[Federal Register Volume 61, Number 71 (Thursday, April 11, 1996)]
[Notices]
[Pages 16152-16156]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9019]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37076; File No. SR-PSE-96-07]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Pacific Stock Exchange Incorporated Relating to the
General Reorganization and Revision of the Exchange's Membership Rules
April 5, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on March 5, 1996, the Pacific
Stock Exchange Incorporated (``PSE'' or ``Exchange'') filed with the
Securities and Exchange Commission (``SEC'' or ``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.
\1\ 15 U.S.C. 78s(b) (1).
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The PSE proposes to reorganize and revise PSE Rule 1, Membership,
and to revise PSE rules 2, 4, 5, and 9.
Exhibit A contains the text of Revised PSE Rule 1, Chart I (which
depicts the sources of Revised Rule 1), and Chart II (which depicts
where the current rules appear in Revised Rule 1). Exhibit B contains
the text of the proposed revisions to PSE rules 2, 4, 5, and 9.
Although the exhibits are not being published with this notice, they
are available for copying at the PSE and at the Commission.
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
The Exchange is proposing these revisions to Rule 1 because much of
its language is outdated, inapplicable, or both. Revised Rule 1 more
accurately reflects the current procedures and requirements of the
Exchange's membership department. While many of the provisions of
existing 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. In addition, much of Rule 1's language
has been rephrased for ease of comprehension. The Exchange has made
these changes in order to enable readers to quickly identify the
provisions related to a particular membership issue.
As part of its review of the existing provisions of 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, as well as retitling
Rule 9. A summary of the changes, organized by reference to the
proposed section numbers, is set forth below.
Rules 1.1(a)-(o); Definitions
A ``Definitions'' section was added to Revised Rule 1 to provide an
explanation of the terms used by the PSE in relation to membership.
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. The sources for the definitions contained
in the proposal are listed in Chart I. The discussion below notes any
significant additions or changes to these defined terms.
The definition for ``Affiliate'' is based on the same definition in
SEC Rule 405.\2\ The proposed definition of an ``Allied Member''
utilizes language from Article V, Section 6, of the PSE Constitution
and adds language to cover
[[Page 16153]]
employees and principal executive officers of limited liability
companies. The definition for ``Approved Person'' is based on language
from PSE Rule 4.1(n), which was rephrased and includes language to
cover persons who contribute 5% or more of a partnership's capital. The
definition for ``Associated Person,'' which is based on Article V,
Section 7 of the PSE Constitution, adds ``member of a limited liability
company'' and ``trustee of a business trust.'' The definition for
``Control,'' combines language from PSE Rule 4.1(s) and Form BD,
Uniform Application for Broker-Dealer Registration. The definition for
``Floor Member'' is based on existing PSE Rule 1.1(a). The definition
of ``Good Standing'' is based on the definition in Article II, Section
2.2, of the CBOE Constitution.
\2\ 17 CFR 230.405 (setting forth the definitions applicable to
the registration of securities).
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The definition for ``Inactive Lessor'' is based on the ``inactive
member'' language currently in the ``Member'' definition in Article V,
Section 3, of the PSE Constitution. The definition for ``Inactive
Lessor'' was further amended by the Board of Governors on January 25,
1996 to eliminate the broker-dealer registration requirement for firms
(partnerships, corporations, limited liability companies) acting solely
as lessors and who are not conducting business for which broker-dealer
registration is required. Under the existing definition for ``Inactive
Member,'' broker-dealer registration is not required for individual
seat owners, but is required for all others. A review of other
exchanges' rules disclosed that the CBOE and the American Stock
Exchange, Inc. (``Amex'') do not require broker-dealer registration for
inactive lessors, regardless of whether they were individuals,
partnerships, corporations, or other entities.\3\
\3\ See American Stock Exchange Guide (CCH) para. 9174
(excepting applicants desiring only to own a membership from the
broker-dealer registration requirement); CBOE Rule 1.1 (ff)
(prohibiting lessors from conducting a public securities business);
CBOE Rule 3.2 (excluding lessors from the broker-dealer registration
requirement).
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The definitions for ``Member,'' ``Member Firm,'' and ``Member
Organization'' are from the PSE Constitution, Article V, Sections 3, 4,
and 5, respectively. The definition for ``Nominee'' simply refers the
reader to Article VIII, Section 2(d), of the PSE Constitution. The
definition for ``Non-Resident Member Organization'' was included
because of the new provision in Revised Rule 1.16, Responsibilities of
Non-Resident Member Organizations. The definition is based on the
definition of Non-Resident Broker Dealers in SEC Rule 17a-7.\4\ The
definition for ``Parent'' is new and is based on the same definition in
SEC Rule 405.\5\ Finally, the definition for ``Person,'' based on PSE
Rule 4.1(t), adds ``limited liability company'' and ``trustee of a
trust fund'' to the definition.
\4\ 17 CFR 240.17a-7 (setting forth additional recordkeeping
requirements that are applicable to nonresident brokers and
dealers).
\5\ 17 CFR 230.405 (setting forth the definitions applicable to
the registration of securities).
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Rules 1.2 and 1.3: 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 a lease agreement. This provision, which is based on CBOE
Rule 3.1, is designed to assist the Exchange in addressing problems
associated with unassigned memberships. The proposal reserves Rule 1.3
for future use.
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 proposed rules 1.4, 1.5, 1.7, and
1.8.
Revised Rule 1.4, Qualifications of Individual Members, which is
based on CBOE Rule 3.2 and Article VI, Section 1 of the PSE
Constitution, and Revised Rule 1.5, Qualifications of Member
Organizations, which is based on CBOE Rule 3.3, establish some of the
basic requirements necessary for Exchange membership. They require that
all members and member organizations, except ``Inactive Lessors,'' must
be registered pursuant to Section 15 \6\ of the Act.\7\ 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.
\6\ 15 U.S.C. 78o.
\7\ See discussion supra concerning the new definition of
``Inactive Lessor.''
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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, which is based on PSE
Rule 1.4 and CBOE Rule 3.4, 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 Membership Committee may 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 has become effective.
Revised Rule 1.8, Effectiveness of Membership Applications, which
is based on CBOE rules 3.10 and 3.11, requires all approved
applications to be activated by the applicant within six months \8\ and
requires the Exchange to provide all members with notice of all newly
effective memberships.
\8\ The Commission notes that Revised Rule 1.8(a) conflicts with
Article VI, Section 3, of the PSE Constitution. The proposal 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 proposal, 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 in September
of 1996. Telephone conversation between Rosemary A. MacGuinness,
Senior Counsel, PSE, and Anthony P. Pecora, Attorney, SEC (Mar. 22,
1996).
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The proposal reserves 1.9 for future use.
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. New to the PSE are proposed rules 1.10(a),
1.10(b), 1.11(a)-(c), 1.16, and 1.17(a). The proposal reserves 1.13,
1.15, and 1.20 for future use.
Revised Rule 1.10(a), which is based on CHX Article I, Rule 1(b),
prohibits sole proprietors from carrying public customer accounts, and
Revised Rule
[[Page 16154]]
1.10(b) prohibits sole proprietors from registering a membership in the
name of a nominee.
Revised rules 1.11(a)-(c), which are based on NYSE rules 311(a) and
312(a), are 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 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 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.
Revised Rule 1.16, Responsibilities of Non-Resident Member
Organizations, is based on CHX Article I, Rule 1(g) and, in accordance
with SEC Rule 17a-7,\9\ places additional requirements on members that
do not maintain an office in the United States that is responsible for
preparing and maintaining financial and other reports required to be
filed with the SEC.
\9\ 17 CFR 240.17a-7 (requiring nonresident brokers and dealers
to maintain books and records in the United States that comply with
all of the Commission's rules and regulations or to grant the
Commission an irrevocable power of attorney to demand such books and
records be provided within 14 days after the Commission's written
request).
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Revised Rule 1.17(a), which is based on CHX Article III, Rule 4,
codifies and clarifies the continuing obligation of member firms to
file copies of amendments to their formation documents with the
Exchange.
Rules 1.21 to 1.25: Purchase, Sale, Transfer, and Lease of Membership
The provisions relating to the purchase and sale of memberships are
essentially unchanged in substance. Of particular note, however, are
proposed 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), which is based on CBOE Rule 3.13(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), which is based on CBOE Rule 3.14(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 rule, which is based on CBOE Rule 3.14(c) and PSE Rule 1.10(a),
allows 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.
The proposal reserves 1.25 for future use.
Rules 1.26-1.27: Employees of Member Organizations
Revised rules 1.27 (a), (b), (c), and (d) represent language new to
the Exchange. Revised Rule 1.27(a), which is based on PSE Rule 5.1(a)
and NYSE Rule 35, clearly states that all employees of member
organizations seeking admission to the Floor must first be approved by
the Exchange. Revised Rule 1.27(c) is based on NYSE rules 35 and 346(f)
and requires every member organization to take reasonable care to
determine the existence of a statutory disqualification.\10\ To assist
member organizations in fulfilling this duty, Revised Rule 1.27(b),
which is based on CSE Article V, Rule 3, Interpretation .2 and NYSE
Rule 35, supplementary material .60, requires all floor employees to
submit fingerprints and to 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.\11\
\10\ See 15 U.S.C. 78c(a)(39) (listing categories of people that
are statutorily disqualified).
\11\ 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. Specifically, the
proposal is deleting provisions from 1.1(b), 1.1(c), 1.1(d), 1.1(f),
1.6(a), 1.6(e), 1.10, 1.14, 1.16(e), and 1.17(f).
Rule 1.1(b), Eligibility, requires, among other things, that a
Floor Member have at least six months experience on the Floor of the
Exchange, unless such experience requirement is waived by the Floor
Trading Committee. Rule 1.1(c), Registration of Floor Members, provides
for the possibility of a written exam for floor members; these
requirements are not contained in Revised Rule 1 because they are
beyond the scope of this rule. These requirements concern
qualifications to act on the Floor and, therefore, should be covered by
the Floor Trading Committee's rules.\12\
\12\ Telephone conversation between Rosemary A. MacGuinness,
Senior Counsel, PSE, and Glen Barrentine, Team Leader, SEC (Nov. 24,
1995).
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Rule 1.1(d), which requires Board approval of applications to
become a Floor Member, and Rule 1.1(f), which requires member
organizations to cancel approved Floor Member applications in writing,
are both being deleted because the Exchange considers them unnecessary.
Rule 1.6(a)(1) requires that a majority of a member's Board of
Directors be either members or allied members. Rule 1.6(a)(2) requires
that at least one director of a member firm be a member of the
Exchange. The proposal deletes both of these requirements.\13\
\13\ The Commission notes that the proposal would permit a
majority of a member firm's directors to be approved persons, and a
member firm's Board could be devoid of members.
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The proposal omits Rule 1.6(e)'s prohibition on member firms acting
as floor brokers from having any freely transferable security
outstanding. The Exchange believes this requirement is unnecessary
because it does not anticipate being the Designated Examining Authority
for these types of firms.
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 proposal
omits all references to the fees currently enumerated in Rule 1.10.\14\
Also, the fee reductions in Rule
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1.10 that pertain to the Options Funding Plan of 1975 are being deleted
because they are no longer relevant.\15\
\14\ Telephone conversation between Rosemary A. MacGuinness,
Senior Counsel, PSE, and Anthony P. Pecora, Attorney, SEC (Mar. 22,
1996). The Commission notes that numerous discrepancies between the
PSE's rules and its fee schedule currently exist. 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).
\15\ Telephone conversation between Rosemary A. MacGuinness,
Senior Counsel, PSE, and Glen Barrentine, Team Leader, SEC (Nov. 24,
1995).
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The rules pertaining to ``Special Memberships,'' rules 1.14 (a)-
(c), are being deleted because they are no longer necessary.\16\
\16\ Telephone conversation between Rosemary A. MacGuinness,
Senior Counsel, PSE, and Glen Barrentine, Team Leader, SEC (Nov. 24,
1995). Special Memberships were special nonvoting memberships
created by the PSE in 1987 that allowed the holder to trade only in
options overlying the Financial News Composite Index, the PSE High
Technology Index, and such other new products as may be determined
by the Exchange's Board. These memberships were scheduled to expire
on December 29, 1987. See Securities Exchange Act Release No. 24516
(May 27, 1987), 52 FR 20659 (approving the issuance of the Special
Memberships).
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Rule 1.16(e) allows the Exchange to waive certain rules concerning
officers and employees, as long as the member or member organization is
a member of another national securities exchange having comparable
requirements. The rules, however, do not permit the waiver of the
requirement that members and member organizations promptly notify the
Exchange of the employment or termination of employment of a registered
employee in California. The proposal deletes this reporting obligation.
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 Exchange proposes to conform its rules to
its current practice.
\17\ Telephone conversation between Rosemary A. MacGuinness,
Senior Counsel, PSE, and Anthony P. Pecora, Attorney, SEC (Mar. 22,
1996).
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PSE Rules 2, 4, 5, and 9
In order to accommodate the revisions to Rule 1, certain changes
need to be made to other existing PSE rules. Rules 1.6(b), Owners of 5%
or More Equity Securities, 1.6(d), Change in Stockholder Status,
1.6(g), Trading in Firm's Securities, 1.6(h), Change in Capitalization,
1.6(j), Conditions for Issuance of Freely Transferable Securities,
1.6(k), Limitations on Issuance of Freely Transferable Securities,
1.6(l), Voting Agreement, and 1.6(o), Participation in Member Firms,
are being relocated to Rule 2.3. Rule 1.8, Fidelity Bonding
Requirements, is being relocated to Rule 2.25.
Because certain provisions already appear in Revised Rule 1, the
following duplicative sections are being deleted from the current
rules: 4.1(h), Member, 4.1(i), Member Firm, 4.1(j), Member
Organization, 4.1(n), Approved Person, 4.1(s), Control, 4.1(t), Person,
and 5.1(a), Floor Clerks.
Rule 9 is being retitled from ``Conduct of Accounts'' to
``Conducting Business with the Public.'' In addition, rules 1.15(a),
Register with Exchange, 1.15(b), Joint Quarters, 1.15(c), Office
Supervision, 1.15(d), Employee Supervision, 1.17(a), Guarantees,
1.17(b), Sharing Profits--Losses, 1.17(c), Compensation Rebate,
1.17(d), Member Compensation Only, are being relocated to Rule 9.1.
Also, rules 9.1(a)-(c) are being renumbered 9.2(a)-(c). Finally, Rule
9.2 is being renumbered to 9.3(a), and Rule 9.3 is being renumbered to
9.3(b).
Exhibit B depicts all of these changes along with the required
renumbering changes.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section 6(b) \18\ of the Act in general and furthers the objectives of
Section 6(b)(5) \19\ in particular in that it is designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, and, in general, to protect investors
and the public interest.
\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes the proposed rule change will impose no
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Revised Rule 1 was submitted to the Membership Committee for their
review. Exchange Staff met with members of the Membership Committee to
discuss their recommendations, many of which are incorporated into
Revised Rule 1.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the 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 the 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, D.C. 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, D.C. 20549. Also, copies of such filing will 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 May 2, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\20\
\20\ 17 C.F.R. 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-9019 Filed 4-10-96; 8:45 am]
BILLING CODE 8010-01-M
