[Federal Register Volume 63, Number 202 (Tuesday, October 20, 1998)]
[Notices]
[Pages 56056-56058]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28001]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40541; File No. SR-PHLX-98-04]
Self-Regulatory Organizations; Proposed Rule Change by the
Philadelphia Stock Exchange, Inc. Amending Rule 783, Report of
Financial Arrangements and Floor Procedure Advice F-11, Splitting
Orders
October 9, 1998.
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 April 27, 1998, 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 October 2, 1998, the PHLX submitted Amendment No. 1 to the
proposed rule change.\3\ The Commission is publishing this notice to
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.
\3\ Letter from Nandita Yagnik, Esquire, PHLX, to Michael
Walinskas, Deputy Associate Director, Division of Market Regulation,
SEC dated September 30, 1998. In Amendment No. 1, the PHLX added a
requirement that members, member organizations, participants and
participant organizations disclose loans and financial arrangements
with non-members.
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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 its financial arrangements rule,
Rule 783, to require that members, member organizations, foreign
currency options (``FCO'') participants, participant organizations and
general partners or voting stockholders thereof report to the Exchange
financial arrangements for amounts greater than $5,000. In addition,
the Exchange proposes to amend Options Floor Procedure Advice
(``Advice'') F-11 \4\ regarding the Splitting of Orders by adding that
dually and financially affiliated Registered Option Traders (``ROTs'')
will be treated
[[Page 56057]]
as one interest in the trading crowd. The fine schedule for failing to
report dual or financial affiliations is also proposed to be increased
from $100.00 to $500.00 for the first offense; $250.00 to $1,000.00 for
the second offense; and from $500.00 to a sanction discretionary with
the Business Conduct Committee for the third offense and thereafter. A
corresponding change to the minor rule plan is also proposed. The
proposed rule language is attached as Exhibit A.
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\4\ The PHLX's minor rule violation enforcement and reporting
plan (``minor rule plan''), codified in PHLX Rule 970, contains
floor procedure advices with accompanying fine schedules. Rule 19d-
1(c)(2) under the Act authorizes national securities exchanges to
adopt minor rule violation plans for summary discipline and
abbreviated reporting; Rule 19d-1(c)(1) under the Act requires
prompt filing with the Commission of any final disciplinary action.
However, minor rule violation not exceeding $2,500 are deemed not
final, thereby permitting periodic; as opposed to immediate,
reporting.
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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
Currently, PHLX Rule 783 requires that members and member
organizations report to the Exchange the obtaining and making of a loan
over $2,500, including loans to non-members. Paragraph (b) provides
exceptions for certain member-to-member loans. The Exchange proposes to
amend Rule 783 to require that all members, member organizations, FCO
participants and participant organization as well as general partners
or voting stockholders thereof, report financial arrangements with
other members, member organizations, FCO participants and participant
organizations, general partners or voting stockholders or persons
associated therewith, or non-members.
Included in the proposed definition of financial arrangements is
any consideration over $5,000 that constitutes a loan, gift, salary or
bonus; the direct financing of a member or participant organization
(except clearing arrangements); \5\ any direct equity investment or
profit sharing arrangement; and the guarantee of a trading account
(except a clearing arrangement). Proposed exceptions to the rule are
outlined in proposed paragraph (c) of PHLX Rule 783. The amended rule
would not apply to stock loan arrangements \6\ or transactions between
members affiliated with the same member organization or participants
affiliated with the same participant organization or transaction in
publicly traded securities of a member organization. All parties
involved in the financial arrangement are required to notify the
Exchange of eligible financial arrangements within ten (10) business
days of the effective date of such arrangements. In the event of
termination of the financial arrangement, the parties involved must
similarly notify the Exchange of the termination. Thus, the purpose of
the proposal is to revise Rule 783 to focus on prompt and complete
reporting of financial arrangements of members.
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\5\ Clearing arrangements are defined as those arrangements in
which a company acts as an intermediary in making payments,
deliveries or both in connection with transactions in securities, or
who provides facilities for comparison of data respecting the terms
of settlement of securities.
\6\ A stock loan arrangement shall mean an agreement for the
lending and borrowing of securities and shall include a securities
contract or other agreement, including related terms, for the
transfer of securities against the transfer of funds, securities, or
other collateral, with simultaneous agreement by the transferee to
transfer to the transferor against the transfer of funds,
securities, or other collateral upon notice, at date certain, upon
demand, the same or substituted securities.
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In addition, the PHLX proposes to amend Advice F-11 such that
dually affiliated and financially affiliated ROTs would be treated as
one interest for the purpose of splitting an order in the trading
crowd. Currently, Advice F-11 requires ROTs of the same firm when
bidding or offering at the same price and for the same option to be
treated as one interest for the purpose of splitting an order in the
trading crowd. Advice F-11 prevents one firm from garnering all of the
executions in a particular option. The proposal would extend the Advice
to dually and financially affiliated ROTs further ensuring fairness in
the order splitting process. Advice F-11 defines ``dually affiliated''
as those ROTs required to report pursuant to Exchange Rule 793; \7\ and
``financially affiliated'' as those ROTs required to report pursuant to
Exchange Rule 783. The Exchange also proposes to increase fines for
failure to report dual or financial affiliations from $100.00 to
$500.00 for the first offense; from $250.00 to $1,000.00 for the second
offense; and from $500.00 to a sanction discretionary with the Business
Conduct Committee for the third offense and thereafter.
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\7\ PHLX Rule 793 requires persons who are general or limited
partners, or an officer, director, stockholder or associated person
of more than one member or participant organization or who are
affiliated in any manner with a non-member, or non-participant
organization which is engaged in the securities business, to
disclose this affiliation in writing and to have such affiliation
approved in writing by the member or participant organization.
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In summary, requiring disclosure of financial arrangements between
members and participant organizations is intended to increase the
ability of the Exchange to monitor the financial status of its own
membership. In addition, notification is intended to facilitate
monitoring by the Exchange and to prevent the splitting of orders in
the trading crowd between members who are either dually or financially
affiliated.
Thus, the PHLX believes that the proposed rule change is consistent
with Section 6 of the Act and more specifically with Section 6(b)(5) in
that it promotes just and equitable principles of trade and protects
investors and the public interest by revising the Exchange's financial
arrangement rule and strengthening the trade splitting provision.
B. Self-Regulatory Organization's Statement on Burden on Competition
The PHLX does not believe that the proposed rule change will 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 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 self-regulatory organization 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
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
[[Page 56058]]
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 the filing will also be available for
inspection and copying at the PHLX's principal offices. All submissions
should refer to File No. SR-PHLX-98-04 and should be submitted by
November 10, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
Exhibit A
Additions are italicized, deletions are bracketed.
Report of Financial Arrangements
Rule 783. (a) Financial Arrangements--Each member, member
organization, participant, participant organization, general partner
or voting shareholder therein shall report to the Exchange,
forthwith [upon the obtaining or the making thereof;
(a) Each loan in the amount of $2,500 or more (whether of cash
or securities) obtained by such member, member organization, general
partner or voting shareholder;] in a form prescribed by the
Exchange, any financial arrangement entered into, either directly or
indirectly, with another member or member organization, participant
or participant organization or general partner, voting shareholder,
or any associated person thereof or a non-member. For the purposes
of this rule, a financial arrangement shall be defined as:
1. the direct financing of a member or participant
organization's dealings upon the Exchange with the exception of
clearing arrangements;
2. any direct equity investment or profit sharing arrangement;
3. any consideration over the amount of $5,000 that constitutes
a gift, loan, salary, or bonus; and
4. the guarantee of a trading account with the exception of
clearing arrangements.
(b) The disclosure of such financial arrangements shall be the
responsibility of all members involved. The member or participant
organization shall submit to the Exchange notification of the
initiation or termination of such financial arrangements within ten
(10) business days of the effective date of such arrangements. The
notice of termination will constitute the end of the financial
arrangement.
[Exceptions
(b) Each loan in the amount of $2,500 or more (whether in cash
or securities) to any member, member organization, general partner
or voting stockholder made by a member, member organization, general
partner or voting stockholder, provided however, that no report
shall be required with respect to:
(1) Any loan fully secured by readily marketable collateral so
long as such loan remains secured;
(2) Any loan of securities made by the borrower for the purpose
of effecting delivery against a sale where money payment equivalent
to the market value of the securities is made to the lender and such
contract is marked approximately to the market;
(3) Any loan on a life insurance policy which is not in excess
of the cash surrender value of such policy;
(4) Any loan obtained from a bank, trust company, monied
corporation, or fiduciary on the security of real estate;
(5) Any loan transaction between members, general partners, or
voting stockholders in the same member organizations.]
(c) Nothing in this rule would require the reporting of
agreements for the lending and borrowing of securities, financial
arrangements between members affiliated with the same member
organization or participants affiliated with the same participant
organization or transactions in publicly traded securities of a
member organization.
Supplementary Material
.01 As used herein, an agreement for the lending and borrowing
of securities shall mean a securities contract or other agreement,
including related terms, for the transfer of securities against the
transfer of funds, securities or other collateral, with a
simultaneous agreement by the transferee to transfer to the
transferor against the transfer of funds, securities, or other
collateral, upon notice, at a date certain, upon demand, the same or
substituted securities.
F-11 Splitting Orders
ROTs of the same firm, dually affiliated or financially
affiliated ROTs, when bidding or offering at the same price for the
same option, are to be treated as one interest for purpose of
splitting an order in the trading crowd.
For the purposes of this Advice, dually affiliated ROTs are ROTs
required to report dual affiliations pursuant to Rule 793 and
financially affiliated ROTs are ROTs required to report financial
arrangements pursuant to Rule 783.
Fine Schedule
Implemented on a one year running calendar basis
F-11
1st Occurrence................... [$100.00] $500.00
2nd Occurrence................... [$250.00] $1,000.000 Sanction is
Discretionary with the
Business Conduct
Committee
3rd Occurrence................... [$500.00]
[4th Occurrence and thereafter... ........... Sanction is
Discretionary with the
Business Conduct
Committee]
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[FR Doc. 98-28001 Filed 10-19-98; 8:45 am]
BILLING CODE 8010-01-M
