30654 Federal Register / Vol. 65, No. 93 / Friday, May 12, 2000 / Notices

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3See Securities Exchange Act Release No. 42178

(Nov. 24, 1999), 64 FR 68136.

amount of the Immediate Interest

Payment will be retained if a Contract

owner does not make a withdrawal of

Contract value (including the exercise of

the free-look right) before the first day

of the second Contract year.

8. Applicants state that Valley Forge’s

right to recapture Immediate Interest

Payments applied to purchase payments

in the event of a withdrawal before the

first day of the second Contract year, is

designed to protect Valley Forge against

Contract owners making large purchase

payments in the first Contract year

without affording it sufficient time to

cover the cost of the Immediate Interest

Payment, to its financial detriment.

With respect to funds paid upon the

return of Contracts within the free-look

period, the amount payable by Valley

Forge must be reduced by the allocated

Immediate Interest Payment. Otherwise,

Applicants state that purchasers could

apply for Contracts for the sole purpose

of exercising the free-look provision and

making a quick profit.

9. Applicants submit that the

provisions for recapture of any

applicable Immediate Interest Payment

under the Contracts or any Future

Contract as set forth in this Application

will not violate Sections 2(a)(32) and

27(i)(2)(A) of the 1940 Act.

Nevertheless, to avoid any uncertainties,

Applicants request an exemption from

those Sections, to the extent deemed

necessary, to permit the recapture of any

Immediate Interest Payment under the

circumstances described herein with

respect to the Contracts and any Future

Contracts, without the loss of the relief

from Section 27 provided by Section

27(i).

10. Section 22(c) of the 1940 Act

authorizes the Commission to make

rules and regulations applicable to

registered investment companies and to

principal underwriters of, and dealers

in, the redeemable securities of any

registered investment company, to

accomplish the same purposes as

contemplated by Section 22(a). Rule

22c–1 thereunder prohibits a registered

investment company issuing any

redeemable security, a person

designated in such issuer’s prospectus

as authorized to consummate

transactions in any such security, and a

principal underwriter of, or dealer in,

such security, from selling, redeeming,

or repurchasing any such security

except at a price based on the current

net asset value of such security which

is next computed after receipt of a

tender of such security for redemption

or of an order to purchase or sell such

security.

11. Arguably, Valley Forge’s recapture

of the Immediate Interest Payment

might be viewed as resulting in the

redemption of redeemable securities for

a price other than one based on the

current net asset value of VFL Separate

Account. Applicants contend, however,

that the recapture of the Immediate

Interest Payment is not violative of

Section 22(c) and Rule 22c–1.

Applicants argue that the recapture does

not involve either of the evils that Rule

22c–1 was intended to eliminate or

reduce, as far as reasonably practicable,

namely: (1) the dilution of the value of

outstanding redeemable securities of

registered investment companies

through their sale at a price below net

asset value or their redemption or

repurchase at a price above it, and (ii)

other unfair results including

speculative trading practices. To effect a

recapture of an Immediate Interest

Payment, Valley Forge will redeem

interests in a Contract owner’s Contract

value at a price determined on the basis

of current net asset value of VFL

Separate Account. The amount

recaptured will equal the amount of the

Immediate Interest Payment that Valley

Forge paid out of its general account

assets. Although Contract owners will

be entitled to retain any investment gain

attributable to the Immediate Interest

Payment, the amount of such gain will

be determined on the basis of the

current net asset value of VFL Separate

Account. Thus, no dilution will occur

upon the recapture of the Immediate

Interest Payment. Applicants also

submit that the second harm that Rule

22c–1 was designed to address, namely,

speculative trading practices calculated

to take advantage of backward pricing,

will not occur as a result of the

recapture of the Immediate Interest

Payment. However, to avoid any

uncertainty as to full compliance with

the Act, Applicants request an

exemption from the provisions of

Section 22(c) and Rule 22c–1 to the

extent deemed necessary to permit them

to recapture the Immediate Interest

Payment under the Contracts and Future

Contracts.

Conclusion

Applicants submit that their request

for an order is appropriate in the public

interest. Applicants state that such an

order would promote competitiveness

in the variable annuity market by

eliminating the need to file redundant

exemptive applications, thereby

reducing administrative expenses and

maximizing the efficient use of

Applicants’ resources. Applicants argue

that investors would not receive any

benefit or additional protection by

requiring Applicants to repeatedly seek

exemptive relief that would present no

issue under the Act that has not already

been addressed in the Application

described herein. Applicants submit

that having Applicants file additional

applications would impair Applicants’

ability effectively to take advantage of

business opportunities as they arise.

Further, Applicants state that if

Applicants were required repeatedly to

seek exemptive relief with respect to the

same issues addressed in the

application described herein, investors

would not receive any benefit or

additional protection thereby.

Applicants submit, based on the

grounds summarized above, that their

exemptive request meets the standards

set out in Section 6(c) of the Act,

namely, that the exemptions requested

are necessary or appropriate in the

public interest and consistent with the

protection of investors and the purposes

fairly intended by the policy and

provisions of the Act, and that,

therefore, the Commission should grant

the requested order.

For the Commission, by the Division of

Investment Management, pursuant to

delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–11960 Filed 5–11–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42759; File No. SR–PCX–

99–39]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change and

Amendment Nos. 1 and 2 and Notice of

Filing and Order Granting Accelerated

Approval to Amendment Nos. 3, 4, 5,

6 and 7 to the Proposed Rule Change

by the Pacific Exchange, Inc. Creating

PCX Equities, Inc.

May 5, 2000.

I. Introduction

On October 7, 1999, the Pacific

Exchange, Inc. (‘‘PCX’’ or ‘‘Exchange’’),

filed with the Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’),

pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934 (‘‘Act’’

or ‘‘Exchange Act’’),1 and Rule 19b–4

thereunder,2 a proposed rule change to

create PCX Equities, Inc. (‘‘PCX

Equities’’). The proposed rule change

was published for comment in the

Federal Register on December 6, 1999. 3

Federal Register / Vol. 65, No. 93 / Friday, May 12, 2000 / Notices 30655

4See Letters from Brandon Becker, Wilmer,

Cutler & Pickering, to Belinda Blaine, Associate

Director, Division of Market Regulation

(‘‘Division’’), SEC, dated November 24, 1999 and

from Kathryn Beck, Senior Vice President, General

Counsel and Corporate Secretary, PCX, to Kelly

Riley, Attorney, Division, SEC, dated January 7,

2000 (‘‘Amendment No. 1’’). The January 7, 2000

letter contained the Form 19b–4 for Amendment

No. 1. 5See Letter from Brandon Becker, Wilmer, Cutler

& Pickering, to Nancy J. Sanow, Senior Special

Counsel, Division, SEC, dated January 7, 2000

(‘‘Amendment No. 2’’). 6See Letter from Brandon Becker, Wilmer, Cutler

& Pickering, to Nancy J. Sanow, Senior Special

Counsel, Division, SEC, dated February 9, 2000

(‘‘Amendment No. 3’’) In Amendment No. 3, the

Exchange responded to comments and questions

raised by the Division staff regarding the proposed

rule change and amended certain proposed Rules of

PCX Equities. In addition, the PCX submitted

amendments to the prposed PCX Equities

Certificate of Incorporation, the proposed PCX

Equities Bylaws, the proposed PCX Equities Rules

and the proposed PCX Rules. Finally, Amendment

No. 3 contained a draft of the proposed

shareholder’s agreement.

7See Securities Exchange Act Release No. 42419

(Feb. 11, 2000), 65 FR 9027.

8See Letter from Cherie Macauley, Wilmer, Cutler

& Pickering, to Nancy J. Sanow, Senior Special

Counsel, Division, SEC, dated March 10, 2000

(‘‘Amendment No. 4’’); Letter from Brandon Becker,

Wilmer, Cutler & Pickering, to Nancy J. Sanow,

Senior Special Counsel, Division, SEC, dated March

29, 2000 (‘‘Amendment No. 5’’); Letter from Cherie

Macauley, Wilmer, Cutler & Pickering, to Nancy J.

Sanow, Senior Special Counsel, Division, SEC,

dated April 18, 2000 (‘‘Amendment No. 6’’); and

Letter from Cherie Macauley, Wilmer, Cutler &

Pickering, to Nancy J. Sanow, Senior Special

Counsel, Division, SEC, dated April 28, 2000

(‘‘Amendment No. 7’’). In Amendment No. 4, the

Exchange amended the proposed PCX Constitution

and selected proposed PCX Equities Rules. In

Amendment No. 5, the Exchange amended selected

proposed PCX Equities Rules and responded to

comments raised by Division staff. In Amendment

No. 6, the Exchange amended selected proposed

PCX Equities Rules and proposed PCX Equities

Equity Floor Procedure Advices. In Amendment

No. 7, the Exchange amended selected proposed

PCX Equities and PCX Rules, and incorporated into

the proposed PCX rules the Plan of Delegation of

Functions by the PCX to PCX Equities.

9See infra note 30.

10The proposed rule change does not affect the

PCX’s options business, which will continue to

operate as a membership organization through the

PCX.

11For example, the management of PCX Equities

will make decisions regarding the listing and

delisting of equities listed on PCX Equities,

although such decisions may be appealed to the

PCX Equities Board Appeals Committee.

12 15 U.S.C. 78f.

On November 24, 1999 and January 10,

2000, respectively, the PCX filed

Amendment Nos. 1 4 and 2 5 to the

proposal. On February 10, 2000, the

PCX submitted Amendment No. 3 to the

proposed rule change. 6 On February 23,

2000, Amendment Nos. 1 and 2 were

published in the Federal Register.7 On

March 13, 2000, March 30, 2000, April

19, 2000, and May 1, 2000, the PCX

submitted Amendment Nos. 4, 5, 6, and

7 respectively to the proposed rule

change. 8 The Commission received 26

comments regarding the proposal; all of

the commenters supported the proposed

rule change.9

This order approves the proposed rule

change, as amended, In addition, the

Commission is approving on an

accelerated basis, and soliciting

comments on, Amendment No. 3, 4, 5,

6 and 7.

II. Description of the Proposal

The PCX proposes to create a

Delaware stock corporation, to be called

PCX Equities that will be a whollyowned subsidiary of the PCX. PCX will

transfer to PCX Equities all of the assets

and liabilities that solely support the

equities trading business and equities

clearing business of the PCX. Upon

restructuring, however, PCX will

continue to be the self-regulatory

organization (‘‘SRO’’) for PCX

Equities.10 The PCX proposes to

authorize PCX Equities to issue Equity

Trading Permits (‘‘ETPs’’) and Equity

Automated Systems Access Permits

(‘‘Equity ASAPs’’) that will entitle

holders of the permits (‘‘ETP Holders’’

and ‘‘Equity ASAP Holders’’) to trade

equity securities on the newly-created

PCX Equities. The proposal submitted

by the PCX to create PCX Equities

represent a significant departure from

the Exchange’s current structure.

According to the PCX, there are two

principal reasons why the Exchange

proposes to create the new PCX Equities

subsidiary and to institute a system of

trading permits. First, the PCX intends

to separate the Exchange’s equities

operation into a subsidiary of PCX that

will continue to share certain corporate

functions with the Exchange’s options

business. By restructuring the equities

business as a private stock corporation

with business control and management

by the directors, officers, and regulatory

staff of PCX Equities, the Exchange

believes that the new entity will have

greater flexibility to develop and

execute strategies designed to improve

its competitive position than it has

under the current membership

structure. Second, the PCX intends to

increase the revenue of its equities

business by conferring trading privileges

on the basis of trading permits (ETPs

and Equity ASAPs), rather than

requiring equities trading participants to

bear the costs of a seat ownership.

PCX Equities will be run by its

management with limited policy

direction by members. As a result,

certain committees that now administer

many of the PCX’s equity trading

programs no longer exist. As discussed

in more detail below, PCX Equities will

have only three member committees: the

Business Conduct Committee, the

Member Advisory Committee, and the

Nominating Committee. The

management of PCX Equities will make

all other business decisions regarding

the trading of equities on PCX

Equities.11

In other ways, the PCX Equities’

structure represents significant changes

to the way U.S. stock exchanges

currently operate. As discussed below,

PCX Equities will issue ETPs and Equity

ASAPs to persons or entities that wish

to engage in equity transactions on PCX

Equities. These trading permits merely

provide access to the PCX Equities’

trading facilities and do not confer

ownership rights on those persons or

entities who purchase them.

Accordingly, with certain exceptions

discussed below, PCX Equities members

will have limited voting rights and

limited input into the administration of

the affairs of PCX Equities.

The proposed rule change for

implementing the restructuring

includes: (i) The proposed Certificate of

Incorporation for PCX Equities; (ii) the

proposed Bylaws for PCX Equities; (iii)

the proposed Rules for PCX Equities;

(iv) changes to the PCX Constitution;

and (v) changes to the PCX Rules.

A. PCX Equities

1. Corporate Status

PCX Equities will be created operates

as a Delaware stock corporation. At this

time, all of the issued shares of stock of

PCX Equities will be owned by the PCX.

Current PCX members will retain their

memberships, and thus, their ownership

interests in the PCX.

2. Regulation of PCX Equities

PCX Equities will operate as a

subsidiary of PCX, which is a national

securities exchange registered under

Section 6 of the Act.12 The PCX, as the

SRO, retains ultimate responsibility for

compliance by its members with the

provisions of the Act and the rules and

regulations thereunder. For this reason,

ETP Holders and Equity ASAP Holders

will be considered statutory ‘‘members’’

of PCX.

As a registered national securities

exchange and the parent company of

PCX Equities, the PCX will continue to

carry out its statutory responsibilities to

enforce compliance by ETP Holders and

Equity ASAP Holders with the

provisions of the federal securities laws

and rules thereunder, as well as the

Rules of PCX Equities, and to govern the

administration of PCX Equities. In

particular, to be effective any changes to

the Rules and governing documents of

30656 Federal Register / Vol. 65, No. 93 / Friday, May 12, 2000 / Notices

13 15 U.S.C. 78s(b).

14 17 CFR 240.19b-4.

15See Attachment No. 4 to Amendment No. 1, for

the proposed Plan of Delegation of Functions by the

PCX to PCX Equities (‘‘Delegation Plan’’).

16An ETP may be issued to either and individual

or an entity, both of which must be registered

broker-dealers pursuant to Section 15 of the Act. If

an ETP is issued to an entity (‘‘ETP Firm’’), the firm

must nominate an individual, approved by PCX

Equities, to conduct business on PCX Equities’

facilities. Such individual is also referred to as an

ETP Holder. See proposed PCX Equities Rules 1.1(l)

and (m).

17An allied person is generally defined as a

control person that is actively involved in the

business of an ETP Firm or Equity ASAP Holder.

See proposed PCX Equities Rule 1.1(b).

18See Attachment No. 5 to Amendment No. 3, for

the proposed Shareholder’s Agreement, which

requires the PCX to elect the slate submitted by the

PCX Equities Nominating Committee.

PCX Equities must be approved by the

PCX. Moreover, filing of changes to PCX

Equities’ Bylaws and Rules with the

Commission pursuant to Section 19(b)

of the Act 13 and Rule 19b–4 14

thereunder must be submitted by the

PCX.

While ultimately responsible, the PCX

has proposed to delegate specific selfregulatory responsibilities to PCX

Equities, pursuant to a Delegation

Plan. 15 Specifically, PCX Equities will

assume responsibility with respect to

the equities business of the Exchange

for, among other things: (1) Extablishing

and interpreting rules governing the

activities of ETP Holders and Equity

ASAP Holders; (ii) determining

regulatory and trading policies relating

to the business activities of ETP Holders

and Equity ASAP Holders; (iii) assuring

compliance with PCX Equities Rules

and the federal securities laws; (iv)

administering surveillance programs

and systems and enforcing rules

governing the conduct and trading

activities of ETP Holders, ETP Firms,16

Equity ASAP Holders and their

associated persons on PCX Equities; (v)

examining and investigating ETP

Holders, ETP Firms, Equity ASAP

Holders and their associated persons to

determine if they have violated the

Rules of PCX Equities or the federal

securities laws; (iv) administering the

PCX Equities disciplinary program; (vii)

conducting arbitrations, medications

and other dispute resolution programs;

(viii) determining whether applicants

need the requirements for holding an

ETP or Equity ASAP; (ix) reviewing

qualifications of persons wishing to

register as associated persons of ETP

Holders, ETP Firms, or Equity ASAP

Holders; (x) placing restrictions on the

business activities of ETP Holders, ETP

Firms, Equity ASAP Holders and their

associated persons consistent with the

public interest, the protection of

investors and the federal securities laws;

(xi) establishing fees and changes; (xii)

overseeing the operation of the PCX

Equities trading facilities; (xiii)

maintaining a communications network

infrastructure for processing quotes,

orders, transaction reports and

transaction comparisons; (xiv) collecting

and consolidating information for the

surveillance audit trail; (xi) developing

and adoping rule changes for the

collection, processing and

dissemination of quote and transaction

information; (xvi) developing and

adopting rules, interpretations and

policies to maintain and enhance the

integrity, fairness, efficiency and

competitiveness of PCX Equities; (xvii)

administering the Exchange’s

involvement in the national market

system (‘‘NMS’’) plans; and (xviii)

developing, administering and enforcing

listing standards for securities traded on

PCX Equities.

While PCX Equities has extensive

delegated authority to administer and

manage the equities trading business,

the PCX retains the ultimate

responsibility for the Rules and

regulations of PCX Equities, as well as

for its operation and administration. As

part of its self-regulatory

responsibilities, the PCX will review

rulemaking and disciplinary decisions

of PCX Equities and direct PCX Equities

to take action that may be necessary to

effectuate the purposes and functions of

the Exchange Act. Thus, while PCX

Equities will be a separate entity, it will

still remain under the self-regulatory

authority of the PCX.

3. Governing Documents and Rules

PCX Equities’ Certificate of

Incorporation, Bylaws and Ruels will

govern its activities. Proposed PCX

Equities Rules 1, 2, and 3, which relate

to qualifications for ETPs and Equity

ASAPs and corporate governance

matters, and proposed PCX Equities

Rule 10, which relates to displinary

procedures, reflect significant

departures from existing PCX rules. The

remaining Rules, although modified to

reflect the issuance of ETPs and Equity

ASAPs and the revised management

structure, are similar to current PCX

Rules. The Rules and Bylaws will reflect

the status of PCX Equities as a whollyowned subsidiary of PCX, under

management of the PCX Equities Board

of Directors (‘‘PCX Equities Board’’) and

its designated officers, and ultimately

subject to the self-regulatory authority of

the PCX.

4. PCX Equities Board of Directors

The PCX Equities Board will consist

of no fewer than 10 or more than 12

directors. Currently, the Exchange

contemplates that there will be 10

directors. The composition of the PCX

Equities Board will be as follows:

• The Chief Executive Officer

(‘‘CEO’’) of PCX;

• The President of PCX Equities;

• Five public directors, at least three

of whom must also be members of the

Board of Governors of the PCX (‘‘PCX

Board’’);

• One allied person 17 from an ETP

Firm who is also a member of the PCX

Board, and

• Two nominees of ETP Holders and

Equity ASAP Holders (the ‘‘ETP/Equity

ASAP Holder Directors’’).

The CEO of PCX, as the Incorporator,

will appoint the initial PCX Equities

Board. Subsequently, the PCX Equities

Board will be nominated by the sitting

PCX Equities Board, subject to the

nominating procedures set forth below

for the selection of two ETP/Equity

ASAP Holder Directors. The PCX

Equities Board will be elected by PCX,

the sole shareholder. PCX will have the

right to approve, remove, and replace

any member of the PCX Equities Board

by virtue of its status as sole

shareholder, subject to the Bylaws. Any

vacancy on the PCX Equities Board will

be filled with a person who satisfies the

classification associated with the vacant

seat, i.e., a member of the public or an

ETP Holder or Equity ASAP Holder. To

the extent that the number of PCX

Equities Board seats is changed from the

initially contemplated 10 members, at

least 50 percent of the PCX Equities

Board must be public directors, and at

least 20 percent (but no fewer than two

directors) must be directors who are

ETP Holders or Equity ASAP Holders

and are nominated by the Nominating

Committee. The ETP/Equity ASAP

Holder Directors will be nominated by

the Nominating Committee or by

petition of at least 10 percent of all ETP

Holders and Equity ASAP Holders. If a

petition is submitted, and a vote is held,

the candidates selected by ETP Holders

and Equity ASAP Holders must be

supported by a plurality of all the ETP

Holders and Equity ASAP Holders in

the aggregate in order to be selected as

a nominee to the PCX Equities Board. If

no petition is filed, the nominees put

forward the Nominating Committee will

be deemed to be elected, and no

separate vote of ETP Holders and Equity

ASAP Holders will be held. Pursuant to

a stockholders voting agreement, the

PCX, as the sole stockholder, will agree

to elect the ETP/Equity ASAP Holder

Directors nominated by the PCX

Equities Nominating Committee.18

Federal Register / Vol. 65, No. 93 / Friday, May 12, 2000 / Notices 30657

19See id.

20See Amendment No. 6 supra note 8.

21However, the PCX Equities Board may appoint

other committees as it deems appropriate.

22See supra note 17.

23For example, if Equity ASAPs represent 34

percent of the total number of trading permits

issued by PCX Equities, then Equity ASAPs will be

entitled to two positions.

24Only those persons that hold either an ETP or

Equity ASAP will have voting privileges. Thus, ETP

Firms do not have a vote separate from their ETP.

An ETP Holder that is nominated by an ETP Firm

will cast its firm’s vote.

25See supra note 23. The proportional

composition of the Business Conduct Committee

will be determined in the same manner as the

Nominating Committee.

5. Representation on PCX Board of

Governors

The PCX Board is currently composed

of 22 governors. The composition of the

PCX Board will be modified as part of

the restructuring to include one

governor representing PCX Equities to

provide input on the PCX Board. This

governor (‘‘ETP/Equity ASAP Holder

Governor’’) will be nominated by the

PCX Equities Nominating Committee or

by a petition of at least 10 percent of all

ETP Holders and Equity ASAP Holders

and must be either an ETP Holder, an

Equity ASAP Holder or an allied person

of an ETP Firm or Equity ASAP Holder.

Pursuant to the agreement between PCX

Equities and the PCX, the PCX Board

will appoint the person who is so

nominated by ETP Holders and Equity

ASAP Holders to the PCX Board.19

6. Committees

As discussed above, the PCX has

proposed to eliminate its current

committee structure for its equities

business. The proposed Bylaws and

proposed Rules of PCX Equities

envision only three equity committees—

the Nominating Committee, the Member

Advisory Committee,20 and the

Business Conduct Committee.21 Except

for the Nominating Committee, the CEO

of PCX Equities will appoint the

members of the equity committees for

terms of one year. The CEO of PCX

Equities also will appoint the Chair and

Vice Chair of each equity committee.

ETP Holders, Equity ASAP Holders, and

public representatives may be appointed

to serve on the equity committees.

a. Nominating Committee. The

Nominating Committee will select two

nominees for the ETP/Equity ASAP

positions on the PCX Equities Board and

one nominee for ETP/Equity ASAP

position on the PCX Board. These

nominees may be ETP Holders, allied

persons 22 of ETP Firms, or Equity

ASAP Holders. The nominee for the

PCX Board may be the same person as

one of the nominees for the PCX

Equities Board. The Nominating

Committee will have seven members,

six of whom will represent ETP Holders

or Equity ASAP Holders. The

composition of the Nominating

Committee will represent

proportionally 23 all ETP Holders and

Equity ASAP Holders with each

member constituency having at least

one representative. The seventh member

will be a representative of the public.

The Incorporator will appoint the initial

Nominating Committee. Thereafter, the

sitting Nominating Committee will

nominate the six member

representatives, and the PCX Equities

CEO will appoint the public

representative. Additional candidates

for the Nominating Committee may be

put forward by a petition of at least 10

percent of all ETP Holders and Equity

ASAP Holders. If no petition is filed, the

slate proposed by the sitting Nominating

Committee will be deemed to be

approved by ETP Holders and Equity

ASAP Holders, and no separate vote of

ETP Holders and Equity ASAP Holders

will be held. If a petition is filed, the

members will vote on the candidates for

each position. A plurality will be

needed for selection.24

b. Business Conduct Committee. The

Business Conduct Committee will have

authority over the disciplinary process

of the PCX Equities. It will be

responsible for examining the business

conduct and financial condition of PCX

Equities members. Further, it will

conduct hearings and render decisions

in summary disciplinary proceedings.

The Business Conduct Committee will

be responsible for imposing sanctions

for violations within the disciplinary

jurisdiction of the PCX Equities. Finally,

the Business Conduct Committee will

require members to produce financial

and operational reports. The Business

Conduct Committee will have a

proportional 25 composition of ETP

Holders and Equity ASAP Holders, with

a minimum of one representative from

each member constituency.

c. Member Advisory Committee. The

Member Advisory Committee will be

responsible for advising the

management of PCX Equities regarding

disciplinary matters and off-board

trading rules. As an equity committee, it

will be subject to the provisions of

proposed Rule 3.2. Thus, the

Incorporator will appoint the initial

members and the CEO of PCX Equities

will appoint all subsequent members.

d. Board Appeals Committee. In

addition to the equity committee, PCX

Equities is proposed to have one Board

committee, the Board Appeals

Committee. The Board Appeals

Committee will be responsible for

hearing appeals of Business Conduct

Committee decisions, listing and

delisting decisions made by the PCX

Equities management, and sanctions

imposed on members by the PCX

Equities regulatory staff. The PCX

Equities Board will appoint directors to

serve on the Board Appeals Committee

and may create any other Board

committee it deems appropriate. Each

Board Appeals Committee will consist

of at least one public director and at

least one ETP/Equity ASAP Holder

Director.

7. Management

PCX equities will have a Chairman of

the Board and a President, either of

whom may be the CEO of PCX Equities.

In addition, PCX Equities will have a

Secretary and a Chief Regulatory Officer

who will be appointed by, and serve at

the pleasure of, the PCX Equities Board.

The officers of PCX Equities will

manage the business and affairs of PCX

Equities, subject to the oversight of the

PCX Equities Board, and, in some cases,

subject to the approval of PCX as the

sole stockholder and SRO.

8. Disciplinary Process

PCX Equities’ disciplinary process

will be similar to the existing PCX

disciplinary process. The PCX Equities

Chief Regulatory Officer, or his or her

staff, will authorize the initiation of

disciplinary actions and proceedings.

The Business Conduct Committee will

conduct hearings, render decisions, and

impose sanctions. Decisions of the

Business Conduct Committee may be

appealed for review to the Board

Appeals Committee. Decisions of the

Board Appeals Committee may be

appealed to the PCX Board. In addition,

the PCX Board may on its own initiative

order a review of any Board Appeals

Committee decision. The decision of the

PCX Board (or, if the PCX Board chooses

not to hear an appeal, the decision of

the Board Appeals Committee) shall be

considered the final action of the

Exchange. Thus, an aggrieved member

may seek review of the Exchange’s

decision by the Commission.

9. Equity Listings and Delistings

The management of PCX Equities will

list and delist securities in accordance

with rules and standards comparable to

those set forth in the PCX Rules and

currently used by the Equity Listing

Committee of the PCX. However, as

described above, PCX Equities will not

have the committee structure currently

used by the PCX for decision-making,

and, thus PCX Equities’ management

30658 Federal Register / Vol. 65, No. 93 / Friday, May 12, 2000 / Notices

26 Issuers will continue to have a right of appeal,

as set forth in proposed PCX Equities Rules 5.5(m).

27Pursuant to proposed PCX Equities Rule 2.16,

Equity ASAP Holders must execute 80 percent of

their total trades and volume on PCX Equities

through P/COAST, Optimark or other systems

approved by PCX Equities. The balance of their

total volume and trades on PCX Equities can be

entered by telephone to a floor broker located in a

firm booth on the trading floor.

28See supra note 24.

29As described further below, ETP Holders and

Equity ASAP Holders are considered members of

the PCX for statutory purposes. See infra Section IV.

will make all decisions regarding

listings and delistings.26

10. Financial Information

PCX will transfer all of the assets and

liabilities that solely support the

equities business or equities clearing

business to PCX Equities. Assets that

support both the options and equities

business will be retained as assets of

PCX. Costs related to these shared assets

will appear as inter-company charges to

PCX Equities and will be defined in an

agreement between PCX and PCX

Equities.

Revenue generated by the equities

activities, including ETP and Equity

ASAP fees, specialist fees, tape fees and

transaction fees, will accrue to PCX

Equities. Direct expenses related to the

equities activities, such as technology

and personnel, will be charged to PCX

Equities. Allocations of the cost of

certain technology, regulatory and

corporate functions will be charged to

PCX Equities pursuant to an agreement

between PCX Equities and PCX.

11. Agreement Between PCX and PCX

Equities

Currently, the PCX’s equities and

options operations share certain

infrastructure and personnel. After the

completion of the restructuring, these

shared assets will remain the property

of PCX and the shared personnel will

continue to be employed by PCX. In

each case, however, PCX Equities will

have access to those resources through

inter-company contracts with PCX. In

particular, PCX will contract to provide

PCX Equities with certain management

and support services and staff. The

contract will include services for

administration, membership,

technology, finance and accounting,

human resources and legal services. The

agreement between PCX and PCX

Equities will allocate charges for these

services and staff between PCX and PCX

Equities.

B. Equity Trading Permits and Equity

ASAPs

1. Classes of Trading Permits and

Privileges Conferred by ETPs and Equity

ASAPs.

PCX Equities will be authorized to

issue two types of equity trading

permits: ETPs and Equity ASAPs. ETPs

will authorize holders to trade equity

securities on any facility of PCX

Equities, including the trading floors, P/

COAST, or Optimark, as a specialist,

floor broker, or order flow firm. ETP

Holders may engage in the trading of

equities in the same manner as currently

practiced by PCX members who trade

on the equity floors. Equity ASAP

Holders, like current ASAP members,

will have electronic access to PCX

Equities via P/COAST, Optimark, and

any other system approved by the PCX

Equities Board, and will be entitled to

limited trading privileges on the

equities floor, in accordance with rules

comparable to those set forth in the PCX

Rules today.27

An ETP or Equity ASAP does not

grant its holder any right to trade

options on the PCX. Any ETP Firm, ETP

Holder or Equity ASAP Holder that

wishes to trade options must be

approved for and obtain a PCX

membership pursuant to the PCX’s

standard application procedures.

ETP Holders and Equity ASAP

Holders will have limited voting

rights 28 and may nominate, through the

Nominating Committee or by petition,

two members to the PCX Equities Board

and one member of the PCX Board.

Unlike current ASAP members, Equity

ASAP Holders will have these limited

voting rights. ETPs and Equity ASAPs

provide access to PCX Equities but do

not confer ownership rights. Thus,

neither ETP Holders nor Equity ASAP

Holders will have any distribution or

other ownership rights in PCX Equities

or PCX by virtue of their status as an

ETP Holder or Equity or ASAP Holder,

or as a member of PCX.29

2. Qualification for ETPs and Equity

ASAPs

There will be no limit on the number

of ETPs and Equity ASAPs issued by

PCX Equities. PCX Equities will

commence issuing ETPs and Equity

ASAPs once the subsidiary is created.

Current PCX members, PCX ASAP

members, and any other interested

persons or entities that are registered

broker-dealers, may be granted PCE

Equities trading permits through an

application process. ETP and Equity

ASAP qualifications will be

substantially the same as the existing

requirements for PCX membership and

PCX ASAP membership, respectively.

The application process for applicants

who are not current PCX members or

ASAP members will be the same as the

PCX’s current process. The decision to

grant or deny an application for trading

privileges will be made by officers of

PCX Equities. The decision to deny an

application may be reviewed by the

Board Appeals Committee in

accordance with the provisions of

proposed PCX Equities Rule 10.

Current PCX members and ASAP

members will be required to submit an

application and pay the applicable fee,

but less documentation will be required

and the application processing time will

be shorter.

3. ETP/Equity ASAP Rollout Process

The Exchange has proposed a ninemonth rollout period during which

equity specialists, floor brokers, their

firms, and PCX seat owners may decide

to convert to ETPs and current ASAP

members can decide to convert to

Equity ASAPs. The monthly fee be

charged for ETPs during the rollout

period will be closely correlated, but

discounted, to the current prevailing

monthly lease rate for PCX

memberships and will decrease

proportionately over that period until it

reaches $2,000 per month in the tenth

month following inception. Equity

ASAP Holders will be charged an

annual fee of $4,000.

During the rollout period, both PCX

members and ETP Holders will be

permitted to trade equities on the equity

trading floors of the PCX. Similarly,

both ASAP holders and Equity ASAP

Holders will be provided automated

system access as set forth in the

proposed PCX Equities Rules.

At the end of the rollout period, all

individuals executing equity trades

through PCX Equities must hold either

an ETP or an Equity ASAP. After the

rollout period, PCX memberships will

no longer confer rights to trade, to route

orders, or to be a clearing give-up

through the equity trading facilities of

PCX Equities.

4. Cost of ETPs and Equity ASAPs

The fees for an ETP will be assessed

on a monthly basis and the fee for an

Equity ASAP will be assessed on a

yearly basis. The fees will be set by PCX

Equities at a fixed level but will be

subject to change.

The management of PCX Equities will

recommend changes to the initial rates

and charges as deemed appropriate for

the development of new business or in

response to competitive changes. All

such rate changes shall be subject to the

approval of the PCX Board and filing

with the Commission.

Federal Register / Vol. 65, No. 93 / Friday, May 12, 2000 / Notices 30659

30See Letters from Arnold Staloff, President and

CEO, Bloom Staloff, to Jonathan G. Katz, Secretary,

SEC, dated December 17, 1999; Leopold Korins,

President and CEO, Securities Traders Association,

to Jonathan G. Katz, Secretary, SEC, dated

December 23, 1999; Douglas Rountree, Member,

PCX, to Jonathan G. Katz, Secretary, SEC, dated

December 21, 1999; Scott Elisha, Member, PCX, to

Jonathan G. Katz, Secretary, SEC, dated December

21, 1999; Robert Pagnini, Member, PCX, to Jonathan

G. Katz, Secretary, SEC, dated December 21, 1999;

Jeffrey C. Hauke, Member, PCX, to Jonathan G. Katz,

Secretary, SEC, dated December 21, 1999; Donald

M. Abramson, Member, PCX, to Jonathan G. Katz,

Secretary, SEC, dated December 21, 1999; Kenneth

Fong, Member, PCX, to Jonathan G. Katz, Secretary,

SEC, dated December 21, 1999; Ronald Chin,

Member, PCX, to Jonathan G. Katz, Secretary, SEC,

dated December 21, 1999; Ray Crown, Member,

PCX, to Jonathan G. Katz, Secretary, SEC, dated

December 21, 1999; Douglas J. Engmann, President

and CEO, ABN–AMRO, to Jonathan G. Katz,

Secretary, SEC, dated December 28, 1999; Robert G.

Kirby, Capital Guardian Trust Co., to Jonathan G.

Katz, Secretary, SEC, dated December 22, 1999;

Craig A. Resnick, to Jonathan G. Katz, Secretary,

SEC, dated December 30, 1999; Allan Leong,

Member, PCX, to Jonathan G. Katz, Secretary, SEC,

dated December 21, 1999; John W. Brown and L.

Matthew Adams, Managing Members, M.J.T.

Securities, LLC, to Jonathan G. Katz, Secretary, SEC,

dated December 27, 1999; Douglas Gooding,

Member, PCX, to Jonathan G. Katz, Secretary, SEC,

dated December 21, 1999; Edward Doherty,

Member, PCX, to Jonathan G. Katz, Secretary, SEC,

dated December 21, 1999; Larry Colvin, Member,

PCX, to Jonathan G. Katz, Secretary, SEC, dated

December 21, 1999; Richard and Vivian Chapnick,

Members, PCX, to Jonathan G. Katz, Secretary, SEC,

dated December 21, 1999; Mark Gattly, Member,

PCX, to Jonathan G. Katz, Secretary, SEC, dated

December 21, 1999; Dr. Martin Jansen, Member,

PCX, to Jonathan G. Katz, Secretary, SEC, dated

December 21, 1999; Sheldon Cohen, Member, PCX,

to Jonathan G. Katz, Secretary, SEC, dated

December 21, 1999; Edward Hager, Member, PCX,

to Jonathan G. Katz, Secretary, SEC, dated

December 21, 1999; Daniel A. Gooze, Member, PCX,

to Jonathan G. Katz, Secretary, SEC, dated

December 21, 1999; Joseph Breger, Member, PCX,

to Jonathan G. Katz, Secretary, SEC, dated

December 21, 1999; Carol O’Neill, to Jonathan G.

Katz, Secretary, SEC, dated December 21, 1999.

31 In approving this proposal, the Commission has

considered its impact on efficiency, competition,

and capital formation. 15 U.S.C. 78c(f).

32 15 U.S.C. 78f(b)(1)–(8).

33See Regulation of Exchanges and Alternative

Trading Systems, Securities Exchange Act Release

No. 40760 (December 8, 1998), 63 FR 70844

(December 22, 1998) (‘‘ATS Release’’).

34 In this order, the term ‘‘member’’ refers to an

ETP Holder, ETP Firm or an Equity ASAP Holder,

which are considered statutory members of the PCX

for purposes of the Act.

35 15 U.S.C. 78c(a)(3)(A).

5. Non-transferability of ETP and Equity

ASAPS

ETPs and Equity ASAPs will not be

transferable by sale or lease, but they

may be transferred between individuals

within the same firm in accordance with

the proposed Rules of PCX Equities.

C. PCX

1. Options Trading

Current PCX members who made only

equities or who trade equities and

options of the PCX must obtain either an

ETP or Equity ASAP by the end of the

rollout period as described above. For

those PCX members who currently trade

only options on the PCX, the proposed

restructing will not affected their access

to or activities on the PCX’s options

trading facilities. PCX memberships will

continue to be required to transact

options business on PCX. After the

rollout period, however, PCX

memberships will no longer confer

rights to trade on the equity floors or

electronically through the equity trading

facilities or to be a clearing give-up for

the equity trading facilities. After the

completion of the restructing, PCX

memberships may be purchased, sold,

or leased as they are today. The rights

of PCX members upon the liquidation of

PCX will remain unchanged.

2. National Market System Plans

The PCX currently is a participant in

various NMS plans, including the

Consolidated Tape Association (‘‘CTA’’)

Plan, the Consolidate Quotation System

(‘‘CQS’’) Plan, the Intermarket Trading

System (‘‘ITS’’) Plan and the Options

Price Reporting Authority (‘‘OPRA’’).

These plans are joint industry plans for

SROs that address last sale reporting,

quotation reporting, intermarket trading,

and options last sale and quote

reporting, respectively. Following the

creation of PCX Equities, PCX, in its

continuing role as the SRO, will

continue to serve as the voting member

of these NMS Plans. Nevertheless, PCX

expects that, for those plans that relate

to equity trading, i.e., the CTA Plan, the

CQS Plan and the ITS Plan, a PCX

Equities representative will serve as the

PCX’s representative in dealing with

these plans.

III. Summary of Comments

The Commission received 26

comment letters on the proposal. All 26

commenters supported the proposal to

create PCX Equities.30 Many

commenters believe that the proposed

structure will allow PCX to better

compete with alternative trading venues

and that the restructuring is critical to

restore the PCX’s equities trading

business to profitability.

IV. Discussion

After careful review, 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.31 In particular, the

Commission believes that the proposal

is consistent with the requirements of

Sections 6(b)(1), 6(b)(2), 6(b)(3), 6(b)(4),

6(b)(5), 6(b)(6), 6(b)(7), and 6(b)(8).32

This proposal represents a significant

departure from the traditional memberbased exchange structure. The PCX

proposes to institute a new framework

by creating a separate corporation, PCX

Equities, to house its equities trading

and related clearing functions. In

moving to a corporate structure for its

equities business, PCX will not confer

on its equity trading participants the

exact same rights and benefits that

otherwise accrue to existing Exchange

members. In lieu of memberships, PCX

Equities will issue trading permits, i.e.,

ETPs and Equity ASAPs, to those

persons and entities that wish to effect

transactions in equity securities on the

Exchange’s trading floors or facilities.

Instead of an ownership right in the

Exchange that may be bought, sold, or

leased, a trading permit will provide its

holder solely with the ability to trade

equity securities on PCX Equities or

through its facilities.

Traditionally, national securities

exchanges have been structured as

membership organizations. While this

type of organization has proved suitable

for the exchanges over the years, the

Commission clarified in the ATS

Release 33 that other structures could

also satisfy the requirements of the Act.

The Commission has considered the

issues raised under the Act by PCX

Equities’ proposed corporate structure

and its issuance of trading permits and

finds that the proposal is consistent

with the requirements of the Act.

As discussed further below, while

PCX is proposing to delegate some of its

responsibilities and functions to PCX

Equities, as the statutory SRO and

registered exchange PCX will remain

ultimately responsible for the activities

of PCX Equities and its ETP and Equity

ASAP Holders. Moreover, the structure

and rules of PCX Equities assure fair

representation of the ETP and Equity

ASAP Holders, consistent with the Act.

A. PCX Responsibilities and Delegation

of Self-Regulatory Authority

Although ETPs and Equity ASAPs are

not like the traditional memberships of

the Exchange, the holders of such

permits are considered members of the

PCX for purposes of the Act.34 In

proposed PCX Equities Rules 1.1(l) and

(j), ETP Holders and Equity ASAP

Holders have been specifically defined

as members of the PCX consistent with

Section 3(a)(3)(A) of the Act.35 Section

3(a)(3)(A) defines a member with

respect to a national securities exchange

as a natural person who is permitted to

effect transactions on the floor of an

exchange without the services of

another person acting as a broker, any

30660 Federal Register / Vol. 65, No. 93 / Friday, May 12, 2000 / Notices

36See supra note 15.

37The Commission notes that the PCX will be the

sole shareholder of the PCX Equities. If the PCX’s

interest in PCX Equities is diluted in the future by,

among other things, the sale of additional interests

to other persons or entities, PCX Equities may be

required to register as an exchange in its own right,

pursuant to Section 6 of the Act. The Commission

expects the PCX to notify the Commission before its

interest in PCX Equities is in any way diminished.

38See Amendment No. 7, supra note 8.

39 15 U.S.C. 78f(b)(1).

40The PCX Board must review and ratify all PCX

Equities proposed rule changes before they are

submitted to the SEC. See Delegation Plan, supra

note 15, and proposed PCX Equities Rule 3.4.

41 15 U.S.C. 78f(b)(3).

42 Id.

43 Id.

44Employees of PCX Equities and PCX are

classified as industry members.

45See proposed PCX Equities Bylaws, Article III,

Section 3.02(a).

46See proposed PCX Constitution, Article III,

Section 2(b).

registered broker or dealer with which

such natural person is associated, or any

other registered broker-dealer that

agrees to be regulated by the Exchange.

Thus, as members of the PCX, ETP

Holders and Equity ASAP Holders and

their related firms and associated

persons will be subject to the selfregulatory authority of the PCX.

As part of its restructuring proposal,

PCX has filed with the Commission a

Delegation Plan, pursuant to which the

PCX proposes to delegate to PCX

Equities certain self-regulatory functions

and responsibilities.36 PCX, however,

retains ultimate self-regulatory authority

over decisions made and policies

implemented by PCX Equities pursuant

to the Delegation Plan, and the PCX

remains the SRO responsible for the

statutory obligations under the Act.37

The Exchange proposes that the

Delegation Plan become part of the

Rules of the PCX and, thus, may only be

amended upon Commission approval.38

Upon approval of this proposal, PCX

Equities will have the delegated

authority to, among other things,

determine regulatory and trading

policies relating to the business conduct

and trading activities of ETP Holders,

Equity ASAP Holders, and associated

persons, develop and adopt necessary

and appropriate rule changes, monitor

the qualifications of ETP Holders, ETP

Firms and Equity ASAP Holders,

initiate disciplinary actions to assure

compliance with the Rules and

procedures of PCX Equities and the

federal securities laws, establish and

assess fees, and oversee the operation of

PCX Equities’ trading facilities.

The Commission finds that the PCX’s

plan of delegation is consistent with the

requirements of Section 6(b)(1) of the

Act, which requires that an exchange be

organized and have the capacity to carry

out the purposes of the Act.39 While the

PCX has delegated many of its

responsibilities to PCX Equities, it

retains ultimate responsibility for

ensuring that its equities business is

conducted in a manner consistent with

the requirements of the Act. Under the

Delegation Plan and the Rules of the

Exchange, PCX will continue to carry

out its statutory responsibilities to

enforce compliance by ETP Holders and

Equity ASAP Holders, as members of

the Exchange, with the Rules of PCX

Equities and the federal securities laws

and regulations, and will continue to

have ultimate responsibility for the

administration and enforcement of rules

governing the operation of the equities

trading business.

PCX also will continue to review and

submit to the Commission any proposed

changes to PCX Equities’ Rules.40 In

addition, PCX will retain the authority

to review disciplinary and other

regulatory decisions of PCX Equities.

These types of checks and balances

should ensure that the PCX remains

aware of the affairs of its equities

business conducted through PCX

Equities, and that its equities business is

conducted in a manner consistent with

the Act.

B. Corporate Structure and Governance

of PCX and PCX Equities

1. PCX Equities Board of Directors

As a separate corporate entity, PCX

Equities will have its own board of

directors and officers that will

administer its day-to-day operations.

The Commission believes that the PCX

Equities’ proposed corporate structure is

consistent with the Act.

Under Section 6(b)(3) of the Act,41 the

rules of an exchange must assure that its

members are fairly represented in the

selection of its directors and in the

administration of its affairs. Section

6(b)(3)’s fair representation requirement

allows statutory members to have a

voice in an exchange’s use of its selfregulatory authority. Moreover, this

statutory requirement helps to ensure

that members are protected from unfair,

unfettered actions by an exchange

pursuant to its rules, and that, in

general, an exchange is administered in

a way that is equitable to all those who

trade on its market or through its

facilities.

In traditional exchanges, the fair

representation requirement is easily

satisfied because most members, as

owners of the exchange, vote for the

governing board, which, in turn,

administers the activities of the

exchange. Thus, the majority of

members have a voice in all aspects of

exchange governance and decisionmaking, including disciplinary rules,

disciplinary appeals, and any exchange

rules governing trading off the

exchange.

In comparison, a demutualized

exchange that is organized as a

corporation (as in the case of PCX

Equities), by definition, is characterized

by the separation of the ownership

interest in the exchange from the right

to trade. Thus, such exchanges must

find alternative ways to ensure that

those persons or entities that trade on

the exchange without owning an

interest in the exchange have a voice in

the selection of directors and the

administration of the exchange.

Otherwise, the governing body

potentially could use its self-regulatory

authority to act solely in its own

commercial interest, to the detriment of

members.

In addition, to make sure that the

public interest is adequately represented

in an exchange’s decision-making

process, Section 6(b)(3) of the Act 42

states that an exchange’s rules must

provide that one or more of its directors

be representative of issuers and

investors, and not associated with a

member of the exchange, or with any

broker-dealer.

The Commission finds that the PCX

Equities’ Board, as proposed by PCX, is

structured in a manner that satisfies

both the fair representation and public

participation requirements of Section

6(b)(3) of the Act.43 As noted above, the

PCX proposes that the PCX Equities

Board shall consist of no fewer than 10

and no more than 12 directors. The

composition is currently contemplated

to be: (i) The CEO of PCX; (ii) the

President of PCX Equities; 44 (iii) five

public directors, at least three of whom

must also be members of the PCX Board;

(iv) one allied person from an ETP Firm

who is also a member of the PCX Board;

and (v) two ETP/Equity ASAP Holder

Directors.

Regardless of the size of the PCX

Equities Board, at least 20 percent of the

seats, but in no event fewer than two

seats, must be nominated and held by

PCX Equities members (i.e., ETP or

Equity ASAP Holders).45 PCX also

proposes to amend the composition of

its Board of Governors to include a

Governor position for an ETP Holder or

Equity ASAP Holder.46 PCX Equities

members therefore will have input in

Federal Register / Vol. 65, No. 93 / Friday, May 12, 2000 / Notices 30661

47PCX Equities members will also play a role in

the process to nominate a Governor for the PCX

Board. See Section IV.B.2.a, infra.

48See PCX Constitution Article II, Section 1(a).

49The Commission notes that the National

Association of Securities Dealers, Inc. (‘‘NASD’’)

and the Chicago Stock Exchange, Inc. (‘‘CHX’’)

currently classify their board members as either

industry/member, non-industry or public. The PCX

Equities’ definition of public is comparable to the

NASD and CHX definition of non-industry. In

contrast, the public member defined by the NASD

and CHX as a person who has no material business

relationship with a broker or dealer or the

Association or the exchange, as the case may be.

See NASD By-laws, Article I; CHX Constitution,

Sections 2 and 10.

50See ATS Release, supra note 33.

51 15 U.S.C. 78f(b)(5).

52See generally proposed PCX Equities Rule 3.

53 If PCX Equities decides to establish an

executive committee, the Commission believes that

its composition should reflect the composition of

the PCX Equities Board.

54But see note 56, infra.

55For example, if Equity ASAP Holders

constituted 10 percent of all trading permit holders

on the PCX Equities, they would be entitled to at

least one Equity ASAP representative on the

Nominating Committee. If, however, the number of

Equity ASAP Holders grew to 34 percent of all

trading permit holders, then the Nominating

Committee would have to include at least two

Equity ASAP Holder representatives.

56A single person may be nominated for one of

the ETP/Equity ASAP Holder Director positions and

the ETP/Equity ASAP Holder Governor position.

See proposed PCX Equities Rule 3.2(b)(2)(C)(1).

57 15 U.S.C. 78f(b)(3).

58 Id.

the administration of the affairs of PCX

Equities and the Exchange.47

In addition, the PCX Equities Board,

as proposed, contains 50 percent public

representation. The PCX has proposed

that a public director be defined as a

person not affiliated with a broker or

dealer. This definition is consistent with

the definition currently found in the

PCX Constitution.48 While the

Commission is satisfied that this

definition is consistent with the Act, it

encourages the PCX to consider

amending this definition in the future to

exclude those persons that may have a

material business relationship with the

Exchange or PCX Equities.49

The Commission has previously

stated its belief that the inclusion of

public, non-industry representatives on

exchange oversight bodies is critical to

make certain that an exchange actively

works to protect the public interest in

the exchange governance process.50

Further, public representatives help to

ensure that no single group of market

participants has the ability to

systemically disadvantage other market

participants through the exchange

governance process. The Commission

believes that public directors can

provide unique, unbiased perspectives,

which should enhance the ability of the

PCX Equities Board to address issues in

a non-discriminatory fashion and foster

the integrity of PCX Equities. In this

way, the public directors may help to

prevent unfair discrimination between

customers, issuers, brokers, or dealers in

the administration of PCX Equities, and

protect investors and the public interest,

consistent with the provisions Section

6(b)(5) of the Act.51

2. PCX Equities’ Committees 52

In an effort to streamline its

management, the PCX has proposed to

eliminate many of the committees

currently used in the administration of

the affairs of PCX’s equities activities.

PCX Equities will have four committees,

which will provide limited member

involvement in the administration of the

day-to-day operations of the

Exchange.53 Specifically, there will be a

Nominating Committee, a Business

Conduct Committee, and a Member

Advisory Committee. In addition, PCX

Equities will have one Board committee,

the Board Appeals Committee.

a. Nominating Committee. The

Nominating Committee of PCX Equities

will be responsible for the selection of

the ETP/Equity ASAP Holder Directors

and the ETP/Equity ASAP Holder

Governor. Under the PCX’s proposal,

the PCX Equities Nominating

Committee will nominate two

candidates for the PCX Equities Board

and one candidate for the PCX Board.54

These candidates will represent ETP

Holders and Equity ASAP Holders on

the respective Boards. The Nominating

Committee will consist of seven

members, six of whom will be ETP

Holders or Equity ASAP Holders or

allied persons of ETP Firms or Equity

ASAP Holders and one of whom will be

a member of the public. Each member

constituency (i.e., ETP Holders and

Equity ASAP Holders) must have

representation on the Nominating

Committee that is equal to or greater

than its percentage representation

among all trading permit holders, with

a minimum of one representative from

each member constituency.55

Each year, the Nominating Committee

will propose a slate of two eligible

candidates for the PCX Equities Board

and one eligible candidate for the PCX

Board.56 The slate put forth by the

Nominating Committee will

automatically be deemed to be selected

by the members of PCX Equities without

an actual vote. Members, however, will

be able to submit additional candidates

by way of petition. If 10 percent of all

PCX Equities members counted as a

single unit support an additional

candidate, such candidate will be added

to the slate and an actual member vote

will be held to select the two nominees

for the PCX Equities Board, or the one

nominee for the PCX Board, or the

nominees for both Boards, as the case

may be.

The Commission finds that the

composition of the Nominating

Committee is consistent with the

requirements of Section 6(b)(3) of the

Act.57 Because the Nominating

Committee is responsible for selecting

member representatives for the PCX

Equities Board and the PCX Board, its

composition should generally reflect the

composition of the members (i.e., the

users) of the exchange. The Commission

finds that the PCX Equities Nominating

Committee’s composition assures that

both ETP Holders and Equity ASAP

Holders will be represented in the

selection of their PCX Equities Board

and PCX Board representatives by

providing that each constituency is

proportionally represented, with a

minimum of one person from each

constituency.

Further, the Commission believes that

the selection process provides members

with an additional opportunity to select

their directors, consistent with the

requirements of Section 6(b)(3).58

Although the slate of the Nominating

Committee will be automatically

deemed selected without a member

vote, PCX Equities members are able to

actively participate in the nomination

process by way of petition. Thus, if a

group of members is dissatisfied with

the Nominating Committee’s proposed

slate, the PCX Equities members have

the ability to force a member vote by

petitioning to add a candidate. The

Commission believes that the petition

process is a fair and reasonable way for

members to be involved in the selection

of their representatives for the PCX

Equities Board and PCX Board.

b. Business Conduct Committee. The

Business Conduct Committee will have

the following functions and authority:

(i) To examine the business conduct and

financial condition of ETP Holders, ETP

Firms and Equity ASAP Holders and

their associated persons; (ii) to conduct

hearings and render decisions in

summary disciplinary actions and

proceedings; (iii) to impose appropriate

sanctions of expulsion, suspension, fine,

censure or any other fitting sanctions

where the Committee finds that a

violation within the disciplinary

jurisdiction of PCX has been committed;

and (iv) to require the production of

detailed financial reports of an ETP

Holder, ETP Firm, or Equity ASAP

Holder.

The Business Conduct Committee will

not have a fixed size. Rather, the PCX

30662 Federal Register / Vol. 65, No. 93 / Friday, May 12, 2000 / Notices

59See supra note 55 for an example of how the

proportional composition of the Nominating

Committee will be determined. The Business

Conduct Committee’s composition will be

determined using the same method.

60 15 U.S.C. 78f(b)(6).

61 15 U.S.C. 78f(b)(3).

62 15 U.S.C. 78f(b)(7).

63See Amendment No. 6, supra note 8, and

proposed PCX Equities Rule 3.3(a)(1)(A).

64 15 U.S.C. 78f(b)(3).

65 15 U.S.C. 78f(b0(7).

66At a minimum, the Commission believes that

any committee responsible for appeals of

disciplinary matters should have an equal number

of non-industry or public members as it has

industry members.

67 Id.

68See proposed PCX Equities Rule 10.8.

69 15 U.S.C. 78f(b)(7).

70As stated earlier, the PCX Equities’ Rules

remain the Rules of the PCX for purposes of the Act

and any proposed changes to those Rules must be

submitted by the PCX to the Commission for

approval, under Section 19(b) of the Act.

Equities’ management may determine

the size of the Committee, as it deems

appropriate. In addition to members of

the public, the Business Conduct

Committee will have proportional

representation of ETP Holders and

Equity ASAP Holders, with a minimum

of one ETP Holder or allied person of an

ETP Firm, and one Equity ASAP Holder

or allied person of an Equity ASAP

Holder, similar to that required for the

Nominating Committee.59 Therefore, all

constituencies of the PCX Equities are

guaranteed some input into the

decisions of the Business Conduct

Committee.

The Commission finds that the stated

functions of the Business Conduct

Committee, as set forth in the PCX

Equities Rules, are consistent with the

Act. The Rules relating to the Business

Conduct Committee are consistent with

Section 6(b)(6) 60 of the Act because they

provide the committee with the

authority to ensure that members are

appropriately disciplined for violations

of PCX Equities’ Rules, as well as for

violations of the rules and regulations of

the of the Act.

In the Commission’s view, the

proposed composition of the Business

Conduct Committee is consistent with

the requirements of Sections 6(b)(3) 61

and 6(b)(7) 62 of the Act because it

contains a member from each member

constituency and thus provides both

ETP Holders and Equity ASAP Holders

with a fair and representative voice in

the administration of PCX Equities’

affairs, in particular, disciplinary

proceedings. The Commission believes

that there should be a level of actual

member involvement in the disciplinary

process of a demutualized exchange,

similar to that practiced today on

traditional member-owned exchanges.

The Commission believes that exchange

members should be permitted to

participate in disciplinary proceedings

by serving as members of the hearing

panels that oversee the disciplinary

process, and should also be included in

the panels or committees that hear

appeals in order to promote procedural

fairness. The Commission finds that the

proposed Business Conduct Committee

adequately meets these goals.

c. Member Advisory Committee. The

PCX has proposed to establish a

Member Advisory Committee, which

will act in an advisory capacity

regarding rule changes that relate to

disciplinary matters and off-board

trading rules. The CEO of PCX Equities

will appoint the members of this

committee for one-year terms, and any

member in good standing may be

eligible to be appointed to the

Committee.

The Commission believes that the

Member Advisory Committee should

provide members with the ability to

provide input into the self-regulatory

process. Members, by virtue of their

positions, have first-hand knowledge

about the workings of the markets. The

Member Advisory Committee should

help prevent potentially inappropriate

or discriminatory disciplinary rules and

off-board trading rules from being

adopted by PCX Equities and help to

ensure that the rules of PCX Equities are

consistent with just and equitable

principles of trade.

d. Board Appeals Committee.

Decisions of PCX Equities made by the

Business Conduct Committee and the

staff of PCX Equities relating to, among

other things, disciplinary matters,

issuances of trading permits, and

listings and delistings, may be appealed

to the Board Appeals Committee. The

Board Appeals Committee, which will

be appointed by the PCX Equities Board,

will include at least one public director

of the PCX Equities Board and at least

one ETP/Equity ASAP Holder

Director.63

The Commission finds that the

proposed composition and authority of

the Board Appeals Committee are

consistent with Section 6(b)(3) 64 and

Section 6(b)(7) 65 of the Act,

respectively. 66 The Board Appeals

Committee will have of at least one

ETP/Equity ASAP Holder Director that

will represent the membership in

helping assure that decisions of the

Business Conduct Committee and the

staff are made in a fair and impartial

manner. In addition, the PCX’s proposal

is consistent with Section 6(b)(7)’s 67

requirement that an exchange establish

fair procedures for disciplining

members and persons associated with

members, denying memberships,

barring persons from seeking to become

members, and prohibiting or limiting

access to services. The Board Appeals

Committee, as proposed, has appellate

jurisdiction over various categories of

disciplinary proceedings and other

regulatory decisions, such as denials of

ETP and Equity ASAP applications,

issuances of floor citations and minor

rule plan sanctions, delisting decisions,

and sanctions for violations of PCX

Equities’ Bylaws, Rules, policies,

regulations and procedures promulgated

under the Act. Moreover, aggrieved PCX

Equities members may appeal the

decision of the Board Appeals

Committee to the PCX Board of

Governors and, ultimately, to the

Commission.68

In sum, the Commission finds that the

Board Appeals Committee’s structure

and jurisdiction appears to provide for

a fair procedure for disciplining

members and associated persons and

overseeing the denial of access to PCX

Equities or its services, in satisfaction of

the standards set forth in Section 6(b)(7)

of the Act.69

C. Proposed PCX Equities Rules

The majority of the rules proposed by

PCX to govern PCX Equities’ trading

operations are closely patterned on

PCX’s existing rules.70 The proposed

rules contain changes to reflect the new

structure whereby trading permits will

be issued to persons or entities

conducting business on PCX Equities.

With the exception of proposed PCX

Equities Rules 1, 2, 3, and 10, the

proposed PCX Equities Rules are

substantially similar and generally

consistent with the PCX Rules that were

previously filed with and approved by

the Commission. In some cases, existing

rules have been restated and clarified

and obsolete references have been

deleted to reflect the new equities

subsidiary.

1. Proposed PCX Equities Rule 1

Proposed PCX Equities Rule 1 defines

the terms and references (e.g., ETP

Holder) that are used throughout the

proposed rules to ensure uniformity and

to conform rule terminology to the

demutualized entity. The Commission

finds that proposed PCX Equities Rule

1 is consistent with Section 6(b)(5) of

the Act, which requires, among other

things, that the rules of an exchange be

designed to facilitate transactions in

securities and to remove impediments

to and perfect the mechanism of a free

and open market and a national market

system and not to permit unfair

Federal Register / Vol. 65, No. 93 / Friday, May 12, 2000 / Notices 30663

71 15 U.S.C. 78f(b)(5).

72See generally proposed PCX Equities Rule 2.

73 15 U.S.C. 78f(b)(2).

74 15 U.S.C. 78o.

75The Commission recently approved

substantially similar proposed changes to the PCX

disciplinary Rules. See Securities Exchange Act

Release No. 42750 (May 4, 2000) (File No. SR–PCX–

99–10).

76 15 U.S.C. 78f(b)(5)–(7).

77 15 U.S.C. 78f(b)(5).

78 15 U.S.C. 78f(b)(6).

79 15 U.S.C. 78f(b)(7). 80 Id.

discrimination between customers,

issuers, brokers or dealers.71 The

Commission believes that these

definitions are necessary and

appropriate additions to the existing

PCX Rules because they provide an

important overview of the restructured

PCX Equities entity and its members

(i.e., ETP Holders and Equity ASAPs

Holders).

2. Proposed PCX Equities Rule 2

Proposed PCX Equities Rule 2

describes the application process, the

qualification requirements and other

requirements for holding an ETP or

Equity ASAP. Although these

provisions are similar to the

requirements and procedures currently

found in PCX Rule 1 and the PCX

Constitution, the PCX made certain

substantive changes to the application

and qualification requirements to reflect

the characteristics of the new ETPs and

Equity ASAPs.

PCX Equities will issue these permits

to persons that satisfy the respective

qualification requirements.72 The

qualification requirements and the

application process have been modeled

after the current procedures and rules

employed by the PCX for PCX

memberships and PCX ASAPs. The PCX

has stated that it will not limit the

number of permits that it will issue.

Current PCX members will need to

submit an application and pay a fee to

receive a trading permit, but because

they have already satisfied the

requirements for PCX membership, the

process will be less time intensive. For

new applicants, the process will be

substantially similar to the current PCX

process except that the approval and

disapproval decisions will be made by

the management of PCX Equities instead

of a membership committee. The

Commission finds that the PCX has

satisfied the requirements of Section

6(b)(2) of the Act 73 because it has

proposed rules that will enable any

broker-dealer registered under Section

15 of the Act 74 that satisfies the

qualification requirements to become a

member of the Exchange.

3. Proposed PCX Equities Rule 3

Proposed PCX Equities Rules 3.1

through 3.3 discuss in detail the

proposed committee structure. These

proposed rules cover the functions and

compositions of the Business Conduct

Committee, Nominating Committee,

Member Advisory Committee, and the

Board Appeals Committee. For the

reasons discussed in Section IV.B.,

above, the Commission finds that these

Rules are consistent with the Act.

Proposed PCX Equities Rules 3.4

through 3.6 discuss the proposed

delegation of authority from the PCX to

PCX Equities. For the reasons discussed

in Section IV.A., above, the Commission

finds that the proposed delegation of

self-regulatory authority from the PCX

to PCX Equities is appropriate and

consistent with the Act.

4. Proposed PCX Equities Rule 10

Proposed PCX Equities Rule 10 sets

forth the disciplinary process for PCX

Equities.75 While proposed PCX

Equities Rule 10 is substantially similar

to the current PCX disciplinary

procedures, the PCX has submitted

some substantive changes relating to the

independence of the PCX Equities

regulatory staff and ex parte

communications. The Commission finds

that the disciplinary provisions

contained in proposed PCX Equities

Rule 10 are consistent with Sections

6(b)(5), 6(b)(6) and 6(b)(7) of the Act.76

Section 6(b)(5) generally requires that

the rules of an exchange be designed to

prevent fraudulent and manipulative

acts and practices and to protect

investors and the public interest.77

Section 6(b)(6) requires, among other

things, that the rules of an exchange

provide that its members shall be

appropriately disciplined for violations

of the Act, the rules and regulations

thereunder, or the rules of an

exchange.78 Section 6(b)(7) requires that

the rules of an exchange, among other

things, should provide a fair procedure

for disciplining members.79

Pursuant to proposed PCX Equities

Rule 10.2, although any person,

including PCX Equities Board members

and PCX Equities committee members,

will be permitted to bring potential

violations to the attention of the PCX

Equities’ regulatory staff, the regulatory

staff will have the exclusive authority to

determine whether to investigate

potential violations within the

disciplinary jurisdiction of the PCX

Equities. The Commission believes that

this provision should prevent

commercial interests of members from

improperly influencing the disciplinary

process, consistent with the

requirements of Section 6(b)(7).80 This

aspect of the proposed Rule should help

to ensure that the disciplinary process

operates in a fair manner without

potential improper, unrelated business

influences.

The Commission believes that the

Exchange has struck an appropriate

balance by permitting PCX Equities’

directors and committee members to

submit complaints alleging possible

violations of PCX Equities Rules and

violations of the Act to the regulatory

staff of PCX Equities for investigation,

but then prohibiting them from further

participation in the investigation or

proceedings. In this way, the directors

and committee members continue have

the ability to bring potential violations

to the attention of the regulatory staff,

but are not given undue control and

influence over the proceedings.

The Commission further finds that the

explicit prohibition in the proposed

Rule against interference by the PCX

Equities Board and other non-regulatory

staff persons with any pending

investigation or disciplinary proceeding

is appropriate. The proposed Rule

ensures that persons responsible for

investigations and disciplinary

proceedings should enjoy autonomy and

independence.

Proposed PCX Equities Rule 10.4

provides that only the regulatory staff of

PCX Equities has the authority to

determine whether there is probable

cause to issue a formal complaint, i.e.,

probable cause for finding that a

violation within the disciplinary

jurisdiction of PCX Equities has

occurred and that further proceedings

are warranted. The Commission believes

that giving the regulatory staff

independence will allow for a vigorous

and evenhanded enforcement program.

Proposed PCX Equities Rule 10.3

defines and prohibits ex parte

communications between various

participants in the disciplinary process

and members of the PCX Equities Board

and PCX Board. In the Commission’s

view, it is appropriate to prohibit ex

parte communications between the

persons, committees and panels

responsible for overseeing the

disciplinary process, and the parties or

their representatives during disciplinary

proceedings. The Commission believes

that the boundaries set out in the

proposed rule defining the prohibited

communications should help ensure

that no party can unfairly advance his

or her position in an investigation or

disciplinary proceedings through

discussion or other communication

outside of the proceeding’s forum.

30664 Federal Register / Vol. 65, No. 93 / Friday, May 12, 2000 / Notices

81 15 U.S.C. 78f(b)(6).

82 15 U.S.C. 78f(b)(7).

83 15 U.S.C. 78f(b)(4).

84 Id.

85As noted earlier, the Commission believes that

any modification to the equity ownership of PCX

Equities may raise regulatory issues, and thus

expects the PCX to notify the Commission in such

an event.

86 15 U.S.C. 78s(b)(2).

87See PCX Constitution Article III, Section 2(b);

see also Securities Exchange Act Release No. 42235

(December 14, 1999), 64 FR 71839 (December 22,

1999).

Therefore, the Commission finds that

the proposed Rule regarding ex parte

communications is consistent with the

requirements of Sections 6(b)(7) by

establishing procedures that provide a

fair disciplinary forum.

The Commission finds therefore that

proposed PCX Equities Rule 10 provides

that ETP Holders, ETP Firms, Equity

ASAP Holders and associated persons

are to be appropriately disciplined, and

provides a fair procedure for them for

violations of the Act, the rules or

regulations thereunder, or the rules of

the exchange in accordance with

Sections 6(b)(6) 81 and 6(b)(7).82

D. Costs of ETPs and Equity ASAPs

In connection with the new trading

permits, the PCX has proposed a new

fee structure for its members. ETP

Holders will pay a fixed monthly

amount to PCX Equities, while Equity

ASAP Holders will pay a fixed annual

amount. The PCX has proposed a

graduate fee schedule for ETP’s during

the first nine months after PCX Equities

has been established, which will be

correlated to the current prevailing

monthly lease rate for PCX

memberships.

The Commission finds that the

proposed trading permit fees to be

consistent with the requirements of

Section 6(b)(4) of the Act 83 that the

Exchange allocate its fees fairly among

its members. The Exchange has

proposed fees based on the type of

permit issued and, thus, the fees are

based on the type of access and services

provided to members. The Commission

finds that establishing the fees in this

manner to be consistent with Section

6(b)(4) of the Act.84

E. Amendment Nos. 3–7

For the reasons discussed below, the

Commission finds good cause for

approving Amendment Nos. 3 through 7

to the proposed rule change prior to the

thirtieth day after the date of

publication of notice thereof in the

Federal Register.

1. Amendment No. 3

Amendment No. 3 sets forth proposed

changes to the proposed PCX Equities

Certificate of Incorporation, proposed

PCX Equities Bylaws, proposed PCX

Equities Rules 1–7 and 10–12, as well as

the proposed PCX Equities Equity Floor

Procedure Advices. Amendment No. 3

also amends PCX Rules 2 and 3 to

reflect changes made to the

corresponding proposed PCX Equities

Rules. With the exception of a change to

the proposed disciplinary Rule

governing ex parte communications, the

proposed changes in Amendment No. 3

are technical, non-substantive

amendments that serve to clarify the

intent and application of the proposed

rule or correct language or typographical

errors.

Proposed PCX Equities Rule 10.3

prohibits certain ex parte

communications, and contains

procedures that require disclosure and a

hearing to show cause why the claim or

defense of a party that received, and

benefited from, a prohibited

communication should not be disposed

of by an adverse summary decision. In

Amendment No. 3, the Exchange added

a provision to this proposed Rule that

states that a member of the Business

Conduct Committee or Conduct Panel

must recuse himself or herself from

participation in such a hearing if the

member has a conflict of interest or bias,

or if circumstances otherwise exist

where his or her fairness might

reasonably be questioned.

The Commission finds that the

addition of this provision will increase

the level of fairness and impartiality in

disciplinary proceedings and will aid in

the dispassionate application of the

disciplinary rules. The Commission

believes that the PCX has proposed a

reasonable standard under which an

adjudicator or participant in the

disciplinary process must recuse

himself or herself or face

disqualification by the Chief Regulatory

Officer, or in the event that the Chief

Regulatory Officer has a conflict, by the

CEO.

In addition, in Amendment No. 3, the

Exchange submitted for the

Commission’s review a draft

Shareholder Agreement. Under the

terms of the Shareholder Agreement, the

PCX agrees to vote all outstanding

shares of the PCX Equities to elect to the

PCX Equities Board the two

representatives of ETP Holders and

Equity ASAP Holders nominated by the

Nominating Committee, pursuant to

proposed PCX Equities Rule 3.85

The Commission believes that

Amendment No. 3 does not significantly

alter the original proposal, which was

subject to a full notice and comment

period. Moreover, the Commission

believes that the changes made to the

proposed rules, as well as to the

Shareholder Agreement strengthen the

proposal and further ensure the

Exchange’s compliance with the Act

through its subsidiary, PCX Equities.

Therefore, the Commission finds that

granting accelerated approval to

Amendment No. 3 is appropriate and

consistent with Section 19(b)(2) of the

Act.86

2. Amendment No. 4

In Amendment No. 4, the PCX

proposes to change the number of floor

members required to be on the PCX

Board at all times from five to two, as

is currently required in the PCX

Constitution. This change is proposed to

make the proposed PCX Constitution

consistent with the current PCX

Constitution.87 Amendment No. 4 also

sets forth changes to proposed PCX

Equities Rule 4 and 10 to ensure that the

language of the proposed rules

appropriately reflects the new structure

of PCX Equities by changing references

to ‘‘members’’ and the ‘‘Exchange’’ to

‘‘ETO Holders,’’ ‘‘ETP Firms,’’ ‘‘Equity

ASAP Holders,’’ and the ‘‘Corporation.’’

The changes in proposed Amendment

No. 4 merely reflect the proposed PCX

Equities structure and make the filing

consistent with current PCX Rules.

Further, the Commission finds that

Amendment No. 4 does not significantly

alter the original proposal, which was

subject to a full notice and comment

period. Therefore, the Commission finds

that granting accelerated approval to

Amendment No. 4 is appropriate and

consistent with Section 19(b)(2) of the

Act.

3. Amendment No. 5

In Amendment No. 5, the PCX sets

forth changes to proposed PCX Equities

Rules 6 and 7. Specifically, Amendment

No. 5 makes several technical, nonsubstantive changes to the proposal,

such as identifying appropriate crossreferences, accurately and fully

transferring the PCX rules into the PCX

Equities Rules, and correctly applying

the proposed Rules to ETP Holders, ETP

Firms and Equity ASAP Holders.

The Commission believes that

Amendment No. 5 does not significantly

alter the original proposal, which was

subject to a full notice and comment

period. Therefore, the Commission finds

that granting accelerated approval to

Amendment No. 5 is appropriate and

consistent with Section 19(b)(2) of the

Act.

Federal Register / Vol. 65, No. 93 / Friday, May 12, 2000 / Notices 30665

88See supra note 55.

89 Id.

90See proposed PCX Equities Rule 3.2(b)(2)(B)(i).

91See proposed PCX Equities Rule 3.2(b)(2)(C)(i).

92 15 U.S.C. 78f(b)(3). 92 15 U.S.C. 78f(b)(3).

4. Amendment No. 6

Amendment No. 6 sets forth proposed

changes to the proposed PCX Equities

Rules 3, 8, 9, 10, 12, and 13, as well as

the proposed PCX Equities Equity Floor

Procedure Advices. The Amendment

makes changes to the process by which

PCX Equities members may submit

petitions to nominate candidates for

positions on the Nominating Committee,

the PCX Equities Board, and the PCX

Board. The composition requirements of

the Nominating Committee, the

Business Conduct Committee and the

Board Appeal Committee were also

further defined. Also, the Exchange

created the Member Advisory

Committee.

In addition, the Amendment

contained minor revisions to ex parte

communication Rules. Finally, the

Exchange submitted technical, nonsubstantive amendments to the

proposed rule language that serve to

clarify the intent of the proposed Rules

or correct textual or typographical

errors.

Proposed PCX Equities Rule

3.2(b)(1)(A) describes and sets forth the

composition requirements of the

Business Conduct Committee. In

Amendment No. 6, the Exchange

revised this proposed Rule to state that

the Business Conduct Committee shall

have proportional representation of all

ETP Holders and Equity ASAP Holders,

with a minimum of one ETP Holder or

allied person of an ETP Firm and one

Equity ASAP Holder or an allied person

of an Equity ASAP Holder.88 Similarly,

in Amendment No. 6, the Exchange

revised proposed PCX Equities Rule 3.2

(b)(2)(A), which sets forth the

composition of the Nominating

Committee, to provide that the six ETP

Equity ASAP Holder representatives on

the Nominating Committee shall

represent proportionally all ETP

Holders, ETP Firms, and Equity ASAP

Holders, with a minimum of one ETP

Holder or allied person of an ETP Firm

and one Equity ASAP Holder or allied

person of an Equity ASAP Holder.89

Proposed PCX Equities Rules

3.2(b)(2)(B)(i) and 3.2(b)(2)(C)(i)

describe the process by which members

are appointed to the Nominating

Committee and, in turn, the process by

which the Nominating Committee

facilitates selection of the ETP Holders

or Equity ASAP Holders for the PCX

Equities Board and the PCX Board.

These proposed Rules include a

provision whereby ETP Holders and

Equity ASAP Holders in good standing

may submit a written petition to the

Nominating Committee to nominate

additional eligible candidates to fill ETP

Holder and Equity ASAP Holder

positions on the Nominating

Committee 90 and on the PCX Board and

PCX Equities Board 91 during the next

term. In Amendment No. 6, the PCX

reduced the aggregate percentage of ETP

Holders and Equity ASAP Holders

necessary to successfully petition to

nominate such candidates from 20

percent to 10 percent.

In addition, in Amendment No. 6, the

PCX proposed new PCX Equities Rule

3.2(b)(2)(C)(3), which establishes a

Member Advisory Committee that shall

act in an advisory capacity regarding

proposed rule changes relating to

disciplinary matters and off-board

trading rules.

Proposed PCX Equities Rule 3.3(a)

governs the composition of the Board

Appeals Committee. In Amendment No.

6, the PCX revised this Rule to require

that each Board Appeals Committee will

contain at least one public director and

at least one ETP/Equity ASAP Holder

Director.

The Commission finds that the above

revisions to the composition

requirements for the PCX Board, PCX

Equities Board and PCX Equities’

committees represent reasonable

standards intended to satisfy the fair

representation and public participation

standards required by Section 6(b)(3).92

In addition, PCX’s proposed reduction

of the percentage of ETP Holders and

Equity ASAPs Holders necessary to

successfully petition the Nominating

Committee for the addition of

alternative candidates is a reasonable

proposal designed to ensure fair

representation of the PCX membership

on the Nominating Committee and PCX

Board and PCX Equities Board.

Finally, in Amendment No. 6, the

PCX made revisions to several of PCX

Equities’ disciplinary rules relating to ex

parte communications. In proposed PCX

Equities Rule 10.3(a)(1)–(3), the PCX

inserted language to prohibit any

interested PCX Equities staff with

knowledge of a pending investigation or

disciplinary proceeding from making, or

knowingly causing to be made, an ex

parte communication. The PCX also

amended proposed PCX Equities Rule

10.3(c) to allow for a disciplinary

committee to issue to interested PCX

Equities staff responsible for an ex parte

communication, or who benefited from

such a communication, an order to

show cause why the claim, defense, or

interest should not be adversely affected

by reason of such ex parte

communication.

The Commission finds that the

addition of this provision will increase

the level of fairness and impartiality in

disciplinary proceedings and will aid in

the even-handed application of the

disciplinary rules. The Commission

believes that the PCX has proposed

reasonable standards intended to

prevent ex parte communications

involving PCX Equities staff, which

satisfies the requirements of Section

6(b)(7) of the Act.93

Overall, the Commission finds that

the PCX’s proposed changes in

Amendment No. 6 strengthen and

clarify the proposed rule change.

Therefore, the Commission finds that

granting accelerated approval to

Amendment No. 6 is appropriate and

consistent with Section 19(b)(2) of the

Act.

5. Amendment No. 7

In Amendment No. 7, the Exchange

deleted PCX Rule 3 regarding listings

and delistings because these provisions

will now be part of the PCX Equities

Rules. In addition, the PCX proposed to

add the Delegation Plan to its Rules as

proposed PCX Rule 14. In the

Amendment, the Exchange also clarified

that summary suspensions, permitted

pursuant to PCX Equities Rule 11.2(a),

will only be enforced for violations of

the Rules of PCX Equities. Finally, the

Exchange proposed non-substantive,

technical amendments to the language

of the proposed PCX Equities Rules.

The Commission finds that proposed

changes in Amendment No. 7 further

strengthen and clarify the proposed rule

change. The Commission believes that

Amendment No. 7 does not significantly

alter the original proposal, which was

subject to a full notice and comment

period. Therefore, the Commission finds

that granting accelerated approval to

Amendment No. 7 is appropriate and

consistent with Section 19(b)(2) of the

Act.

F. Summary of Commission’s Findings

In sum, as discussed above, the

Commission believes the proposal to

create PCX Equities is consistent with

the requirements of the Act and the

rules and regulations thereunder

applicable to a national securities

exchange. Specifically, the Commission

finds that the proposal is consistent

with the requirements of Sections

30666 Federal Register / Vol. 65, No. 93 / Friday, May 12, 2000 / Notices

94 15 U.S.C. 78f(b)(1) through (b)(8).

95 15 U.S.C. 78f(b)(1).

96 15 U.S.C. 78f(b)(8).

97The Commission notes that this Section 6(b)(8)

finding does not extend to all of the Rules proposed

to be PCX Equities Rules. As described above, the

majority of the Rules intended to become the Rules

of PCX Equities were incorporated from the PCX

Rules in their entirety without substantive change

and were previously subject to Commission review.

Thus, the current finding is limited only to those

PCX Equities Rules that have been specifically

amended to reflect the restructuring.

98 15 U.S.C. 78s(b)(2).

99 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2The PACE quote consists of the best bid/offer

among the American, Boston, Cincinnati, Chicago,

new York, Pacific and Philadelphia Stock

Exchanges. See Phlx Rule 229.

3See Phlx Rule 229, Commentary .07(c)(i).

6(b)(1), 6(b)(2), 6(b)(3), 6(b)(4), 6(b)(5),

6(b)(6), 6(b)(7), and 6(b)(8).94

In addition, the Commission finds

that the proposal is consistent with the

requirements of Section 6(b)(1) of the

Act.95 Section 6(b)(1) requires that an

exchange be so organized and have

capacity to carry out the purposes of the

Act. According to the PCX, all revenue

generated by the equities business,

including ETP and Equity ASAP fees,

specialist fees, tape fees, and transaction

fees will accrue to PCX Equities.

Further, the PCX has committed to

provide PCX Equities with the resources

necessary for it to carry out its delegated

responsibilities. The Commission

expects that the PCX, as the registered

exchange ultimately responsible for

compliance with the provisions of the

Act, will continue to properly fund its

subsidiary for such purposes. In

addition, the PCX has committed to

provide certain services and facilities to

help support PCX Equities’ trading

operations. These services and facilities

and their costs will be specifically

defined in an agreement between PCX

and PCX Equities. The Commission

finds that these provisions should

enable PCX Equities to fulfill the

requirements imposed by the Act,

consistent with the PCX’s self-regulatory

requirements.

Finally, the Commission finds that the

proposal is consistent with Section

6(b)(8) of the Act,96 which requires that

the rules of an exchange not impose any

burden on competition not necessary or

appropriate in furtherance with the Act.

The Commission does not believe that

the proposed structure will impose any

inappropriate burdens on

competition.97

V. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning Amendment Nos.

3–7, including whether the proposed

amendments are consistent with the

Act. Persons making written

submissions should file six copies

thereof with the Secretary, Securities

and Exchange Commission, 450 Fifth

Street, NW, Washington, DC 20549–

0609. Copies of the submission, all

subsequent amendments, all written

statements with respect to the proposed

amendment that are filed with the

Commission, and all written

communications relating to the

amendment 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 such filing also will be

available for inspection and copying at

the principal office of the PCX. All

submissions should refer to File No.

SR–PCX–99–39 and should be

submitted by June 2, 2000.

VI. Conclusion

For the reasons discussed above, the

Commission finds that the proposal is

consistent with the Act and the rules

and regulations thereunder applicable to

a national securities exchange.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act, 98 that the

proposed rule change (SR–PCX–99–39),

as amended, be and hereby is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.99

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–11920 Filed 5–11–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42762; File No. SR–PHLX–

00–37]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

Philadelphia Stock Exchange, Inc.

Relating to Starting the Automatic

Price Improvement Feature and the

Mandatory Manual Double-up Doubledown Price Protection Feature at (9:30

A.M.)

May 5, 2000.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

April 20, 2000, the Philadelphia Stock

Exchange, Inc. (‘‘Phlx’’ or ‘‘Exchange’’)

filed with the Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’)

the proposed rule change as described

in Items I, II, and III below, which Items

have been prepared by the Exchange.

The Commission is publishing this

notice to solicit comments on the

proposed rule change from interested

persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Phlx proposes to begin the

Automatic Price Improvement feature

(‘‘API’’) of the Philadelphia Stock

Exchange, Inc. Automatic

Communication and Execution

(‘‘PACE’’) System at 9:30 A.M. instead

of 9:45 A.M. In addition, the Exchange

also proposes to begin the Mandatory

Manual Double-up Double-down price

protection at 9:30 A.M. instead of 9:45

A.M. The Text of the proposed rule

change is available at the Office of the

Secretary, the Phlx and at the

Commission.

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

Exchange included statements

concerning 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

Exchange 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

PACE is the Exchange’s automated

order routing and execution system on

the equity trading floor. The PACE

System accepts orders for automatic or

manual execution in accordance with

the provisions of Phlx Rule 229, which

governs the PACE System and defines

its parameters. The API feature of the

PACE System allows the specialist to

voluntarily provide automatic price

improvement to market and marketable

limit orders to all customers in a

security for orders which are 599 shares

or less, and when the PACE quote 2 is 3⁄16 or 1⁄8 for greater.3

The specialist must provide

Mandatory Manual Double-up Doubledown price protection where the

specialist does not agree to use the API