[Federal Register Volume 61, Number 193 (Thursday, October 3, 1996)]
[Notices]
[Pages 51734-51737]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-25279]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37736; File No. SR-PSE-96-07]
Self-Regulatory Organizations; Pacific Stock Exchange
Incorporated; Order Granting Approval To Proposed Rule Change and
Notice of Filing of, and Order Granting Accelerated Approval to,
Amendment No. 1 to the Proposed Rule Change Relating to the General
Reorganization and Revision of the Exchange's Membership Rules
September 26, 1996.
I. Introduction
On March 5, 1996, the Pacific Stock Exchange Incorporated (``PSE''
or ``Exchange'') submitted to the Securities
[[Page 51735]]
and Exchange Commission (``SEC'' or ``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\
and Rule 19b-4 thereunder,\2\ a proposed rule change to reorganize and
revise PSE Rule 1, Membership, and to make conforming changes to PSE
rules 2, 4, 5, and 9.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in the Federal
Register on April 11, 1996.\3\ No comments were received concerning the
proposal. On September 23, 1996, the Exchange submitted Amendment No. 1
to the proposed rule change.\4\ This order approves the proposed rule
change, including Amendment No. 1 on an accelerated basis.
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\3\ Securities Exchange Act Release No. 37076 (Apr. 5, 1996), 61
FR 16152 [hereinafter Notice].
\4\ See letter from Rosemary A. MacGuinness, Senior Counsel,
PSE, to Ivette Lopez, Assistant Director, Division of Market
Regulation, SEC, dated Sept. 20, 1996 [hereinafter Amendment No. 1].
Amendment No. 1 made a number of typographical edits; clarified the
PSE's policy concerning members giving gifts to employees of other
members and employees of the Exchange; clarified that inactive
lessors need not register as a broker or dealer to own a membership;
added a definition for wholly owned subsidiary; changed the policy
concerning changes in documents submitted as part of a membership
application from 15 calendar days to 15 business days; and explained
the purpose and impact of a member's comments concerning a
membership application.
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II. Description of the Proposal
PSE Rule 1 is being revised because much of its language is
outdated, inapplicable, or both. Revised PSE Rule 1 more accurately
reflects the current procedures and requirements of the Exchange's
membership department. While many of the provisions of existing PSE
Rule 1 have been kept, they have been reorganized so that the
provisions concerning Exchange membership are presented in a more
logical and chronological order to enable readers to quickly identify
the provisions related to a particular membership issue. In addition,
much of PSE Rule 1's language has been rephrased to enhance the
readers' comprehension.
As part of its review of the existing provisions of PSE Rule 1, the
Exchange's staff also reviewed the membership rules of other exchanges.
As described more particularly below, certain provisions from the New
York Stock Exchange, Inc. (``NYSE''), the Chicago Board Options
Exchange, Incorporated (``CBOE''), and the Chicago Stock Exchange,
Incorporated (``CHX'') are incorporated in Revised Rule 1.
The Exchange also is proposing to make conforming changes to
certain provisions in PSE Rules 2, 4, 5, and 9. A summary of the most
significant changes, organized by reference to the proposed section
numbers, is set forth below.\5\
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\5\ See Notice, supra note 3, and File No. SR-PSE-96-07 for a
more complete description of the proposal.
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Rule 1.1: Definitions
A ``Definitions'' section was added to Revised Rule 1 to provide an
explanation of the terms used by the PSE in relation to its membership
rules. Many of the definitions already were contained in the PSE
Constitution and PSE Rule 4, but the Exchange determined that it would
be more practical to place these definitions in alphabetical order at
the beginning of Revised Rule 1. In addition, the Exchange added a
definition of ``wholly owned subsidiary'' that is based on a Commission
definition of that term.\6\
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\6\ See Amendment No. 1, supra note 4; 17 CFR 230.405.
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Rule 1.2: Public Securities Business
Revised Rule 1.2, Public Securities Business, is new to the PSE.
This new language was included to require members to use their
memberships for trading, either directly or indirectly through the
execution of lease agreement. This provision is designed to assist the
Exchange in addressing problems associated with unassigned memberships.
Rules 1.4 to 1.9: Qualifications and Application for Membership
The existing provisions relating to qualification and application
for membership were completely reorganized to set forth the Membership
Department's requirements in a more orderly and chronological manner.
The reorganization is designed to make the provisions easier to follow
and understand. In addition to the PSE's current membership
requirements, the proposal also adds Revised Rules 1.4 1.5, 1.7, and
1.8.
Revised Rule 1.4, Qualifications of Individual Members, and Revised
Rule 1.5, Qualification of Member Organizations, establish some of the
basic requirements necessary for Exchange membership. They require that
all members and member organizations, except ``Inactive Lessors,'' \7\
must be registered pursuant to Section 15 \8\ of the Act.\9\ In
addition, Revised Rule 1.5(b) requires member firms who own or lease a
membership to designate a natural person as its member. When a member
confers the privileges of membership on a member firm, Revised Rule
1.5(c) requires that member to be the firm's designated representative
and prohibits members from representing more than one member
organization.
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\7\ Revised PSE Rule 1.1(h) defines an ``Inactive Lessor'' as a
natural person, firm, or other such entity as the PSE Board may
approve that owns or inherits a membership for the sole purpose of
acting as a lessor.
\8\ 15 U.S.C. 78o.
\9\ See Amendment No. 1, supra note 4.
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In addition to the authority contained in Current Rule 1.4, Revised
Rule 1.7, Denial of and Conditions to Membership, grants the Membership
Committee greater discretion when reviewing applications. The proposal
contains two new grounds for denying or conditioning membership--an
applicant, either directly or indirectly, has engaged in conduct that
would bring the Exchange into disrepute or any other reasonable cause
the Membership Committee may decide. In addition, the PSE clarified the
impact that a current member's comments concerning an applicant will
have on the application process in Revised Rule 1.7(b)(6) and in the
PSE Membership Application.\10\ Finally, the proposal grants the
Membership Committee the authority to toll the approval process while
an applicant is the subject of an investigation by any self-regulatory
organization or government agency and may take action against a member
if any of the reasons for denying or conditioning membership comes into
existence after a member has been approved and its membership has
become effective.
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\10\ See Amendment No. 1, supra note 4.
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Revised Rule 1.8, Effectiveness of Membership Applications,
requires all approved applications to be activated by the applicant
within six months and requires the Exchange to provide all members with
notice of all newly effective memberships.
Rules 1.10 to 1.20: Requirements of Membership
This new section pulls together the obligations of members and
member organizations from different locations and describes particular
requirements for sole proprietors, corporations, partnerships, and
limited liability companies.
Revised Rule 1.11 is designed to give the Exchange greater
oversight of allied members and approved persons. Revised Rule 1.11(a)
provides that allied members and approved persons are subject to
Exchange approval and that the Exchange must receive written notice,
all applicable fees, and all necessary information before an allied
member or approved person will be admitted. Revised Rule 1.11(b)
prohibits
[[Page 51736]]
a firm from remaining a member firm unless all persons required to be
approved are, in fact, approved and the member firm continues to meet
all of the prescribed membership requirements. Revised Rule 1.11(c)
requires that the Exchange promptly receive written notice of the
dissolution of a member firm, as well as written notice of the death,
retirement, or other termination of any member, allied member, or
approved person.
PSE members are required to keep current all of the documents
submitted in connection with their application. When changes to those
documents become necessary (e.g., change in member's home address or
Form BD), the member has fifteen calendar days to submit an amendment
to the Exchange. Revised Rule 1.17(b) changes this policy to fifteen
business days.\11\
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\11\ See Amendment No. 1, supra note 4.
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Rules 1.21 to 1.25: Purchase, Sale, Transfer, or Lease of Membership
The provisions relating to the purchase and sale of memberships are
essentially unchanged in substance. Of particular note, however, are
Revised Rules 1.21(b), 1.22(a), and 1.23 because they either are new to
the PSE or modify existing responsibilities.
Revised Rule 1.21(b) requires the Exchange to post the highest bid
with the earliest submission date on the Exchange bulletin board for
six months. Likewise, Revised Rule 1.22(a) requires the Exchange to
post the lowest offer with the earliest submission date on the Exchange
bulletin board for six months. When a bid filed in accordance with the
provisions of Revised Rule 1.21, Purchase of Membership, is matched
with an offer filed in accordance with the provisions of Revised Rule
1.22, Sale of Membership, neither can be changed or withdrawn.
In addition to the types of transfers already defined in the PSE
rules, Revised Rule 1.23, Transfer of Membership, adds ``Succession of
member organization'' to the list of permissible interfirm transfers.
This would allow a membership to be transferred from a member
organization to an organization that succeeds through statutory merger,
exchange of stock, or acquisition of assets to the business of the
transferring membership organization.
Rules 1.26 to 1.27: Employees of Member Organizations
Currently, the PSE's rules require that the Exchange and, when
relevant, the recipient's employer give their consent before a member
can give a gift or gratuity in excess of $100 to an employee of the
Exchange or an employee of another member. Revised Rule 1.26(f)
modifies this policy by requiring prior Exchange consent only when a
member wants to give a gift to an Exchange employee. The Exchange has
not been requiring members to obtain the Exchange's prior consent when
members were giving gifts to employees of other members.\12\ Therefore,
the Exchange proposes to conform its rules to its current practice.
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\12\ Telephone conversation between Rosemary A. MacGuinness,
Senior Counsel, PSE, and Anthony P. Pecora, Attorney, SEC (Mar. 22,
1996).
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In addition, Revised Rule 1.26(f) eliminates a potential loophole
by clarifying that the $100 minimum is per calendar year. Hence, a
member may not avoid the prior consent requirement of this rule by
simply granting consecutive $99 gifts (i.e., when the value of all of
the gifts given by a member to an Exchange or another member's employee
in one calendar year exceed $100, prior consent must be obtained).
Revised Rule 1.27, Floor Employees of Member Organizations, is new
to the Exchange. Revised Rule 1.27(a) clarifies that all employees of
member organizations seeking admission to the Floor must first be
approved by the Exchange. Revised Rule 1.27(c) requires every member
organization to take reasonable care to determine the existence of a
statutory disqualification.\13\ To assist member organizations in
fulfilling this duty, Revised Rule 1.27(b) requires all floor employees
to submit fingerprints and complete an application form that includes
those questions from the Form U-4 that would aid member organizations
in determining whether an individual is subject to a statutory
disqualification. In addition, the application must be signed by the
member firm. Revised Rule 1.27(d) codifies the Exchange's policy
requiring a member firm with an employee on one of the PSE's trading
floors to have at least one member present on the trading floors at all
times. The Exchange believes these provisions will help member
organizations and the PSE identify persons who are subject to a
statutory disqualification and, in addition, enhance the overall
security on the PSE's trading floors.\14\
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\13\ See 15 U.S.C. 78c(a)(39) (listing categories of people that
are statutorily disqualified).
\14\ See Securities Exchange Act Release No. 33045 (Oct. 14,
1993), 58 FR 54179 (approving File No. SR-NYSE-93-28).
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Provisions Removed From Existing PSE Rule 1
In updating the PSE's rules, Revised Rule 1 omits certain
requirements that presently are contained in Rule 1. The most
significant of thee deletions involves the PSE's fees and the giving of
gifts by members to employees of other members.
In order to avoid the confusion caused by having some of the PSE's
fees listed in both its rules and in its fee schedule, the Exchange
will omit from Rule 1 all references to the fees currently enumerated
in Rule 1.10.\15\ Also, the fee reductions in Rule 1.10 that pertain to
the Options Funding Plan of 1975 are being deleted because they are no
longer relevant.\16\
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\15\ Telephone conversation between Rosemary A. MacGuinness,
Senior Counsel, PSE, and Anthony P. Pecora, Attorney, Division of
Market Regulation, SEC (Mar. 22, 1996). For example, the initial
membership fee in PSE Rule 1.10(a)(i)(A) is ``5 percent of the
average purchase price plus the two preceding seat sales,'' while
the fee schedule sets the initial membership fee at ``5 percent of
the average price of the last three membership sales, with a minimum
of $1,000 and a maximum of $4,000.'' (Emphasis added). See also PSE
Rule 1.10(c)(i) (no minimum or maximum); PSE Rule 1.10(c), cmt. 01
($350 minimum and $3,500 maximum).
\16\ Telephone conversation between Rosemary A. MacGuinness,
Senior Counsel, PSE, and Glen Barrentine, (then) Team Leader,
Division of Market Regulation, SEC (Nov. 24, 1995).
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Rules 1.17(f) and 1.17(g) pertain to the giving of gifts and
gratuities by members to employees of other members and to employees of
the Exchange. The rules currently require that the Exchange and, when
relevant, the recipient's employer give their prior consent. The
proposal modifies this policy by requiring prior Exchange consent only
when a member wants to give a gift to an Exchange employee. The
Exchange has not been requiring members to obtain the Exchange's prior
consent when members were giving gifts to employees of other
members.\17\ Therefore, the proposal conforms the PSE's rules to its
current practice.
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\17\ Telephone conversation between Rosemary A. MacGuinness,
Senior Counsel, PSE, and Anthony P. Pecora, Attorney, Division of
Market Regulation, SEC (Mar. 22, 1996).
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III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 1. 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
[[Page 51737]]
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. Sec. 552, will
be available for inspection and copying at the Commission's Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of such filing will also be available for inspection and copying
at the principal office of the PSE. All submissions should refer to
File No. SR-PSE-96-07 and should be submitted by October 24, 1996.
IV. Commission's Findings and Order Granting Approval to the Proposed
Rule Change
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange. In particular,
the Commission believes the proposal is consistent with the Section
6(b)(5) \18\ requirements that the rules of an exchange be designed to
promote just and equitable principles of trade, to prevent fraudulent
and manipulative acts, and, in general, to protect investors and the
public interest and the Section 6(d) \19\ and Section 6(b)(7) \20\
requirements that the rules of an exchange provide a fair procedure for
the denial of membership to any person seeking membership therein.
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\18\ 15 U.S.C. 78f(b)(5).
\19\ 15 U.S.C. 78f(d).
\20\ 15 U.S.C. 78f(b)(7).
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The Commission supports the PSE's efforts to continue to review the
form and substance of its membership regulations in response to changes
in market structure and to eliminate requirements that no longer serve
a meaningful regulatory purpose. For example, consolidating the
Exchange's fees into a single fee schedule should eliminate a source of
confusion among the PSE's members without raising any regulatory
concerns. The Commission also believes the proposed rule changes should
be helpful in updating the PSE's membership rules, should facilitate
transactions in securities, should clarify certain obligations already
contained in the rules and, in general, further the purposes of the
Act.
The Commission notes that the new rules grant a certain amount of
discretion to the PSE in the standards for evaluating an application
for membership. For example, Revised PSE Rule 1.6(b) requires the PSE
Membership Department to post the name of an applicant on the bulletin
board of the trading floors of the Exchange for ten calendar days. The
PSE represents that the purpose of this posting is to provide current
members an opportunity to comment on an applicant. Comments may include
an objection from a member claiming that the applicant owes the member
money. If the applicant agrees with the member's assertion, the
Exchange will require the applicant to pay the debt in full or work out
a payment schedule with the member before the PSE will take any further
steps to process the application. If the applicant disputes the
member's claim, the Exchange will continue to process the application
without coming to any conclusions concerning this unadjudicated
dispute. If the application is approved and activated, however, the
newly approved member will become subject to the provisions of PSE Rule
12, Arbitration, thereby enabling the objecting member to request that
the dispute be submitted to arbitration.\21\
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\21\ PSE Rule 12.1(a) states ``Any dispute, claim or controversy
between parties who are members, member organizations or associated
persons arising in connection with the securities business of such
parties shall, at the request of any such party, be submitted for
arbitration in accordance with this Rule.'' (Emphasis added.) The
Commission emphasizes that either party to a claim within the scope
of PSE Rule 12 may request arbitration of that claim. Although the
language in Revised Rule 1.7 and Item 16 of the Exchange's
membership application only refers to what action an objecting
member may take, this language does not preclude the applicant, once
he becomes a member, from requesting that the disputed debt be
submitted to arbitration.
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Although the Commission understands the PSE's need to solicit
comment from its members concerning an applicant and the importance of
this input in the decision making process, the Commission urges the PSE
to be judicious in processing membership applications where claims of
debts are raised. In this regard, the Commission believes the existence
of an unadjudicated, disputed debt, by itself, may not be a sufficient
basis to deny an application. Furthermore, the Commission emphasizes
that the Exchange must exercise its discretion in a fair and impartial
manner in accordance with the goals of the Act.\22\
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\22\ The Commission has taken appropriate action where it found
the membership application process not to conform with the goals set
forth in the Act. See, e.g., Securities Exchange Act Release No.
37538 (Aug. 8, 1996) (imposing remedial sanctions on the National
Association of Securities Dealers, Inc.); SEC, Report Pursuant to
Section 21(a) of the Securities Exchange Act of 1934 Regarding the
NASD and the Nasdaq Stock Market (Aug. 8, 1996).
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In addition to these concerns, the Commission expects the PSE to
resolve the conflict that exists between provisions in the PSE
Constitution and in the new rules regarding the membership application
process.\23\ Due to the potential for confusion among applicants,
members, and regulators, the Commission encourages the PSE to rectify
this situation before November 1, 1996.\24\
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\23\ Revised Rule 1.8(a) conflicts with Article VI, Section 3,
of the PSE Constitution. The new rule states that approved
applications must be activated by the applicant within six months,
while the PSE Constitution provides that admission to membership
automatically becomes effective after an approved application has
been posted for 10 days.
In addition, Revised Rule 1.6(b) conflicts with Article VI,
Section 2, of the PSE Constitution. The PSE Constitution requires
that the name of the applicant be posted after it has been approved.
The rule, however, requires the name of all applicants to be posted
within a reasonable time after receipt and before being approved.
The Exchange anticipates rectifying this situation by having its
members vote to amend the PSE Constitution in September 1996.
Telephone conversation between Rosemary A. MacGuinness, Senior
Counsel, PSE, and Anthony P. Pecora, Attorney, Division of Market
Regulation, SEC (Mar. 22, 1996).
\24\ The PSE represented that it anticipates submitting a rule
filing that conforms the PSE Constitution to the provisions
contained in this proposal in October 1996. Telephone conversation
between Erin E. Cosgrove, Vice President, Membership and Corporate
Secretary, PSE, and Ivette Lopez, Assistant Director, Division of
Market Regulation, SEC (Sept. 12, 1996).
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The Commission finds good cause for approving Amendment No. 1 prior
to the thirteenth day after the date of publication of notice thereof
in the Federal Register. All of the changes contained in Amendment No.
1 simply correct typographical errors, the PSE's rules, or otherwise do
not raise any significant regulatory concerns. Therefore, the
Commission believes that granting accelerated approval to Amendment No.
1 is appropriate and consistent with Section 6 and Section 19(b)(2) of
the Act.\25\
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\25\ 15 U.S.C. 78f and 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\26\ that the proposed rule change (SR-PSE-96-07) is approved,
including Amendment No. 1 on an accelerated basis.
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\26\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-25279 Filed 10-2-96; 8:45 am]
BILLING CODE 8010-01-M
