[Federal Register Volume 62, Number 20 (Thursday, January 30, 1997)]
[Notices]
[Pages 4564-4566]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2319]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38203; File No. SR-PSE-96-46]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Stock Exchange, Inc. Relating to Foreign Broker-
Dealers

January 24, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on December 
16, 1996, the Pacific Stock Exchange, Inc. (``PSE'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the PSE. 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 Exchange is proposing to amend its rules to specify that the 
term ``broker/dealer,'' as used in PSE Rules 6.52(a), 6.86 and 6.87, 
includes foreign broker/dealers. The Exchange is also proposing to 
adopt a definition of the term ``foreign broker/dealer.''
    The text of the proposed rule change is available at the Office of 
the Secretary, the PSE, and at the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The PSE 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

Purpose
    PSE Rules 6.52(a), 6.86 and 6.87, relating to option transactions, 
currently distinguish between orders for broker/dealers and orders for 
non-broker/dealers. Under these rules, only non-broker/dealer customer 
orders are eligible to be placed on the public limit order book,\1\ to 
be entered for automatic execution,\2\ or to be eligible for a

[[Page 4565]]

guaranteed minimum execution of twenty contracts on the floor of the 
Exchange.\3\
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    \1\ Rule 6.52(a) provides in part that ``[o]nly non-broker/
dealer customer orders may be placed with an Order Book Official 
pursuant to this Rule.'' Cf. SEC Rule 11Ac1-4(a)(6) (equity 
``customer limit orders'' that must be displayed pursuant to Rule 
11Ac-1-4 include those that are ``not for the account of either a 
broker or dealer'') (effective January 20, 1997).
    \2\ Rule 6.87(a) provides: ``Only non-broker/dealer customer 
orders are eligible for execution on the Exchange's Automatic 
Execution System (''Auto-Ex'').''
    \3\ Rule 6.86(a) provides: ``Each trading crowd is required to 
provide a depth of twenty (20) option contracts for all non-broker/
dealer customer orders, at the bid/offer that is displayed as the 
disseminated market quote at the time such orders are announced or 
displayed at the trading post designated for trading the subject 
option class.''
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    The purpose of the proposed rule change is to clarify the meaning 
of the term ``broker/dealer,'' as used in Rules 6.52(a), 6.86 and 6.87, 
by specifying that it includes foreign broker/dealers. The Exchange is 
also proposing to adopt the following definition of ``foreign broker/
dealers,'' to be applicable to PSE Rules 6.52(a), 6.86 and 6.87:

    ``Foreign Broker/Dealer. The term `foreign broker/dealer' means 
any person or entity that is registered, authorized or licensed by a 
foreign governmental agency or foreign regulatory organization to 
perform the function of a broker or dealer in securities, or both. 
The terms `broker' and `dealer' mean the same as set out in Sections 
3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934, provided 
that a `broker' or `dealer' may be a bank.'' \4\
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    \4\ Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act 
of 1934 provide:
    ``(4) The term `broker' means any person engaged in the business 
of effecting transactions in securities for the account of others, 
but does not include a bank.
    ``(5) The term `dealer' means any person engaged in the business 
of buying and selling securities for his own account, through a 
broker or otherwise, but does not include a bank, or any person 
insofar as he buys or sells securities for his own account, either 
individually or is some fiduciary capacity, but not as a part of a 
regular business.''

    In light of the current globalization of the securities markets, 
the Exchange believes that the subject rules should be applied 
consistently. In this regard, an exchange specialist in Canada or 
Mexico, for example, should be subject to the same rules applicable to 
trading on the PSE as an exchange specialist in the United States, and 
should not have a competitive advantage over United States broker/
dealers.
    The Exchange believes that the proposed definition is sufficiently 
specific to ensure fair enforcement of the affected rules.\5\ The 
question of whether a person or entity is registered, authorized or 
licensed by a foreign governmental agency or a foreign regulatory 
organization to perform the specified functions, is objective in nature 
and easily verifiable--as is currently the case with determinations of 
whether U.S. brokers or dealers are registered as such with the 
Commission. The PSE notes that, as a member of the Intermarket 
Surveillance Group (``ISG''),\6\ the Exchange may promptly obtain from 
ISG members and affiliates information on the accounts of persons or 
entities entering orders for execution on the PSE, including whether 
such orders have been entered for the account of a broker or dealer. 
The Exchange may also obtain such information from foreign exchanges or 
foreign regulatory authorities with whom the Exchange has an effective 
surveillance sharing agreement or from a foreign exchange or regulatory 
authority that is subject to a memorandum of understanding with the 
Commission that would require those entities to provide such 
information to the Exchange upon request.
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    \5\See Securities Exchange Act Release No. 37695 (September 17, 
1996), 61 FR 50366 (September 25, 1996) (order approving SR-PSE-96-
19).
    \6\ ISG was created in February 1981 to design, develop and 
implement a coordinated intermarket surveillance system among 
securities markets in the United States. On July 14, 1983, the 
exchanges participating in the ISG entered into an agreement to 
coordinate more effectively surveillance and investigative 
information sharing agreements in stock and options markets. In 
1989, with the active participation of the SEC and Commodity Futures 
Trading Commission, the ISG created an ``affiliate'' category for 
futures exchanges and non-U.S. SROs. Currently, the ISG is comprised 
of nine members and 13 affiliates.
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    Based upon its review of the applicable regulatory structures of 
various foreign jurisdictions, the Exchange believes that the proposed 
definition is sufficiently specific to cover the foreign equivalents of 
U.S. brokers and dealers. These foreign jurisdictions include: 
Australia, Canada, the Czech Republic, France, Germany, Hong Kong, 
Hungary, Japan, Luxembourg, Mexico, the Netherlands, Poland, South 
Africa, South Korea, the Slovak Republic, Switzerland, and the United 
Kingdom.\7\
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    \7\ See generally H. Bloomenthal & S. Wolff, International 
Capital Markets and Securities Regulation (1996).
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    The Exchange also notes that the proposed definition of ``foreign 
broker/dealer'' contains objective criteria for its application and is 
narrower in scope than the definition of ``foreign broker or dealer'' 
specified in SEC Rule 15a-6(b)(3).\8\ In addition, the Exchange 
believes the proposed definition is substantially similar in form and 
substance to SEC Rule 17a-7(c) (definition of nonresident brokers and 
dealers) and Exchange Act Sections 3(a)(50) (definition of foreign 
securities authority) and 3(a)(52) (definition of foreign financial 
regulatory authority).
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    \8\ SEC Rule 15a-6(b)(3) provides:
    ``The term `foreign broker or dealer' shall mean any non-U.S. 
resident person (including any U.S. person engaged in business as a 
broker or dealer entirely outside the United States, except as 
otherwise permitted by this rule) that is not an office or branch 
of, or a natural person associated with, a registered broker or 
dealer, whose securities activities, if conducted in the United 
States, would be described by the definition of `broker' or `dealer' 
in sections 3(a)(4) or 3(a)(5) of the Act.''
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Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act, in general, and furthers the objectives 
of Section 6(b)(5) in particular, in that it is designed to promote 
just and equitable principles of trade, to protect investors and the 
public interest, and to prevent unfair discrimination between 
customers, brokers and dealers.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The PSE does not believe that the proposed rule change will impose 
any inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

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 period 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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 25049. 
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

[[Page 4566]]

the Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. Copies of such filing will also be available for 
inspection and copying at the principal office of the PSE. All 
submissions should refer to File No. SR-PSE-96-46 and should be 
submitted by February 20, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-2319 Filed 1-29-97; 8:45 am]
BILLING CODE 8010-01-M