[Federal Register Volume 65, Number 111 (Thursday, June 8, 2000)]
[Notices]
[Pages 36493-36495]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-14404]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42868; File No. SR-Phlx-99-26]


Self-Regulatory Organizations; Order Approving Proposed Amendment 
to the By-Laws and Corresponding Changes to the Rules of the 
Philadelphia Stock Exchange, Inc., Relating to Various Committees

May 31, 2000.

I. Introduction

    On July 30, 1999, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change amending the Exchange's By-Laws and corresponding 
Phlx Rules to streamline its committee process. The Phlx filed 
Amendments No. 1 and No. 2 to the proposed rule change on October 4, 
1999 \3\ and February 23, 2000, respectively. The Federal Register 
published the proposed rule change, Amendment No. 1, and the substance 
of Amendment No. 2, for comment on March 6, 2000.\4\ The Commission 
received no comments on the proposal. This order approves the proposal, 
as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter to Michael Walinskas, Associate Director, 
Division of Market Regulation (Division''), Commission, from John 
Dayton, Counsel, Phlx, dated October 1, 1999 (``Amendment 1''). 
Amendment No. 1 proposes certain technical changes. Specifically, it 
amends Phlx Rule 930 to reflect the fact that the Arbitration 
Committee is being eliminated from the By-Laws. Amendment No. 1 also 
proposes changes to Phlx Rule 950, Secs. 1 and 2, to reflect the 
elimination of the Arbitration Committee. The Phlx also submitted a 
letter (hereinafter referred to as ``Amendment No. 2''), confirming 
that the board will continue to engage an independent auditing firm 
to administer all elections. The contents of Amendment No. 2 were 
substantively discussed in the notice.
    \4\ Securities Exchange Act Release No. 42464 (Feb. 28, 2000), 
65 FR 11826.
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II. Description of Proposal

    The Exchange has proposed By-Law amendments to provide for 
streamlining the committee process as follows: (i) Dissolving the 
Arbitration Committee, whose limited remaining functions would be 
transferred to the Executive committee, who will oversee ongoing 
arbitrations filed before the transfer of arbitration responsibilities 
to the National Association of Securities Dealers, Inc. (``NASD'') in 
October,

[[Page 36494]]

1998; \5\ (ii) dissolving the Elections Committee and transferring its 
functions, along with those of the Nominating Committee, to the 
Nominating and Elections Committee; and (iii) consolidating the three 
Quality of Markets Committees into a single Quality of Markets 
Committee with responsibilities for all three Phlx trading floors.
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    \5\ See Securities Exchange Act Release No. 40517 (Oct. 1, 
1998), 63 FR 54177 (Oct. 8, 1998) (SR-Phlx-98-28).
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    First, the Exchange has proposed to amend its By-Laws to dissolve 
the Arbitration Committee and transfer its duties to the Executive 
Committee. The Phlx states that it ceased accepting arbitration cases 
on October 1, 1998 and that jurisdiction for Phlx arbitration cases now 
resides with the NASD. Currently, the Exchange is processing and 
closing the cases that were filed prior to October 1, 1998.\6\ 
Following the cessation of these cases, the arbitration function at the 
Exchange will cease, as will the need for any committee oversight of 
these matters.
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    \6\ As of May 26, 2000, one case is currently pending with the 
Arbitration Committee that would be transferred to the Executive 
Committee. Potentially twelve arbitration cases in federal court 
could be transferred back to the Phlx. Phone call between John 
Dayton, Counsel, Phlx, and Sonia Patton, Attorney, Division, 
Commission, on May 26, 2000.
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    Second, the Exchange has proposed several changes to the Nominating 
Committee and the Elections Committee, essentially collapsing them into 
a single committee. The Exchange proposes to eliminate the Elections 
Committee, and move its powers to the Nominating Committee. The 
Exchange also proposes to amend its By-Laws to change the name of the 
Nominating Committee to the Nominating and Elections Committee. The 
Exchange believes this change will help to streamline the functions of 
the two committees.
    The Elections Committee administers membership elections. The 
Nominating Committee submits nominations for industry and non-industry 
Governors who stand for election by the members. Because these two 
Committees perform functions related to the election and appointment of 
Governors of the Exchange, the Exchange believes that the merging of 
the Elections Committee with the Nominating Committee will not impair 
the functioning of any of their tasks.\7\ The Exchange believes that 
merging these responsibilities should improve efficiency as well as 
coordination, as the same group of committee members will oversee the 
complete election-related process.
    Finally, the Exchange has proposed to reduce the number of Quality 
of Markets Committees from three to one, also to improve efficiency.\8\ 
In addition, the Exchange proposes to amend its By-Laws to ensure that 
the Committee will contain at least as many non-industry as industry 
members. The proposed language provides that ``[t]he [Quality of 
Markets] Committee will have broad representation that shall include at 
least as many non-industry as industry Committee members.''\9\ The 
current language requires present committees to be ``equally 
balanced''. The Exchange believes that the proposed language will give 
it more flexibility to constitute the proposed Committee while 
retaining the appropriate non-industry representation.
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    \7\ The Commission notes that the Exchange currently has a 
policy of engaging an independent auditing firm to administer 
elections. This practice will continue following the merger of the 
Nominations Committee and the Elections Committee. See Amendment No. 
2, supra note 3. Of course, any changes to the practice would have 
to be submitted pursuant to Section 19(b)(1) of the Act.
    \8\ Currently the Exchange has three separate Quality of Markets 
Committees for each of the three trading floors: equity, equity-
index options, and foreign currency options.
    \9\ See Proposed Phlx By-Law Art. X, Sec.  10.20.
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    The Exchange believes that the consolidation of the Quality of 
Markets Committees should also improve the input of the committee on 
the overall committee process by taking advantage of the overlap in 
issues emanating from each of the three trading floors, as well as 
providing for more singular input. The Exchange further believes that 
this consolidation of committee functions will be beneficial to the 
functioning of the committee process by decreasing the number of 
committee assignments for some public, non-industry and industry 
Governors, allowing them to concentrate more of their energies to their 
remaining assignments, as well as lowering the costs associated with 
convening meetings. The Exchange believes the quality of information 
received from the committees by the Board of Governors will not be 
affected by the consolidation.

III. Discussion

    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. In particular, 
the Commission finds that the proposed rule change meets the 
requirements of Section 6(b)(5) of the Act,\10\ which states that, 
among other things, the rules of an exchange must be designed to 
facilitate securities transactions and to remove impediments to and 
perfect the mechanism of a free and open market, and to protect 
investors and the public interest. In addition, the Commission finds 
that the proposed rule change further the objectives of sectin 6(b)(3) 
\11\ which requires an exchange's rules, among other things, to be 
designed to assure a fair representation of its members in the 
administration of its affairs.\12\
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    \10\ 15 U.S.C. 78f(b)(5).
    \11\ 15 U.S.C. 78f(b)(3).
    \12\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \13\ See supra, note 6.
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    The Commission believes that it is reasonable for the Exchange to 
dissolve the Arbitration Committee and transfer its remaining duties to 
the Executive Committee. The Commission notes that the NASD has 
jurisdiction over Phlx arbitration cases filed after October 1, 1998 
and that following the completion of cases filed before October 1, 
1998, the Exchange will have no arbitration duties.\13\ In addition, 
the Commission believes that the Executive Committee is fully capable 
of overseeing the adjudication of the remaining cases. The Commission 
also notes that although the Executive Committee contains more members 
(9) than the current Phlx Arbitration Committee (4), the members of the 
Executive Committee represent varying interests similar to the 
Arbitration Committee and include on-floor, off-floor, and non-industry 
(including one public) members.
    The Commission also believes that it is reasonable for the Exchange 
to combine the Nominating Committee and the Elections Committee into 
one committee--the Nominating and Elections Committee. These committees 
perform distinct but related functions. As noted above, the Elections 
Committee oversees the election process while the Nominating Committee 
submits nominations for industry and non-industry governors who stand 
for election by the members. While the Commission believes it is within 
the Phlx's business judgment in determining that the merged committees 
should be able to function more efficiently as a single unit, we are 
concerned about assuring that elections are administered fairly and 
adequately monitored. The Commission notes that the Exchange has 
addressed this by committing itself to continue its current practice of 
engaging an independent auditing firm to administer all Exchange 
elections. The Commission believes that this safeguard will help to 
ensure that all Exchange elections, particularly

[[Page 36495]]

contested elections, will be administered in a manner that is fair to 
all participants in the election process.
    Finally, the Commission believes that it is reasonable for the 
Exchange to consolidate all three of its Quality of Markets Committees 
into one Quality of Markets Committee responsible for all three Phlx 
trading floors. The COmmission does not disagree with the Phlx's 
conclusion that the resulting committee could function more efficiently 
by taking advantage of the overlap in issues that face each of the 
three current committees. The Commission notes that the resulting 
committee will be required to contain at least as many non-industry as 
industry members, which will ensure that the committee will retain 
appropriate non-industry representation. While current rules require 
each of the Quality of Markets Committees to be ``equally balanced,'' 
the new language will, in the Phlx's view, give it more flexibility in 
the new committee's composition. Without specifically addressing this 
issue, the Commission simply notes that by requiring the newly merged 
committee to be comprised of broad representation with at least the 
same number of non-industry and industry directors, the new rule 
language should ensure that the composition of the new Quality of 
Markets Committee is consistent with the section 6(b)(3) requirement 
for fair representation in the administration of the Exchange.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-PHLX-99-26), as amended, is 
approved.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-14404 Filed 6-7-00; 8:45 am]
BILLING CODE 8010-01-M