[Federal Register Volume 61, Number 113 (Tuesday, June 11, 1996)]
[Notices]
[Pages 29582-29583]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-14711]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37274; File No. SR-PSE-96-08]
Self-Regulatory Organizations; the Pacific Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change Relating to Amendments
to Exchange Constitution Article III, Section 2(c)
June 4, 1996.
I. Introduction
On March 28, 1996, the Pacific Stock Exchange, Inc. (``PSE'' or
``Exchange'') submitted to the Securities and Exchange Commission)
``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend Exchange Constitution
Article II, Section 2(c).
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 37083 (April 8, 1996), 61 FR 16515 (April 15,
1996). No comments were received on the proposal.
II. Background
Prior to 1973, the Exchange had no rule in place regarding
conflicts of interest on the Board of Governors. In 1973, a simplified
version of the current rule was added to the PSE Constitution, which
read as follows:
No two or more Governors for a common or overlapping term may be
associated either as partners, stockholders or otherwise in the same
member firm or in a partnership or corporation which is affiliated
with the same member firm.
In 1983, the rule expanded the definition of associates to include
officers and directors,\3\ and attempted to define more clearly an
``indirect association'' between Governors, by using two specific tests
that are set forth in the current rule.\4\ The experience of PSE
management and the PSE Board of Governors, however, in interpreting and
applying the current rule has been that the language is too cumbersome
and specific to achieve the intended purpose of eliminating conflicts.
The existing rule limits the Exchange's authority to force a governor
off the Board only in limited circumstances.
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\3\ See Securities Exchange Act Release No. 19406 (Feb. 17,
1983), 48 FR 8385 (Feb. 28, 1983) (order approving File No. SR-PSE-
82-16).
\4\ See PSE Const., Art. III, Sec. 2(c).
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A task force was created to review the current rule and to examine
alternatives that might work better to avoid conflicts on both the
Board of Governors and the Exchange committees. The task force
consisted of nine members as follows: four Governors (including a
public governor, a specialist, an options floor broker and an allied
member), two options clearing firm officials, the chairman of the
Options Floor Trading Committee, the chairman of the Equity Floor
Trading Committee, and the chairman of the Ethics and Business Conduct
Committee. The task force concluded that the current language was
unnecessarily specific, and therefore was too restrictive on the
Board's power
[[Page 29583]]
to determine whether a conflict existed. After review, the task force
noted that most of the other exchanges used broad and general
language,\5\ or no language at all, with the understanding that the
boards of each exchange follow the spirit of a general policy of
avoiding conflicts of interest. The task force approved the proposed
rule, which is intended to provide the PSE Board with more flexibility
in determining when a conflict exists and with the authority to take
appropriate action when such conflicts arise.
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\5\ See Amex Const. Art. 3, Para. 9022; CBOE Const. Art. 4,
para. 1033.
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III. Description of Proposal
The PSE, accordingly, proposes to amend its rules to authorize the
Exchange to remove a governor from the Board, if no resignation is
received, in cases where the Board determines that an affiliation or
association between Governors of the Board creates a conflict of
interest. Moreover, the proposed rule provides that care shall be taken
to have the various interests of the membership represented on the
Board of Governors.
The PSE states that the proposal is designed to provide the
Exchange with the added flexibility and authority necessary to assure
that the Board of Governors is comprised of members representative of
the public interests while ensuring that an affiliation or association
between two or more governors does not create a conflict of interest.
IV. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, with the requirements of Section 6(b).\6\ In particular,
the Commission believes the proposal is consistent with the Section
6(b)(1) requirement that the exchange be organized so as to be able to
carry out the purposes of the Act. The proposal also is consistent with
the Section 6(b)(3) requirement that the rules of the exchange assure a
fair representation of its members in the selection of its directors
and administration of its affairs and provides that one or more
directors must be representative of issuers and investors and not be
associated with a member of the exchange, broker, or dealer. Lastly,
the proposal is consistent with the Section 6(b)(5) requirement that
the rules of an exchange be designed to promote just and equitable
principles of trade, to prevent fraudulent and manipulative acts, and,
in general, to protect investors and the public interest.
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\6\ 15 U.S.C. 78f(b).
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The Commission believes that the PSE's proposal to authorize the
Exchange to remove a Governor from the Board, if no resignation is
received, when, in the opinion of the Board, an affiliation or
association between Governors creates a conflict of interest while
ensuring that various interests of the membership are represented on
the Board is appropriate and will make the PSE's rules consistent with
those that are applicable on other exchanges.
The Commission believes that the current rule prevents the Board
from resolving conflicts of interest arising among Governors in certain
situations in that it limits the Exchange's authority to force a
governor off the Board only in limited circumstances. As a result, the
Exchange is precluded from addressing various conflicts of interest
that arise from an affiliation or association between Governors of the
Board that can result in a lack of independence among the Board of
Governors. This situation may affect the Board's ability to effectuate
proper oversight of the Exchange's business. In this regard, the
Commission supports the PSE's proposal which gives the Exchange the
authority to remove a governor from the Board when any conflicts of
interest arise due to an affiliation or association between Governors
of the Board. The Commission notes that the proposal appropriately
gives the Exchange the requisite authority to promote and ensure the
independence of the Board of Governors, which should result in a more
impartial decision making process.
The Commission also believes that a diversified Board, which no
single membership group could dominate, would better represent the
interests of all of the PSE's constituencies. Towards this end, the PSE
proposal appropriately promotes and ensures the diversity of Board
representation among the different categories of member firms and the
public in that it requires the Exchange to exhibit care to have various
interests of the membership represented on the Board of Governors.
Finally, the Commission believes that the PSE proposal promotes a
Board of Governors representative of various independent interests that
would be more likely to enforce the rules of the Act and of the
Exchange.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\7\ that the proposed rule change (SR-PSE-96-08) is approved.
\7\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-14711 Filed 6-10-96; 8:45 am]
BILLING CODE 8010-01-M
