33606 Federal Register / Vol. 65, No. 101 / Wednesday, May 24, 2000 / Notices

6 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See Letter from Edith Hallahan, Deputy General

Counsel, Phlx, to Nancy Sanow, Assistant Director,

Division of Market Regulation, Commission, dated

May 15, 2000. Amendment No. 1 summarizes the

two comment letters the Exchange received in

response to this proposal and clarifies who is

eligible for this credit. Due to the substantive nature

of Amendment No. 1, this proposed rule change is

deemed filed and immediately effective as of today.

4Out-of-pocket expenses include charges for

wireless telephone services, postage, ILX machines

and Dow Jones News Service.

5Pass-through costs include charges for member

health insurance and parcel delivery services.

6Capital funding fees are fees assessed on owners

to provide funding for technological improvements

and other capital needs. The Commission approved

the capital funding fee for a pilot period extending

to July 6, 2000. See Securities Exchange Act Release

No. 42405 (February 8, 2000) 65 FR 8226 (February

17, 2000) (SR–Phlx–99–51); and Securities

Exchange Act Release No. 42714 (April 24, 2000),

65 FR 25782 (May 3, 2000) (SR–Phlx–00–29). The

proposal to adopt the capital funding fee on a

permanent basis is pending with the Commission.

See Securities Exchange Act Release No. 42318

(January 5, 2000), 65 FR 2216 (January 13, 2000)

(SR–Phlx–99–49).

7The credit-eligible fees are fees assessed on

members and include transaction as well as trading

floor fees. Transaction fees include equity

transaction value charges, equity floor brokerage

transaction fees, option comparison charges, and

option transaction charges. Trading floor fees

include charges for trading post/booth, controller

space, shelf space, transmission, execution/

communication charge, and floor facility fees. Fees

assessed on foreign currency options participants

are not considered credit-eligible fees.

8This proposed rule change is intended to

replace SR–Phlx–99–54, which was filed with the

Commission on December 22, 1999 and withdrawn

by letter dated May 13, 2000.

9Pursuant to Phlx Rule 940, the parties to an A–

B–C Agreement are an employee, general partner,

or officer, and the member organization with which

such person is associated. The member organization

provides all or part of the funds for the purchase

of a membership of which the legal title is placed

in the member and the equitable title is placed in

the member organization.

10 Immediate family member is defined as a

member’s spouse, parents, stepmother, stepfather,

mother-in-law, father-in-law, brothers, brothers-inlaws, stepbrothers, sisters, sisters-in-law,

stepsisters, children, stepchildren, and any other

person living with the member for whom the

member provides at least 50 percent of his/her

financial support per year.

Regulation believes that the proposed

rule change is in the public interest

because it will encourage the use of

mediation, especially for small claims.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

NASD Regulation does not believe

that the proposed rule change will result

in any burden on competition that is not

necessary or appropriate in furtherance

of the purposes of the Act, as amended.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

Written comments were neither

solicited nor received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

90 days of such date if it finds such

longer periods to be appropriate and

publishes its reasons for so finding or

(ii) as to which the self-regulatory

organization consents, the Commission

will:

A. by order approve such proposed

rule change, or

B. institute proceedings to determine

whether the proposed rule change

should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing,

including whether the proposed rule

change is 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 rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change 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 in

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the NASD. All

submissions should refer to file number

SR–NASD–00–11 and should be

submitted by June 14, 2000.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.6

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–13068 Filed 5–23–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42791; File No. SR–Phlx–

00–44]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

Philadelphia Stock Exchange, Inc.

Adopting a Pilot Program To Assess a

Monthly Credit of Up to $1,000 to

Qualified Members

May 16, 2000.

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

Securities Exchange Act of 1934

(‘‘Act’’),1 and Rule 19b–4 thereunder, 2

notice is hereby given that on May 15,

2000, the Philadelphia Stock Exchange,

Inc. (‘‘Phlx’’ or ‘‘Exchange’’) filed with

the Securities and Exchange

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

the proposed rule change as described

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

have been prepared by the Exchange.

Today the Phlx filed an amendment to

the proposed rule change (‘‘Amendment

No. 1’’).3 The Commission is publishing

this notice to solicit comments on the

proposed rule change from interested

persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Phlx proposes to amend its

schedule of fees, dues, and charges to

allow for a monthly credit of up to

$1,000 to be applied against all fees,

dues, charges, and other amounts as

may from time to time be owed to the

Exchange that month, except fines, late

fees, out-of-pocket expenses,4 passthrough costs,5 capital funding fees,6

and any fees paid by equity trading

permit holders in respect of any trading

permits the Exchange may issue

(‘‘credit-eligible fees’’) 7 by members

who own the membership by which

they are a member (‘‘member-owners’’)

and certain other categories of members

described below.8 This credit is

proposed as a six month pilot program.

In addition to member-owners, a

monthly credit of up to $1,000 may be

applied against credit-eligible fees

incurred by the following persons, who

are so closely connected to the owners

that the Exchange believes they should

be treated as member-owners: (1) All

members who are a party to an A–B–C

Agreement 9 with a member

organization who owns that

membership; or (2) all members who are

lessees if: (a) the member is also an

owner of a different membership; (b) the

member is an immediate family member

of the owner of that membership; 10 (c)

the member is associated with a member

organization in which the owner has an

interest of at least ten percent; (d) the

member leases from an owner or a

Federal Register / Vol. 65, No. 101 / Wednesday, May 24, 2000 / Notices 33607

11For example, if a member has $1,500 in crediteligible fees for the month, such member is entitled

to the full $1,000 credit. However, if the member

has $600 in credit-eligible fees for the month, such

member is entitled to a $600 credit.

12This credit is part of the Exchange’s long-term

financing plan, which separately includes the

$1,500 capital funding fee.

13A lessor entitled to vote in any decision

relating to a compromise or arrangement between

the Phlx and its creditors or its members, or relating

to a reorganization of the Phlx. See e.g. Article

Thirteenth of the Exchange’s Certificate of

Incorporation and Phlx By-Law Article XII, Section

12–6.

14See Phlx Rule 930(b).

related entity of the owner who

provides order flow to the Exchange

through the member consisting of at

least 5,000 equity trades over the

preceding twelve months or 50,000

option contracts over the preceding

twelve months; or (e) the member leases

from a clearing firm or a related entity

of the clearing firm that provides

clearing services to the leasing member.

The aforementioned categories

(including member-owners) are

hereinafter to as ‘‘qualified members.’’

Specifically, the amount of crediteligible fees owed to the Exchange shall

be reduced on a monthly basis by an

amount equal to: (1) $1,000 per month

if such fees, dues, charges, and other

amounts equal to or greater than $1,000,

or (2) the amount of such fees, dues,

charges and other amounts if such fees,

dues, charges and other amounts are

less that $1,000.11 Credits may not be

carried over from one month to the next

and only one credit of up to $1,000 is

available per membership per month.

Credits cannot be shared among

members, except qualified member(s) in

the same member organization may

aggregate their credit(s). The monthly

credit of up to $1,000 will be applied

against the invoice of the member or

member organization with which is

associated. However, in no event shall

the aggregate credit(s) exceed $1,000 per

membership per month.

The Exchange initially intends that

the request to receive the credit will be

application driven, which applicant

submitting an Exchange form

delineating the credit-eligible fees for

that calendar month. The credit is

proposed for a six month pilot period.12

The Exchange reserves the right to

suspend the credit at any time.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

Exchange included statements

concerning the purpose of, and basis for,

the proposed rule change and discussed

any comments it received on the

proposed rule change. The text of these

statements may be examined at the

places specified in Item IV below. The

Exchange has prepared summaries, set

forth in sections A, B, and C below, of

the most significant aspects of such

statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

a. Introduction. The purpose of the

proposed rule change is to amend the

Exchange’s schedule of fees, dues and

charges to allow for a monthly credit of

up to $1,000 to be applied against

certain fees, dues, charges and other

amounts, as defined above, owed to the

Exchange by a qualified member of the

Exchange.

As more fully explained below, the

Exchange believes that the proposed

credit should provide qualified

members with additional liquidity and

an incentive for seat owners to trade on

the Exchange. In turn, the Exchange

believes that this will introduce

additional liquidity into the

marketplace to the benefit of the

investing public.

The Exchange believes that leasing of

memberships by passive holders of

equitable title to lessees who trade on

the Exchange (e.g., members) does not

necessarily promote the long-term

interests of the Exchange. Although the

practice of leasing by financial investors

to members is permitted by the rules of

the Exchange, and may provide an

important means by which members can

access trading rights on the Exchange,

the Exchange believes that lessors who

are passive financial investors have a

limited stake and interest in the

liquidity, technology or operations of

the Exchange.

Moreover, such lessors have limited

practical ability to influence the affairs

of the Exchange because practically all

voting rights are vested in the

‘‘members’’ under Phlx’s Certificate of

Incorporation and By-Laws.13

The Exchange also believes that

members who acquire membership and

access trading on the Exchange by

means of a lease may in many cases

have a very limited stake in the wellbeing and survival of the Exchange.

Although such members may have

voting rights, they have no capital

investment in their membership, and,

because leases typically may be

terminated on 30 days notice,14 they do

not necessarily have the incentive to act

in the long-term best interests of the

Exchange.

Specifically, by terminating a lease

with 30 days notice, lessees who do not

have ‘‘other’’ business interests or

relationships with the Exchange beyond

the mere existence of a lease (such as

those relationships enumerated in part

b. below) may, and often do, leave the

Exchange to trade on another exchange,

perhaps seeking to trade a certain ‘‘hot’’

option or other product. Thus, their

potential commitment to the Exchange’s

long-term well-being and survival is

undercut by their easy ability to pursue

business endeavors that further their

own well-being. Further, although

member-lessees may be appointed to

certain Exchange committees and subcommittees, their motivation to devote

the time to such service may be less, as

is their incentive to make decisions

focused on the long-term. Both daily

and longer terms, strategic decisionmaking could thus be affected.

This short-term commitment may also

bear on the quality and quantity of

liquidity provided on the Exchange.

Building order flow commitments with

order flow providers is a long-term

endeavor, often requiring regular

performance, evaluation, and most

importantly, a relationship with the

trading crowd providing liquidity. Thus,

familiarity and consistency of crowd

participation are an important

marketing mechanism to order flow

providers. Providing liquidity also

involves a longer-term view of

sacrificing profit today for continued

order flow, as well as acknowledging

that not every order is a profitable one,

but continuous order flow, spawned by

ample liquidity, should, over time,

provide more opportunity for additional

order flow.

Lessees that do not have other

business interests or relationships such

as those referred to in part b. below may

also have a limited stake in the

technology of the Exchange, including

participation in and good use of

technology, nor would they necessarily

have an incentive to invest in the

longer-term development of that

technology. Such investment is not only

financial, but also strategic. Such lessees

may also have a limited stake in the

operations of the Exchange, including

the continued long-term refinement and

upgrading of facilities, other equipment

and the pricing of such operations. In

sum, lessees, absent other factors tying

them to the Exchange, may be less

vested in the long-term success of the

Exchange, in terms of a lesser incentive

to create liquidity, invest in technology

and be active in strategic and daily

decision-making.

33608 Federal Register / Vol. 65, No. 101 / Wednesday, May 24, 2000 / Notices

15The Exchange notes that, as part of its overall

strategic financing plan, contemporaneously with

the implementation of the credit described in this

filing, it is separately instituting a $1,500 monthly

capital funding fee upon all ‘‘owners,’’ regardless of

their level of activity (if any) of the Exchange. See

supra notes 6 and 12. Although the credit is not

available to offset all or any portion of the capital

funding fee, the credit will enable member-owners

and others eligible for the credit to defray a portion

of the transaction and other fees charged by the

Exchange (and that, in general, result from member

activity on the Exchange), thereby effectively

reducing, for member-owners and other eligible

members the cost of trading on the Exchange.

Therefore, the credit may also have the indirect

effect of blunting the incremental economic burden

of the capital funding fee for owners who are active

and, directly or indirectly, trading on (or otherwise

providing certain economic benefits to) the

Exchange. In addition, the credit frees up funds for

trading activity on the Exchange that would

otherwise be used for the payment of credit-eligible

Exchange fees.

16 15 U.S.C. 78f(b)(4).

17 15 U.S.C. 78f(b)(5).

18 15 U.S.C. 78f(b)(4).

19 15 U.S.C. 78f(b)(5).

20See e.g. Securities Exchange Act Release Nos.

41748 (August 16, 1999), 64 FR 46218 (August 24,

1999) (SR–CBOE–99–34); 40496 (September 29,

1998), 63 FR 54175 (October 8, 1998) (SR–PCX–98–

42); and 41108 (February 25, 1999), (64 FR 10516

(March 4, 1999) (SR–BSE–99–2).

21The CTA Plan and the OPRA Plan are approved

by the Commission as national market system plans

under Rule 11Aa3–2, 17 CFR 240.11Aa3–2,

governing the dissemination of market information

for certain equity securities and options,

respectively; these plans govern both the fees that

can be charged for such information as well as the

distribution of revenues derived from those fees

among participants in these plans, including the

Exchange.

In contrast, the Exchange is of the

view that members who own their own

memberships (and their functional

equivalents, such as members who lease

their members from close family

members), and members who have

certain other business or financial

relationships which owners who are

active on the Exchange (e.g., members

who are associated with member

organizations and hold their

memberships pursuant to ‘‘A-B-C

Agreements’’) have a combination of

financial incentives and voting rights (in

some cases, indirectly via the owners

with whom they are closely related or

associated) to create liquidity on the

Exchange, to invest in systems and

compliance infrastructure, to be active

in and informed about the decisionmaking processes of the Exchange, and

otherwise to act in the Exchange’s longterm best interests. By providing the

credit described in this filing to these

groups of members, the Exchange

expects to create economic incentives

for owners to trade on the Exchange by

actively using their memberships (or

selling them to persons who would do

so) and for members to organize their

affairs in ways that, the Exchange’s

view, properly align the interests of the

members with the long-term interest of

the Exchange. The Exchange also

believes that the credit should help

retain or create liquidity on the

Exchange by freeing up funds that

member-owners of their functional

equivalents may otherwise be

expending on credit-eligible fees.15

Although the credit described in this

filing is available to some Exchange

members and not others, it meets the

criteria set forth in Sections 6(b)(4) 16

and 6(b)(5) 17 of the Act because it: (i)

provides for ‘‘* * * the equitable

allocations of dues, fees and other

charges among its members * * * and

other persons using its facilities;’’ and

(ii) is not designed ‘‘* * * to permit

unfair discrimination between

customers, issuers, brokers or dealers.’’

Although the Exchange is not aware of

precedents in which other exchanges

have established fee or credit programs

based upon ownership of seats or the

connection between lessees and their

lessors, as the Phlx proposes to adopt in

this filing, the Commission has

approved many exchange fee and credit

arrangements that do not threat all

members (or other persons covered by

Sections 6(b)(4) 18 and (5)) 19 equally,

such as credits and discounts based on

transaction volume, fees based upon the

usage by certain members of equipment

or other services or resources of an

exchange, and fee structures that

distinguish among the various activities

of persons and firms (e.g., specialists

versus floor brokers, or specialists

versus market makers). As with the

proposed credit, such measures are

designed to promote and encourage

certain behaviors and/or discourage

others. The Exchange believes that this

is an appropriate, nondiscriminatory

business strategy.

As more fully articulated below, the

Exchange believes that the credit is

equitably distributed and not unfairly

discriminatory, because it is based on

legitimate, reasonable business interests

of the Exchange, and is reasonably

designed to further those interests.

Moreover, it does not unfairly single out

individuals or groups for personal or

political reasons. To the contrary, and

member may become eligible for the

credit by changing the way in which

such member finances his or her access

to the Exchange by purchasing the

membership or by changing the

member’s lease arrangement.

b. More Detailed Rationale

Specifically Applied to the Various

Eligibility Criteria—i. Member-Owners.

In many areas of economic life,

businesses and governments establish

incentives to encourage behavior that is

deemed desirable. In the case of

exchanges, volume discounts and

credits encourage members to direct

transaction volume and trading activity

to the exchange; other fee structures are

designed to deter excessive usage of

exchange resources or to cause scarce

resources to be allocated more

efficiently (e.g., equipment service fees

or fees relating to use of post/booth

space on the floor).20 The Exchange, as

a matter of policy, believes that ownermembership or its functional

equivalents as described above, should

be encouraged because:

(A) Unlike passive, financial

investors, owner-members risk their

capital by their trading and other

activities on the floor, thereby (in many

cases) creating liquidity in our market

and generating revenues for the

Exchange, both directly though

transaction-based revenues, and

indirectly, by generating activity that

results in tape revenues under the

Consolidated Tape Association (‘‘CTA’’)

and Options Price Reporting Authority

(‘‘OPRA’’) plans.21

Seat ownership is one aspect of

Exchange ‘‘investment’’ and the actual

use of that membership by the qualified

member is a different form. Memberowners on their functional equivalents,

have additional operational and market

risks. For example, a qualified member

who is also a specialist or market maker

may have additional risks related to

fluctuations in the securities market and

order-processing errors in addition to

market risks associated with seat

ownership. Similarly, a qualified

member who is also a specialist may

have risks (in addition to seat risk)

associated with the specialists’

obligation to promote a fair and orderly

market and, particularly, maintain the

limit order book. Furthermore, in

addition to any fees assessed on owners,

qualified members also contribute to the

Exchange by paying transaction fees,

such as equity transaction value

charges, equity floor brokerage

transaction fees, option comparison

charges and option transaction charges,

and trading floor fees, such as trading

post/both, controller space, shelf space,

transmission, execution/communication

charges, and floor facility fees.

(B) Unlike members who lease their

seats under typical lease arrangements

that may be cancelled on 30 days’

notice, member-owners have a

significant capital investment at risk;

and

(C) Unlike owners that are not

members, member-owners may have

voting rights under the Exchange’s byVerDate 11<MAY>2000 13:56 May 23, 2000 Jkt 190000 PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 E:\FR\FM\24MYN1.SGM pfrm01 PsN: 24MYN1
Federal Register / Vol. 65, No. 101 / Wednesday, May 24, 2000 / Notices 33609

22See supra note 13. 23As of March 31, 2000, 324 memberships were

subject to lease agreements. This number may

change on a monthly basis. 24As of March 31, 2000, 48 seats were dormant

(neither used for active trading nor leased). 25See Phlx Rules 940 and 941. 27See supra note 3.

laws, and may participate on certain

Exchange committees.22

Because of their dual interest in

preserving and increasing the value of

their memberships, and in the

technological, operational, and

regulatory infrastructure that affects the

present and future conditions of

transacting business on or at the

Exchange, the Exchange believes that

member-owners have powerful

incentives to create liquidity on the

Exchange, and to participate responsibly

in the business life of the Exchange

through the exercise of voting rights,

and through service on the Board and

certain Exchange committees. The

concept (and the underlying policy) of

making the credit available to memberowners is not unlike that of the federal

government in providing tax incentives

to homeowners that are not available to

renters. The long-term capital stake of

the homeowner in his or her property

promotes various behaviors that have

social utility in that it fosters

community-oriented behavior, and

increases the prospect that the

homeowner will make further socially

useful investments in the property and

in the neighborhood.

The Exchange believes that similar

principles are involved in the instant

case. The ability to lease memberships

has been available for many years. Over

time, the equitable ownership of

memberships by passive financial

investors has become a very pervasive

phenomenon at the Exchange, with 324

of the Exchange’s 505 memberships

being owned by such financial

investors.23 Of those memberships

owned by passive financial investors,

approximately 48 memberships are

currently dormant (neither used for

active trading nor leased).24 Although

the Exchange believes that leasing of

memberships has a legitimate role in

providing members a means of

accessing trading rights on the

Exchange, it also believes that the extent

to which long-term capital investment is

currently divorced from voting rights

and trading interest in not healthy

insofar as it relates to the long-term

viability of the institution and its

membership as a whole. The credit

should create an incentive for owners to

actively use their trading rights though

membership and for members to

reconsider the manner in which they

finance their access to the Exchange.

Furthermore, the Exchange believes that

the credit will free up funds for those

owners who are most likely to put their

capital to work by trading and creating

liquidity on the floor. The credit may

also effectively (but indirectly) lessen

the overall impact of the capital funding

fee on those owners who are trading at

the Exchange and (because the credit

may be applied against transactional

fees) create further incentives to trade.

The Exchange notes that no member

may claim that his or her lack of

eligibility for the credit is unfair or

discriminatory. Any member may obtain

eligibility for the credit by changing his

or her method of financing their access

to the Exchange—e.g., by purchasing

their membership and (if they choose)

borrowing from third-party lenders to

effect that purchase. Any owner may

obtain eligibility for the credit by, for

instance, becoming an Exchange

member (if they qualify for this and

subject to the procedures set forth in the

Exchange’s rules).

ii. Members/Member Organizations

with A–B–C Agreements. By definition,

with respect to A–B–C Agreements,

there is a very close nexus between a

member and the member organization

with whom the member is associated; in

general, the member is an employee of

the member organization. This close

connection is reflected in the fact that

the member organization provides all or

part of the funds for the purchase of the

membership of which the legal title is

placed in the member, while the

equitable title remains with the member

organization.25 In addition, the

Exchange’s By-Laws state, in part, that

‘‘[a]n A–B–C Agreement is a contract

between the member and member

organization with which the member is

associated in which a portion of the risk

of fluctuations in the value of the

membership shall rest with the member

organization rather than with the

member.’’ 26

Pursuant to the A-B-C Agreement, the

member contributes to use of the

membership to the member organization

and subjects the membership to the

claims of the creditors of the member

organization. Moreover, the member

organization pays the dues, fees, and

other charges on behalf of the member.

Thus, given this unique business

relationship, owners who are member

organizations have significant capital

investment at risk and have a long-term

interest in preserving and increasing the

value of their membership, much like

member-owners. For this reason, the

Exchange is providing the credit to

members who are a party to an A-B-C

Agreement with a member organization

who owns that membership. 27

iii. Lessees. As stated previously,

although leasing arrangements are

permitted, lessees, other than the five

types of qualifying members discussed

in detail below (‘‘non-qualifying

lessees’’), may have a limited stake in

the long-term well-being of the

Exchange. In fact, non-qualifying lessees

may lack the incentive to engage in

certain types of behavior that promote

the long-term best interests of the

Exchange, including providing liquidity

and investing in technology

enhancements. Specifically, nonqualifying lessees who do not put their

own (or a member with whom they have

a close nexus) capital at risk with

respect to membership may provide

liquidity or order flow with less of a

long-term view and more of a focus on

their current market risk only. This view

may be at odds with behavior needed to

address long-term Exchange needs.

These non-qualifying lessees who do

not have the types of additional

connections to owners on the Exchange

described below, may only have the

incentive to participate in a self-focused

way for their short-term benefit. If the

credit were made available to all lessees,

it would not serve its purpose as an

inducement to promote ownermembership or other relationships to

the Exchange that the Exchange believes

are the most conductive to its continued

health and success. Therefore, the

Exchange is not making the credit

available to all lessees. However, the

Exchange is seeking to provide the

credit to those qualified members whose

relationship with the owners from

whom they lease their seats is such that

the Exchange believes they (either

individually or indirectly when viewed

in conjunction with their owners) have

incentives properly aligned with the

long-term interests of the Exchange.

(A) Members who are Lessees but who

also are Owners of Different

Memberships. Members who are lessees

but who also are owners of a different

membership should be accorded the

same treatment as the traditional

member-owners who were previously

discussed. These members, who are also

owners, have an interest in preserving

and increasing the value of their

membership as well as an interest in

preserving and increasing the standard

of technology and the operational and

regulatory infrastructure that affects the

present and future conditions of

transacting business at the Exchange. As

with traditional member-owners, the

Exchange believes that the credit will

33610 Federal Register / Vol. 65, No. 101 / Wednesday, May 24, 2000 / Notices

28 17 CFR 240.16a–1.

29 Immediate family is defined to mean any child,

stepchild, grandchild, parent, stepparent,

grandparent, spouse, sibling, mother-in-law, fatherin-law, son-in-law, daughter-in-law, brother-in-law,

or sister-on-law, and shall include adoptive

relationships. 17 CFR 240.16a–1(e).

30 17 CFR 230.71.

31 15 U.S.C. 77e.

32 17 CFR 230.701(c)(3).

33 17 CFR 240.16a–1.

34See 26 U.S.C. Section 318.

35See 26 U.S.C. Section 301 et. seq.

36NASD Conduct Rule IM–2110–1. The

Freeriding and Withholding Interpretation is based

on the premise that NASD members have an

obligation to make a bona fide distribution of

securities of a public offering that trade at a

premium in the secondary market.

37 15 U.S.C. 78p.

38 15 U.S.C. 78L.

39 15 U.S.C. 78p.

40 Id. 41See supra note 33.

free up funds for those members who

are also owners thereby encouraging

them to put their capital to work by

trading and creating liquidity on the

floor. As previously discussed, the

credit may also effectively (but

indirectly) lessen the overall impact of

the capital funding fee on those owners

who are trading at the Exchange.

(B) Members who Lease from Close

Family Members. At the Phlx, many

members firms are family businesses,

which choose to structure their

operations with the owner being a

relative (rather than that member) for

tax or estate planning purposes. The

Exchange believes that there is

commonality of interest in property of

close family members, thus affording

the credit to members who lease from

close family members. This concept is

one that is widely accepted, especially

in connection with rules relating to the

securities industry and tax law. For

example, Rule 16a–1(a)(2) under the

Act 28 defines the term ‘‘beneficial

owner’’ to mean any person who,

directly or indirectly, through any

contract, arrangement, understanding,

relationship or otherwise, has or shares

a direct or indirect pecuniary interest in

the equity securities. Indirect pecuniary

interest is then defined to include

securities held by members of a person’s

immediate family sharing the same

household.29 In addition, Rule 701

under the Securities Act of 1933 30

exempts from Section 5 of the Securities

Act 31 certain offers and sales of

securities under a written compensatory

benefit plan established by the issuer for

the participation of their employees and

their family members who acquire such

securities from such persons though

gifts or domestic relations orders.

Family members are defined in Rule

701(c)(3) 32 the same as ‘‘immediate

family’’ is defined in Rule 16a–1(e).33

Tax laws also recognize the

commonality of interest in property of

close family members. For example, the

Internal Revenue Code (‘‘IRC’’)

recognizes the shared interests of family

members by way of attributing the

ownership of stock held by close family

members to the taxpayer.34 The IRC

treats stock owned by these close family

members as owned by the taxpayer in

determining the tax liability of the

taxpayer in various situations.35

A further example is the National

Association of Securities Dealers, Inc.

(‘‘NASD’’) Freeriding and Withholding

Interpretation,36 which restricts sales by

NASD members to accounts in which

so-called ‘‘restricted persons’’ have a

beneficial interest. Such restrictions are

also applicable, with some exceptions,

to immediate family members of those

restricted persons.

The Exchange believes that it should

not penalize members who choose to

lease memberships from close family

members, as it believes that these

persons are the functional equivalents of

member-owners, and the same rationale

applies to giving the credit to these

members as to member-owners.

(C) Members who are Associated with

a Member Organization in which the

Owner has an Interest of at Least Ten

Percent. Members who are lessees and

are associated with a member

organization in which the owner has at

least a ten percent interest also should

be eligible for the credit based on their

closely aligned interests with the owner.

The federal securities laws and rules of

the securities industry have long

recognized that a ten percent ownership

interest is a significant capital

investment. For example, Section 16 of

the Act 37 requires any person who is

the beneficial owner of more than ten

percent of an equity security registered

under Section 12 of the Act 38 to file a

statement with the Commission

indicating his ownership interest.

Section 16 39 also treats such beneficial

owners as a company insiders and

limits their ability to realize ‘‘short

swing’’ profits. In enacting Section 16,40

the Congress found that a ten percent

owner was sufficiently involved in the

affairs of the issuer to be treated as an

insider.

Moreover, for purposes of NASD

Conduct Rule 2720, which restricts the

ability of an NASD member to

participate in the distribution of a

public offering of its own securities or

the securities of the member’s parent or

affiliate, a company is presumed to

control a member (and thus is an

affiliate) if the company beneficially

owns ten percent or more of the member

firm. Finally, under the NASD’s

Freeriding and Withholding

Interpretation,41 an individual with a

ten percent or more equity interest in an

NASD member firm is deemed restricted

by virtue of his ownership interest, and,

thus, NASD member firms may not sell

so-called ‘‘hot issues’’ to that individual.

In each of these examples, Congress or

the NASD found that a ten percent

owner is sufficiently involved in the

affairs of the subject entity to be subject

to the applicable restriction. A similar

analysis is applicable with respect to

owners of Phlx memberships who hold

a ten percent or greater interest in the

very member organization with which

the lessee is associated. The interests of

the owner, the member lessee and the

member organization are sufficiently

aligned to allow the lessee member the

benefit of the credit.

(D) Members who Lease From Owners

or Their Affiliates who Provide Order

Flow to the Exchange Member. Similar

to member-owners and other eligible

members discussed above, members

who lease from owners or their affiliates

who provide order flow to the Exchange

through the member have a direct

contractual relationship with that

owner. For example, a floor broker who

executes orders entered by the owner

from whom the member leases his or

her seat has a fiduciary relationship

with that owner. The member derives

income, by way of commissions, from

the order floor provider and the order

flow provider, in turn, provides revenue

to the Exchange mainly by way of

transaction fees (and indirectly via tape

revenues). Giving a credit to members in

this situation should encourage the

member to fully maximize the business

relationship between the floor broker

and order flow provider by encouraging

the member to get more order flow,

which in turn equates to an increase in

fees paid by the floor broker to the

Exchange. The Exchange believes that

by extending the credit to this category

of members who are closely associated

with the owner, it is encouraging

behavior that is beneficial to the longterm interests of the Exchange, e.g.,

providing more order flow.

(E) Members who Lease From a

Clearing Firm or a Related Entity of the

Clearing Firm That Provides Clearing

Services to the Leasing Member.

Members who lease from a clearing firm

or related entity of the clearing firm that

provides clearing services to the leasing

member should also be eligible to

receive the credit. Members have a close

connection to their clearing firms, or

Federal Register / Vol. 65, No. 101 / Wednesday, May 24, 2000 / Notices 33611

42 15 U.S.C. 78f(b).

43 15 U.S.C. 78(b)(4)

44See supra note 3.

45 15 U.S.C. 78s(b)(3)(A)(ii).

46 17 CFR 240.19b–4(f)(2).

47 17 CFR 240.19b–4(f)(6)(iii).

related entity of the clearing firms, in

that the clearing firms provide

important and essential services by

contractual agreement with such

members; for instance, they guarantee

members’ trades. In addition, clearing

firms lend money and extend credit;

they also manage risk by way of tracking

positions and other monitoring

functions. Moreover, the clearing firm

offers various ancillary services to the

members, including stock executions

services, office space and other business

amenities. Therefore, given this close

connection between the members and

clearing firms or their affiliates, the

Exchange believes that the credit is

appropriate and should further their

joint interest in the well-being of the

Exchange.

2. Statutory Basis

For these reasons, the Exchange

believes that the proposed rule change

is consistent with Section 6(b) of the

Act, 42 in general, and with Section

6(b)(4) 43 in that it provides for the

equitable allocation of reasonable dues,

fees and other charges.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange believes that the

proposed rule imposes no inappropriate

burden on competition.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants or Others

Although written comments were not

solicited, the Exchange issued a circular

dated September 27, 1999 which

announced certain actions taken at the

September 1999 Phlx Board of

Governors meeting. These actions

included the approval of a monthly

credit of up to $1,000 and invited

telephone comments to be made to the

Chairman. The Exchange has received

two written comments; although these

comments do not specifically address

the proposed $1,000 credit, they do

make reference to a ‘‘rebate’’ and a

‘‘credit.’’ Both letters raised the issue,

among other things, of fairness in that

some members would receive the credit

and not others; this issue is addressed

in detail in section A.1. above.44

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

The foregoing proposed rule change

has become immediately effective upon

filing pursuant to Section 19(b)(3)(A)(ii)

of the Act 45 and Rule 19b–4(f)(2) 46

thereunder because it establishes a due,

fee, or other charge. At any time within

60 days of the filing of such proposed

rule change, the Commission may

summarily abrogate such rule change if

it appears to the Commission that such

action is necessary or appropriate in the

public interest, for the protection of

investors, or otherwise in furtherance of

the purposes of the Act.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing,

including whether the proposed rule

change is 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 rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change 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 in

the Commission’s Public Reference

Room, 450 Fifth Street NW.,

Washington, DC 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of the Phlx. All submissions

should refer to File No. SR–Phlx–00–44

and should be submitted by June 14,

2000.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.47

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–13069 Filed 5–23–00; 8:45 am]

BILLING CODE 8010–01–M

SMALL BUSINESS ADMINISTRATION

Reporting and Recordkeeping

Requirements Under OMB Review

AGENCY: Small Business Administration.

ACTION: Notice of Reporting

Requirements Submitted for OMB

Review.

SUMMARY: Under the provisions of the

Paperwork Reduction Act (44 U.S.C.

Chapter 35), agencies are required to

submit proposed reporting and

recordkeeping requirements to OMB for

review and approval, and to publish a

notice in the Federal Register notifying

the public that the agency has made

such a submission.

DATES: Submit comments on or before

June 23, 2000. If you intend to comment

but cannot prepare comments promptly,

please advise the OMB Reviewer and

the Agency Clearance Officer before the

deadline.

COPIES: Request for clearance (OMB 83–

1), supporting statement, and other

documents submitted to OMB for

review may be obtained from the

Agency Clearance Officer.

ADDRESSES: Address all comments

concerning this notice to: Agency

Clearance Officer, Jacqueline White,

Small Business Administration, 409 3rd

Street, SW., 5th Floor, Washington, DC

20416; and OMB Reviewer, Office of

Information and Regulatory Affairs,

Office of Management and Budget, New

Executive Office Building, Washington,

D.C. 20503.

FOR FURTHER INFORMATION CONTACT:

Jacqueline White, Agency Clearance

Officer, (202) 205–7044.

SUPPLEMENTARY INFORMATION:

Title: Request for Information

Concerning Portfolio Financing.

Form No: SBA Form-857.

Frequency: On Occasion.

Description of Respondents: SBIC

Investment Companies.

Annual Responses: 2,160.

Annual Burden: 2,160.

Jacqueline White,

Chief, Administrative Information Branch.

[FR Doc. 00– 12984 Filed 5–23–00; 8:45 am]

BILLING CODE 8025–01–P

SMALL BUSINESS ADMINISTRATION

Reporting and Recordkeeping

Requirements Under OMB Review

AGENCY: Small Business Administration.

ACTION: Notice of Reporting

Requirements Submitted for OMB

Review.

SUMMARY: Under the provisions of the

Paperwork Reduction Act (44 U.S.C.

Chapter 35), agencies are required to

submit proposed reporting and

recordkeeping requirements to OMB for

review and approval, and to publish a

notice in the Federal Register notifying

the public that the agency has made

such a submission.