[Federal Register Volume 70, Number 108 (Tuesday, June 7, 2005)]
[Notices]
[Pages 33245-33248]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-2894]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51752; File No. SR-PCX-2005-34]


Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change and 
Amendment No. 1 thereto Relating to ETP Holders Borrowing from or 
Lending to Their Customers

May 27, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 15, 2005, the Pacific Exchange, Inc. (``PCX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II, which Items have 
been prepared by PCX. The proposed rule change has been filed by the 
PCX as a ``non-controversial'' rule change pursuant to Rule 19b-4(f)(6) 
under the Act.\3\ On May 25, 2005, the PCX filed Amendment No. 1 to the 
proposed rule change (``Amendment No. 1'').\4\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
    \4\ Amendment No. 1 revised and clarified the statutory basis 
for the proposed rule change. See Letter Dated May 23, 2005, from 
Melanie Grace, Office of the Corporate Secretary, PCX, to Nancy 
Sanow, Assistant Director, Division of Market Regulation.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    PCX, through its wholly-owned subsidiary PCX Equities, Inc. 
(``PCXE''), proposes to adopt a new rule restricting registered persons 
of ETP Holders from borrowing from or lending to their customers, 
except pursuant to the conditions specified in the rule. The text of 
the proposed rule change is set forth below. Proposed new language is 
in italics.
* * * * *

Rule 9.29. Borrowing From or Lending to Customers

    (a) No person associated with an ETP Holder in any registered 
capacity may borrow money from or lend money to any customer of such 
person unless:
    (1) The ETP Holder has written procedures allowing the borrowing 
and lending of money between such

[[Page 33246]]

registered persons and customers of the ETP Holder; and
    (2) The lending or borrowing arrangement meets one of the following 
conditions:
    (A) the customer is a member of such person's immediate family;
    (B) the customer is a financial institution regularly engaged in 
the business of providing credit, financing, or loans, or other entity 
or person that regularly arranges or extends credit in the ordinary 
course of business;
    (C) the customer and the registered person are both registered 
persons of the same ETP Holder;
    (D) the lending arrangement is based on a personal relationship 
with the customer, such that the loan would not have been solicited, 
offered, or given had the customer and the associated person not 
maintained a relationship outside of the broker/customer relationship; 
or
    (E) the lending arrangement is based on a business relationship 
outside of the broker/customer relationship;
    (b) Procedures.
    (1) ETP Holders must pre-approve in writing the lending or 
borrowing arrangements described in subparagraphs (a)(2)(C), (D), and 
(E) above.
    (2) With respect to the lending or borrowing arrangements described 
in subparagraph (a)(2)(A) above, an ETP Holder's written procedures may 
indicate that registered persons are not required to notify the ETP 
Holder, or receive ETP Holder approval either prior to or subsequent to 
entering into such lending or borrowing arrangements.
    (3) With respect to the lending or borrowing arrangements described 
in subparagraph (a)(2)(B) above, an ETP Holder's written procedures may 
indicate that registered persons are not required to notify the ETP 
Holder or receive their approval either prior to or subsequent to 
entering into such lending or borrowing arrangements, provided that the 
loan has been made on commercial terms that the customer generally 
makes available to members of the public similarly situated as to need, 
purpose, and creditworthiness. For purposes of this subparagraph, the 
ETP Holder may rely on the registered person's representation that the 
terms of the loan meet the above-described standards.
    (c) The term immediate family shall include parents, grandparents, 
mother-in-law or father-in-law, husband or wife, brother or sister, 
brother-in-law or sister-in-law, son-in-law or daughter-in-law, 
children, grandchildren, cousin, aunt or uncle, or niece or nephew, and 
shall also include any other person whom the registered person 
supports, directly or indirectly, to a material extent.
* * * * *

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

    In its filing with the Commission, PCX included statements 
concerning the purpose of and basis for the proposed rule change, as 
amended, 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. PCX 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 adopt a rule that 
prohibits registered persons of an ETP Holder from borrowing money from 
or lending money to a customer unless each of the following applies: 
(1) The ETP Holder has written procedures allowing such borrowing or 
lending arrangements; and (2) the borrowing or lending arrangement 
falls within one of five permissible types of lending arrangements.\5\ 
In certain cases, the ETP Holder must also pre-approve the loan in 
writing. The five types of permissible lending arrangements are:
---------------------------------------------------------------------------

    \5\ The proposed rule is substantially similar to NASD Rule 
2370. See Securities Exchange Act Release No. 48242 (August 29, 
2003), 68 FR 52806 (September 5, 2003). NASD Rule 2370 was amended 
in Securities Exchange Act Release No. 49269 (February 18, 2004), 69 
FR 8718 (February 25, 2004). See also Securities Exchange Act 
Release No. 50874 (December 16, 2004), 69 FR 76803 (December 22, 
2004) (SR-CBOE-2004-66).

    (i) The customer is a member of the registered person's 
immediate family (as defined in the proposed rule);
    (ii) The customer is a financial institution regularly engaged 
in the business of providing credit, financing, or loans, or other 
entity or person that regularly arranges or extends credit in the 
ordinary course of business;
    (iii) The customer and the registered person are both registered 
persons of the same ETP Holder;
    (iv) The lending arrangement is based on a personal relationship 
outside of the broker-customer relationship; or
    (v) The lending arrangement is based on a business relationship 
outside of the broker-customer relationship.

    The proposed rule change establishes a regulatory framework that 
would give ETP Holders greater control over, and more specific 
supervisory responsibilities for, lending arrangements between 
registered persons and their customers. ETP Holders could choose to 
permit their registered persons to borrow from or lend to specified 
customers consistent with the requirements of the rule. If ETP Holders 
choose to permit their registered persons to engage in lending 
arrangements with those customers, the proposed rule change would 
require ETP Holders to have written procedures allowing the borrowing 
and lending of money between registered persons and customers or ETP 
Holders. As stated above, ETP Holders would be permitted to approve 
loans only if the loan falls within one of the five types of 
permissible lending arrangements set forth in the rule.
    The proposed rule would require ETP Holders to pre-approve in 
writing three out of the five types of lending arrangements permitted 
by the rule. It would exempt from the rule's notice and approval 
requirements lending arrangements involving a registered person and 
his/her customer that is (1) a member of his/her immediate family (as 
defined in the proposed rule); or (2) a financial institution regularly 
engaged in the business of providing credit, financing, or loans (or 
other entity or persons that regularly arranges or extends credit in 
the ordinary course of business), provided the loan has been made on 
commercial terms that the customer generally makes available to members 
of the general public similarly situated as to need, purpose, and 
creditworthiness. PCX believes the requirement in the proposed rule 
that certain types of lending and borrowing arrangements must be pre-
approved by the ETP Holder would enhance the ETP Holder's ability to 
supervise such lending and borrowing activities of registered 
personnel.
    PCX also believes that the proposed rule change would enhance PCX's 
ability to monitor loans between registered persons and their 
customers. Currently, under controlling Commission decisions, to bring 
a disciplinary action against a registered person who has entered into 
an unethical lending arrangement with a customer, PCX generally must 
prove that the arrangement is inconsistent with just and equitable 
principles of trade because the registered person has acted in bad 
faith or unethically. This can be difficult to prove in cases in which 
the customer is unable or unavailable to testify, or refuses to testify 
because he or she is relying on the registered person for financial 
advice. The proposed rule change

[[Page 33247]]

would better enable PCX to monitor and bring disciplinary actions in 
cases involving such loans.
    PCX notes that the safeguards provided under the proposed rule, 
including bringing disciplinary actions for violations of the rule, are 
in addition to the general powers that PCX has to bring disciplinary 
actions against a registered person who has entered into an unethical 
lending arrangement with a customer. It is also important to note that 
this proposal does not change the applications of Regulation T to 
lending activities by associated persons. Specifically, the definition 
of ``creditor'' under Regulation T extends to associated persons of 
broker-dealers and therefore, certain loans to customers by associated 
persons may require compliance with the provisions of Regulation T.
2. Statutory Basis
    For the above reasons, PCX believes that the proposed rule change 
would enhance competition. PCX believes that the proposed rule change 
is consistent with Section 6(b) \6\ of the Act, in general, and 
furthers the objectives of Section 6(b)(5),\7\ in particular, in that 
it is designed to prevent fraudulent and manipulative acts and 
practices, promote just and equitable principles of trade, to foster 
competition and to protect investors and the public interest. PCX 
believes that the proposed rule change is designed to accomplish these 
ends by establishing a regulatory framework that will give ETP Holders 
greater control over lending arrangements by permitting ETP Holders to 
permit such arrangements only if they fall within the five types of 
permissible arrangements, or, as was the case before the proposal of 
this new rule, prohibit such arrangements altogether. ETP Holders that 
permit such arrangements would be required to keep written procedures. 
These procedures would enable both ETP Holders and PCX to proscribe 
certain customer-broker loans and monitor those that have been 
approved.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    PCX does not believe that the proposed rule change will 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

    PCX has stated that the foregoing proposed rule change has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \8\ and Rule 
19b-4(f)(6) \9\ thereunder because the proposed rule change: (i) Does 
not significantly affect the protection of investors or the public 
interest; (ii) does not impose any significant burden on competition; 
and (iii) does not become operative for 30 days from the date on which 
it was filed, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest. At 
any time within 60 days of the filing of such proposed rule change, the 
Commission may summarily abrogate such rule change if it appears to the 
Commission that such action is necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Act.\10\ The PCX provided the Commission with 
written notice of its intent to file this proposed rule change at least 
five business days prior to the date of filing the proposed rule 
change.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4(f)(6)(iii).
    \10\ For purposes only of calculating the 60-day abrogation 
period, the Commission considers the proposed rule change to have 
been filed on May 25, 2005, when Amendment No. 1 was filed.
---------------------------------------------------------------------------

    Pursuant to Rule 19b-4(f)(6)(iii) under the Act,\11\ the proposal 
does not become operative for 30 days after the date of its filing, or 
such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest. The PCX has 
requested that the Commission waive the 30-day operative delay so that 
the proposed rule change will become immediately effective upon filing.
---------------------------------------------------------------------------

    \11\ Id.
---------------------------------------------------------------------------

    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public 
interest.\12\ Accelerating the operative date will allow for an 
immediately effective mechanism for proscribing certain customer-broker 
loans and monitoring those that have been approved. For these reasons, 
the Commission designates that the proposed rule change has become 
effective and operative immediately.
---------------------------------------------------------------------------

    \12\ For purposes of accelerating the operative date of this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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-2005-34 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-2005-34. 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 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-2005-34 
and should be submitted on or before June 28, 2005.


[[Page 33248]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-2894 Filed 6-6-05; 8:45 am]
BILLING CODE 8010-01-P