[Federal Register Volume 69, Number 152 (Monday, August 9, 2004)]
[Notices]
[Pages 48266-48267]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18124]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50131; File No. SR-PCX-2004-29]


Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of 
Filing of Proposed Rule Change and Amendments Nos. 1 and 2 to Add a 
Provision in the Minor Rule Plan and Recommended Fine Schedule for 
Failure to Maintain Continuous, Two-Sided Q Orders in Those Securities 
in Which the Market Maker is Registered to Trade

July 30, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on April 14, 2004, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange''), through its wholly owned subsidiary PCX Equities, Inc. 
(``PCXE''), filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. On July 
2, 2004, the PCX amended the proposed rule change.\3\ On July 26, 2004, 
the PCX again amended the proposed rule change.\4\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Tania J.C. Blanford, Regulatory Policy, PCX, 
to Nancy J. Sanow, Assistant Director, Division of Market 
Regulation, Commission, dated July 1, 2004 (``Amendment No. 1''). 
Amendment No. 1 completely replaced and superseded the original 
filing.
    \4\ See letter from Tania J.C. Blanford, Regulatory Policy, PCX, 
to Nancy J. Sanow, Assistant Director, Division of Market 
Regulation, Commission, dated July 23, 2004 (``Amendment No. 2''). 
Amendment No. 2 replaced footnote 2 (on page 3 of Amendment 
No. 1) and footnote 4 (on page 8 of Amendment No. 1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend the PCXE Minor Rule Plan (``MRP'') 
and Recommended Fine Schedule (``RFS'') to add a provision in the MRP 
and RFS for failure to maintain continuous, two-sided Q Orders in those 
securities in which a PCXE market maker is registered to trade. The 
text of the proposed rule change is below. Proposed new language is in 
italics.

Rule 10--Disciplinary Proceedings, Other Hearings, and Appeals

* * * * *
Minor Rule Plan
    Rule 10.12(a)-(f)--No change.
    (g) Minor Rule Plan: Minor Trading Rule Violations.
    (1)-(2)--No change.
    (3) Failure to maintain continuous, two-sided Q Orders in those 
securities in which the Market Maker is registered to trade (Rule 
7.23(a)(1)).
* * * * *
    \1\ Fines for multiple violations of Minor Trading Rules are 
calculated on a running two-year basis, except that violations 
denoted with an asterisk are calculated on a running one-year basis.
* * * * *
    (i) Minor Rule Plan: Recommended Fine Schedule.

------------------------------------------------------------------------
                                       1st          2nd          3rd
                                    violation    violation    violation
------------------------------------------------------------------------
(1)-(2)--No change...............
(3) Failure to maintain                $100.00      $250.00      $500.00
 continuous two-sided Q Orders in
 those securities in which the
 Market Maker is registered to
 trade. (Rule 7.23(a)(1)) \2\....
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\2\ This schedule is based on the number of violations for a particular
  security and the number of violations shall be calculated on a monthly
  basis and is intended to apply to inadvertent violations of Rule
  7.23(a)(1). In cases of deliberate or other aggravated circumstances,
  other disciplinary action may be sought.

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

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

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

1. Purpose
    The Exchange is proposing to amend the PCXE MRP and RFS to add a

[[Page 48267]]

provision in the MRP and RFS for failure to maintain continuous, two-
sided Q Orders in those securities in which a PCXE market maker is 
registered to trade. PCXE Rule 7.23(a)(1) states that a market maker 
must maintain continuous, two-sided Q Orders in those securities in 
which it is registered to trade as a component of the market maker's 
obligations. The proposed fines are $100 for a first violation, $250 
for a second violation, and $500 for a third violation for failure to 
maintain continuous, two-sided Q Orders in those securities in which 
the market maker is registered to trade. The fine schedule and the 
number of violations are based on each failure to quote and for each 
security, depending on the number of securities involved. For example, 
if a market maker failed to maintain continuous, two-sided Q Orders for 
``IBM'' on Day 1, then failed to maintain continuous, two-sided Q 
Orders in ``Microsoft'' and ``Yahoo'' on Day 2, such violations will be 
calculated as violations 1, 2, and 3, respectively, assuming that Day 1 
and 2 are within the same month. Violations would be calculated on a 
monthly basis \5\ and the proposed MRP is intended to apply to 
inadvertent violations of PCXE Rule 7.23(a)(1).\6\
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    \5\ Monthly basis means a strict month-to-month calculation. The 
calculation would restart at the beginning of each month. For 
example, if a market maker incurred a first violation on July 15th 
and incurred another violation on August 15th, the August 15th 
violation would be calculated as a first violation since it occurred 
during a different month.
    \6\ An inadvertent violation is when a market maker 
inadvertently fails to put in quotes as opposed to purposely backing 
away from maintaining a fair and orderly market. An example of an 
inadvertent violation is when a market maker puts in a maximum 
tradable size for a given security and the entire size is traded, 
which would leave the security without a quote. An example of a 
deliberate failure is when a market maker pulls a quote in reaction 
to a drop in stock price. Such an action would be evident from the 
surveillance report review process and would be taken out of the MRP 
and pursued as a formal disciplinary proceeding.
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    The Exchange believes that the proposed rule change would 
strengthen the ability of the Exchange to carry out its oversight 
responsibilities as a self-regulatory organization. The proposed rule 
change should also aid the Exchange in carrying out its surveillance 
and enforcement functions. The Exchange does not minimize the 
importance of compliance with these rules, and all other rules subject 
to the imposition of fines under the Exchange's MRP. The Exchange 
relies on its MRP as a tool to address enumerated violations via the 
MRP process that provides the Exchange with greater flexibility to 
address violations that may not require formal disciplinary 
proceedings. Under the proposed rule change, the Enforcement Department 
would continue to exercise its discretion under PCXE Rule 10.13(f) and 
take cases out of the MRP to pursue them as formal disciplinary matters 
if the facts or circumstances warrant such action.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act, in general, and Section 6(b)(5) of the Act,\7\ in 
particular, in that it is designed to promote just and equitable 
principles of trade, facilitate transactions in securities, remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and protect investors and the public 
interest. The Exchange also believes the proposal is consistent with 
Section 6(b)(6),\8\ which requires that members and persons associated 
with members be appropriately disciplined for violations of Exchange 
rules.
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    \7\ 15 U.S.C. 78f(b)(5).
    \8\ 15 U.S.C. 78f(b)(6).
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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 
Rule Change Received from Members, Participants, or Others

    Written comments on the proposed rule change were neither solicited 
nor 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 PCX consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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-PCX-2004-29 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-PCX-2004-29. 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. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
PCX. 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-PCX-
2004-29 and should be submitted on or before August 30, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-18124 Filed 8-6-04; 8:45 am]
BILLING CODE 8010-01-U