[Federal Register Volume 62, Number 168 (Friday, August 29, 1997)]
[Notices]
[Pages 45902-45904]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23048]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38955; File No. SR-PCX-97-12]
Self-Regulatory Organizations; Pacific Exchange, Inc.; Order
Approving Proposed Rule Change Modifying Rules on Disclosure of
Financial Arrangements of Members and Notice of Filing and Order
Granting Accelerated Approval of Amendment Thereto
August 20, 1997.
I. Introduction
On April 23, 1997, the Pacific Exchange, Inc. (``PCX'' or
``Exchange''), filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') pursuant to Section 19(b)(1) of the
[[Page 45903]]
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change modifying rules on disclosure of
financial arrangements of Members. The proposed rule change was
published for comment in Securities Exchange Act Release No. 38623 (May
13, 1997), 62 FR 27640 (May 20, 1997). The Commission received no
comments on the proposal. On June 27, 1997, the Exchange amended the
proposed rule change (``Amendment No. 1'') to clarify certain aspects
of the filing.\3\ This order approves the proposed rule change and
grants accelerated approval to Amendment No. 1.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Letter from Michael D. Pierson, Senior Attorney, Regulatory
Policy, PCX, to Margaret J. Blake, Division of Market Regulation,
Commission (June 27, 1997).
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II. Description of the Proposal
The Exchange is proposing to make various changes to the PCX Rule
4.18, ``Disclosure of Financial Arrangements of Members.'' Currently,
Rule 4.18(a) requires disclosure of financial arrangements between
Members only. In its filing, the Exchange proposed amending Rule
4.18(a) to require that a Market Maker, Floor Broker, Specialist or
Member Organization that enters into a financial arrangement with any
other Member or Non-Member shall disclose to the Exchange the name of
such Member or Non-Member and the terms of the arrangement.
Second, Subsection (a) currently defines ``financial arrangement''
for purposes of Rule 4.18 as ``(1) the direct financing of a Member's
dealing upon the Exchange; or (2) any direct equity investment or
profit sharing arrangement; or (3) any consideration over the amount of
$5,000.00 that constitutes a gift, loan, salary or bonus.'' The
Exchange is proposing to clarify and expand the third clause to
provide: ``any consideration over the amount of $5,000.00, including,
but not limited to, gifts, loans, annual salaries or bonuses.''
Third, the Exchange is proposing to eliminate Subsection (b), which
currently provides that each market Maker shall inform the Exchange
immediately of the intention of any party (1) to change any financial
arrangement as defined in this Rule; or (2) to issue a margin call. It
further provides that on a form prescribed by the Exchange, a Market
Maker shall submit to the Exchange a monthly report of his use or
extension of credit pursuant to this Section.
Fourth, the Exchange is proposing to eliminate Subsection (c),
which provides that the disclosure of financial arrangements pursuant
to this Rule shall be the responsibility of all parties involved.
Finally, Subsection (d) currently provides that unless otherwise
agreed, an Exchange Member shall submit to the Exchange notification of
the initiation or termination of financial arrangements within ten
business days of the effective date of such arrangements. It further
provides that failure to disclose the terms of any financial
arrangement to the Financial Compliance Department may result in
disciplinary action by the Exchange. The Exchange is proposing to
modify subsection (d) to provide that Exchange Members with financial
arrangements must submit to the Exchange notification of the
initiation, modification or termination of such financial arrangements
within ten business days of the effective date of such arrangements or
within such shorter period of time as the Exchange may require.\4\ It
further states that failure to disclose the terms of such financial
arrangements to the Exchange may result in disciplinary action. The
Exchange believes that the proposal is consistent with Section 6(b) of
the Act, and Section 6(b)(5) of the Act \5\ in particular, in that it
promotes just and equitable principles of trade and protects investors
and the public interest.
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\4\ See supra note 3.
\5\ 15 U.S.C. 78f(b)(5).
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III. Discussion
The Commission believes PCX's proposed rule change is consistent
with Section 6(b)(5) of the Act.\6\ Section 6(b)(5) requires, among
other things, that the rules of an exchange be designed to promote just
and equitable principles of trade, and, in general, to further investor
protection and the public interest.\7\
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\6\ 15 U.S.C. 78f(b)(5).
\7\ In approving this rule, the Commission notes that it has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
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PCX proposes requiring disclosure of financial arrangements between
Members and Non-Members. The Commission believes it is appropriate to
require reporting of financial arrangements between Members and Non-
Members, as such arrangements may be significant and if left unreported
will have an impact on the Exchange's ability to monitor the financial
status of Members.
The Commission believes that the Exchange's proposal to change the
definition of ``financial arrangement'' to include ``any consideration
over the amount of $5,000.00, including, but not limited to, gifts,
loans, annual salaries or bonuses'' is reasonable. The Commission
believes that expanding and clarifying the definition will ensure that
certain arrangements, previously outside of the enumerated items in the
definition of financial arrangement, will now be included, resulting in
more accurate monitoring of Member financial arrangements.
The Exchange is proposing to eliminate Rule 4.18(b) which currently
provides that Market Makers must inform the Exchange of the intention
of any party to change financial arrangements or to issue a margin
call. The Commission believes that elimination of this subsection is
reasonable as Members are already required to provide notification of
changes to financial arrangements after they occur pursuant to 4.18(b)
as amended. The Commission believes that pre-notification of such
changes is unnecessary and wasteful of Exchange resources. The
Commission also believes it is appropriate to eliminate the requirement
that a Market Maker notify the Exchange of the intention of any party
to issue a margin call. Based on the Exchange's representations, the
Commission believes that requirement is unnecessary, as the Exchange
currently receives prompt notification from a clearing Member whenever
a Market Maker's trading account liquidates to a deficit.\8\ Exchange
clearing Members also provide the Exchange with capital information on
lead Market Makers on a daily basis. For these reasons the Commission
believes the notification by Market Makers of the intention of any
party to issue a margin call is uninformative and therefore
unnecessary.
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\8\ See supra note 3.
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The Commission believes the elimination of subsection 4.18(c),
providing that the disclosure of financial arrangements pursuant to the
rule is the responsibility of all parties involved, is reasonable. The
Commission believes that this requirement is stated clearly in Rule
4.18(a), and is therefore redundant.
Finally, the Commission believes the Exchange's proposal requiring
Exchange Members with financial arrangements to submit to the Exchange
notification of the initiation, modification or termination of such
financial arrangements within ten business days of the effective date
of such arrangements or within such shorter period of time as the
Exchange may
[[Page 45904]]
require, is reasonable.\9\ The proposal sets forth an absolute time
frame within which information must be provided to the Exchange, while
allowing the Exchange a certain level of flexibility in acquiring
information in certain instances. The Commission believes such
flexibility is necessary for adequate oversight of Member financial
arrangements and will allow the Exchange to obtain information
immediately, if necessary. The Commission further believes that it is
reasonable for the Exchange to have the authority to subject Members to
disciplinary action where they have failed to disclose the terms of
financial arrangements to the Exchange. The Commission believes that
such disclosure is necessary for appropriate monitoring of Market Maker
activity. The Commission believes that the proposal will promote
investor protection, as failure to disclose such arrangements could
result in reliance on inaccurate information to the detriment of the
Exchange and its Members.
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\9\ See supra note 3.
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The Commission finds good cause to approve Amendment No. 1 to the
filing prior to the 30th day after the publication of the notice of
filing because the Amendment does not affect the substantive rights of
Members and accelerated approval will facilitate the uninterrupted
implementation of the proposed rule change.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 1. Persons making written submission
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 changes 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. Copies of the filing will also be
available at the principal office of the Exchange. All submissions
should refer to File No. SR-PCX-97-12 and should be submitted by
September 19, 1997.
V. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change and Amendment No. 1 are consistent with the Act and the
rules and regulations thereunder applicable to the PCX, and in
particular Section 6(b)(5).
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\10\ that the proposed rule change (File No. SR-PCX-97-12) be and
hereby is approved, and that Amendment No. 1 filed thereto be and
hereby is approved on an accelerated basis.
\10\ 15 U.S.C. 78s(b)(2).
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For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-23048 Filed 8-28-97; 8:45 am]
BILLING CODE 8010-01-M
