[Federal Register Volume 62, Number 168 (Friday, August 29, 1997)]
[Notices]
[Pages 45904-45907]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23009]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38960; File No. SR-PHLX-97-31]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change Relating to Amendments
to Certificate of Incorporation and By-Laws
August 22, 1997.
I. Introduction
On June 25, 1997, the Philadelphia Stock Exchange, Inc. (``Phlx''
or Exchange''), pursuant to Section 19(b)(1) of the Securities Exchange
Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ filed with the
Securities and Exchange Commission (``SEC'' or ``Commission'') a
proposed rule change to amend its Certificate of Incorporate and By-
Laws.
---------------------------------------------------------------------------
\1\ 15 U.S.C. Sec. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
The proposed rule change was published for comment in the Federal
Register on July 10, 1997.\3\ No comments were received on the
proposal. This order approves the proposed rule change.
---------------------------------------------------------------------------
\3\ Securities and Exchange Act Release No. 38809 (July 1,
1997), 62 FR 37109.
---------------------------------------------------------------------------
II. Description of the Proposal
On May 21, 1997, the Phlx Board of Governors approved draft
amendments to the Phlx Certificate of Incorporation and By-Laws that
are designed to promote an enhanced governance structure for the
Exchange. Thereafter, with the Phlx Board's endorsement, the amendments
were announced to the membership in accordance with Exchange By-Law
Article XXII, Section 22-2.\4\
---------------------------------------------------------------------------
\4\ In accordance with Phlx By-Law Article XXII, Section 22-2,
the membership was notified of the proposed amendment by a
memorandum dated June 4, 1997, and no written request for a special
meeting of the Exchange membership was filed within the 10 day
period allowed by the By-Law. Thereafter, on June 18, 1997, a
membership petition was received by the Board pursuant to Phlx By-
Law Article XXII, Section 22-1, which offered, in writing, certain
proposed amendments to the By-Laws. On August 1, 1997, the petition
was submitted to the membership for vote. The petition failed for
lack of the required quorum.
---------------------------------------------------------------------------
As no written request was made requesting a special meeting of the
Exchange membership to consider the amendments, the Phlx Board on June
18, 1997 unanimously approved the proposed amendments for filing with
the Commission.
Two of the most significant proposed changes to the By-Laws are
reducing the size of the Board from 30 to 22 Governors and changing the
composition of the Board to: 11 non-industry Governors, of whom at
least 5 must be public Governors; 10 industry Governors; \5\ and a
Chairman of the Board who will be the full time, paid Chief Executive
Officer of the Exchange.\6\
---------------------------------------------------------------------------
\5\ See By-Law Article I, Section 1-1 (defining ``industry,''
``non-industry,'' and ``public'').
\6\ See By-Law Article IV, Section 4-1 and By-Law Article V,
Section 5-1. Various other amendments to the By-Laws have been made
in connection with these changes. For instance, references to
``President'' have been changed to refer to the ``Chief Executive
Officer'' or ``Chairman of the Board'' and revisions to the number
of Board members necessary to effect certain Board actions have been
made, e.g., in most cases where the affirmative vote of 15 of the
current 30 Governors was required, the By-Law is changed to state
that a majority vote is required.
---------------------------------------------------------------------------
The proposed By-Law amendments specify the composition of the 10
industry Governors as follows: 2 Equity Floor Industry Governors, 1
Equity Options Floor Specialist Governor and 1 Equity Options Floor
Registered Options Trader Governor (all of whom must work on the
Exchange Floor or be a general partner, executive officer or member
associated with a member organization primarily engaged in business on
the Exchange Floor); 1 Equity Options Floor Broker Governor (who must
work on the Equity Options Floor); and 5 Off-Floor Governors.\7\ Except
for the Chairman of the Board, all Governors are subject to term limits
of two consecutive three year terms.\8\
---------------------------------------------------------------------------
\7\ See By-Law Article IV, Section 4-1.
\8\ See By-Law Article IV, Section 4-3.
---------------------------------------------------------------------------
The manner in which the Vice-Chairmen of the Board are selected
also has been changed. Instead of the Vice-
[[Page 45905]]
Chairmen being elected by the membership, the Board will now appoint
the Off-Floor Vice-Chairman from among the Off-Floor Governors, and the
On-Floor Vice-Chairman from among the On-Floor Governors. If there is a
contest for On-Floor Vice-Chairman, a membership election will be held
solely for the On-Floor Vice-Chairman.\9\
---------------------------------------------------------------------------
\9\ See By-Law Article IV, Section 4-2.
---------------------------------------------------------------------------
The proposed By-Law amendments make significant changes to the
Nominating Committee's charter. The amendments specify that a majority
of the Committee be non-industry Governors and authorize the Committee
to select non-industry and public Governors, nominees for the industry
Governor, committee chairs, and the Nominating Committee's successors,
and to fill vacancies on the Board, all subject to Board approval.\10\
---------------------------------------------------------------------------
\10\ See By-Law Article III, Section 3-5.
---------------------------------------------------------------------------
The number of members required to file independent Governor
nominations will be increased from 10 to 50 members for an individual
nomination, and 30 to 75 members for nominating an entire slate or
portion thereof.\11\
---------------------------------------------------------------------------
\11\ See By-Law Article III, Section 3-7.
---------------------------------------------------------------------------
Substantial amendments relating to the Exchange's standing
committees are proposed, including adding new standing committees of
Automation, Compensation and Quality of Markets; reducing the size of
standing committees to no more than 9 members except for floor
committees, which may have no more than 12 members; requiring the
committee chair and at least one other member to be a Governor; and
revising the charter and composition of certain existing committees. Of
particular note, the Executive Committee will be authorized, with Broad
approval, to appoint committee members other than committee chairs, and
to act on behalf of the Board when the Broad is not in session.\12\
---------------------------------------------------------------------------
\12\ See By-Law Article X, Section 10-14.
---------------------------------------------------------------------------
The Arbitration Committee's composition will be reduced from 25 to
4 members and member controversies will be handled in the same fashion
as public customer controversies.\13\
---------------------------------------------------------------------------
\13\ See By-Law Article X, Section 10-8
---------------------------------------------------------------------------
The Audit Committee will be composed of 3 public Governors and the
Committee's charter will be significantly expanded to authorize the
Committee's inquiries into all aspects of the Exchange's operations and
finances, including regulatory matters.\14\
---------------------------------------------------------------------------
\14\ See By-Law Article X, Section 10-9.
---------------------------------------------------------------------------
Business Conduct Committee (``BCC'') appeals will be taken directly
to the Board and the Disciplinary Review Committee will be
eliminated.\15\ The Exchange Enforcement staff will be entitled to
petition the Board to appeal a BCC decision.\16\
---------------------------------------------------------------------------
\15\ See By-Law Article X, Section 10-11.
\16\ See By-Law Article XI, Section 11-3.
---------------------------------------------------------------------------
Board Advisory Committees that hear appeals of standing committee
decisions and are composed of 3 Governors, will now include at least 1
public Governor.\17\
---------------------------------------------------------------------------
\17\ See By-Law Article XI, Sections 11-1 and 11-2.
---------------------------------------------------------------------------
By-Law Article IV, Section 4-8, is proposed to be amended so that
no person shall participate in the ``determination'' as opposed to
``adjudication'' of any matter in which he is personally interested.
This change is intended to expand the coverage of this provision, which
pertains to disqualification of Governors from participation in Board
actions. In addition, the Phlx is proposing to replace in its entirety
Article XIV of the Certificate of Incorporation with a current
provision of the Delaware General Corporation Law regarding contracts
and transactions entered into by the Phlx in which a Governor,
director, or officer has a financial interest.
Certain provisions of the Phlx Certificate of Incorporation and By-
Laws are being amended in order to attract qualified candidates to
serve on the Phlx Board and committees, and to clarify the
responsibilities and obligations of those who are appointed. In this
regard, new Article XVIII to the Phlx Certificate of Incorporation will
limit the legal liability of Phlx Governors, as permitted under the
Delaware General Corporation Law. In addition, current By-Law Article
IV, Section 4-18, will be replaced entirely by a provision that
provides broad and comprehensive indemnification coverage and rights to
Governors, committee members and officers of the Exchange, and provides
discretionary authority for the Board to indemnify agents and employees
of the Exchange.
A number of other revisions to the By-Laws are proposed for the
sake of organization or accuracy. For instance, the term
``Corporation'' has been changed throughout the By-Laws to
``Exchange,'' and By-Law Articles VI and VII regarding Vice-Chairmen of
the Board of Governors and Officers of the Corporation are being
deleted in their entirety with the relevant sections being moved into
Article V.
III. Discussion
After careful consideration, the Commission finds that the proposed
rule change is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to the Exchange. The
Commission is approving this rule change proposal in order to enable
the Phlx to better fulfill its responsibilities as a self-regulatory
organization. The proposal institutes or strengthens existing
provisions that should help the Phlx maintain and promote the highest
ethical standards among its members and staff. The Commission finds
that the proposed amendments to Phlx's By-Laws and Certificate of
Incorporation are designed to assure fair representation of the
Exchange's members in the selection of its directors and the
administration of its affairs, and that the changes will enable the
Exchange to better comply with the requirements of Section 6 in
particular and the Act in general. Specifically, the Commission
believes that the proposed rule change is consistent with Section
6(b)(5) of the Act \18\ 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.\19\
---------------------------------------------------------------------------
\18\ 15 U.S.C. Sec. 78f(b)(5).
\19\ In approving the proposal, the Commission has considered
the proposal's impact on efficiency, competition, and capital
formation. 15 U.S.C. Sec. 78c(f).
---------------------------------------------------------------------------
The Commission finds consistent with the Act the Phlx's reduction
in size of the Board of Governors from 30 to 22 and changing the
composition of the Board to: 11 non-industry governors (at least 5 of
whom must be public Governors); 10 industry Governors; and a Chairman
of the Board who will be the paid, full-time Chief Executive Officer of
the Exchange. This change is consistent with Section 6(b)(3) of the Act
\20\ in that the Board will be more representative of the various
constituencies that comprise the Exchange or are affected by its
activities. The substantial revisions to the Phlx corporate governance
structure are a result, in part, of an inquiry by a special outside
committee charged with reviewing the organizational and governance
structure of the Phlx. In addition, events at the Phlx over the past
year have evidenced a need for a less insular and more diverse
governance and committee structure for the Exchange to perform
adequately its self-regulatory obligations.\21\ The above
[[Page 45906]]
noted changes, along with the increase in public representation on the
Board, should enhance the Phlx's ability to uphold its responsibilities
as a self-regulatory organization, and to act in a manner more
consistent with the public interest. In addition, the amendment to
reduce the size of the Board from 30 to 22 governors will enable the
Board to perform its duties in a more efficient manner.
---------------------------------------------------------------------------
\20\ 15 U.S.C. Sec. 78f(b)(3).
\21\ See Phlx Appoints Special Committee to Investigate Casella-
Ashton Ties, Securities Week, September 23, 1996, at 1; Phlx
Chairman's Resignation May Have Raised More Questions than it
Answered, Securities Week, October 21, 1996, at 1. See also
Securities Exchange Act Release No. 38918 (August 11, 1997), In the
Matter of Stock Clearing Corporation of Philadelphia and
Philadelphia Depository Trust Company, Respondents, Order
Instituting Proceedings Pursuant to Sections 19(h) and 21C of the
Securities Exchange Act of 1934, Making Findings and Imposing
Remedial Sanctions (finding that the Stock Clearing Corporation of
Philadelphia (``SCCP'') and Philadelphia Depository Trust Company
failed to comply with their respective rules and procedures, failed
to file necessary proposed rule changes with the Commission, and, in
the case of SCCP, violated Regulation T).
---------------------------------------------------------------------------
The Commission believes that the amendment to require 50%
representation by public governors on the Board is particularly
important in addressing the Exchange's governance problems, and should
ensure better protection of investors and the public interest. Public
governors are likely to have little or no stake in internal Exchange
politics, and, if carefully selected, public governors should bring
diverse experience and increased ethical sensitivity to the Board, thus
enhancing the confidence of members and of the public in the Exchange's
ability to govern its members and discharge its regulatory obligations
appropriately.
The Exchange will continue the practice of having two Vice-
Chairmen. However, one Vice-Chairman will now be appointed by the Board
from among the Off-Floor Governors, and the other will be appointed by
the Board from among the On-Floor Governors. Previously, these
positions were elected by the membership. This change is a reasonable
method of ensuring that there is balanced representation of two groups
that can have divergent interests.
The Phlx is increasing the number of members required to support
independent governor nominations from 10 to 50 for an individual
nomination and from 30 to 75 members for nomination of a whole or
partial slate. The Commission believes that this change will benefit
the election process by requiring significant membership interest prior
to a nomination.
The Phlx is changing the manner of the appointment of members to
standing committees of the Board, designating the composition of
certain committees, and creating new committees. The changes to
committee structure and procedures are important components of
addressing the governance problems of the Exchange. Committees often
are charged with implementing Board policies and directives, and they
develop recommendations for Board consideration. An overhaul of the
Board structure, without reform of the committee structure, would only
partially rectify the governance problems at the Phlx. The proposed
committee changes, discussed below, are designed to complement the
Board changes by improving the structure of committees and selection of
committee members. First, members of standing committees previously
were selected by the Chairman of the Board with the approval of the
Board of Governors. Under this proposal, members of standing committees
will be selected by the Executive Committee, with the approval of the
Board. The Commission believes that this method will better ensure the
selection of qualified members of standing committees by removing
selection from the sole control of the Chairman and vesting it in a
more diverse group.
The charter and composition of the Nominating Committee has been
changed to reduce its size from nine to seven members, with four of
those members being non-industry governors, and at least two of the
four being public governors (including the chair of the committee). The
balance of the committee will comprise two floor governors and one off-
floor governor. The Commission believes that the proposed change in
composition and number of members on this committee strikes an
appropriate balance in attempting to fairly represent the various
interests of the Phlx membership and trading community, including
investors.
The size of the Arbitration Committee has been reduced
significantly from twenty-five members to four. Two of the committee
members will be non-industry governors, with at least one being a
public governor and one being the chair of the committee. The two other
members will be an off-floor member and an on-floor member. Member
controversies will be handled in the same fashion as public customer
controversies. The Commission considers these changes to the
Arbitration Committee to be an improvement over the Exchange's prior
system of member dispute resolution, which at times resulted in delay
in the resolution of disputes. While the streamlined committee should
provide an effective forum for the resolution of member disputes, the
Commission intends to monitor the impact of these changes on
arbitration at the Exchange.
The Commission finds consistent with the Act the significant
expansion of the charter of the Audit Committee, authorizing this
committee to inquire into all aspects of the Exchange's operations and
finances, including regulatory matters. The committee will be composed
of three public Governors. The expansion of the audit committee's
charter will authorize the investigation and resolution of allegations
of misconduct by governors, committee members, and Exchange staff. The
Commission believes that it is important for the Phlx to have a
committee with such broad investigatory powers, and approves the
expansion of the committee's charter. A committee that is small and
composed of independent governors should be better able to reach quick
and unbiased decisions regarding alleged misconduct, or other matters
pertinent to the Audit Committee's mission.
The Business Conduct Committee monitors compliance with the Act and
the rules and regulations thereunder, as well as the rules and
regulations of the Exchange. The Commission is approving the
elimination of the Disciplinary Review Committee, in order that appeals
from the Business Conduct Committee may be taken directly to the Board
of Governors. In the Commission's view, this change eliminates an
unnecessary level of appeal. The Commission also is approving an
amendment to the By-Laws to include at least one public governor on the
Advisory Committees that hear appeals of standing committee decisions
because of the importance of having balanced views on these committees.
The Commission approves the creation of three Quality of Markets
Committees representing the equity, equity and index option, and
foreign currency option trading floors. The committees will provide
advice and guidance to the Board on the Exchange's competitive position
in new and existing markets, and the quality and depth of markets. The
committees also will provide advice and guidance on issues relating to
the fairness, integrity, efficiency, and competitiveness of the
information, order handling, and execution mechanisms of the Exchange
and systems operated by the Exchange. The Commission believes that the
existence of these committees is an important improvement in the Phlx's
review mechanism for assuring sound, fair markets.
The Exchange has modified the Certificate of Incorporation to
include a
[[Page 45907]]
provision of the Delaware General Corporation Law requiring disclosure
of certain information where a governor, director, or officer has a
financial interest in a contract or transaction entered into by the
Phlx. Pursuant to this provision, if appropriate disclosure is made,
the contract entered into by the Phlx is not void or voidable solely by
reason of the financial interest. The Exchange also has amended its by-
laws to clarify when governors must be disqualified from participation
in Board actions. Whereas previously governors were prohibited from
participating in the ``adjudication'' of any matters in which they were
personally interested, the applicable by-law now uses the term
``determination.'' The use of this term is intended to broaden the
universe of matters from which a governor could potentially be
disqualified. While these amendments represent a first step in the
clarification of the Exchange's conflict of interest rules, the
Commission expects that the Exchange will further amend its by-laws to
add more specific provisions that contain clear and detailed recusal,
disclosure, and conflict of interest procedures for Board and committee
members.
The Commission understands that the Phlx is formulating various
orientation and educational materials, as well as a code of conduct, in
order to brief persons who serve the Exchange in any official capacity,
including governors, committee members, officers, employees, agents,
members, member organizations, and persons affiliated with a member or
member organization. The code of conduct reiterates the principles of
business conduct which the Phlx expects to be maintained and followed,
with the core principles being that the Exchange should conduct every
aspect of its business in a fair and lawful manner, and that the
Exchange should maintain a climate which encourages the fair and lawful
conduct of business. These principles include the conduct of business
in accordance with the federal securities laws and other applicable
rules and regulations, the proper use of confidential information,
disclosure of information and recusal from decision making, where
appropriate, and provision of information to the Exchange where such
information is reasonably requested.
The Commission supports the Phlx's strengthening of orientation and
education materials in order that these persons better understand their
mission, duties, and appropriate standards of conduct. The Commission
understands that the Phlx is considering amending its by-laws to
include compliance with the code of conduct, which at this time is
merely an Exchange policy. The Commission encourages the Phlx to submit
such an amendment in order to formally reflect the important principles
contained in the code of conduct, and looks forward to reviewing such
an amendment.
Finally, The Commission approves the amendment of the by-laws and
Certificate of Incorporation to include indemnification provisions, and
supports the Exchange's goal of attracting qualified candidates for the
Phlx Board of Governors through the inclusion of such provisions. The
Commission also approves all non-substantive by-law changes made for
the sake of organization and accuracy.
IV. Conclusion
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\22\ that the proposed rule change (SR-PHLX-97-31) is approved.
---------------------------------------------------------------------------
\22\ 15 U.S.C. Sec. 78s(b)(2).
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\23\
---------------------------------------------------------------------------
\23\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-23009 Filed 8-28-97; 8:45 am]
BILLING CODE 8010-01-M
