[Federal Register Volume 64, Number 248 (Tuesday, December 28, 1999)]
[Notices]
[Pages 72712-72714]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-33636]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-42248; File No. SR-PCX-99-46]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the Pacific
Exchange, Inc. Relating to the Specialist Evaluation Pilot Program
December 17, 1999.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on November 2, 1999, the Pacific Exchange, Inc. (``PCX'' 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 Exchange. On
December 6, 1999, the Exchange 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
and to grant accelerated approval to the proposal, as amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from Robert Pacileo, Staff Attorney, PCX, to
Richard Strasser, Assistant Director, Division of Market Regulation,
Commission, dated December 6, 1999 (``Amendment No. 1''). In
Amendment No. 1, the Exchange requested permanent approval of the
specialist evaluation pilot program on an accelerated basis.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule change
The Exchange seeks permanent approval of its Specialist Evaluation
Pilot Program.
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 PCX 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 III below. The PCX has prepared summaries, set forth in Sections
A, B, and C below, of the most significant aspects of such statements.
[[Page 72713]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
On October 1, 1996, the Commission approved a nine month pilot
program for evaluating PCX equity specialists using a number of
criteria.\4\ On December 22, 1997, the Commission approved a one-year
extension of the Exchange's pilot program for the evaluation of equity
specialists.\5\ That rule change established an overall score and
individual passing scores for specialists, replaced the ``Bettering the
Quote'' criterion with a ``Price Improvement'' criterion, and lowered
the weighting of the ``Specialist Evaluation Questionnaire'' criterion
from 15% to 10%, so that Price Improvement could be given a weight of
10%. Subsequently, on May 8, 1998, the Commission approved an Exchange
proposal to codify these changes.\6\ The Commission later approved
another one-year extension of the Exchange's pilot program to January
1, 2000.\7\ The program currently measures specialist performance under
the following criteria, among others, trading between the quote,
executions in size greater than the National Best Bid or Offer, Price
Improvement, and answers to specialist evaluation questionnaire.
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\4\ See Exchange Act Release No. 37770 (October 1, 1996), 61 FR
52820 (October 8, 1996).
\5\ See Exchange Act Release No. 39477 (December 22, 1997), 62
FR 68334 (December 30, 1997).
\6\ See Exchange Act Release No. 39976 (May 8, 1998), 63 FR
26834 (May 14, 1998).
\7\ See Exchange Act Release No. 40817 (December 21, 1998), 63
FR 71993 (December 30, 1998).
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The Exchange is now proposing to make the program permanent. On
October 29, 1999, the Exchange submitted a required report to the
Commission responding to particular questions set forth in the December
1997 approval order.\8\ The Exchange believes that this program is
operating successfully and without any problems and, on that basis, the
Exchange believes that permanent approval of the Specialist Evaluation
Pilot Program is warranted.
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\8\ The December 1998 approval order required the Exchange to
submit a report containing the information described in the December
1997 order. See Release No. 40817, supra note 6. The December 1997
approval order requested a report containing data on (1) the number
of specialists who, as a result of failing the overall passing score
in any one quarterly evaluation, appeared before the Equity
Allocation Committee (``EAC''); (2) the number of specialists who,
as a result of failing the overall passing score in any three out of
four quarters, appeared before the EAC; (3) the number of
specialists who, as a result of failing any individual criterion
passing score for at least two consecutive quarters, appeared before
the EAC; (4) the number of specialists who, as a result of scoring
in the bottom 10% in any one quarterly evaluation, appeared before
the EAC; and (5) the number of specialists who, as a result of
scoring in the bottom 10% in any two out of four consecutive
quarterly evaluations, appeared before the EAC. The report included
any type of restrictions that were imposed on these specialists, any
further action that was taken against these specialists, and any
situation in which the restrictions were not imposed due to
mitigating circumstances. The report also included the number of
specialists for whom formal proceedings were initiated and the
results of such proceedings, and the number of registered
specialists who scored in the bottom 10% of all registered
specialists on his or her trading floor in the overall program.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section 6(b) \9\ of the Act, in general, and furthers the objectives of
Section 6(b)(5),\10\ in particular, in that it is designed to promote
just and equitable principles of trade.
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\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The PCX does not believe that the proposed rule change would 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
Written comments on the proposed rule change were neither solicited
nor received.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposal 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. 20549-0609. 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 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 No. SR-PCX-99-46 and should
be submitted by January 18, 2000.
IV. Commission's Findings and Order Granting Accelerated Approval
of Proposed Rule Change
The Commission believes that specialists play a crucial role in
providing stability, liquidity, and continuity to the trading of
stocks. Among the obligations imposed upon specialists under the Act is
the maintenance of fair and orderly markets in their designated
securities. To ensure that specialists fulfill these obligations, it is
important that the Exchange conduct effective oversight of their
performance. The Commission believes that the PCX's specialist
evaluation program can play an important role regarding to this
oversight.
The Exchange's specialist evaluation pilot program has undergone
several changes since it was first implemented in 1996. However, the
Commission believes that the pilot program in its current form has
generated, and will continue to generate, sufficiently, detailed
information to enable the Exchange to make accurate assessments of
specialist performance. For example, the overall passing score and
individual criterion passing scores establish minimum adequate
performance thresholds. These thresholds allow the Exchange to identify
specialists who are not operating at an acceptable level of
performance. In its October 1999 report, the Exchange noted that all
specialists attained the overall passing score in the first three
quarters of 1999. The report also noted, however, the number of
specialists who did not attain a passing score in one or more of the
individual criteria for the specified period of time (e.g., four out of
five quarters). The report specified the restrictions placed on the
failing specialists (e.g., no new allocations).
For the reasons discussed above, the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
the rules and regulations under the Act applicable to a national
securities exchange and, in particular, with the requirements of
Section 6(b) \11\ of the Act. Specifically, the Commission believes the
proposal is consistent with the Section 6(b)(5) \12\ requirement that
the rules of an exchange be designed to facilitate transaction in
securities, and to remove impediments to and perfect the mechanism of a
free and open market and a national market system. The criteria used to
assess the
[[Page 72714]]
performance of PCX equity specialists (e.g., price improvement and
trading in size greater than the NBBO) are appropriate means of helping
to determine whether a PCX equity specialist in performing its
specialist duties to maintain a fair and orderly market.\13\
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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(5).
\13\ In approving this rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
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Further, the Commission finds that the proposal is consistent with
the Act, particularly section 11(b) \14\ of the Act and Rule 11b-1 \15\
under the Act, which allows securities exchanges to permit exchange
members to register as specialists, providing that the exchange
requires the specialist to assist in maintaining a fair and orderly
market. As discussed, the means PCX has chosen to assess those duties
and the means of sanctioning specialists who fail to meet their
obligations (e.g., restrictions on further stock allocations) are
appropriate and consistent with the Act.
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\14\ 15 U.S.C. 78k(b).
\15\ 17 CFR 240.11b-1.
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The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
notice of the filing in the Federal Register. The Exchange has stated
that the program is operating successfully and without any problems.
Accelerated approval will permit the Specialist Evaluation program to
continue on an uninterrupted basis. In addition, the rule change that
implemented the pilot program in its current form and the rule change
that subsequently extended pilot program were noticed for the full
statutory period and the Commission received no comments on the
proposed rule changes. Accordingly, the Commission does not believe
that the current filing raises any regulatory issues not raised in the
previous filings.
It is therefore ordered, pursuant to Section 19(b)(2) \16\ of the
Act, that the proposed rule change (SR-PCX-99-46), as amended, is
approved on an accelerated basis.
\16\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\17\
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\17\ CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-33636 Filed 12-27-99; 8:45]
BILLING CODE 8010-01-M
