Committee (``EBCC''). The reorganized PCX's disciplinary process will 
be similar to the existing PCX disciplinary process and will be 
governed by the EBCC. Pursuant to the proposed rule, the EBCC would 
have the following functions and authority to: (1) Examine the business 
conduct and financial condition of OTP Holders, OTP Firms, and 
associated persons; (2) conduct hearings and render decisions in 
summary disciplinary actions and proceedings; (3) impose appropriate 
sanctions of expulsion, suspension, fine, censure, or any other fitting 
sanctions where the Committee finds that a violation within the 
disciplinary jurisdiction of the Exchange has been committed; and (4) 
require the production of detailed financial reports of an OTP Holder 
or OTP Firm and such other operational reports as it may deem relevant.
    In addition, under this proposed rule, the EBCC will have the 
authority to examine and subsequently suspend an OTP Firm or OTP Holder 
if the person or entity is in violation of proposed PCX Rule 4. Any 
such suspension is subject to review by the Board Appeals Committee. 
Such review shall not operate as a stay of the suspension

[[Page 16313]]

unless specifically allowed by the Board. A person or firm which 
experiences a reversal of the suspension imposed by the Committee shall 
be prohibited from instituting a lawsuit against the Exchange or the 
Committee members.
    Finally, decisions of the EBCC or sanctions imposed by the 
regulatory staff relating to disciplinary proceedings may be appealed 
to the Board Appeals Committee in accordance with proposed PCX Rule 10.
    Proposed PCX Rule 3.2(b)(2)--Proposed PCX Rule 3.2(b)(2) describes 
the characteristics and function of the Nominating Committee. 
Specifically, the Nominating Committee will have seven members 
consisting of six OTP Holders and one public representative. Members of 
the Nominating Committee will be nominated in accordance with the 
procedures set forth in proposed PCX Rule 3.2(b)(2). This proposed rule 
states that, prior to the expiration of its term, the Nominating 
Committee shall publish a slate of six eligible nominees for the 
committee. OTP Holders may submit a petition to the Exchange in writing 
to nominate additional eligible candidates to fill the OTP positions. 
Upon written petition of the lesser of thirty-five or ten percent (10%) 
of the OTP Holders in good standing, the additional candidates shall 
also be nominated by the Nominating Committee. The CEO shall appoint a 
person from the public to fill the public position on the Nominating 
Committee.
    If there are more than six nominees to fill the OTP Holder 
positions on the Nominating Committee, the Nominating Committee shall 
submit the nominees to the OTP Holders for election. Each OTP Holder in 
good standing shall be permitted to vote for up to six nominees and the 
six nominees receiving the most votes shall fill the OTP positions. Tie 
votes shall be decided by the Board of Directors at its first meeting 
following the election. If there are only six nominees to fill the OTP 
Holder positions, those six nominees shall be deemed elected to the 
Nominating Committee.
    This Nominating Committee will nominate at least one nominee for 
the reorganized PCX Board. Such nominee may be an OTP Holder or Allied 
Person of an OTP Firm. OTP Holders may submit a written petition to the 
Exchange to nominate additional eligible candidates to fill the OTP 
Holder position and, upon written petition of the lesser of thirty-five 
or ten percent (10%) of OTP Holders in good standing, the additional 
person(s) shall also be nominated by the Nominating Committee.
    After the nomination by petition period has closed, the Board of 
Directors of PCX Holdings shall have ten (10) business days to object 
to the nomination of any or all of the OTP Holder nominee(s). The Board 
of Directors of PCX Holdings may in its sole discretion object to the 
nomination of any or all of the OTP Holder nominee(s) if the nominee(s) 
have been disciplined by any securities SRO or the nominee would be 
subject to statutory disqualification within the meaning of Section 
3(a)(39) of the Act.\42\ Any nominee who is objected to by the Board of 
Directors of PCX Holdings is not eligible to be considered as a nominee 
or petition candidate until the expiration of the current term of the 
Board of Directors. If the Board of Directors of PCX Holdings objects 
to all of the proposed nominees, the Nominating Committee shall publish 
the name of an eligible alternative nominee by the later of ten (10) 
business days after the Board of Directors of PCX Holdings notifies the 
Secretary of the reorganized Exchange of their objection to the 
proposed nominee(s) or sixty-five (65) days prior to the expiration of 
the term of the Directors. If the Board of Directors of PCX Holdings 
objects to all of the original nominees, the above defined process 
shall continue with all of the same deadlines until the Nominating 
Committee nominates a nominee that is not objected to by the Board of 
Directors of PCX Holdings.
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 78c(a)(39).
---------------------------------------------------------------------------

    If there are two or more OTP Holder nominees for the Board of 
Directors of the reorganized PCX, the Nominating Committee shall submit 
the contested nomination to the OTP Holders for selection. Each OTP 
Holder may select one nominee for the contested seat on the Board of 
Directors. With respect to the contested positions, the nominee for the 
Board of Directors selected by the OTP Holders, shall be submitted by 
the Nominating Committee to the Board of Directors. Similarly, the 
Nominating Committee shall submit an uncontested nominee to the Board 
of Directors. Tie votes shall be decided by the respective Board at its 
first meeting following the election.
    Proposed PCX Rule 3.2(b)(3)--The proposed OTP Advisory Committee 
will be responsible for advising the management of the reorganized PCX 
regarding rule changes relating to disciplinary matters and trading 
rules. The OTP Advisory Committee shall be made up of OTP Holders. 
According to PCX, attempts shall be made to have diverse OTP Holder 
representation of different constituencies on the Committee.
    Proposed PCX Rule 3.2(c)--Under this proposed rule, each Options 
Committee shall have such other powers and duties as delegated to it by 
the Board of Directors. Each Options Committee is subject to the 
control, review, and supervision of the Board of Directors.
    Proposed PCX Rule 3.3(a)(1)--Proposed PCX Rule 3.3(a)(1) describes 
the functions and authority of the Board Appeals Committee. The Board 
Appeals Committee shall be made up of the OTP Director(s), the ETP 
Director(s), and all of the Public Directors of the reorganized PCX. 
Board Appeals Committee Panels (``Appeals Panels'') shall be made up of 
members of the Board Appeals Committee. An Appeals Panel shall be made 
up of no less than three (3), but no more than five (5) 
individuals.\43\ The Appeals Panel will conduct reviews of matters 
subject to the applicable provisions of proposed PCX Rule 3.2(b)(1)(C) 
or 10. Each Appeals Panel will contain at least one Public Director and 
at least one Director that is an OTP Holder or Allied Person of an OTP 
Firm. Subject to proposed PCX Rule 10, decisions of the Board Appeals 
Committee shall be subject to the review of the Board of Directors. The 
decision of the Board of Directors shall constitute the final action of 
the Exchange, unless the Board remands the proceedings.
---------------------------------------------------------------------------

    \43\ The body conducting the review, either the Board Appeals 
Committee itself or the Appeals Panel, is also referred to in the 
proposed rules as the Review Board.
---------------------------------------------------------------------------

    Proposed PCX Rule 3.3(a)(2)--Proposed PCX Rule 3.3(a)(2) describes 
the functions and authority of the Regulatory Oversight Committee 
(``ROC''). The ROC shall ensure: (1) The independence of Exchange 
regulation; (2) that the Exchange provides adequate resources to 
properly fulfill its SRO regulatory obligations; and (3) that Exchange 
management fully supports the execution of the regulatory process. The 
ROC shall be made up of all the Public Directors of the reorganized 
PCX.
    Proposed PCX Rule 3.3(a)(3)--Proposed PCX Rule 3.3(a)(3) describes 
the functions and authority of the Audit Committee. The Audit Committee 
shall be made up of at least three (3) Directors of the reorganized 
PCX. All members of the Audit Committee shall be Public Directors and 
at least one member of the Audit Committee shall have accounting or 
related financial management expertise, as the reorganized PCX Board of 
Directors interprets such qualification in its business judgment. The 
Audit Committee shall conduct an annual

[[Page 16314]]

review with the independent auditors to determine the scope of their 
examination and the cost thereof. The Audit Committee shall 
periodically review with the independent auditors and the internal 
auditor, the Exchange's internal controls and the adequacy of the 
internal audit program. The Audit Committee shall review the annual 
reports submitted both internally and externally, and take such action 
with respect thereto as it may deem appropriate. The Audit Committee 
shall also recommend independent public accountants as auditors of the 
Exchange and its subsidiaries to the reorganized PCX Board of 
Directors.
    Proposed PCX Rule 3.3(a)(4)--Proposed PCX Rule 3.3(a)(4) describes 
the functions and authority of the Compensation Committee. The 
Compensation Committee shall be made up of at least three (3) Directors 
of the reorganized PCX Board of Directors. Only one (1) non-Public 
Director may serve on the committee. The Compensation Committee shall 
review and approve corporate goals and objectives relevant to the CEO's 
Compensation, evaluate the CEO's performance in light of those goals 
and objectives, and set the CEO's compensation level based on this 
evaluation. The Compensation Committee shall also make recommendations 
to the Board of Directors of the reorganized PCX with respect to the 
design of incentive compensation and equity-based plans.
    Proposed PCX Rule 3.6--Subject to minor word changes, proposed PCX 
Rule 3.6 regarding surveillance agreements is the same as existing PCX 
Rule 14.1.
    Proposed PCX Rules 3.7-3.9--Other than minor conforming word 
changes, proposed PCX Rules 3.7 through 3.9 are the same as current PCX 
Constitution Article XIV, Section 1. Under these rules, the reorganized 
PCX Board may impose reasonable fees, assessments, charges, or fines to 
be paid by OTP Holders or OTP Firms. Prior to implementing the 
demutualization, PCX represents that it will file with the Commission a 
rule proposal to change its Schedule of Fees and Charges for services 
provided by the reorganized PCX.
    D. PCX Rule 4--Capital Requirements, Financial Reports, and 
Margins. Proposed PCX Rule 4, which sets forth the net capital, 
financial reporting, and margin requirements for OTP Holders and OTP 
Firms, has been adapted from current PCX Rule 2. Only minor conforming 
changes in terminology and clean-up corrections have been made to the 
current PCX Rules.
    E. PCX Rule 5--Listings. Proposed PCX Rule 5 is comprised of the 
General Provisions and Definitions, Underlying Securities, Stock Index 
Options, Flexible Exchange Options, Buy-Write Option Unitary 
Derivatives (BOUNDs), and Portfolio Depositary Receipts. This proposed 
rule has been adapted from current PCX Rules 3, 7, and 8. Only minor 
conforming changes in terminology and clean-up corrections have been 
made to the current PCX Rules.
    F. PCX Rule 6--Options Trading. Other than the substantive changes 
discussed below and minor conforming word changes that reflect the 
demutualization, proposed PCX Rule 6 is the same as the current PCX 
Rule 6 governing options trading. Accordingly, the Exchange proposes to 
modify PCX Rule 6 in order to make two notable modifications to its 
options trading rules. First, the Exchange seeks to confer jurisdiction 
currently held by the Options Floor Trading Committee to the Exchange, 
and, second, the Exchange proposes to confer jurisdiction currently 
held by Floor Officials to either Trading Officials or the 
Exchange.\44\
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    \44\ Initially, Trading Officials will be acting as officials of 
the Exchange as opposed to members of the Options Floor Trading 
Committee. Over time, the Exchange expects that the PCX's regulatory 
staff will be primarily responsible for the general supervision of 
the conduct and dealings of OTP Holders, OTP Firms, and Associated 
Persons on the options trading facility. The Commission notes that 
the Exchange committed to file a proposed rule change under Section 
19(b) of the Act with respect to any proposal to permit PCX's 
regulatory staff to assume responsibilities handled by Trading 
Officials. Telephone Conversation on March 17, 2004.
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    G. PCX Rule 7--General Trading PCX Rules. Proposed PCX Rule 7, 
which pertains to general trading rules that address trading hours, 
access to trading facilities, etc., has been adapted from current PCX 
Rule 4. Only minor conforming changes in terminology have been made to 
the current PCX Rules.
    H. PCX Rule 9--Conducting Business with the Public. Proposed PCX 
Rule 9, which governs how OTP Holders and OTP Firms must conduct 
business with the public, is patterned after existing PCX Rule 9. 
Except for minor changes in terminology and clean-up corrections, the 
proposed rule is substantially the same as the existing rule.
    I. PCX Rule 10--Disciplinary Proceedings, Other Hearings, and 
Appeals. Proposed PCX Rule 10 describes the disciplinary process for 
the reorganized PCX. The reorganized PCX's disciplinary process will be 
similar to the existing PCX disciplinary process (including summary 
sanction procedures under the Minor PCX Rule Plan) and will be governed 
by the Ethics and Business Conduct Committee. Therefore, aside from 
conforming word changes and the substantive changes discussed below, 
proposed PCX Rule 10 will be closely modeled after existing PCX Rule 
10.
    Proposed PCX Rules 10.8(a)--Defines and clarifies the procedures 
and timetables for the respondent to follow when requesting the review 
of a decision by the Conduct Panel appointed by the Ethics and Business 
Conduct Committee.\45\ The respondent may appeal to the Board at any 
time within fifteen (15) calendar days after the decision has been 
served.
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    \45\ The Exchange is proposing to make certain technical changes 
throughout the text of the proposed PCX Rule 10 for clarification 
purposes, e.g., changing the reference to calendar days.
---------------------------------------------------------------------------

    Proposed PCX Rule 10.8(b)--Provides that the Board Appeals 
Committee may appoint an Appeals Panel to review the decision rendered 
by the Conduct Panel. The composition of the Appeals Panel will be 
determined by the Board Appeals Committee in accordance with proposed 
PCX Rule 3.3(a)(1)(A). Unless the Review Board shall decide to open the 
record for the introduction of new evidence or to hear argument, such 
review shall be based solely upon the record and the written exceptions 
filed by the parties. The standard of review shall be de novo.
    PCX Rules 10.14(a)-(m)--Current PCX Rules 11.7(a)-(m) regarding 
appeals for non-disciplinary matters will be incorporated into proposed 
PCX Rule 10.14. Proposed PCX Rule 10.14 provides the procedures for 
persons aggrieved by any of the following actions taken by the 
reorganized Exchange to apply for an opportunity to be heard and to 
have the action reviewed. These actions are: (1) Denial of an OTP; (2) 
the barring of any person from becoming associated with an OTP Firm; 
(3) the suspension or cancellation of OTP trading privileges; (4) the 
prohibition or limitation with respect to access to services provided 
by the Exchange, or the access to services of any OTP Firm taken 
pursuant to the Bylaws, or Rules or procedures of the Exchange; (5) 
actions taken pursuant to proposed PCX Rules 6.37 (Obligations of 
Market Makers), 6.82(e) or (f) (regarding allocation or reallocation of 
option issues), and 6.82(g) (regarding qualification or 
disqualification of an LMM); or (6) the denial of an applicant for 
registration as a Market Maker, Lead Market Maker, or Floor Broker 
(proposed PCX Rules 6.33, 6.44 and

[[Page 16315]]

6.82(b)(1)). The provisions of this rule shall not apply to reviews of 
disciplinary action, for which review is already provided within 
proposed PCX Rule 10, and actions in Arbitration.
    J. PCX Rule 11--Business Conduct. Proposed PCX Rule 11 consolidates 
various options-related rules that address business practices, ethical 
standards, and prohibited acts contained in the existing PCX Rules 2 
and 4 and the PCX Constitution. Other than minor conforming word 
changes that reflect the demutualization, each section of proposed PCX 
Rule 11 is substantially the same as the relevant corresponding PCX 
Rule or Article.
    K. Rule 12--Arbitration. Proposed PCX Rule 12, the arbitration 
rule, has been patterned closely after current PCX Rule 12. Only minor 
changes in terminology have been made to conform the proposed rule to 
the circumstances of the proposed demutualization.
    L. PCX Rule 13--Expulsion, Suspension, and Reinstatement. Proposed 
PCX Rule 13 clarifies, restates, and reorganizes existing PCX Rules and 
procedures regarding certain suspensions, cancellations, bars, and 
prohibitions on access to the reorganized PCX services and facilities. 
The following describes the proposed rules and how they differ from 
existing rules, where applicable.
    Proposed PCX Rules 13.1(a)-(b)--Proposed PCX Rules 13.1(a)-(b) 
incorporate a modified version of Article X, Sections 1(a) and (b) of 
the current PCX Constitution. This rule requires an OTP Holder or OTP 
Firm to give prompt written notice to the Exchange if it is expelled or 
suspended from any SRO, encounters financial difficulty or operating 
inadequacies, fails to perform contracts or becomes insolvent, or if 
any associated person of such OTP Firm is similarly expelled or 
suspended by an SRO.
    Proposed PCX Rules 13.2(a)-(b)--PCX has reorganized and simplified 
its Rules relating to summary and non-summary disciplinary proceedings. 
The proposed PCX Rules have been adapted from NASD Rule 9510 Series and 
current PCX Constitution, Article X, Section 2 and Article XI, Section 
3(c). These proposed sections are intended to eliminate any potential 
ambiguities in the procedures related to summary and non-summary 
suspensions by expressly identifying the grounds for imposing such 
suspensions.
    Proposed PCX Rule 13.2(c)--Proposed PCX Rule 13.2(c) provides that 
action taken pursuant to PCX Rule 13.2(a) shall also be subject to the 
applicable provisions of proposed PCX Rule 10.14. Furthermore, under 
proposed Commentary .01, the Exchange will be required to notify the 
Commission in the event that it determines to take summary action 
pursuant to proposed PCX Rule 13.2.
    Proposed PCX Rule 13.3--Proposed PCX Rule 13.3 states that an OTP 
Holder, OTP Firm, or associated person thereof loses all rights and 
trading privileges when those privileges are suspended or canceled by 
the Exchange. However, such person or organization shall remain subject 
to the disciplinary power of the Exchange.
    Proposed PCX Rule 13.4--Proposed PCX Rule 13.4 states that an OTP 
Holder, OTP Firm, or associated person thereof whose trading privileges 
are suspended may be disciplined by the Exchange for any offense 
committed either before or after the announcement of the suspension.
    Proposed PCX Rule 13.5--Other than minor word changes, proposed PCX 
Rule 13.5 is modeled closely after Article X, Section 3 of the current 
PCX Constitution. Proposed PCX Rule 13.5 states that a person or 
organization whose trading privileges have been suspended must 
immediately allow the reorganized Exchange to investigate its affairs.
    Proposed PCX Rule 13.6--Other than minor word changes, proposed PCX 
Rule 13.6 is modeled closely after Article X, Section 4 of the current 
PCX Constitution. Proposed PCX Rule 13.6 describes the grounds for 
canceling trading privileges.
    Proposed PCX Rule 13.7--Other than minor word changes, proposed PCX 
Rule 13.7 is modeled closely after Article X, Section 5 of the current 
PCX Constitution. Proposed PCX Rule 13.7 describes the reinstatement 
process after trading privileges have been suspended.
    Proposed PCX Rule 13.8--Proposed PCX Rule 13.8 provides that if any 
OTP Holder, OTP Firm, or any other associated person is suspended and 
fails or is unable to apply for reinstatement or fails to obtain 
reinstatement, trading privileges conferred by an OTP will terminate.
    M. PCX Rule 14--Liability of Directors and Exchange. Proposed PCX 
Rule 14 has been adapted from current PCX Rule 13. Only minor changes 
in terminology have been made to conform the rule to the proposed 
demutualization.
    N. Option Floor Procedure Advices (``OFPA''). This section of the 
proposed rules contains the various options floor procedures and 
policies that have been adopted over time. These proposed rules have 
been adapted from the existing ones, which were previously approved by 
the Commission. These policies will apply to OTP Holders, OTP Firms, or 
associated persons thereof that conduct business on the options trading 
facilities. Minor conforming changes in terminology have been made to 
the existing floor procedures and policies. In addition, the Exchange 
proposes to delete OFPA B-4 (Market Maker Trading on PCX Equity Floors) 
and OFPA D-8a (Marking Orders to Reflect Split Transactions) because, 
according to PCX, they are obsolete and no longer applicable to the 
current trading environment.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\46\ in general, and furthers the 
objectives of Sections 6(b)(5),\47\ in particular, because it is 
designed to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, and to remove impediments to and perfect 
the mechanism for a free and open market and a national market system, 
and to protect investors and the public interest. In addition, the 
Exchange believes that the proposed rule change is consistent with the 
provisions of Section 11A(a)(1)(B) \48\ of the Act.
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    \46\ 15 U.S.C. 78f(b).
    \47\ 15 U.S.C. 78f(b)(5).
    \48\ 15 U.S.C. 78kA(a)(1)(B).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
PCX 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 PCX 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

[[Page 16316]]

    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 should be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-PCX-2004-08. This file number should be included on the 
subject line if e-mail is used. To help the Commission process and 
review comments more efficiently, comments should be sent in hard copy 
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 be submitted by April 19, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\49\
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    \49\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-6817 Filed 3-26-04; 8:45 am]
BILLING CODE 8010-01-P