[Federal Register Volume 65, Number 93 (Friday, May 12, 2000)]
[Notices]
[Pages 30654-30666]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-11920]


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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\

[[Page 30655]]

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\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 42178 (Nov. 24, 
1999), 64 FR 68136.
    \4\ See 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.
    \5\ See Letter from Brandon Becker, Wilmer, Cutler & Pickering, 
to Nancy J. Sanow, Senior Special Counsel, Division, SEC, dated 
January 7, 2000 (``Amendment No. 2'').
    \6\ See 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.
    \7\ See Securities Exchange Act Release No. 42419 (Feb. 11, 
2000), 65 FR 9027.
    \8\ See 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.
    \9\ See infra note 30.
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    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 wholly-owned 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.
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    \10\ The proposed rule change does not affect the PCX's options 
business, which will continue to operate as a membership 
organization through the PCX.
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    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\
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    \11\ For 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.
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    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.
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    \12\ 15 U.S.C. 78f.
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    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

[[Page 30656]]

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.
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    \13\ 15 U.S.C. 78s(b).
    \14\ 17 CFR 240.19b-4.
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    While ultimately responsible, the PCX has proposed to delegate 
specific self-regulatory 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 wholly-owned 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.
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    \15\ See Attachment No. 4 to Amendment No. 1, for the proposed 
Plan of Delegation of Functions by the PCX to PCX Equities 
(``Delegation Plan'').
    \16\ An 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).
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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:
    <bullet> The Chief Executive Officer (``CEO'') of PCX;
    <bullet> The President of PCX Equities;
    <bullet> Five public directors, at least three of whom must also be 
members of the Board of Governors of the PCX (``PCX Board'');
    <bullet> One allied person \17\ from an ETP Firm who is also a 
member of the PCX Board, and
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    \17\ An 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).
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    <bullet> 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\
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    \18\ See 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.

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[[Page 30657]]

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\
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    \19\ See id.
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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.
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    \20\ See Amendment No. 6 supra note 8.
    \21\ However, the PCX Equities Board may appoint other 
committees as it deems appropriate.
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    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\
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    \22\ See supra note 17.
    \23\ For 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.
    \24\ Only 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.
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    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.
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    \25\ See supra note 23. The proportional composition of the 
Business Conduct Committee will be determined in the same manner as 
the Nominating Committee.
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    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

[[Page 30658]]

will make all decisions regarding listings and delistings.\26\
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    \26\ Issuers will continue to have a right of appeal, as set 
forth in proposed PCX Equities Rules 5.5(m).
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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\
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    \27\ Pursuant 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.
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    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\
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    \28\ See supra note 24.
    \29\ As described further below, ETP Holders and Equity ASAP 
Holders are considered members of the PCX for statutory purposes. 
See infra Section IV.
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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 nine-month 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.

[[Page 30659]]

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.
---------------------------------------------------------------------------

    \30\ See 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.
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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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    This proposal represents a significant departure from the 
traditional member-based 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.
---------------------------------------------------------------------------

    \33\ See Regulation of Exchanges and Alternative Trading 
Systems, Securities Exchange Act Release No. 40760 (December 8, 
1998), 63 FR 70844 (December 22, 1998) (``ATS Release'').
---------------------------------------------------------------------------

    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

[[Page 30660]]

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 self-regulatory authority of the PCX.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \36\ See supra note 15.
    \37\ The 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.
    \38\ See Amendment No. 7, supra note 8.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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

    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.
---------------------------------------------------------------------------

    \40\ The 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.
---------------------------------------------------------------------------

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 self-regulatory 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.
---------------------------------------------------------------------------

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

    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 decision-making, 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.
---------------------------------------------------------------------------

    \42\ Id.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \43\ Id.
    \44\ Employees of PCX Equities and PCX are classified as 
industry members.
---------------------------------------------------------------------------

    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

[[Page 30661]]

the administration of the affairs of PCX Equities and the Exchange.\47\
---------------------------------------------------------------------------

    \45\ See proposed PCX Equities Bylaws, Article III, Section 
3.02(a).
    \46\ See proposed PCX Constitution, Article III, Section 2(b).
    \47\ PCX 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \48\ See PCX Constitution Article II, Section 1(a).
    \49\ The 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \50\ See ATS Release, supra note 33.
    \51\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

2. PCX Equities' Committees \52\
---------------------------------------------------------------------------

    \52\ See generally proposed PCX Equities Rule 3.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \54\ But see note 56, infra.
    \55\ For 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \56\ A 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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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

    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.
---------------------------------------------------------------------------

    \58\ Id.
---------------------------------------------------------------------------

    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

[[Page 30662]]

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.
---------------------------------------------------------------------------

    \59\ See 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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

    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.
---------------------------------------------------------------------------

    \61\ 15 U.S.C. 78f(b)(3).
    \62\ 15 U.S.C. 78f(b)(7).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \63\ See Amendment No. 6, supra note 8, and proposed PCX 
Equities Rule 3.3(a)(1)(A).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \64\ 15 U.S.C. 78f(b)(3).
    \65\ 15 U.S.C. 78f(b0(7).
    \66\ At 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.
    \68\ See proposed PCX Equities Rule 10.8.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

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

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.
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    \70\ As 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.
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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

[[Page 30663]]

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

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.
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    \72\ See generally proposed PCX Equities Rule 2.
    \73\ 15 U.S.C. 78f(b)(2).
    \74\ 15 U.S.C. 78o.
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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\
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    \75\ The 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).
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    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.
---------------------------------------------------------------------------

    \80\ Id.
---------------------------------------------------------------------------

    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.

[[Page 30664]]

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\
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    \81\ 15 U.S.C. 78f(b)(6).
    \82\ 15 U.S.C. 78f(b)(7).
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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\
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    \83\ 15 U.S.C. 78f(b)(4).
    \84\ Id.
---------------------------------------------------------------------------

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\
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    \85\ As 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

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

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.''
---------------------------------------------------------------------------

    \87\ See PCX Constitution Article III, Section 2(b); see also 
Securities Exchange Act Release No. 42235 (December 14, 1999), 64 FR 
71839 (December 22, 1999).
---------------------------------------------------------------------------

    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, non-substantive changes to the proposal, such as identifying 
appropriate cross-references, 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.

[[Page 30665]]

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, non-
substantive 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\
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    \88\ See supra note 55.
    \89\ Id.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \90\ See proposed PCX Equities Rule 3.2(b)(2)(B)(i).
    \91\ See proposed PCX Equities Rule 3.2(b)(2)(C)(i).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

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

    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

[[Page 30666]]

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

    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.
---------------------------------------------------------------------------

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

    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\
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    \96\ 15 U.S.C. 78f(b)(8).
    \97\ The 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.
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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.

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

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\99\
---------------------------------------------------------------------------

    \99\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-11920 Filed 5-11-00; 8:45 am]
BILLING CODE 8010-01-M