[Federal Register Volume 59, Number 92 (Friday, May 13, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-11702]
[[Page Unknown]]
[Federal Register: May 13, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34026; File No. SR-PSE-94-3]
Self-Regulatory Organizations; Filing of Proposed Rule Change by
the Pacific Stock Exchange, Inc. Relating to Its Capital Requirements
for Equity Specialists
May 9, 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 January
14, 1994, the Pacific Stock Exchange, Inc. (``PSE'' 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. On March
8, 1994, the PSE submitted to the Commission Amendment No. 1 to the
proposed rule change.\1\ On April 1, 1994, the PSE submitted to the
Commission Amendment No. 2 to the proposed rule change.\2\ The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\See letter from Michael D. Pierson, Senior Attorney, Market
Regulation, PSE, to Louis A. Randazzo, Attorney, Office of
Derivative and Exchange Oversight, SEC, dated March 4, 1994.
Amendment No. 1 made various clarifying amendments to the proposed
rule change.
\2\See letter from Michael D. Pierson, Senior Attorney, Market
Regulation, PSE, to Louis A. Randazzo, Attorney, Office of
Derivative and Exchange Oversight, SEC, dated March 28, 1994.
Amendment No. 2 made further clarifying amendments to the proposed
rule change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The PSE proposes to amend its rules relating to the capital
requirements for specialists. The proposal states that if an Exchange
specialist firm is subject to the Aggregate Indebtedness Requirement
Under Rule 15c3-1,\3\ such firm must maintain a minimum net capital of
not less than $200,000.\4\ The proposal establishes a lesser minimum
net capital requirement for broker-dealers in specialist posts that are
backed by more than one broker-dealer. Finally, the Exchange is
proposing to amend its rules in response to recent amendments adopted
by the Commission to its net capital rules for Exchange specialists.\5\
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\3\The Aggregate Indebtedness Standard under Rule 15c3-1 states
that no broker or dealer, other than one that elects the Alternative
Standard, shall permit its aggregate indebtedness to all other
persons to exceed 1500 percent of its net capital (or 800 percent of
its net capital for 12 months after commencing business as a broker
or dealer). See 17 CFR 240.15c3-1(a)(1)(i) (1993).
\4\The term ``net capital'', as used in the PSE proposal, means
net capital as defined by Commission Rule 15c3-1. Rule 15c3-1
defines net capital as the net worth of a broker or dealer, adjusted
by certain adjustments prescribed in Rule 15c3-1. See 17 CFR
240.15c3-1(c)(2) (1993).
\5\According to proposed PSE Rule 2.1, Commentary .03, the
proposed amendments to Rules 2.1(b) and (c) will become effective on
July 1, 1994. See Amendment No. 1, supra note 1.
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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 governing 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
Pursuant to recent amendments to Commission Rule 15c3-1,\6\ on
April 1, 1994, the Exchange's equity specialists became subject to the
Commission's net capital rule.\7\ Accordingly, the Exchange is
proposing to amend its rules to reflect the elimination of exemption
from that Rule.\8\ The Exchange is also proposing to establish an
additional requirement that its equity specialist firms that are
subject to the Aggregate Indebtedness Requirement under Rule 15c3-1
must maintain a minimum net capital of $200,000. Equity specialist
firms subject to the Alternative Net Capital Requirement would be
required to comply with subsection (a)(1)(ii) of Rule 15c3-1.\9\ The
Exchange is also proposing further amendments to clarify these new
requirements and to establish related procedures for specialist firms
whose net capital falls below certain levels. The Exchange believes
that the proposed amendments are appropriate to assure that the
customers and creditors of its equity specialists are protected from
monetary losses and delays in the event of a specialist's failure.
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\6\17 CFR 240.15c3-1 (1993).
\7\See Securities Exchange Act Release No. 32737 (August 11,
1993), 58 FR 43555 (August 17, 1993).
\8\On August 11, 1993, the Commission amended Rule 15c3-1, in
part, to make the Commission's net capital rule applicable to
certain specialists that are currently exempt from the rule (the
amended Rule makes the Commission's net capital rule applicable to
all specialists other than options market makers). See Securities
Exchange Act Release No. 32737, supra note 7.
\9\As of April 1, 1994, the Commission's net capital rule
requires the Exchange's equity specialists to maintain net capital,
under the aggregate indebtedness method, equal to a minimum of
$100,000 ($75,000 until June 30, 1994) and, under the alternative
method, equal to a minimum of $250,000 ($200,000 until July 1,
1994). See Securities Exchange Act Release No. 32737, supra note 7.
Rule 15c3-1(a)(1)(ii) contains the Alternative Standard, which
states in part, that a broker or dealer shall not permit its net
capital to be less than the greater of $250,000 or 2 percent of
aggregate debit items computed in accordance with Exhibit A to Rule
15c3-3. See 17 CFR 240.15c3-1(a)(1)(ii) (1993).
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(a) Elimination of specialist exemption. The Exchange is proposing
to amend PSE Rule 1.8(a), which currently identifies the following
members as exempt from the Exchange's net capital rule: any floor
broker, market maker in listed options, or specialist, registered with
the Exchange in any such capacity, who is exempt from the minimum net
capital requirements prescribed by Rule 2.1 (Capital Requirements). The
Exchange is proposing to delete ``specialists'' from this list and to
add ``lead market makers in listed options'' to the list.\10\ This
amendment is intended to make the Exchange's rules conform to the
recent amendments to the Commission's net capital rule.\11\
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\10\In the Commission's release adopting amendments to Rule
15c3-1 (the net capital rule), the Commission stated that it does
not believe that it is necessary to apply the net capital rule to
options market makers because, on an individual basis, they are not
as integral to the proper functioning of the markets in their
securities. The release further states that specialists other than
options market makers perform several functions that options market
makers do not, including the maintenance of a specialist's book
containing a listing of all orders away from the current market
price and the dissemination of accurate quotations in their
speciality securities. Moreover, the exchanges that use options
specialists look to a single specialist or specialist unit to handle
all trade whereas options market makers compete with other market
makers. See Securities Exchange Act Release No. 32737, supra note 7.
Options lead market makers on the Exchange floor compete with other
market makers for orders and do not maintain a specialist book
containing a list of all orders away from the current market price.
Accordingly, the Exchange believes that options lead market makers
should be treated as options market makers that are exempt from
Commission Rule 15c3-1 and therefore, have been exempted from the
Exchange capital regulations.
\11\The proposal also adds Commentary .04 to Rule 2.1, which
states that members exempt from the provisions of subsections (b),
(c) and (d) of Rule 2.1 are set forth in Rule 2.8(a).
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(b) Specialist subject to aggregate indebtedness requirement. The
Exchange is proposing to adopt a rule that, notwithstanding the
requirements of the Commission's net capital rule, would require each
of its specialist firms that are subject to the Aggregate Indebtedness
Requirement of Rule 15c3-1 to maintain a minimum net capital of not
less than $200,000. The proposed rule further provides that if at any
time a specialist firm's net capital falls below $200,000, such firm
shall promptly notify the Financial Compliance Department of the
Exchange and, in addition, such firm shall not operate as a specialist
with net capital of between $150,000 and $199,999 for more than 60 days
unless such firm (a) obtains from the Vice President, Regulation, or a
senior officer of the Exchange written consent to continue to operate
as a specialist; and (b) takes corrective action including, but not
limited to, actively seeking financing to correct its net capital
deficiency.\12\
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\12\Pursuant to amendments to the Commission's net capital rule,
effective April 1, 1994, Exchange equity specialists became subject
to the Commission's net capital rule. See Securities Exchange Act
Release No. 32737, supra note 7. As a result, Exchange equity
specialists are required to comply generally with the provisions of
the Commission's early warning notification procedures as codified
in Section 17a-11 under the Act.
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The proposal further provides that if such a specialist firm's net
capital falls below $150,000, such firm shall be subject to remedial
action including, but not limited to, the loss of specialist
privileges.
With regard to joint accounts, the proposal provides that if a
specialist post is backed by more than one broker-dealer, then each
such broker-dealer subject to the Aggregate Indebtedness Requirement of
Rule 15c3-1 must maintain a minimum net capital of $150,000. If at any
time such a broker-dealer's net capital falls below $150,000, such
broker-dealer shall promptly notify the Financial Compliance Department
of the Exchange and, in addition, such broker-dealer shall not operate
as a specialist with net capital between $120,000 and $149,999 for more
than 60 days unless such firm (a) obtains from the Vice President,
Regulation, or a senior officer of the Exchange written consent to
continue to operated as a specialist; and (b) takes corrective action
including, but not limited to, actively seeking financing to correct
its net capital deficiency. In addition, if such broker-dealer's net
capital falls below $120,000, such broker-dealer shall be subject to
remedial action including, but not limited to, the loss of specialist
privileges.
(c) Specialists subject to the alternative net capital
requirements. The Exchange is proposing to provide in its rules that
specialist firms subject to the Alternative Net Capital Requirement
must comply with the requirements of Rule 15c3-1(a)(1)(ii). The
Exchange is further proposing to state that if a specialist post is
backed by more than one broker-dealer then each such broker-dealer that
is subject to the Alternative Net Capital Requirement must comply with
the requirements of Rule 15c3-1(a)(1)(ii).
(d) Other proposed changes. The Exchange is proposing to make the
following additional changes to its rules on capital requirements for
specialists: First, the Exchange is proposing to clarify its rules by
providing in Rule 2.1 that the new net capital requirements will be in
addition to the Specialist Post Capital requirement of Rule 2.2.\13\
Second, the proposal provides that the Exchange shall promptly notify
the Equity Floor Trading Committee of any specialist firm's net capital
deficiency and of any action taken by the Vice President, Regulation,
or senior officer of the Exchange in connection therewith. Third, the
proposal further provides that each specialist firm shall report its
net capital to the Exchange in a form and manner prescribed by the
Exchange.\14\
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\13\Rule 2.2 provides, in part, that members registered as
specialists shall at all times maintain for each specialist post a
minimum of $150,000 in either cash or marketable securities or an
amount equal to 25% of the sum of the market value of its securities
positions, both long and short, whichever is greater.
\14\The proposal also adds clarifying language to Rule 2.1(a),
which states, among other things, that pursuant to the provisions of
Rule 17a-11 under the Act, each member organization shall promptly
notify the Commission if the member organization's net capital does
not equal or exceed the appropriate minimum required by SEC Rule
15c3-1 or if notice is otherwise required by SEC Rule 17a-11.
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(2) Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act, in general, and section 6(b)(5), in
particular, in that it promotes just and equitable principles of trade
and protects investor and the public interest.
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.
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. 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 other 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, 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 Room, 450 Fifth Street, NW, Washington DC
20549. Copies of the filing will also be available for inspection and
copying at the principal office of the PSE. All submissions should
refer to File No. SR-PSE-94-3 and should be submitted by June 3, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-11702 Filed 5-12-94; 8:45 am]
BILLING CODE 8010-01-M
