94-31209. Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by the Philadelphia Stock Exchange, Inc. To Adopt a Monthly Examinations Fee  

  • [Federal Register Volume 59, Number 243 (Tuesday, December 20, 1994)]
    [Unknown Section]
    [Page 0]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 94-31209]
    
    
    [[Page Unknown]]
    
    [Federal Register: December 20, 1994]
    
    
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    SECURITIES AND EXCHANGE COMMISSION
    [Release No. 34-35091; File No. SR-Phlx-94-66]
    
     
    
    Self-Regulatory Organizations; Notice of Filing and Immediate 
    Effectiveness of Proposed Rule Change by the Philadelphia Stock 
    Exchange, Inc. To Adopt a Monthly Examinations Fee
    
    December 12, 1994.
        Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
    (``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on December 
    2,1994, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
    ``Exchange'') filed with the Securities and Exchange Commission 
    (``Commission'') the proposed rule change as described in Items I, II 
    and III below, which Items have been prepared by the self-regulatory 
    organization. The Commission is publishing this notice to solicit 
    comments on the proposed rule change from interested persons.
    
    I. Self-Regulatory Organization's Statement of the Terms of 
    Substance of the Proposed Rule Change
    
        The Phlx, pursuant to Rule 19b-4 of the Act, proposes to adopt an 
    examinations fee applicable to Phlx member and participant 
    organizations for which the Exchange is the Designated Examining 
    Authority (``DEA''), effective January 1, 1995. The following Phlx 
    member/participant organizations would be exempt from the examinations 
    fee: (1) Inactive organizations; (2) organizations that operate from 
    the Exchange's trading floors; (3) organizations for any month where 
    they incur transaction or clearing fees charged directly to them by the 
    Exchange or by its registered clearing subsidiary, provided that the 
    fees exceed the examinations fee for that month;\1\ and (4) 
    organizations affiliated with an organization exempt from this fee due 
    to the second or third category.\2\
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        \1\The $1,000 threshold is required in order for a firm to be 
    exempt from the examinations fee. For example, a firm with $600 in 
    transaction fees for a month is required to pay the full amount of 
    the $1,000 examinations fee. See letter from Gerald D. O'Connell, 
    First Vice President, PHLX, to Glen Barrentine, Branch Chief, SEC, 
    dated December 12, 1994 (``Letter'').
        \2\Affiliated firms, which are exempt if affiliated with an 
    exempt organization, are permitted to aggregate their respective 
    transaction fees to meet the $1,000 threshold, i.e., each firm is 
    not required to meet a separate threshold. See Letter, supra note 1.
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        Affiliation includes an organization that is a wholly owned 
    subsidiary of, as well as an organization controlled by or under common 
    control with, an ``exempt'' member or participant organization. An 
    inactive organization is one which had no securities-related 
    transaction revenue, as determined by semi-annual FOCUS reports, as 
    long as the organization continues to have no revenue each month.\3\ In 
    order to compensate for the extensive staff time and costs associated 
    with examining off-floor firms who are not active participants in Phlx 
    markets, the Exchange is proposing to amend its fee schedule by 
    adopting a $1,000 per month examination fee.
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        \3\A FOCUS report, Securities and Exchange Commission Form X-
    17A-5, Financial and Operational Combined Uniform Single Report, is 
    required by SEC Rule 17a-5 and Phlx Rule 703(c)(i).
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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 self-regulatory organization 
    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 self-regulatory organization 
    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
        Commission Rule 15b2-2(b) requires that broker-dealers designated 
    to a self-regulatory organization (``SRO'') be examined for compliance 
    with applicable financial responsibility rules within six months of 
    registration with the Commission. In addition, the examining SRO must 
    conduct an examination within 12 months of Commission registration to 
    review compliance with all other Commission rules. Thereafter, 
    examinations are conducted on a periodic basis. In accordance with 
    Commission rules, the Phlx administers an examinations program 
    conducting reviews of organizations for which the Exchange is the DEA. 
    The examinations focus on an organization's compliance with applicable 
    financial and record keeping requirements, including net capital, books 
    and record maintenance, Regulation T and financial reporting, of the 
    Phlx as well as the Commission.
        The Examinations Department incurs certain costs in the course of 
    conducting these examinations, including travel and staff costs. Of 
    course, such costs rise when the offices of the organization being 
    reviewed are located outside of the Philadelphia area. Staff time 
    required to conduct an examination is substantially longer when the 
    businesses of the firm are atypical of those firms for which the Phlx 
    has historically served as DEA. Because of the familiarity that 
    inherently results from repeatedly conducting similar examinations, 
    Phlx Examinations staff has accumulated substantial experience 
    regarding where to focus and locate information revealing potential 
    areas of concern.
        However, the Exchange is currently the DEA for approximately one 
    dozen firms that engage in Phlx-atypical businesses from remote 
    locations. The Phlx is the DEA for firms located in other geographic 
    regions, which do not transact business on the Exchange, and trade 
    products not available on the Phlx. For instance, a Chicago-based firm 
    conducting proprietary trades in government securities and a 
    Connecticut-based firm engaged in convertible debt securities arbitrage 
    are examples of atypical Phlx firms. The heightened costs, which 
    include both money as well as valuable staff time, may be due to an 
    atypically lengthy examination, travel and specific training regarding 
    non-Phlx trading instruments.
        In addition to actual costs incurred in conducting required 
    examinations, the Exchange notes that, as the DEA for a firm, the Phlx, 
    similar to other SROs, also frequently performs an advisory role 
    respecting the regulatory obligations of its member/participant firms. 
    This ``service'' function may take the form of answering telephone 
    calls and other questions of such firms regarding Exchange and 
    Commission rules, as well as the types of procedures such firm should 
    have in place. Initially, becoming a member/participant firm of the 
    Phlx, the Exchange assists in the firm's set-up of its financials and 
    communicates with the firm, providing sample forms and general 
    guidance. Thereafter, a firm may require periodic follow-up advice. 
    These advisory costs to the Exchange of serving as the DEA are greater 
    for the Phlx-atypical firms.
        However, these heightened costs may be offset by transaction 
    charges and related revenues received by the Exchange if such firms 
    trade in Phlx markets. In reviewing these costs, the Exchange notes 
    that Phlx member/participant organizations may be required to pay 
    various fees and transaction charges, which usually constitute a large 
    part of the revenue collected by the Exchange. Organization not trading 
    on the Phlx escape these fees, while the Exchange remains obligated to 
    administer various regulatory functions, including costlier 
    examinations. In the area of examinations, the factor of staff time is 
    particularly pronounced.
        In some cases, these firms do not engage in business on the Phlx, 
    and, consequently, the heightened costs are not offset by revenues 
    derived from these firms. Without this income source, the Exchange has 
    determined to adopt an examinations fee in order to alleviate certain 
    costs of conducting examinations. Currently, the Phlx does not charge 
    an examinations or DEA fee, noting, in contrast, that most other SROs 
    in the U.S. impose direct examinations fees.\4\ For the above reasons, 
    therefore, the Phlx is proposing such a fee for those organizations for 
    which it serves as DEA--with certain exceptions. The proposed 
    examinations fee would apply primarily to those member and participant 
    organizations which do not execute trades on the Phlx.
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        \4\The Chicago Board Options Exchange imposes a fee equal to 
    $.40 per $1,000 in gross revenues. Other exchanges similarly impose 
    revenue-based examinations fees.
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        In order to fairly allocate the proposed examinations fee, the 
    Exchange has determined to exempt those member and participant 
    organizations that actively trade on the Exchange, thereby 
    counterbalancing examination costs with transaction fees. Organizations 
    that for any month incur transaction or clearing fees charged directly 
    to them by the Exchange or by its registered clearing subsidiary would 
    be exempt from the fee, provided that the fees exceed the examinations 
    fee for that month. Inactive organizations would be exempt because 
    examinations are not customarily conducted for such organizations. 
    Compliance with the inactive status will be determined by gross 
    securities-related transaction revenues reported on the organization's 
    most recent semi-annual FOCUS report. In addition, the organization 
    must continue to lack such revenues, as determined monthly, in order to 
    be exempt from the examinations fee.
        Similarly, a member or participant organization that is wholly 
    owned by, controlled by, or under common control with an organization 
    operating from the Phlx trading floor or generating counterbalancing 
    Phlx transaction or clearing fees would be exempt from this fee, 
    because the affiliated organization is generating transaction or 
    clearing fees to help offset examinations costs.
    2. Statutory Basis
        The proposed rule change is consistent with Section 6 of the Act in 
    general, and in particular, with Section 6(b)(4), in that it provides 
    for the equitable allocation of reasonable dues, fees and other charges 
    among its members and issuers and other persons using its facilities. 
    The Exchange believes that the proposed examinations fee of $1,000 per 
    month is reasonable in view of the Exchange's costs in conducting 
    examinations of non-Phlx-trading organizations, especially in terms of 
    staff time.
        The Exchange also believes that structuring the fee to exempt 
    organizations that transact business on the Exchange represents an 
    equitable allocation of the Exchange's examination costs among members 
    by focusing on those member organizations that generally do not 
    otherwise continually contribute to compensating for, and usually, in 
    fact, increase Exchange examination costs. The Exchange notes that the 
    fee becomes effective January 1, 1995.
    
    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
    
        The foregoing rule change establishes or changes a due, fee, or 
    other charge imposed by the Exchange and therefore has become effective 
    pursuant to Section 19(b)(3)(A) of the Act and subparagraph (e) of Rule 
    19b-4 thereunder. 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.
    
    IV. Solicitation of Comments
    
        Interested persons are invited to submit written data, views and 
    arguments concerning the foregoing. 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 provisions 
    of 5 U.S.C. 552, will be available for inspection and copying at the 
    Commission's Public Reference Section, 450 Fifth Street, NW., 
    Washington, DC 20549. Copies of such filing will also be available for 
    inspection and copying at the principal office of the Phlx. All 
    submissions should refer to File No. SR-Phlx-94-66 and should be 
    submitted by January 10, 1995.
    
        For the Commission, by the Division of Market Regulation, 
    pursuant to delegated authority.
    Margaret H. McFarland,
    Deputy Secretary.
    [FR Doc. 94-31209 Filed 12-19-94; 8:45 am]
    BILLING CODE 8010-01-M
    
    
    

Document Information

Published:
12/20/1994
Department:
Securities and Exchange Commission
Entry Type:
Uncategorized Document
Document Number:
94-31209
Pages:
0-0 (1 pages)
Docket Numbers:
Federal Register: December 20, 1994, Release No. 34-35091, File No. SR-Phlx-94-66