[Federal Register Volume 70, Number 108 (Tuesday, June 7, 2005)]
[Notices]
[Pages 33248-33250]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-2896]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51751; File No. SR-PCX-2005-33]


Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change and 
Amendment No. 1 Thereto Relating to OTP Holders and OTP Firms 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 below, 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 23, 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.
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    \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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    PCX proposes to adopt a new rule restricting registered persons of 
OTP Holders or OTP Firms 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 OTP Holder or OTP Firm in any 
registered capacity may borrow money from or lend money to any customer 
of such person unless:
    (1) The OTP Holder or OTP Firm has written procedures allowing the 
borrowing and lending of money between such registered persons and 
customers of the OTP Holder or OTP Firm; 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 OTP Holder or OTP Firm;
    (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) OTP Holders or OTP Firms 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 OTP Holder's or OTP Firm's written 
procedures may indicate that registered persons are not required to 
notify the OTP Holder or OTP Firm, or receive OTP Holder or OTP Firm 
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 OTP Holder's or OTP Firm's written 
procedures may indicate that registered persons are not required to 
notify the OTP Holder or OTP Firm 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 OTP Holder or OTP Firm 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 OTP Holder or OTP Firm from 
borrowing money from or lending money to a customer unless each of the 
following applies: (1) The OTP Holder or OTP Firm 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 OTP Holder or 
OTP Firm 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);

[[Page 33249]]

    (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 OTP Holder or OTP Firm;
    (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 OTP Holders and OTP Firms greater control over, and more 
specific supervisory responsibilities for, lending arrangements between 
registered persons and their customers. OTP Holders and OTP Firms could 
choose to permit their registered persons to borrow from or lend to 
specified customers consistent with the requirements of the rule. If 
OTP Holders or OTP Firms choose to permit their registered persons to 
engage in lending arrangements with those customers, the proposed rule 
change would require OTP Holders and OTP Firms to have written 
procedures allowing the borrowing and lending of money between 
registered persons and customers or OTP Holders or OTP Firms. As stated 
above, OTP Holders and OTP Firms 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 OTP Holders and OTP Firms 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 OTP Holder or OTP Firm would 
enhance the OTP Holder's and OTP Firm'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 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 OTP Holders 
and OTP Firms greater control over lending arrangements by permitting 
OTP Holders and OTP Firms 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. OTP Holders and OTP Firms that permit such arrangements 
would be required to keep written procedures. These procedures would 
enable both OTP Holders and OTP Firms and PCX to proscribe certain 
customer-broker loans and monitor those that have been approved.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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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.
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    \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 23, 2005, when Amendment No. 1 was filed.

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[[Page 33250]]

    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.
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    \11\ Id.
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    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.
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    \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).
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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-2005-33 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-2005-33. 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-2005-33 
and should be submitted on or before June 28, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-2896 Filed 6-6-05; 8:45 am]
BILLING CODE 8010-01-P