00-14404. Self-Regulatory Organizations; Order Approving Proposed Amendment to the By-Laws and Corresponding Changes to the Rules of the Philadelphia Stock Exchange, Inc., Relating to Various Committees

May 31, 2000.

I. Introduction

On July 30, 1999, the Philadelphia Stock Exchange, Inc. (“Phlx” or “Exchange”) submitted to the Securities and Exchange Commission (“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 amending the Exchange's By-Laws and corresponding Phlx Rules to streamline its committee process. The Phlx filed Amendments No. 1 and No. 2 to the proposed rule change on October 4, 1999 ^[3] and February 23, 2000, respectively. The Federal Register published the proposed rule change, Amendment No. 1, and the substance of Amendment No. 2, for comment on March 6, 2000.^[4] The Commission received no comments on the proposal. This order approves the proposal, as amended.

II. Description of Proposal

The Exchange has proposed By-Law amendments to provide for streamlining the committee process as follows: (i) Dissolving the Arbitration Committee, whose limited remaining functions would be transferred to the Executive committee, who will oversee ongoing arbitrations filed before the transfer of arbitration responsibilities to the National Association of Securities Dealers, Inc. (“NASD”) in October, 1998; ^[5] (ii) dissolving the Elections Committee and transferring its functions, along with those of the Nominating Committee, to the Nominating and Elections Committee; and (iii) consolidating the three Quality of Markets Committees into a single Quality of Markets Committee with responsibilities for all three Phlx trading floors.

First, the Exchange has proposed to amend its By-Laws to dissolve the Arbitration Committee and transfer its duties to the Executive Committee. The Phlx states that it ceased accepting arbitration cases on October 1, 1998 and that jurisdiction for Phlx arbitration cases now resides with the NASD. Currently, the Exchange is processing and closing the cases that were filed prior to October 1, 1998.^[6] Following the cessation of these cases, the arbitration function at the Exchange will cease, as will the need for any committee oversight of these matters.

Second, the Exchange has proposed several changes to the Nominating Committee and the Elections Committee, essentially collapsing them into a single committee. The Exchange proposes to eliminate the Elections Committee, and move its powers to the Nominating Committee. The Exchange also proposes to amend its By-Laws to change the name of the Nominating Committee to the Nominating and Elections Committee. The Exchange believes this change will help to streamline the functions of the two committees.

The Elections Committee administers membership elections. The Nominating Committee submits nominations for industry and non-industry Governors who stand for election by the members. Because these two Committees perform functions related to the election and appointment of Governors of the Exchange, the Exchange believes that the merging of the Elections Committee with the Nominating Committee will not impair the functioning of any of their tasks.^[7] The Exchange believes that merging these responsibilities should improve efficiency as well as coordination, as the same group of committee members will oversee the complete election-related process.

Finally, the Exchange has proposed to reduce the number of Quality of Markets Committees from three to one, also to improve efficiency.^[8] In addition, the Exchange proposes to amend its By-Laws to ensure that the Committee will contain at least as many non-industry as industry members. The proposed language provides that “[t]he [Quality of Markets] Committee will have broad representation that shall include at least as many non-industry as industry Committee members.”^[9] The current language requires present committees to be “equally balanced”. The Exchange believes that the proposed language will give it more flexibility to constitute the proposed Committee while retaining the appropriate non-industry representation.

The Exchange believes that the consolidation of the Quality of Markets Committees should also improve the input of the committee on the overall committee process by taking advantage of the overlap in issues emanating from each of the three trading floors, as well as providing for more singular input. The Exchange further believes that this consolidation of committee functions will be beneficial to the functioning of the committee process by decreasing the number of committee assignments for some public, non-industry and industry Governors, allowing them to concentrate more of their energies to their remaining assignments, as well as lowering the costs associated with convening meetings. The Exchange believes the quality of information received from the committees by the Board of Governors will not be affected by the consolidation.

III. 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. In particular, the Commission finds that the proposed rule change meets the requirements of Section 6(b)(5) of the Act,^[10] which states that, among other things, the rules of an exchange must be designed to facilitate securities transactions and to remove impediments to and perfect the mechanism of a free and open market, and to protect investors and the public interest. In addition, the Commission finds that the proposed rule change further the objectives of sectin 6(b)(3) ^[11] which requires an exchange's rules, among other things, to be designed to assure a fair representation of its members in the administration of its affairs.^[12]

The Commission believes that it is reasonable for the Exchange to dissolve the Arbitration Committee and transfer its remaining duties to the Executive Committee. The Commission notes that the NASD has jurisdiction over Phlx arbitration cases filed after October 1, 1998 and that following the completion of cases filed before October 1, 1998, the Exchange will have no arbitration duties.^[13] In addition, the Commission believes that the Executive Committee is fully capable of overseeing the adjudication of the remaining cases. The Commission also notes that although the Executive Committee contains more members (9) than the current Phlx Arbitration Committee (4), the members of the Executive Committee represent varying interests similar to the Arbitration Committee and include on-floor, off-floor, and non-industry (including one public) members.

The Commission also believes that it is reasonable for the Exchange to combine the Nominating Committee and the Elections Committee into one committee—the Nominating and Elections Committee. These committees perform distinct but related functions. As noted above, the Elections Committee oversees the election process while the Nominating Committee submits nominations for industry and non-industry governors who stand for election by the members. While the Commission believes it is within the Phlx's business judgment in determining that the merged committees should be able to function more efficiently as a single unit, we are concerned about assuring that elections are administered fairly and adequately monitored. The Commission notes that the Exchange has addressed this by committing itself to continue its current practice of engaging an independent auditing firm to administer all Exchange elections. The Commission believes that this safeguard will help to ensure that all Exchange elections, particularly contested elections, will be administered in a manner that is fair to all participants in the election process.

Finally, the Commission believes that it is reasonable for the Exchange to consolidate all three of its Quality of Markets Committees into one Quality of Markets Committee responsible for all three Phlx trading floors. The COmmission does not disagree with the Phlx's conclusion that the resulting committee could function more efficiently by taking advantage of the overlap in issues that face each of the three current committees. The Commission notes that the resulting committee will be required to contain at least as many non-industry as industry members, which will ensure that the committee will retain appropriate non-industry representation. While current rules require each of the Quality of Markets Committees to be “equally balanced,” the new language will, in the Phlx's view, give it more flexibility in the new committee's composition. Without specifically addressing this issue, the Commission simply notes that by requiring the newly merged committee to be comprised of broad representation with at least the same number of non-industry and industry directors, the new rule language should ensure that the composition of the new Quality of Markets Committee is consistent with the section 6(b)(3) requirement for fair representation in the administration of the Exchange.

IV. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the Act,^[14] that the proposed rule change (SR-PHLX-99-26), as amended, is approved.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[15]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  See Letter to Michael Walinskas, Associate Director, Division of Market Regulation (Division”), Commission, from John Dayton, Counsel, Phlx, dated October 1, 1999 (“Amendment 1”). Amendment No. 1 proposes certain technical changes. Specifically, it amends Phlx Rule 930 to reflect the fact that the Arbitration Committee is being eliminated from the By-Laws. Amendment No. 1 also proposes changes to Phlx Rule 950, §§ 1 and 2, to reflect the elimination of the Arbitration Committee. The Phlx also submitted a letter (hereinafter referred to as “Amendment No. 2”), confirming that the board will continue to engage an independent auditing firm to administer all elections. The contents of Amendment No. 2 were substantively discussed in the notice.

4.  Securities Exchange Act Release No. 42464 (Feb. 28, 2000), 65 FR 11826.

5.  See Securities Exchange Act Release No. 40517 (Oct. 1, 1998), 63 FR 54177 (Oct. 8, 1998) (SR-Phlx-98-28).

6.  As of May 26, 2000, one case is currently pending with the Arbitration Committee that would be transferred to the Executive Committee. Potentially twelve arbitration cases in federal court could be transferred back to the Phlx. Phone call between John Dayton, Counsel, Phlx, and Sonia Patton, Attorney, Division, Commission, on May 26, 2000.

7.  The Commission notes that the Exchange currently has a policy of engaging an independent auditing firm to administer elections. This practice will continue following the merger of the Nominations Committee and the Elections Committee. See Amendment No. 2, supra note 3. Of course, any changes to the practice would have to be submitted pursuant to Section 19(b)(1) of the Act.

8.  Currently the Exchange has three separate Quality of Markets Committees for each of the three trading floors: equity, equity-index options, and foreign currency options.

9.  See Proposed Phlx By-Law Art. X, § 10.20.

10.  15 U.S.C. 78f(b)(5).

11.  15 U.S.C. 78f(b)(3).

12.  In approving this rule, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

13.  See supra, note 6.

14.  15 U.S.C. 78s(b)(2).

15.  17 CFR 200.30-3(a)(12).