[Federal Register Volume 63, Number 231 (Wednesday, December 2, 1998)]
[Notices]
[Pages 66621-66622]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32040]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40707; File No. SR-PHLX-98-04]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the Philadelphia Stock Exchange, Inc. Amending Rule 783,
Report of Financial Arrangements and Floor Procedure Advice F-11,
Splitting Orders
November 24, 1998.
I. Introduction
On April 27, 1998, the Philadelphia Stock Exchange, Inc. (``PHLX''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 \2\
thereunder a proposed rule change to amend its financial arrangements
rule, Rule 783, and Options Floor Procedure Advice F-11 \3\ regarding
the Splitting of Orders. On October 2, 1998, the PHLX submitted
Amendment No. 1 to the proposed rule change.\4\ On October 20, 1998,
the proposal, as amended, was published for comment in the Federal
Register.\5\ The Commission received no comments on the proposal. This
order approves the proposal.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The PHLX's minor rule violation enforcement and reporting
plan (``minor rule plan''), codified in PHLX Rule 970, contains
floor procedure advises 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 18d-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.
\4\ Letter from Nandita Yagnik, Esquire, PHLX, to Michael
Walinskas, Deputy Associate Director, Division of Market Regulation,
SEC dated Sept. 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.
\5\ Securities Exchange Act Release No. 40541 (Oct. 9, 1998), 63
FR 56056 (Oct. 20, 1998).
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II. Description of the Proposal
The Exchange proposes to amend its financial arrangements rule Rule
783, to require that members, member organizations, foreign currency
options participants, participant organizations and general partners or
voting stockholders thereof report to the Exchange financial
arrangements for amounts greater than $5,000. Currently, PHLX Rule 783
requires that members and member organizations report to the Exchange
the obtaining and making of a loan over $2500, including loans to non-
members. The proposed definition of financial arrangements includes any
consideration over $5000 that constitutes a loan, gift, salary or
bonus; the direct financing of a member of or participant organization
(except clearing arrangements) \6\, any direct equity investment or
profit sharing arrangement; and the guarantee of a trading account
(except a clearing arrangement). Currently, paragraph (b) of PHLX Rule
783 provides exceptions for certain member-to-member loans. 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
\7\ or transactions 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. All parties involved in the financial arrangement are
required to notify the Exchange of eligible financial arrangements
without 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.
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\6\ Under the proposal, 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\ Under the proposal, 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 a date
certain, upon demand, the same or substituted securities.
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In addition, the Exchange proposes to amend Options Floor Procedure
Advice F-11 regarding the Splitting of Orders by adding that dually and
financially affiliated Registered Option Traders (``ROTs'') will 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. 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,\8\ and
``financially affiliated'' as those ROTs required to report pursuant to
Exchange Rule 783. The Exchange also proposes to increase the fine
schedule for failing to report dual or financial affiliations 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. The
[[Page 66622]]
Exchange also proposes a corresponding change to its minor rule plan.
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\8\ 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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III. Discussion
The Commission believes that the proposed rule change is consistent
with Section 6(b)(5) of the Act \9\ 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 order splitting provision of Advice F-11.\10\ The
Commission believes the increased dollar limit updates the Exchange's
financial arrangement rule to take into account inflation without
significantly reducing the protections of the rule. The Commission also
believes that extending Advice F-11 to dually and financially
affiliated ROTs should enhance competition in options traded on the
PHLX by preventing one firm from garnering all of the executions in a
particular option by splitting orders in the trading crowd among
members who are either dually or financially affiliated.
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\9\ 15 U.S.C. 78f(b)(5).
\10\ In reviewing this proposed rule change, the Commission has
considered its impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\11\ that the proposed rule change (SR-PHLX-98-04) is approved.
\11\ 15 U.S.C. 78s(b)(2).
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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. 98-32040 Filed 12-1-98; 8:45 am]
BILLING CODE 8010-01-M
