Federal Register / Vol. 62, No. 36 / Monday, February 24, 1997 / Notices 8287

handwritten notes will indicate that the original

order has been divided up. In addition, the

Exchange’s time and sales report will establish that

a number of sub-orders occurred sequentially on the

Auto-Ex system during a relatively short period of

time.

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

8 15 U.S.C. 78f(b)(5).

9 15 U.S.C. 78f(b)(7).

17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.18b-4.

notes that the recommended fine levels

being proposed are comparable to the

fines that the Exchange has imposed

previously for violations of Rule 6.87(c).

2. Statutory Basis

The Exchange believes the proposed

rule change is consistent with Section

6(b) 7 of the Act in general and furthers

the objectives of Section 6(b)(5) 8 and

Section 6(b)(7) 9 in particular in that it

is designed to promote just and

equitable principles of trade, to assure

that members, member organizations,

and persons associated with members

and member organizations are

appropriately disciplined for violations

of Exchange rules and, in general, to

protect investors and the public interest.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange believes the proposed

rule change will impose no burden on

competition.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

The Exchange has neither solicited

nor received written comments.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the 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 the 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, NW.,

Washington, DC 20549. 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 at

the Commission’s Public Reference

Section, 450 Fifth Street, NW.,

Washington, DC 20549. Also, copies of

such filing will be available for

inspection and copying at the principal

office of the PSE. All submissions

should refer to File No. SR–PSE–96–42

and should be submitted by March 17,

1997.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.10

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–4446 Filed 2–21–97; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–38286; File No. SR–CBOE–

96–70]

Self-Regulatory Organizations;

Chicago Board Options Exchange,

Inc., Order Approving Proposed Rule

Change Relating to the Reporting

Requirements for Securities Accounts

and Orders of Market-Makers and Joint

Account Provisions

February 13, 1997.

I. Introduction

On November 20, 1996, the Chicago

Board Options Exchange, Inc., (‘‘CBOE’’

or ‘‘Exchange’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’ or ‘‘SEC’’) 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 relating to the reporting

requirements for securities accounts and

orders of market-makers and joint

account provisions. The proposed rule

change was published for comment in

Securities Exchange Act Release No.

38085 (December 24, 1996), 62 FR 434

(January 3, 1997). The Commission

received no comments on the proposal.

II. Description of the Proposal

CBOE proposes amending Rule 8.9,

regarding Securities Accounts and

Orders of Market-Makers. Specifically,

CBOE is amending Rule 8.9(a),

regarding the identification of accounts,

to eliminate the routine submission of

information by market-makers

respecting non-market-maker trading

accounts, or ‘‘outside accounts.’’

Currently, Exchange market-makers are

required to identify and report to the

Exchange all accounts in which the

market-maker may engage in stock,

option and securities trading, directly or

indirectly, or over which it has

investment discretion. The rule in its

current form is broad enough to require

market-makers to report professional

trading accounts held at clearing firms,

as well as outside personal accounts

such as brokerage accounts. The

Exchange is amending the reporting

requirements of Rule 8.9(a) to eliminate

the routine submission of information

respecting non-market-maker trading

accounts, or ‘‘outside accounts.’’ The

rule change will require market-makers

to report outside account information

only when requested by the Exchange.

CBOE also proposes amending Rule

8.9(b), regarding the reporting of marketmaker orders. Currently, each marketmaker is required to report to the

Exchange every order entered into by

that market-maker within the

specifications of the Rule. CBOE

proposes amending Rule 8.9(b) to

require the clearing firm that maintains

the market-maker’s trading account,

rather than the market-maker

personally, to report executed order

information to the Exchange. The

Exchange believes it is appropriate to

limit the required order information to

‘‘executed’’ orders only, based upon its

position that only marginal surveillance

benefits are derived from gathering

unexecuted order information on a

routine basis.

Under the proposal, the market-maker

will be held responsible for the

reporting requirements only if the

clearing firm is not reporting executed

order information to the Exchange and/

or if the Exchange has requested that the

market-maker provide the information.

Furthermore, the proposed rule change

will clarify that this reporting

requirement applies to ‘‘professional

trading accounts’’ (i.e., transactions

cleared into all accounts carried for

market-makers who are the subject of a

clearing firm letter of guarantee issued

to the Exchange pursuant to CBOE Rule

8.5).

The clearing firm thus will be the

primary source for the reporting of

market-maker executed order

information to the Exchange. However,

all firms which represent and execute

market-maker orders, including order

services firms as defined in Exchange

Rule 6.77, will continue to be
8288 Federal Register / Vol. 62, No. 36 / Monday, February 24, 1997 / Notices

3CBOE Rule 8.9(b) states that the report

pertaining to orders must include the terms of each

order, identification of the brokerage firms through

which the orders were entered, the times of entry

or cancellation, the times report of execution were

received and, if all or part of the order was

executed, the quantity and execution price. 4 15 U.S.C. § 78f(b)(5).

5 17 CFR 240.17a–3.

6 17 CFR 240.17a–4.

7See supra note 3.

8 15 U.S.C. 78s(b).

9Although the submitted filing indicated that

circulars would be issued to clearing members, the

CBOE has clarified that all members will receive a

circular informing them of changes in the reporting

requirements. Although the circulars sent to

clearing firms may differ from those sent to other

CBOE members, the information contained therein

will be the same. Phone conversation between Jeff

Schroer, Market Surveillance, CBOE, and Peggy

Blake, Division of Market Regulation, Commission

(February 13, 1997).

responsible for maintaining and

retaining executed and unexecuted

order information as required by Rules

17a-3 and 17a-4 under the Act and by

Exchange Rule 15.1. The continuing

recordkeeping obligations of such firms

pursuant to Exchange rules and other

applicable securities laws and

regulations will be noted in an

Exchange regulatory circular upon

approval of the proposed rule change.

In an effort to improve reporting and

move toward electronic reporting in the

future, CBOE proposes to eliminate the

existing description of specific order

information required to be reported as

set forth in Rule 8.9(b).3 Upon approval

of this filing, the Exchange will issue a

regulatory circular to clearing firms

which will list the order reporting

requirements that were previously

embodied in Rule 8.9(b). CBOE will

issue additional circulars as reporting

requirements are added.

Finally, CBOE proposes to amend

Interpretation and Policy .06 to Rule 8.9

to clarify that the existing prohibition

against a joint account participant

effecting a transaction with another

member acting on behalf of the same

joint account applies whether the

transaction is effected in person or via

order. CBOE will also revise

Interpretation and Policy .06 to Rule 8.9

to prohibit transactions between two

joint accounts if the member who causes

a transaction to be executed for one of

the joint accounts knows or has reason

to know that the two joint accounts have

one or more common participants.

The addition to Interpretation .06 to

Rule 8.9 codifies in the rule’s current

provisions in regulatory circulars which

seek to ensure that joint account

transactions result in a bona fide change

in beneficial ownership. Existing

regulatory circulars RG96–28 (item 7(b))

and RG95–64 (item 8(b)) provide that a

member has the responsibility to ensure

that in-person transactions or the entry

of orders with floor brokers do not result

in trades occurring ‘‘between two joint

accounts that have common

participants.’’ The rule change expressly

imposes a knowledge requirement as an

element of the offense of effecting a

transaction between joint accounts with

common participants. This recognizes

that members are not always able to

know whether there are common

participants in two joint accounts

because of the frequency with which

joint account composition may change.

III. Discussion

The Commission believes CBOE’s

proposed rule change is consistent with

Section 6(b)(5) of the Act.4 Section

6(b)(5) requires, among other things,

that the rules of an exchange be

designed to promote just and equitable

principles of trade, perfect the

mechanism of a free and open national

market system, and, in general, to

further investor protection and the

public interest.

The Commission believes that CBOE’s

proposal to allow market-makers to

provide outside account information

upon request by the Exchange rather

than providing such information on a

routine basis is a reasonable revision to

CBOE’s market-maker account reporting

procedures. This conclusion is based on

CBOE’s representation that outside

account information provides little

benefit to the Exchange’s surveillance

programs unless special circumstances

exist. The Commission believes that the

ability of the Exchange to request

outside account information upon

request should help preserve the

Exchange’s ability to conduct adequate

surveillance.

The Commission believes that CBOE’s

proposal to make a market maker’s

clearing firm the primary responsible

source for reporting market-maker

executed order information to the

Exchange is a reasonable means of

streamlining the order reporting

process. The Commission also

recognizes the Exchange’s position that

clearing firms with back-office systems

capabilities can most accurately gather

and report market-maker order

information to the Exchange.

Accordingly, the proposed change

should result in more effective and

efficient reporting of market-maker

accounts and executed order

information to the Exchange, thus

promoting just and equitable principles

of trade, perfecting the mechanism of a

free and open national market system,

and furthering investor protection and

the public interest.

The Commission believes it is

appropriate to limit the required

submitted order information to

‘‘executed’’ orders only, based on

CBOE’s representation that only

minimal surveillance benefits are gained

by gathering unexecuted order

information on a routine basis. Where

the clearing firm is not reporting the

information to the Exchange and if the

Exchange requests that the marketmaker provide the information, the

market-maker will be responsible for

reporting executed order information.

Moreover, while the clearing firm is the

primary source for the reporting of

market-maker executed order

information, the firms representing and

executing market-maker orders will

continue to be responsible for

maintaining and retaining executed and

unexecuted order information pursuant

to Rules 17a–3 5 and 17a–4,6 of the Act

and CBOE Rule 15.1. These provisions

offer further assurance that executed

order information will be reported and

records of executed and unexecuted

orders will be maintained.

The Commission believes that CBOE’s

proposal to eliminate the existing

description of specific order information

required to be reported pursuant to Rule

8.9(b), and its proposal to issue a

regulatory circular to clearing firms

listing the order reporting requirements,

will provide the CBOE with greater

flexibility in adding reporting

requirements as needed. The

Commission notes that the Exchange

has agreed to issue a regulatory circular

to its members reflecting that all of the

specific order information currently

contained in Rule 8.9(b) 7 will continue

to be required to be reported pursuant

to the rule. If the CBOE in the future

seeks to eliminate the required reporting

of any of this specific information, such

a change would require the submission

of a rule filing pursuant to Section

19(b) 8 of the Act.9

The Commission believes that CBOE’s

proposed clarifications to Interpretation

.06 will aid members in understanding

their responsibilities with regard to joint

account transactions, thus assuring that

such transactions result in a bona fide

change in beneficial ownership. Finally,

the Commission believes that CBOE’s

proposed change to require knowledge

as an element of the offense of effecting

a transaction between joint accounts

with common participants constitutes a

reasonable clarification of CBOE’s

existing joint account provisions,

thereby serving to protect investors and

the public interest.
Federal Register / Vol. 62, No. 36 / Monday, February 24, 1997 / Notices 8289

10 15 U.S.C. 78s(b)(2).

11 17 CFR 200.30–3(a)(12).

1 15 U.S.C. § 78s(b)(1).

2See Securities Exchange Act Release No.

37619A (September 6, 1996); 61 FR 48290

(September 12, 1996) (Order Handling Rules

Adopting Release).

3See Securities Exchange Act Release No. 38175

(January 23, 1997); 62 FR 3548.

IV. Conclusion

For the foregoing reasons, the

Commission finds that the proposed

rule change is consistent with the Act

and the rules and regulations

thereunder applicable to the CBOE, and

in particular Section 6(b)(5).

It is therefore ordered, Pursuant to

Section 19(b)(2) of the Act,10 that the

proposed rule change (File No. SR–

CBOE–96–70) be and hereby is

approved.

For the Commission by the Division

of Market Regulation, pursuant to

delegated authority.11

[FR Doc. 97–4387 Filed 2–21–97; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–38294; File No. SR–NASD–

97–07]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Temporary Accelerated Approval of

Proposed Rule Change by the National

Association of Securities Dealers, Inc.

Relating to Rule 4612, Primary Nasdaq

Market Maker Standards Through

October 1, 1997

February 14, 1997.

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

Securities Exchange Act of 1934

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

January 31, 1997, the Nasdaq Stock

Market, Inc. (‘‘Nasdaq’’) filed with the

Securities and Exchange Commission

(‘‘SEC’’ or ‘‘Commission’’) the proposed

rule change as described in Items I and

II below, which Items have been

prepared by Nasdaq. The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested persons and to grant

accelerated approval to the proposal.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

Pursuant to the provisions of Section

19(b)(1) under the Act, Nasdaq, a wholly

owned subsidiary of the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’), is herewith

filing a proposed rule change to

temporarily suspend the use of the

Primary Nasdaq Market Maker

qualification criteria found in Rule 4612

(a) and (b) of the Nasdaq Market Maker

Requirements of the NASD Rules for all

Nasdaq National Market securities for

the remainder of the current pilot period

of the Nasdaq Short Sale Rule or until

such earlier time when new primary

market maker qualification criteria can

be devised and adopted.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

Nasdaq 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. Nasdaq 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

After the first week of trading under

the new SEC rules regarding a Nasdaq

market maker’s order handling

obligations, i.e., Rule 11Ac1–4 (the

customer limit order display rule) and

amended Rule 11Ac1–1 (amendments to

the firm quote rule regarding the display

of priced orders entered by market

makers or specialists into electronic

communications networks (‘‘ECNs’’)),2

Nasdaq has re-evaluated its existing

qualification criteria in the primary

market maker standards rule, Rule 4612

(a) and (b), in those stocks that are not

subject to the primary market maker

standard suspension approved in SR–

NASD–96–55.3 In that rule filing,

Nasdaq noted that because of the

potential changes in quotation and

trading activity in Nasdaq securities

when the new SEC Rules became

effective, the existing numerical criteria

used to qualify a registered market

maker as a primary market maker would

be significantly affected. Because the

precise effects on market maker quotes

and trades were not possible to predict

until Nasdaq could develop practical

experience with new patterns of activity

under the new rules, Nasdaq believed

that it should attempt to minimize the

possible harmful unintended

consequences that could occur by

leaving the current standards in place.

Accordingly, Nasdaq proposed, and the

SEC approved, that the existing

standards would be temporarily

suspended on the same schedule for the

phase in of the SEC Rules requirements.

However, based upon trading

experience in the first week of trading

under the new SEC and NASD Rules,

Nasdaq believes that the primary market

maker standards should be suspended

immediately for all National Market

securities and all registered market

makers in those securities should be

designated as primary market makers.

Nasdaq bases this proposed rule change

on three factors that were not readily

apparent at the time it filed SR–NASD–

96–55: (1) many market makers have

voluntarily chosen to display customer

limit orders in their quotes even though

the SEC’s Limit Order Display Rule does

not yet require it; (2) SOES

decrementation for all Nasdaq stocks

has significantly affected market maker

ability to meet several of the primary

market maker standards; and (3) with

the inability to meet the existing criteria

for a larger number of securities, a

market maker may be prevented from

registering as a primary market maker in

an initial public offering because it fails

to meet the 80% primary market maker

test contained in Rule 4612(g)(2)(B).

Under existing Rule 4612, a registered

Nasdaq Market Maker may be deemed to

be a Primary Market Maker in National

Market securities if the market maker

meets two of three criteria: (1) the

market maker maintains the best bid or

best offer as shown on Nasdaq no less

than 35% of the time; (2) a market

maker maintains a spread no greater

than 102% of the average dealer spread;

and (3) no more than 50% of a market

maker’s quotation changes occur

without a trade execution. In addition,

if a registered market maker meets only

one of the above criteria, it may

nevertheless qualify as a primary market

maker if the market maker accounts for

volume at least 11⁄2 times its

proportionate share of overall volume in

the stock. The review period for meeting

any of these criteria is one calendar

month. Nasdaq notifies a market maker

at the beginning of the new calendar

month if it does not meet the tests, and

one business day following the

notification, Nasdaq withdraws the ‘‘p’’

designator.

The changes to market maker

quotation and trading activities have

been dramatic in the first week of

trading in the new environment. To

provide their customers with the greater

transparency, many market makers have

begun to display customer limit orders

in all Nasdaq securities, not only those

subject to the phase-in of the Limit

Order Display Rule, Rule 11Ac1–4. With

the voluntary display of customer limit

orders in stocks not yet subject to Rule

11Ac1–4, Nasdaq market makers are

changing their quotes when they are in