[Federal Register Volume 63, Number 228 (Friday, November 27, 1998)]
[Notices]
[Pages 65627-65630]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-31586]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40686; File No. SR-PCX-98-52]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the Pacific Exchange, Inc.
Relating to Amendments to Rule 2.6(e) on the Prevention of the Misuse
of Material, Nonpublic Information
November 18, 1998.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
[[Page 65628]]
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on October 5, 1998, the Pacific Exchange, Inc. (``PCX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') a proposed rule change as described in
Items I, II and III below, which Items have been prepared by the
Exchange.\3\ 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\ The PCX filed an amendment to the proposed rule change. See
Letter from Robert Pacileo, Jr., Staff Attorney, PCX, to Kathy
England, Assistant Director, Division of Market Regulation,
Commission, dated October 29, 1998 (``Amendment No. 1''). The
substance of Amendment No. 1 is incorporated into this Notice.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange is proposing to amend Rule 2.6(e) to modify and
clarify its current guidelines established for the prevention of the
misuse of material, non-public information by members and member
organizations for whom the PCX is the Designated Examining Authority
(``DEA''). Below is the test of the proposed rule change. The proposed
new language is italicized and the deleted language is bracketed.
* * * * *
para. 3369
Prevention of the Misuse of Material, Nonpublic Information
RULE 2.6(e) Every member or member organization must [shall]
establish, maintain and enforce written policies and procedures
reasonably designed, taking into consideration the nature of the
member or member organization's business, to prevent the misuse of
material, non-public information by such member or member
organization or persons associated with such member or member
organization. Members or member organizations for whom the Exchange
is the Designated Examining Authority (``DEA'') that are required,
pursuant to Rule 2.6, to file SEC Form X-17A-5 with the Exchange on
an annual or more frequent basis must [shall] file contemporaneously
with [those] the submissions for the calendar year end [attestations
signed by such members] ITSFEA compliance acknowledgments stating
that the procedures mandated by this Rule have been established,
enforced and maintained. Any member or member organization or
associated person who becomes aware of a possible misuse of
material, non-public information must promptly notify the Exchange's
Equities or Options Surveillance Department.
Commentary.
.01 For purposes of Rule 2.6(e), conduct constituting the misuse
of material, non-public information includes, but is not limited to,
the following:
A. T[t]rading in any securities issued by a corporation, or in
any related securities or related options or other derivative
securities, while in possession of material, non-public information
concerning that issuer; or
B. T[t]rading in a security or related options or other
derivative securities, while in possession of material non-public
information concerning imminent transactions in the security or
related securities; [and] or
C. D[d]isclosing to another person or entity any material, non-
public information involving a corporation whose shares are publicly
traded or an imminent transaction in an underlying security or
related securities for the purpose of facilitating the possible
misuse of such material, non-public information.
.02 The terms ``associated person'' and ``person associated with
a member or member organization'' mean anyone who directly is
engaged in the member or member organization's trading-related
activities, including General [any] partners, officers, directors,
[or branch] managers [of a member] (or any person occupying a
similar status or performing similar functions), or any person
directly or indirectly controlling, controlled by, or under common
control with a member, or any employee of the [a] member or member
organization.
For the purposes of this Rule, the term ``employee'' includes
every person who is compensated directly or indirectly by the member
or member organization for the solicitation or handling of business
in securities, including individuals trading securities for the
account of the member or member organization, whether such
securities are dealt in on an exchange or are dealt over-the-
counter.
.03 Rule 2.6(e) [requires] provides that [, at a minimum,] each
member or member organization for which the Exchange is the DEA
should establish, maintain, and enforce [the following] written
policies and procedures similar to the following, as applicable:
A. All associated persons must be advised in writing of the
prohibition against the misuse of material, non-public information;
and
B. All associated persons of the member or [Each] member
organization [and all persons associated with that member
organization] must sign attestations affirming their awareness of,
and agreement to abide by the aforementioned prohibitions. These
signed attestations must be maintained for at least three years, the
first two years in an easily accessible place; and
C. Each member or member organization must receive and
re[main]tain copies of trade confirmations and monthly account
statements for each account in which an associated person: [(1)] has
a direct or indirect financial interest [,] or [(2)] makes
investment decisions. [These account statements and trade
confirmations must be maintained for at least three years, the first
two years in an easily accessible place.] The activity in [S]such
brokerage accounts should [must] be reviewed at least quarterly by
the member or member organization for the express purpose of
detecting the possible misuse of material, non-public information;
and
D. All associated persons must disclose to the member or member
organization whether they, or any person in whose account they have
a direct or indirect financial interest, or make investment
decision, [is] are an officer, director or 10% shareholder in a
company whose shares are publicly traded. Any transaction in the
stock (or option thereon) of such company shall be reviewed to
determine whether the transaction may have involved a misuse of
material non-public information. [(``Eligible members'' are member
organizations and sole PSE members that do not carry or introduce
customer accounts and for whom the Exchange is the Designated
Examining Authority (``DEA'').]
Maintenance of the foregoing policies and procedures may not, in
all cases, satisfy the requirements and intent of Rule 2.6(e). The
adequacy of each member or member organization's policies and
procedures will depend upon the nature of each member or member
organization's business.
.04 [The Exchange has developed sample forms, denominated as the
``ITSFEA Compliance Procedures'' (in reference to the Insider
Trading and Securities Fraud Enforcement Act of 1998), that may be
used by certain eligible member organizations to facilitate their
compliance with the filing and record-keeping requirements of Rule
2.6(e). Use of these forms does not create a presumption by the
Exchange that any particular member has satisfied the requirements
of this Rule.] An Exchange member who is solely a lessor of a
membership and is not registered and not required to register as a
broker-dealer under Section 15 of the Exchange Act is not subject to
the requirement of Exchange Rule 2.6(e) concerning the
establishment, maintenance, and enforcement of written policies and
procedures respecting the misuse of material, non-public
information.
* * * * *
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 the proposed rule change and
discussed any comments it received on the proposed rule change. The
test of these statement may be examined at the placed 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.
[[Page 65629]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
Purpose
Background: In November 1988, Congress enacted the Insider Trading
and Securities Fraud Enforcement Act of 1988 (``ITSFEA''), designed to
prevent, deter, and prosecute insider trading. ITSFEA requires broker-
dealers to maintain written procedures reasonably designed to prevent
the misuse of material, non-public information by broker-dealer or any
person associated with them.\4\ ITSFEA also provides for penalties of
up to $1 million or three times the amount gained or amount of loss
avoided, whichever is greater, for the misuse of material non-public
information.\5\ ITSFEA clearly anticipates liability where written
procedures have not been established or have not been enforced. In
December 1992, the Commission approved a PCX proposal to adopt new Rule
2.6(e) relating to the establishment, maintenance and enforcement of
procedures designated to prevent the misuse of material non-public
information.\6\ The Commission also approved similar proposals of other
self-regulatory organizations relating to ITSFEA requirements.\7\
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\4\ 15 U.S.C. 78o(f).
\5\ 15 U.S.C. 78u-1.
\6\ See Securities Exchange Act Release No. 33171 (November 9,
1993), 58 FR 60892 (November 18, 1993) (SR-PSE-92-20).
\7\ See Securities Exchange Act Release No. 30597 (April 16,
1992), 57 FR 14855 (April 23, 1992) (SR-Phlx-91-47); Securities
Exchange Act Release No. 33008 (October 4, 1993), 58 FR 52518
(October 8, 1993) (SR-Phlx-93-36); Securities Exchange Act Release
No 30557 (April 6, 1992) 57 FR 13393 (April 16, 1992) (SR-CBE-91-
14); Securities Exchange Act Release No. 33937 (April 20, 1994), 59
FR 22030 (April 28, 1994) (SR-CBOE-93-58). See also New York Stock
Exchange Rule 342.
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Proposal: The Exchange is proposing to modify its Rule 2.6(e) to
clarify the guidelines established for the prevention of the misuse of
material, non-public information by members and member organizations
for whom the PCX is the DEA. Currently, the rule states: ``Members that
are required, pursuant to Rule 2.6, to file SEC Form X-17A-5 with the
Exchange on an annual basis shall file contemporaneously with those
submissions attestations signed by such members stating that the
procedures mandated by this Rule have been established, enforced and
maintained.'' The proposed rule change would state that only those
organizations for which the Exchange is the DEA are required to file
ITSFEA compliance acknowledgments stating that the procedures mandated
by this rule have been established, enforced and maintained. In that
regard, the rule change will codify the existing practices of the
Exchange.
The Exchange also proposes to modify the definition of ``associated
person'' in Rule 2.6(e). The current rule defines associated person as
``any partner, officer, directors or branch manager of a member (or any
person occupying a similar status or performing similar functions), any
person directly or indirectly controlling, controlled by or under
common control with a member, or any employee of a member.'' The
Exchange is proposing to change the definition to ``anyone who directly
is engaged in the member or member organization's trading-related
activities, including general partners, officers, directors, managers
(or any person occupying a similar status or performing similar
functions), any person directly or indirectly controlling, controlled
by or under common control with a member, or any employee of the member
or member organization.'' The rule change would exclude limited
partners from this definition, unless such limited partners are
directly involved in the member organization's trading-related
activities. The Exchange believes that the current requirement, which
covers limited partners who are not directly involved in the member
organization's trading-related activities, goes to far because it would
impose unnecessary affirmative obligations on PCX members. For example,
if a floor trader's grandmother, who lives across the country, is a
small investor in that trader's market making operation, under the
current rule, the trader would be required to review his grandmother's
securities account statements pursuant to Commentary .03(C), which the
Exchange believes would be an unreasonable requirement.
The Exchange further proposes to define ``employee'' as ``every
person who is compensated directly or indirectly by the member or
member organization for the solicitation or handling of business in
securities, including individuals trading securities for the account of
the member or member organization, whether such securities are dealt in
on the exchange or dealt over-the-counter.'' \8\ Thus, independent
contractors \9\ as well as actual employees will be subject to the
requirements of the rule.
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\8\ The Commission approved a similar definition that the
Philadelphia Stock Exchange proposed in 1997. See Securities
Exchange Act Release No. 39178 (October 1, 1997), 62 FR 52804
(October 9, 1997).
\9\ See, e.g., Letter from Douglas Scarff, Director, Division of
Market Regulation, SEC to Gordon S. Macklin, President, National
Association of Securities Dealers, Inc., dated June 18, 1982
(clarifying the status of independent contractors under the Act).
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The Exchange proposes to delete superfluous language regarding
record keeping in Commentary .03 of Rule 2.6(e). In Commentary .03(C),
the Exchange proposes to delete language that reads ``These account
statements and trade confirmations must be maintained for at least
three years, the first two years in an easily accessible place.'' The
Exchange believes this language is superfluous given requirements under
Rule 17a-3 of the Act. Specifically, Rule 17a-3 sets requirements for
records to be made by certain Exchange Members, Brokers and Dealers and
would require the members or member organizations to maintain account
statements and trade confirmations.
Finally, the Exchange proposes to clarify that an Exchange member
who is a lessor of a membership, and is not registered and required to
register as a broker-dealer under Section 15 of the Act, is not subject
to the requirements of Exchange Rule 2.6(e) concerning the
establishment, maintenance and enforcement of written policies and
procedures respecting the misuse of material, non-public information. A
lessor of a membership that is not registered as a broker-dealer under
section 15 of the Act cannot engage in trading operations and is
therefore not required, pursuant to Rule 2.6, to file SEC Form X-17A-5
with the Exchange.
Basis
The Exchange believes the proposed rule change is consistent with
section 6(b)\10\ of the Act, in general, and furthers the objectives of
section 6(b)(5),\11\ in particular, because it is designed to perfect
the mechanisms of a free and open market and to protect investors and
the public interest.
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\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange 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.
[[Page 65630]]
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 neigher 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 self-regulatory organization consents, the Commission will:
(A) By order approve such 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, NW, Washington, DC 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 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 provision
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
PCX. All submissions should refer to File SR-PCX-98-52 and should be
submitted by December 18, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-31586 Filed 11-25-98; 8:45 am]
BILLING CODE 8010-01-M
