[Federal Register Volume 69, Number 82 (Wednesday, April 28, 2004)]
[Notices]
[Pages 23246-23248]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-9567]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49587; File No. SR-Phlx-2003-54]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 by the Philadelphia Stock Exchange, Inc. To 
Amend Rules Relating to the Minimum Net Capital for Specialists in 
Index Fund Shares

April 21, 2004.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on October 20, 2003, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the Exchange. On March 29, 2004, the Phlx amended the proposal.\3\ 
Amendment No. 1 completely replaces and supersedes the original filing. 
The Commission is

[[Page 23247]]

publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See March 26, 2004 letter from Mark I. Salvacion, Director 
and Counsel, Phlx, to Rachael Grad, Attorney, Division of Market 
Regulation, SEC and attachments (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to add a new subsection (B) to Exchange Rule 
703(a)(v), which would establish a minimum net capital requirement of 
$1,000,000 for specialists in Index Fund Shares. The text of the 
proposed rule change is below. Proposed new language is in italics.

Rule 703(a)

    (i)-(iv) No change.
    (v)(A) An assigned Specialist in Trust Shares, as defined in Rule 
803(i), that are listed on the Exchange, shall be required to maintain 
a minimum of $1,000,000 in net capital. The assigned Specialist shall 
immediately inform the Examinations Department upon failure to be in 
compliance with such requirement. (B) An assigned Specialist in Index 
Fund Shares, as defined in Rule 803(l)(2)(A), that are listed on the 
Exchange, shall be required to maintain a minimum of $1,000,000 in net 
capital. The assigned Specialist shall immediately inform the 
Examinations Department upon failure to be in compliance with such 
requirement. The Exchange may waive the financial requirements of this 
Rule 703(a)(v) in unusual circumstances.
    (vi)-(ix) No change.

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

    In its filing with the Commission, the Phlx included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Phlx has prepared summaries, set forth in sections 
A, B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    The purpose of the proposed rule change is to increase the minimum 
net capital requirement for specialists in Index Fund Shares because of 
the unique risks associated with Index Fund Shares.\4\ Currently, 
Exchange Rule 703(a) \5\ sets forth certain categories of net capital 
requirements for various types of member organizations, based on the 
type of security or activity in which the member organization engages. 
For example, subsection (v) of Exchange Rule 703(a) \6\ provides that 
an assigned specialist in Trust Shares is required to maintain a 
minimum of $1,000,000 in net capital. Because of the potential risks 
associated with trading Trust Shares, specialists in Trust Shares are 
expected to make a greater financial commitment for the privilege of 
acting as a specialist in Trust Shares.\7\
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    \4\ ``Index Fund Share'' is defined in Exchange Rule 
803(l)(2)(A) as a ``security (I) that is issued by an open-end 
management investment company based on a portfolio of stocks that 
seeks to provide investment results that correspond generally to the 
price and yield performance of specified foreign or domestic stock 
index; (II) that is issued by such an open-end management investment 
company in a specified aggregate minimum number in return for a 
deposit of specified number of shares of stock and/or a cash amount 
with a value equal to the next determined net asset value; and (III) 
that, when aggregated in the same specified minimum number, may be 
redeemed at a holder's request by such open-end management 
investment company which will pay to the redeeming holder the stock 
and/or cash with a value equal to the next determined net asset 
value.''
    \5\ See Phlx Rule 703(a).
    \6\ See Phlx Rule 703(a)(v).
    \7\ See Securities Exchange Act Release No. 45129 (December 4, 
2001), 66 FR 64331 (December 12, 2001) (SR-Phlx-99-41) (Order 
approving $1 million minimum net capital requirement for specialists 
in Trust Shares).
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    Index Fund Shares that are to be listed on the Exchange, just as 
Trust Shares, are expected to entail a substantial financial commitment 
on the part of the specialist assigned to them because most, if not 
all, index fund shares are created and redeemed in large blocks called 
``creation units'' which may be as large as 50,000 shares per unit. 
Because the potential risks associated with Index Fund Shares are no 
less than the risks associated with Trust Shares, the proposed rule 
change establishes a minimum net capital requirement of $1,000,000 for 
specialists in Index Fund Shares. As such, proposed Rule 703(a)(v)(B) 
is substantially similar to current Rule 703(a)(v), which would be 
renumbered Rule 703(a)(v)(A). The Exchange believes that imposing a 
higher net capital requirement is one way to ensure that the Index Fund 
Share specialist can carry out his or her duties to maintain a fair and 
orderly market. Moreover, the Exchange believes that the higher minimum 
net capital requirement for Index Fund Shares pursuant to proposed 
Section 703(a)(v)(B) will ensure that only sufficiently capitalized 
firms will apply to become specialists in Index Fund Shares.
    The proposed higher minimum net capital requirement for specialists 
in Index Fund Shares listed and traded on the Phlx on a primary basis 
would not apply to Index Fund Shares traded on an unlisted trading 
privileges basis. This is due to the fact that specialists, in the case 
of Index Fund Shares traded on an unlisted trading privileges basis, do 
not generally undertake the same financial commitments to create and 
redeem Index Fund Shares as do specialists in their primary market.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \8\ in general, and furthers the objectives of section 
6(b)(5) of the Act \9\ in particular, in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system; and, in general, to 
protect investors and the public interest.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Phlx does not believe that the proposed rule change would 
impose any inappropriate burden on competition.

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

    No written comments were either solicited or received.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve such proposed rule change; or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

[[Page 23248]]

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposal is 
consistent with the Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

     Use the Commission's Internet comment form 
(http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please 
include File Number SR-Phlx-2003-54 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW., Washington, DC 20549-0609.
    All submissions should refer to File Number SR-Phlx-2003-54. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. Copies of the submission, all 
subsequent amendments, all written statements with respect to the 
proposed rule change that are filed with the Commission, and all 
written communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for inspection and copying in the Commission's Public 
Reference Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the Phlx. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-Phlx-2003-54 and should be 
submitted on or before May 19, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 04-9567 Filed 4-27-04; 8:45 am]
BILLING CODE 8010-01-P