78822 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

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

2 17 CFR 240.19b–4.

3This notice represents Amendment No. 1 and

replaces the proposed rule change, as originally

filed, in its entirety. See letter from Cherie

Macauley, Counsel for the Exchange, Wilmer,

Cutler, & Pickering, to John Polise, Senior Special

Counsel, Division of Market Regulation, dated

November 9, 2000 (‘‘Amendment No. 1’’).

4Under the Act the ‘‘term ‘‘facility’’ when used

with respect to an exchange includes its premises,

tangible or intangible property whether on the

premises or not, any right to the use of such

premises or property or any service thereof for the

purpose of effecting or reporting a transaction on an

exchange (including, among other things, any

system of communication to or from the exchange,

by ticker or otherwise, maintained by or with the

consent of the exchange), and any right of the

exchange to the use of any property or service.’’ See

15 U.S.C. 78c(a)(2).

5See proposed PCXE Rule 1.1(e) (definition of

‘‘Archipelago Exchange’’).

6 In addition to proposed PCXE Rule 14.3, the

PCXE proposes to clarify the Delegation Plan by

adding the following language to proposed PCXE

Rule 14.1(b): ‘‘and all officers, directors, employees,

and agents of PCX Equities are officers, directors,

employees, and agents of the PCX for purposes of

the Act. The books and records of PCX Equities

would be subject at all times to inspection and

copying by the PCX.’’

7See proposed PCXE Rule 1.1(oo) (definition of

‘‘User’’).

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43608; File No. SR–PCX–

00–25]

Self-Regulatory Organizations; Notice

of Filing of a Proposed Rule Change by

the Pacific Exchange, Inc. and

Amendment No. 1 Thereto Relating to

the Archipelago Exchange

November 21, 2000.

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

Securities Exchange Act of 1934

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

notice is hereby given that on July 31,

2000, the Pacific Exchange, Inc. (‘‘PCX’’

or ‘‘Exchange’’), through its subsidiary

PCX Equities, Inc. (‘‘PCXE’’ or

‘‘Corporation’’) pursuant to delegated

authority, filed with the Securities and

Exchange Commission (‘‘Commission’’

or ‘‘SEC’’) the proposed rule change as

described in Items I, II and III below,

which Items have been prepared by the

PCXE. On November 9, 2000, the

Exchange filed Amendment No. 1 to the

proposal.3 The Commission is

publishing this notice to solicit

comments on the proposed rule change,

as amended, from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The PCX, through its wholly-owned

subsidiary PCXE, proposes to create a

new electronic trading facility of the

PCXE, called the Archipelago Exchange

(‘‘Arca’’). The text of the proposed rule

change has been posted to the

Commission’s web site, www.sec.gov,

and is attached here (in blacklined

version) as Appendix A.

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

PCXE 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 PCXE 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

The PCXE proposes to establish rules

for Arca, a new exchange facility, as that

term is defined in Section 3(a)(2) of the

Act.4 Arca, which is to be operated by

Archipelago Exchange, L.L.C., would be

an electronic securities communications

and trading facility intended for the use

of Equity Trading Permit (‘‘ETP’’)

Holders and their customers.5 Arca

would provide automatic order

execution capabilities in the equity

securities listed or traded on the PCXE.

It is the PCXE’s intent to operate the

Arca facility in the place of the PCXE’s

traditional floor trading environment

and thus PCXE also proposes to

eliminate the existing PCXE Rules

related to floor trading.

1. Relationship of Archipelago

Exchange, L.L.C., to PCX Equities, Inc.

The PCX and PCXE have entered into

various agreements with Archipelago

Holdings, L.L.C., under which

Archipelago Exchange, L.L.C., a

subsidiary of Archipelago Holdings,

L.L.C., would operate Arca as a facility

of the PCXE. Pursuant to these

agreements, PCX and PCXE would

maintain responsibility for all regulatory

functions related to the facility and

Archipelago Exchange, L.L.C., would be

responsible for the business of the

facility to the extent those activities are

not inconsistent with the regulatory and

oversight functions of PCX and PCXE.

The relationship between the PCX,

PCXE, and the Archipelago entities is

explained further in proposed PCXE

Rule 14.3.6 Under proposed PCXE Rule

14.3(a), the books, records, premises,

officers, directors, agents and employees

of Archipelago Exchange, L.L.C., would

be deemed to be the books, records,

premises, officers, directors, agents and

employees of PCX and PCXE for

purposes of, and subject to, oversight

pursuant to the Act. The books and

records of Archipelago Exchange, L.L.C.,

would be subject at all times to

inspection and copying by the PCX,

PCX Equities, and the SEC. In addition,

proposed PCXE Rule 14.3(b) states that

‘‘[a]ll officers and directors of

Archipelago Holdings, L.L.C., shall be

deemed to be officers and directors of

PCX and PCXE for purposes of and

subject to oversight pursuant to the

Securities Exchange Act.’’ As set forth

in proposed PCXE Rule 14.3(c),

however, paragraphs (a) and (b) of

proposed PCXE Rule 14.3 would not be

deemed to create any rights or benefits

for any person or entity other than the

SEC.

2. Archipelago Exchange

The PCXE describes Arca, the

proposed electronic trading venue, as a

limit order book, characterized by pricetime priority that would provide

execution enhancements such as

additional order types. Under the

proposal, market makers would

participate electronically in Arca to

enhance liquidity in the book and could

interact with order flow subject to

automatic price improvement

requirements. In addition, orders could

be crossed on Arca subject to price

improvement where the price and time

priority of the limit order book is

protected.

Arca is described in more detail in the

following subsections. Specifically,

subsection (a) describes who may access

Arca. Subsection (b) discusses the

registration requirements as well as the

trading obligations of market makers

and Odd Lot Dealers. Subsection (c)

describes trading on Arca in detail,

including a description of how orders

are executed during Arca’s three trading

sessions. Finally, subsections (d)

through (g) discusses the proposed rules

regarding trade execution and reporting,

clearance and settlement, Arca’s

interaction with OptiMark, and the

limitation of liability with regard to

Arca, respectively.

a. Access to the Archipelago

Exchange. The PCXE would authorize

any ETP Holder or Sponsored

Participant (collectively, ‘‘Users’’)7 who

meet certain enumerated requirements

to obtain access to Arca. A ‘‘Sponsored

Participant’’ is a person, such as an

institutional investor, who has entered

into a sponsorship arrangement with an

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78823

8See proposed PCXE Rule 1.1(jj) (definition of

‘‘Sponsored Participant’’).

9See proposed PCXE Rule 1.1(pp) (definition of

‘‘User Agreement’’).

10See proposed PCXE Rule 7.29(a).

11See proposed PCXE Rule 1.1(kk) (definition of

‘‘Sponsoring ETP Holder’’). A Sponsoring ETP

Holder must be either (i) a clearing firm with

membership in a clearing agency registered with the

Commission that maintains facilities through which

transactions may be cleared or (ii) a correspondent

firm with a clearing arrangement with any such

clearing firm. Id.

12See proposed PCXE Rule 7.29(b)(1).

13See proposed PCXE Rule 1.1(ll) (definition of

‘‘Sponsorship Provisions’’).

14See proposed PCXE Rule 7.29(b)(2).

15See proposed PCXE Rule 1.1(y) (definition of

‘‘Notice of Consent’’).

16See proposed PCXE Rule 7.29(b)(3).

17See proposed PCXE Rule 1.1(g) (definition of

‘‘Authorized Trader’’).

18See proposed PCXE Rule 7.30 (‘‘Authorized

Traders’’).

19See proposed PCXE Rule 1.1(u) (definition of

‘‘Market Maker’’).

20The Commission notes that the proposal does

not require that a market be assigned to every PCXE

security traded through Arca, and thus it is possible

that PCXE trades on Arca could occur without the

benefit of a market maker.

21See proposed PCXE Rule 7.20(a).

22See proposed PCXE Rule 7.20(a) and& (b).

23See proposed PCXE Rule 7.20(b).

24See proposed PCXE Rule 7.20(c).

25See proposed PCXE Rule 7.20(d).

26See proposed PCXE Rule 7.20(e).

ETP Holder.8 The requirements for

access are as follows: First, all Users—

both ETP Holders and Sponsored

Participants—would have to enter into a

User Agreement9 with Archipelago

Exchange, L.L.C., the operator of the

Arca facility.10 Second, Sponsored

Participants would have to enter into a

sponsorship arrangement with a

‘‘Sponsoring ETP Holder,’’ which is

defined as an ETP Holder that has been

designated by a Sponsored Participant

to execute, clear and settle transactions

on Arca.11 The sponsorship

arrangement consists of three separate

components. First, the Sponsored

Participant would have to enter into and

maintain a customer agreement with its

Sponsoring ETP Holder, establishing a

proper relationship and account through

which the Participant may trade on

Arca.12

Second, the Sponsored Participant

and its Sponsoring ETP Holder would

have to enter into a written agreement

which incorporates the Sponsorship

Provisions,13 which include the

following:

(1) The Sponsoring ETP Holder

acknowledges and agrees that: (i) All orders

entered by its Sponsored Participant and any

person acting on behalf of or in the name of

such Sponsored Participant and any

executions occurring as a result of such

orders are binding in all respects on the

Sponsoring ETP Holder and (ii) the

Sponsoring ETP Holder is responsible for any

and all actions taken by such Sponsored

Participant and any person acting on behalf

of or in the name of such Sponsored

Participant.

(2) The Sponsored Participant agrees that

it will comply with the PCXE Certificate of

Incorporation, Bylaws, Rules and procedures

with regard to its activity on Arca, as if the

Sponsored Participant were an ETP Holder.

(3) The Sponsored Participant agrees that

it will maintain, keep current and provide to

the Sponsoring ETP Holder a list of its

Authorized Traders who may obtain access to

Arca on behalf of the Sponsored

Participant(s).

(4) The Sponsored Participant agrees that

it will familiarize its Authorized Traders

with all of the Sponsored Participant’s

obligations under its Arca-related agreements

and the PCXE Rules and will assure that they

receive appropriate training prior to any use

or access to Arca.

(5) The Sponsored Participant agrees that

it will not permit anyone other than

Authorized Traders to use or obtain access to

Arca.

(6) The Sponsored Participant agrees that

it will take reasonable security precautions to

prevent unauthorized use or access to Arca,

including unauthorized entry of information

into Arca, or the information and data made

available therein. The Sponsored Participant

understands and agrees that it is responsible

for any and all orders, trades and other

messages and instructions entered,

transmitted or received under identifiers,

passwords and security codes of Authorized

Traders, and for the trading and other

consequences thereof.

(7) The Sponsored Participant

acknowledges its responsibility for

establishing adequate procedures and

controls that permit it to effectively monitor

its employees, agents and customers’ use of

and access to Arca for compliance with the

terms of the Sponsorship Provisions.

(8) The Sponsored Participant agrees that

it will pay when due all amounts, if any,

payable to the Sponsoring ETP Holder,

Archipelago Exchange, L.L.C., PCXE, or any

other third parties that arise from the

Sponsored Participant’s access to and use of

Arca. Such amounts include, but are not

limited to, applicable exchange and

regulatory fees.14

Finally, the Sponsoring ETP Holder

would have to provide PCXE with a

‘‘Notice of Consent,15 which

acknowledges the Sponsoring ETP

Holder’s its responsibility for the orders,

executions and actions of its Sponsored

Participant.16

As a further condition to access to

Arca, each ETP Holder would have to

maintain an up-to-date list of persons

who could obtain access to Arca on

behalf of the ETP Holder or the ETP

Holder’s Sponsored Participants, i.e.,

Authorized Traders,17) and provide the

list to the PCXE upon request. In

addition, each ETP Holder would have

to have have reasonable procedures to

ensure that all of its Authorized Traders

maintain the physical security of Arca

and otherwise comply with the PCXE

Rules. If the PCXE determines that an

Authorized Trader has caused an ETP

Holder to violate the PCXE Rules, the

PCXE may could direct the ETP Holder

to suspend or withdraw the person’s

status as an Authorized Trader.18

b. Market Makers. The PCXE intends

to replace its traditional floor specialists

with makers 19 trading on Arca. Based

on this change, the PCXE proposes to

delete all existing PCXE Rules related to

specialists and substitute rules related

to market makers, as discussed in more

detail below.20 The registered market

makers would be designated as dealerspecialists on the PCXE for all purposes

under the Act.21

i. Registration of Market Makers. To

act as a market maker on Arca, an ETP

Holder would have to register as a

market maker by filing a written

application with the PCXE.22 In

determining whether to approve a

market maker application, the PCXE

will would consider, among other

things, the ETP Holder’s capital

operations, personnel, technical

resources, and disciplinary history.23

The applicant’s registration would

become effective upon receipt by the

ETP Holder of notice of the PCXE’s

approval of the registration. If the

application is disapproved, the

applicant would have the opportunity to

be heard upon the specific grounds of

the denial under the provisions of Rule

10.13.24

A market maker’s registration could

be suspended or terminated by the

PCXE upon a determination of any

substantial or continued failure by the

market maker to engage in dealings in

accordance with the market maker’s

obligations under proposed PCXE Rule

7.23, as discussed below.25 In addition,

a registered market maker could

withdraw its registration by giving

written notice to the PCXE. The

withdrawal would become effective on

the tenth business day following the

PCXE’s receipt of the notice. A market

maker who fails to give a ten-day notice

of withdrawal could be subject to formal

disciplinary action pursuant to PCXE

Rule 10. After a withdrawal, the ETP

Holder shall would not be permitted to

re-register as a market maker for a

period of six months.26

In addition to registering as a market

maker generally, a market maker also

would have to register in each security

in which it wishes to make a market on

Arca. To become registered in a

security, a market maker would have to

78824 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

27See proposed PCXE Rule 7.22(a).

28See proposed PCXE Rule 7.22(b).

29See proposed PCXE Rule 7.22(d).

30See proposed PCXE Rule 7.22(c).

31See proposed PCXE Rule 7.22(e). See also

proposed PCXE Rule 10.13(a)(5).

32See proposed PCXE Rule 1.1(v) (definition of

‘‘MMAT’’).

33See proposed PCXE Rule 7.21(b). Proposed

Rule PCXE 7.21(b)(2) states that, ‘‘[t]o be eligible for

registration as a MMAT, a person must successfully

complete the General Securities Representative

Examination (Series 7) and complete a training and

certification program sponsored by the Corporation;

provided, however, the requirement to complete the

Series 7 Examination may be waived by the

Corporation if the applicant MMAT has served as

a dealer-specialist or market maker on a registered

national securities exchange or association for at

least two consecutive years within three years of the

date of application.’’ See also proposed PCXE Rule

7.21(b)(5) and proposed PCXE Rule 2.4(b)(10)(A).

34See proposed PCXE Rule 7.21(a).

35See proposed PCXE Rule 7.21(c).

36See proposed PCXE Rule 1.1(j) (‘‘Core Trading

Hours’’ mean the hours of 6:30 a.m. through 1:00

p.m. (Pacific Time) or such other hours as may be

determined by the PCXE from time to time).

37See proposed PCXE Rule 7.31(k) (definition of

‘‘Q Order’’). A Q Order may not be a Working

Order.

38See proposed PCXE Rule 1.1(p) (definition of

‘‘Good Standing’’).

39See proposed PCXE Rule 7.23(a) and & (b).

40See proposed PCXE Rule 7.23(c). See also

proposed PCXE Rule 10.13(a)(6).

41See proposed PCXE Rule 7.23(d).

42See proposed PCXE Rule 1.1(aa) (definition of

‘‘Odd Lot Dealer’’).

43See proposed PCXE Rule 7.25(b).

file a security registration application

form with the PCXE. In determining

whether to approve or disapprove the

market maker’s registration in a

security, the PCXE may could consider:

(1) The financial resources available to

the market maker; (2) the market

maker’s experience, expertise and past

performances in making markets,

including the market maker’s

performance in other securities; (3) the

market maker’s operational capability;

(4) the maintenance and enhancement

of competition among market makers in

each security in which it is registered;

(5) the existence of satisfactory

arrangements for clearing the market

maker’s transactions; and (6) the

character of the market for the security

(e.g., price, volatility, and relative

liquidity). Registration in a security will

would become effective on the first

business day following the PCXE’s

approval of the registration.27

Under the proposal, PCXE could

terminate a market maker’s registration

in a security if the market maker fails to

enter quotations in the security within

five business days after the market

maker’s registration in the security

becomes effective.28 Furthermore, PCXE

could suspend or terminate the market

maker’s registration in a security or

securities whenever, in the PCXE’s

judgment, the interests of a fair and

orderly market are best served by such

action.29

In addition, a market maker could

voluntarily terminate its registration in

a security by providing PCXE with a

one-day written notice. A market maker

that failed to give advanced written

notice of such termination could be

subject to formal disciplinary action

pursuant to PCXE Rule 10.30 Finally, an

ETP Holder could seek review of any

action taken by the PCXE pursuant to

proposed PCXE Rule 7.22 governing a

market maker’s registration in a

security, including the denial of the

application for, or the termination or

suspension of, a market maker’s

registration in a security or securities, in

accordance with PCXE Rule 10.31

ii. Market Maker Authorized Traders.

Each market maker would have to apply

in writing to the PCXE to register a

‘‘Market Maker Authorized Trader’’ or

‘‘MMAT,’’ 32 which is an Authorized

Trader that performs market making

activities on behalf of his or her market

maker. An MMAT would have to be an

officer, partner, employee or another

associated person of a market maker,

who is properly qualified to perform

market making activities and has been

trained and certified in the use of

Arca.33 Once registered, an MMAT

could only submit orders for the

account of its own market maker.34 The

PCXE may suspend or withdraw an

MMAT’s registration if the PCXE

determines that: (1) The person has

caused the market maker to fail to

comply with the securities laws, rules

and regulations or the Bylaws, Rules or

procedures of the PCXE; (2) the person

is not properly performing the

responsibilities of an MMAT; (3) the

person has failed to pass the Series 7 or

to acquire the requisite certification

and/or training, as necessary; or (4)

PCXE believes it is in the interest of

maintaining fair and orderly markets. If

the PCXE suspended the registration of

a person as an MMAT, the market maker

could not allow the person to submit

orders to Arca. In addition, PCXE would

withdraw the registration of an MMAT

upon the written request of the MMAT’s

market maker.35

iii. Obligations of Market Makers.

Market makers electronically engage in

a course of dealings for their own

account to enhance liquidity available

to Arca and to assist in the maintenance,

insofar as reasonably practicable, of fair

and orderly markets. In addition, market

makers may interact with directed order

flow, subject to price improvement

requirements and certain obligations

and duties.

Specifically, market makers would

have to satisfy the following

responsibilities and duties during Core

Trading Hours: 36 (1) maintain

continuous, two-sided Q Orders, which

are limit orders submitted to Arca by a

market maker, in those securities in

which the market maker is registered to

trade; 37; (2) maintain adequate

minimum capital in accordance with

PCXE Rule 4.1; (3) remain in Good

Standing 38 with the PCXE; (4) inform

PCXE of any material change in

financial or operational condition or in

personnel; (5) clear and settle

transactions through the facilities of a

registered clearing agency; and (6) enter

and maintain a Cleanup Order in each

security in which the market maker is

registered as such for each Market Order

Auction.39 If the PCXE found any

substantial or continued failure by a

market maker to meet the above

responsibilities and duties, the PCXE

could subject the market maker to

disciplinary action or suspension or

revoke the market maker’s registration

in one or more securities. In accordance

with PCXE Rule 10, an ETP Holder

could seek review of actions taken by

the PCXE pursuant to this Rule 7.23.40

The market maker could apply to the

PCXE to withdraw temporarily from its

market maker status. This request would

have to be based on a demonstrated

legal or regulatory requirement that

necessitates its temporary withdrawal.

The PCXE would act promptly on the

request and, if the request is granted, the

PCXE could temporarily reassign the

securities to another market maker.41

iv. Odd Lot Dealers. In addition to the

market maker obligations discussed

above, a market maker would have to

become an Odd Lot Dealer 42 for each

security in which it is registered as a

market maker.43 Furthermore, a market

maker could apply to register as an Odd

Lot Dealer in any other security.

Any market maker could become

registered as an Odd Lot Dealer in any

security by filing an odd lot registration

form with the PCXE. Registration as an

Odd Lot Dealer becomes effective on the

first business day following the PCXE’s

approval of the registration. In

considering the approval of the

registration of the market maker as an

Odd Lot Dealer in a security, the PCXE

would consider such factors as financial

resources, capital operations, personnel,

technical resources and disciplinary

history. If the PCXE denies an

application to become an Odd Lot

Dealer in a security or securities, the

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78825

44See proposed PCXE Rule 7.25(a).

45For a discussion of Odd Lot Tracking Orders

and the execution thereof, see Section (2)(c)(iv).

46See proposed PCXE Rule 7.25(c).

47See proposed PCXE Rule 7.25(d).

48See proposed PCXE Rule 7.25(e). See also

proposed PCXE Rule 10.13(a)(7).

49See proposed PCXE Rule 1.1(o) (definition of

‘‘General Authorized Trader’’).

50See proposed PCXE Rule 7.26(a).

51See proposed PCXE Rule 7.26(b)(1).

52See proposed PCXE Rule 7.26(b)(2).

53See proposed PCXE Rule 7.26(b)(3).

54See proposed PCXE Rule 7.26(c).

applicant could seek review of the

decision in accordance with PCXE Rule

10.13.44

Once registered, an Odd Lot Dealer is

obligated to: (1) Maintain an Odd Lot

Tracking Order, as described in

proposed PCXE Rule 7.31(g), during

each day in which the PCXE is open for

business for each security in which the

Odd Lot Dealer is registered as such; 45

and (2) register and maintain

registration as an Odd Lot Dealer in a

minimum of 100 securities if the Odd

Lot Dealer registers as such in any

security for which it is not registered as

a market maker.46

Under proposed PCXE Rule 7.25(d) an

Odd Lot Dealer’s registration in a

security or securities could be

suspended or terminated if: (1) The

PCXE determines that the Odd Lot

Dealer has substantially or continually

failed to engage in dealings as required

of an Odd Lot Dealer; or (2) if, in the

PCXE’s judgment, the interests of a fair

and orderly market are best served by

such action. An ETP Holder could seek

review of any such termination or

suspension in accordance with

proposed PCXE Rule 10.47

Finally, an Odd Lot Dealer could

voluntarily terminate its registration as

such in a security or securities by

providing the PCXE with a one-day

written notice of such termination. An

Odd Lot Dealer that fails to give advance

notice of termination to the PCXE could

be subject to formal disciplinary action

pursuant to proposed PCXE Rule 10.48

v. Limitations on Dealings. Under the

proposed rules, a market maker could:

(1) Conduct an investment banking or

public securities business; (2) function

as a General Authorized Trader

(‘‘GAT’’), i.e., an Authorized Trader who

performs only non-market making

activities on behalf of an ETP Holder; 49

or (3) make markets in the options

overlying the security in which it makes

markets; (collectively, ‘‘Other Business

Activities’’) or it could be affiliated with

a broker-dealer that engages in Other

Business Activities only if there is an

Information Barrier (also commonly

referred to as a Chinese Wall) between

the market making activities and the

Other Business Activities.50

An Information Barrier is an

organizational structure in which the

market making functions are conducted

in a physical location separate from the

locations in which the Other Business

Activities are conducted in a manner

that impedes the free flow of

communications between MMATs and

persons conducting the Other Business

Activities. However, upon request and

not on his or her own initiative, an

MMAT performing the function of a

market maker could furnish to persons

at the same firm or an affiliated firm

(‘‘affiliated persons’’) the same sort of

market information that the MMAT

would make available to any other

person in the normal course of its

market making activity. The MMAT

would have to provide such information

to affiliated persons in the same manner

that he or she would make such

information available to a non-affiliated

person.51

Procedures would have to be

implemented to prevent the use of

material non-public corporate or market

information in the possession of persons

on one side of the barrier from

influencing the conduct of persons on

the other side of the barrier. The

procedures, at a minimum, would have

to provide that (1) The MMAT

performing the function of a market

maker does not take advantage of

knowledge of pending transactions,

order flow information, corporate

information, or recommendations

arising from Other Business Activities;

and (2) all information pertaining to the

market maker’s positions and trading

activities is kept confidential and not

made available to persons on the other

side of the Information Barrier.52

Although persons on one side of the

barrier could not exercise influence or

control over persons on the other side

of the barrier, the following could occur:

(1) The market making function and the

Other Business Activities could be

under common management as long as

any general management oversight does

not conflict with or compromise the

market maker’s responsibilities; (2) the

same person or persons (the

‘‘Supervisor’’) could be responsible for

the supervision of the market making

and the GAT functions of the same firm

or affiliated firms in order to monitor

the overall risk exposure of the firm or

affiliate firms. While the Supervisor

could establish general trading

parameters with respect to both market

making and other proprietary trading

other than on an order-specific basis,

the Supervisor could not (1) act as either

an MMAT or GAT; (2) provide to any

GAT any information relating to market

making activity beyond the information

that an MMAT would normally provide

to any other person in the course of its

market making activity; or (3) provide

an MMAT with specific information

regarding the firm’s pending

transactions or order flow arising out of

its GAT activities.53

An ETP Holder that intends to

implement an Information Barrier

would have to submit to the PCXE a

written statement setting forth the

following:

(1) The manner in which it intends to

comply with the requirements of an

Information Barrier (as discussed above) and

the compliance and audit procedures it will

implement to maintain the Barrier;

(2) The names and titles of the person(s)

responsible for the maintenance and

surveillance of the procedures;

(3) A commitment to provide the PCXE

with such information and reports as the

PCXE could request relating to its

transactions;

(4) A commitment to take appropriate

remedial action against any person violating

this Rule or the ETP Holder’s internal

compliance and audit procedures and that it

recognizes that the PCXE could take

appropriate remedial action in the event of

such a violation;

(5) Whether the ETP Holder or an affiliate

intends to clear its proprietary trades, and, if

so, the procedures established to ensure that

information with respect to such clearing

activities will not be used to compromise the

Information Barrier (which procedures, at a

minimum, would have to be the same as

those used by the ETP Holder or the affiliate

to clear for unaffiliated third parties). These

procedures would have to provide that any

information pertaining to market maker

securities positions and trading activities,

and information derived from any clearing

and margin financing arrangements, could be

made available only to those employees

specifically authorized to have access to such

information or to other employees in senior

management positions who are involved in

exercising general managerial oversight with

respect to market making activity.

Furthermore, any margin financing

arrangements would have to be sufficiently

flexible so as not to limit the ability of any

market maker to meet market making or other

obligations under the PCXE Rules; and

(6) That it recognizes that any trading by

a person while in possession of material,

non-public information received as a result of

the breach of the internal controls could be

a violation of the Act, or the rules

thereunder, or PCXE Rules.54

After the submission of the written

statement detailing the internal controls

and compliance and audit procedures to

PCXE, if the PCXE determines that the

structure and procedures are acceptable,

PCXE will inform the ETP Holder in

writing of their acceptability. Absent a

78826 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

55See proposed PCXE Rule 7.26(d).

56See proposed PCXE Rule 7.26(e).

57See generally proposed PCXE Rule 7.31.

58See proposed PCXE Rule 7.31(h).

59See proposed PCXE Rule 7.31(h)(1).

60See proposed PCXE Rule 7.31(h)(2).

61See proposed PCXE Rule 7.31(h)(3).

62See proposed PCXE Rule 7.31(v).

63See proposed PCXE Rule 1.1(s) (‘‘Limited Price

Order’’ is defined as any order with a specified

price or prices (e.g., limit orders and Working

Orders), other than Stop Orders).

64See proposed Rule 7.31(i) (definition of

‘‘Directed Order’’).

66See proposed PCXE Rule 1.1(z) (definition of

‘‘NOW Recipient’’).

67See proposed PCXE Rule 7.31(t). See Section

2(c)(vii) for a discussion of the Auction-Only Limit

Orders role in the Market Order Auction.

68See generally proposed PCXE Rule 7.31.

69See proposed PCXE Rule 7.33.

70See proposed PCXE Rule 1.1(a) (definition of

‘‘Arca Book’’).

71See proposed PCXE Rule 1.1(a) (definition of

‘‘Arca Book’’).

finding that an ETP Holder’s

Information Barrier procedures are

acceptable, a market maker could not

conduct Other Business Activities.55

Finally, an ETP Holder or an affiliate

of the ETP Holder could clear the ETP

Holder’s market maker transactions if it

establishes procedures to ensure that

information with respect to clearing

activities would not be used to

compromise the Information Barrier. In

this regard, the procedures would have

to provide that any information

pertaining to market maker securities

positions and trading activities, and

information derived from any clearing

and margin financing arrangements,

could be made available only to those

employees (other than employees

actually performing clearing and margin

functions) specifically authorized to

have access to such information or to

other employees in senior management

positions who are involved in exercising

general managerial oversight with

respect to the market making activity.

Furthermore, any margin financing

arrangements would have to be

sufficiently flexible so as not to limit the

ability of any market maker to meet

market making or other obligations

under the PCXE Rules.56

c. Trading on the Archipelago

Exchange. i. Order Entry—Users would

enter into Arca the following standard

types of orders: Market orders, limit

orders, Day Orders, Good-Til-Canceled

(GTC) Orders, Immediate-or-Cancel

Orders, Stop Orders, Stop Limit Orders,

Do Not Reduce, Do Not Increase, and

Timed Orders.57

In addition, Users could utilize

Working Orders, which are defined to

include ‘‘any order with a conditional or

undisplayed price and/or size

designated as a ‘Working Order,’ ’’

including All-or-None, Discretionary,

and Reserve Orders.58 An All-or-None

Order is a limit order which is to be

executed in its entirety or not at all.59

A Discretionary Order is an order to buy

or sell a stated amount of a security at

a specified, undisplayed price (the

‘‘discretionary price’’), in addition to at

a specified, displayed price (‘‘displayed

price’’).60 For example, a User could

submit a Discretionary Order to buy

5000 shares of XYZ at 20, with

discretion to 20.25. In that case, the

User represents a displayed price of 20,

but the User is willing to buy the 5000

shares at a price up to the discretionary

price of 20.25. A Reserve Order is a

limit order with a portion of the size

displayed and with a reserve portion of

the size (‘‘reserve size’’) that is not

displayed on the Arca book.61 For

example, a User could submit a Reserve

Order to buy 5000 shares of XYZ at 20

with a request that 1000 shares be

displayed. Therefore, the 1000 shares

are displayed and 4000 shares, as the

reserve size, are not displayed.

Arca would also accept NOW

Orders.62 A NOW Order is a Limited

Price Order 63 that is to be executed in

whole or in part on Arca, and the

portion not so executed would be routed

pursuant to Rule 7.37(d) only to one or

more NOW Recipients for immediate

execution as soon as the order is

received by the NOW Recipient. Any

portion not immediately executed by

the NOW Recipient would be cancelled.

If a NOW Order is not marketable when

it is submitted to the PCXE, it would be

cancelled. NOW Orders cannot be

Directed Orders.64 For the purposes of a

NOW Order, a NOW Recipient means

any exchange, ECN, or other brokerdealer (1) with which Arca maintains an

electronic linkage, which includes ITS,

and (2) which provides instantaneous

responses to NOW Orders routed from

Arca. The PCXE would designate from

time to time those exchanges, ECNs, or

other broker-dealers that qualify as

NOW Recipients.66 An Auction-Only

Limit Order, which is a limit order that

could be executed only during the

Market Order Auction, would also be

submitted to Arca.67 In addition, Users

could submit Primary Only Orders (‘‘PO

Orders’’) which are market orders, for

exchange-listed securities only, that are

to be routed as a market-on-open order

to the primary market for participation

in the primary market opening process.

A PO Order would have to be entered

before 6:28 a.m. (Pacific Time) and it

would not be included in the Market

Order Auction.

Furthermore, as discussed in more

detail in other sections, Users could

submit Tracking Orders, Odd Lot

Tracking Orders, Directed Orders,

Directed Fills, Q Orders, Fill-or-Return

Orders, Fill-or-Return Plus Orders, PNP

Orders, Cross Orders and Cleanup

Orders as well.68

Finally, as a general matter, consistent

with proposed PCXE Rules, ETP Holder

Users of Arca could enter both

proprietary orders and agency orders for

the account of a customer. Proprietary

orders entered into Arca are subject to

the same display and execution

processes as agency orders. An ETP

Holder User that enters a proprietary

order into Arca would mark the order

with the appropriate designator to

identify the order as proprietary.69

ii. Order Ranking and Display. Arca

would maintain an electronic file of

orders, called the Arca Book, which

contains all the User’s orders in the four

components, called Processes, of the

Arca Book.70 Specifically, the Arca

Book contains the Directed Order,

Display Order, Working Order, and

Tracking Order Processes.71 Limited

Price Orders of Users submitted to Arca

(other than such orders as Directed Fills

and Tracking Orders) would be ranked

and maintained in the Display Order

Process and/or Working Order Process

of the Arca Book according to price-time

priority, such that within each price

level, all orders would be organized by

the time of entry, as discussed in more

detail below.

The displayed portion of orders are

ranked in the Display Order Process.

One category of orders—limit orders,

with no other conditions—would be

ranked in the Display Order Process

based on the specified limit price and

the time of original order entry. With

regard to Reserve Orders, the displayed

portion of Reserve Orders (not the

reserve size) would be ranked in the

Display Order Process at the specified

limit price and the time of order entry.

If the displayed portion of the Reserve

Order is decremented in its entirety, the

displayed portion of the Reserve Order

would be refreshed for the displayed

amount from the reserve portion and

would be submitted and ranked at the

specified limit price and the new time

that the displayed portion of the order

was refreshed. Finally, Discretionary

Orders would be ranked in the Display

Order Process based on the displayed

price (not the discretionary price) and

the time of order entry. If a

Discretionary Order is decremented, it

remains ranked based on the displayed

price and the time of original order

entry.

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78827

72See proposed PCXE Rule 7.36(b).

73 17 CFR 240.11Ac1–1.

74See proposed PCXE Rule 7.36(c).

75 17 CFR 240.10a–1.

76See proposed PCXE Rule 1.1(x) (the term

‘‘NBBO’’ refers to the national best bid or offer).

77See proposed PCXE Rule 7.31(i) (definition of

‘‘Directed Order’’).

78See proposed PCXE Rule 7.37(a).

79See proposed PCXE Rule 1.1(h) (the term

‘‘BBO’’ refers to the best bid or offer on Arca).

80See proposed PCXE Rule 7.6, Commentary .06.

81See proposed PCXE Rule 7.31(j) (definition of

‘‘Directed Fill’’).

82See proposed PCXE Rule 1.1(t) (‘‘Marketable’’

means, for a Limited Price Order, the matches or

price crosses the NBBO on the other side of the

market. Market orders are always considered

marketable.).

83See proposed PCXE Rule 7.37(a).

84See proposed PCXE Rule 7.37(b).

Only All-or-None Orders and the

undisplayed portion of Reserve Orders

and Discretionary Orders are ranked in

the Working Order Process. The reserve

portion of Reserve Orders would be

ranked in the Working Order Process

based on the specified limit price and

the time of original order entry. After

the displayed portion of a Reserve Order

is refreshed from the reserve portion,

the reserve portion remains ranked

based on the original time of order

entry, while the displayed portion is

sent to the Display Order Process with

a new time-stamp. Discretionary Orders

would be ranked in the Working Order

Process based on the displayed price

and the time of original order entry.

After a Discretionary Order is

decremented, it remains ranked as

described above. All-or-None Orders

would be ranked in the Working Order

Process based on the specified limit

price and the time of order entry.

PCXE offers the following example to

clarify how orders are ranked in the

Display and Working Order Processes.

Suppose that the following orders are

submitted to Arca by Users:

10:00 a.m.—Order A—Limit order to

buy 1000 XYZ at 20

10:01 a.m.—Order B—Reserve Order to

buy 5000 XYZ at 20 (show 1000)

10:02 a.m.—Order C—Limit order to

buy 500 XYZ at 20

10:03 a.m.—Order D—Discretionary

Order to buy 5000 XYZ at 20

(discretion to 20.25)

10:04 a.m.—Order E—All-or-None to

buy 1500 XYZ at 20

10:05 a.m.—Order F—Q Order to buy

1000 XYZ at 20

10:06 a.m.—Order G—Limit order to

buy 700 XYZ at 20

10:07 a.m.—Order H—Q Order to buy

500 XYZ at 20

10:08 a.m.—Order I—Discretionary

Order to buy 10,000 XYZ at 20

(discretion to 20.25)

Orders A–H would be ranked in the

Arca Book as follows: In the Display

Order Process, the orders would be

ranked in the following order: (1) Order

A; (2) Order B1 (the displayed 1000

shares of Order B); (3) Order C; (4) Order

D1 (the displayed price of 20 for Order

D); (5) Order F; (6) Order G; (7) Order

H; and (8) Order I1 (the displayed price

of 20 for Order I). In the Working Order

Process, the orders would be ranked in

the following order: (1) Order B2 (4000

shares of the reserve portion of Order B);

(2) Order D2 (the discretionary price up

to 20.25 for Order D); (3) Order E; and

(4) Order I2 (the discretionary price up

to 20.25 for Order I).

iii. Order Display and Dissemination.

Arca would operate the Arca Book on an

open basis. All orders at all price levels

in the Display Order Process of the Arca

Book would be displayed to all Users on

an anonymous basis. In addition, the

same information would be made

available to other interested parties.72

Furthermore, the best-ranked displayed

order(s) to buy and sell in the Arca Book

and the corresponding aggregate size of

such orders associated with such prices

would be collected and made available

to quotation vendors for dissemination

pursuant to the requirements of Rule

11Ac1–1 73 under the Act.74

iv. Order Execution. Subject to the

restrictions on short sales under Rule

10a-1 under the Exchange Act,75 likepriced orders, bids and offers would be

matched for execution by following

Steps 1 through 5, as described below;

provided, however, that for an

execution to occur in any Order Process

the price would have to be equal to or

better than the NBBO,76 unless Arca has

routed orders to all away markets at the

NBBO:

Step 1: Directed Order Process. The

first step of the Arca execution

algorithm is the Directed Order Process.

Through this process, Users could direct

an order to a market maker with whom

they have a relationship and the market

maker would execute the order. To

access this process, the User would have

to submit a Directed Order, which is a

market or limit order to buy or sell

which has been directed to a particular

market maker by the User.77 Any type

of order other than a Directed Order

would skip the Directed Order Process

and immediately enter Step 2, the

Display Order Process. The Directed

Order Process is available only during

Core Trading Hours.78

In the Directed Order Process, the

User’s Directed Order would be

executed against a Directed Fill, which

is the order of the User’s designated

market maker. Specifically, any market

maker could submit a standing

instruction to Arca for the parameters of

a Directed Fill, including, but not

limited to, the size of the order, the

Users that could send such market

maker a Directed Order, the price

improvement algorithm, and the period

of time the instruction is effective. The

market maker’s Directed Fill described

in the instruction would be generated

only in response to a Directed Order

directed to such market maker. The

Directed Fill is a limit order with a size

that is equal to or less than the size of

the Directed Order and a price that

improves the BBO79 by an automatically

preset amount, which would have to be

equal to or greater than the Minimum

Price Improvement Increment,80

pursuant to a price improvement

algorithm; provided, however, that the

Directed Fill would not be generated if

the price is not equal to or better than

the NBBO. In other words, a market

maker may not execute against a

Directed Order without improving the

best price on the Arca Book. A market

maker may modify the parameters of the

instruction for a Directed Fill from time

to time, as the PCXE permits.81

If a User submits a marketable 82

Directed Order to Arca and the User’s

designated market maker has a standing

instruction for a Directed Fill, the

Directed Order would be executed

against the Directed Fill of the

designated market maker. If a User

submits a marketable Directed Order

and the User’s designated market maker

has not submitted an instruction for a

Directed Fill, or if a User submits any

order other than a marketable Directed

Order, the Directed Order would enter

the Display Order Process without

interacting with any Directed Fills.83

Step 2: Display Order Process. If an

incoming marketable order has not been

executed in its entirety in the Directed

Order Process, any remaining part of the

order would be routed to the Display

Order Process, Step 2 of the execution

algorithm.84 In the Display Order

Process, Arca would match an incoming

marketable order against orders in the

Display Order Process at the display

price of the resident order for the total

size available at that price or for the size

of the incoming order, whichever is

smaller. For the purposes of the Display

Order Process, the size of an incoming

Reserve Order includes the displayed

and reserve size and the size of the

portion of the Reserve Order resident in

the Display Order Process is equal to its

displayed size. If the incoming

marketable order has not been executed

in its entirety, the remaining part of the

78828 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

85See proposed PCXE Rule 7.37(b)(1).

86See proposed PCXE Rule 7.37(b)(2).

87See proposed PCXE Rule 7.37(b)(2)(A).

88See proposed PCXE Rule 1.1(w) (‘‘Market

Participant’’ includes ECNs, dealer-specialists

registered with a national securities exchange and

market makers registered with a national securities

association).

89See proposed PCXE Rule 7.37(b)(2)(B).

90See proposed PCXE Rule 7.37(c).

91See proposed PCXE Rule 7.37(c)(1).

92See proposed PCXE Rule 7.31(f) (definition of

‘‘Tracking Order’’).

93See proposed PCXE Rule 7.31(g) (definition of

‘‘OLTO’’).

94See proposed PCXE Rule 7.37(c)(2).

order would be routed to the Working

Order Process.85

An incoming order that is not

marketable would skip the Display

Order Process and enter the Working

Order Process to be executed against

any Discretionary Orders at or better

than the NBBO.86

Step 3: Working Order Process. An

incoming marketable order would be

matched for execution against orders in

the Working Order Process in the

following manner: An incoming

marketable order would be matched

against orders within the Working Order

Process in the order of their ranking, at

the price of the displayed portion (or in

the case of an All-or-None Order, at the

limit price), for the total amount of stock

available at that price or for the size of

the incoming order, whichever is

smaller. If the BBO is outside the NBBO

and any Discretionary Orders within the

Working Order Process have a

discretionary price equal to or better

than the NBBO, the incoming order

would execute against such

Discretionary Order(s) at the NBBO up

to the size of the smaller of the two

orders. If an incoming marketable order

is a Discretionary Order or a Reserve

Order and its prices overlap with the

prices of a Discretionary Order(s) in the

Working Order Process, then the orders

would be executed at the display price

of the order that was entered first up to

the size of the smaller of the two orders.

For the purposes of this subsection, the

size of the incoming Reserve Order

includes the displayed and reserve size.

If the incoming marketable order has not

been executed in its entirety, the

remaining part of the order would be

routed to the Tracking Order Process.87

An incoming order that is not

marketable would be matched for

execution against orders in the Working

Order Process in the following manner:

The incoming order would be matched

against any Discretionary Orders in the

Working Order Process that have

discretionary prices that would satisfy

an otherwise displayable incoming

Limited Price Order. The execution

would occur at the limited price of the

incoming order. If the incoming order is

a Discretionary Order and its prices

overlap with the prices of a

Discretionary Order in the Working

Order Process, then the orders would be

executed at the discretionary price of

the incoming order that would be the

best price available for the order entered

first. If any change in the NBBO or other

available away trading interest would

cause a potential match between the

away order and an order in the Working

Order Process, a commitment to trade

would be sent to that market center or

market participant 88 pursuant to Step 5

below.89

Step 4: Tracking Order Process.

During Core Trading Hours only, the

fourth step of the execution algorithm is

the Tracking Order Process. If an order

has not been executed in its entirety in

the Directed, Display, or Working Order

Processes, Arca then would match and

execute any remaining part of the order

in the Tracking Order Process, unless

the order or portion thereof was

received from another market center or

market participant, in which case it

would be cancelled immediately.90

If the unfilled order or portion of an

order that enters the Tracking Order

Process is a mixed lot or round lot

order, Arca would match the order

against any Tracking Orders.91 Any User

could submit an instruction to Arca for

the parameters of a Tracking Order at

any time during the day, where such

parameters include: (1) the maximum

aggregate size, which is the aggregate

size of all partial orders generated in the

Tracking Order Process for a particular

security that the User is willing to trade

on that day; (2) the maximum tradeable

size, which is the maximum size of any

partial order generated in response to an

order entering the Tracking Order

Process that the User is willing to trade

on that day; (3) the price in relation to

the NBBO; and (4) the relevant security.

Once a User has submitted an

instruction for the parameters of the

Tracking Order, the instruction would

remain in effect until closing or until

the User has traded its maximum

aggregate size for that day, whichever

comes first.92

Users who have submitted an

instruction for the parameters of a

Tracking Order would be assigned

trades on a price/time rotating basis,

such that within each price level, trades

would be assigned by the time the

Users’ instructions are received by Arca.

Within each price level, the first User to

send an instruction for a Tracking Order

would be the first User to be assigned

a trade in the rotation process. For each

order that enters the Tracking Order

Process, the Tracking Order Process

would rotate once through the Users in

the rotation pattern. In each rotation, the

User would be responsible for one trade

up to the User’s maximum tradeable

size.

The order described in the User’s

Tracking Order instruction would be

generated only if an unfilled round or

mixed lot order enters the Tracking

Order Process and it is such User’s turn

as determined by the Tracking Order

Process rotation pattern.

Each partial order generated in a

rotation is a limit order in which (1) the

price is set at or better than the NBBO

at the time the unfilled order enters the

Tracking Order Process, based on the

User’s parameters; and (2) the size is (i)

equal to the User’s maximum tradeable

size if the unfilled order is equal to or

larger than the maximum tradeable size;

or (ii) equal to the size of the unfilled

order if the unfilled order is smaller

than the maximum tradeable size. A

User could modify the parameters of the

instruction for the Tracking Order from

time to time, as the PCXE permits.

After the order has been matched

against any Tracking Orders, if the order

has not been executed in its entirety and

the remaining part of the order is an odd

lot, the odd lot order would be executed

in the Odd Lot Tracking Order Process,

as described below. Otherwise the order

would be routed pursuant to the final

step of the execution algorithm.

If the unfilled order or portion of an

order that enters the Tracking Order

Process is an odd lot, Arca would match

the order against any Odd Lot Tracking

Orders 93 (‘‘OLTOs’’), using the same

rotation process described above with

regard to Tracking Orders.94 An OLTO,

which could only be submitted to Arca

by a registered Odd Lot Dealer, is a

Tracking Order in which: (1) the

maximum aggregate size is unlimited;

(2) the maximum tradeable size is 99

shares; (3) the price is set at the NBBO;

(4) the security is one in which the Odd

Lot Dealer is registered as such; and (5)

the instruction would have to be in

effect for the duration of Core Trading

Hours. The order described in the

instruction would be generated only if

an unfilled odd lot market order enters

the Odd Lot Tracking Order Process or

an odd lot limit order causes a locked

market as described in proposed PCXE

Rule 7.56.

Whenever in the judgment of the

PCXE, because of an influx of orders, a

system malfunction, or other unusual

conditions or circumstances, the

interests of a fair and orderly market so

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78829

95See proposed PCXE Rule 7.31(f)(7).

96See proposed PCXE Rule 1.1(gg) (definition of

‘‘Routing Agreement’’).

97See proposed PCXE Rule 7.37(d)(2).

98See proposed PCXE Rule 7.32.

99See proposed PCXE Rule 7.31(p) (definition of

‘‘Fill-or-Return’’).

100See proposed PCXE Rule 7.31(r) (definition of

‘‘Fill-or-Return Plus’’).

101See proposed PCXE 7.31(w).

102See proposed PCXE Rule 7.37(d)(1). 103See proposed PCXE Rule 7.37(e).

require, the PCXE could suspend the

Tracking Order Process. If the PCXE

suspends the Tracking Order Process,

the Process would become operational

again when the PCXE determines that

the conditions supporting the

suspension no longer exist.95

Step 5: Routing. The fifth step of the

Arca execution algorithm, which

involves routing orders away to other

market centers or market participants, is

available only to those ETP Holders who

have entered into a Routing Agreement.

A Routing Agreement is an agreement

between an ETP Holder and a brokerdealer affiliate of Archipelago Exchange,

L.L.C., under which the broker-dealer

affiliate agrees to act as agent for routing

orders of the ETP Holder and the ETP

Holder’s Sponsored Participants to other

market centers or broker-dealers for

execution, whenever routing is

required.96

For those ETP Holders that are parties

to a Routing Agreement and indicate

that they wish the order to be routed

away, if necessary, if the order has not

been executed in its entirety pursuant to

the other Order Processes, the order

would be routed to another market

center or market participant as

follows:97 Arca would route the order to

another market center or market

participant as a limit order priced at the

quote published by the market center or

market participant. Arca would attempt

to match the part of the order that has

not been routed away against then

available trading interest in the Arca

Book for an internal fill by following

Steps 1 through 4 again.

Orders routed to other market centers

or market participants would remain

outside Arca for a prescribed time

period during which such orders could

be executed (in whole or in part) or

declined. While an order remains

outside Arca, it would have no time

standing relative to other orders

received from Users at the same price

which could be executed against the

Arca Book. Requests from Users to

cancel their orders while the order is

routed away to another market center or

market participant and remains outside

Arca would be processed, subject to

applicable trading rules of the relevant

market center or market participant.

In the event that a marketable order

routed from Arca to another market

center or market participant is not

executed in its entirety at the other

market center or market participant’s

quote (i.e., all attempts to fill the order

are declined or timed-out), Arca would

attempt to match the residual or

declined market order against then

available trading interest in the Arca

Book for an internal fill by following

Steps 1 through 4 above. Any remaining

unmatched trading interest would be rerouted to another market center or

market participant at the next available

displayed price level.

When routing an order away to

another market center, the PCXE would

utilize such electronic intermarket

linkages and order delivery facilities as

could be approved by the Board of

Directors from time to time, subject to

such applicable requirements as could

be agreed to with the relevant market

center.

Under the proposal, if an ETP Holder

has not entered into a Routing

Agreement, the ETP Holder and its

Sponsored Participants could submit to

Arca only Fill-or-Return, Fill-or-Return

Plus, or PNP Orders, which are orders

that could not be routed outside of

Arca.98 Specifically, a Fill-or-Return

Order is an order to buy or sell that is

to be executed in whole or in part on the

PCXE, and any portion not executed on

the PCXE is to be cancelled, without

routing the order to another market

center or market participant.99

Similarly, a Fill-or-Return Plus Order is

a Fill-or-Return Order, except, in the

event any portion of the order is not

executed on the PCXE and would have

to be cancelled, Arca, after canceling the

unexecuted portion of the order, would

send an administrative message to an

ETP Holder designated by the order

entry ETP Holder informing the

designated ETP Holder that a portion of

the order was cancelled.100 A Post No

Preference (‘‘PNP’’) Order is a limit

order to buy or sell that is to be

executed in whole or in part on the

PCXE, and the portion not so executed

is to be ranked in the Arca Book,

without routing any portion of the order

to another market center. However, the

PCXE would cancel a PNP Order that

would lock or cross the NBBO.101

Therefore, if an order has not been

executed in its entirety pursuant to the

other Order Processes and it has been

designated as a Fill-or-Return, Fill-orReturn Plus Order, or a PNP Order, the

order would be cancelled at the routing

step, without routing the order away

from Arca.102

Finally, if an order has not been

executed in its entirety after following

Steps 1—5, the order would be ranked

in the Arca Book pursuant to Rule

7.36.103

Examples. The following examples

clarify the order execution process for

the Arca Book. Assuming PCXE has the

orders in the Arca Book as specified in

the ranking example above (see Section

2(c)(ii)), suppose an incoming order,

which is not a Directed Order and

therefore bypasses the Directed Order

Process, enters Arca:

Example 1. Suppose the incoming

order is a market order to sell 1000

shares of XYZ. The market order would

execute against Order A, filling both

Order A and the incoming order for

1000 shares at the price of 20.

Example 2. Suppose the incoming

order is a market order to sell 5000

shares of XYZ.

(1) The incoming order would execute

against Order A, filling Order A and

executing 1000 shares of the incoming

order at 20.

(2) Next, 1000 shares of the incoming

order would execute against the 1000

displayed shares of Order B1 at 20,

without affecting the 4000 undisplayed

shares of Order B2 in the Working Order

Process.

(3) Third, the incoming order would

execute against Order C, filling both

Order C and executing 500 shares of the

incoming order at 20.

(4) Finally, the remaining 2500 shares

of the incoming order would execute

against 2500 shares of D1 at 20,

completing the incoming order.

Example 3. Suppose the incoming

order is a market order to sell 25,200

shares of XYZ.

(1) The incoming order would execute

against Orders A, B1, and C in the same

manner as in Example 3.

(2) Then, the incoming order would

execute against Order D1 for 5000

shares at 20, filling Order D.

(3) Next, the incoming order would

execute against Order F for 1000 shares

at 20, thereby filling Order F.

(4) The incoming order then would

execute against Order G for 700 shares

at 20, thereby filling Order G.

(5) Then, the incoming order would

execute against Order H for 5000 shares

at 20, thereby filling Order H.

(6) Then, the incoming order would

execute against Order I1 for 10,000

shares at 20, thereby filling Order I.

(7) Then, because the incoming order

has exhausted orders in the Display

Order Process and has not been filled in

its entirety, it enters the Working Order

Process. First, the incoming order is

78830 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

104See proposed PCXE Rule 7.31(s) (definition of

a ‘‘Cross Order’’).

105For a description of the Minimum Price

Improvement Increment, see proposed PCXE Rule

7.6(a), Commentary .06.

106For the purposes of a Cross Order, an order of

block size would have the same meaning as set

forth in proposed PCXE Rule 7.57 regarding ITS.

See proposed PCXE Rule 7.31(s).

107For a discussion of the Opening Auction and

the Market Order Auction, see Section 2(c)(vii).

108See proposed PCXE Rule 7.34(a).

109See proposed PCXE Rule 7.34(b).

110See proposed PCXE Rule 7.34(c).

111See proposed PCXE Rule 7.34(d)(1).

112See proposed PCXE Rule 7.34(d)(2).

executed against the 4000 shares of

reserve size for Order B2. This fills the

balance of Order B.

(8) The incoming order does not

interact with Order D2 in the Working

Order Process because Order D was

filled in the Display Order Process.

(9) The incoming order then executes

against the 1500 shares of Order E at 20,

thereby filling both Order E and the

incoming order.

Example 4. Suppose the incoming

order is a market order to sell 25,300

shares of XYZ. The order would be

executed as described in Example 3,

paragraphs (1)–(9). The remaining 100

shares would be routed to the Tracking

Order Process, where they would be

executed against Tracking Order(s), if

any.

Example 5. Suppose the incoming

order is a market order to sell 25,250

shares of XYZ. The order would be

executed as described in Example 3,

paragraphs (1)–(9). The remaining 50

shares would be routed to the Tracking

Order Process, where they would be

executed against Odd Lot Tracking

Order(s), if any.

v. Crosses. Arca permits the execution

of a Cross Order, which is defined as a

two-sided order with instructions to

match the identified buy-side with the

identified sell-side at a specified price

(the ‘‘cross price’’), subject to price

improvement requirements described

below.104 A Cross Order would be

executed as follows; provided, however,

no Cross Orders would be matched at

the cross price without interacting with

any orders in the Arca Book unless the

cross price improves the BBO by the

Minimum Price Improvement

Increment.105

(1) If the cross price is equal to or

better than the NBBO and is between

the BBO, the orders could be crossed

without interacting with any other

orders.

(2) If the cross price is equal to or

better than the NBBO and is at the BBO,

the remainder of the Cross Order could

be crossed, after any relevant portion is

matched against any displayed orders

with priority in the Arca Book.

(3) If the cross price is outside the

NBBO and is between the BBO, the

remainder of the Cross Order could be

crossed, after the relevant portion is

routed away to other markets for

execution.

(4) If the cross price is outside the

NBBO and is at the BBO, the remainder

of the Cross Order could be crossed,

after any relevant portion is first routed

away to other markets for execution and

then any relevant portion is matched

against any displayed orders with

priority in the Arca Book.

(5) If the cross price is outside the

NBBO and the BBO and the NBBO is

better than the BBO, the relevant

portion of the order first would be

routed away to other markets for

execution. Then, the Cross Order would

be matched at the displayed price (if the

Cross Order is smaller than block

size 106) or at the cross price (if the Cross

Order is of block size) against displayed

orders with priority in the Arca Book.

Then, the Cross Order would be

matched at the price at which the

Working Order is represented in the

Book against all Working Orders with

priority. Finally, any remainder of the

Cross Order would be matched at the

cross price.

(6) If the cross price is outside the

NBBO and the BBO and the NBBO

equals the BBO, then the Cross Order

first would be matched at the displayed

price (if the Cross Order is smaller than

block size) or at the cross price (if the

Cross Order is of block size) against

displayed orders with priority in the

Arca Book. Then, the Cross Order would

be matched at the price at which the

Working Order is represented in the

Book against all Working Orders with

priority. Then, the relevant portion of

the order would be routed away to other

markets for execution. Finally, any

remainder of the Cross Order would be

matched at the cross price.

vi. Trading Sessions. Arca would have

three trading sessions each day the

PCXE is open for business: the Opening

Session, the Core Trading Session and

the Late Trading Session. The Opening

Session begins at 5:00 a.m. (Pacific

Time) and concludes at the

commencement of the Core Trading

Session. The Opening Auction and the

Market Order Auction 107 would occur

during the Opening Session. The Core

Trading Session begins for each security

at 6:30 a.m. (Pacific Time) or at the

conclusion of the Market Order Auction,

whichever comes later, and concludes at

1:00 p.m. (Pacific Time). Finally, the

Late Trading Session begins after the

conclusion of the Core Trading Session

and concludes at 5:00 p.m. (Pacific

Time).108

During the Core Trading Session,

market makers would be obligated to

enter Q Orders in securities in which

they are registered by the time Core

Trading Hours begin. During the

Opening Session and the Late Trading

Session, market makers are not

obligated to enter Q Orders in securities

in which they are registered. Market

makers are required to enter at least one

Cleanup Order for all securities in

which they are registered for each

Market Order Auction.109

Any Day Order entered into Arca

could remain in effect for one or more

consecutive trading sessions on a

particular day. For each Day Order

entered into Arca, the User would have

to designate for which trading session(s)

the order would remain in effect. Any

GTC Order entered into Arca would

remain in effect only during Core

Trading Sessions, unless the User

indicates that the GTC Order would

remain in effect for the Opening and/or

Late Trading Sessions.110

For each trading session, some order

types are eligible to be executed and

others are not eligible to be executed.

During the Opening Session, orders

eligible for the Display Order Process

(other than Q Orders) and for the

Working Order Process that have been

designated as available for the Opening

Session are eligible for entry into and

execution on Arca. Stop Orders are not

eligible for execution during the

Opening Session. Users could enter

market and Auction Only Limit Orders

for inclusion in the Market Order

Auction. Market orders and Auction

Only Limit Orders are not eligible for

execution during the Opening Session,

except during the Market Order

Auction. Neither the Directed Order

Process nor the Tracking Order Process

is available during the Opening Session.

For the purposes of the Opening

Session, market Directed Orders are

eligible for execution in the Market

Order Auction. NOW Orders are eligible

for execution during the Opening

Session; however, NOW Orders are not

eligible for the Opening Auction or the

Market Order Auction. PNP Orders are

eligible for execution during the

Opening Session.111

During the Core Trading Session,

market orders, Stop Orders, NOW

Orders, PNP Orders and orders eligible

for the Directed Order, Display Order,

Working Order, and Tracking Order

Processes are eligible for entry into and

execution on Arca.112

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78831

113See proposed PCXE Rule 7.34(d)(3).

114See proposed PCXE Rule 7.34(e). 115See proposed PCXE Rule 7.34(f).

116See proposed PCXE Rule 1.1(r) (definition of

‘‘Indicative Match Price’’).

117See proposed PCXE Rule 1.1(q) (definition of

‘‘Imbalance’’).

118See proposed PCXE Rule 7.31(u) (definition of

‘‘Cleanup Order’’).

119See proposed PCXE Rule 7.35(a).

During the Late Trading Session,

orders eligible for the Display Order

Process (other than Q Orders) and for

the Working Order Process, including

NOW Orders and PNP Orders, that have

been designated as available for the Late

Trading Session are eligible for entry

into and execution on Arca. Market

orders and Stop Orders are not eligible

for execution during the Late Trading

Session. The Directed Order Process and

Tracking Order Process are not available

during the Late Trading Session.113

Because Arca would operate the

Opening and Late Trading Sessions

outside of traditional trading hours, the

PCXE requires certain customer

disclosures.114 In particular, no ETP

Holder could accept an order from a

non-ETP Holder for execution in the

Opening or Late Trading Session

without disclosing to such non-ETP

Holder that:

(1) Except for market orders eligible

for execution during the Market Order

Auction, Limited Price Orders are the

only orders that are eligible for

execution during the Opening and Late

Trading Sessions;

(2) An order would have to be

designated specifically for trading in the

Opening and/or Late Trading Session to

be eligible for trading in the Opening

and/or Late Trading Session; and

(3) Extended hours trading involves

material trading risks, including the

possibility of lower liquidity, high

volatility, changing prices, unlinked

markets, an exaggerated effect from

news announcements, wider spreads

and any other relevant risk. The

disclosures required pursuant to this

paragraph could take the following form

or such other form as provides

substantially similar information:

1. Risk of Lower Liquidity. Liquidity

refers to the ability of market

participants to buy and sell securities.

Generally, the more orders that are

available in a market, the greater the

liquidity. Liquidity is important because

with greater liquidity it is easier for

investors to buy or sell securities, and

as a result, investors are more likely to

pay or receive a competitive price for

securities purchased or sold. There may

be lower liquidity in extended hours

trading as compared to regular market

hours. As a result, your order may only

be partially executed, or not at all.

2. Risk of Higher Volatility. Volatility

refers to the changes in price that

securities undergo when trading.

Generally, the higher the volatility of a

security, the greater its price swings.

There may be greater volatility in

extended hours trading than in regular

market hours. As a result, your order

may only be partially executed, or not

at all, or you may receive an inferior

price in extended hours trading than

you would during regular markets

hours.

3. Risk of Changing Prices. The prices

of securities traded in extended hours

trading may not reflect the prices either

at the end of regular market hours, or

upon the opening of the next morning.

As a result, you may receive an inferior

price in extended hours trading than

you would during regular market hours.

4. Risk of Unlinked Markets.

Depending on the extended hours

trading system or the time of day, the

prices displayed on a particular

extended hours system may not reflect

the prices in other concurrently

operating extended hours trading

systems dealing in the same securities.

Accordingly, you may receive an

inferior price in one extended hours

trading system than you would in

another extended hours trading system.

5. Risk of News Announcements.

Normally, issuers make news

announcements that may affect the price

of their securities after regular market

hours. Similarly, important financial

information is frequently announced

outside of regular market hours. In

extended hours trading, these

announcements may occur during

trading, and if combined with lower

liquidity and higher volatility, may

cause an exaggerated and unsustainable

effect on the price of a security.

6. Risk of Wider Spreads. The spread

refers to the difference in price between

what you can buy a security for and

what you can sell it for. Lower liquidity

and higher volatility in extended hours

trading may result in wider than normal

spreads for a particular security.

Finally, trades on Arca executed and

reported outside of the Core Trading

Session would have to be designated as

.T trades.115

vii. Opening Session Auctions.

Definitions. Arca would operate two

auctions during its Opening Session—

the Opening Auction and the Market

Order Auction. In preparation for a

description of these two auctions, PCXE

would define several new terms

applicable to the auctions.

First, for the purposes of the Opening

Auction and the Market Order Auction,

PCXE proposes to define the term

‘‘Indicative Match Price’’ to mean ‘‘for

each security’’ (1) the price at which the

maximum volume of orders are

executable; or (2) if there are two or

more prices at which the maximum

volume of orders are executable, the

price that is closest to the closing price

of the previous trading day’s normal

market hours, as determined by the

Consolidated Tape.’’ 116

In addition, the PCXE defines the

term ‘‘Imbalance’’ as the number of buy

or sell shares orders that can not be

matched with other orders at the

Indicative Match Price at any given

time.117

Finally, the PCXE introduces the

Cleanup Order for the Market Order

Auction.118 Cleanup Orders (1) could be

submitted only by Market makers; (2)

would have to be submitted to Arca

before 6:15 a.m. (Pacific Time) and

remain in effect until the conclusion of

the Market Order Auction; (3) would

have to be 2500 shares in size; (4) would

have to be entered as both buy or sell

orders, provided, however, the Cleanup

Order could be executed only on the

side of the market opposite the

Imbalance; (5) would be executed at the

Indicative Match Price as of the time of

the Market Order Auction; and (6)

would be executed only if: (i) there was

an Imbalance of eligible orders at the

conclusion of the Market Order Auction,

as provided in proposed PCXE Rule

7.35; and (ii) the Imbalance is less than

or equal to aggregate size of all Cleanup

Orders in the relevant security. If there

is an Imbalance and Cleanup Orders

would be executed, the market orders

which make up the Imbalance would be

divided equally among, and allocated

to, all Market makers registered in the

relevant security and executed against

such market makers’ Cleanup Orders. If

no Imbalance exists at the time of the

Market Order Auction, all Cleanup

Orders would be cancelled at that time.

Order Entry and Cancellation Before

the Opening Auction.119 Users could

submit any orders to Arca beginning at

4:30 a.m. (Pacific Time). Any such

Limited Price Orders designated for the

Opening Session would be queued until

5:00 a.m. (Pacific Time) at which time

they would be eligible to be executed

pursuant to the Opening Auction. Any

such market orders would be queued

until the Market Order Auction at which

time they would be executed pursuant

to the Market Order Auction.

Only Limited Priced Orders

designated for the Opening Session

would be eligible for the Opening

Auction. Market orders entered before

the Opening Auction would participate

78832 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

120See proposed PCXE Rule 7.35(b).

121See proposed PCXE Rule 7.35(c).

122See proposed PCXE Rule 7.35(c)(1).

123See proposed PCXE Rule 7.35(c)(2). 124See proposed PCXE Rule 7.35(c)(3).

in the Market Order Auction. Limited

Price Orders not designated for the

Opening Session would become eligible

for execution pursuant to Rule 7.37 at

the commencement of the Core Trading

Session.

Beginning at 4:30 a.m. (Pacific Time),

and various times thereafter as

determined from time to time by the

PCXE, the Indicative Match Price of the

Opening Auction, and any Imbalance

associated therewith, would be

published via electronic means as

determined from time to time by the

PCXE. Orders that are eligible for the

Opening Auction could not be cancelled

between 4:58 a.m. (Pacific Time) and

the conclusion of the Opening Auction.

Opening Auction. At 5:00 a.m.

(Pacific Time), Limited Price Orders

designated for the Opening Session are

matched and executed in the Opening

Auction. The orders in the Opening

Auction would be executed at the

Indicative Match Price as of the time of

the Opening Auction. Orders that are

eligible for, but not executed in, the

Opening Auction would become eligible

for the Opening Session immediately

upon conclusion of the Opening

Auction.120

For example, if the last .T sale is 50,

Arca has a limit order to buy 1000

shares at 50.5 and a limit order to sell

1000 shares at 50.2, the opening

execution would occur at 50.2 for 1000

shares. As another example, suppose the

last .T sale is at 50 and Arca has (1) a

limit order to buy 1500 shares at 50.5;

(2) a limit order to sell 1000 shares at

50.25; and (3) a limit order to sell 300

at 50.5. The opening execution would

occur at 50.5 for 1300 shares. The

remaining 200 shares would be bid at

50.5 in the Opening Session.

Market Order Auction.121 Beginning

at 5:00 a.m. (Pacific Time), and various

times thereafter as determined from

time to time by the PCXE, the Indicative

Match Price of the Market Order

Auction and the volume available to

trade at such price, would be published

via electronic means as determined from

time to time by the PCXE. If such a price

does not exist (i.e., there is an Imbalance

of market orders), Arca would indicate

via electronic means that an Indicative

Match Price does not exist. In addition,

beginning at 5:00 a.m. (Pacific Time),

and various times thereafter as

determined from time to time by the

PCXE, the market order Imbalance

associated with the Market Order

Auction, if any, would be published via

electronic means as determined from

time to time by the PCXE. If the

difference between the Indicative Match

Price and the closing price of the

previous trading day’s normal market

hours, as determined by the

Consolidated Tape, is equal to or greater

than a pre-determined amount, as

determined from time to time by the

PCXE, Arca would assign a ‘‘SIG’’

designator to such Indicative Match

Price and publish such designator via

electronic means as determined from

time to time by the PCXE.

For example, suppose Arca has the

following orders: (1) market order to buy

5000 shares; (2) Auction-Only Limit

Order to sell 1000 at 50; (3) limit order

to sell 1000 at 50.50; and (4) limit order

to sell 500 at 50.75. Arca would publish

an Indicative Match Price of 50.75, a

volume of 2500 shares and a buy

Imbalance of 2500 shares.

As another example, suppose Arca

has the following orders: (1) market

order to buy 3000 shares; (2) market

order to sell 1000; (3) limit order to sell

1000 at 41.00; and (4) limit order to sell

1000 at 41.25. Arca would publish an

Indicative Match Price of 41.25 and a

volume of 3000 shares and would not

publish an Imbalance.122

Any Imbalance in the Market Order

Auction could be reduced by new

orders, entered on the side of the market

opposite the Imbalance, pursuant to the

following priority: (1) Market orders; (2)

Limited Price Orders eligible for the

Opening Session; (3) Limited Price

Orders entered before 6:28 a.m. (Pacific

Time); (4) Auction-Only Limit Orders;

and (5) Cleanup Orders. Between 6:28

a.m. (Pacific Time) and the conclusion

of the Market Order Auction, Limited

Price Orders eligible for the Opening

Session or the Core Trading Session

could be cancelled, but market orders,

Auction-Only Limit Orders and Cleanup

Orders could not be cancelled. In

addition, between 6:28 a.m. (Pacific

Time) and the conclusion of the Market

Order Auction, market orders and

Auction-Only Limit Orders could not be

entered on the same side as the

Imbalance. Market orders and AuctionOnly Limit Orders may could be entered

on the opposite side of the Imbalance,

however, any time before the Market

Order Auction.123

Arca would determine the price of the

Market Order Auction as follows: If

there is no Imbalance, orders would be

executed in the Market Order Auction at

the Indicative Match Price as of 6:30

a.m. (Pacific Time). If an Imbalance

exists, or if an equilibrium exists

between buy market orders and sell

market orders, as many buy market

orders and sell market orders as possible

would be matched, on a time priority

basis, (1) at the midpoint of the NBBO

at 6:30 a.m. (Pacific Time), in the case

of exchange-listed securities for which

the PCXE is not the primary market; or

(2) at the midpoint of the NBBO at 6:30

a.m. (Pacific Time), in the case of

Nasdaq securities, provided that the

NBBO is not crossed; (3) at the midpoint

of the first uncrossed NBBO after 6:30

a.m. (Pacific Time), in the case of

Nasdaq securities in which the NBBO is

crossed but the BBO is not crossed by

the NBBO; (4) at the bid (offer) of the

BBO that was crossed prior to 6:30 a.m.

(Pacific Time), in the case of Nasdaq

securities in which the BBO is crossed

by a market participant; or (5) at the

Indicative Match Price as of 6:30 a.m.

(Pacific Time) in the case of those issues

for which the PCXE is the primary

market; if an equilibrium exists between

buy and sell market orders, the match

price would be the last Corporation sale

price in the security regardless of the

trading session, provided that, if the last

Corporation sale price is inferior to the

BBO, the match price would be the

Corporation bid (offer). Such executions

would be designated with a modifier to

identify them as Market Order Auction

trades. The market orders that are

eligible for, but not executed in the

Market Order Auction, would become

eligible for execution in the Core

Trading Session immediately upon

conclusion of the Market Order

Auction.124

The following examples clarify how

the Market Order Auction works:

Example 1. Suppose Arca has the

following orders: (1) Market order to

buy 5000; (2) Opening Session active

limit order to buy 1000 at 50; (3)

Opening Session active limit order to

sell 1000 at 50.5; (4) Core Session limit

order to sell 500 at 50.25; (5) Auction

Only Limit order to sell 3000 at 50.5

and; (6) One Market maker Cleanup

Order for 2500 shares. The Market Order

Auction would occur at 50.5 with the

market order being executed against

orders in the following manner: (1) 1000

executed against the Opening Session

Limit sell order; (2) 500 executed

against the Core Session limit order; (3)

3000 executed against the Auction Only

Limit Order; and (4) 500 executed

against the Cleanup Order.

Example 2. Suppose Arca has the

following orders: (1) Market order to

buy 5000; (2) Market order to sell 5000;

and (3) NBBO at 6:30 is 50 to 50.5. The

Market Order Auction would occur at

50.25 with the market buy order being

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78833

125See proposed PCXE Rule 7.35(e).

126See proposed PCXE Rule 7.38(a).

127See proposed PCXE Rule 7.38(b). For a

discussion of the Tracking Order Process, see

Section 2(c)(iv).

128See proposed PCXE Rule 7.38(c).

129See proposed PCXE Rule 7.5.

130See proposed PCXE Rule 7.6(a), Commentary

.05.

131See proposed PCXE Rule 7.6(a), Commentary

.06.

132 17 CFR 240.11Ac1–1.

133Proposed PCXE Rule 7.13 would replace

existing PCXE Rule 7.46, entitled ‘‘Trading Halts

and Suspensions.’’

134See proposed PCXE Rule 7.11.

executed against the market sell order at

the mid-point of the spread.

Example 3. Suppose Arca has the

following orders: (1) Market order to

buy 5000; (2) Market order to sell 5000;

and (3) NBBO at 6:30: 50.6 bid quoted

at 6:29 and 50.5 offer quoted at 6:15.

The Market Order Auction would occur

at 50.55 with the market buy order being

executed against the market sell order at

the price of the most recent quote.

Example 4. Suppose Arca has the

following orders for Nasdaq securities:

(1) Market order to buy 5000; (2) Market

order to sell 5000; (3) Opening Session

active limit order to sell 1000 at 50.5;

and (4) NBBO at 6:30: 50.6 bid quoted

at 6:29 and 50.5 offer quoted at 6:15

(Arca). The Market Order Auction

would occur at 50.5 with the market buy

order being executed against the market

sell order at the price of the Arca quote

that has been locked crossed.

Transition to Core Trading Session.

Limited Price Orders entered before 6:28

a.m. (Pacific Time) would participate in

the Market Order Auction. Limited Price

Orders designated for the Core Trading

Session entered after 6:28 a.m. (Pacific

Time) would become eligible for

execution at 6:30 a.m. (Pacific Time) or

at the conclusion of the Market Order

Auction, whichever is later. Market

orders entered after 6:28 a.m. (Pacific

Time) and before 6:30 a.m. (Pacific

Time), which are eligible for either the

Market Order Auction or the Core

Trading Session, would become eligible

for execution at 6:30 a.m. (Pacific Time)

or at the conclusion of the Market Order

Auction, whichever is later, unless

otherwise provided in proposed Rule

7.350(c)(2)(C). Stop Orders entered

before or during the Opening Session

become eligible for execution at 6:30

a.m. (Pacific Time) or at the conclusion

of the Market Order Auction, whichever

is later.125

viii. Odd and Mixed Lots. In addition

to round lots, Users could also submit

odd and mixed lots to Arca and,

therefore, proposed PCXE Rule 7.38

describes the treatment of odd and

mixed lots on Arca. All odd lot orders

submitted by Users to Arca would have

to be market orders or limit orders,

where such orders are subject to no

additional conditions. In other words,

odd lot orders could not be Working

Orders, Directed Orders, Directed Fills,

Tracking Orders, or other similar orders.

As an exception to this prohibition on

conditional odd lot orders, Odd Lot

Dealers could submit Odd Lot Tracking

Orders. Mixed lot orders could be any

order type supported by Arca.126

Round lot, mixed lot, and odd lot

orders are treated in the same manner in

Arca, except in the Tracking Order

Process. The Tracking Order Process

treats odd lot orders in a different

manner from mixed lot and round lot

orders, as discussed above.127

Finally, proposed PCXE Rule 7.38(c)

states that the following actions related

to odd lot orders would be considered

conduct inconsistent with just and

equitable principles: (1) combining odd

lot orders given by different customers

into a round lot order or orders unless

specifically requested to do so by the

customers giving the orders; (2)

unbundling round lots for the purpose

of entering odd lot limit orders in

comparable amounts; (3) failing to

aggregate odd lot orders into round lots

when such orders are for the same

account or for various accounts in

which there is a common monetary

interest; and (4) entering both buy and

sell odd lot limit orders in the same

stock before one of the orders is

executed for the purpose of capturing

the spread in the stock.128

ix. Miscellaneous Trading Rules. A.

Trading Units and Differentials. The

PCXE proposes to reduce the unit of

trading in stocks from the current 100

shares to 1 share.129 The PCXE also

proposes to establish the minimum

price variation for equity securities

traded on Arca as 1⁄64 of $1.00 for those

securities that are quoted in fractions

and $0.01 for those equity securities that

are quoted in decimals. However, at all

times, the minimum price variation

must would have to be consistent with

the Decimalization Implementation

Plan.130 In addition, the PCXE proposes

to make the Minimum Price

Improvement Increment on Arca equal

to $0.01 or 10% of the spread,

whichever is more.131

B. Firm Orders and Quotes. The

proposed rules require that ETP Holders

submit firm quotes and orders to Arca.

Proposed PCXE Rule 7.17(a) states no

ETP Holder could submit to the PCXE

an order (including Q Orders) to buy

from or sell to any person any security

at a stated price and/or size unless such

ETP Holder is prepared to, and, upon

submission of an appropriate contraside order, does, purchase or sell, as the

case may be, at such price and/or size

and under such conditions as are stated

at the time of submission of such order

to buy or sell. Additionally, proposed

PCXE Rule 7.17(b) requires that all bids

and all offers be made in accordance

with the provisions of Rule 11Ac1–1

under the Act,132 governing the

dissemination of quotations for reported

securities.

C. Trading Halts and Suspensions.

The PCXE guidelines for trading halts

and suspensions are set forth in

proposed PCXE Rules 7.12 and 7.13.

PCXE proposes to keep current PCXE

Rule 7.47, entitled ‘‘Trading Halts Due

to Extraordinary Market Volatility,’’

renumbered as proposed PCXE Rule

7.12. In addition, proposed PCXE Rule

7.13 regarding trading suspensions

states that, except as otherwise stated in

the proposed rules, the Chair of the

Board or the President, or the officer

designee of the Chair or the President,

would have the power to suspend

trading in any and all securities traded

on the PCXE whenever in his or her

opinion such suspension would be in

the public interest. No such action

would continue longer than a period of

two days, or as soon thereafter as a

quorum of Directors can be assembled,

unless the Board approves the

continuation of such suspension.133

D. Clearly Erroneous Policy. Given the

change from a manual to an electronic

trading environment, the PCXE

proposes to adopt a rule regarding

clearly erroneous submissions to

Arca.134 Proposed PCXE Rule 7.11

would allow an ETP Holder that

receives an execution on an order that

was submitted erroneously to the PCXE

for its own or customer account to

request that the PCXE review the

transaction. Such a request for review

could be made via telephone and in

writing via facsimile or e-mail. The

telephonic request should be submitted

immediately and the written request

should be submitted within fifteen (15)

minutes of the time the trade in

question was executed. Once the request

has been received, an officer of the

PCXE designated by the President

would review the transaction under

dispute and determine whether it is

clearly erroneous, with a view toward

maintaining a fair and orderly market

and the protection of investors and the

public interest. For the purposes of

proposed PCXE Rule 7.11, the terms of

a transaction executed on the PCXE are

‘‘clearly erroneous’’ when there is an

obvious error in any term, such as price,

78834 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

135See proposed PCXE Rule 6.16, which would

replace current PCXE Rule 6.7.

136 15 U.S.C. 80b–3.

137See proposed PCXE Rule 7.40.

138See proposed PCXE Rule 7.14(a).

139See proposed PCXE Rule 7.14(b).

140See proposed PCXE Rule 7.14(c).

141See proposed PCXE Rule 7.14(d).

142See proposed PCXE Rule 7.41.

number of shares or other unit of

trading, or identification of the security.

Each party to the transaction would

provide, on a timely basis, any

supporting written information as could

be reasonably requested by the

designated officer to aid resolution of

the matter.

Unless both parties (or party, in the

case of a cross) to the disputed

transaction agree to withdraw the initial

written request for review, the

transaction under dispute would be

reviewed, and a determination would be

rendered by the designated PCXE

officer. If the officer determines that the

transaction is not clearly erroneous, the

officer would decline to take any action

in connection with the completed trade.

In the event that the officer determines

that the transaction in dispute is clearly

erroneous, the officer would declare the

transaction null and void or modify one

or more of the terms of the transaction

to achieve an equitable rectification of

the error that would place the parties in

the same position, or as close as

possible to the same position that they

would have been in, had the error not

occurred. The officer would promptly

notify the parties of the determination

reached and would issue a written

resolution of the matter. The ETP

Holder aggrieved by the officer’s

determination could appeal such

determination in accordance with the

provisions of proposed PCXE Rule

10.13.

In the event of any disruption or a

malfunction in the use or operation of

any electronic communications and

trading facilities of the PCXE, the Chief

Executive Officer or the President could

declare a transaction arising out of the

use or operation of such facilities during

the period of such disruption or

malfunction null and void or modify the

terms of these transactions. Absent

extraordinary circumstances, any such

action of the Chief Executive Officer or

President would be taken within thirty

(30) minutes of detection of the

erroneous transaction. Each ETP Holder

involved in the transaction would be

notified as soon as practicable, and the

ETP Holder aggrieved by the action

could appeal such action in accordance

with the provisions of proposed PCXE

Rule 10.13.

E. Trading Ahead of Customer Limit

Orders. PCXE proposes to adopt a rule

prohibiting ETP Holders from trading

ahead of customer limit orders.135

Proposed PCXE Rule 6.16 states that:

No ETP Holder may accept and hold

an unexecuted limit order from its

customer (whether its own customer or

a customer of another ETP Holder) and

continue to trade on the Corporation the

subject security for its own account at

prices that would satisfy the customer’s

limit order, without executing that limit

order; provided, however, that an ETP

Holder may negotiate specific terms and

conditions applicable to the acceptance

of limit orders only with respect to limit

orders that are:

(1) For institutional customer accounts,

where such account is defined as the account

of:

(A) A bank, savings and loan association,

insurance company, or registered investment

company;

(B) An investment adviser registered either

with the Securities and Exchange

Commission under Section 203 of the

Investment Advisers Act of 1940136 or with

a state securities commission (or agency or

office performing like functions); or

(C) Any other entity (whether a natural

person, corporation, partnership, trust or

otherwise) with total assets of at least $50

million; or

(2) 10,000 shares or more, unless such

orders are less than $100,000 in value.

Proposed PCXE Rule 6.16 would not

apply to a customer limit order if the

limit order is marketable at the time it

is received by the ETP Holder; provided,

however, if the limit order were

marketable when received and then

becomes non-marketable, the limit order

would be subject to the Rule’s

prohibitions. Nothing in proposed PCXE

Rule 6.16 would require ETP Holders to

accept limit orders from customers. For

the purposes of proposed PCXE Rule

6.16 an ETP Holder that controls or is

controlled by another ETP Holder

would be considered a single entity,

absent appropriate information barriers.

Thus, if a customer’s limit order is

accepted by one affiliate and forwarded

to another affiliate for execution, the

firms would be considered a single

entity.

d. Trade Execution and Reporting.

Under the proposal, executions

occurring as a result of orders matched

against the Arca Book would be

reported by the PCXE to an appropriate

consolidated transaction reporting

system. Executions occurring as a result

of orders routed away from Arca would

be reported to an appropriate

consolidated transaction reporting

system by the relevant reporting market

center. Arca would promptly notify

Users of all executions of their orders as

soon as the executions take place.137

e. Clearance and Settlement Under

the proposed rule for clearance and

settlement, each ETP Holder would

have to be a clearing firm, clear

transactions on the PCXE through a

clearing firm, or clear transactions

through an entity duly authorized by the

PCXE.138 Pursuant to proposed PCXE

Rule 7.14, an ETP Holder would have to

must give up the name of the clearing

firm through whom each transaction on

the PCXE would be cleared. If the

identity of the clearing firm

subsequently changed, the ETP Holder

would have to report such change to the

PCXE at least five (5) business days in

advance.139

Pursuant to proposed PCXE Rule 7.14,

each clearing firm must would have to

be admitted to the PCXE as an ETP

Holder, by meeting the qualification

requirements for becoming an ETP

Holder. However, if a clearing firm

becomes an ETP Holder for the sole

purpose of acting as a clearing firm on

the PCXE, the clearing firm would not

have to pay the regular ETP Holder fee.

As a general matter, the clearing firm

would be responsible for the clearance

of the transactions effected by each ETP

Holder which gives up such clearing

firm’s name pursuant to a letter of

authorization, letter of guarantee or

other authorization given by such

clearing firm to such ETP Holder, which

authorization would be submitted to the

PCXE.140

Notwithstanding any other provisions

contained in proposed PCXE the Rule

7.14 to the contrary, the Board could

extend or postpone the time of the

delivery of a transaction on the PCXE

whenever, in its opinion, such action is

called for by the public interest, by just

and equitable principles of trade or by

the need to meet unusual conditions. In

such case, delivery would be effected at

such time, place and manner as directed

by the Board of Directors.141

The details of each transaction

executed within Arca would be

automatically processed for clearance

and settlement on a locked-in basis. ETP

Holders would not have to separately

report their transactions to the PCXE for

trade comparison purposes. All

transactions effected by a Sponsored

Participant would be cleared and

settled, using the relevant Sponsoring

ETP Holder’s mnemonic or its clearing

firm’s mnemonic, as applicable.142

f. Interaction with PCXE Application

of the OptiMark System. The PCXE

Application of the OptiMark System

would continue to operate as it does

now. In addition, however, the

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78835

143See proposed PCXE Rules 7.39(a) and 7.47(b).

Proposed PCXE Rule 7.47(b) replaces PCXE Rule

7.73(b) which described a specialist’s obligations

regarding the OptiMark System.

144See proposed PCXE Rule 7.45(a)(6).

145See proposed PCXE Rules 7.39(b), 7.45(a)(5)

and 7.48(b).

146See proposed PCXE Rule 7.42.

147 15 U.S.C. 78c.

148See proposed PCXE Rule 1.1(n) (definition of

‘‘ETP Holder’’).

149See proposed PCXE Rule 1.1(m) (definition of

‘‘ETP’’).

150See proposed PCXE Rule 2.100 (Any PCX

member, as defined in the PCX Parent Rule 1.1, or

Equity ASAP Holder that wishes to continue to

effect securities transactions without interruption

on the PCXE’s Trading Facilities must obtain an

ETP prior to the first day Arca becomes operational.

If the PCX member or Equity ASAP Holder fails to

obtain an ETP prior to that date, the PCX member

or Equity ASAP Holder will not be permitted to

effect securities transactions on the PCXE’s Trading

Facilities until such time as it does obtain an ETP).

151PCXE proposes to delete the following

Nominee-related PCXE Rules or sections thereof:

PCXE Rule 1.1(n) (definition of ‘‘Nominee’’); PCXE

Rule 2.1(b)(2) (‘‘Securities Business’’); PCXE Rule

2.2 (‘‘Qualifications and Application of Individual

Applicants’’); PCXE Rule 2.3(b)–(d) (‘‘Qualifications

of Firm Applicants’’); PCXE Rule 2.11(b)–(c) (‘‘Sole

Proprietors’’); PCXE Rule 2.21(c) (‘‘Termination of

Trading Privileges’’); and PCXE Rule 2.22(c)

(‘‘Limited Transferability’’).

152PCXE proposes to delete PCXE Rule 1.1(m)

(‘‘ETP Firm’’).

153Compare PCXE Rule 1.1(l) (‘‘ETP Holder’’)

with proposed PCXE Rule 1.1(n) (‘‘ETP Holder’’).

154Compare PCXE Rule 1.1(i) (‘‘Equity ASAP’’)

with proposed PCXE Rule 1.1(m) (‘‘ETP’’).

155PCXE proposes to delete the following Equity

ASAP-related: PCXE Rule 1.1(i) (definition of

‘‘Equity ASAP’’); PCXE Rule 1.1(j) (definition of

‘‘Equity ASAP Holder’’) and Rule 2.16 (Terms and

Conditions Relating to Equity ASAPs).

information from the Arca Book, but not

the orders themselves, would be

submitted to OptiMark at relevant times

during Core Trading Hours in the form

of Arca Profiles.143 Arca Profiles are

defined as ‘‘the satisfaction profile

generated by the OptiMark System from

processing the Arca Book.’’144 Any

Order generated from a Cycle

representing matches involving Arca

Profiles would be routed as an

Immediate-or-Cancel Order to Arca for

execution against the relevant Arca limit

order. If the relevant limit order is no

longer available on Arca, the Order

generated from the Cycle would be

automatically cancelled.145

g. Limitation of Liability. The PCXE

proposes to limit the liability of the

PCXE, Archipelago Exchange, L.L.C.,

and their respective affiliates with

regard to Arca.146 Specifically, proposed

PCXE Rule 7.42 states that:

Neither the PCXE, any affiliate of the

PCXE, Archipelago Exchange, L.L.C.,

nor any affiliate of the Archipelago

Exchange, L.L.C., would be liable to

Users for any loss, damages, claim or

expense:

(1) growing out of the use or enjoyment of

Arca; or

(2) arising from or occasioned by any

inaccuracy, error or delay in, or omission of

or from the collection, calculation,

compilation, maintenance, reporting or

dissemination of any information derived

from Arca, resulting either from any act or

omission by the PCXE, any affiliate of the

PCXE, Archipelago Exchange, L.L.C., or any

affiliate of Archipelago Exchange, L.L.C., or

from any act, condition or cause beyond the

reasonable control of the PCXE, any affiliate

of the PCXE, Archipelago Exchange, L.L.C.,

or any affiliate of Archipelago Exchange,

L.L.C., including, but not limited to, flood,

extraordinary weather conditions, earthquake

or other acts of God, fire, war, insurrection,

riot, labor dispute, accident, action of

government, communications or power

failure, or equipment or software

malfunction.

In addition, proposed PCXE Rule

7.42(b) provides that ‘‘[e]ach ETP

Holder expressly agrees, in

consideration of the issuance of the

ETP, to release and discharge the

Corporation, any affiliate of the

Corporation, Archipelago Exchange,

L.L.C., and any affiliate of the

Archipelago Exchange, L.L.C., and any

officers, directors, employees and agents

thereof, of and from all claims and

damages arising from their acceptance

and use of Archipelago Exchange.’’

Furthermore, proposed PCXE Rule

7.42(c) states that ‘‘[n]either the

Corporation, any affiliate of the

Corporation, Archipelago Exchange,

L.L.C., nor any affiliate of the

Archipelago Exchange, L.L.C., makes

any express or implied warranties or

conditions to Users as to results that any

person or party may obtain from

Archipelago Exchange for trading or for

any other purpose, and all warranties of

merchantability or fitness for a

particular purpose or use, title, and noninfringement with respect to Arca are

hereby disclaimed.’’

3. PCXE Membership Structure:

Equity Trading Permits. With the

introduction of Arca, the PCXE intends

to simplify its membership rules to

reflect more accurately the change from

a traditional floor trading environment.

The PCXE would only have one

category of members, as that term is

defined in the Section 3 of the Act: 147

ETP Holders.148 Any registered brokerdealer who wishes to be a member once

Arca begins operation would have to

must become an ETP Holder by

purchasing an Equity Trading Permit

(‘‘ETP’’) 149 from the PCXE.150 By

becoming an ETP Holder, the registered

broker-dealer may effect approved

securities transactions on the PCXE’s

two trading facilities, Arca and the

PCXE Application of OptiMark. As is

the case under the current PCXE Rules,

an ETP Holder: (1) Must agree to be

bound by the Certificate of

Incorporation, Bylaws and Rules of the

PCXE, and by all applicable rules and

regulations of the SEC; (2) haves no

ownership or distribution rights in the

PCXE; and (3) have limited voting rights

to nominate two Directors to the PCXE’s

Board of Directors and one Governor to

the Board of Governors of the PCX

Parent.

With the elimination of the trading

floor and the introduction of remote

electronic trading on the PCXE, two

aspects of the current PCXE Rules

relating to memberships become

obsolete. First, under the existing PCXE

Rules, an ETP Firm must have a natural

person, a Nominee, to act as its

representative on the PCXE. Because an

ETP Firm no longer needs a natural

person to act on its behalf on the floor,

the concept of a Nominee of the ETP

Firm has been eliminated.151 Therefore,

an ETP Firm would be re-designated as

an ETP Holder.152 In addition, the

definition of an ETP Holder would no

longer be defined as a ‘‘natural person’’

or ‘‘Nominee,’’ but rather a ‘‘sole

proprietorship, partnership,

corporation, limited liability company

or other organization’’ that has been

issued an ETP.153

Second, an important difference

between an Equity Automated Systems

Access Permits (‘‘ASAP’’) and an ETP

today is that an ETP allows its holder to

transact business on the floor of the

PCXE, whereas the Equity ASAP does

not.154 Because the PCXE proposes to

eliminate the floor, there will no longer

be a need for two separate membership

categories. Therefore, Equity ASAP

Holders would be re-designated as ETP

Holders and the rules related to Equity

ASAP Holders would be deleted.155

4. Applicability of Existing PCXE

Rules. In addition to the new proposed

rules set forth above, the PCXE proposes

to delete the following existing PCXE

Rules, which relate primarily to floor

trading and specialists or are otherwise

inapplicable to the new trading

environment: PCXE Rule 1.1(g) (Floor

Trader); PCXE Rule 1.1(o) (NonResident Organization); PCXE Rule

2.12(a); PCXE Rule 2.24 (Trading Floor

Employees of ETP Firms); PCXE Rule

4.1(b–c) (Minimum Net Capital for

Specialist Firms); PCXE Rule 4.2

(Specialist Post Capital); PCXE Rule 6.8

(Discretionary Transactions); PCXE Rule

6.16(b) (Miscellaneous Prohibitions);

PCXE Rule 7.1(a)(6) (Freely Transferable

Security); PCXE Rule 7.1(a)(8) (Local

Security); PCXE Rule 7.1(a)(9) (Dually

78836 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

156 15 U.S.C. 78f(b).

157 15 U.S.C. 78f(b)(5).

158Telephone conversation between Peter Bloom,

Director of Regulatory Projects, PCX, and Patrick

Joyce, Special Counsel, Commission, November 16,

2000.

159 17 CFR 240.11Ac1–1.

160See proposed PCXE Rules 7.31(i) (definition of

‘‘Directed Order’’) and (j) (definition of ‘‘Directed

Fill’’). The Commission notes that only executions

of Directed Orders against Directed Fills would be

subject to the minimum price improvement

increment. See proposed PCXE Rule 7.37.

161See proposed PCXE Rule 7.31(s) (definition of

‘‘Cross Order’’).

162The proposed rule further specifies that the

minimum price variation shall be consistent with

the Decimal Implementation Plan. See proposed

PCXE Rule 7.6(a), Commentary .05.

Traded Security); PCXE Rule 7.2,

Comm. 01; PCXE Rule 7.4 (Types of

Orders); PCXE Rule 7.5 (Authority of

Trading Officials); PCXE Rule 7.8

(Trading Floor Standards); PCXE Rule

7.12 (Recognized Quotations); PCXE

Rule 7.14 (Trading in ‘‘When Issued/

Distributed’’ Securities); PCXE Rule 7.17

(Manner of Bidding and Offering); PCXE

Rule 7.18 (Types of Bids or Offers);

PCXE Rule 7.19 (Priority and

Precedence of Bids and Offers); PCXE

Rule 7.20 (Cabinet Dealings); PCXE Rule

7.21 (Error Accounts); PCXE Rule 7,

Section 5 (ETP Holders Acting as

Specialists); PCXE Rule 7, Section 6

(Specialists Acting as Odd-lot Dealers);

PCXE Rule 7, Section 7 (Trading

Practices and Procedures) (except for

Rule 7.40—Short Sales, Rule 7.45—

Stock Option Transactions and Rule

7.47—Trading Halts Due to

Extraordinary Market Volatility); PCXE

Rule 7, Section 8 (Contracts in

Securities) (except for Rules 7.50 &

7.51—Definitions and General

Provisions and Rule 7.53—Delivery of

Securities); PCXE Rule 7.69 (Liability of

Corporation Relating to Operation of

ITS); PCXE Rule 7.70 (Pacific

Computerized Order Access System (‘‘P/

COAST’’)); PCXE Rule 10.12(g) (Floor

Citations); PCXE Rule 10.13 (Summary

Sanction Procedures); and PCXE Rule

12.1(a); PCXE Equity Floor Procedure

Advices.

Furthermore, minor conforming

changes have been made throughout the

existing PCXE Rules to conform the

proposed rules to the new terminology

associated with Arca. For example,

PCXE we have deleted references to,

among other things, Equity ASAP

Holders, ETP Firms and the trading

floor throughout the PCXE Rules.

Finally, any other existing PCXE rules

which have not been deleted or

amended as specified remain in effect as

they are currently.

The Exchange believes the proposed

rule change is consistent with Section

6(b) of the Act,156 in general, and

furthers the objectives of Section

6(b)(5),157 in particular, in that it is

designed to promote just and equitable

principles of trade, to foster cooperation

and coordination with persons engaged

in facilitating transactions in securities,

and to remove impediments and perfect

the mechanisms of a free and open

market and to protect investors and the

public interest.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange does not believe that

the proposed rule change will impose

any burden on competition that is not

necessary or appropriate in furtherance

of the purposes of the Act. In fact, PCX

and PCXE believe that the introduction

of a fully electronic trading venue will

serve to enhance competition.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

Written comments on the proposed

rule change 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 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. SEC’s Solicitation of Comments

The PCX proposes that Arca become

a facility of PCXE that would replace the

PCX’s traditional floor-based auction

market for equity securities. The PCX’s

proposal presents several novel issues

with respect to the operation of a

national securities exchange. In addition

to requesting comments concerning the

overall proposal, the Commission

requests comments addressed to the

following specific items: (1)

Discretionary Orders, (2) the minimum

price improvement level, (3) customer

order priority, and (4) the opening and

late trading sessions.

First, the PCX’s proposal would

enable users to submit ‘‘Discretionary

Orders’’ for execution on Arca.

Proposed PCXE Rule 7.31(h)(2) defines

a Discretionary Order as ‘‘an order to

buy or sell a stated amount of a security

at a specified, undisplayed price (the

‘discretionary price’), in addition to at a

specified, displayed price.’’ For

example, an incoming marketable limit

order may be matched for execution

against the displayed price of a

Discretionary Order. An otherwise nonmarketable incoming limit order,

however, may trigger an execution

against a Discretionary Order at a price

within the undisplayed, discretionary

price range of the Discretionary Order.

The PCX believes that Discretionary

Orders will help replicate the dynamic

of a traditional floor-based auction

market, in particular the trading

discretion of a floor broker.158

The Commission notes that, pursuant

to Rule 11Ac1–1 under the Act 159 (the

‘‘Quote Rule’’), each responsible broker

or dealer is required promptly to

communicate to its exchange or

association, pursuant to the procedures

established by that exchange or

association, its best bids, offers, and

quotation sizes for any subject security.

The Commission seeks general

comments on the proposed availability

of Discretionary Orders on Arca in the

light of the Quote Rule. In addition, the

Commission seeks specific comments

on the following:

• What are the potential advantages

or disadvantages of Discretionary Orders

with regard to:

(a) price discovery;

(b) market transparency; and

(c) transaction costs for investors?

• Should a distinction be made

between Discretionary Orders placed on

behalf of public customers and

Discretionary Orders placed by PCXE

market makers trading for their own

accounts?

Second, proposed PCXE Rule 7.6(a),

Commentary .06, would establish a

minimum price improvement increment

of $.01 or 10% of the spread, whichever

is greater, with regard to the execution

of Directed Orders 160 and Cross

Orders.161 Accordingly, under the PCX’s

proposal, the minimum price

improvement increment for Directed

Orders and Cross Orders would not be

less than $.01. The Commission notes

that, under the PCX’s proposal, the

minimum price variation for equity

securities traded on Arca would be 1⁄64

of $1.00 for securities that are quoted in

fractions, and $.01 for equity securities

that are quoted in decimals.162 The

Commission seeks comment on whether

the PCX’s proposed minimum price

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78837

163The Commission notes that no other registered

national securities exchange has such a

requirement, but that the NASD requires a

registered Nasdaq market maker to improve the

price of a customer order that it holds by at least

1⁄16 or one-half of the spread, whichever is less.

164The Commission notes that proposed PCXE

Rule 6.16 would prohibit a market maker from

trading for its proprietary account on Arca ahead of

its own customer’s limit order at the same price. 165 17 CFR 200.30–3(a)(12).

improvement interval that may be

greater than the minimum price

variation for internalized or otherwise

preferenced orders is appropriate.163

Third, historically, securities

exchanges have adopted rules that give

priority to the agency orders of public

customers over the proprietary trades of

member firms, in recognition that

traders on the floor of an exchange

generally possess an informational

advantage over public customers.

Because the PCX seeks to establish Arca

as a purely electronic facility that would

not employ a trading floor, the PCX does

not believe that its users would possess

any informational advantage over public

customers who submit agency orders for

execution on the Arca Book.

Accordingly, the Arca Book would not

give precedence to agency orders over

principal orders, but rather would rank

orders based upon price/time

priority.164 The Commission seeks

comment on the order execution

priority of the Arca Book, including

whether market makers’ orders should

have priority equal to orders of the same

type placed by public customers.

Fourth, and finally, the PCX proposes

to operate three distinct trading

sessions: an opening session, a core

trading session, and a late trading

session. The opening session, which

would begin at 5:00 a.m. (Pacific Time)

and run until the start of the core

trading session, would include an

Opening Auction at the start of the

opening session and a Market Order

Auction that would begin at 6:30 a.m.

(Pacific Time). The core trading session

for each security would begin

immediately after conclusion of the

Market Order Auction for such security.

The Commission seeks comments about

the opening session, particularly the

opening procedures and the transition

from the opening session to the core

trading session.

The PCX also proposes to operate a

late trading session that would begin

when the core trading session ends and

conclude at 5:00 p.m. (Pacific Time),

contingent upon arrangements with the

Consolidated Tape Association.

Currently, after-hours trading sessions

for listed securities end at 3:30 p.m.

(Pacific Time). The Commission invites

comments about the PCX’s proposed

late trading session, including the

possible extension of the late trading

session to 5:00 p.m. (Pacific Time).

The Commission invites interested

persons to submit written data, views,

and arguments concerning the proposed

rule change, including whether it 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 PCX. All

submissions should refer to File No.

SR–PCX–00–25 and should be

submitted by January 5, 2001.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.165

Margaret H. McFarland,

Deputy Secretary.

Appendix A—Rules of PCX Equities,

Inc.

Rule 1

Definitions

Rule 1.1 Whenever and wherever used

herein, unless the context requires otherwise,

the following terms shall be deemed to have

the meanings indicated:

Arca Book

(a) The term ‘‘Arca Book’’ shall refer to the

Archipelago Exchange’s electronic file of

orders, which contains all the User’s orders

in each of the Directed Order, Display Order,

Working Order and Tracking Order

Processes.

Affiliate

(b)[(a)] An ‘‘affiliate’’ of, or person

‘‘affiliated[’’] with’’ a specific person, is a

person that directly, or indirectly through

one or more intermediaries, controls or is

controlled by, or is under common control

with, the person specified.

Allied Person

(c)[(b)]The term ‘‘Allied Person’’ shall refer

to an individual, who is:

(1) an employee of an ETP [Firm or Equity

ASAP] Holder who controls such firm, or

(2) an employee of an ETP [Firm or Equity

ASAP] Holder corporation who is a director

or a principal executive officer of such

corporation, or

(3) an employee of an ETP [Firm or Equity

ASAP] Holder limited liability company who

is a manager or a principal executive officer

of such limited liability company, or

(4) a general partner in an ETP [Firm or

Equity ASAP] Holder partnership; and who

has been approved by the Corporation as an

Allied Person.

Approved Person

(d)[(c)]The term ‘‘Approved Person’’ shall

refer to a person who is not an ETP Holder,

nor an employee or an Allied Person of an

[ETP Firm or Equity ASAP] Holder, and who:

(1) is a director of an ETP [Firm or Equity

ASAP] Holder, or

(2) controls an ETP [Firm or Equity ASAP]

Holder, or

(3) beneficially owns, directly or indirectly,

5% or more of the outstanding equity

securities of an ETP [Firm or Equity ASAP]

Holder, or

(4) has contributed 5% or more of the

partnership capital, and who has been

approved by the Corporation as an Approved

Person.

Archipelago Exchange

(e) The term ‘‘Archipelago Exchange’’ shall

mean the electronic securities

communications and trading facility

designated by the Board of Directors through

which orders of Users are consolidated for

execution and/or display.

Associated Person

(f)[(d)]The term ‘‘Associated Person’’ shall

refer to a person who is a partner, officer,

director, member of a limited liability

company, trustee of a business trust,

employee of an ETP [Firm or Equity ASAP]

Holder or any person directly or indirectly

controlling, controlled by or under common

control with an ETP [Firm or Equity ASAP]

Holder.

Authorized Trader

(g) The term ‘‘Authorized Trader’’ or ‘‘AT’’

shall mean a person who may submit orders

to the Corporation’s Trading Facilities on

behalf of his or her ETP Holder or Sponsored

Participant.

BBO

(h) The term ‘‘BBO’’ shall refer to the best

bid or offer on the Archipelago Exchange.

Control

(i))[(e)]—No change.

Core Trading Hours

(j) The term ‘‘Core Trading Hours’’ shall

mean the hours of 6:30 am through 1:00 pm

(Pacific Time) or such other hours as may be

determined by the Corporation from time to

time.

Corporation

(k)[(f)] The term ‘‘Corporation’’ shall mean

PCX Equities, Inc., as described in the PCX

Equities, Inc.’s [Corporation’s] Certificate of

Incorporation and [the PCX Equities, Inc.]

Bylaws.

Eligible Security

(l) The term ‘‘Eligible Security’’ shall mean

any equity security (i) either listed on the

78838 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

Corporation or traded on the Corporation

pursuant to a grant of unlisted trading

privileges under Section 12(f) of the

Exchange Act and (ii) specified by the

Corporation to be traded on the Archipelago

Exchange, PCXE Application or other facility,

as the case may be.

[Floor Trader]

[(g)—Deleted.]

[Equity ASAP]

[(i)—Deleted.]

[Equity ASAP Holder]

[(j)—Deleted.]

ETP

(m)[(k)]—No change.

ETP Holder

(n)[(1)] The term ‘‘ETP Holder’’ shall refer

to a [natural person, in good standing, who]

sole proprietorship, partnership, corporation,

limited liability company or other

organization in good standing that has been

issued an ETP[, or has been named as a

Nominee]. An ETP Holder must be a

registered broker or dealer pursuant to

Section 15 of the Securities Exchange Act of

1934[, or a nominee or an associated person

of a registered broker or dealer that has been

approved by the Corporation to conduct

business on the Corporation’s trading

facilities]. An ETP Holder shall agree to be

bound by the Certificate of Incorporation,

Bylaws and Rules of the Corporation, and by

all applicable rules and regulations of the

Securities and Exchange Commission.

An ETP Holder shall not have ownership

or distribution rights in the Corporation. An

ETP Holder will have limited voting rights to

nominate two Directors [members] to the

Corporation’s Board of Directors and one

Governor [member] to the Board of

Governors of the PCX Parent. An ETP Holder

will have status as a ‘‘member’’ of the PCX

Parent as that term is defined in Section 3 of

the Securities Exchange Act of 1934, as

amended.

[ETP Firm]

[(m)—Deleted.]

General Authorized Trader

(o) The term ‘‘General Authorized Trader’’

or ‘‘GAT’’ shall mean an authorized trader

who performs only non-market making

activities on behalf of an ETP Holder.

Good Standing

(p)[(h)] The term ‘‘good standing’’ shall

refer to an ETP Holder[, Equity ASAP Holder

or ETP Firm] who is not in violation of any

of its agreements with the Corporation or any

of the provisions of the Rules or Bylaws of

the Corporation, and who has maintained all

of the conditions for approval of the ETP.

Imbalance

(q) For the purposes of the Opening

Auction and the Market Order Auction, as

the case may be, the term ‘‘Imbalance’’ shall

mean the number of buy or sell orders that

can not be matched with other orders at the

Indicative Match Price at any given time.

Indicative Match Price

(r) For the purposes of the Opening

Auction or the Market Order Auction, as the

case may be, the term ‘‘Indicative Match

Price’’ shall mean for each security (1) the

price at which the maximum volume of

orders are executable; or (2) if there are two

or more prices at which the maximum

volume of orders are executable, the price

that is closest to the closing price of the

previous trading day’s normal market hours,

as determined by the Consolidated Tape.

Limited Price Order

(s) The term ‘‘Limited Price Order’’ shall

mean any order with a specified price or

prices (e.g., limit orders and Working Orders),

other than Stop Orders.

Marketable

(t) The term ‘‘Marketable’’ shall mean, for

a Limited Price Order, the price matches or

crosses the NBBO on the other side of the

market. Market orders are always considered

marketable.

Market Maker

(u) The term ‘‘Market Maker’’ shall refer to

an ETP Holder that acts as a Market Maker

pursuant to Rule 7.

Market Maker Authorized Trader

(v) The term ‘‘Market Maker Authorized

Trader’’ or ‘‘MMAT’’ shall mean an

authorized trader who performs market

making activities pursuant to Rule 7 on

behalf of a Market Maker.

Market Participant

(w) For the purposes of Rule 7, the term

‘‘Market Participant’’ shall include electronic

communications networks (‘‘ECN’’), dealerspecialists registered with a national

securities exchange, and market makers

registered with a national securities

association.

NBBO

(x) The term ‘‘NBBO’’ shall refer to the

national best bid or offer.

[Nominee]

[(n)—Deleted.]

[Non-Resident Organization]

[(o)—Deleted.]

Notice of Consent

(y) The term ‘‘Notice of Consent’’ shall

mean a written statement provided to the

Corporation by a Sponsoring ETP Holder by

which the Sponsoring ETP Holder

acknowledges responsibility for the orders,

executions and actions of its Sponsored

Participant(s).

NOW Recipient

(z) The term ‘‘NOW Recipient’’ shall mean

any exchange, ECN or other broker-dealer (1)

with which the Archipelago Exchange

maintains an electronic linkage, which

includes ITS, and (2) which provides

instantaneous responses to NOW Orders

routed from the Archipelago Exchange. The

Corporation shall designate from time to time

those exchanges, ECNs or other brokerdealers that qualify as NOW Recipients.

Odd Lot Dealer

(aa) The term ‘‘Odd Lot Dealer’’ shall refer

to a Market Maker that is registered as an

Odd Lot Dealer as described in Rule 7.25.

Parent

(bb) [(p)]—A ‘‘parent’’ of a specified person

or organization is an affiliate controlling such

person or organization directly[,] or

indirectly through one or more

intermediaries.

Participant

(cc) The term ‘‘Participant’’ shall mean any

ETP Holder, Allied Person, partner, approved

person, stockholder associate, registered

employee or other full-fime employee of an

ETP Holder.

PCX Parent

(dd) [(q)] The term ‘‘PCX Parent’’ shall refer

to the Pacific Exchange, Inc., a Delaware

corporation and national securities exchange

as the term is defined in [by] Section 6 of the

Securities Exchange Act of 1934, as

amended. The Pacific Exchange, Inc. is the

sole shareholder of the Corporation.

Person

(ee) [(r)]—No change.

Registered Employee

(ff) The term ‘‘Registered Employee’’ shall

mean any person soliciting or conducting

business in securities on behalf of an ETP

Holder.

Routing Agreement

(gg) The term ‘‘Routing Agreement’’ shall

mean the form of Agreement between an ETP

Holder and the broker-dealer affiliate of

Archipelago Exchange, L.L.C., under which

the broker-dealer affiliate of Archipelago

Exchange, L.L.C., agrees to act as agent for

routing orders of the ETP Holder and the ETP

Holder’s Sponsored Participants entered into

the Archipelago Exchange to other market

centers or broker-dealers for execution,

whenever such routing is required.

Security

(hh) The terms ‘‘security’’ and ‘‘securities’’

mean any security as defined in Rule 3(a)(10)

under the Securities Exchange Act of 1934.

Self-Regulatory Organization (‘‘SRO’’)

(ii) [(s)]—No change.

Sponsored Participant

(jj) The term ‘‘Sponsored Participant’’ shall

mean a person which has entered into a

sponsorship arrangement with a Sponsoring

ETP Holder pursuant to Rule 7.29.

Sponsoring ETP Holder

(kk) The term ‘‘Sponsoring ETP Holder’’

shall mean a broker-dealer that has been

issued an ETP by the Corporation who has

been designated by a Sponsored Participant

to execute, clear and settle transactions

resulting from the Archipelago Exchange.

The Sponsoring ETP Holder shall be either (i)

a clearing firm with membership in a clearing

agency registered with the Commission that

maintains facilities through which

transactions may be cleared or (ii) a

correspondent firm with a clearing

arrangement with any such clearing firm.

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78839

Sponsorship Provisions

(ll) The term ‘‘Sponsorship Provisions’’

shall mean the provisions sent forth in Rule

7.29(b)(2). For a Sponsored Participant to

obtain authorized access to the Archipelago

Exchange, the Sponsored Participant and its

Sponsoring ETP Holder must enter into an

agreement which incorporates the

Sponsorship Provisions.

Stockholder Associate

(mm) The term ‘‘Stockholder Associate’’

means a person who is the employee of an

ETP Holder, who is actively engaged in its

business and devotes the major portion of his

or her time thereto, who is not an ETP Holder

or Allied Person, and who, as a holder of

equity securities, has been approved by the

Corporation as a stockholder associate.

Trading Facilities

(nn) [(t)] The term ‘‘Trading Facilities’’ or

‘‘Facilities’’ shall refer to [the Corporation’s

Los Angeles and San Francisco trading floors,

office space] any and all electronic or

automatic trading systems provided by the

Corporation to ETP Holders [and ETP Firms

in connection with their floor trading

activities, and any and all electronic or

automatic systems access programs provided

by the Corporation to ETP Holders, ETP

Firms and Equity ASAP Holders].

User

(oo) The term ‘‘User’’ shall mean any ETP

Holder or Sponsored Participant who is

authorized to obtain access to the

Archipelago Exchange pursuant to Rule 7.29.

User Agreement

(pp) The term ‘‘User Agreement’’ shall

mean an appropriate subscription agreement

entered into by the User with Archipelago

Exchange, L.L.C.

Wholly Owned Subsidiary

(qq) [(u)] The term ‘‘wholly owned

subsidiary’’ shall mean[s) a subsidiary

substantially all of whose outstanding voting

securities are owned by its parent and/or the

parent’s other wholly owned subsidiaries.

Rule 2

Equity Trading Permits [and Equity ASAPs]

Securities Business

Rule 2.1(a) Every ETP Holder[, ETP Firm

and Equity ASAP Holder] shall have as its

principal purpose the conduct of a securities

business.

(b) An ETP Holder[, ETP Firm and Equity

ASAP Holder] shall be deemed to have such

a purpose if and so long as[:]

[(1)] the ETP Holder[, ETP Firm or Equity

ASAP Holder, as the case may be,] has

qualified and acts in respect of its business

in an approved capacity pursuant to the

Certificate of Incorporation, Bylaws, Rules

and procedures of the Corporation; and all

transactions are in compliance with Section

11(a) of the Securities Exchange Act of 1934

as amended and the Rules and regulations

adopted thereunder[; or]

[(2) the ETP Holder is a general partner,

executive officer or nominee of an ETP Firm

who has conferred ETP trading privileges

upon that ETP Firm].

(c) No ETP Holder[, ETP Firm or Equity

ASAP Holder] shall utilize any scheme,

device, arrangement, agreement or

understanding designed to circumvent or

avoid, by reciprocal means or in any other

manner, the provisions of this Rule 2.1.

Qualifications [and Application of Individual

Applicants] of Applicants

[Rule 2.2—Deleted.]

[Qualifications of Firm Applicants]

Rule [2.3.] 2.2

[(a)] An ETP [or Equity ASAP] may be held

by an entity which is a registered broker or

dealer pursuant to Section 15 of the

Securities Exchange Act of 1934, as

amended, including sole proprietors,

partnerships, limited liability partnerships,

corporations, and limited liability

companies. A corporation, limited liability

company, or limited liability partnership

must be organized under the laws of one of

the states of the United States or under other

laws as the Corporation’s Board of Directors

shall approve.

[(b)–(d)—Deleted.]

Application Procedures

Rule [2.4.] 2.3

(a) Every [individual] person applying to

become an ETP Holder[, every individual

applying to become the Nominee of an ETP

Firm, every entity upon whom an ETP

Holder will confer trading privileges, and

every entity applying to become an Equity

ASAP Holder] shall complete an application

on a form prescribed by the Corporation and

shall file it with the Corporation. The

application shall be filed with such

application fees and such documents as may

be required by the Corporation. Application

fees are not transferable and not refundable.

(b) Within a reasonable period of time

following receipt of an application for an ETP

[or Equity ASAP], the name of the applicant[,

and in the case of an entity, the individual

in whose name the permit will be held,] shall

be distributed to all ETP Holders and [Equity

ASAP Holders and] shall be posted by the

Corporation by publishing the name of each

applicant in the Corporation’s Weekly

Bulletin for at least ten (10) calendar days

prior to the approval or rejection of the

application by the Corporation.

(c) Every [individual] applicant and[, in the

case of applicant entities,] all persons

associated with the [entity,] applicant may be

investigated by the Corporation. The

applicant shall file with the Corporation such

additional documents as may be requested by

the Corporation.

(d) Upon completion of the application

process, the Corporation shall consider and

then approve or reject the application, unless

there is just cause for delay. [Individual] Sole

proprietor applicants and persons associated

with applicant entities may be required to

appear in person before the Corporation. The

Corporation may also require any ETP

Holder[, Equity ASAP Holder] or person

associated with an ETP [Firm or Equity

ASAP] Holder who may possess information

relevant to the applicant’s suitability for

holding an ETP [or Equity ASAP] to provide

information or testimony.

(e) The Corporation shall approve an

application if it finds that the applicant

meets all of the qualifications for holding an

ETP [or Equity ASAP]. The Corporation shall

reject an application if it does not make such

a finding or if it finds that, if the application

were approved, the permit holder would be

subject to suspension or expulsion under the

provisions of the Bylaws, Rules or

procedures of the Corporation or the rules,

regulations and procedures promulgated

under the Securities Exchange Act of 1934,

as amended.

(f)—No change.

(g) In the event that an application is

rejected by the Corporation, the applicant

shall have an opportunity to be heard upon

the specific grounds for the rejection, in

accordance with the provisions of Rule 10.

An applicant denied an ETP [or Equity

ASAP] may challenge the denial by filing

with the Corporate Secretary, a petition for

review of the denial by the Corporation’s

Board Appeals Committee. Such petition

shall be filed within thirty (30) calendar days

of the date upon which the Corporation’s

decision was mailed to the applicant and

shall be filed in accordance with the

provisions of Rule [10.14] 10.13.

Denial of or Conditions to ETPs [or Equity

ASAPs]

Rule [2.5.] 2.4(a) The Corporation may

deny (or may condition) trading privileges

under an ETP or [Equity ASAP or] may bar

a natural person from becoming associated

(or may condition an association) with an

ETP [Firm or Equity ASAP] Holder for the

same reasons that the Securities and

Exchange Commission may deny or revoke a

broker or dealer registration and for those

reasons required or allowed under the

Securities Exchange Act of 1934, as

amended.

(b) The Corporation may deny or may

condition trading privileges under an ETP [or

Equity ASAP], or may prevent a natural

person from becoming associated (or may

condition an association) with an ETP [Firm

or Equity ASAP] Holder when the applicant

directly or indirectly:

(1) is unable to satisfactorily demonstrate

its present capacity to adhere to all

applicable Corporation and Securities and

Exchange Commission policies, [Rules] rules

and regulations, including, without

limitation, those concerning record-keeping,

reporting, finance and trading procedures;

(2) has previously violated, and there is a

reasonable likelihood such applicant will

again engage in acts or practices violative of,

any applicable Corporation or Securities and

Exchange Commission policies, [Rules] rules

and regulations, including, without

limitation, those concerning record-keeping,

reporting, finance and trading procedures or

those [Rules] rules of other self-regulatory

organizations of which such applicant is or

was a member[:]

(3)–(5)—No change.

(6) owes an undisputed debt to an ETP

Holder[, ETP Firm or Equity ASAP Holder]

arising out of the securities business, in

which case the Corporation may take such

action as it deems appropriate, including,

without limitation, denying the application

or conditioning the issuance of the ETP [or

Equity ASAP] upon the execution of an

agreement regarding repayment of the debt;

78840 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

(7) allegedly owes a debt to an ETP

Holder[, ETP Firm or Equity ASAP Holder]

arising out of the securities business, in

which case the Corporation may take such

action as it deems appropriate, including,

without limitation, denying the application

or conditioning the issuance of the ETP [or

Equity ASAP] upon the debt being submitted

to arbitration pursuant to Rule 12 at the

request of the ETP [Holder, ETP Firm or

Equity ASAP] Holder to whom the debt is

allegedly owed;

(8)–(10)—No change.

Series 7 Requirement [for Off-Floor Traders]

(A) Traders of ETP [Firms and Equity

ASAP] Holders for which the Corporation is

the Designated Examining Authority (‘‘DEA’’)

must successfully complete the General

Securities Registered Representative

Examination (Test Series 7), if the primary

business of the ETP [Firm or Equity ASAP]

Holder involves the trading of securities that

is unrelated to the performance of the

functions of a registered [specialist or

registered floor broker] Market Maker. Unless

required to complete the Series 7 under Rule

7.21(b)(2), the [The] following are exempt

from the requirement to successfully

complete the Series 7 Examination: ETP

Holders who are performing the function of

a registered [specialist or registered floor

broker] Market Maker (pursuant to Rule

[7.22(a))] 7).

For purposes of this Rule:

(i) The term ‘‘trader’’ means a person (a)

who is directly or indirectly compensated by

an ETP [Firm or Equity ASAP] Holder, or

who is any other associated person of an ETP

[Firm or Equity ASAP] Holder and (b) who

trades, makes trading decisions with respect

to, or otherwise engages in the proprietary or

agency trading of securities; and

(ii) The term ‘‘primary business’’ means

greater than 50% of the ETP [Firm’s or Equity

ASAP] Holder’s business.

(B) Each ETP [Firm and Equity ASAP]

Holder for which the Corporation is the DEA

must complete, on an annual basis, and on

a form prescribed by the Corporation, a

written attestation as to whether the ETP

[Firm’s or Equity ASAP] Holder’s primary

business is conducted in the performance of

the function of a registered [specialist or a

registered floor broker] Market Maker

(pursuant to Rule [7.22(a))] 7).

(C) The requirement to complete the Series

7 Examination will apply to current traders

of ETP [Firms and to Equity ASAP] Holders

that meet the criteria of subsection (A),

above, as well as to future traders of ETP

[Firms or Equity ASAP] Holders that meet

the criteria of subsection (A), above, at a later

date. Traders of ETP [Firms or Equity ASAP]

Holders that meet the criteria of subsection

(A), above, at the time of SEC approval of this

Rule, must successfully complete the Series

7 Examination within six months of

notification by the Corporation.

(11)–(13)—No change.

(c) The Corporation may waive or modify

a required examination for any applicant if,

within two years of the date such applicant

applied to the Corporation for an ETP [or

Equity ASAP], such applicant has

successfully completed a comparable

examination administered by a selfregulatory organization or the Securities and

Exchange Commission.

(d) The Corporation shall regard the failure

by any applicant to carry out any contract or

honor any financial commitment with an

ETP Holder[, ETP Firm or Equity ASAP

Holder] as a violation of just and equitable

principles of trade, and an indication of a

broker or dealer applicant’s inability to meet

such standards of financial responsibility as

may be set by the Corporation.

(e) No change.

(f) The Corporation’s Business Conduct

Committee may take action against an ETP

Holder[, ETP Firm or Equity ASAP Holder]

under Rule 10 when any of the above reasons

for denying or conditioning the issuance of

an ETP [or Equity ASAP, as the case may be,]

come into existence after an application has

been approved and an ETP [or Equity ASAP]

has been issued.

Publication of Approved ETP [and Equity

ASAP] Applications

Rule [2.6] 2.5 With respect to each ETP

[and Equity ASAP] that is issued, the

Corporation shall promptly distribute a

notice thereof to all ETP Holders[, ETP Firms

or Equity ASAP Holders] by publishing the

name of each new ETP Holder[, ETP Firm

and Equity ASAP Holder] in the

Corporation’s Weekly Bulletin.

Requirements of Holding an ETP [or Equity

ASAP]

Requirements Applicable Generally

Revocable Privilege

Rule [2.7] 2.6. The issuance of an ETP [or

an Equity ASAP] constitutes only a revocable

privilege and confers on its holder no right

or interest of any nature to continue as an

ETP Holder[, ETP Firm or Equity ASAP

Holder, as the case may be].

No Liability for Using Trading Facilities

Rule [2.8] 2.7. The Corporation shall not be

liable for any damages sustained by an ETP

Holder[, ETP Firm or Equity ASAP Holder]

growing out of the use or [employment]

enjoyment by such ETP [Holder, ETP Firm or

Equity ASAP] Holder of the facilities

afforded by the Corporation in the conduct of

[their] its business. Each ETP Holder[, ETP

Firm and Equity ASAP Holder] expressly

[agree] agrees, in consideration of the

issuance of the ETP [or Equity ASAP, as the

case may be], to release and discharge the

Corporation, its officers, directors, employees

and agents, of and from claims or damages

arising from their acceptance and use of such

ETP [or Equity ASAP] and their agreement to

be bound by the Certificate of Incorporation,

Bylaws and Rules of the Corporation.

Corporation Not Bound By ETP Holder[, ETP

Firm or Equity ASAP Holder] Agreements

Rule [2.9] 2.8. Nothing contained in any

partnership agreement, limited partnership

agreement, articles of incorporation,

resolutions, by-laws or any other

organizational documents, or amendment

thereto, of an ETP [Firm or Equity ASAP]

Holder, not any other agreements between

any ETP [Holder, ETP Firm and/or Equity

ASAP] Holder and a third party, or any

amendment thereto, even though submitted

to or filed with the Corporation, shall

obligate or be binding upon the Corporation.

Only ETP [Firms and Equity ASAP Holders

To Trade Under Firm Name] Holder

Organizations May Carry Customer Accounts

[Rule 2.10.] Rule 2.9. [Only Equity ASAP]

Only ETP Holders [and ETP Firms] which are

partnerships, limited liability partnerships,

corporations or limited liability companies

shall carry accounts for customers or conduct

business under a firm name[, except that if

by death or otherwise, an ETP Firm is

reduced to the ETP Holder, such ETP Firm

may continue business in the firm name for

such a period only as may be allowed by the

Corporation].

Sole Proprietors [and Individual ETP

Holders]

[Rule 2.11] Rule 2.10(a) A sole proprietor

ETP Holder may not carry public customer

accounts.

[(b)–(c)—Deleted.]

[(d)](b) Sole proprietor ETP Holders shall

comply with such additional requirements as

the Corporation may from time to time

prescribe.

ETP [Firms and Equity ASAP Holders]

Holder Organizations

[Rule 2.12] Rule 2.11[(a)—Deleted.]

[(b)] (a) Each ETP [Firm and Equity ASAP]

Holder shall maintain at the Corporation at

all times a record of the name and address

of the individual duly authorized by such

[Firm or] ETP Holder to receive and accept

legal or other notices on its behalf.

[(c)] (b) An ETP [Firm or Equity ASAP]

Holder shall adopt such restrictions on the

conduct of its affairs as may be prescribed by

the Corporation, including, without

limitation, restrictions to the payment of

dividends and loans to officers, directors,

stockholders, partners or members.

Rule [2.13] 2.12. An ETP [Firm or Equity

ASAP] Holder that intends to admit any

person to partnership, or to elect or appoint

any person as an officer or director, or to

enter into a partnership agreement, or to form

a corporation or limited liability company or

other entity, or to alter the terms of an

existing partnership agreement or articles of

incorporation or limited liability company

agreement or other similar operating

agreement shall notify the Corporation in

writing of such proposed admission,

arrangement, or alteration before said

becomes effective and shall submit such

papers and information and comply with

such requirements in connection therewith

as the Corporation may prescribe.

Rule [2.14] 2.13

(a) Allied Persons and Approved Persons,

as defined in Rule 1, shall be subject to

approval by the Corporation. An ETP [Firm

or Equity ASAP] Holder which proposes to

admit an Allied Person or an Approved

Person shall notify the Corporation in

writing, shall pay any applicable fees and

shall submit such information as may be

reasonably required by the Corporation.

(b) In order to maintain its trading

privileges, each ETP [Firm and Equity ASAP]

Holder shall obtain approval from the

Corporation for all persons required to be

approved, and each such ETP [Firm and

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78841

Equity ASAP] Holder shall maintain

continuous compliance with all standards

prescribed by the Bylaws and Rules of the

Corporation.

(c) Each ETP [Firm and Equity ASAP]

Holder shall promptly give the Corporation

written notice on such form as may be

required by the Corporation of the death,

retirement, or other termination of any ETP

Holder, [Equity ASAP Holder,] Allied Person,

Approved Person and of the dissolution of

the ETP [Firm or Equity ASAP] Holder.

(d) Each ETP [Firm and Equity ASAP]

Holder shall designate ‘‘principal executive

officers’’ of such corporation who must[, in

the case of ETP Firms,] be [ETP Holders or]

Allied Persons, and who[, in either case,]

must exercise supervision and control over

the various areas of the business of such

[Firm or] ETP Holder in such areas as the

Rules of the Corporation may prescribe.

(e) Each ETP [Firm and Equity ASAP]

Holder shall include in its name an

appropriate identifier of its corporate or

business association status, in English (e.g.,

Incorporated, Corporation, Limited Liability

Company, Limited Liability Partnership, or

an appropriate abbreviation thereof).

(f) The Corporation may require each

applicant becoming a general partner, officer,

voting stockholder, limited liability company

member, or director of any ETP [Firm or

Equity ASAP] Holder to pass an examination

to demonstrate that they have adequate

experience and knowledge of the securities

business before undertaking any active duties

with the firm. Compliance with this

requirement may be waived if the principal

is a member of an ETP [Firm or Equity ASAP]

Holder belonging to another national

securities exchange having comparable

requirements.

(g) Each ETP [Firm] Holder shall be liable

for all [of the] liabilities to the Corporation

of [the ETP Holders, as the case may be,

conferring his or her on their ETP trading

privileges on the firm] authorized traders,

which shall include, without limitation, the

payment of all [Corporation] fees and charges

as well as meeting all obligations accruing in

the course of [the firm’s (or its respective ETP

Holders’)] an ETP Holder’s or AT’s business

with the Corporation.

(h) Each [ETP Holder, Equity ASAP

Holder,] Approved Person, Allied Person,

Affiliate, and Associated Person shall be

liable to the same discipline and penalties for

the acts and omissions of his or her ETP

[Firm or Equity ASAP] Holder[, as the case

may be,] as for their own acts.

(i) Claims of [ETP Holders, Equity ASAP

Holders,] Affiliates, Allied Persons, directors,

officers, and Associated Persons of an ETP

[Firm or Equity ASAP] Holder shall be

subordinate in right of payment to payment

or provision for payment of all claims of

customers of such ETP Holder[, ETP Firm or

Equity ASAP Holder].

(j) Each ETP [Firm and Equity ASAP]

Holder shall submit to the Corporation, at

such times as the Corporation may require,

an affidavit listing, to the best of its

knowledge and belief, the name of each party

directly or indirectly beneficially owning 1%

or more of its outstanding voting stock and

showing the percentage of such ownership.

(k) No parent or person controlling any

parent of an ETP [Firm or Equity ASAP]

Holder may engage in any transaction or

action for the purpose of circumventing any

Rule of the Corporation governing the

activities of an ETP [Firm or Equity ASAP

Holder, as the case may be.] Holder.

(l) ETP [Firms and Equity ASAP] Holders

shall comply wit such additional

requirements as the Corporation may from

time to time prescribe.

Rule [2.15] 2.14.

(a) Each ETP [Firm and Equity ASAP]

Holder that is a partnership (whether general

or limited) and which has only one general

partner shall provide in its partnership

agreement that:

(1)–(2)—No change.

(b) Upon the death or withdrawal of any

partner, if the partnership business is

continued by the surviving partners, the

continuing partnership will not be

recognized as an ETP [Firm or Equity ASAP]

Holder[, as the case may be,] if the

unsubordinated claim of the deceased or

withdrawing partner to a return of such

deceased or withdrawing partner’s capital

contribution would result in a net capital

impairment of the continuing partnership.

The continuing partnership will ordinarily be

recognized as an ETP [Firm or Equity ASAP]

Holder[, as the case may be,] during the

period of subordination of such claim if

subordination provisions substantially as

follows are included in the partnership

agreement:

Upon the death of a withdrawal of any

partner, if the surviving partners desire to

continue to the partnership business, the

capital contribution of such deceased or

withdrawing partner shall remain at the risk

of the business and shall be considered

capital of such continuing firm for a period

of fifteen (15) calendar days to the extent

necessary to comply with the net capital

requirements of the Corporation. Any claim

of the withdrawing partner or of the personal

representative of the deceased partner to the

repayment of such deceased or withdrawing

partner’s capital contribution during such

period shall be subordinated to the payment

in full of such claims of all present and

future creditors of the continuing partnership

arising out of any matters occurring before

the end of such period.

[Terms and Conditions Relating to Equity

ASAPs]

[Rule 2.16.—Deleted]

Responsibilities of Non-resident Firms

Rule [2.17.] 2.15(a) An ETP [Firm or Equity

ASAP] Holder that does not maintain an

office in the United States responsible for

preparing and maintaining financial and

other reports required to be filed with the

Securities and Exchange Commission and the

Corporation must:

(1)—No change.

(2) Reimburse the Corporation for any

expenses incurred in connection with

examinations of the ETP Holder[, ETP Firm

or Equity ASAP] Holder to the extent that

such expenses exceed the cost of examining

an ETP [Holder, ETP Firm or Equity ASAP]

Holder located within the continental United

States in the geographic location most distant

from the principal office of the Corporation

or, in such other amount as the Corporation

may deem to be an equitable allocation of

such expenses,

(3)—No change.

(4) Utilize, either directly or indirectly, the

services of a broker/dealer registered with the

Securities and Exchange Commission, a bank

or a clearing agency registered with the

Securities and Exchange Commission located

in the United States in clearing all

transactions involving persons affiliated with

the ETP Holder [, ETP Firm or Equity ASAP

Holder,] except where both parties to a

transaction agree otherwise.

Amendments to ETP [Firm and Equity ASAP]

Holder Documents

Rule [2.18.] 2.16(a) All formation

documents for ETP [Firms and Equity ASAP]

Holders, such as articles of incorporation, bylaws, partnership agreements, limited

liability company agreements, and all

amendments thereto, now in effect or

adopted in the future, shall be filed with the

Corporation and shall be subject to approval

by the Corporation.

(b) Each ETP [Holder, ETP Firm and Equity

ASAP] Holder must submit to the

Corporation any amendment to any

document submitted as part of their

application, including but not limited to

amendments to documents required by Rule[

4] 2.3, amendments to the [permit holder’s]

ETP Holder’s Form BD, and changes to the

[permit holder’s] ETP Holder’s home or

business address, within fifteen (15) business

days of such amendment or change.

ETP Charges

Rule [2.19.] 2.17(a) Securities and

Exchange Commission Registration Fee:

Section 31 of the Securities Exchange Act of

1934 imposes upon every national securities

exchange the payment of a fee of 1/300th of

1 percentum of the aggregate dollar amount

of the sales of securities transacted on the

exchange, subject to some limitations. There

shall be paid to the Corporation by each ETP

Holder[, ETP Firm or Equity ASAP Holder]

in such manner and at such times as the

Corporation shall direct, Section 31 fees

equal to the sum of one cent for each $300

or fraction thereof of the aggregate dollar

amount of the sales of securities transacted

by it through the Corporation, except in

respect of transactions in securities which are

direct obligations of or guaranteed as to

principal or interest by the Untied States, or

such securities issued, or obligations

guaranteed by corporations in which the

United States has a direct or indirect interest

as may be designated for exemption

therefrom by the Secretary of the Treasury.

Such sum shall be paid by the selling ETP

Holder[, ETP Firm or Equity ASAP Holder]

as appearing on the comparison ticket of each

transaction effected. The selling ETP [Holder,

ETP Firm or Equity ASAP] Holder shall

charge and collect such sum from the persons

for whom he, she or it was acting in making

the transaction. [Specialists] Market Makers

shall pay such sum of both odd lots and

round lots that they sell.

(b) Other Charges: In addition to

transaction fees and the Securities and

exchange Commission registration fee, the

78842 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

Corporation may from the time fix and

impose other charges or fees to be paid by

ETP Holders[, ETP Firms and Equity ASAP

Holders] for the use of equipment or facilities

or for services or privileges granted.

Exemption from Registration Requirements

Rule [2.20.] 2.18. An ETP [Firm or Equity

ASAP] Holder shall be exempt from such

registration requirements as the Corporation

may designate if it is a member organization

of another self-regulatory organization, which

is the appointed Designated Examining

Authority (‘‘DEA’’) for such organization by

the Securities and Exchange Commission.

Termination of [Trading Privileges] ETP

[Rule 2.21] Rule 2.19(a) [Trading privileges

conferred by an] An ETP [or Equity ASAP]

will terminate upon the occurrence of any

one of the following conditions:

(1) the expulsion of the ETP Holder[, ETP

Firm or Equity ASAP Holder] from the

Corporation’s Trading Facilities;

(2) the suspension of the ETP Holder[,]

where such ETP [Firm or Equity ASAP]

Holder [where such Holder or Firm] failed to

be reinstated at the expiration of the period

of suspension, including any extension of

such period which may have been granted by

the Corporation;

(3) the formal or informal dissolution or

winding up of an ETP [Firm or Equity ASAP]

Holder;

(4)–(5)—No change.

(b) Obligations of Terminating ETP

Holders[, ETP Firms and Equity ASAP

Holders]: Every ETP [Firm, and Equity

ASAP] Holder, and any successor-in-interest

thereto, and each ETP [Holder and Equity

ASAP] Holder whose trading privileges are

terminated due to expulsion, suspension

without reinstatement, death, declaration of

incompetency, dissolution, winding up, or

other cessation of business, must be current

in all filings and payments of dues, fees and

charges relating to that ETP [or Equity ASAP,

as the case may be], including, without

limitation, filing fees and charges required by

the Securities and Exchange Commission and

the Securities Investor Protection

Corporation. if any ETP Holder, [ETP Firm,

or Equity ASAP Holder,] or any successor-ininterest thereto, fails to make all such filings,

or to pay all such dues, fees and charges, the

Secretary of the Corporation shall retain such

jurisdiction over such former ETP Holder[,

ETP Firm or Equity ASAP] Holder to require

such filings and collect such outstanding

dues fines and charges until such time as

they have been filed and/or paid.

[(c)—Deleted.]

Limited Transferability

Rule [2.22] 2.20(a) Transfer by Purchase,

Sale or Lease Prohibited. ETPs [and Equity

ASAPs] may not be purchased (other than

from the Corporation), sold or leased. Any

purported purchase (other than from the

Corporation), sale or lease of an ETP [or

Equity ASAP] shall be void abe inition

within further action by the Corporation.

(b) Private Transfer Void: An ETP [Holder,

ETP Firm or Equity ASAP] Holder which

attempts to transfer an ETP [or Equity ASAP]

by private sale or lease, or otherwise, may be

adjudged guilty of conduct detrimental to the

interest and welfare of the Corporation, and

any purported transfer shall be void ab initio

without further action by the Corporation

and will confer no rights upon the purported

transferee.

[(c)—Deleted.]

Employees of ETP [Firms and Equity ASAP]

Holders Registration

Rule [2.23] 2.21(a) Every employee,

including any branch office [managers]

manager, of an ETP [Firm or Equity ASAP]

Holder who is compensated directly or

indirectly for the solicitation or handling of

business in securities, including trading in

securities for the account of the organization,

whether such securities are those dealt in on

the Corporation or those dealt in over-thecounter, must be registered with an approved

by the Corporation.

The Corporation may waive compliance

with the requirements of Rule [2.23(a)]

2.21(a) in the event the ETP [Firm or Equity

ASAP] Holder is also a member organization

of another national securities exchange

having comparable requirements.

(b)–(c)—No change.

(d) A registered employee may not be

engaged in any other business or be

employed by another employer in any

capacity or receive compensation, without

the prior written and continuing approval of

his or her ETP Holder[, ETP Firm or Equity

ASAP Holder, as the case may be,] and such

registered employee shall devote a

substantial portion of the business day to the

activities of his or her [Firm or] ETP Holder.

(e) No ETP [Holder, ETP Firm or Equity

ASAP] Holder may employee any employee

of the Corporation during the hours of regular

employment by the Corporation. No ETP

[Holder, ETP Firm or Equity ASAP] Holder

may employ any employee of the Corporation

outside the hours of regular employment by

the Corporation without having obtained the

prior, written approval therefore of the

Corporation and registering therewith the

name of said employee, the nature of the

services rendered and the amount of said

compensation.

(f) No ETP [Holder, ETP Firm or Equity

ASAP] Holder shall give any compensation

or gratuity in any one calendar year in excess

of $100 to any employee of any other ETP

Holder, [ETP Firm or Equity ASAP Holder,]

to ro any employee of a broker or dealer,

bank or institution that is not an ETP Holder,

[ETP Firm or Equity ASAP Holder,] without

the prior consent of the employee’s

employer.

(g) No ETP [Holder, ETP Firm or Equity

ASAP] Holder shall give any compensation

to any officer, director, employee or other

agent of the Corporation without the prior

written consent of the Corporation. No ETP

[Holder, ETP Firm or Equity ASAP] Holder

shall give any gratuity or gift in any one

calendar year in excess of $100 to any officer,

director, employee or other agent of the

Corporation without the prior written

consent of the Corporation. All requests for

such consent should contain the following

information.

(1)–(5)—No change.

(h) Termination of the employment of a

registered employee shall be reported to the

Corporation, and the Corporation shall be

notified in writing of the specific grounds for

termination immediately when the

employment of any persion is terminated by

an ETP Holder[, ETP Firm or Equity ASAP

Holder] under circumstances involving

misconduct, fraud or unethical practices.

[Trading Floor Employees of ETP Firms]

[Rule 2.24—Deleted.]

Managatory Decimal Pricing Testing

Rule [2.25] 2.22(a)[(1)]. Point-to-Point

Testing. Each ETP Holder[, Equity ASAP

Holder or ETP Firm] that has an electronic

interface with the Corporation must

participate in point-to-point testing with the

Corporation of its computer systems designed

to ascertain decimal pricing conversion

compatibility of those computer systems, in

a manner and frequency as prescribed by the

Corporation. An ETP Holder[, Equity ASAP

Holder or ETP Firm) that has its electronic

interface through a service provider need not

participate in point-to-point testing if, by a

time designated by the Corporation.

[(A)] (1) The service provider conducts

successful tests with the Corporation on

behalf of the firms it serves.

[(B)] (2) The ETP Holder[, Equity ASAP

Holder or ETP Firm] conducts successful

point-to-point testing with the service

provider and

[(C)] (3) The Corporation agrees that

further testing is not necessary.

[(2)] (b) Industry Wide Testing.The

Corporation may require certain of its ETP

Holders[, Equity ASAP Holders or ETP

Firms] to participate in industry wide testing

of computer systems for decimal pricing

conversion. The Corporation may require any

ETP Holder[, Equity ASAP Holder or ETP

Firm] who will participate in industry wide

testing to also participate in any tests

necessary to ensure preparedness to

participate in industry wide testing.

[(3)] (c) Reports. ETP Holders[, Equity

ASAP Holders or ETP Firms] participating in

point-to-point testing (whether between the

firm and the Corporation, between the firm

and its service provider, or between the ETP

Holder’s[, Equity ASAP Holder’s or ETP

Firm’s] service provider and the Corporation)

or industry wide testing must file reports

with the Corporation concerning the required

tests in the manner and frequency required

by the Corporation.

[(4)] (d) Documentation. ETP Holders[,

Equity ASAP Holders or ETP Firms] must

maintain adequate documentation of tests

required by this Rule and the results of such

testing for examination by the Corporation.

Commentary

.01 This rule will expire automatically

upon the full implementation fo decimal

pricing.

Transition

Rule 2.100. Any PCX member, as defined

in the PCX Parent Rule 1.1, or Equity ASAP

Holder that wishes to continue to effect

securities transactions without interruption

of the Corporation’s Trading Facilities must

obtain an ETP prior to the first day the

Archipelago Exchange becomes operational.

If the PCX members or equity ASAP Holder

fails to obtain an ETP prior to the first day

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78843

the Archipelago Exchange becomes

operational, the PCX member or equity ASAP

holder will not be permitted to effect

securities transactions on the Corporation’s

Trading Facilities until such PCX member of

Equity ASAP Holder obtains an ETP.

Rule 3

Organization and Administration

Part I—Committees of the Corporation

Overview

Rule 3.1(a).—No change.

Equity Committees

Rule 3.2.

(a) General Provisions:

(1)–(7)—No change.

(8) Eligibility for and Appointment to

Equities Committees. Any ETP [Holder and

Equity ASAP] Holder of the Corporation in

good standing or allied person of an ETP

[Firm or Equity ASAP] Holder, or any person

from the public is eligible for appointment or

election to Equity Committees. Only one

person affiliated with the same ETP [Firm or

Equity ASAP] Holder shall be eligible for

service on the same Equity Committee.

Except as otherwise set forth in these Rules,

the Chief Executive Officer of the

Corporation shall appoint eligible ETP

Holders [, Equity ASAP Holders] and persons

from the public to the positions so allocated

on Equity Committees for terms of one (1)

year.

(9) Alternate Members. The Chief

Executive Officer of the Corporation may

designate one or more ETP Holders, [Equity

ASAP Holders,] an allied person of an ETP

[Firm or Equity ASAP] Holder, and persons

from the public as alternate members of any

Equity Committee, who may replace any

absent or disqualified member at any meeting

of such committee.

(10)–(11)—No change.

(b) Equity Committees. As set forth below,

the Board of Directors has delegated certain

authority and functions to its committees.

Action taken pursuant to delegated authority,

however, is subject to review, ratification or

rejection by the Board of Directors.

(1) Business Conduct Committee.

(A) Composition. In addition to any

members of the public on the Business

Conduct Committee, the Business Conduct

Committee shall have [proportional

representation of all (i) ETP Holders and ETP

Firms and (ii) Equity ASAP Holders, with] a

minimum of one ETP Holder or allied person

of an ETP [Firm and one Equity ASAP]

Holder [or allied person of an Equity ASAP

Holder].

(B) Functions and Authority. The Business

Conduct Committee shall, in accordance with

the Bylaws, Rules and procedures of the

Corporation, have the following functions

and authority:

(i) Examine the business conduct and

financial condition of ETP Holders [, ETP

Firms, Equity ASAP Holders,] and associated

persons;

(ii)–(iii)—No change.

(iv) Require the production of detailed

financial reports of an ETP Holder[, ETP

Firm, or ASAP Holder] and such other

operational reports as it may deem relevant.

(C) This Committee shall have authority,

whenever it appears that an ETP [Firm, ETP

Holder, or Equity ASAP] Holder is in

violation of Rule 4, to direct a representative

of such ETP [Firm, ETP Holder, or Equity

ASAP] Holder to appear before the

Committee for examination upon 48 hours

notice, either orally or in writing. After such

examination, the Committee shall have

authority to suspend such ETP [Firm, ETP

Holder, or Equity ASAP] Holder until the

requirements of Rule 4 are fully met. Any

such suspension directed by the Committee

shall be subject to review by the Board. Such

review shall not operate as a stay of the

suspension unless specifically allowed by the

Board. In the event of a reversal of the

suspension imposed by the Committee, an

ETP [Firm, ETP Holder, Equity ASAP] Holder

or officer, partner, director, stockholder, or

representative thereof shall be prohibited

from instituting a lawsuit in any forum

against the Corporation or the members of the

Committee, based in whole or in part upon

the suspension imposed by the Committee.

(D)—No change.

(2) Nominating Committee.

(A) Composition. The Nominating

Committee shall have seven members

consisting of six ETP Holders [and/or Equity

ASAP Holders] and one person from the

public. [The six ETP Holders and/or Equity

ASAP Holders on the Nominating Committee

shall represent proportionally all (i) ETP

Holders and ETP Firms and (ii) Equity ASAP

Holders, with a minimum of one ETP Holder

or allied person of an ETP Firm and one

Equity ASAP Holder or allied person of an

Equity ASAP Holder.]

(B) Nomination, Appointment and

Election.

(i) Nomination. Sixty-five days prior to the

expiration of the term of its members, the

Nominating Committee shall publish a slate

of six eligible nominees to fill the positions

during the next annual term of the

Nominating Committee. ETP [Holders and

Equity ASAP] Holders in good standing may

submit a petition to the Corporation in

writing to nominate additional eligible

candidates to fill [ETP/Equity ASAP] ETP

positions during the next annual term, and

upon written petition of at least 10 percent

of ETP Holders [and Equity ASAP Holders,

considered as one group,] in good standing

on or before the forty-fifth day preceding the

expiration of the existing term such person(s)

shall also be nominated by the Nominating

Committee.

(ii)—No change.

(iii) Election. In the event that ETP Holders

[or Equity ASAP Holders], or allied persons

of an ETP [firm or Equity ASAP] Holders, are

nominated by the Nominating Committee

pursuant to petition by the ETP Holders

[and/or Equity ASAP Holders], and there are

more than six nominees to fill the [ETP/

Equity ASAP] ETP Holders positions on the

Nominating Committee, the Nominating

Committee shall submit the nominees to the

ETP Holders [and the Equity ASAP Holders],

collectively for election. Each ETP [Holder

and Equity ASAP] Holder in good standing

shall be permitted to vote for up to six

nominees and the six nominees receiving the

most votes shall fill the [ETP/Equity ASAP]

ETP positions as members during the next

annual term of the Nominating Committee.

Tie votes shall be decided by the Board of

Directors at its first meeting following the

election.

(iv) Acclamation of Slate. In the event there

are only six nominees to fill the [ETP/EquityASAP] ETP positions on the Nominating

Committee on or after the forty-fifth day prior

to the expiration of the terms of the outgoing

Nominating Committee, those six nominees

shall be deemed elected to the next annual

term of the Nominating Committee.

(C) Representatives to the Board of

Directors of the Corporation and the Board of

Governors of the Pacific Exchange, Inc.

(i) Nomination. Sixty-five days prior to the

expiration of the term of its Directors, the

Nominating Committee shall publish the

names of two (2) ETP Holders, [Equity ASAP

Holders,] or persons affiliated with such

Holders (in any combination) as its nominees

for the Board of Directors of the Corporation

and one ETP Holder, [Equity ASAP Holder,]

or allied [persons] person of an ETP [Firm or

Equity ASAP] Holder, as nominee for the

Board of Governors of the Pacific Exchange,

Inc. The nominee for the Board of Governors

may be a person nominated to the Board of

Directors. ETP [Holders and Equity ASAP]

Holders in good standing may submit a

petition to the Corporation in writing to

nominate additional eligible candidates to fill

[ETP/Equity ASAP] ETP positions during the

next term, and upon written petition of at

least 10 percent of ETP Holders [and Equity

ASAP Holders, considered as one group,] in

good standing on or before the forty-fifth day

preceding the expiration of the existing term

such person(s) shall also be nominated by the

Nominating Committee.

(ii) Selection of Nominees. In the event that

[ETP/Equity ASAP] ETP positions are

nominated by the Nominating Committee

pursuant to petition by the ETP Holders [and

Equity ASAP Holders], and there are three or

more nominees for the Board of Directors or

two or more nominees for the Board of

Governors, the Nominating Committee shall

submit the contested nomination(s) to the

ETP Holders [and Equity ASAP Holders,

considered as one group,] for selection. Each

ETP [Holder and Equity ASAP] Holder in

good standing may select two nominees for

contested seats on the Board of Directors and

one nominee for contested seats on the Board

of Governors. With respect to contested

positions, the two nominees for the Board of

Directors and the nominee for the Board of

Governors selected by the most ETP Holders

[and Equity ASAP Holders, considered as

one group,] shall be submitted by the

Nominating Committee to the Board of

Directors of the Corporation or the Board of

Governors of the Pacific Exchange, Inc., as

the case may be. Similarly, the Nominating

Committee shall submit uncontested

nominees to the Board of Directors of the

Corporation or the Board of Governors of the

Pacific Exchange, Inc., as the case may be.

Tie votes shall be decided by the respective

Board at its first meeting following the

election.

(3)—No change.

(c)—No change.

78844 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

Board Committees

Rule 3.3(a). Board Committees.

(1) Board Appeals Committee.

(A) Composition. The Board of Directors

may appoint one or more Appeals

Committees to conduct reviews of matters

subject to the applicable provisions of Rule

3.2b(b)(1)(C), 5 or 10. The Board of Directors

will determine the size of any Appeals

Committee that it appoints. Each Appeals

Committee will contain at least one public

director and at least one director that is an

ETP Holder[,] or allied person of an ETP

[Firm, Equity ASAP] Holder [or allied person

of an Equity ASAP Holder].

(B)—No change.

Part II—Regulation

Self-Regulatory Responsibilities

Rule 3.4. The Pacific Exchange, Inc. (‘‘PCX

Parent’’), as a self-regulatory organization

registered with the Securities and Exchange

Commission pursuant to Section 6 of the

Exchange Act, shall have ultimate

responsibility in the administration and

enforcement of rules governing the operation

of its subsidiary, PCX Equities, Inc.

(‘‘Corporation’’). Notwithstanding the

delegation of authority to the subsidiary, as

set forth below in Rule 3.5, the PCX Parent

shall review and ratify any rule change

adopted by the Board of Directors of the

Corporation before such rule change becomes

the final action.

Delegation of Authority

Rule 3.5(a). Except as otherwise provided

in the Bylaws, Rules and procedures of the

Corporation, the Chief Regulatory Officer or

such other designated officer of the

Corporation shall have the following

delegated authority.

(1) To establish and interpret rules and

regulations for ETP Holders[, Equity ASAP

Holders, ETP Firms,] or associated persons

including, but not limited to trading rules,

fees, access to and use of system facilities,

and arbitration procedures.

(2) To determine regulatory and trading

policies, including the development and

adoption of necessary or appropriate rule

changes, relating to the business conduct and

trading activities of ETP Holders[, Equity

ASAP Holders, ETP Firms,] and associated

persons. This includes, but is not limited to,

the following:

(A) Arbitration of disputes between ETP

Holders[, Equity ASAP Holders, ETP Firms,]

or associated persons arising from

transactions on the facility;

(B) Financial responsibility;

(C) Clearance and settlement of securities

transactions and other financial

responsibility and operational matters

affecting ETP Holders[, Equity ASAP

Holders, ETP Firms,] or associated persons in

general; and

(D) Qualification requirements for ETP

Holders[, Equity ASAP Holders, ETP Firms,]

and associated persons.

(3)—No change.

(4) To administer programs and systems for

the surveillance and enforcement of rules

governing the conduct and trading activities

of ETP Holders[, Equity ASAP Holders, ETP

Firms,] and associated persons.

(5)—No change.

(6) To examine and investigate ETP

Holders[, Equity ASAP Holders, ETP Firms,]

and associated persons to determine if they

have violated the Rules and procedures of the

Corporation, the federal securities laws, and

other laws, rules, and regulations that the

Corporation has the authority to administer,

interpret, or enforce.

(7) To place restrictions on the business

activities of ETP Holders[, Equity ASAP

Holders, ETP Firms,] and associated persons

consistent with the public interest, the

protection of investors, and the federal

securities laws.

(8)—No change.

(9) To appoint [Trading Officials] staff, as

necessary, that shall be responsible for the

general supervision of the conduct and

dealings of ETP Holders[, Equity ASAP

Holders, ETP Firms,] and associated persons

on the trading [facility] facilities. These

duties include, but are not limited to, the

following:

(A) Arbitrate differences between ETP

Holders[, Equity ASAP Holders, ETP Firms,]

or associated persons arising from

transactions on the trading [facility] facilities;

(B) Supervise all connections or means of

communication with the trading [facility]

facilities, which may require the

discontinuance of any such connection or

means of communication that is deemed

contrary to the welfare or interest of the

Corporation;

(C) Issue a [Floor Citation] citation when it

appears that a Minor Rule Plan violation has

occurred as specified in Rule 10;

(D) Declare a ‘‘fast [market’’ or] market,’’

invoke a trading halt in a security due to an

influx of orders or other unusual market

conditions or circumstances[. Take], or take

such other actions as are deemed necessary

in the interest of maintaining a fair and

orderly market; and

(E) Supervise and regulate the operation of

ITS, or any other application of the system

during active openings, heavy trading and

unusual situations.

(10) To administer or enforce policies and

Rules of the Corporation [(including] (as well

as federal and state regulations) governing

the initial and continued listing or trading of

securities on the Corporation.

Surveillance Agreements

Rule 3.6.—No change.

Part III—Dues, Fees and Fines

Dues, Fees and Charges

Rule 3.7. ETP Holders[, ETP Firms, and

Equity ASAP Holders] of the Corporation,

whether or not in good standing, shall pay to

the Corporation such dues, fees and charges

as the Board of Directors shall prescribe.

Liability for Payment

Rule 3.8. An ETP Firm or Equity ASAP

Holder] failing to pay any dues, fees, charges

or fines to the Corporation for thirty days

after the same shall become payable, may be

suspended by the Board of Directors or the

Chief Executive Officer of the Corporation in

accordance with Rule 11.2.

Fines

Rule 3.9.—No change.

Rule 4

Capital Requirements, Financial Reports,

Margins

Section 1. Capital Requirements

Minimum Net Capital

Rule 4.1[(a). To the extent applicable, every

ETP Holder, ETP Firm and Equity ASAP

Holder]. ETP Holders that are subject to Rule

15c3 under the Securities Exchange Act of

1934 (‘‘Exchange Act’’), as amended, shall

maintain a minimum net capital in

accordance with the provisions of Rule 15c3–

1 under the [Securities] Exchange Act [of

1934 (‘‘Exchange Act’’), as amended. For].

Each ETP [Holders and ETP Firms, this

requirement is in addition to the

requirements of Rule 4.2 (Specialist Post

Capital). Each ETP Holder, ETP Firm and

Equity ASAP] Holder shall promptly notify

the Corporation and, pursuant to the

provisions of Rule 17a–11 under the

Exchange Act, the Securities and Exchange

Commission if such ETP [Holder, ETP Firm

or Equity ASAP] Holder’s net capital does

not equal or exceed the appropriate

minimum required by Rule 15c3–1 or if

notice is otherwise required by Rule 17a–11.

[(b)–(c)—Deleted.]

[(d)] Each [specialist firm] Market Maker

shall report its net capital to the Corporation

in a form and manner prescribed by the

Corporation.

Commentary

.01 ETP [Firms] Holders Who Do Not

Carry Customers’ Accounts

An ETP Holder[, Equity ASAP Holder or

ETP Firm] operating under paragraph (a)(2)

of SEC Rule 15c3–1 shall file a written

application with the Corporation for approval

on a form prescribed by the Corporation.

.02 Trading in Gold and Silver Bullion:

(a) Where gold or silver bullion, which

upon payment to the seller is within the ETP

[Firm’s] Holder’s control in good deliverable

form and covered by appropriate insurance,

is purchased by customers under agreements

wherein full payment is required and is made

within seven business days after the date of

purchase, or full payment is required and

made within an extended or longer period of

time as approved by the Corporation upon

application, such purchases may be

considered bona fide cash transactions which

require no deduction from net worth in

computing net capital. In all other purchases

by customers of such gold or silver bullion,

which liquidate to an equity, cash required,

if any, to provide margin equal to 25% (10%

if hedged by futures contracts in the same

commodity) of the market value of the gold

or silver bullion in each such customer’s

account in equity shall be deducted from net

worth in computing net capital.

(b) If upon payment to the seller, gold or

silver bullion purchased by customers and

paid for by them is not within the ETP

[Firm’s] Holder’s control in good deliverable

form and covered by appropriate insurance,

the market value of such gold or silver

bullion shall be deducted from net worth in

computing net capital so long as the ETP

[Firm] Holder is accountable therefore. If

upon payment to the seller, gold or silver

bullion purchased for a proprietary account

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78845

is not within the ETP [Firm’s] Holder’s

control in good deliverable form and covered

by appropriate insurance, such gold or silver

bullion shall be considered to have no market

value for purposes of net capital.

(c) Definitions:

(1) ‘‘Within the ETP [Firm’s] Holder’s

Control’’

Gold or silver in bullion form, identified by

serial number or otherwise, and subject to

immediate disposition at the direction of the

[member firm] ETP Holder.

Storage arrangements acceptable to

insurance carriers will satisfy the

Corporation provided the coverage complies

with the ‘‘appropriate insurance’’

requirement discussed below. While the

Corporation will not specify acceptable

bullion depositories to [ETPs] ETP Holders,

certain custodial requirements must be

satisfied whenever gold or silver bullion is

stored in outside depositories. The ETP

[Firm] Holder shall satisfy itself that the

depository will maintain physical possession

or control of the bullion stored for its

customers free of any lien or claim on such

bullion other than that arising out of, and

limited to the extent of, any margin

transaction or other unpaid for transaction.

Records shall be maintained to separately

identify customer pledged gold and silver

bullion subject to lien from that customer

bullion not pledged and fully paid for. The

ETP [Firm] Holder shall include as part of a

written agreement with the depository such

other protections as may be deemed

necessary. ETP [Firms] Holders considering

the utilization of foreign depositories are

cautioned to familiarize themselves with

foreign laws on banking and bankruptcy to

insure compliance with this paragraph, since

these laws may differ significantly from those

of the United States.

(2)—No change.

(3) ‘‘Appropriate Insurance’’

All gold or silver under the control of an

ETP [Firm] Holder, whether stored in a

depository, in its own custody, in transit, or

in any other location, within the ETP [Firm’s]

Holder’s control, shall be covered by

insurance of the ETP [Firm] Holder.

‘‘Appropriate insurance’’ is defined to

mean inclusion of gold and silver bullion as

covered property under a broker’s blanket

bond as required by Rule 2, subject to the

following additional criteria which

specifically apply to gold and silver bullion

wherever stored:

(A) That gold and silver stored meets the

ETP [Firm’s] Holder’s insurance carrier’s

standards including specific identification so

as to preclude non-coverage as an inventory

loss;

(B) that gold and silver bullion be insured

at full market value when in transit;

(C) that no dollar amount of gold and silver

bullion stored in depository exceed the sum

of the ETP [Firm’s (a)] Holder’s (i) insurance

coverage and [(b)] (ii) excess net capital; and

(D) that the value of any bullion stored in

a depository and in transit in excess of the

sum of [(iii)(a)] (C)(i) and [(b)] (ii) is charged

to net capital. (The ETP [Firm] Holder may,

should it wish, avoid this capital charge by

acquiring separate insurance to fully cover

bullion exceeding the amount in the broker’s

blanket bond.) ETP [Firms] Holders shall file

with the Corporation copies of letters from its

insurance underwriters setting forth the

extent of its coverage for bullion stored in its

depositories.

(d) Further Customer Protections—To

further ensure protection of customers of

[member organizations, the Exchange] ETP

Holders, the Corporation has established the

following guidelines:

(1) Disclosure to Customer

The ETP [Firm] Holder shall fully disclose

to its customer all relevant information

pertaining to a transaction, including, but not

limited to, names and locations of

depositories, insurance coverage, charges

incidental to storage, requirements and costs

related to taking physical delivery of the

bullion (e.g., possible need for assay), and

applicable [Federal] federal, state or local

laws or regulations (e.g., sales tax

implications of the purchase).

Communications to the public with regard to

gold and silver shall state that SIPC coverage

is not available. Due to the varying degrees

of fineness, and the need for the customer to

be informed as to the quality of bullion being

purchased and its attendant variation in

price, the fineness, weight, price per ounce,

and any markup, commissions, fees, taxes or

other costs shall be disclosed to the

customer. Salesmen must convey to each

customer the special risks and expenses

involved in investing in gold and silver

bullion. In particular, the customer must be

given the opportunity to take delivery of the

gold or silver and be informed whether or not

the [member organization] ETP Holder will

buy it back at a later date, and if so, on what

basis.

(2) Sale or Saleback of Gold and Silver

All sales of gold and silver bullion shall be

long, whether for customer or proprietary

accounts.

Under no circumstances shall [a member

organization] an ETP Holder release the

proceeds of sale of gold or silver to a

customer unless the customer’s gold or silver

has been assayed by an acceptable assayer (as

defined above) or is in a form acceptable to

such assayer. Gold or silver which is to be

sold should be within an ETP [Firm’s]

Holder’s control before it is sold, but in no

event later than two business days after the

trade date. An ETP [Firm] Holder may,

however, submit a plan for review by the

Corporation, the effect of which would allow

a customer longer than two days to deliver

the bullion within the ETP [Firm’s] Holder’s

control on a ‘‘buy-back’’ transaction, where

the customer is selling bullion originally

purchased from that ETP [Firm] Holder.

(3)—No change.

(e) Cash Transactions—Purchases of gold

or silver bullion in a customer’s cash

commodity account must be paid for as

promptly as possible, but no later than the

fifth business day after the date of purchase.

A charge against capital will result if full

payment has not been received by the

seventh business day after purchase.

Although the amendment allows ETP

[Firms] Holders to request extensions of time

for payments not received within seven

business days, the Corporation does not

anticipate granting any such extension except

in rare cases.

Extension requests should be submitted in

letter form, giving the full particulars of the

transaction, the customer’s name and ID

number, the reason for the request, and any

other pertinent data. The letter should be

signed by an authorized individual or officer.

These extension requests will be handled

separately from securities extensions, but

will, as mentioned above, be restrictly

granted.

(f) Margin Transactions—Required margin

shall be furnished within five business days

after date of purchase or made within an

extended or longer period of time as

approved by the Corporation upon

application.

Extension requests on margin transactions

will be subject to the same requirements

applicable to cash transactions.

(1) Initial Margin

For the [purchase] purpose of effecting new

transactions, the margin required shall be an

amount equivalent to the requirements stated

below, or such greater amounts as the

Corporation may from time to time require,

with an minimum equity in the account of

at least $2,000, except that cash need not be

deposited in excess of the cost of any new

transaction.

Withdrawals of cash or spot commodities

may be made, provided that after such

withdrawal the equity in the account is at

least the greater of $2,000 or the amount

required by the maintenance requirement

stated below.

(2) Maintenance

Margin must be maintained in margin

accounts of customers, including [members,

Allied members, organization or

nonmembers] ETP Holders, Allied Persons

thereof and non-ETP Holders and shall be as

follows:

(A) 25% of the market value of gold or

silver spot commodities ‘‘long’’ in each

customer’s account, or

(B) 10% of the market value of the gold and

silver spot commodities if ‘‘hedged by futures

contracts’’ in the same commodity. Gold or

silver bullion which is carried on margin for

customers must be within the control of the

[member organization] ETP Holder, in good

deliverable form and covered by appropriate

insurance.

(g) Records—ETP [Firms] Holders shall

make, keep current and preserve books and

records on spot commodities as are required

for securities.

(h) Conduct of Accounts—Rule 9 requires

the diligent supervision of accounts. All

information requirements or assessments

applicable to other customers’ accounts shall

apply to customers effecting transactions in

gold or silver bullion.

ETP [Firms] Holders should give serious

consideration to securing an adequate

deposit before executing any customer orders

for gold. This will serve to demonstrate the

customer’s ability to consummate the

transaction as well as protecting the [member

organization] ETP Holder from potential

market fluctuations in the event of customer

default. Upward variations in deposit may be

advisable for new customers, or when the

ETP [Firm] Holder anticipates unusual

volatility in the price of gold.

Currently, international settlement of spot

gold transactions take place on the second

78846 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

business day following the order.

Accordingly, ETP [Firms] Holders will have

to pay for or deliver gold on that second

business day. In view of this fact, ETP

[Firms] Holders are hereby put on notice that

good business practice would in most

instances, require substantial cash deposits

in advance of all purchases of gold or silver.

(i) Business Plan—An ETP [Firm] Holder

shall file with the Corporation a detailed

business plan for approval by the

Corporation prior to effecting any

transactions in gold or silver bullion. Such a

plan shall comply with the standards

enunciated herein, and the ETP [Firm]

Holder may utilize the below checklist in

drafting its business plan.

(j) Gold and Silver Business Plan Checklist:

(1) Structure and Nature

(A) Will activities be processed through the

ETP [Firm] Holder subsidiary, affiliate,

holding company, or joint venture? Name the

affiliate/subsidiary responsible for bullion

business, if applicable.

(B)—No change.

(C) Will the organization position bullion

for its own account and/or act as a [market

maker] Market Maker?

(D)–(F)—No change.

(2) Legal Review

(A)—No change.

(B) Has the organization requested counsel

to review the plan for compliance with other

[Federal] federal, state or local applicable

laws?

(C)–(10)—No change.

(3)–(10)—No change.

[.03—Deleted.]

[Specialist Post Capital]

[Rule 4.2—Deleted.]

Rule 4.2. Reserved.

Corporate Affiliates and Subsidiaries

Rule 4.3(a). An ETP [Firm or Equity ASAP]

Holder shall not a corporate affiliate or

subsidiary without the prior written approval

of the Corporation. All affiliates or

subsidiaries of an ETP [Firm or Equity ASAP]

Holder shall be subject to compliance with

the Bylaws, Rules and procedures of the

Corporation, or other conditions as may be

established by the Corporation. ETP Holders[,

Equity ASAP Holders,] and Allied Persons of

ETP [Firms or Equity ASAP] Holders shall be

responsible for any fraud committed by a

corporation affiliate or subsidiary

organization or for any act or proceeding

thereof contrary to just equitable principles

of trade or detrimental to the interest or

welfare of the Corporation.

An ETP [Firm or Equity ASAP] Holder

proposing to organize an affiliate or

subsidiary corporation shall submit full

details to the Corporation.

[The above] Rule 4.3 shall apply to all ETP

[Firms or Equity ASAP] Holders of the

Corporation unless the ETP [Firm or Equity

ASAP] Holder is subject to the jurisdiction of

another national securities exchange or

association designated by the Board of

Directors as having comparable standards, or

it is subject to the jurisdiction of another

national securities exchange or association

designated by the Securities and Exchange

Commission as the primary regulatory body.

Changes in Stockholder Status

Rule 4.3(b). Whenever a person owning 5%

or more of any class of equity securities,

directly or indirectly, of an ETP [Firm or an

Equity ASAP] Holder ceases to be an ETP

Holder, [Equity ASAP Holder,] Allied Person

or Approved Person, the firm shall redeem or

convert such securities to fixed income

securities so that such security interest is less

than 5%. Provided, however, that if such

redemption or conversion would cause such

ETP [Firm or Equity ASAP] Holder not to

comply with the capital requirement of Rule

4, the ETP [Firm or Equity ASAP] Holder will

so notify the Corporation and the assets

which the person receives upon redemption

of such securities, will be loaned by the

person to the ETP [Firm or Equity ASAP]

Holder as a loan subordinated to the claims

of all customers and general creditors of the

ETP [Firm or Equity ASAP] Holder, or the

fixed income securities which the person

receives upon conversion of such securities

will be subordinated to the claims of all

customers and general creditors of the ETP

[Firm or Equity ASAP] Holder. Any such

subordination shall be pursuant to an

agreement approved by the Corporation.

Trading in Firm’s Securities

Rule 4.3(c). An ETP [Firm or Equity ASAP]

Holder shall not trade in (except on an

unsolicited basis) or make recommendations

with respect to its own securities or those of

its parents or affiliates (other than registered

investment companies) and any parents or

affiliates of an ETP [Firm or Equity ASAP]

Holder shall not trade in (except on an

unsolicited basis) or make recommendations

with respect to its own securities or those of

its affiliates, or those of the ETP [Firm or

Equity ASAP] Holder (other than registered

investment companies).

Change in Capitalization

Rule 4.3(d). No ETP [Firm or Equity ASAP]

Holder shall make any change in its

capitalization without prior written approval

of the Corporation.

Owners of 5% or More Equity Securities

Rule 4.3(e). Every party who owns

beneficially 5% or more of any class of equity

security, either directly or indirectly, of the

firm shall be an ETP [Firm or Equity ASAP]

Holder,] Allied Person or Approved Person.

Conditions for Issuance of Freely

Transferable Securities

Rule 4.3(f). ETP [Firm or Equity ASAP]

Holders which issue freely transferable

securities must maintain a ratio of not more

than 50 percent of property subordinated

debt equity (including common and preferred

stock) after giving the effect to any public

financing, and ETP [Firm or Equity ASAP]

Holders or parents thereof which issue freely

transferable securities must:

(1)—No change.

(2) Have two years of operations by the

ETP [Firm or Equity ASAP] Holder as a bona

fide broker-dealer.

(3)—No change.

(4) Pay a filing fee for approval by the

Corporation of the ETP [Firm’s or Equity

ASAP] Holder’s issuance of freely

transferable securities.

Rule 4.3(g). Reserved.

Voting Agreement

Rule 4.3(h). None of the stock of a

corporate ETP [Firm or Equity ASAP] Holder

shall at any time be held under or subject to

any voting agreement whereby the voting of

such stock is pooled or joined with the stock

of any then ETP Holder, [ETP Firm Equity

ASAP Holder,] Allied Person, stockholder

associate or Approved Person unless

approved by the Board of Directors.

Participation in ETP [Firms] Holders

Rule 4.3(i). The Corporation hereby

specifically approves the beneficial

ownership of an interest in any other ETP

[Firm or Equity ASAP] Holder by an ETP

Holder, [Equity ASAP Holder,] Allied Person,

or Approved Person of any ETP [Firm or

Equity ASAP] Holder.

(1)–(2)—No change.

(3) In connection with his, her or its

activity as a [market maker] Market Maker in

such stock, in which event the ETP Holder[,

ETP Firm or Equity ASAP Holder] or Allied

Person, or Approved Person thereof shall be

required to be registered with the

Corporation as a [market maker] Market

Maker in such stock.

Restrictions on ETP [and Equity ASAP]

Holder Activities

Rule 4.4 The Corporation may restrict the

conduct of an ETP [Holder’s, ETP Firm’s or

Equity ASAP] Holder’s activities if at any

time the ETP [Firm or Equity ASAP] Holder

appears to be approaching financial

difficulties or appears to be experiencing

difficulties in its daily operations.

(a) The Corporation may implement the

provisions of Paragraph (b) of this Section if

it determines the existence of one or more of

the following conditions:

(1) The ETP [Holder, ETP Firm or Equity

ASAP] Holder fails to maintain net capital,

above requirements of Rule 4, equivalent to

the greater of (i) one-half of the losses of an

ETP [Holder, ETP Firm or Equity ASAP]

Holder in the twelve-month period

immediately preceding the date of such

computation, or (ii) the loss experienced by

the ETP [Holder, ETP Firm or Equity ASAP]

Holder in the six-month period immediately

preceding such computation.

In determining profit or loss, the ETP

[Holder, ETP Firm or Equity ASAP] Holder

shall mark its trading accounts to the market,

and, its expenses shall reflect, among other

things, all partners’ drawings and salaries,

and appropriate amounts for assets doubtful

of collection.

(2) The ETP [Holder, ETP Firm or Equity

ASAP] Holder has subordinated capital

which will mature within the next 180 days,

and which, if not renewed, would cause (i)

the ratio of aggregate indebtedness to net

capital to exceed 12 to 1, or, in the case of

an ETP [Holder, ETP Firm or Equity ASAP]

Holder which is operating pursuant to

paragraph (f) of SEC Rule 15c3–1 (Alternative

Net Capital Requirement), net capital to be

less than 6% of the aggregate debits; (ii) a

reduction in excess of net capital below the

standard set forth in subparagraph (1) of this

Section, or (iii) a reduction in net capital

below 120% of the minimum required net

capital.

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78847

(3) The ETP [Holder, ETP Firm or Equity

ASAP] Holder has experienced a reduction in

net capital of 15% in the preceding month or

30% in the three-month period immediately

preceding such computation, other than as a

result of increased capital haircuts on firm

proprietary securities positions.

(4) The ETP [Holder’s, ETP Firm’s or

Equity ASAP] Holder’s net capital is less

than $1,000,000 and (i) its ratio of aggregate

indebtedness to net capital equals or exceeds

8 to 1, or (ii) its net capital is less than 150%

of the minimum required net capital.

(5) The ETP [Holder’s, ETP Firm’s or

Equity ASAP] Holder’s net capital equals or

exceeds $1,000,000 and (i) its ratio of

aggregate indebtedness to net capital equals

or exceeds 10 to 1, or (ii) its net capital is

less than 120% of the minimum required net

capital.

(6) Notwithstanding the provisions of

subparagraphs (4) and (5) above, if the ETP

[Holder, ETP Firm or Equity ASAP] Holder

is operating pursuant to Paragraph (f) of SEC

Rule 15c3–1 (Alternative Net Capital

Requirement), its net capital is less than the

greater of $200,000 or 6% of its aggregate

debits.

(7) The ETP [Holder, ETP Firm or Equity

ASAP] Holder has experienced a substantial

change in the nature of the business

conducted which, in the view of the

Corporation, increases the potential risk of

loss to customers[,] and ETP [Holders, ETP

Firms and Equity ASAP] Holders.

(8) The ETP [Holders, ETP Firms or Equity

ASAP] Holder’s books and records are not

maintained in accordance with the

provisions of SEC Rules 17a–3 and 17a–4.

(9) The ETP [Holder, ETP Firm or Equity

ASAP] Holder is unable to demonstrate

compliance with applicable net capital

requirements.

(10) The ETP [Holder, ETP Firm or Equity

ASAP] Holder has substantial unsecured

loans, advances or other similar receivables

relative to its net capital position. For

purposes of this provision, 15% is

considered substantial.

(11) The ETP [Holders, ETP Firms or

Equity ASAP] Holder’s subordinated capital

equals or exceeds 40% of its debt-equity

total, as defined under paragraph (d) of SEC

Rule 15c1–1.

(12) The ETP [Holder, ETP Firm or Equity

ASAP] Holder is subject to undue

concentration charges on proprietary

positions, the aggregate market value of

which equals or exceeds 15% of the total

market value of all proprietary positions.

(13) The ETP [Holder, ETP Firm or Equity

ASAP] Holder is unable to clear and settle

transactions promptly.

(14) The ETP [Holder, ETP Firm or Equity

ASAP] Holder is not in compliance, or is

unable to demonstrate compliance, with SEC

Rule 15c3–3 (Customer Protection-Reserves

and Custody of Securities).

(15) The ETP [Holder, ETP Firm or Equity

ASAP] Holder is subject to the reporting

provisions of SEC Rule 17a–11.

(b) If the Corporation determines that any

of the conditions listed under Paragraph (a)

of this Section exist, or otherwise determines

that the ETP [Holder, ETP Firm or Equity

ASAP] Holder is guilty of (i) conduct

inconsistent with just and equitable

principles of trade, (ii) acts detrimental to the

interest or welfare of the Corporation; or (iii)

conduct contrary to an established practice of

the Corporation, the Corporation may require

that the ETP [Holder, ETP Firm or Equity

ASAP] Holder take appropriate action by

effecting one or more of the following or

similar steps, until such time as the

Corporation determines otherwise:

(1)—No change.

(2) Promptly effect delivery to customers of

all fully paid securities in the ETP [Holder’s,

ETP Firm’s or Equity ASAP] Holder’s

physical possession or control.

(3) Introduce all or a portion of its business

to another ETP [Holder, ETP Firm or Equity

ASAP] Holder on a fully disclosed basis.

(4)–(7)—No change.

(8) Undertake an immediate audit by an

independent public accountant at the ETP

[Holder’s, ETP Firm’s or Equity ASAP]

Holder’s expense.

(9) Restrict the payment of salaries or other

sums to partners, officers, directors,

shareholders or affiliated persons of the ETP

[Holder, ETP Firm or Equity ASAP] Holder.

(10)–(12)—No change.

(c) The provisions contained in this

Section do not limit the Corporation’s

authority to use other standards or to impose

other restrictions, or take other action

deemed appropriate under the circumstances

in the public interest and for the protection

of ETP Holders[, Equity ASAP Holders, and

ETP Firms].

Commentary

.01.—No change.

Section 2. Financial Reports

Reports To Be Filed

Rule 4.5 Unless the Corporation

determines otherwise, every ETP Holder,

[ETP Firm and Equity ASAP Holder,] except

as otherwise provided in Rule 4.7, shall file

with the Corporation the reports prescribed

by this Section.

Monthly Reports

Rule 4.5(a). Part I of SEC Form X–17A–5

shall be filed monthly by any ETP Holder[,

ETP Firm or Equity ASAP Holder] which

carries or clears accounts for customers. Such

report shall be due by the tenth business day

following the end of the month being

reported upon.

Part II Quarterly Reports

Rule 4.5(b). Two manually signed copies of

Part II of SEC Form X–17A–5 shall be filed

for each calendar quarter by any ETP Holder[,

ETP Firm or Equity ASAP Holder] which

carries or clears accounts for customers. Such

report shall be due by the fifteenth calendar

day following the end of the calendar quarter

being reported upon.

Part IIA Quarterly Reports

Rule 4.5(c). Two manually signed copies of

Part IIA of SEC Form X–17A–5 shall be filed

for each calendar quarter by any ETP Holder[,

ETP Firm or Equity ASAP Holder] which

does not carry or clear accounts for

customers. Such report shall be due by the

fifteenth calendar day following the end of

the calendar quarter being reported upon.

Part II or Part IIA Filings on Other Than

Calendar Quarters

Rule 4.5(d). An ETP Holder[, ETP Firm or

Equity ASAP Holder] shall file an additional

Part II or Part IIA of SEC Form X–17A–5, as

appropriate, within fifteen calendar days

after the date selected for the annual audited

financial statements of the ETP Holder, [ETP

Firm or Equity ASAP Holder,] pursuant to

the provisions of Rule 4.10, where such date

does not coincide with the end of a calendar

quarter.

Periodic Reports

Rule 4.5(e). Every ETP Holders[, Equity

ASAP Holders, and ETP Firm] shall submit,

as required by the Corporation periodic

reports with respect to short positions in

securities.

Commentary

01. Short Positions. ETP Holders[, Equity

ASAP Holders, and ETP Firm] for which the

Corporation is the designated examining

authority (‘‘DEA’’) are required to report

‘‘short’’ positions, including odd lots, in each

stock or warrant listed or traded on the

Corporation, and in each other stock or

warrant not listed or traded on the

Corporation (and not otherwise reported to

another self-regulatory organization), using

such automated format and methods as

prescribed by the Corporation. Such reports

must include customer and proprietary

positions and must be made at such times

and covering such time period as may be

designated by the Corporation.

Every ETP Holder[, Equity ASAP Holder,

and ETP Firm] for which the Corporation is

not the DEA must report ‘‘short’’ positions to

the self-regulatory organization that is the

DEA for such ETP Holder[, Equity ASAP

Holder or ETP Firm] if such DEA has a

requirement for such reports. If the DEA does

not have such a reporting requirement, then

such ETP Holder[, Equity ASAP Holder or

ETP Firm] must comply with the provisions

of this Rule 4.5(e).

ETP [Holders, ETP Firms or Equity ASAP]

Holders whose short positions have been

properly reported to, and are carried by, a

non-ETP [or non-Equity ASAP] clearing

organization will be in compliance with this

Rule 4.5(e) if adequate arrangements have

been made for such clearing organization to

report such positions to the Corporation or to

another self-regulatory organization.

‘‘Short’’ positions to be reported are those

resulting from ‘‘short’’ sales as defined in

SEC Rule 3b–3, but excluding positions

resulting from sales specified in clauses (1),

(6), (7), (8), (9) and (10) of paragraph (e) of

SEC Rule 10a–1. Also to be excluded are

‘‘short’’ positions carried for other ETP

Holders[, Equity ASAP Holders, and ETP

Firms] reporting for themselves.

Only one report should be made for each

stock or warrant in which there is a short

position. If more than one account has a short

position in the same stock or warrant, the

combined aggregate should be reported.

The term ‘‘designated examining

authority’’ means the self-regulatory

organization that has been assigned

responsibility for examining an ETP Holder[,

Equity ASAP Holder, or ETP Firm] for

78848 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

compliance with applicable financial

responsibility rules.

.02 ETP Holders[, Equity ASAP Holders,

and ETP Firms] for which the Corporation is

the DEA need not report ‘‘short’’ positions to

the Corporation as provided in Commentary

.01 if such ETP Holder[, Equity ASAP

Holder, or ETP Firm] has made arrangements,

satisfactory to the Corporation, to report such

positions to another self-regulatory

organization.

Accelerated Reporting

Rule 4.6. Unless the Corporation

determines otherwise, if any of the

conditions described in this Section is

applicable, an ETP Holder[, Equity ASAP

Holder or ETP Firm] subject to the provisions

of Rule 4.5 shall file with the Corporation on

a monthly basis (or more frequently if the

Corporation so determines) Part II or Part IIA

of SEC Form X–17A–5, as appropriate,

together with a schedule of proprietary

securities and commodities, and related

‘‘haircuts’’, and any other supplementary

schedules deemed appropriate by the

Corporation. Such reports shall be due by the

fifteenth calendar day following the end of

the month during which this Section

becomes applicable to [a] an ETP Holder[,

Equity ASAP Holder, or ETP Firm,] and such

accelerated reports shall continue to be filed

each month thereafter (or more frequently is

the Corporation so determines) until the ETP

Holder[, Equity ASAP Holder, or ETP Firm]

is otherwise advised by the Corporation[:].

SIPC Referral

Rule 4.6(a). An ETP Holder[, Equity ASAP

Holder or ETP Firm] subject to the referral

provisions of Section 59a) of the Securities

Investor Protection Act will be notified by

the Corporation to file accelerated reports.

Financial or Operational Condition

Rule 4.6(b). An ETP Holder[, Equity ASAP

Holder, or ETP Firm] that has exceeded or is

exceeding the financial or operational

parameters set forth in Rule 4.4 shall file

without further notice the reports required by

this Section.

General Conditions

Rule 4.6(c). The Corporation requires the

filing of accelerated reports for reasons

relating to (i) the financial or operational

condition of the ETP Holder[, Equity ASAP

Holder, or ETP Firm] (notwithstanding the

provisions of paragraph (b) of this Section),

(ii) the condition of the securities markets, or

(iii) the condition of the securities industry,

in which events the Corporation will notify

the ETP Holder[, Equity ASAP Holder, or

ETP Firm] to file accelerated reports.

Exemptions

Rule 4.7(a). An ETP Holder[, Equity ASAP

Holder, or ETP Firm] shall be exempt from

the filing requirements prescribed by Rules

4.5 and 4.6 under the following conditions:

[(1)] Any ETP Holder[, Equity ASAP

Holder or ETP Firm] which is a member of

another self-regulatory organization which

has been designated the examining authority

for such ETP Holder[, Equity ASAP Holder

or ETP Firm] by the Securities and Exchange

Commission.

(b) An ETP Holder[, Equity ASAP Holder

or ETP Firm] qualifying for an exemption

pursuant to this Paragraph shall file with the

Corporation a copy of Notice and Part II of

SEC Form X–17A–5, including such

supplementary schedules as may be required,

pursuant to the provisions of Rule 17a–11

under the Securities Exchange Act of 1934,

as amended, at such time and at such

frequency as prescribed by such other

designated examining authority or by any

applicable rule.

Report Filed Upon Termination of

Membership Interest

Rule 4.8. If an ETP Holder[, Equity ASAP

Holder or ETP Firm] holding any

membership interest in a national securities

exchange ceases to be a member in good

standing of such exchange, such ETP

Holder[, Equity ASAP Holder or ETP Firm]

shall, within two business days after such

event, file with the Securities and Exchange

Commission and with the Corporation, Part

II of Form X–17A–5, as of the date of such

event, pursuant to the provisions of

Paragraph (b) of Rule 17a–5 under the

Securities Exchange Act of 1934, as

amended.

Customer Statements

Rule 4.9. Every ETP Holder[, Equity ASAP

Holder or ETP Firm] shall furnish to its

customers, principal stockholders and

subordinated lenders, and shall file with the

Securities and Exchange Commission, the

Corporation, and any other self-regulatory

organizations of which it is a member, certain

financial statements in accordance with the

provisions of Paragraph (c) of Rule 17a–5

under the Securities Exchange Act of 1934,

as amended.

Annual Filing of Audited Financial

Statements

Rule 4.10. Every ETP Holder[, Equity

ASAP Holder or ETP Firm] shall file

annually a report which shall be audited by

an independent public accountant in

accordance with the provisions of paragraphs

(d) through (n) of Rule 17a–5 under the

Securities Exchange Act of 1934, as

amended.

Financial Reports

Rule 4.11(a). Every ETP Holder[, Equity

ASAP Holder or ETP Firm] which is not a

member of another national securities

exchange or registered national securities

association which is the Designated

Examining Authority for that ETP Holder[,

Equity ASAP Holder or ETP Firm] shall file

with the Corporation answers to Financial

Questionnaires, Reports of Income and

Expenses and additional financial

information in the type, form, manner and

time prescribed by the Corporation.

Rule 4.11(b).

(1) Each ETP Holder[, Equity ASAP Holder,

or ETP Firm] shall file with the Corporation

a Report of Financial Condition on SEC Form

X–17A–5 as required by Securities and

Exchange Commission Rules 17a–5 and 17a–

10. Any ETP Holder[, Equity ASAP Holder or

ETP Firm] who fails to file such Report of

Financial Condition in a timely manner shall

be subject to late filing charges as follows:

Number of Days Late Amount of

Charge

1–30 .......................................... $20.00

31–60 ........................................ 400.00

61–90 ........................................ 800.00

Repeated or aggravated failure to file such

Report of Financial Condition or failure to

file such report for more than ninety (90)

days will be referred to the Business Conduct

Committee for appropriate disciplinary

action.

(2) Each ETP Holder[, Equity ASAP Holder

or ETP Firm] for which the Corporation is the

designated collection agent must file with the

Corporation such forms and assessments as

are required pursuant to the Securities

Investor Protection Act of 1970. Any ETP

Holder[, Equity ASAP Holder or ETP Firm]

that fails to file such form or assessment in

a timely manner will be subject to a late

filing charge as follows:

Number of days late Amount of

charge

1–30 .......................................... $100.00

31–60 ........................................ 200.00

61–90 ........................................ 300.00

Provided however:

(A) if an ETP Holder[, Equity ASAP Holder

or ETP Firm] files its SIPC form and

assessment after its receipt of SIPC’s final late

notice, but files within five business days

after its receipt of SIPC’s final late notice,

such ETP Holder[, Equity ASAP Holder or

ETP Firm] will be subject to a fine pursuant

to Rule 10.12(i)(2); and

(B) if an ETP [Firm] Holder fails to file its

SIPC form and assessment within five

business days after its receipt of SIPC’s final

late notice, such ETP [Firm] Holder will be

subject to formal disciplinary action pursuant

to Rule 10.4.

Commentary

.01 An ETP Holder[, Equity ASAP Holder

or ETP Firm] that files its SIPC form and

assessment more than 90 days late but before

its receipt of SIPC’s final late notice will be

subject to a late charge of $800.

.02—No change.

Financial Responsibility and Operational

Condition

Rule 4.11(c). The Corporation shall have

the authority to examine the financial

responsibility and/or operational conditions

of any ETP Holder[, Equity ASAP Holder, or

ETP Firm]. In conducting such examinations,

the Corporation may require an ETP Holder[,

Equity ASAP Holder, or ETP Firm] to furnish

requested information. If the Corporation

deems it necessary, ETP Holders[, Equity

ASAP Holders or ETP Firms] shall make

available their books and records as well as

provide sworn or unsworn testimony. All

examinations shall be conducted in a manner

consistent with the rules and regulations

governing the duty of the Corporation.

Underwriting Commitments

Rule 4.12. Each ETP Holder[, Equity ASAP

Holder or ETP Firm,] for which the

Corporation is the designated examining

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78849

authority, which enters into a security

underwriting commitment, either with

respect to an original or a secondary

distribution of securities, whether or not

admitted to dealing on the Corporation, shall

notify the Corporation thereof in such

manner as the Corporation shall prescribe.

Lawsuits

Rule 4.13. Each ETP Holder[, Equity ASAP

Holder or ETP Firm] for which the

Corporation is the designated examining

authority, shall give written notice to the

Corporation regarding all lawsuits involving

such ETP Holder[, Equity ASAP Holder or

ETP Firm] or any participant therein,

including a description of the nature and

principal allegations of such lawsuits, and a

statement of the amount of damages claimed

therein. Similar notice shall be given to the

Corporation regarding any claims or

contingent liabilities that appear likely to

result in litigation.

Section 3. Margins

Daily Margin Record

Rule 4.14(a). Each ETP Holder[, Equity

ASAP Holder, or ETP Firm] registered on the

Corporation, carrying margin accounts for

customers shall make and maintain a record

of every case in which initial or additional

margin must be obtained in a customer’s

account because of transactions effected in

such account. This record shall show for

each account the date of the transaction, the

customer’s name, the amount of margin

required and the time when and manner in

which such margin is furnished or obtained.

This record shall be in a form acceptable to

the Corporation and contain such additional

information as the Corporation may from

time to time prescribe. This record shall be

preserved for at least twelve months.

Margin by Liquidation

Rule 4.14(b). No ETP Holder[, Equity ASAP

Holder, or ETP Firm] registered on the

Corporation shall permit a customer to make

a practice of effecting transactions requiring

initial or additional margin pursuant to rules

of the Corporation or regulations of the Board

of Governors of the Federal Reserve System

and then furnishing such margin by the

liquidation of the same or other

commitments; except that the provisions of

this section shall not apply to any account

maintained for another broker or dealer in

which are carried only the commitments of

the customers of such other broker or dealer

exclusive of his partners, provided such

other broker or dealer (i) is an ETP Holder[,

or Equity ASAP Holder] of the Corporation[,

or an ETP Firm registered thereon]; or (ii) has

agreed in good faith with the ETP Holder[,

Equity ASAP Holder, or ETP Firm] carrying

the account that [he] it will maintain a record

equivalent to that referred to in Rule 4.14(a);

or (iii) is not subject to the regulations of the

Board of Governors of the Federal Reserve

System.

Members Other Exchanges

Rule 4.14(c). An ETP Holder[, Equity ASAP

Holder, or ETP Firm] registered as a member

on another national securities exchange or

association which has comparable standards

and which has been designated by the

Securities and Exchange Commission as the

primary regulator is exempt from the

provisions of this [rule] Rule, unless

otherwise stated.

Customer Defined

Rule 4.14(d). For the purpose of this [rule]

Rule, the term customer shall include any

person or entity for whom securities are

purchased or sold or to whom securities are

sold or from whom securities are purchased

whether on a regular way, when issued,

delayed or future delivery basis. It will also

include any person or entity for whom

securities are held or carried. The term will

not include a broker or dealer from whom a

security has been purchased or to whom a

security has been sold for the account of the

ETP Holder[, Equity ASAP Holder or ETP

Firm] or its customers.

Initial Margin

Rule 4.14(e)—No change.

Margin Requirements

Rule 4.15(a). For the purpose of effecting

new securities transactions and

commitments, the margin required shall be

an amount equivalent to the requirements of

paragraph (b) of this section, or such greater

amount as the Corporation may from time to

time require for specific securities, with a

minimum equity in the account of at least

$2,000, except that cash need not be

deposited in excess of the cost of any security

purchased. The foregoing minimum equity

and cost of purchase provisions shall not

apply to ‘‘when distributed’’ securities in

cash accounts and the exercise of rights to

subscribe.

Withdrawals of cash or securities may be

made from any account, provided that after

such withdrawal the equity in the account is

at least the greater of $2,000 or the amount

required by the maintenance requirement of

this [rule] Rule.

Maintenance Margin Rule

Rule 4.15(b). The margin which must be

maintained in margin accounts of customers,

whether ETP Holder, [Equity ASAP Holders,

ETP Firms,] Allied Persons thereof or nonETP [or non-Equity ASAP Firms] Holders,

shall be as follows:

(1)–(5)—No change.

Exceptions to Rule

Rule 4.15(c). The foregoing requirements of

this Rule are subject to the following

exceptions:

(1)—No change.

(2) Exempted Securities.

(A)–(B)—No change.

(C) Cash Transactions With Customers—

Special Provisions—When a customer

purchases an issued ‘‘exempted’’ security

from or through an ETP Holder, [Equity

ASAP Holder, or ETP Firm,] in a cash

account, full payment shall be made

promptly. If, however, delivery or payment

therefore is not made promptly after the trade

date, a deposit shall be required as if it were

a margin transaction, unless it is a

transaction with a bank, trust company,

insurance company, investment trust or

charitable or nonprofit educational

institution.

In connection with any net position

resulting from any transaction in issued

‘‘exempted’’ securities made for an ETP

Holder[, Equity ASAP Holder or ETP Firm,]

or a non-ETP [or non-Equity ASAP] brokerdealer, or made for or with a bank, trust

company, insurance company, investment

trust or charitable or non-profit educational

institution, no margin need be required and

such net position need not be marked to

market. However, where such net position is

not marked to the market, an amount equal

to the loss at the market in such position

shall be considered as cash required to

provide margin in the computation of the net

capital of the ETP Holder[, Equity ASAP

Holder or ETP Firm] under the Corporation’s

capital requirements.

(3) Joint Accounts in Which the Carrying

Firm or a Partner or Stockholder Therein Has

an Interest—in the case of a joint account

carried by a firm, in which such firm, or any

partner, ETP [Holder, Equity ASAP] Holder,

Allied Person or stockholder (other than a

holder of freely transferable stock only) of

such ETP [Firm] Holder participate with

others, the interest of each participant other

than the carrying ETP [Firm] Holder shall be

margined by each such participant pursuant

to the provisions of this [rule] Rule as if such

interest were in a separate account.

(4)—No change.

(5) [Specialists’ and] Market Maker[‘s]

Accounts

(A) The account of an ETP Holder[, Equity

ASAP Holder or ETP Firm] in which are

effected only transactions in securities in

which he is [registered and acts as a

specialist] a Market Maker may be carried

upon a margin basis which is satisfactory to

the [specialist] Market Maker and the ETP

Holder[, Equity ASAP Holder or ETP Firm].

The amount of any deficiency between the

margin deposited by the [specialist] Market

Maker and the haircut requirements of SEC

Rule 15c3–1 shall be considered as a debit

item in the computation of the net capital of

ETP [Holder, Equity ASAP Holder or ETP

Firm] Holders under the Corporation’s

capital requirements.

(A) In the case of joint accounts carried by

an ETP Holder[, Equity ASAP Holder or ETP

Firm for specialists] for Market Makers, in

which the ETP Holder[, Equity ASAP Holder

or ETP Firm] participates, the margin

deposited by the other participants may be in

any amount which is mutually satisfactory.

The amount of any deficiency between the

amount deposited by the other participant, or

participants, based upon their proportionate

share of the haircut requirements of SEC Rule

15c3–1, shall be considered as a debit item

in the computation of the net capital of ETP

[Holder, Equity ASAP Holder or ETP Firm]

Holders under the Corporation’s capital

requirements.

(6) Broker/Dealer Accounts

(A) An ETP Holder[, Equity ASAP Holder

or ETP Firm] may carry the proprietary

account of another broker-dealer that is

registered with the Securities and Exchange

Commission, upon a margin basis that is

satisfactory to both parties, provided the

requirements of Regulation T of the Board of

Governors of the Federal Reserve System are

adhered to and the account is not carried in

a deficit equity condition. The amount of any

deficiency between the equity maintained in

78850 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

the account and the haircut requirements of

SEC Rule 15c3–1 shall be deducted in

computing the Net Capital of the ETP

Holder[, Equity ASAP Holder or ETP Firm]

under the Corporation’s Capital

Requirements.

(B) Joint Back Offices Arrangements. An

arrangement may be established between two

or more registered broker-dealers pursuant to

Regulation T, Section 220.11 to form a joint

back office (‘‘JBO’’) arrangement for carrying

and clearing, or carrying accounts of

participating broker-dealers. ETP Holders[,

Equity ASAP Holders or ETP Firms] must

provide written notification to the

Corporation prior to establishing a JBO.

(i) A carrying and clearing, or clearing ETP

Holder[, Equity ASAP Holder or ETP Firm]

must:

(a) maintain a minimum Tentative Net

Capital of $25 million as computed pursuant

to SEC Rule 15c3–1, except that an ETP

Holder[, Equity ASAP Holder or ETP Firm]

whose primary business consists of the

clearance of options market-maker accounts,

may carry JBO accounts provided that it does

not allow its Net Capital, as computed

pursuant to SEC Rule 15c3–1, to fall below

$7 million for a period in excess of three

consecutive business days. In addition, the

ETP Holder[, Equity ASAP Holder or ETP

Firm] must include in its ratio of gross

options market maker deductions to Net

Capital required by the provisions of SEC

Rule 15c3–1, gross deductions for JBO

participant accounts. Clearance of options

market maker accounts shall be deemed to be

a broker-dealer’s primary business if a

minimum of 60% of the aggregate deductions

in the above ration are options market maker

deductions;

(b) maintain a written risk analysis

methodology for assessing the amount of

credit extended to participating brokerdealers which shall be made available to the

Corporation upon request; and

(c) deduct from Net Capital haircut

requirements pursuant to SEC Rule 15c3–1 in

excess of the equity maintained in the

amounts of participating broker-dealers.

(ii) A participating broker-dealer must:

(a) be a registered broker-dealer subject to

the SEC’s Net Capital Rule;

(b) maintain an ownership interest in the

carrying/clearing ETP Holder[, Equity ASAP

Holder or ETP Firm] pursuant to Regulation

T, Section 220.11; and

(c) maintain a minimum liquidating equity

of $1 million in the Joint Back Office

arrangement exclusive of the ownership

interest established in (b) above. When the

minimum liquidating equity decreases below

the $1 million requirement, the participant

must deposit an amount sufficient to

eliminate this deficiency within 5 business

days. If funds or securities sufficient to

eliminate the deficiency are not received

within 5 business days, the carrying

organization must margin the account in

accordance with the requirements prescribed

for a customer in Regulation T.

(d) If at any time a clearing ETP Holder[,

Equity ASAP Holder or ETP Firm] operating

pursuant to subsection 6(b)(1)(a) above

determines that its tentative net capital or

that its net capital, respectively, has fallen

below the applicable requirements, such

clearing ETP Holder[, Equity ASAP Holder or

ETP Firm] must immediately notify the

Corporation of such deficiency by telegraphic

or facsimile notice; and such clearing ETP

Holder[, Equity ASAP Holder or ETP Firm]

will be subject to the prohibitions against

withdrawal of equity capital set forth in SEC

Rule 15c3–1(e) and to the prohibitions

against reduction, prepayment, and

repayment of subordination agreements set

forth in paragraph (b)(1) of SEC Rule 15c3–

1, as if such broker or dealer’s net capital

were below the minimum standards specified

by each of these paragraphs.

Other Provisions

Rule 4.15(d). Determination of Value for

Margin Purposes.

(1) Active securities dealt in on a

recognized exchange shall, for margin

purposes, be valued at current market prices.

Other securities shall be valued

conservatively in the light of current market

prices and the amount which might be

realized upon liquidation. Substantial

additional margin must be required in all

cases where the securities carried are subject

to unusually rapid or violent change sin

value, or do not have an active market on a

recognized exchange, or where the amount

carried is such that it cannot be liquidated

promptly.

To qualify for margin value, securities shall

be in negotiable form and, except for bearer

securities, shall be registered in street name

(firm name, or firm agent, or firm nominee

or in process of being transferred to such)

after constructive receipt thereof. A cash

margin deficiency shall be treated as a debit

item in the computation of [Net Capital] net

capital.

(2) Puts, Calls Other Options, Currency

Warrants, Currency Index Warrants and

Stock Index Warrants.

(A)—No change.

(B) The issuance, guarantee or sale (other

than a ‘‘long’’ sale) for a customer of a put

or a call shall be considered as a security

transaction subject to Rule 4.15(a). The short

sale for a customer of a currency warrant,

currency index warrant or stock index

warrant shall be considered as a security

transaction subject to paragraph (a) of this

Rule 4.15[(d)].

(C)—No change.

(D) The margin on any put, call, currency

warrant, currency index warrant or stock

index warrant issued, guaranteed or carried

‘‘short’’ in a customer’s account shall be:

(i)—No change.

(ii) In the case of puts and calls listed or

traded on a registered national securities

exchange or a registered securities

association and issued by a registered

clearing corporation which [represent]

represents options on GNMA obligations in

the principal amount of $100,000, 130% of

the current market value of the option plus

$1,500, except that the margin required need

not exceed $5,000 plus the current market

value of the option.

(iii)—No change.

(E)—No change.

(F) (1)–(3)—No change.

(4)—No change.

(G)—No change.

(H) ‘‘Long’’ and ‘‘Short’’ Positions in

Securities and Options. (1)–(4)—No change.

(5) Bank Guarantee Letters—

No margin need be required in respect of

a put option contract carried in a ‘‘short’’

position where the customer has delivered to

the ETP Holder[, Equity ASAP Holder or ETP

Firm] with which such position is

maintained a letter of guarantee issued by a

bank approved to issue escrow receipts under

Rule 610 of the Rules of the Options Clearing

Corporation, in form satisfactory to the

Corporation, which certifies that such bank

holds on deposit for the account of the

customer cash in the full amount of the

aggregate exercise price of such put option

contract, and that such amount will be paid

to the ETP Holder[, Equity ASAP Holder or

ETP Firm] against delivery of the underlying

security covered by such put option contract.

(6) No margin is required in respect of a

warrant on a market index carried in a short

position where the customer has delivered,

promptly after the warrant has been sold

short, to the ETP Holder[, Equity ASAP

Holder or ETP Firm] with which such

position is maintained, a Market Index

Warrant Escrow Receipt in a form satisfactory

to the Corporation, issued by a bank or trust

company pursuant to specific authorization

from the customer certifying that the issuer

of the agreement holds for the account of the

customer: (1) cash, (2) cash equivalents, (3)

one or more qualified equity securities, or (4)

a combination thereof; that such deposit has

an aggregate market value, at the time the

warrant has been sold short, or not less than

100% of the aggregate currency index value;

and that the issuer will promptly pay the ETP

Holder[, Equity ASAP Holder or ETP Firm]

the exercise settlement amount in the event

the account is assigned an exercise notice.

(7)—No change.

(I) When an ETP Holder[, Equity ASAP

Holder or ETP Firm] issues or guarantees an

option to receive or deliver securities for a

customer, such option shall be margined as

if it were a put or call.

(J) Option Specialists, Market Makers and

Traders. Notwithstanding the other

provisions of this sub-section (d)(2), an ETP

Holder[, Equity ASAP Holder or ETP Firm]

may clear and carry the listed option

transactions of one or more registered

specialists, registered market makers or

registered traders in options (which

registered traders are deemed specialists for

all purposes under the Securities Exchange

Act of 1934 pursuant to the rules of a

national securities exchange) (hereafter

referred to as ‘‘specialists(s)’’), upon a ‘‘Good

Faith’’ margin basis satisfactory to the

concerned parties, provided the ‘‘Good

Faith’’ margin requirement is not less that the

Net Capital haircut deduction of the ETP

Holder[, Equity ASAP Holder or ETP Firm]

carrying the transaction pursuant to SEC Rule

15c3–1. In lieu of collecting the ‘‘Good Faith’’

margin requirement, a carrying ETP Holder[,

Equity ASAP Holder or ETP Firm] may elect

to deduct in computing its net capital the

amount of any deficiency between the equity

maintained in the account and the ‘‘Good

Faith’’ margin required.

For purposes of the subsection (d)(2)(J), a

permitted offset position means, in the case

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78851

of an option in which a specialist makes a

market, a position in the underlying asset or

other related assets, and in the case of other

securities in which a specialist makes a

market, a position in options overlying the

securities in which a specialist makes a

market. Accordingly, a specialist in options

may establish, on a share-for-share basis, a

long or short position in the securities

underlying the options in which the

specialist makes a market, and a specialist in

securities other than options may purchase or

write options overlying the securities in

which the specialist makes a market, if the

account holds the following permitted offset

positions:

(i)–(ii)—No change.

(iii)—No change.

(iv)–(vi)—No change.

(vii) a specified portfolio type as referred

to in SEC Rule 15c3–1, including its

appendices, or any applicable SEC staff

interpretation or no-action position.

Permitted offset transactions must be

effected for market making purposes such as

hedging, risk reduction, rebalancing of

positions, liquidation, or accommodation of

customer orders, or other similar market

making purposes.

For purposes of this paragraph (d)(2)(J), the

term ‘‘in or at the money’’ means the current

market price of the underlying security is not

more than two standard exercise intervals

below (with respect to a call option) or above

(with respect to a put option) the exercise

price of the option; [the term ‘‘in the money’’

means the current market price of the

underlying asset or index is not below (with

respect to a call option) or above (with

respect to a put option) the exercise price of

the option;] and, the term ‘‘overlying option’’

means a put option purchased or a call

option written against a long position in an

underlying asset; or a call option purchased

or a put option written against a short

position in an underlying asset.

Securities, including options, in such

accounts shall be valued conservatively in

the light of current market prices and the

amount that might be realized upon

liquidation. Substantial additional margin

must be required or excess net capital

maintained in all cases were the securities

carried: (i) are subject to unusually rapid or

violent [chances] changes in value including

volatility in the expiration months of options,

(ii) do not have an active market, or (iii) in

one or more or all accounts, including

proprietary accounts combined, are such that

they cannot be liquidated promptly or

represent undue concentration of risk in view

of the carrying organization’s net capital and

its overall exposure to material loss.

(K)—No change.

(L) Exclusive designation—A customer

may designate at the time an option order is

entered which security position held in the

account is to serve in lieu of the required

margin, if such service is offered by the ETP

Holder[, Equity ASAP Holder or ETP Firm];

or the customer may have a standing

agreement with the ETP Holder[, Equity

ASAP Holder or ETP Firm] as to the method

to be used for determining on any given day

which security position will be used in lieu

of the margin to support an option

transaction. Any security held in the account

that serves in lieu of the required margin for

a short put or short call shall be unavailable

to support any other option transaction in the

account.

(M) Cash account transactions.—An ETP

Holder[, Equity ASAP Holder or ETP Firm]

may make option transactions in a customer’s

cash account, providing:

(i)–(ii)—No change.

(3) ‘‘When Issued’’ and ‘‘When

Distributed’’ Securities—

(A)—No change.

(B) Cash Accounts

In connection with any transactions or net

position resulting from contracts for a ‘‘when

issued’’ security in an account other than that

of an ETP Holder, [Equity ASAP Holder or

ETP Firm,] non-ETP [or non-Equity ASAP]

broker or dealer, bank, trust company,

insurance company, investment trust, or

charitable or non-profit educational

institution, deposits shall be required equal

to the margin required were such transaction

or position in a margin account.

In connection with any net position

resulting from contracts for a ‘‘when issued’’

security made for or with a non-ETP [or nonEquity ASAP] broker or dealer, no margin

need be required, but such net position must

be marked to the market.

In connection with any net position

resulting from contracts for a ‘‘when issued’’

security made for an ETP Holder[, Equity

ASAP Holder or ETP Firm] or for or with a

bank, trust company, insurance company,

investment trust, or charitable or non-profit

educational institution, no margin need be

required and such net position need not be

marked to the market. However, where such

net position is not marked to the market, an

amount equal to the loss at the market in

such position shall be considered as cash

required to provide margin in the

computation of the net capital of the ETP

Holder[, Equity ASAP Holder or ETP Firm]

under the Corporation’s capital requirements.

The provisions of this subparagraph shall

not apply to any position resulting from

contracts on a ‘‘when issued’’ basis in a

security

(i)–(ii)—No change.

(4) Guaranteed Accounts—Any account

guaranteed by another account may be

consolidated with such other account and the

required margin may be determined on the

net position of both accounts, provided the

guarantee is in writing and permits the ETP

Holder[, Equity ASAP Holder or ETP Firm]

carrying the account, without restriction, to

use the money and securities in the

guaranteeing account to carry the guaranteed

account or to pay any deficit therein; and

provided further that such guaranteeing

account is not owned directly or indirectly

by (a) a partner, ETP Holder, [Equity ASAP

Holder, ETP Firm,] Allied Person thereof or

any stockholder (other than a holder of freely

transferable stock only) in the firm carrying

such account or (b) an ETP Holder, [Equity

ASAP Holder, ETP Firm,] a partner, Allied

Person, or any stockholder (other than a

holder of freely transferable stock only)

therein having a definite arrangement for

participating in the commissions earned on

the guaranteed account. However, the

guarantee of a limited partner or of a holder

of non-voting stock, if based upon his

resources other than his capital contribution

to or other than his interest in an ETP

Holder[, Equity ASAP Holder or ETP Firm,]

is not affected by the foregoing prohibition,

and such a guarantee may be taken into

consideration in computing margin in the

guaranteed account.

(5)–(6)—No change.

(7) Practice of Meeting Margin Calls by

Liquidation Prohibited—No ETP Holder[,

Equity ASAP Holder, or ETP Firm] shall

permit a customer to make a practice of

effecting transactions requiring margin and

then either deferring the furnishing of margin

beyond the time when such transactions

would ordinarily be settled or cleared, or

meeting such demand for margin by the

liquidation of the same or other

commitments in his account.

(8) Free Riding in Cash Accounts

Prohibited—No ETP Holder[, Equity ASAP

Holder, or ETP Firm] shall permit a customer

(other than a broker/dealer or bank, trust

company, insurance company, investment

trust, or charitable or non-profit educational

institution) to make a practice, directly or

indirectly, of effecting transactions in a cash

account where the cost of securities

purchased is met by the sale of the same

securities. No ETP Holder[, Equity ASAP

Holder or ETP Firm] shall permit such a

customer to make a practice of selling

securities which were purchased in a cash

account at another broker-dealer and are not

yet paid for. A customer shall not be deemed

to be continuing this practice if for a period

of 90 days (or less with the approval of the

Corporation) no such transactions have taken

place. An ETP Holder[, Equity ASAP Holder

or ETP Firm] transferring an account which

is under restraint to another broker-dealer

shall inform the receiving broker-dealer of

the restraint.

(9) BOUNDs

(A)–(F)—No change.

(G)(i)—No change.

(ii) When a BOUND and a LEAP with the

same expiration and strike price are issued,

guaranteed or carried ‘‘short’’ against an

existing net ‘‘long’’ position in the security

underlying the BOUND and LEAP, or in any

security that meets the requirements of Rule

[6.1(1)(23)] 6.1(a)(23) of the PCX Parent

relating to covered options or in any security

immediately exchangeable or convertible,

other than warrants without restriction

including the payment of money, into the

security underlying the BOUND and LEAP,

no margin need be required on either the

BOUND or the LEAP provided (1) such net

‘‘long’’ position is adequately margined in

accordance with this Rule and (2) the right

to exchange or convert the net ‘‘long’’

position does not expire on or before the

expiration date of the ‘‘short’’ BOUND or

LEAP.

(iii)–(iv)—No change.

(H) Notwithstanding the other provisions

of this paragraph (d)(9), the account of a

person in which are effected only transaction

in which such person is registered and acts

as a specialist or market maker on an

exchange, and the account of a registered

trader containing only transactions effected

78852 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

by him in his capacity as a registered trader,

may be cleared and carried on a margin basis

which is satisfactory to the specialist, market

maker or registered trader and the ETP

Holder[, Equity ASAP Holder or ETP Firm]

carrying the account.

(I)—No change.

Commentary

.01—No change.

Notice to Corporation

Rule 4.16. An ETP Holder[, Equity ASAP

Holder, or ETP Firm] commencing to carry

margin accounts shall immediately notify the

Corporation in writing.

Location of Records

Rule 4.17. An ETP Holder[, Equity ASAP

Holder, or ETP Firm] shall maintain at its

main office the daily margin record required

by Rule [4(a)] 4.14(a). An ETP Holder[,

Equity ASAP Holder, or ETP Firm]

maintaining margin records at two or more

offices shall maintain such records at each

office for inspection.

Determination of Margin

Rule 4.18—No change.

Fidelity Bonds

Rule 4.19(a). Each ETP Holder[, Equity

ASAP Holder or ETP Firm] which transacts

business with the public or clears

transactions for other ETP Holders[, Equity

ASAP Holders, or ETP Firms] shall carry

fidelity bonds in such form and in such

amounts as the Corporation may require

covering the [individual] sole proprietor ETP

[Holder, Equity-ASAP] Holder, or, in the case

of an [Equity ASAP] ETP Holder [or ETP

Firm] organization, its general partners or

officers and its employees.

(b) ETP Holders[, Equity ASAP Holders or

ETP Firms] subject to this Rule are required

to maintain basis and specific coverages in

amounts not less than those prescribed in

this Rule. Where applicable such coverage

must also extend to limited partners as

employees, and outside organizations

providing electronic data processing services

and the handling of U.S. Government

securities in bearer form.

(c) Each ETP Holder[, Equity ASAP Holder

or ETP Firm] that introduces customers’

accounts on a fully disclosed basis must

maintain coverage as follows:

(i) Minimum basis coverage for such ETP

Holder[, Equity ASAP Holder or ETP Firm]

whose net capital requirement under Rule 4:

A.–B—No change.

(ii) Specific coverage for such ETP

Holders[, Equity ASAP Holders or ETP

Firms] shall be as follows:

A—No change.

B. Fraudulent Trading (not required of ETP

Holders, [Equity ASAP Holders,] those not

associated with an ETP [Firm] Holder or

partnerships having no employees)—the

greater of $25,000 or 50% of the basis bond

minimum requirement, up to $500,000.

C.—No change.

(d) Each ETP Holder[, Equity ASAP Holder

on ETP Firm] which carries customers’

accounts or clears transactions for other ETP

Holders[, Equity-ASAP Holders, ETP Firms]

must maintain coverage as follows:

(i) Minimum basis coverage for such ETP

Holder[, Equity ASAP Holder or ETP Firm]

shall be based on their net capital

requirement under Rule 4 as follows:

Net capital requirement

under rule 4

Basis

minimum

coverage

$25,000–$50,000 .................. $200,000

$50,001–$100,000 ................ 300,000

$100,001–$200,000 .............. 500,000

$200,001–$300,000 .............. 600,000

300,001–$500,000 ................ 700,000

$500,001–$1,000,000 ........... 800,000

$1,000,001–$2,000,000 ........ 1,000,000

$2,000,001–$3,000,000 ........ 1,500,000

$3,000,001–$4,000,000 ........ 2,000,000

$4,000,001–$6,000,000 ........ 3,000,000

$6,000,001–$12,000,000 ...... 4,000,000

$12,000,001 and higher ....... 5,000,000

(ii) Specific coverages for such ETP

Holder[, Equity ASAP Holder or ETP Firm]

shall be as follows:

A.–C. No change.

(iii) Misplacement, Fraudulent Trading,

Check Forgery and Securities Forgery.

A. Each ETP Holder[, Equity ASAP Holder

or ETP Firm] shall be expected to review

carefully any need for coverage greater than

that provided by the required minimums.

Where experience or the nature of the

business warrants additional coverage, the

Corporation expects the ETP Holder[, Equity

ASAP or ETP Firm] to acquire it.

B. ETP Holder[, Equity ASAP Holders, and

ETP Firms] required to carry the above

form(s) of insurance shall advise the

Corporation in writing if such insurance is

entirely or partially canceled.

(e)—No change.

Rule 5

Listings

Section 1. General Provisions and

Definitions

General Provisions and Definitions

RULE 5.1(a)—No change.

RULE 5.1(b). Definitions. The following

terms used in Rules 5.2 through 5.5 shall,

unless otherwise indicated, have the

meanings herein specified:

(1)–(3)—No change.

(4) The term ‘‘listed’’; and the phrase

‘‘listed’’ on the Corporation [means] mean a

security that has been listed on the PCX

Parent pursuant to Section 12(b) of the

Securities Exchange Act of 1934. Such

security shall be listed pursuant to a formal

application and request for such listing filed

by the issuing company.

(5)–(15)—No change.

Section 2. Applications to List

RULE 5.2(a)–5.2(f)—No change.

Contingent Value Rights (‘‘CVRs’’)

RULE 5.2(g)—No change.

Commentary

.01 Prior to the commencement of trading

of securities admitted to listing under this

Rule 5.2(g), the Corporation will distribute a

circular to its membership explaining the

specific risks associated with CVRs and

providing guidance regarding [member firm]

ETP Holder compliance responsibilities

when handling transactions in such

securities.

Unit Investment Trusts (‘‘UITs’’)

RULE 5.2(h)—No change.

Commentary

.01 Customers must be provided with a

prospectus and an explanation of any special

characteristics and risks attendant to trading

MIT interests. Before [a] an ETP Holder, [ETP

Firm, or Equity ASAP Holder,] or an officer,

partner, or employee of such [a] an ETP

[Firm, or Equity ASAP] Holder, undertakes to

recommend a transaction in the UIT interest

or in the component securities, such officer,

partner or employee should make a

determination that such UIT interests,

components or units are not unsuitable for

such customer, and the person making the

recommendation should have a reasonable

basis for believing at the time of making the

recommendation, that the customer has such

knowledge and experience in financial

matters that he may reasonably be expected

to be capable of evaluating the risks and the

special characteristics of the recommended

transaction and is financially able to bear the

risks of the recommended transaction and

constituent interest.

.02 An ETP Holder[, Equity ASAP Holder

or ETP Firm] must provide a prospectus to

an investor in connection with each

transaction in a UIT interest, unless such ETP

[Holder, ETP Firm, or Equity ASAP] Holder

has in place a procedure by which to verify

previous receipt of a current prospectus. The

investor must receive such prospectus prior

to or concurrently with the transaction

confirmation.

.03—No change.

RULE 5.2(i)—No change.

Other Securities

RULE 5.2(j)(1)—No change.

Commentary

.01 Prior to commencement of trading of

securities admitted to listing pursuant to this

Rule 5.2(j)(1), the Corporation will evaluate

the nature and complexity of the issue and,

if appropriate, distribute a circular to the ETP

Holders[, ETP Firms and Equity ASAP]

Holders providing guidance regarding the

[Firm or] Holder’s compliance

responsibilities when handling transactions

in such securities.

Equity Linked Notes (‘‘ELNs’’)

RULE 5.2(j)(2). In the case of ELNs, the

following listing requirements must be met:

(A) Issuer Listing Standards

(i) The issuer of ELNs must be an entity

that:

(a) is listed on a national securities

exchange or the Nasdaq National Market or

is an affiliate of a company listed on a

national securities exchange or the Nasdaq

National Market; and

(b)— has a minimum net worth of $150

million.

(ii)—No change.

(B)–(D)—No change.

(E) Prior to the commencement of trading

of particular ELNs listing pursuant to this

Rule, the Corporation will distribute a

circular to ETP [Firms and Equity ASAP]

Holders providing guidance regarding

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78853

compliance responsibilities (including

suitability recommendations and account

approval) when handling transactions in

ELNs.

RULE 5.2(j)(3)—No change.

RULE 5.2(k)–(n)—No change.

Section 3. Corporate Governance and

Disclosure Policies

RULE 5.3(a)–(i)—No change.

Financial Reports and Related Notices

RULE 5.3(i)(1). Companies applying for

listing enter into agreements with the

Corporation and become subject to its [Rules]

rules, regulations and policies applicable to

listed companies. Pursuant to the listing

agreement with the Corporation and the

Rules of the Securities and Exchange

Commission under the Securities Exchange

Act of 1934, each listed company is required

to submit the following information:

(i)–(ii)—No change.

Commentary

.01–.04—No change.

RULE 5.3(i)(2)—No change.

Procedure for Public Dissemination

RULE 5.3(i)(3). A listed company is

expected to make timely and adequate

disclosure to its shareholders, the financial

community, and investing public of any

news or information that might reasonably be

expected to materially affect the market for

its securities. Furthermore, a company

should also act promptly to dispel any

unfounded rumors that result in unusual

market activity or price variations.

The following information will provide

guidance to a listed company in making

appropriate public disclosure and, therefore,

ensure the maintenance of a fair and orderly

marketplace to all participants:

(1)–(ii)—No change.

(iii) Relationships between Company

Officials and Others

(A)—No change.

(B) [Specialists:] Market Makers

[The Specialist is] Market Makers are

obligated to contribute, insofar as reasonably

practical, to the maintenance of a fair and

orderly market pursuant to the Rules and

procedures of the Corporation. In fulfilling

this responsibility, it is desirable for the

[Specialist] Market Makers to have

appropriate liaison with one or more

corporate officials. Such liaison, properly

conducted, provides opportunity for

communication in the event of particular

questions or problems encountered by either

the [Specialist] Market Makers or the

company. Company officials should be

informed of any unusual market problems if

deemed appropriate and would be free to call

the Securities Qualification Department or

Surveillance Department [(not the

Specialist)] for information if a question

arises about the market in the security.

There is a point beyond which it is

improper for the company to go in providing

information to [the Specialist] Market

Makers. Therefore, for the company to give

advance earnings, dividend, stock split, or

merger information to a [Specialist] Market

Maker or anyone else would be

inappropriate. Alternatively, it is entirely

appropriate for company officials to discuss

matters such as the trend of business with

[the Specialist] a Market Maker, much as

they would with shareholders, security

analysts, or anyone having a legitimate

interest in the company. In this way, [the

Specialist] a Market Maker may be better able

to maintain a market beneficial to the

company and its present and prospective

shareholders.

Content and Preparation of Public

Announcements

RULE 5.3(i)(4)—No change.

Section 4. Suspension or Issuer Withdrawal

from Listing

Suspension

RULE 5.4(a)–(b)—No change.

Section 5. Maintenance Requirements and

Delisting Procedures

RULE 5.5(a)—No change.

Tier I Securities

Maintenance Requirements

Common Stock—Select Market Companies

RULE 5.5(b). In the case of common stock,

the following maintenance requirements

must be met:

(1)–(4)—No change.

Commentary

.01—No change.

.02 With regard to the share bid price

requirements, as set forth in Rule 5.5(b), the

Corporation may waive such requirements

upon consideration of market conditions, the

issuer’s capitalization, the number of

outstanding and publicly held shares, and

any other factors the Corporation deems

appropriate.

RULE 5.5(c)–(1)—No change.

Delisting Procedures

RULE 5.5(m). Whenever the Corporation

determines that it is appropriate to either

suspend dealings in and/or remove securities

from listing pursuant to this Rule 5.5, except

for other than routine reasons (e.g.,

redemptions, maturities, etc.), it will follow,

insofar as practicable, the following

procedures:

(1)–(2)—No change.

(3) Concurrent with the Corporation’s

decision to delist the issuer’s security, the

Corporation will prepare a press

announcement, which will be disseminated

to the [specialist] Market Makers and the

investing public no later than the opening of

trading the business day following the

Corporation’s decision (the Securities

Qualification Department will also distribute

[a floor bulletin] the information to the ETP

[Holders, ETP Firms and Equity ASAP]

Holders). Accordingly, the suspension of

trading in the issuer’s security will become

effective at the opening of business on the

day following the Corporation’s decision.

4–(6)—No change.

(7) Any documents or other written

material the issuer wishes to consider should

be submitted to the appropriate office of the

Corporation at least five (5) business days

prior to the date of the hearing.

(8)–(9)—No change.

Rule 6

Business Conduct

Adherence to Law

Rule 6.1. The acceptance of any account,

whether on a disclosed or undisclosed basis,

by an ETP Holder[, Equity ASAP Holder or

ETP Firm] shall at all times comply with fair

and equitable principles of trade, the

applicable regulations of the Securities and

Exchange Commission and of the Federal

Reserve Board, and the Bylaws and Rules of

the Corporation.

Prohibited Acts

Rule 6.2. Any ETP Holder[, Equity ASAP

Holder, ETP Firm] or any [other] associated

person thereof found guilty in accordance

with the Rules and procedures of the

Corporation of any of the following

prohibited acts shall be subject to the

imposition of penalties in accordance with

the Rules of the Corporation.

(a)—No change.

(b) Conduct or proceeding inconsistent

with just and equitable principles of trade, it

being declared among other things, that the

willful violation of any provision of the

federal securities laws, the regulations of the

Securities and Exchange Commission and of

the Federal Reserve Board, and the Bylaws

and Rules and procedures of the Corporation

shall be considered conduct or proceedings

inconsistent with just and equitable

principles of trade.

(c)—No change.

(d) Willful failure to carry out any contract

with another ETP Holder[, Equity ASAP

Holder, or ETP Firm] of the Corporation.

(e) Willful action deemed to be detrimental

to the welfare of investors, creditors, ETP

[Holders, ETP Firms, Equity ASAP] Holders

or the Corporation.

(f) Subjecting the Corporation or any

Director or officer thereof to litigation seeking

to restrain the lawful exercise of powers and

duties under the Bylaws [and], Rules and

procedures of the Corporation.

Prevention of the Misuse of Material,

Nonpublic Information

Rule 6.3. Every ETP Holder], Equity ASAP

Holder or ETP Firm] must establish, maintain

and enforce written policies and procedures

reasonably designed, taking into

consideration the nature of such ETP

Holder’s[, Equity ASAP Holder’s or ETP

Firm’s] business, to prevent the misuse of

material, non-public information by such

ETP Holder[, Equity ASAP Holder or ETP

Firm] or persons associated with such ETP

Holder[, Equity ASAP Holder or ETP Firm].

ETP Holders for whom the Corporation is the

Designated Examining Authority (‘‘DEA’’)

that are required, pursuant to Rule [6.7] 4.5,

to file SEC form X–17A–5 with the

Corporation on an annual or more frequent

basis must file contemporaneously with the

submission for the calendar year end ITSFEA

compliance acknowledgments stating that the

procedures mandated by this Rule have been

established, enforced and maintained. Any

ETP Holder[, Equity ASAP Holder or ETP

Firm] or associated person who becomes

aware of a possible misuse of material, nonpublic information must promptly notify the

Corporation’s Surveillance Department.

78854 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

Commentary:

.01—No change.

.02 The terms ‘‘associated person’’ and

‘‘person associated with an ETP Holder[,

Equity ASAP Holder or ETP Firm]’’ mean

anyone who directly is engaged in the ETP

Holder’s[, Equity ASAP Holder’s or ETP

Firm’s] trading-related activities, including

general partners, officers, directors, managers

(or any person occupying a similar status or

performing similar functions), any person

directly or indirectly controlling, controlled

by, or under common control with an ETP

Holder[, Equity ASAP Holder or ETP Firm]

or any employee of the ETP Holder[, Equity

ASAP Holder or ETP Firm].

For the purposes of this Rule, the term

‘‘employee’’ includes every person who is

compensated directly or indirectly by the

ETP Holder[, Equity ASAP Holder or ETP

Firm] for the solicitation or handling of

business in securities, including individuals

trading securities for the account of the ETP

Holder[, Equity ASAP Holder or ETP Firm],

whether such securities are dealt in on an

exchange or are dealt over-the-counter.

.03 Rule 6.3 provides that, at a minimum,

each ETP Holder, [Equity ASAP Holder or

ETP Firm] establish, maintain, and enforce

the following policies and procedures:

A. All associated persons must be advised

in writing of the prohibition against the

misuse of material, non-public information;

and

B. All associated persons of the ETP

Holder[, Equity ASAP Holder or ETP Firm]

must sign attestations affirming their

awareness of, and agreement to abide by the

aforementioned prohibitions. These signed

attestations must be maintained for at least

three years, the first two years in an easily

accessible place; and

C. Each ETP Holder[, Equity ASAP Holder

or ETP Firm] must receive and retain copies

of trade confirmations and monthly account

statements for each account in which an

associated person: has a direct or indirect

financial interest or makes investment

decisions. The activity in such brokerage

accounts should be reviewed at least

quarterly by the ETP Holder[, Equity ASAP

Holder or ETP Firm] for the purpose of

detecting the possible misuse of material,

non-public information; and

D. All associated persons must disclose to

the ETP Holder[, Equity ASAP Holder or ETP

Firm] whether they, or any person in whose

account they have a direct or indirect

financial interest, or make investment

decisions, are an officer, director or 10%

shareholder in a company whose shares are

publicly traded. Any transaction in the stock

(or option thereon) of such company shall be

reviewed to determine whether the

transaction may have involved a misuse of

material non-public information.

Maintenance of the foregoing policies and

procedures will not, in all cases, satisfy the

requirements and intent of Rule 6.3; the

adequacy of each ETP Holder’s[, Equity

ASAP Holder’s or ETP Firm’s] policies and

procedures will depend upon the nature of

such ETP Holder’s[, Equity ASAP Holder’s or

ETP Firm’s] business.

Rumors

Rule 6.4. No ETP Holder[, Equity ASAP

Holder or ETP Firm] or any participant

therein shall circulate, in any manner,

rumors of a character which might affect

market conditions on the Corporation;

provided, however, that this rule shall not

prohibit discussion of unsubstantiated

information when its source and

unsubstantiated nature are disclosed.

Manipulation

Rule 6.5. No ETP Holder[, Equity ASAP

Holder or ETP Firm] or any participant

therein shall effect or induce the purchase or

sale or otherwise effect transactions in any

security for the purpose of creating or

inducing a false, misleading or artificial

appearance of activity in such security, or for

the purpose of unduly or improperly

influencing the market price of such security,

or for the purpose of making a price which

does not reflect the true state of the market

in such security.

Front-Running of Block Transactions

6.6. An ETP Holder[, Equity ASAP Holder

or ETP Firm] or associated person obtaining

information of an immediate pending

transaction or a transaction executed but not

yet reported on any national securities

exchange or association involving 5,000

shares or more of a security including an

equivalent number of option contracts

admitted to dealings on the Pacific Exchange,

Inc., or securities, underlying the options so

admitted, shall not initiate or transmit an

order in the security involved, or options

relating to that security, [on] through the

facilities of the Corporation for any account

in which he or she or his or her organization

are participants until after the transaction

appears on the ticker or is otherwise

disclosed, in the case of orders pertaining to

equities, or until two minutes after such

disclosure, in the case of orders pertaining to

options. Exceptions will require prior

approval from the Corporation.

[Limitations on Trading Because of

Customers’ Orders]

[Rule 6.7—Deleted.]

[Discretionary Transactions]

[Rule 6.8—Deleted.]

Excessive Trading

Rule [6.9] 6.8. No ETP Holder[, Equity

ASAP Holder, ETP Firm,] nor any participant

therein shall effect [on] through the facilities

of the Corporation purchases or sales for any

account in which such ETP Holder[, Equity

ASAP Holder, ETP Firm] or participant

therein is directly or indirectly interested,

which purchases or sales are excessive in

view of the financial resources of such ETP

Holder[, Equity ASAP Holder, ETP Firm] or

participant therein or in view of the market

for such security.

Commentary

.01 An ETP Holder[, Equity ASAP Holder

or ETP Firm] who issues a commitment to

trade from the Corporation through ITS or

any other Application of the System shall, as

a consequence thereof, be deemed to be

initiating a purchase or a sale of a security

[on] through the facilities of the Corporation

as referred to in this Rule.

Taking or Supplying Securities to Fill

Customer’s Order

Rule [6.10] 6.9(a). No ETP Holder[, Equity

ASAP Holder or ETP Firm] who has accepted

for execution, personally or through the ETP

[Firm or Equity ASAP] Holder or any

participant therein, an order for the purchase

of securities shall fill such order by selling

such securities for any account in which the

ETP Holder[, Equity ASAP Holder, ETP Firm]

or any participant therein has a direct or

indirect interest, or having so accepted an

order for the sale of securities, shall fill such

order by buying such securities for such an

account, except as follows:

(1) An ETP Holder[, Equity ASAP Holder

or ETP Firm] who neglects to execute an

order may be compelled to take for or supply

from such ETP [Holder, Equity ASAP Holder

or ETP Firm’s] Holder’s account [or] the

securities named in the order;

(2) An ETP Holder[, Equity ASAP Holder

or ETP Firm,] acting for another ETP Holder,

[Equity ASAP Holder or ETP Firm,] may take

or supply the securities named in the order

provided the price is justified by the

condition of the market and provided that the

ETP Holder[, Equity ASAP Holder or ETP

Firm] who gave the order shall directly, or

through a broker authorized to act for him or

her, after prompt notification, accept the

trade;

(3) An ETP Holder, [Equity ASAP Holder

or ETP Firm,] acting as a broker, is permitted

to report to his or her principals a transaction

as made with himself or herself when he or

she has offsetting orders from two principals

to buy and to sell and not to give up;

(4) A [specialist] Market Maker in

accordance with his or her duty to provide

an orderly market in the securities in which

he or she is registered may purchase or sell

for principal account, such securities named

in his or her firm’s customer’s order and

record the transaction [on] through the

facilities of the Corporation provided that:

(i) the price is consistent with the market;

(ii) full disclosure to his or her customer

is made on the confirmation of the

transaction in a manner that defines the

interest of the ETP Holder[, Equity ASAP

Holder or ETP Firm].

(5) An ETP Holder[, Equity ASAP Holder

or ETP Firm] may purchase or sell for

principal account the securities named in his

customer’s order, and record the transaction

[on] through the facilities of the Corporation

provided that:

(i) the price is consistent with the market;

(ii) full disclosure of the interest of the ETP

Holder[, Equity ASAP Holder or ETP Firm]

is made to his customer on the confirmation

of the transaction[,].

ETP Holders Holding Options

Rule [6.11] 6.10(a). No ETP Holder [or ETP

Firm while on the Floor] shall initiate the

purchase or sale [on] through the facilities of

the Corporation for his or her own account

or for any account in which the ETP Holder

[or ETP Firm] or any participant therein is

directly or indirectly interested, of any

security admitted to dealings [on] through

the facilities of the Corporation in which he

or she holds or has granted any put, call,

straddle or option, or in which he or she has

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78855

knowledge that the ETP [Firm] Holder or any

participant therein holds or has granted any

put, call, straddle or option, unless such put,

call, straddle, or option is issued by the

Options Clearing Corporation and is

immediately reported to the Corporation in

accordance with such procedures as may be

prescribed by the Corporation.

Commentary

.01 An ETP Holder [or ETP Firm] who

issues a commitment to trade from the

facilities of the Corporation through ITS or

any other Application of the System shall, as

a consequence thereof, be deemed to be

initiating a purchase or a sale or a security

[on] through the facilities of the Corporation

as referred to in this Rule.

(b) Each ETP Holder [or ETP Firm] shall

report to the Corporation such information as

may be required with respect to any

substantial option relating to securities

admitted to dealings [on] through the

facilities of the Corporation in which such

ETP Holder [or ETP Firm] or any participant

therein is directly or indirectly interested or

of which such ETP Holder [or ETP Firm] or

any participant therein has knowledge by

reason of transactions executed by or through

such ETP Holder [or ETP Firm]. The

Corporation may disapprove of the

connection of any ETP Holder [or ETP Firm]

or any participant therein with any such

option which it shall determine to be

contrary to the best interest or welfare of the

Corporation or to be likely to create prices

which will not fairly reflect market values.

Disclosure of Financial Arrangements

Rule [6.12] 6.11(a). An ETP Holder[, Equity

ASAP Holder, or ETP Firm] who enters into

a financial arrangement with any other

person or entity shall disclose to the

Corporation the identity of such person or

entity and the terms of the arrangement. For

the purposes of this rule, a financial

arrangement is defined as:

(1) the direct financing of an ETP Holder’s[,

ETP Firm’s or Equity ASAP Holder’s]

dealings upon the Corporation; or

(2)–(3)—No change.

(b) ETP Holders[, Equity ASAP Holders

and ETP Firms] with financial arrangements

must submit to the Corporation notification

of the initiation, modification or termination

of such financial arrangements in a form,

time and manner approved by the

Corporation within ten (10) business days of

the effective date of such arrangements or

within such shorter period of time as the

Corporation may require. Failure to disclose

the terms of such financial arrangements to

the Corporation may result in disciplinary

action.

Joint Accounts

Rule [6.13] 6.12(a). No ETP Holder [or ETP

firm while on the Floor,] shall, without the

prior approval of the Corporation, initiate the

purchase or sale [on] through the facilities of

the Corporation of any security admitted to

dealings [on] through the facilities of the

Corporation for any account in which the

ETP Holder[, ETP Firm] or any participant

therein is directly or indirectly interested

with any person other than such ETP [Firm]

Holder or participant therein.

The provisions of this rule shall not apply

to any purchase or sale (1) by any ETP Holder

[or ETP Firm] for any joint account

maintained solely for effecting bona fide

domestic or foreign arbitrage transactions or

(2) by a [specialist] Market Maker for any

joint account in which he or she is expressly

permitted to have an interest or participation

by this Rule.

Commentary

.01 An ETP Holder [or ETP Firm] who

issues a commitment to trade [on] through

the facilities of the Corporation through ITS

or any other Application of the System shall,

as a consequence thereof, be deemed to be

initiating a purchase or a sale of a security

[on] through the facilities of the Corporation

as referred to in this Rule.

(b) Reporting. No ETP Holder[, Equity

ASAP Holder or ETP Firm,] nor any

participant therein shall directly or indirectly

hold any interest or participation in any

substantial joint account for buying or selling

any security [on] through the facilities of the

Corporation, unless such joint account is

reported to and not disapproved by the

Corporation. Such reports, in form prescribed

by the Corporation, shall be filed with the

Corporation before any transaction is

completed [on] through the facilities of the

Corporation for such joint account.

The Corporation shall require weekly

reports, in a form prescribed by the

Corporation, to be filed with it with respect

to every substantial joint account for buying

or selling any specific security on the

Corporation and with respect to every joint

account which actively trades in any security

on the Corporation in which any ETP

Holder[, Equity ASAP Holder, or ETP Firm]

or participant therein holds any interest or

participation or of which such ETP Holder[,

Equity ASAP Holder or ETP Firm] or

participant therein has knowledge by reason

of transactions executed by or through such

ETP Holder[, Equity ASAP Holder, ETP Firm]

or participant therein; provided, however,

that this paragraph shall not apply to joint

accounts specifically permitted by this Rule.

In the event the requirements hereof

should be applicable to a security also dealt

in on another national securities exchange

having requirements substantially equivalent

hereto and an ETP Holder[, Equity ASAP

Holder or ETP Firm] is a member or member

firm of such other exchange and complies

with such requirements of such other

exchange, then such ETP Holder[, Equity

ASAP Holder or ETP Firm] need not comply

with the reporting provisions hereof.

Disciplinary Action By Other Organizations

Rule [6.14] 6.13. Every ETP Holder[, Equity

ASAP Holder or ETP Firm] shall promptly

notify the Corporation in writing of any

disciplinary action, including the basis

therefore, taken by any national securities

exchange or association, clearing corporation,

commodity futures market or government

regulatory body against the ETP Holder[,

Equity ASAP Holder or ETP Firm] or its

associated persons, and shall similarly notify

the Corporation of any disciplinary action

taken by the ETP Holder[, Equity ASAP

Holder or ETP Firm] itself against any of its

associated persons involving suspension,

termination, the withholding of commissions

or imposition of fines in excess of $2,500.00,

or any other significant limitation on

activities.

Officers and Employees Restricted

Rule [6.15] 6.14(a)—No change.

(b) No salaried officer or employee of the

Corporation or salaried officer or employee of

any corporation in which the Corporation

owns the majority of the corporate stock may

purchase or sell for his own account or for

the account of others any option contract

which entitles the purchaser to purchase or

sell any security described in paragraph (a)

of Rule [6.15] 6.14.

Miscellaneous Prohibitions

Rule [6.16] 6.15. No ETP Holder[, Equity

ASAP Holder, ETP Firm] or any participant

therein shall:

(a)—No change.

[(b)—Deleted.]

[(c)] (b)—No change.

[Rule 6.17—Deleted.]

Trading Ahead of Customer Limit Orders

Rule 6.16(a) No ETP Holder may accept

and hold an unexecuted limit order from its

customer (whether its own customer or a

customer of another ETP Holder) and

continue to trade on the Corporation the

subject security for its own account at prices

that would satisfy the customer’s limit order,

without executing that limit order; provided,

however, that an ETP Holder may negotiate

specific terms and conditions applicable to

the acceptance of limit orders only with

respect to limit orders that are:

(1) for institutional customer accounts,

where such account is defined as the account

of:

(A) a bank, savings and loan association,

insurance company, or registered investment

company;

(B) an investment adviser registered either

with the Securities and Exchange

Commission under Section 203 of the

Investment Advisers Act of 1940 or with a

state securities commission (or agency or

office performing like functions); or

(C) any other entity (whether a natural

person, corporation, partnership, trust or

otherwise) with total assets of at least 450

million; or

(2) 10,000 shares or more, unless such

orders are less than $100,000 in value.

(b) Paragraph (a) of this Rule shall not

apply to a customer limit order if the limit

order is marketable at the time it is received

by the ETP Holder; provided, however, if the

limit order was marketable when received

and then becomes non-marketable, once the

limit order becomes non-marketable, it

becomes subject to the prohibitions of

paragraph (a) of this Rule.

(c) Nothing in this Rule requires ETP

Holders to accept limit orders from

customers.

(d) For the purposes of this Rule, an ETP

Holder that controls or is controlled by

another ETP Holder shall be considered a

single entity, absent appropriate information

barriers, so that if a customer’s limit order is

accepted by one affiliate and forwarded to

another affiliate for execution, the firms are

considered a single entity.

78856 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

Rule 7

Equities Trading

Section 1. [Definitions and] General

Provisions

[Rule 7.1—Deleted.]

Hours of Business

Rule 7.1 [7.2]. Unless otherwise ruled by

the Board of Directors, the Corporation shall

be open for the transaction of business daily

except on Saturdays and Sundays. The hours

at which trading sessions shall open and

close shall be established by the Board.

Dealings upon the Corporation shall be

limited to the hours during which the

Corporation is open for the transaction of

business. No ETP Holder[, Equity ASAP

Holder or ETP Firm] shall make any bid, offer

or transaction [on] through the facilities of

the Corporation, or issue a commitment to

trade through ITS [on] through the facilities

of the Corporation before or after those hours,

except that a Market Maker [specialist] may

issue and receive pre-opening notifications

and pre-opening responses, pursuant to the

provisions of the Plan relating to the PreOpening Application of the Systems, before

the official opening of the Corporation and

loans of securities may be made after those

hours.

[Commentary:]

[.01—Deleted.]

Holidays

Rule 7.2[7.3].—No change.

[Rule 7.4–7.5—Deleted.]

Commissions

Rule 7.3[7.6] (a). Fixed Rates. Nothing

contained in the Rules [rules] of the

Corporation or its practices shall be

construed to require or authorize its ETP

Holders[, Equity ASAP Holders, ETP Firms,]

or any associated person, to agree or arrange,

directly or indirectly, for the charging of

fixed rates of commission for transactions

effected on, or effected by the use of, the

facilities of the Corporation.

(b) Acting as Broker. In all transactions in

which an ETP Holder[, Equity ASAP Holder

or ETP Firm] acts solely as a broker, the bills

and confirmations rendered must so indicate,

and all commissions charged, if any, shall be

appropriately identified.

(c) Acting as Principal. In all transactions

in which an ETP Holder[, Equity ASAP

Holder or ETP Firm] acts as principal or in

which the ETP Holder[, Equity ASAP Holder

ETP Firm] or any of its [nominees,] Allied

Persons, partners, approved persons or

stockholder associates have an interest as

principal in any manner, the bills and

confirmations rendered must so indicate.

Ex-Dividend or Ex-Right Dates

Rule 7.4[7.7]. Transactions in stocks,

traded ‘‘regular’’ shall be ‘‘ex-dividend’’ or

‘‘ex-rights’’ as the case may be, on the second

business day preceding the record date fixed

by the company or the date of the closing of

transfer books, except when the Board of

Directors rules otherwise. Should such

record date or such closing of transfer books

occur upon a day other than a business day

this Rule [rule] shall apply for the third

preceding business day.

[Section 2. Admission to and Conduct on the

Trading Floor]

[Rule 7.8—Deleted.]

[Section 3. Units of Trading, Bids, Offers and

Quotations]

Trading Units

Rule 7.5[7.9]. The unit of trading in stocks

shall be 1 [100] share[s] and the unit of

trading in bonds shall be $1,000 in par value

thereof unless otherwise designated by the

Corporation. For stocks, 100 shares shall

constitute a ‘‘round lot,’’ any amount less

than 100 shares shall constitute an ‘‘odd lot,’’

and any amount greater than 100 shares that

is not a multiple of a round lot shall

constitute a ‘‘mixed lot.’’ For bonds, a [A]

designated unit of trading shall constitute a

‘‘round lot[.]’’ and any [Any] lesser amount

shall constitute an ‘‘odd lot.’’

Trading Differentials

Rule 7.6[7.10](a). The Corporation shall

determine the trading differentials for equity

securities traded on the Corporation.

Commentary

.01—No change.

.02 Notwithstanding Commentary .01, [an

ETP Holder may trade on the Floor at

increments of 1/32 or 1/64] the Corporation

may allow trading at smaller increments in

order to match bids and offers displayed by

other markets for the purpose of preventing

Intermarket Trading System trade-throughs.

.03—No change.

.04 The minimum price variation for

orders generated from Profiles designated for

the midpoint pricing service by the OptiMark

System will be the variation of the midpoint

price between the highest published bid and

the lowest published offer displayed on the

Consolidated Quotation System. Any

executions resulting from processing Profiles

designated for midpoint pricing will be

priced and reported in increments as small

as 1/64th or, upon conversion to decimals,

one-half of the minimum price variation.

.05 The minimum price variation

(‘‘MPV’’) for equity securities traded on the

Archipelago Exchange shall be 1/64 of $1.00

for those securities that are quoted in

fractions and $0.01 for those equity securities

that are quoted in decimals; provided,

however, at all times the MPV shall be

consistent with the Decimalization

Implementation Plan.

.06 The minimum price improvement

increment (‘‘MPII’’) on the Archipelago

Exchange shall be equal to $0.01 or 10% of

the spread, whichever is more.

(b) Bonds. Bids or offers in bonds shall not

be made at a lesser variation than 1/8 of 1%

of the principal amount, except that the

Corporation may fix a lesser variation in

specific issues.

Transmission of Bids or Offers

Rule 7.7[7.11](a). The names of ETP

Holders [or ETP Firms] bidding for or

offering securities [on] through the use of the

facilities of the Corporation shall not be

transmitted from the facilities of the

Corporation to a non-holder of an ETP. No

ETP Holder having the right to trade [on]

through the facilities of the Corporation and

who has been a party to or has knowledge of

an execution shall be under obligation to

divulge the name of the buying or selling

firm in any transaction.

(b) Except as otherwise permitted by these

Rules [stated in Rule 7.12(b)], no ETP Holder

[or ETP Firm] shall transmit [on] through the

facilities of the Corporation any information

regarding a bid, offer or other indication of

an order to a non-holder of an ETP until such

bid, offer or other indication of an order has

been disclosed and permission to transmit

such information has been obtained from the

originating ETP Holder [or ETP Firm].

[Rule 7.12—Deleted.]

Bid or Offer Deemed Regular Way

Rule 7.8 [7.13]—No change.

[Rule 7.14—Deleted.]

Execution Price Binding

Rule 7.9 [7.15]. Notwithstanding Rules 7.10

and 7.11, the [The] price at which an order

is executed shall be binding notwithstanding

the fact that an erroneous report in respect

thereto may have been rendered. [A report

shall not be binding if an order was not

actually executed but was in error reported

to have been executed; however, an order

which was executed, but in error reported as

not executed, shall be binding. No ETP

Holder, Equity ASAP Holder or ETP Firm

shall assume or pay any part of the difference

between the price at which an order is

executed and the price at which it may have

been erroneously reported.]

Cancellation of Revisions in Transactions

Rule 7.10 7.16. A sale made in

demonstrable error and canceled by both

parties may be removed, if the parties do not

object, subject to the approval of the

Corporation [is subject to removal, if there is

no objection.]

[Commentary:]

[.01 Specialists and floor brokers are

responsible for the satisfactory execution of

orders accepted by them and] Disagreements

[disagreements] with respect thereto shall be

referred to the appropriate trading authority

of the Corporation.

A dispute arising on bids, offers or sales if

not settled by agreements between the parties

interested, shall be settled by the

Corporation.

Clearly Erroneous Policy

Rule 7.11(a). Definition. For the purposes

of this Rule, the terms of a transaction

executed on the Corporation are ‘‘clearly

erroneous’’ when there is an obvious error in

any term, such as price, number of shares or

other unit of trading, or identification of the

security.

(b) Request for Corporation Review. An

ETP Holder that receives an execution on an

order that was submitted erroneously to the

Corporation for its own or customer account

may request that the Corporation review the

transaction under this Rule. Such request for

review shall be made via telephone and in

writing via facsimile or e-mail. The telephone

request should be submitted immediately

and the written request should be submitted

within fifteen (15) minutes of the time the

trade in question was executed. Once the

request has been received, an officer of the

Corporation designated by the President shall

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78857

review the transaction under dispute and

determine whether it is clearly erroneous,

with a view toward maintaining a fair and

orderly market and the protection of

investors and the public interest. Each party

to the transaction shall provide, on a timely

basis, any supporting written information as

may be reasonably requested by the

designated officer to aid resolution of the

matter.

(c) Review Procedures. Unless both parties

(or party, in the case of a cross) to the

disputed transaction agree to withdraw the

initial written request for review, the

transaction under dispute shall be reviewed,

and a determination shall be rendered by the

designated Corporation officer. If the officer

determines that the transaction is not clearly

erroneous, the officer shall decline to take

any action in connection with the completed

trade. In the event that the officer determines

that the transaction in dispute is clearly

erroneous, the officer shall declare the

transaction null and void or modify one or

more of the terms of the transaction to

achieve an equitable rectification of the error

that would place the parties in the same

position, or as close as possible to the same

position that they would have been in, had

the error not occurred. The officer shall

promptly notify the parties of the

determination reached and shall issue a

written resolution of the matter. The ETP

Holder aggrieved by the officer’s

determination may appeal such

determination in accordance with the

provisions of Rule 10.13.

(d) System Disruption and Malfunctions. In

the event of any disruption or a malfunction

in the use or operation of any electronic

communications and trading facilities of the

Corporation, the Chief Executive Officer or

the President may declare a transaction

arising out of the use or operation of such

facilities during the period of such disruption

or malfunction null and void or modify the

terms of these transactions. Absent

extraordinary circumstances, any such action

of the Chief Executive Officer or President

pursuant to this subsection (d) shall be taken

within thirty (30) minutes of detection of the

erroneous transaction. Each ETP Holder

involved in the transaction shall be notified

as soon as practicable, and the ETP Holder

aggrieved by the action may appeal such

action in accordance with the provisions of

Rule 10.13.

[Rules 7.17–7.39—Deleted.]

[Rules 7.41–7.44—Deleted.]

[Rule 7.46—Deleted.]

Trading Halts Due to Extraordinary Market

Volatility

Rule 7.12 [7.47] (a)–(c)—No change.

Commentary

.01–.02—No change.

.03 The reopening of trading following a

trading halt under this Rule will be

conducted pursuant to procedures adopted

by the Corporation and communicated by

notice to its ETP Holders[, Equity ASAP

Holders, and ETP Firms].

.04 Nothing in this Rule should be

construed to limit the ability of the

Corporation to otherwise halt or suspend the

trading in any stock or stocks traded on the

Corporation pursuant to any other

Corporation Rule [rule] or policy.

Trading Suspensions

Rule 7.13. Except as otherwise stated in

Rule 5.5, the Chair of the Board or the

President, or the officer designee of the Chair

or the President, shall have the power to

suspend trading in any and all securities

traded on the Corporation whenever in his or

her opinion such suspension would be in the

public interest. No such action shall continue

longer than a period of two days, or as soon

thereafter as a quorum of Directors can be

assembled, unless the Board approves the

continuation of such suspension.

Clearance and Settlement

Rule 7.14(a). Each ETP Holder shall either:

(1) Be a clearing firm;

(2) clear transactions on the Corporation

through a clearing firm; or

(3) clear transactions through an entity

duly authorized by the Corporation.

(b) An ETP Holder must give up the name

of the clearing firm through which each

transaction on the Corporation will be

cleared. If there is a subsequent change in

identity of the clearing firm through which

the transaction on the Corporation will be

cleared, the ETP Holder shall report such

change to the Corporation at least five (5)

business days in advance.

(c) Each clearing firm must be admitted to

the Corporation as an ETP Holder by meeting

the qualification requirements set forth above

in Rule 2; provided, however, if the clearing

firm has become an ETP Holder for the sole

purpose of acting as a clearing firm on the

Corporation, such clearing firm need not pay

the regular ETP Holder fee. The clearing firm

shall be responsible for the clearance of the

transactions effected by each ETP Holder

which gives up such clearing firm’s name

pursuant to a letter of authorization, letter of

guarantee or other authorization given by

such clearing firm to such ETP Holder, which

authorization shall be submitted to the

Corporation.

(d) Notwithstanding any other provisions

contained in the Rule to the contrary, the

Board may extend or postpone the time of

the delivery of a transaction on the

Corporation whenever in its opinion, such

action is called for by the public interest, by

just and equitable principles of trade or by

the need to meet unusual conditions. In such

case, delivery shall be effected at such time,

place and manner as directed by the Board

of Directors.

Stock Option Transactions

Rule 7.15[7.45](a). No Market Maker

[specialist] nor his or her firm, nor any

participant therein, shall, directly or

indirectly, be interested in a pool dealing or

trading in any security in which he or she is

registered as a Market Maker [specialist].

(b) No Market Maker [specialist], nor his or

her firm, nor any participant therein shall

acquire, hold or grant, directly or indirectly,

any interest in any option to buy or to sell

or to receive or to deliver shares of any

security in which he or she is registered as

a Market Maker [specialist], unless such

option is issued by the Options Clearing

Corporation and is immediately reported to

the Corporation in accordance with such

procedures as may be prescribed by the

Corporation.

Short Sales

Rule 7.16 [7.40](a) (1) Except as provided

in subsection (d) hereof, no ETP Holder[,

Equity ASAP Holder, or ETP Firm] shall for

his, her or its own account or for the account

of any other person, effect [on] through the

facilities of the Corporation a short sale of

any security for which trades are reported

pursuant to a consolidated transaction

reporting system operated in accordance with

a plan declared effective under the Securities

Exchange Act Rule 11Aa3–1 [17a–15] (a

‘‘consolidated system’’) (A) below the price at

which the last sale thereof, regular way, was

reported in such consolidated system, or (B)

at such price unless such price is above the

next preceding different price at which a sale

of such security, regular way, was reported

in such consolidated system.

(2) Except as provided in subsection (d)

hereof, no ETP Holder[, Equity ASAP Holder,

or ETP Firm] shall for his, her or its own

account, or for the account of any other

person, effect [on] through the facilities of the

Corporation a short sale of any security not

covered by paragraph (1) of this subsection

(A) below the price at which the last sale of

such security, regular way, was effected [on]

through the facilities of the Corporation, or

(B) at such price unless such price is above

the next preceding different price at which a

sale of such security, regular way, was

effected [on] through the facilities of the

Corporation.

(3) Notwithstanding paragraph (1) of this

subsection (a), the Board of Directors of the

Corporation, in its discretion, may determine

that it is necessary or appropriate in the

public interest or for the protection of

investors that short sales in any security for

which trades are reported in a consolidated

system be subject to the Rule [rule] set forth

in paragraph (2) hereof. Following any such

designation of any such security by the Board

of Directors, compliance with the terms of

paragraph (2) shall constitute compliance

with this subsection (a).

(b) Order Identification. No ETP Holder[,

Equity ASAP Holder, or ETP Firm] of the

Corporation shall, by the use of any facility

of the Corporation, execute any sell order

unless such order is indicated as either

‘‘long’’ or ‘‘short’’.

(c) Marking Orders. No ETP Holder[,

Equity ASAP Holder, or ETP Firm] of the

Corporation shall mark a sell order ‘‘long’’

unless (1) the security to be delivered after

sale is carried in the account for which the

sale is to be effected, or (2) such ETP Holder[,

Equity ASAP Holder, or ETP Firm] is

informed that the seller owns the security

ordered to be sold, and as soon as is possible

without undue inconvenience or expense,

will deliver the security owned to the

account for which the sale is to be effected.

(d) Exceptions. The provisions of

subsection (a) hereof shall not apply to:

(1) Any sale by any person, for an account

in which he or she has an interest, if such

person owns the security sold and intends to

deliver such security as soon as possible

without undue inconvenience or expense;

78858 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

(2) Any ETP Holder[, Equity ASAP Holder,

or ETP Firm] in respect of a sale, for an

account in which it has no interest, pursuant

to an order to sell which is marked ‘‘long’’;

(3) Any sale of a security for which trades

are reported in a consolidated system (except

a sale to a stabilizing bid complying with

Securities Exchange Act Rule 104 [10b–7]) by

a registered market maker [specialist] in such

security for its own account (i) effected at a

price equal to or above the last sale, regular

way, reported for such security pursuant to

an effective transaction reporting plan; or (ii)

effected at a price equal to the most recent

offer communicated for the security by such

registered specialist pursuant to the

Securities Exchange Act Rule 11Ac1–1 if

such offer, when communicated, was equal

to or above the last sale, regular way,

reported for such security pursuant to an

effective transaction reporting plan. This

exemption shall not be available for a short

sale of any security not covered by paragraph

(a)(1) of this Rule 7.16 [7.40];

(4) Any sale by an odd lot dealer registered

with the Corporation for such security [a

specialist] to offset odd lot orders of

customers;

(5) Any sale by an odd lot dealer registered

with the Corporation for such security [a

specialist] to liquidate a long position which

is less than a round lot, provided such sale

does not change the position of such Market

Maker [specialist] by more than the unit of

trading;

(6) Any sale of a security for which trades

are not reported in a consolidated system

(except a sale to a stabilizing bid complying

with Securities Exchange Act Rule 104 [10b–

7]) effected with the approval of the

Corporation which is necessary to equalize

the price of such security on the Corporation

with the current price of such security on

another national securities exchange which is

the principal exchange market for such

security;

(7) Any sale of a security for a special

arbitrage account by a person who then owns

another security by virtue of which he or she

is, or presently will be, entitled to acquire an

equivalent number of securities of the same

class as the securities sold, provided such

sale, or the purchase which such sale offsets,

is effected for the bona fide purpose of

profiting from a current difference between

the price of the security sold and the security

owned and that such right of acquisition was

originally attached to or represented by

another security or was issued to all the

holders of any class of securities of the

issuer;

(8) Any sales of a security on the

Corporation effected for a special

international arbitrage account for the bona

fide purpose of profiting from a current

difference between the price of such security

on a securities market not within or subject

to the jurisdiction of the United States and

on the Corporation, provided the seller at the

time of such sale knows or, by virtue of

information currently received, has

reasonable grounds to believe that an offer

enabling him or her to cover such sale is then

available to him in such foreign securities

market and intends to accept such offer

immediately;

[(9) Any sale of a security effected in

accordance with a special offering plan

declared effective by the Securities and

Exchange Commission pursuant to paragraph

(d) of Securities Exchange Act Rule 10b–2;

or]

(9)[(10)] Any sale by an underwriter, or any

member of a syndicate or group participating

in the distribution of a security, in

connection with an over-allotment of

securities, or any lay-off sale by such a

person in connection with a distribution of

securities through rights [pursuant to

Securities and Exchange Act Rule 10b–8] or

a standby underwriting commitment.

(11) Any sale of a security for which trades

are reported in a consolidated system (except

a sale to a stabilizing bid complying with the

Securities and Exchange Act Rule 104 [10b–

7]) by any broker or dealer, for his or her own

account or for the account of any other

person, effected at a price equal to the most

recent offer communicated by such broker or

dealer pursuant to the Securities and

Exchange Act Rule 11Ac1–1 in an amount

less than or equal to the quotation size

associated with such offer, if such offer,

when communicated, was (A) above the price

at which the last sale, regular way, for such

security was reported pursuant to an effective

transaction reporting plan; or (B) at such last

sale price, if such last sale price is above the

next preceding different price at which a sale

of such security, regular way, was reported

pursuant to an effective transaction reporting

plan. This exemption shall not be available

for a short sale of any security not covered

by paragraph (a)(1) of this Rule 7.16 7.40.

For the purpose of paragraph (8) of this

subsection (d) a depository receipt for a

security shall be deemed to be the same

security as the security represented by such

receipt.

(e) Short Sales After ‘‘Ex’’ Date. In

determining the price at which a short sale

may be effected after a security goes exdividend, ex-rights or ex-any other

distribution, all sales prices prior to ‘‘ex’’

date may be reduced by the value of such

distribution.

(f) Covering Short Sales. No ETP Holder[,

Equity ASAP Holder, or ETP Firm] of the

Corporation shall lend, or arrange for the

loan of any security for delivery to the broker

for the purchaser after sale, or shall fail to

deliver a security on the date delivery is due,

if such ETP Holder[, Equity ASAP Holder, or

ETP Firm] knows or has reasonable grounds

to believe that the sale was effected, or will

be effected, pursuant to an order marked

‘‘long’’ unless such ETP Holder[, Equity

ASAP Holder, or ETP Firm] knows, or has

been informed by the seller (i) that the

security sold has been forwarded to the

account for which the sale was effected, or

(ii) that the seller owns the security sold, that

it is then impracticable to deliver such

security to such account and that delivery

will be made as soon as is possible without

undue inconvenience or expense. The

provisions of this subsection (f) shall not

apply to:

(1) The lending of a security by an [a] ETP

Holder[, Equity ASAP Holder, or ETP Firm]

through the medium of a loan to another ETP

Holder[, Equity ASAP Holder, or ETP Firm];

or

(2) Any loan, or arrangement for the loan,

of any security, or any failure to deliver any

security if, prior to such loan, arrangement,

or failure to deliver, the Corporation finds (A)

that such sale resulted from a mistake made

in good faith; (B) either that the condition of

the market at the time the mistake was

discovered was such that undue hardship

would result from covering the transaction by

a ‘‘purchase for cash’’ or that the mistake was

made by the seller’s broker and the sale was

at a price permissible for a short sale under

Rule 7.16 [7.40]; and (C) that due diligence

was used to ascertain that the circumstances

specified in clause (1) of Rule 7.16(c)

[7.40(c)] existed or to obtain the information

specified in clause (2) thereof.

Firm Orders and Quotes

Rule 7.17(a) Orders at Stated Prices and

Sizes. No ETP Holder shall submit to the

Corporation an order (including Q Orders) to

buy from or sell to any person any security

at a stated price and/or size unless such ETP

Holder is prepared to, and, upon submission

of an appropriate contra-side order, does,

purchase or sell, as the case may be, at such

price and/or size and under such conditions

as are stated at the time of submission of

such order to buy or sell.

(b) Firm Quotes. All bids made and all

offers made shall be in accordance with the

provisions of Rule 11Ac1–1 under the

Securities Exchange Act of 1934, governing

the dissemination of quotations for reported

securities.

[Rule 7.18. Reserved.

[Rule 7.19. Reserved.

[Rules 7.48–7.49—Deleted.]

[Rule 7.52—Deleted.]

[Rules 7.54–7.65—Deleted.]

Section 2. Market Makers

Registration of Market Makers

Rule 7.20(a). No ETP Holder shall act as a

Market Maker in any security unless such

ETP Holder is registered as a Market Maker

in such security by the Corporation pursuant

to this Rule and the Corporation has not

suspended or canceled such registration.

Registered Market Makers are designated as

dealers on the Corporation for all purposes

under the Securities Exchange Act of 1934

and the rules and regulations thereunder.

(b) As applicant for registration as a

Market Maker shall file an application in

writing on such form as the Corporation may

prescribe. Applications shall be reviewed by

the Corporation, which shall consider such

factors including, but no limited to capital

operations, personnel, technical resources,

and disciplinary history.

(c) An applicant’s registration as a Market

Maker Shall become effective upon receipt by

the ETP Holder of notice of an approval of

registration by the Corporation. In the event

that an application is disapproved by the

Corporation, the applicant shall have an

opportunity to be heard upon the specific

grounds for the denial, in accordance with

the provisions of Rule 10.13.

(d) The registration of a Market Maker may

be suspended or terminated by the

Corporation upon a determination of any

substantial or continued failure by such

Market Maker to engage in dealings in

accordance with Rule 7.23.

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78859

(e) Any registered Market Maker may

withdraw its registration by giving written

notice to the Corporation. Such withdrawal

of registration shall become effective on the

tenth business day following the

Corporation’s receipt of the notice. A Market

Maker who fails to give a ten-day written

notice of withdrawal, the ETP Holder shall

not be permitted to re-register as a Market

Maker for a period of six months.

Obligations of Market Maker Authorized

Traders

Rule 7.21(a). General. MMATs are

permitted to enter orders only for the account

of the Market Maker for which they are

registered.

(b) Registration of Market Maker

Authorized Traders. The Corporation may,

upon receiving an application in writing from

a Market Maker on a form prescribed by the

Corporation, register a person as a MMAT.

(1) MMAT’s may be officers, partners,

employees or other associated persons of ETP

Holders that are registered with the

Corporation as Market Maker.

(2) To be eligible for registration as a

MMAT, a person must be successfully

complete the General Securities

Representative Examination (Series 7) and

complete a training and certification program

sponsored by the Corporation; provided,

however, the requirement to complete the

Series 7 Examination may be waived by the

Corporation if the applicant MMAT has

served as a dealer-specialist or market maker

on a registered national securities exchange

or association for at least two consecutive

years within three years of the date of

application.

(3) The Corporation may require a Market

Maker to provide additional information the

Corporation considers necessary to establish

whether registration should be granted.

(4) The Corporation may grant a person

conditional registration as a MMAT subject

to any conditions it considers appropriate in

the interests of maintaining a fair and orderly

market.

(5) A Market Maker must ensure that a

MMAT is properly qualified to perform

market making activities, including but not

limited to ensuring the MMAT has met the

requirements set forth in paragraph (b)(2) of

this Rule.

(c) Suspension or Withdrawal of

Registration.

(1) The Corporation may suspend or

withdraw the registration previously given to

a person to be a MMAT if the Corporation

determines that:

(A) the person has caused the Market

Maker to fail to comply with the securities

laws, rules and regulations or the Bylaws,

Rules and procedures of the Corporation;

(B) the person is not properly performing

the responsibilities of a MMAT.

(C) the person has failed to meet the

conditions set forth under paragraphs (b)

above; or

(D) the Corporation believes it is in the

interest of maintaining fair and orderly

markets.

(2) If the Corporation suspends the

registration of a person as a MMAT, the

Market Maker must not allow the person to

submit orders into the Archipelago Exchange.

(3) The registration of a MMAT will be

withdrawn upon the written request of the

ETP Holder for which the MMAT is

registered. Such written request shall be

submitted on the form prescribed by the

Corporation.

Registration of Market Makers in a Security

Rule 7.22(a). A Market Maker may become

registered in a newly authorized security or

in a security already admitted on the

Corporation by filing a security registration

form with the Corporation. Registration in the

security shall become effective on the first

business day following the Corporation’s

approval of the registration. In considering

the approval of the registration of the Market

Maker in a security, the Corporation may

consider;

(1) the financial resources available to the

Market maker;

(2) the Market Maker’s experience,

expertise and past performance in making

markets, including the Market Maker’s

performance in other securities;

(3) the Market Maker’s operational

capability;

(4) the maintenance and enhancement of

competition among Market Makers in each

security in which they are registered;

(5) the existence of satisfactory

arrangements for clearing the Market Maker’s

transactions;

(6) the character of the market for the

security, e.g., price, volatility, and relative

liquidity.

(b) A Market Maker’s registration in a

security may be terminated by the

Corporation if the Market Maker fails to enter

quotations in the security within five (5)

business days after the Market Maker’s

registration in the security becomes effective.

(c) Voluntary Termination of Security

Registration. A Market Maker may

voluntarily terminate its registration in a

security by providing the Corporation with a

one-day written notice of such termination. A

Market Maker that fails to give advanced

written notice of termination to the

Corporation may be subject to formal

disciplinary action pursuant to Rule 10.

(d) The Corporation may suspend or

terminate any registration of a Market Maker

in a security or securities under this Rule

whenever, in the Corporation’s judgment, the

interests of a fair and orderly market are best

served by such action.

(e) An ETP Holder may seek review of any

action taken by the Corporation pursuant to

this Rule, including the denial of the

application for, or the termination or

suspension of, a Market Maker’s registration

in a security or securities, in accordance with

Rule 10.13.

Obligations of Market Makers

Rule 7.23(a). General. ETP Holders who are

registered as Market Makers in one or more

securities traded on the Corporation must

engage in a course of dealings for their own

account to assist in the maintenance, insofar

as reasonably practicable, of fair and orderly

markets on the Corporation in accordance

with this Rule. The responsibilities and

duties of a Market Maker specifically include,

but are not limited to, the following:

(1) Maintain continuous, two-sided Q

Orders in those securities in which the

Market Maker is registered to trade;

(2) Maintain adequate minimum capital in

accordance with Rule 4.1; 

(3) Remain in Good Standing with the

Corporation;

(4) Inform the Corporation of any material

change in financial or operational condition

or in personnel.

(5) Clear and settle transaction through the

facilities of a registered clearing agency. This

requirement may be satisfied by direct

participation, use of direct clearing services,

or by entry into a correspondent clearing

arrangement with another ETP Holder that

clears trades through such agency.

(6) Enter and maintain a Cleanup Order in

each security in which the Market Maker is

registered as such for each Market Order

Auction. 

(b) A Market Maker must satisfy the

responsibilities and duties as set forth in

paragraph (a) of this Rule during the Core

Trading Hours on all days in which the

Corporation is open for business.

(c) If the Corporation finds any substantial

or continued failure by a Market Maker to

engage in a course of dealings as specified in

paragraph (a) of this Rule, such Market

Maker will be subject to disciplinary action

or suspension or revocation of the

registration by the Corporation in one or

more of the securities in which the Market

Maker is registered. Nothing in this Rule will

limit any other power of the Board of

Directors under the Bylaws, Rules, or

procedures of the Corporation with respect to

the registration of a Market Maker or in

respect of any violation by a Market Maker

of the provisions of this Rule. In accordance

with Rule 10, an ETP Holder may seek review

of actions taken by the Corporation pursuant

to this Rule.

(d) Temporary Withdrawal. A Market

Maker may apply to the Corporation to

withdraw temporarily from its Market Maker

status in the securities in which it is

registered. The Market Maker must base its

request on demonstrated legal or regulatory

requirements that necessitate its temporary

withdrawal, or provide the Corporation an

opinion of counsel certifying that such legal

or regulatory basis exists. The Corporation

will act promptly on such request and, if the

request is granted, the Corporation may

temporarily reassign the securities to another

Market Maker. 

Rule 7.24. Reserved.

Registration of Odd Lot Dealers

Rule 7.25(a). Eligibility. Any Market Maker

may become registered as an Odd Lot Dealer

in any security by filing an odd lot

registration form with the Corporation.

Registration as an Odd Lot Dealers shall

become effective on the first business day

following the Corporation’s approval of the

registration. In considering the approval of

the registration of the Market Maker as an

Odd Lot Dealer in a security, the Corporation

shall consider such factors including, but not

limited to, financial resources, capital

operations, personnel, technical resources

and disciplinary history. If the Corporation

denies an application to become an Odd Lot

78860 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

Dealer in a security or securities, the

applicant may seek review of the decision in

accordance with Rule 10.13.

(b) Market Makers Registered in a Security.

For each security in which a Market Maker

is registered, the Market Maker must become

an Odd Lot Dealer in that security.

(c) Obligations of Odd Lot Dealers. An Odd

Lot Dealer must:

(1) Maintain an OLTO, as described in Rule

7.31(g), during each day in which the

Corporation is open for business for each

security in which the Odd Lot Dealer is

registered as such; and 

(2) Register and maintain registration as an

Odd Lot Dealer in a minimum of 100

securities if the Odd Lot Dealer registers as

such in any security for which it is not

registered as a Market Maker.

(d) Termination of Odd Lot Dealer

Registration. The Corporation may suspend

or terminate an Odd Lot Dealer’s registration

in a security or securities: 

(1) If the Corporation determines that the

Odd Lot Dealer has substantially or

continually failed to engage in dealings in

accordance with paragraph (c); or 

(2) If, in the Corporation’s judgment, the

interest of a fair and orderly market are best

served by such action.

An ETP Holder may seek review of any

such termination or suspension in

accordance with Rule 10.

(e) Voluntary Termination of Registration.

An Odd Lot Dealer may voluntarily terminate

its registration as such in a security or

securities by providing the Corporation with

a one-day written notice of such termination.

An Odd Lot Dealer that fails to give advance

notice of termination to the Corporation may

be subject to formal disciplinary action

pursuant to Rule 10.

Limitations on Dealings

Rule 7.26(a) General. A Market Maker on

the Corporation may engage in Other

Business Activities, or it may be affiliated

with a broker-dealer that engages in Other

Business Activities, only if there is an

Information Barrier (also commonly referred

to as ‘‘Chinese Wall’’) between the market

making activities and the Other Business

Activities. ‘‘Other Business Activities’’ mean:

(1) conducting an investment banking or

public securities business;

(2) making markets in the options overlying

the security in which it makes markets; or

(3) functioning as a GAT.

(b) Information Barrier. For the purposes of

this rule, an Information Barrier is an

organizational structure in which:

(1) The market making functions are

conducted in a physical location separate

from the locations in which the Other

Business Activities are conducted, in a

manner that effectively impedes the free flow

of communications between MMATs, and

persons conducting the Other Business

Activities. However, upon request and not on

his/her own initiative, a MMAT performing

the function of a Market Maker may furnish

to persons at the same firm or an affiliated

firm (‘‘affiliated persons’’), the same sort of

market information that the MMAT would

make available in the normal course of its

market making activity to any other person.

The MMAT must provide such information to

affiliated persons in the same manner that

he/she would make such information

available to a non-affiliated person.

(2) There are procedures implemented to

prevent the use of material non-public

corporate or market information in the

possession of persons on one side of the

barrier from influencing the conduct of

persons on the other side of the barrier.

These procedures, at a minimum, must

provide that:

(A) the MMAT performing the function of

a Market Maker does not take advantage of

knowledge of pending transactions, order

flow information, corporate information or

recommendations arising from the Other

Business Activities; and

(B) all information pertaining to the Market

Maker’s positions and trading activities is

kept confidential and not made available to

persons on the other side of the Information

Barrier.

(3) Persons on one side of the barrier may

not exercise influence or control over persons

on the other side of the barrier, provided that:

(A) the market making function and the

Other Business Activities may be under

common management as long as any general

management oversight does not conflict with

or compromise the Market Maker’s

responsibilities under the Rules of the

Corporation; and

(B) the same person or persons (the

‘‘Supervisor’’) may be responsible for the

supervision of the market making and the

GAT functions of the same firm or affiliated

firms in order to monitor the overall risk

exposure of the firm or affiliated firms. While

the Supervisor may establish general trading

parameters with respect to both market

making and other proprietary trading other

than on an order-specific basis, the

Supervisor may not:

(i) actually perform the function either of

MMAT or GAT;

(ii) provide to any person performing the

function of a GAT any information relating

to market making activity beyond the

information that a MMAT performing the

function of a Market Maker may provide

under subparagraph (b)(1), above; nor

(iii) provide a MMAT performing the

function of Market Maker with specific

information regarding the firm’s pending

transactions or order flow arising out of its

GAT activities.

(c) Documenting and Reporting of

Information Barrier Procedures. An ETP

Holder implementing an Information Barrier

pursuant to this Rule shall submit to the

Corporation a written statement setting forth:

(1) The manner in which it intends to

satisfy the conditions in paragraph (b) of this

Rule, and the compliance and audit

procedures it proposes to implement to

ensure that the Information Barrier is

maintained;

(2) The names and titles of the person or

persons responsible for maintenance and

surveillance of the procedures;

(3) A commitment to provide the

Corporation with such information and

reports as the Corporation may request

relating to its transactions;

(4) A commitment to take appropriate

remedial action against any person violating

this Rule or the ETP Holder’s internal

compliance and audit procedures adopted

pursuant to subparagraph (c)(1) of this Rule,

and that it recognizes that the Corporation

may take appropriate remedial action,

including (without limitation) reallocation of

securities in which it serves as a Market

Maker, in the event of such a violation;

(5) Whether the ETP Holder or an affiliate

intends to clear its proprietary trades and, if

so, the procedures established to ensure that

information with respect to such clearing

activities will not be used to compromise the

ETP Holder’s Information Barrier, which

procedures, at a minimum, must be the same

as those used by the ETP Holder or the

affiliate to clear for unaffiliated third parties;

and

(6) That it recognizes that any trading by

a person while in possession of material,

non-public information received as a result of

the breach of the internal controls required

under this Rule may be a violation of Rules

10b–5 and 14e–3 under the Exchange Act or

on or more other provisions of the Exchange

Act, the rules thereunder or the Rules of the

Corporation, and that the Corporation

intends to review carefully any such trading

of which it becomes aware to determine

whether a violation has occurred.

(d) Approval of Information Barrier

Procedures. The written statement required

by paragraph (c) of this Rule must detail the

internal controls that the ETP Holder will

implement to satisfy each of the conditions

stated in that Rule, and the compliance and

audit procedures proposed to implement and

ensure that the controls are maintained. If

the Corporation determines that the

organizational structure and the compliance

and audit procedures proposed by the ETP

Holder are acceptable under this Rule, the

Corporation shall so inform the ETP Holder,

in writing. Absent the Corporation finding an

ETP Holder’s Information Barrier procedures

acceptable, a Market Maker may not conduct

Other Business Activities.

(e) Clearing Arrangements. Subparagraph

(c)(5) permits an ETP Holder or an affiliate

of the ETP Holder to clear the ETP Holder’s

Market Maker transactions if it establishes

procedures to ensure that information with

respect to such clearing activities will not be

used to compromise the Information Barrier.

In this regard:

(1) The procedures must provide that any

information pertaining to Market Maker

securities positions and trading activities,

and information derived from any clearing

and margin financing arrangements, may be

made available only to those employees

(other than employees actually performing

clearing and margin functions) specifically

authorized under this Rule to have access to

such information or to other employees in

senior management positions who are

involved in exercising general managerial

oversight with respect to the market making

activity.

(2) Any margin financing arrangements

must be sufficiently flexible so as not to limit

the ability of any Market Maker to meet

market making or other obligations under the

Corporation’s Rules.

Rule 7.27. Reserved.

Rule 7.28. Reserved.

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78861

Section 3. Archipelago Exchange

Access

Rule 7.29(a). General. The Archipelago

Exchange shall be available for entry and

execution of orders by Users with authorized

access. To obtain authorized access to the

Archipelago Exchange, each User must enter

into a User Agreement.

(b) Sponsored Participants. A Sponsored

Participant may obtain authorized access to

the Archipelago Exchange only if such access

is authorized in advance by one or more

Sponsoring ETP Holders as follows:

(1) Sponsored Participants must enter into

and maintain customer agreements with one

or more Sponsoring ETP Holders establishing

proper relationship(s) and account(s) through

which the Sponsored Participant may trade

on the Archipelago Exchange. Such customer

agreement(s) must incorporate the

Sponsorship Provisions set forth in

paragraph (2) below.

(2) For a Sponsored Participant to obtain

and maintain authorized access to the

Archipelago Exchange, a Sponsored

Participant and its Sponsoring ETP Holder

must agree in writing to the following

Sponsorship Provisions:

(A) Sponsored Participant and its

Sponsoring ETP Holder must have entered

into and maintained a User Agreement with

Archipelago Exchange, L.L.C. The

Sponsoring ETP Holder must designate the

Sponsored Participant by name in its User

Agreement as such.

(B) Sponsoring ETP Holder acknowledges

and agrees that

(i) All orders entered by the Sponsored

Participants and any person acting on behalf

of or in the name of such Sponsored

Participant and any executions occurring as

a result of such orders are binding in all

respect on the Sponsoring ETP Holder and

(ii) Sponsoring ETP Holder is responsible

for any and all actions taken by such

Sponsored Participant and any person acting

on behalf of or in the name of such

Sponsored Participant.

(C) Sponsored ETP Holder shall comply

with the PCXE Certificate of Incorporation,

Bylaws, Rules and procedures with regard to

the Archipelago Exchange and Sponsored

Participant shall comply with PCXE

Certificate of Incorporation, Bylaws, Rules

and procedures with regard to the

Archipelago Exchange, as if Sponsored

Participant were an ETP Holder.

(D) Sponsored Participant shall maintain,

keep current and provide to the Sponsoring

ETP Holder a list of Authorized Traders who

may obtain access to the Archipelago

Exchange on behalf of the Sponsored

Participant.

(E) Sponsored Participant shall familiarize

its Authorized Traders with all of the

Sponsored Participant’s obligations under

this Rule and will assure that they receive

appropriate training prior to any use or

access to the Archipelago Exchange.

(F) Sponsored Participant may not permit

anyone other than Authorized Traders to use

or obtain access to the Archipelago

Exchange.

(G) Sponsored Participant shall take

reasonable security precautions to prevent

unauthorized use of access to the

Archipelago Exchange, including

unauthorized entry of information into the

Archipelago Exchange, or the information

and data made available therein. Sponsored

Participant understands and agrees that

Sponsored Participant is responsible for any

and all orders, trades and other messages

and instructions entered, transmitted or

received under identifiers, passwords and

security codes of Authorized Traders, and for

the trading and other consequences thereof.

(H) Sponsored Participant acknowledges

its responsibility to establish adequate

procedures and controls that permit it to

effectively monitor its employees, agents and

customers’ use and access to the Archipelago

Exchange for compliance with the terms of

this agreement.

(I) Sponsored Participant shall pay when

due all amounts, if any, payable to

Sponsoring ETP Holder, Archipelago

Exchange, L.L.C., PCXE or any other third

parties that arise from the Sponsored

Participants access to and use of the

Archipelago Exchange. Such amounts

include, but are not limited to applicable

exchange and regulatory fees.

(3) The Sponsoring ETP Holder must

provide the Corporation with a Notice of

Consent acknowledging its responsibility for

the orders, executions and actions of its

Sponsored Participant at issue.

Authorized Traders

Rule 7.30(a). An ETP Holder shall

maintain a list of ATs who may obtain access

to the Archipelago Exchange on behalf of the

ETP Holder or the ETP Holder’s Sponsored

Participants. The ETP Holder shall update

the list of ATs as necessary. ETP Holders

must provide the list of ATs to the

Corporation upon request.

(b) An ETP Holder must have reasonable

procedures to ensure that all ATs comply

with the trading Rules and procedures

related to the Archipelago Exchange and all

other Rules of the Corporation.

(c) An ETP Holder must suspend or

withdraw a person’s status as an AT if the

Corporation has determined that the person

has caused the ETP Holder to fail to comply

with the Rules of the Corporation and the

Corporation has directed the ETP Holder to

suspend or withdraw the person’s status as

an AT.

(d) An ETP Holder must have reasonable

procedures to ensure that the ATs maintain

the physical security of the equipment for

accessing the facilities of the Corporation to

prevent the improper use of access to the

systems, including unauthorized entry of

information into the systems.

Orders and Modifiers

Rule 7.31.

(a) Market Order. An order to buy or sell

a stated amount of a security that is to be

executed at the best price obtainable when

the order reaches the Corporation.

(b) Limit Order. An order to buy or sell a

stated amount of a security at a specified

price or better. A ‘‘marketable’’ limit order is

a limit order to buy (sell) at or above (below)

the consolidated best offer (bid) for the

security.

(c) Day Order. An order to buy or sell

which, if not executed, expires at the end of

the day on which it was entered.

(d) Good-Till-Canceled (‘‘GTC’’) Order. An

order to buy or sell which remains in effect

until it is executed or canceled. The

Corporation will modify GTC Orders as

appropriate in light of stock events (e.g.,

stock split or reverse split).

(e) Immediate-or-Cancel Order. A market

or limit order that is to be executed in whole

or in part as soon as such order is received,

and the portion not so executed is to be

treated as canceled.

(f) Tracking Order.

(1) Any User may submit an instruction to

the Archipelago Exchange for the parameters

of a Tracking Order at any time during the

day. The parameters shall include:

(A) the maximum aggregate size, which is

the aggregate size of all partial orders

generated in the Tracking Order Process for

a particular security that the User is willing

to trade on that day;

(B) the maximum tradeable size, which is

the maximum size of any partial order

generated in response to an order entering

the Tracking Order Process that the User is

wiling to trade on that day; 

(C) the price in relation to the NBBO; and

(D) the relevant security.

(2) Once a User has submitted an

instruction for the parameters of the Tracking

Order, the instruction will remain in effect

until closing or until the User has traded its

maximum aggregate size for that day,

whichever comes first. 

(3) The Tracking Order Process rotation is

as follows: Users who have submitted an

instruction for the parameters of a Tracking

Order will be assigned trades on a price/time

rotating basis, such that within each price

level, trades shall be assigned by the time the

Users’ instructions are received by the

Archipelago Exchange. Within each price

level, the first User to send an instruction for

a Tracking Order will be the first User to be

assigned a trade in the rotation process. For

each order that enters the Tracking Order

Process, the Tracking Order Process will

rotate once through the Users in the rotation

pattern. In each rotation, the User will be

responsible for one trade up to the User’s

maximum tradeable size. 

(4) The order described in the User’s

Tracking Order instruction will only be

generated if:

(A) an unfilled round or mixed lot order

enters the Tracking Order Process and

(B) it is such User’s turn as determined by

the Tracking Order Process rotation pattern.

(5) Each partial order generated in a

rotation is a limit order in which:

(A) the price is set or better than the NBBO

at the time the unfilled order enters the

Tracking Order Process, based on the User’s

parameters; and 

(B) the size is (i) equal to the User’s

maximum tradeable size if the unfilled order

is equal to or larger than the maximum

tradeable size; or (ii) equal to the size of the

unfilled order if the unfilled order is smaller

than the maximum tradeable size.

(6) A User may modify the parameters of

the instruction for the Tracking Order from

time to time, as the Corporation permits.

78862 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

(7) Whenever in the judgment of the

Corporation, because of an influx of orders,

a system malfunction or other unusual

conditions or circumstances, the interests of

a fair and orderly market so require, the

Corporation may suspend the Tracking Order

Process. The Tracking Order Process shall

resume when the Corporation determines

that the conditions supporting the

suspension no longer exist.

(g) Odd Lot Tracking Order.

(1) Only Odd Lot Dealers may submit an

Odd Lot Tracking Order or ‘‘OLTO’’ to the

Archipelago Exchange.

(2) An OLTO is a Tracking Order, as

described in paragraph (f), in which:

(A) the maximum aggregate size is

unlimited; 

(B) the maximum tradeable size is 99

shares; 

(C) the price is set at the NBBO; and

(D) the security is one in which the ODD

Lot Dealer is registered as such; and

(E) the instruction must be in effect for the

duration of Core Trading Hours;

provided, however, the order described in

the OLTO instruction will only be generated

if

(1) an unfilled odd lot market order enters

the Odd Lot Tracking Order Process pursuant

to Rule 7.37(c); or

(2) an odd lot limit order causes a locked

market as described in Rule 7.56.

(h) Working Order. Any order with a

conditional or undisplayed price and/or size

designated as a ‘‘Working Order’’ by the

Corporation, including, without limitation:

(1) All-or-None Order. A limit order which

is to be executed in its entirety or not at all.

(2) Discretionary Order. An order to buy or

sell a stated amount of a security at a

specified, undisplayed price (the

‘‘discretionary price’’), in addition to at a

specified, displayed price (‘‘displayed

price.’’)

(3) Reserve Order. A limit order with a

portion of the size displayed and with a

reserve portion of the size (‘‘reserve size’’)

that is not displayed on the Corporation.

(i) Directed Order. Any market or limit

order to buy or sell which has been directed

to a particular Market Maker by the User.

(j) Directed Fill. Any Market Maker may

submit a standing instruction to the

Archipelago Exchange for the parameters of

a Directed Fill, including, but not limited to,

the size of the order, the Users that may send

such Market Maker a Directed Order, the

price improvement algorithm and the period

of time the instruction is effective. The

Market Maker’s Directed Fill described in the

instruction will only be generated in response

to a Directed Order directed to such Marker

Maker. The Directed Fill is a limit order with

(1) a size that is equal to or less than the size

of the Directed Order and (2) a price that

improves the BBO by an automatically preset

amount, which must be equal to or greater

than the MPII, pursuant to a price

improvement algorithm; provided, however,

the Directed Fill will not be generated if the

price is not equal to or better than the NBBO.

A Marker Maker may modify the parameters

of the instruction for a Directed Fill from time

to time, as the Corporation permits.

(k) Q Order. A limit order submitted to the

Archipelago Exchange by a Market Maker. A

Q Order may not be a Working Order.

(l) Stop Order. A Stop Order to buy

becomes a market order when a transaction

in the security occurs on the Corporation or

on another national securities exchange or

association at or above the stop price. A Stop

Order to sell becomes a market order when

a transaction in the security occurs on the

Corporation or on another national securities

exchange or association at or below the

‘‘stop’’ price. Stop Orders shall not have

standing in any Order Process in the Arca

Book and shall not be displayed.

(m) Stop Limit Order. A Stop Limit Order

to buy becomes a limit order when a

transaction in the security occurs on the

Corporation or on another national securities

exchange or association at or above the stop

price. A Stop Limit Order to sell becomes a

limit order when a transaction in the security

occurs on the Corporation or on another

national securities exchange of association at

or below the stop price.

(n) Do Not Reduce. A limit order to buy,

a Stop Order to sell or a Stop Limit Order to

sell which is not to be reduced by the amount

of an ordinary cash dividend on the exdividend date. A Do Not Reduce Order

applies only to ordinary cash dividends; it

should be reduced for other distributions

such as when a stock goes ‘‘ex’’ a stock

dividend or ex rights.

(o) Do Not Increase. A limit order to buy,

a Stop Order to sell or a Stop Limit Order to

sell which is not to be increased in shares on

the ex-date as a result of a stock dividend or

stock distribution.

(p) Fill-or-Return. An order to buy or sell

that is to be executed in whole or in part on

the Corporation, and the portion not so

executed is to be cancelled, without routing

the order to another market center or market

participant.

(q) Timed Order. An order to buy or sell

which is to remain in effect from and/or until

a specified time, after which such order or

the portion thereof not executed is to be

treated as cancelled.

(r) FIll-or-Return Plus. An order to buy or

sell that is to be executed in whole or in part

on the Corporation, and the portion not so

executed is to be cancelled, without routing

the order to another market center or market

participant. In the event any portion of the

order is not executed on the Corporation and

must be cancelled, the Archipelago

Exchange, after canceling the unexecuted

portion of the order, shall send an

administrative message to an ETP Holder

designated by the order entry ETP Holder

informing the designated ETP Holder that

portion of the order was cancelled.

(s) Cross Order. A two-sided order with

instructions to match the identified buy-side

with the identified sell-side at a specified

price (the ‘‘cross price’’). For the purposes of

this Rule 7.31(s), an order of block size shall

have the same meaning as set forth in Rule

7.57. A Cross Order will be executed as

follows; provided, however, no Cross Orders

shall be matched at the cross price without

interacting with any orders in the Arca Book

unless the cross price improves the BBO by

the MPII:

(l) If the cross price is equal to or better

than the NBBO.

(A) and the cross price is between the BBO,

the Cross Order shall be matched at the cross

price without interacting with any orders in

the Arca Book.

(B) and the cross price is at the BBO.

(i) first, the Cross Order shall be matched

at the displayed price, against all pre-existing

displayed orders in the Display Order

Process of the Arca Book with priority

according to Rule 7.36; and

(ii) then, any remainder of the Cross Order

shall be matched at the cross price.

(2) If the cross price is outside the NBBO,

(A) and the cross price is between the BBO,

(i) first, the portion of the Cross Order that

may be executed in another market shall be

routed away for execution pursuant to

Section 5 of Rule 7; and

(ii) then, the remainder of the Cross Order

shall be matched at the cross price without

interacting with any orders in the Arca Book.

(B) and the cross price is at the BBO,

(i) first, the portion of the Cross Order that

may be executed in another market shall be

routed away for execution pursaunt to

Section 5 of Rule 7;

(ii) then, the Cross Order shall be matched,

at the displayed price, against all pre-existing

displayed orders in the Display Order

Process of the Arca Book with priority

according to Rule 7.36; and

(iii) then, any remainder of the Cross Order

shall be matched at the cross price.

(C) and the cross price is outside the BBO,

(i) and the NBBO is better than the BBO,

(l) first, the portion of the Cross Order that

may be executed in another market shall be

routed away for execution pursuant to

Section 5 of Rule 7;

(2) then, the Cross Order shall be matched,

(a) at the displayed price (if the Cross

Order is smaller than block size) or at the

cross price (if the Cross Order is of block

size), against all pre-existing orders in the

Display Order Process of the Arca Book with

priority according to Rule 7.36; and

(b) at the price at which the Working Order

is represented in the Arca Book, against all

pre-existing orders in the Working Order

Process of the Arca Book with priority

according to Rule 7.36.

The Cross Order shall be matched against

any displayed and/or Working Order at a

better price level before being matched to any

displayed and/or Working Order at the next

best price level.

(2) then, the portion of the Cross Order that

may be executed in another market shall be

routed away for execution pursuant to

Section 5 of Rule 7;

(3) then, any remainder of the Cross Order

shall be matched at the cross price.

(t) Auction-Only Limit Order. A limit order

that is to be executed only during the Market

Order Auction.

(u) Cleanup Order.

(1) Only Market Makers may submit

Cleanup Orders to the Archipelago

Exchange.

(2) Cleanup Orders must be submitted to

the Archipelago Exchange before 6:15 a.m.

(Pacific Time) and remain in effect until the

conclusion of the Market Order Auction.

(3) Cleanup Orders must be 2500 shares in

size.

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78863

(4) Cleanup Orders must be entered as both

buy or sell orders, provided, however, the

Cleanup Order may only be executed on the

side of the market opposite the Imbalance.

(5) Cleanup Orders will be executed at the

Indicative Match Price as of the time of the

Market Order Auction.

(6) Cleanup Orders will only be executed

if:

(A) There is an Imbalance of Market Orders

at the conclusion of the Market Order

Auction, as provided in Rule 7.35; and

(B) The Imbalance is less than or equal to

aggregate size of all Cleanup Orders in the

relevant security.

(7) If there is an Imbalance and Cleanup

Orders will be executed based on the criteria

in paragraph (6), the market orders which

make up the Imbalance will be divided

equally among, and allocated to, all Market

Makers registered in the relevant security and

executed against such Market Makers’

Cleanup Orders.

(8) If no Imbalance exists at the time of the

Market Order Auction, all Cleanup Orders

shall be cancelled at that time.

(v) NOW Order. A Limited Price Order that

is to be executed in whole or in part on the

Corporation, and the portion not so executed

shall be routed pursuant to Rule 7.37(d) only

to one or more NOW Recipients for

immediate execution as soon as the order is

received by the NOW Recipient. Any portion

not immediately executed by the NOW

Recipient shall be cancelled. If a NOW Order

is not marketable when it is submitted to the

Corporation, it shall be cancelled. NOW

Orders may not be Directed Orders.

(w) PNP Order (Post No Preference). A limit

order to buy or sell that is to be executed in

whole or in part on the Corporation, and the

portion not so executed is to be ranked in the

Arca Book, without routing any portion of the

order to another market center; provided,

however, the Corporation shall cancel a PNP

Order that would lock or cross the NBBO.

(x) Primary Only Order (PO Order). For

exchange-listed securities only, a market

order that is to be routed as a market-onopen order to the primary market for

participation in the primary market opening

process. A PO Order must be entered before

6:28 a.m. (Pacific Time) and it will not be

included in the Market Order Auction.

Order Entry

Rule 7.32. Users may enter into the

Archipelago Exchange the types of orders

listed in Rule 7.31; provided, however, no

User may enter an order other than a Fill-orReturn, Fill-or-Return Plus or PNP Order

unless the User or the User’s Sponsoring ETP

Holder has entered into a Routing

Agreement.

ETP Holder Users

Rule 7.33. Consistent with Rules of the

Corporation, ETP Holder Users of the

Archipelago Exchange may enter proprietary

orders and agency orders for the account of

a customer. Proprietary orders accepted by

the Archipelago Exchange from ETP Holder

Users are subject to the same display and

execution processes as agency orders. An

ETP Holder User that enters a proprietary

order into the Archipelago Exchange shall

mark the order with the appropriate

designator to identify the order as

proprietary.

Trading Sessions

Rule 7.34(a) Sessions. The Archipelago

Exchange shall have three trading sessions

each day the Corporation is open for

business:

(1) Opening Session. The Opening Session

shall begin at 5:00:00 a.m. (Pacific Time) and

conclude at the commencement of the Core

Trading Session. The Opening Auction and

the Market Order Auction shall occur during

the Opening Session.

(2) Core Trading Session. The Core Trading

Session shall begin for each security at

6:30:00 a.m. (Pacific Time) or at the

conclusion of the Market Order Auction,

whichever comes later, and conclude at

1:00:00 p.m. (Pacific Time).

(3) Late Trading Session. The Late Trading

Session shall begin following the conclusion

of the Core Trading Session and conclude at

5:00:00 p.m. (Pacific Time).

(b) Market Maker Obligations. During the

Core Trading Session, Market Makers will be

obligated to enter Q Orders in securities in

which they are registered in accordance with

Rule 7.23 by the time Core Trading Hours

begin. During the Opening Session and the

Late Trading Session, Market Makers are not

obligated to enter Q Orders in securities in

which they are registered. Market Makers are

required to enter at least one Cleanup Order

for all securities in which they are registered

for each Market Order Auction.

(c) Order Designation. Any Day Order

entered into the Archipelago Exchange may

remain in effect for one or more consecutive

trading sessions on a particular day. For each

Day Order entered into the Archipelago

Exchange, the User must designate for which

trading session(s) the order will remain in

effect. Any GTC Order entered into the

Archipelago Exchange will remain in effect

only during Core Trading Sessions, unless

the User indicates that the GTC Order will

remain in effect for the Opening and/or Late

Trading Sessions.

(d) Orders Permitted in Each Session.

(1) During the Opening Session:

(A) Orders eligible for the Display Order

Process (other than Q Orders) and for the

Working Order Process that have been

designated as available for the Opening

Session are eligible for entry into and

execution on the Archipelago Exchange.

(B) Stop Orders are not eligible for

execution during the Opening Session.

(C) Users may enter market and AuctionOnly Limit Orders for inclusion in the Market

Order Auction. Market orders and AuctionOnly Limit Orders are not eligible for

execution during the Opening Session,

except during the Market Order Auction.

(D) Neither the Directed Order Process nor

the Tracking Order Process is available

during the Opening Session. For the purposes

of the Opening Session, market Directed

Orders are included in the Market Order

Auction.

(E) NOW Orders are eligible for execution

during the Opening Session, provided,

however, NOW Orders are not eligible for the

Opening Auction or the Market Order

Auction.

(F) PNP Orders are eligible for execution

during the Opening Session.

(2) During the Core Trading Session,

market orders, Stop Orders, NOW Orders,

PNP Orders and orders eligible for the

Directed Order, Display Order, Working

Order and Tracking Order Processes are

eligible for entry into and execution on the

Archipelago Exchange.

(3) During the Late Trading Session:

(A) Orders eligible for the Display Order

Process (other than Q Orders) and for the

Working Order Process, including NOW

Orders and PNP Orders, than have been

designated as available for the Late Trading

Session are eligible for entry into and

execution on the Archipelago Exchange.

(B) Market orders and Stop Orders are not

eligible for execution during the Late Trading

Session.

(C) The Directed Order and Tracking Order

Processes are not available during the Late

Trading Session.

(e) Customer Disclosures. No ETP Holder

may accept an order from a non-ETP Holder

for execution in the Opening or Late Trading

Session without disclosing to such non-ETP

Holder that:

(1) except for market orders eligible for

execution during the Market Order Auction,

Limited Price Orders are the only orders that

are eligible for execution during the Opening

and Late Trading Sessions;

(2) an order must be designated

specifically for trading in the Opening and/

or Late Trading Session to be eligible for

trading in the Opening and/or Late Trading

Session; and

(3) extended hours trading involves

material trading risks, including the

possibility of lower liquidity, high volatility,

changing prices, unlinked markets, an

exaggerated effect from news

announcements, wider spreads and any other

relevant risk.

The disclosures required pursuant to this

subparagraph (e)(3) may take the following

form or such other form as provides

substantially similar information:

1. Risk of Lower Liquidity. Liquidity refers

to the ability of market participants to buy

and sell securities. Generally, the more orders

that are available in a market, the greater the

liquidity. Liquidity is important because with

greater liquidity it is easier for investors to

buy or sell securities, and as a result,

investors are more likely to pay or receive a

competitive price of securities purchased or

sold. There may be lower liquidity in

extended hours trading as compared to

regular market hours. As a result, your order

may only be partially executed, or not at all.

2. Risk of Higher Volatility. Volatility refers

to the changes in price that securities

undergo when trading. Generally, the higher

the volatility of a security, the greater its

price swings. There may be greater volatility

in extended hours trading than in regular

market hours. As a result, your order may

only be partially executed, or not at all, or

you may receive an inferior price in extended

hours trading than you would during regular

markets hours.

3. Risk of Changing Prices. The prices of

securities traded in extended hours trading

may not reflect the prices either at the end

78864 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

of regular market hours, or upon the opening

of the next morning. As a result, you may

receive an inferior price in extended hours

trading than you would during regular

market hours.

4. Risk of Unlinked Markets. Depending on

the extended hours trading system or the

time of day, the prices displayed on a

particular extended hours system may not

reflect the prices in other concurrently

operating extended hours trading systems

dealing in the same securities. Accordingly,

you may receive an inferior price in one

extended hours trading system than you

would in another extended hours trading

system.

5. Risk of New Announcements. Normally,

issues make news announcements that may

affect the price of securities after regular

market hours. Similarly important financial

information is frequently announced outside

of regular market hours. In extended hours

trading, these announcements may occur

during trading, and if combined with lower

liquidity and higher volatility, may cause an

exaggerated and unsustainable effect on the

price of a security.

6. Risk of Wider Spreads. The spread refers

to the difference in price between what you

can buy a security for and what you can sell

it for. Lower liquidity and higher volatility in

extended hours trading may result in wider

than normal spreads for a particular security.

(f) Trades on the Archipelago Exchange

executed and reported outside of the Core

Trading Session shall be designated as .T

trades.

Opening Session Auctions

Rule 7.35(a) Order Entry and Cancellation

Before Opening Auction

(1) Users may submit any orders to the

Archipelago Exchange beginnings at 4:30 am

(Pacific Timer). Any such Limited Price

Orders designated for the Opening Session

will be queued until 5:00 am (Pacific Time)

at which time they will be eligible to be

executed pursuant to paragraph (b) of this

Rule. Any such market orders will be queued

until the Market Order Auction at which time

they will be executed pursuant to paragraph

(c) of this Rule.

(2) Only limited priced orders designated

for the Opening Session will be eligible for

the Opening Auction. Market orders entered

before the Opening Auction will participate

in the Market Order Auction. Limited Price

Orders not designated for the Opening

Session will become eligible for execution

pursuant to Rule 7.37 at the commencement

of the Core Trading Session.

(3) Beginning at 4:30 am (Pacific Time),

and various times thereafter as determined

from time to time by the Corporation, the

Indicative Match Price of the Opening

Auction, and any Imbalance associated

therewith, shall be published via electronic

means as determined from time to time by

the Corporation.

(4) Orders that are eligible for the Opening

Auction may not be cancelled between 4:58

am (Pacific Time) and the conclusion of the

Opening Auction.

(b) Opening Auction.

(1) At 5:00 am (Pacific Time), Limited Price

Orders designated for the Opening Session

are matched and executed in the Opening

Auction.

(2) The orders in the Opening Auction

shall be executed at the Indicative Match

Price as of the time of the Opening Auction.

(3) Orders that are eligible for, but not

executed in, the Opening Match shall become

eligible for the Opening Session immediately

upon conclusion of the Opening Auction.

(c) Market Order Auction.

(1) Publication of Indicative Match Price

and Imbalances

(A) Beginning at 5:00 am (Pacific Time),

and various times thereafter as determined

from time to time by the Corporation, the

Indicative Match Price of the Market Order

Auction and the volume available to trade at

such price, shall be published via electronic

means as determined from time to time by

the Corporation. If such a price does not exist

(i.e., there is an Imbalance of market orders),

the Archipelago Exchange shall indicate via

electronic means that an Indicative Match

Price does not exist.

(B) Beginning at 5:00 am (Pacific Time),

and various times thereafter as determined

from time to time by the Corporation, the

market order Imbalance associated with the

Market Order Auction, if any, shall be

published via electronic means as

determined from time to time by the

Corporation.

(C) If the difference between the Indicative

Match Price and the closing price of the price

of the previous trading day’s normal market

hours, as determined by the Consolidated

Tape, is equal to or greater than a predetermined amount, as determined from time

to time by the Corporation, the Archipelago

Exchange will assign a ‘‘SIG’’ designator to

such Indicative Match Price and publish

such designator via electronic means as

determined from time to time by the

Corporation.

Example: (1) Market order to buy 5000

shares;

(2) Auction-Only Limit Order to sell 1000

at 50;

(3) Limit order to sell 1000 at 50.50; and

(4) Limit order to sell 500 at 50.75.

The Archipelago Exchange will publish an

Indicative Match Price of 50.75, a volume of

2500 shares and a buy Imbalance of 2500

shares.

Example: (1) Market order to buy 3000

shares;

(2) Market order to sell 1000;

(3) Limit order to sell 1000 at 41.00; and

(4) Limit order to sell 1000 at 41.25.

The Archipelago Exchange will publish an

Indicative Match price of 41.25 and a volume

of 3000 shares and will not publish an

Imbalance.

(2) Reduction of Imbalances

(A) Any Imbalance in the Market Order

Auction may be reduced by new orders,

entered on the side of the market opposite

the Imbalance, pursuant to the following

priority:

(i) Market orders;

(ii) Limited Price Orders eligible for the

Opening Session;

(iii) Limited Price Orders entered before

6:28 am (Pacific Time);

(iv) Auction-Only Limit Orders; and

(v) Cleanup Orders.

(B) Between 6:28 am (Pacific Time) and the

conclusion of the Market Order Auction,

Limited Price Orders eligible for the Opening

Session or the Core Trading Session may be

cancelled, but market orders, Auction-Only

Limit Orders and Cleanup Orders may not be

cancelled.

(C) Between 6:28 am (Pacific Time) and the

conclusion of the Market Order Auction,

market orders and Auction-Only Limit

Orders may not be entered on the same side

as the Imbalance. Market orders and

Auction-Only Limit Orders may be entered

on the opposite side of the Imbalance,

however, any time before the Market Order

Auction.

(3) Determination of Market Order Auction

Price

(A) If there is no Imbalance, orders will be

executed in the Market Order Auction at the

Indicative Match Price as of 6:30 am (Pacific

Time).

(B) If an Imbalance exists, or if an

equilibrium exists between buy market orders

and sell market orders, as many buy market

orders and sell market orders as possible

shall be matched, on a time priority basis,

(i) at the midpoint of the NBBO at 6:30 am

(Pacific Time), in the case of exchange-listed

securities for which the Corporation is not

the primary market; or

(ii) at the midpoint of the NBBO at 6:30 am

(Pacific Time), in the case of Nasdaq-listed

securities, provided that the NBBO is not

crossed; or

(iii) at the midpoint of the first uncrossed

NBBO after 6:30 am (Pacific Time), in the

case of Nasdaq securities in which the NBBO

is crossed but the BBO is not crossed by the

NBBO; or

(iv) at the bid (offer) of the BBO that was

crossed prior to 6:30 am (Pacific Time), in the

case of Nasdaq securities in which the BBO

is crossed by a market participant; or

(v) at the indicative Match Price as of 6:30

am (Pacific Time) in the case of those issues

for which the Corporation is the primary

market. If equilibrium exists between buy and

sell market orders, the match price shall be

the last Corporation sale price in the security

regardless of the trading session, provided

that, if the last Corporation sale price is

inferior to the BBO, the match price shall be

the Corporation bid (offer).

Such executions shall be designated with

a modifier to identify them as Market Order

Auction trades. The market orders that are

eligible for, but not executed in the Market

Order Auction, shall become eligible for

execution in the Core Trading Session

immediately upon conclusion of the Market

Order Auction.

(d) Reserved.

(e) Transition to Core Trading Session.

(1) Limited Price Orders entered before

6:28 am (Pacific Time) shall participate in

the Market Order Auction. Limited Price

Orders designated for the Core Trading

Session entered after 6:28 am (Pacific Time)

shall become eligible for execution at 6:30

am (Pacific Time) or at the conclusion of the

Market Order Auction, whichever is later.

(2) Market orders entered after 6:28 am

(Pacific Time) and before 6:30 am (Pacific

Time), which are eligible for either the

Market Order Auction or the Core Trading

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78865

Session, shall become eligible for execution

at 6:30 am (Pacific Time) or at the conclusion

of the Market Order Auction, whichever is

later, unless otherwise provided in Rule

7.30(c)(2)(C).

(3) Stop Orders entered before or during

the Opening Session become eligible for

execution at 6:30 am (Pacific Time) or at the

conclusion of the Market Order Auction,

whichever is later.

Order Ranking and Display

Rule 7.36. The Archipelago Exchange shall

display to Users and other market

participants all non-marketable limit orders

in the Display Order Process. The

Archipelago Exchange will also disseminate

current consolidated quotations/last sale

information, and such other market

information as may be made available from

time to time pursuant to agreement between

the Corporation and other market centers.

(a) Ranking. Orders of Users shall be

ranked and maintained in the Display Order

Process and/or Working Order Process of the

Arca Book according to price-time priority,

such that within each price level, all orders

shall be organized by the time of entry in the

following manner.

(1) Display Order Process. Within the

Display Order Process:

(A) Limit orders, with no other conditions,

shall be ranked based on the specified limit

price and the time of original order entry.

(B) The displayed portion of Reserve

Orders (not the reserve size) shall be ranked

at the specified limit price and the time of

order entry. If the displayed portion of the

Reserve Order is decremented in its entirety,

the displayed portion of the Reserve Order

shall be refreshed for the displayed amount

from the reserve portion and shall be

submitted and ranked at the specified limit

price and the new time that the displayed

portion of the order was refreshed.

(C) Discretionary Orders shall be ranked

based on the displayed price (not the

discretionary price) and the time of order

entry. If a Discretionary Order is

decremented, it remains ranked based on the

displayed price and the time of original order

entry.

(2) Working Order Process. Within the

Working Order Process:

(A) The reserve portion of Reserve Orders

shall be ranked based on the specified limit

price and the time of original order entry.

After the displayed portion of a Reserve

Order is refreshed from the reserve portion,

the reserve portion remains ranked based on

the original time of order entry, while the

displayed portion is sent to the Display Order

Process with a new time-stamp.

(B) Discretionary Orders shall be ranked

based on the displayed price and the time of

original order entry. After a Discretionary

Order is decremented, it remains ranked as

described above.

(C) All-or-None Orders shall be ranked

based on the specified limit price and the

time of order entry.

(b) Display. All Orders at all price levels in

the Display Order Process of the Arca Book

shall be displayed to all Users and other

market participants on an anonymous basis.

(c) Dissemination. The best-ranked

displayed order(s) to buy and the best ranked

displayed order(s) to sell in the Arca Book

and the aggregate displayed size of such

orders associated with such prices shall be

collected and made available to quotation

vendors for dissemination pursuant to the

requirements of Rule 11Ac1–1 under the

Exchange Act.

Order Execution

Rule 7.37. Subject to the restrictions on

short sales under Rule 10a–1 under the

Exchange Act, like-priced orders, bids and

offers shall be matched for execution by

following Steps 1 through 5 in this Rule;

provided, however, for an execution to occur

on any Order Process, the price must be

equal to or better than the NBBO, unless the

Archipelago Exchange has routed orders to

all away markets at the NBBO.

(a) Step 1: Directed Order Process. During

Core Trading Hours only, orders may be

matched and executed in the Directed Order

Process as follows:

(1) If a User submits a marketable Directed

Order to the Archipelago Exchange and the

User’s designated Market Maker has a

standing instruction for a Directed Fill to the

Archipelago Exchange, the Directed Order

shall be executed against the Directed Fill of

the designated Market Maker.

(2) If a User submits a marketable Directed

Order to the Archipelago Exchange and the

User’s designated Market Maker has not

submitted an instruction for a Directed Fill,

the Directed Order shall enter the Display

Order Process, as described in subsection (b)

of this Rule.

(3) If a User submits any order other than

a marketable Directed Order to the

Archipelago Exchange, the User’s order

immediately shall enter the Display Order

Process, as described in subsection (b) of this

Rule, without interacting with any Directed

Fills.

(b) If an incoming marketable order has not

been executed in its entirety pursuant to

paragraph (a) of this Rule, any remaining

part of the order shall be routed to the

Display Order Process.

(1) Step 2: Display Order Process.

(A) An incoming marketable order shall

first attempt to be matched for execution

against orders the Display Order Process at

the display price of the resident order for the

total amount of stock available at that price

or for the size of the incoming order,

whichever is smaller. For the purposes of this

subsection, the size of an incoming Reserve

Order includes the displayed and reserve size

and the size of the portion of the Reserve

Order resident in the Display Order Process

is equal to its displayed size. If the incoming

marketable order has not been executed in its

entirety, the remaining part of the order shall

be routed to the Working Order Process.

(B) An incoming order that is not

marketable shall enter the Working Order

Process to be executed against any

Discretionary Orders at or better than the

NBBO.

(2)Step 3: Working Order Process.

(A) An incoming marketable order shall be

matched for execution against orders in the

Working Order Process in the following

manner:

(i) An incoming marketable order shall be

matched against orders within the Working

Order Process in the order of their ranking,

at the price of the displayed portion (or in the

case of an All-or-None Order, at the limit

price), for the total amount of stock available

at that price or for the size of the incoming

order, whichever is smaller.

(ii) If the BBO is outside the NBBO and any

Discretionary Order(s) within the Working

Order Process have a discretionary price

equal to or better than the NBBO, the

incoming order shall execute against such

Discretionary Order(s) at the NBBO up to the

size of the smaller of the two orders.

(iii) If an incoming marketable order is a

Discretionary Order or a Reserve Order and

its prices overlap with the prices of a

Discretionary Orders in the Working Order

Process, then the orders will be executed at

the display price of the order that was

entered first up to the size of the smaller of

the two orders. For the purposes of this

subsection, the size of the incoming Reserved

order includes the displayed and reserve size.

(iv) If the incoming marketable order has

not been executed in its entirety, the

remaining part of the order shall be routed

to the Tracking Order Process.

(B) An incoming order is not marketable

shall be matched for execution against orders

in the Working Order Process in the following

manner:

(i) The incoming order shall be matched

against any Discretionary Orders in the

Working Order Process that have

discretionary prices that would satisfy an

otherwise displayable incoming Limited Price

Order. The execution shall occur at the

limited price of the incoming order.

(ii) If the incoming order is a Discretionary

Order and its prices overlap with the prices

of a Discretionary Order in the Working

Order Process, then the orders will be

executed at the discretionary price of the

incoming order that would be the best price

available for the order entered first.

(C) If any change in the NBBO or other

available away trading interest would cause

a potential match between the away order

and an order in the Working Order Process,

a commitment to trade shall be sent to that

market center or market participant pursuant

to Step 5 below.

(c) Step 4: Tracking Order Process. During

Core Trading Hours only, orders may be

matched and executed in the Tracking Order

Process as follows: If an order has not been

executed in its entirety pursuant to

paragraphs (a) and (b) of this Rule, the

Archipelago Exchange shall match and

execute any remaining part of the order in

the Tracking Order Process in the following

manner; provided, however, any portion of

an order received from another market center

or market participant shall be cancelled

immediately:

(1) If the unfilled order is a mixed lot or

round lot order, the order shall be matched

against any Tracking Orders pursuant to the

rotation pattern described in Rule 7.31(f)(3)

for immediate execution thereafter. After the

order has been matched against any Tracking

Orders, if the order has not been executed in

its entirety and the remaining part of the

order is an odd lot, the odd lot order shall

been executed in the Odd Lot Tracking Order

Process, as described in paragraph (2).

78866 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

(2) If the unfilled order is an odd lot, the

order shall be matched in the Odd Lot

Tracking Order Process against any OLTOs

pursuant to the rotation pattern described in

Rule 7.31(f)(3) for immediate execution

thereafter.

(d) Step 5: Routing Away.

(1) If an order has not been executed in its

entirety pursuant to paragraphs (a) through

(c) of this Rule and it has been designated as

a Fill-or-Return, Fill-or-Return Plus Order or

PNP Order, the Order shall be cancelled,

without routing the order to another market

center or market participant.

(2) If an order has not been executed in its

entirety pursuant to paragraphs (a) through

(c) of this Rule and it has not been

designated as a Fill-or-Return, Fill-or-Return

Plus Order or PNP Order, the order shall be

routed for execution as follows:

(A) The order shall be routed, either in its

entirety or as component orders, to another

market center or market participant as a limit

order priced at the quote published by the

market center or market participant.

(B) the Archipelago Exchange shall attempt

to match the part of the order that has not

been routed away against then available

trading interest in the Archipelago Exchange

for an internal fill by following Steps 1

through 4 as set forth in paragraphs (a)

through (c) above.

(C) Orders routed to other market centers

or market participants shall remain outside

the Archipelago Exchange for a prescribed

time period during which they may be

executed (in whole or in part) or declined.

While an order remains outside the

Archipelago Exchange, it shall have no time

standing, relative to other orders received

from Users at the same price which may be

executed against the Arca Book. Requests

from Users to cancel their orders while the

order is routed away to another market

center or market participant and remains

outside the Archipelago Exchange shall be

processed, subject to the applicable trading

rules of the relevant market center or market

participant.

(D) In the event that a marketable order

routed from the Archipelago Exchange to

another market center or market participant

is not executed in its entirety at the other

market center or market participant’s quote

(i.e., all attempts at the fill are declined or

timed-out), the Archipelago Exchange shall

attempt to match the residual or declined

market order against then available trading

interest in the Archipelago Exchange for an

internal fill by following Steps 1 through 4

as set forth in paragraphs (a) through (c)

above. Any remaining unmatched trading

interest shall be rerouted to another market

center or market participant at the next

available displayed price level pursuant to

this paragraph (d)(2) above.

(E) When routing an order in an Eligible

Security away to another market center, the

Corporation shall utilize such electronic

intermarket linkages and order delivery

facilities as may be approved by the Board

of Directors from time to time, subject to such

applicable requirements as may be agreed to

with the relevant market center.

(e) If an order has not been executed in its

entirety after following Steps 1–5, the order

shall be ranked in the Arca Book pursuant

to Rule 7.36.

Odd and Mixed Lots

Rule 7.38(a) Order Types.

(1) Odd Lots. All odd lot orders submitted

by Users to the Archipelago Exchange must

be market orders or limit orders, where such

orders are subject to no additional conditions

(e.g., odd lot orders may not be Working

Orders, Directed Orders, Directed Fills,

Tracking Orders, etc.), provided, however,

Odd Lot Dealers may submit OLTOs.

(2) Mixed Lots. Mixed lot orders submitted

by Users to the Archipelago Exchange may be

any order type supported by the Archipelago

Exchange.

(b) Ranking and Execution. Round lot,

mixed lot and odd lot orders are treated in

the same manner in the Archipelago

Exchange; provided, however, the Tracking

Order Process treats odd lot orders in a

different manner from mixed lot and round

lot orders.

(c) Prohibitions. It shall be considered

conduct inconsistent with just equitable

principle for ETP Holders to engage in the

following actions:

(1) Combining odd lot orders given by

different customers into a round lot order or

orders unless specifically requested to do so

by the customers giving the orders;

(2) Unbundling round lots for the purpose

of entering odd lot limit orders in comparable

amounts;

(3) Failing to aggregate odd lot orders into

round lots when such orders are for the same

account or for various accounts in which

there is a common monetary interest; and

(4) Entering both buy and sell odd lot limit

orders in the same stock before one of the

orders is executed for the purpose of

capturing the spread in the stock.

Interaction with PCXE Application of the

OptiMark System

Rule 7.39(a) The information from the Arca

Book (including Working Orders), but not the

orders themselves, shall be submitted to the

PCXE Application at all relevant times

during Core Trading Hours, as set forth in

Rule 7.47.

(b) The Archipelago Exchange may receive

Immediate-or-Cancel Orders from the PCXE

Application as set forth in Rule 7.48. Such

Immediate-or-Cancel Orders shall be treated

as a User order once submitted to the

Archipelago Exchange.

Trade Execution and Reporting

Rule 7.40. Executions occurring as a result

of orders matched against the Arca Book

shall be reported by the Corporation to an

appropriate consolidate transaction reporting

system. Executions occurring as a result of

orders routed away from the Archipelago

Exchange shall be reported to an appropriate

consolidated transaction reporting system by

the relevant reporting market center. The

Archipelago Exchange shall promptly notify

Users of all executions of their orders as soon

as executions take place.

Clearance and Settlement

Rule 7.41. The details of each transaction

executed within the Archipelago Exchange

shall be automatically processed for

clearance and settlement on a locked-in

basis. ETP Holders need not separately report

their transactions to the Corporation for trade

comparison purposes. All transactions

effected by a Sponsored Participant shall be

cleared and settle, using the relevant

Sponsoring ETP Holder’s mnemonic (or its

clearing firm’s mnemonic as applicable).

Limitation of Liability

Rule 7.42(a). Neither the Corporation, any

affiliate of the Corporation, Archipelago

Exchange, L.L.C., nor any affiliate of the

Archipelago Exchange, L.L.C., shall be liable

to Users for any loss, damages, claim or

expense:

(1) growing out of the use or enjoyment of

the Archipelago Exchange; or

(2) arising from or occasioned by any

inaccuracy, error or delay in, or omission of

or from the collection, calculation,

compilation, maintenance, reporting or

dissemination of any information derived

from the Archipelago Exchange, resulting

either from any act or omission by the

Corporation, any affiliate of the Corporation,

Archipelago Exchange, L.L.C., or any affiliate

of Archipelago Exchange, L.L.C., or from any

act condition or cause beyond the reasonable

control of the Corporation, any affiliate of the

Corporation, Archipelago Exchange, L.L.C.,

or any affiliate of Archipelago Exchange,

L.L.C., including, but not limited to, flood,

extraordinary weather conditions,

earthquake or other acts of God, fire, war,

insurrection, labor dispute, accident, action

of government, communications or power

failure, or equipment or software

malfunction.

(b) Each ETP Holder expressly agrees, in

consideration of the issuance of the ETP, to

release and discharge the Corporation, any

affiliate of the Corporation, Archipelago

Exchange, L.L.C., and any affiliate of the

Archipelago Exchange, L.L.C., and any

officers, directors, employees and agents

thereof, of and from all claims and damages

arising from their acceptance and use of the

Archipelago Exchange.

(c) Neither the Corporation, any affiliate of

the Corporation, Archipelago Exchange,

L.L.C., nor any affiliate of the Archipelago

Exchange, L.L.C., makes any express or

implied warranties or conditions to Users as

to results that any person or party may obtain

from the Archipelago Exchange for trading or

for any other purpose, and all warranties of

merchantability or fitness for a particular

purpose or use, title, and non-infringement

with respect to the Archipelago Exchange are

hereby disclaimed.

Rule 7.43. Reserved.

Rule 7.44. Reserved.

Section 4 [10]. PCXE Application of the

OptiMark System [Automatic Execution

Systems]

[Rule 7.70—Deleted.]

PCX Equities, Inc. Application of the

OptiMark System

Definitions

Rule 7.45[7.71](a). Definitions. Whenever

and wherever used herein, unless the context

requires otherwise, the following terms shall

be deemed to have the meanings indicated:

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78867

(1)—No change.

(2) The term ‘‘Designated Broker’’ shall

mean a broker-dealer that has been issued an

ETP [or Equity ASAP] by the Corporation

who has been designated by a non-ETP [or

non-Equity ASAP] User to execute, clear and

settle transactions resulting from the

Application.

[(3) The term ‘‘Eligible Securities’’ shall

mean the equity securities currently listed or

traded on the Corporation.]

(3)[4] The term ‘‘Supplemental Account

Agreement’’ shall mean the form of

Agreement between a non-ETP [or nonEquity ASAP] User and a Designated Broker

under which Orders of the non-ETP [or nonEquity ASAP] User and resulting transactions

will be executed, cleared and settled, using

the Designated Broker’s mnemonic (or its

clearing broker’s mnemonic as applicable).

(4) [(5)]—No change.

(5) [(6)] The term ‘‘Orders’’ shall mean one

or more orders generated from a Cycle at

specific prices and sizes at which execution

immediately may occur; provided, however,

an Order to be matched against a limit order

from the Arca Book shall be routed to the

Archipelago Exchange as an Immediate-orCancel Order. Orders in Eligible Securities

for execution on the Corporation or other ITS

participating market centers shall be in round

lots equal to or greater than 1,000 shares,

except for Orders resulting from processing

COS Profiles (as defined below) and those

Profiles created from the Arca Book [PCX

Specialist’s book] that may be in any round

lot size, and in price increments conforming

to the requirements of the Corporation’s

[rules] Rules and policies applicable to all

orders executed on the Archipelago

Exchange [Floor]; provided, however, that

Orders may be generated from central

processing of the Profiles designated for the

midpoint service by the OptiMark System in

conformance with the trading differential in

Rule [7.10] 7.6(a), Commentary .04. Such

orders shall be considered ‘‘immediate or

cancel [Cancel]’’ orders within the meaning

of the Corporation’s Rule 7.31 [7.4] and shall

include the following information:

(A) the stock ticker symbol;

(B) a designation as ‘‘buy,’’ ‘‘sell long,’’ or

‘‘sell short’’; and

(C) such other information as may be

required by the Board

(6) [(7)] The term ‘‘Profile’’ shall mean the

expression of trading interest received by the

OptiMark System in the form of a satisfaction

profile that shows the User’s degree of

satisfaction (expressed as a number between

zero and one) to trade at each coordinate of

the price/size grid. The term ‘‘COS Profile’’

means the satisfaction profile generated by

the OptiMark system from processing

quotations of other market centers from the

COS that can be accessed by ITS/CAES. The

term ‘‘Arca Profile’’ means the satisfaction

profile generated by the OptiMark System

from processing the Arca Book.

(7) [(8)] the term ‘‘PCXE Application’’ (or

‘‘Application’’) shall mean the Corporation’s

trading service facility consisting of certain

electronic communications and information

services of the OptiMark System provided on

a non-exclusive basis through the necessary

communications interfaces (‘‘PCX

Interfaces’’) between the OptiMark System

and the Corporation’s computerized order

system and other facilities to permit

execution of Orders in Eligible Securities and

to receive executions and reports in respect

thereof, all in accordance with these Rules

and other applicable Rules and policies of

the Corporation.

(8) [(9)]—No change.

(9) [(10)]—No change.

Access

Rule 7.46 [7.72]. The PCXE Application

shall be available for all interested ETP

Holders[, Equity ASAP Holders, and ETP

Firms] that decide to become Users. [The

Corporation will assure that each PCX

Specialist is provided with appropriate

access to the PCX Application for the

purpose of submitting Profiles from the

Specialist’s Post.] A non-ETP Holder User

may obtain access to the PCXE Application

only if such access is authorized in advance

by one or more Designated Brokers in

accordance with the terms of the applicable

Supplemental Account Agreement and the

Designated Broker Consent Agreement. Both

agreements shall be in force before a non-ETP

[or non-Equity ASAP] User may be given the

authorization to obtain access to the PCXE

Application. At a minimum, the

Supplemental Account Agreement and the

Designated Broker Consent Agreement shall

include any applicable credit limits imposed

by the Designated Broker on the non-ETP

Holder User; the Designated Broker’s

undertaking that it is responsible for that

non-ETP Holder [or non-/Equity ASAP]

User’s Orders and resulting transactions; and

such other terms and conditions that may be

agreed to from time to time. The Corporation

shall be provided with a written statement

from the Designated Broker acknowledging

its responsibility for such Orders and

resulting transactions.

Entry of Profiles and Generation of Orders

Rule 7.47 [7.73] (a)—No change.

(b) Interaction with the Archipelago

Exchange. The information from the Arca

Book (including Working Orders) shall be

submitted to the PCXE Application at all

relevant times during Core Trading Hours in

the form of Arca Profiles. [Specialist

Obligations. Specialists must ensure that at

all relevant times during regular trading

hours, their best bids and offers (whether

reflecting limit orders or the Specialist’s own

interest) will be included in the OptiMark

System as Profiles.]

(c)—No change.

Commentary

.01. For the purpose of this Rule [rule], a

profile for the proprietary account of an ETP

Holder[, Equity ASAP Holder, or ETP Firm]

(other than for a Market Maker [specialist or

floor broker]) will be deemed ‘‘principle

exempt’’ and therefore receive the priority

treatment of agency profiles but only when

such person does not hold or have

knowledge that his or her firm or any

participant therein holds or has knowledge of

a customer’s profile or order at the same

price or better. If the ETP Holder[, ETP Firm

or Equity ASAP Holder] holds or has

knowledge of such customer profile or order,

the ETP Holder[, ETP Firm or Equity ASAP

Holder] will be deemed non-exempt and

must designate any proprietary profile as

‘‘principal non-exempt.’’

.02. After screening for price and

standing, the matching algorithm will rank

the following categories of profiles and order

types for time priority purposes:

(1) Arca Profiles [PCX Book—limit orders

from the PCX limit order book];

(2) Agency—other public customer

profiles, non-ETP [or non-Equity ASAP]

profiles, and ‘‘principal-exempt’’ proprietary

profiles entered directly into OptiMark;

(3) Principal—proprietary profiles

submitted by Market Makers [specialists and

floor brokers], and ‘‘non-exempt’’ ETP

Holders[, Equity ASAP Holders, and ETP

Firms] ([all three] considered ‘‘principal nonexempt’’); and

(4) [Consolidated Quote System (‘‘]CQS[’’)

profiles.

(d) Frequency. Cycles respecting an

Eligible Security shall be scheduled at one or

more specified times throughout the trading

day after the opening of the market in that

security and prior to the closing of the

market. The maximum frequency with which

Cycles may take place throughout the trading

day shall be 90 seconds, while the minimum

shall be once a day. The exact frequency of

Cycles as to any given Corporation [PCX]

Security shall be determined by OptiMark

Services, Inc., based on the general

characteristics of the security, the robustness

of the associated Profile flow over a period

and the current level of interest expressed by

Users, and may be subsequently altered in

response to subsequent developments in the

above-stated market circumstances. Any

change in the frequency of Cycles will be

effective upon three days’ notice to the User

in advance; provided, however, that at all

relevant times, the Corporation finds any

such scheduling of Cycles to be

commensurate with the demand for the PCXE

Application among ETP Holders[, Equity

ASAP Holders or ETP Firms] and their

customers and also consistent with the

safeguards in place to ensure system capacity

and integrity.

Order Execution and Reporting

Rule 7.48(a) [7.74]—No change.

(b) Notwithstanding paragraph (a) of this

Rule, any Order generated from a Cycle

representing matches involving Arca Profiles

shall be routed to the Archipelago Exchange

for execution against the relevant the

Archipelago Exchange limit order as an

Immediate-or-Cancel Order. If the relevant

Archipelago Exchange limit order is no

longer available, the Order generated from

the Cycle shall be automatically canceled.

Hours of Operation

Rule 7.49 [7.75]. The PCXE Application

will be available for execution of Orders and

routing of ITS commitments during the

regular trading hours.

Errors

Rule 7.50 [7.76]. Whenever a User

discovers an error in a transaction resulting

from the PCXE Application, such error may

be corrected in accordance with the rules of

the applicable market center and clearing

78868 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

arrangement through which the transaction is

executed and settled.

Trading Suspension and Halts

Rule 7.51 [7.77]. In the event of a

suspension in trading of an Eligible Security

pursuant to Rule 7.12 [7.46(b)], the

Corporation shall suspend the related trading

activities respecting that security through the

PCXE Application. In addition, the trading

activities through the PCXE Application

respecting all Eligible Securities shall halt

whenever the President or, in the President’s

absence, Chief Operating Officer or other

PCXE Officer(s) as the President may

designate, determines that market conditions

warrant such a halt. The Corporation may

suspend the trading activities through the

PCXE Application relating to one or more

Eligible Securities at any other time upon

consultation with OptiMark Technologies,

Inc., if deemed necessary and proper to

preserve system capacity and integrity.

Limitation of Liability

Rule 7.52 [7.78](a). Limitation of Liability.

Neither the Corporation, any affiliate, nor any

operator, licensor or administrator of the

OptiMark System shall have any liability to

Users or Designated Brokers for any loss,

damages, claim or expense arising from or

occasioned by any inaccuracy, error or delay

in, or omission of or from:

(1) the PCXE Application of the OptiMark

System or

(2) the collection, calculation, compilation,

maintenance, reporting or dissemination of

any information derived from the PCXE

Application or the OptiMark System,

resulting either from any act or omission by

the Corporation or any affiliate, or any

operator, licensor or administrator of the

OptiMark System or from any act, condition

or cause beyond the reasonable control of the

Corporation or any affiliate, or any operator,

licensor or administrator of the OptiMark

System, including, but not limited to, flood,

extraordinary weather conditions, earthquake

or other acts of God, fire, war, insurrection,

riot, labor dispute, accident, action of

government, communications or power

failure, or equipment of software

malfunction.

(b) Neither the Corporation, any affiliate,

nor any operator, licensor or administrator of

the OptiMark System makes any express or

implied warranties or conditions to Users or

Designated Brokers as to results that any

person or party may obtain from the PCXE

Application for trading or for any other

purpose, and all warranties of

merchantability or fitness for a particular

purpose or use, title, and non-infringement

with respect to the PCXE Application are

hereby disclaimed.

Rule 7.53. Reserved.

Rule 7.54. Reserved.

Section 5 [9]. Intermarket Trading System

Plan

Definitions

Rule 7.55 [7.66](a). Definitions. Whenever

and wherever used herein, unless the context

requires otherwise, the following terms shall

be deemed to have the meanings indicated:

(1)–(4)—No change.

(5) The term ‘‘Pre-Opening Application’’

shall mean the application of the System

which permits a market maker in one

participating market, who wishes to open his

or her market in an Eligible Listed Security,

to obtain from other market makers registered

in that security in other participating

markets, any pre-opening interests such other

market makers might decide to disclose as set

forth in the Plan.

(6)–(10)—No change.

[(11)—Deleted.]

Intermarket Trading System Application

(b) Provisions of the Plan. The Corporation

has agreed to comply to the best of its ability,

and, absent reasonable justification or

excuse, to enforce compliance by its ETP

Holders, [Equality ASAP Holders and ETP

Firms,] with the provisions of the Plan. In

this connection, the following shall apply:

Intermarket Trading System (ITS)

(1) All transactions effected through ITS

shall be on a ‘‘regular way’’ basis. Each

transaction effected through ITS shall be

cleared and settled through a clearing agency

registered with the Securities and Exchange

Commission which maintains facilities

through which ITS transactions may be

compared and settled and which agrees to

supply each participating market center with

data reasonably requested in order to permit

such market center to enforce compliance by

its members [ETP Holders, Equity ASAP

Holders and ETP Firms] with the provisions

of the Act, the rules and regulations

thereunder, and the rules of such market

center.

(2) Any ‘‘commitment to trade’’, which is

transmitted by an ETP Holder [or ETP Firm],

via the facilities of the Corporation, to

another participating market center through

ITS, shall be firm and irrevocable for the

period of time applicable to such

commitment. All such commitments to trade

shall:

(A) specify the security which is the

subject of the commitment; [,]

(B) designate the commitment as either a

commitment to buy or a commitment to sell;

[,]

(C) specify the amount of the security to be

bought or sold, which amount shall be for

one unit of trading or any multiple thereof;

[,]

(D) specify the price at or below which the

security is to be bought or the price at or

above which the security is to be sold, or

specify that the commitment is a

commitment to trade ‘‘at the market;’’ [,’’]

(E) designate the commitment ‘‘short’’ or

‘‘short exempt’’ whenever it is a commitment

to sell which, if it should result in an

execution in the market of the receiving

market center, would result in a short sale to

which the provisions of paragraph (a) of Rule

10a–1 under the Act would apply; and [,]

(F)—No change.

(3) No change.

(4) The ETP Holder [or ETP Firm on the

Floor] who made the bid or offer which is

sought by a commitment to trade received

[on the Floor] through ITS shall accept such

commitment to trade, via the facilities of the

Corporation, up to the amount of the bid or

offer if the bid or offer is still available [on

the Floor] when the commitment to trade is

received by such ETP Holder [or ETP Firm],

via the facilities of the Corporation, unless

acceptance is precluded by the Rules [rules]

of the Corporation. In the event that the bid

or offer which is sought by a commitment to

trade is no longer available through the

facilities of the Corporation [on the Floor]

when the commitment is received, but a new

bid or offer is available through the facilities

of the Corporation [on the Floor] which

would enable the commitment to trade to be

executed at a price which is more favorable

than the price specified in such commitment,

then the ETP Holder [or ETP firm] who [has]

made the [such new] bid or offer shall accept,

via the facilities of the Corporation, such

commitment at the price, and up to the

amount of, the new [his] bid or offer, unless

acceptance is precluded by the Rules [rules]

of the Corporation.

(5) Any ETP Holder [or ETP Firm] who

receives, via the facilities of the Corporation,

a commitment to trade through ITS from

another market center and who intends to

reject that commitment shall notify, via the

facilities of the Corporation, the market

center from which the commitment was sent

of such rejection as promptly as possible.

(6) Any commitment to trade received [on

the Floor] through ITS and any execution

thereof and any commitment to trade issued

by an ETP Holder [or ETP Firm], via the

facilities of the Corporation, through ITS

shall be subject to such Rules [rules] as the

Corporation may from time to time

determine.

Pre-Opening Application

(7) The provisions of subparagraph (1)

above shall also be applicable to any

transaction effected through the Pre-Opening

Application. The Pre-Opening Application

applies in two instances. First, it applies

whenever a market maker in any Participant

market [Market], in arranging an opening

transaction in his or her market in a System

security, anticipates that the opening

transaction will be at a price that represents

a change from the security’s ‘‘previous day’s

consolidated closing price’’ at more than the

‘‘applicable price change.’’ Second, it applies

whenever an ‘‘indication of interest’’ (i.e., an

anticipated opening price range) is sent to the

CTA Plan Processor as required or permitted

by the CTA Plan or a Participant market’s

rules.

(8) Openings

(A) [(i)] Notification Requirements

(i) [(A)] Applicable Price Change

(1) Initial Notification—Whenever a Market

Maker [specialist], in arranging an opening

transaction through the facilities of [on] the

Corporation in any Eligible Listed Security,

anticipates that the opening transaction [on]

through the facilities of the Corporation will

be at a price that represents a change from

the security’s previous day’s consolidated

closing price of more than the ‘‘applicable

price change’’ (as defined below), he or she,

via the facilities of the Corporation, shall

notify the other Participant markets of the

situation by sending a ‘‘pre-opening

notification’’ through the System. Thereafter,

the Market Maker [specialist] shall not open

the security in his or her market until not less

than three minutes after the [his]

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78869

*** Example: CTA close at 30. Pre-Opening

Notification sent with any one of the following

price ranges 30—1⁄2; 301⁄8—5⁄8; or 301⁄4—3⁄4. It is

then determined that the stock will open at 293⁄4 or 7⁄8. Under paragraph (II)(a), the Market Maker

[specialist] ‘‘shall’’ send, via the facilities of the

Corporation, cancellation notification. If it is

subsequently determined that stock will open at 30,

301⁄8, or 301⁄4, the Market Maker [specialist] need

not reindicate stock, via the facilities of the

Corporation, pursuant to paragraph (II)(b).

transmission of the pre-opening notification.

The ‘‘applicable price changes’’ are:

Security Consolidated closing price Applicable price change

(more than)

Network A ........................................ Under $15 .................................................................. .10 or 1⁄8 point

$15 or over * .............................................................. .25 or 1⁄4 point

Network B ........................................ Under $5 .................................................................... .10 or 1⁄8 point

$5 or over * ................................................................ .25 or 1⁄4 point

—A pre-opening notification shall:

(A) be designated as a pre-opening notification (‘‘IND’’);

(B) identify the participant market (‘‘P’’), the Market Maker [specialist] and the security (‘‘XYZ’’); and

(C) indicate the ‘‘applicable price range’’ by being formatted as a standardized pre-opening administrative message as follows:

IND P/XYZ (RANGE)

The price range shall not exceed the ‘‘applicable price range’’ shown below:

Network A ........................................ Under $50 .................................................................. .50 or 1⁄2 point

$50 or over* ............................................................... 1 point or, for stocks trading in decimals, 1.00

Network B ........................................ Under $10 .................................................................. .50 or 1⁄2 point

$10 or over* ............................................................... 1 point or, for stocks trading in decimals, 1.00

The price range also shall not straddle the previous day’s consolidated closing price, although it may include it as an endpoint (e.g., a.10–.60 or 1⁄8–5⁄8 price range would be permissible if the previous day’s consolidated closing price were .10 or .60 or 1⁄8 or 5⁄8, but not if the closing price

were .25, or .40 or .50 or 1⁄4, or 3⁄8 or 1⁄2).

* If the previous day’s consolidated closing price of a Network A Eligible Security exceeded $100 and the security does not underlie an individual stock option contract listed and currently trading on a national securities exchange, the ‘‘applicable price range’’ is two dollars.

* If the previous day’s consolidated closing price of a Network B Eligible Security exceeded $75 and the security is not a Portfolio Depository

Receipt, Index Fund Share, or Trust Issued Receipt, or does not underlie an individual stock option contract listed and currently trading on a national securities exchange, the ‘‘applicable price range’’ is two dollars.

(2) Subsequent Notifications—If, after

sending a pre-opening notification, the

situation in a Market Maker’s [specialist’s]

market changes, he or she may have to issue,

via the facilities of the Corporation, a

subsequent pre-opening notification. The

three situations requiring subsequent preopening notifications are described below.

Subsequent pre-opening notifications shall

be standardized pre-opening administrative

messages. After sending a subsequent

notification, the Market Maker [specialist]

shall wait either (A) one minute or (B) until

the balance of the original three-minute

waiting period expires whichever is longer,

before opening his or her market (i.e., if more

than one minute of the initial waiting period

has not yet expired at the time the

subsequent notification is sent, the Market

Maker [specialist] must wait for the rest of

the period to pass before opening his or her

market).

(I) Increase or Decrease in Applicable Price

Range—Where, prior to the Market Maker’s

[specialist’s] opening of his or her market in

the security, his or her anticipated opening

price shifts so that it (1) is outside of the

price range specified in his or her preopening notification but (2) still represents a

change from the previous day’s consolidated

closing price of more than the applicable

price change, he or she shall issue, via the

facilities of the Corporation, a replacement

preopening notification (an ‘‘additional’’

notification) through the System before

opening his or her market in the security. An

additional notification contains the same

kind of information as is required in an

original preopening notification.

(II) [II.] Shift to Within Applicable Price

Change Parameter—

(a) The Market Maker [specialist] shall, by

issuing, via the facilities of the Corporation,

a ‘‘cancellation’’ notification through the

System, notify the Participant market(s) of

the receiving market maker(s) prior to

opening the security if the price at which he

or she anticipates opening his or her market

shifts so that it (1) is outside of the price

range specified in his or her pre-opening

notification but (2) does not represent a

change from the previous day’s consolidated

closing price of more than the applicable

price change.

(b) Notwithstanding the preceding

sentence, in situations where the price range

in an initial or additional notification

includes price variations equal to or less than

the applicable price change parameters, the

‘‘cancellation’’ notification signifies that the

anticipated opening price: (1) may or may not

be outside of the price range specified in the

pre-opening notification and (2) does not

represent a change from the previous day’s

consolidated closing price of more than the

applicable price change.***

(III) Participation as Principal Precluded

(‘‘Second Look’’)—If a responding market

maker who has shown in his or her preopening response interest as principal at a

price better than the anticipated opening

price would be precluded from participation

as principal in the opening transaction (e.g.,

his or her responding principal interest is to

sell at a price 1⁄8 or more below the opening

price established by paired agency orders),

the Market Maker [specialist] shall send, via

the facilities of the Corporation, a ‘‘second

look’’ notification through the System

notifying such responding market maker of

the price and size at which he or she could

participate as principal (i.e., in the

parenthetical example above, the total

amount of the security that he or she would

have to sell at the 1⁄8 better price to permit

the opening transaction to occur at that

price).

(ii)[(B)] Tape Indications—If the CTA Plan

or the Corporation’s Rules [rules] require or

permit that an ‘‘indication of interest’’ (i.e.,

an anticipated opening price range) in a

security be furnished to the consolidated last

sale reporting system prior to the opening of

trading, or reopening of trading following a

halt or suspension in trading in one or more

Eligible Listed Securities, then the furnishing

of an indication of interest, in such situations

shall, without any other additional action

required of the Market Maker [specialist], (1)

initiate the Pre-Opening process, and, (2) if

applicable, substitute for and satisfy the

requirements of paragraphs (8)(A)(i)(1),

(8)(A)(i)(2)(I) and (8)(A)(i)(2)(II) [(8)(i)(A)(1),

(8)(i)(A)(2)(I) and (8)(i)(A)(2)(II)]. (While the

furnishing of an indication of interest to the

consolidated last sale reporting system

satisfies the notification requirements of this

Rule [rule], a Market Maker [a specialist]

should also transmit, via the facilities of the

Corporation, the indication through the

System in the format of a standardized preopening administrative message.) In any such

situation the Market Maker [specialist] shall

not open or reopen the security until not less

than three minutes after the [his]

transmission of the opening or reopening

indication of interest. For the purpose of

paragraphs (8)(B)(i), (8)(B)(iii), (8)(A)(i)(2)(III),

(8)(B)(iv), (8)(B)(v), (8)(C) and (8)(A)(ii)

[8(ii)(A), 8(ii)(C), 8(i)(A)(2)(III), 8(i)(D),

8(ii)(E), 8(iii) and 8(i)(B)] ‘‘pre-opening

78870 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

1For purposes of this section, the market in a

security is opened (or reopened) with either a trade

or a quotation, if trades are being reported to the

Consolidated Tape and quotes are being

disseminated on the Consolidated Quotation

System.

notification’’ includes an indication of

interest furnished to the consolidated last

sale reporting service.

(B)[(ii)] Pre-Opening Responses

(i) [Decision on Opening Transaction—

Subject to paragraph 8(B)(ii) [(8)(ii)(B)]. If a

Market Maker [specialist] who has issued, via

the facilities of the Corporation, a preopening notification receives, via the

facilities of the Corporation, ‘‘pre-opening

responses’’ through the System containing

‘‘obligation to trade’’ from market makers in

other Participant markets (‘‘responding

market makers’’), he or she shall combine

those obligations with orders he or she

already holds in the security and, on the

basis of this aggregated information, decide

upon the opening transaction in the security.

If the Market Maker [specialist] has received,

via the facilities of the Corporation, more

than one-pre-opening response from a

Participant market, he or she shall include in

such combination only those obligations to

trade from such Participant market as are

specified in the most recent response

whether or not the most recent response

expressly cancels the preceding response(s).

An original or revised response, via the

facilities, received after the Market Maker

[specialist] has affected his or her opening

transaction shall be to no effect.

(ii)[(B)] Pre-Opening Responses from Open

Markets—A Market Maker, via the facilities

of the Corporation, [specialist] must accept

only those pre-opening responses sent to the

Corporation by market makers in other

Participant markets prior to the opening of

the[ir] market[s] for trading in the security.1

Following a halt or suspension in trading on

the Corporation, a Market Maker, via the

facilities of the Corporation, [specialist] must

accept only those pre-opening responses sent

by market makers to the Corporation from

other Participant markets that halted trading

in the security contemporaneously with the

Corporation and that had not resumed

trading in the security at the time the preopening response is sent.

In the event that one or more market

makers from Participant markets that have

already opened trading in a security or, with

respect to a halt or suspension in trading,

either did not halt trading in a security

contemporaneously with the Corporation, or

has already resumed trading in a security,

respond to a pre-opening notification in that

security, the Market Maker [specialist] need

not, but may in his or her discretion, accept,

via the facilities of the Corporation, such

responses for the purpose of inclusion in the

opening or reopening transaction. In the

event that a Participant market opens or with

respect to a halt or suspension in trading,

resumes trading in a security subsequent to

a market maker in that Participant market

sending a pre-opening response but prior to

the opening or reopening transaction on the

Corporation, the market maker who sent the

pre-opening response to the Corporation

must confirm the pre-opening response by

sending an administrative message through

the System stating that the response remains

valid: if the market maker fails to so confirm

the pre-opening response, the Market Maker

[specialist] need not, but may in his or her

discretion, accept, via the facilities of the

Corporation, the original response for the

purpose of inclusion in the opening or

reopening transaction.

(iii)[(C)] Allocation of Imbalances—

Whenever pre-opening responses from one or

more responding market makers include

obligations to take or supply as principal

more than 50 percent of the opening

imbalance, the Market Maker [specialist] may

take or supply as principal 50 percent of the

imbalance at the opening price, rounded up

or down as may be necessary to avoid the

allocation of odd lots. In any such case,

where the pre-opening response is from more

than one responding market maker, the

Market Maker [specialist] shall allocate the

remaining imbalance (which may be greater

than 50 percent if the Market Maker

[specialist] elects to take or supply less than

50 percent of the imbalance) among them in

proportion to the amount each obligated

himself or herself to take or supply as

principal at the opening price in his or her

pre-opening response, rounded up or down

as may be necessary to avoid the allocation

of odd lots. For the purpose of this paragraph

8(B)(iii) [(8)(ii)(C)], multiple responding

market makers in the same Eligible Listed

Security in the same Participant market shall

be deemed to be a single responding market

maker.

(iv)[(D)] Treatment of Obligations to

Trade—In receiving a pre-opening response

via the facilities of the Corporation, a Market

Maker [specialist], via the facilities of the

Corporation, shall accord to any obligation to

trade as agent included in the response the

same treatment as he or she would to an

order entrusted to him or her as agent on the

Corporation [Exchange] at the same time

such obligation was received.

(v)[(E)] Responses Increasing the

Imbalance—A Market Maker [specialist] shall

not reject, via the facilities of the

Corporation, a pre-opening response that has

the effect of further increasing the existing

imbalance for that reason alone.

(C)[(iii)] Reports of Participation—

Promptly following the opening in any

security as to which a Market Maker, via the

facilities of the Corporation, [an Exchange

specialist] issued pre-opening notification,

the Market Maker, via the facilities of the

Corporation, [specialist] shall report to each

Participant responsible for a market in which

one or more responding market makers are

located (A) the amount of the security

purchased and/or sold, if any, by the

responding market maker(s) in the opening

transaction and the price thereof or (B) if the

responding market maker’s response(s)

included agency or principal interest at the

opening price that did not participate in the

opening transaction, the fact that such

interest did not so participate.

(9) Opening in Other Participating Markets

(A)[(i)] Pre-Opening Responses—Subject to

paragraph (9)(B) [(9)(ii)], whenever a Market

Maker, via the facilities of the Corporation,

[specialist] who has received a pre-opening

notification as provided in the ITS Plan in

any Eligible Listed Security as to which he

or she is registered as a Market Maker

[specialist] wishes to participate in the

opening of that security in the Participant

market from which the pre-opening

notification was issued, he or she may do so

by sending, via the facilities of the

Corporation, obligations to trade through the

System to such Participant market in a preopening response. A pre-opening response

shall:

(i)[(A)] be designated as a pre-opening

response (‘‘RES’’)

(ii)[(B)] Identify the Participant market P,

the Market Maker [specialist] and the

security (‘‘XYZ’’), and

(iii) [(C)] Show the Market Maker’s

[specialist’s] interest (if any), both as

principal for his or her own account (‘‘P’’)

and as agent for orders left with him or her

(‘‘A’’), at each price level within the pricerange indicated in the pre-opening

notification (e.g., 403⁄8, reflected on a netted

share basis by being formatted as a

standardized pre-opening administrative

message as follow: RES/P/XYZ BUY A—P

403⁄8

The response may also show market orders

separately.

(B)[(ii)] Response When the Corporation is

Open—Notwithstanding paragraph (9)(A)

[(9)(i)], a Market Maker [specialist] who has

received via the facilities of the Corporation,

a pre-opening notification in any Eligible

Listed Security in which he or she is

registered as a Market Maker [specialist]

should not send, via the facilities of the

Corporation, a pre-opening response to the

originator of such notification if (i) [(A)] the

market for trading in the security is open on

the Corporation or (ii) [(B)] the Participant

market from which the notification emanated

had declared a halt or suspension in trading

in such security, and the Corporation either

had not halted trading in the security

reasonably contemporaneously with the

Participant Market or had resumed trading

during the halt or suspension in trading.

(C) [(iii)] Revised Responses—a Market

Maker [specialist] may cancel or modify his

or her pre-opening response by sending

through the System, via the facilities of the

Corporation, a revised response that cancels

the obligations to trade contained in this

original responses and, if a modification is

desired, that substitutes new obligations to

trade stating the Market Maker’s [specialist’s]

aggregate interest (i.e., his or her interest

reflected in the original response plus any

additional interest and/or minus any

withdrawn interest) at each price level. Each

succeeding response, even if it fails to

expressly cancel its predecessor response,

shall supersede the predecessor response in

its entirety. Any revised response shall be to

no effect if received in the Participant market

from which the pre-opening notification was

issued after the security has opened in such

Participant market.

(D)[iv] Sole Means of Pre-Opening

Routing—Once a pre-opening notification as

to any security is received through the

facilities of [on] the Corporation, the one or

more Market Makers [specialists] in such

security shall submit, via the facilities of the

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78871

Corporation, any obligations to trade that

security as principal for his, her or their own

accounts to the Participant market from

which the pre-opening notification was

issued only through the Pre-Opening

Application and shall not send orders to

trade that security for his, her or their own

accounts to such Participant market for

participation at the opening in that market by

any other means. The foregoing sentence

shall have no application to orders sent to

that market by the Market Makers, via the

facilities of the Corporation, [specialists(s)]

prior to the issuance of a pre-opening

notification.

(E) Use of System before Opening or

Reopening—No ETP Holder[, Equity ASAP

Holder or ETP Firm] where acting as

principal or agent, shall send, via the

facilities of the Corporation, an obligation to

trade, commitment to trade or order in any

security in the Participant market (or prior to

the resumption of trading in the security in

the Participant market following the

initiation of a halt or suspension in trading

in the security until a pre-opening

notification in the security has been issued

from the other Participant market, or, if no

pre-opening notification is required, until the

market in the security has opened in such

other Participant market.

(F)[(iv)] Duration of Obligations to Trade—

Responses to pre-opening notifications shall

be voluntary, but each obligation to trade that

at a Market Maker [specialist] includes, via

the facilities of the Corporation, in any preopening response, or in any modification of

a pre-opening reponse, shall remain binding

on him or her, and on any person for whom

he or she is acting, until the security has

opened in the Participant market from which

the pre-opening notification was issued or

until a cancellation or modification of such

obligation has been received in such

Participant [participant] market, and any

such modification shall itself be binding on

the Market Maker [specialist] or such person

until a subsequent cancellation or

modification thereof has been received in

such Participant market. The preceding

sentence applies to obligations to trade even

if included in pre-opening responses

contravening paragraph (8)(B) [(8)(ii)].

Commentary

01. No ETP Holder[, Equity ASAP Holder

or ETP Firm] shall buy against a commitment

to sell designated as ‘‘short’’ which is

received through [on] the facilities of the

Corporation if the resulting transaction

would violate the short selling rules.

02. Any purchase or sale against a

commitment to trade received through [on]

the facilities of the Corporation shall be

effected in accordance with the Rules [rules]

applicable to the making of bids, offers and

transactions on the facilities of the

Corporation [facility].

03. For the purposes of this Rule [rule],

the market in a security is opened (or

reopened) with either a trade or quotation, if

trades are being reported to the Consolidated

Tape and quotes are being disseminated to

the Consolidated Quotation System.

[.04—Deleted.]

ITS ‘‘Trade-Throughs’’ and ‘‘Locked

Markets’’

Rule 7.56 [7.67](a). Definitions.

(1) An ‘‘Exchange trade-through,’’ as that

term is used in this Rule, occurs whenever

an ETP Holder [or ETP Firm] initiates the

purchase of an Eligible Listed Security

through the facilities of [on] the Corporation

at a price which is higher than the price at

which the security is being offered (or

initiates the sale of such a security through

the facilities of [on] the Corporation at a price

which is lower than the price at which the

security is being bid for) at the time of the

purchase (or sale) in another ITS

participating market center as reflected by

the bid (offer) then being displayed [on the

Floor] from such other market center. The

ETP Holder [or ETP Firm] described in the

foregoing sentence is referred to in this Rule

as the ETP Holder [or ETP Firm ] who

initiated a trade-through.

(2)—No change.

(3) A ‘‘third participating market center

trade-through,’’ as that term is used in this

Rule, occurs whenever an ETP Holder [or

ETP Firm on the Corporation] initiates the

purchase of an Eligible Listed Security by

sending a commitment, via the facilities of

the Corporation, to trade through the System

and such commitment results in an execution

at a price which is higher than the price at

which the security is being offered (or

initiates the sale of such a security by

sending, via the facilities of the Corporation,

a commitment to trade through the System

and such commitment results in an execution

at a price which is lower than the price at

which the security is being bid for) at the

time of purchase (or sale) in another ITS

participating market center, as reflected by

the offer (bid) then being displayed through

the facilities of the Corporation. The ETP

Holder [member] described in the foregoing

sentence is referred to in this Rule as the

‘‘ETP Holder [or ETP Firm] who initiated a

third participating market center tradethrough.’’

(4) A ‘‘trade-through,’’ as that term is used

in this Rule, means either an Exchange tradethrough [on the facilities of the Corporation]

or a third participating market center tradethrough.

(b) Trade Throughs.

When purchasing or selling, either as

principal or agent, any Eligible Listed

Security through the facilities of [on] the

Corporation or by issuing, via the facilities of

the Corporation, a commitment to trade

through the System, ETP Holders[, Equity

ASAP Holder or ETP Firms] should avoid

initiated a trade-through unless the

provisions of paragraphs (b)(3) below are

applicable.

(2)(A) Except as provided in paragraph

(b)(3) below, if a trade-through occurs and a

complaint thereof is received by the

Corporation through the System from the

party whose bid or offer was traded-through

(‘‘the aggrieved party’’, then:

(i) In the case of an Exchange trade-through

[on through the facilities of the Corporation]

only, if the ETP Holder[or ETP Firm] who

initiated the trade-through and the party on

the contra side of the transaction each

initiated the transaction [while on] through

the facilities of the Corporation for his or or

her own account or any account in which he

or she has an interest, the transaction shall

be deemed void and a cancellation therefore

shall be reported through the consolidated

last sale reporting system;

(ii) Except as provided in paragraph

(b)(2)(A)(i) above, (a) the ETP Holder [or ETP

Firm] who initiated the trade-through shall

satisfy, or cause to be satisfied the bid or offer

traded-through in its entirely either at the

price of such bid or offer, or, at the price that

caused the trade-through (as determined in

accordance with paragraph (b)(2)(B) below)

or, (b) if he or she elects not to do so (and,

in the case of an third participating market

center trade-through he or she obtains the

agreement of the contra party within the ITS

participating market center that received the

commitment that caused that trade-through),

then the price of the transaction which

constituted the trade-through shall be

corrected to a price at which a trade-through

would not have occurred and the price

correction shall be reported through the

consolidated last sale reporting system.

(B) The price at which the bid or offer

traded-through shall be satisfied pursuant to

clause (a) of paragraph (b)(2)(A)(ii) shall be

the price of such bid or offer except if:

(i) the transaction that constituted the

trade-through was of ‘‘block size’’ but did not

constitute a ‘‘block trade’’ (as those terms are

defined in Rule 7.57 [7.68]); and

(ii) the ETP Holder [or ETP Firm] who

initiated the trade-through did not make

every reasonable effort to satisfy or cause to

be satisfied, through the System, the bid or

offer traded-through at its price and in its

entirety within two (2) minutes from the time

the report of this transaction that constituted

the trade-through was disseminated over the

high speed line of the consolidated last sale

report system. In the case of such exception,

the price at which the bid or offer tradedthrough shall be satisfied shall be the price

that caused the trade-through.

Whenever paragraph (b)(2)(A)(ii) applies, if

the ETP Holder [or ETP Firm] who initiated

the trade-through, or the party (or the broker/

dealer within another ITS participating

market center) on the contra side of the

transaction was, of if both such parties were

executing (in whole or in part) orders that

originated from off the facilities of the

Corporation or off the Floor of the other

[their] respective market centers [Floor], each

such order to portion thereof that was

executed in the transaction that constituted

the trade-through (whether such order or

portion thereof was executed by the party

who initiated the trade-through or by the

member or a broker/dealer within another

ITS participating market center on the contra

side of the transaction) shall receive the price

that caused the trade-through or the price at

which the bid or offer traded-through was

satisfied, if it was satisfied, pursuant to

clause (a) of paragraph (b)(2)(A)(ii) or the

adjusted price, if there was an adjustment,

pursuant to clause (b) of paragraph

(b)(2)(A)(ii), whichever price is most

beneficial to the order or portion. Resulting

money differences shall be the liability of the

party who initiated the trade through.

78872 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

(3) The provisions of paragraph (b)(2)

above shall not apply under the following

conditions:

(A)–(C)—No change.

(D) the trade-through occurred during a

period when, with respect to the Eligible

Listed Security which was the subject of the

trade-through, ETP Holders [and ETP Firms

of the Corporation] were relieved of their

obligations under paragraph (c)(2) of Rule 11

Ac1–1 pursuant to the ‘‘unusual market’’

exception of paragraph (b)(3) of Rule 11Ac1–

1; provided, however, that, unless the

provisions of this paragraph (b)(3) (other than

those of this proviso) apply, during any such

period ETP Holders [and ETP Firms] shall

make every reasonable effort to avoid tradingthrough any bid or offer displayed on the

Floor from another ITS participating market

center whose members are not relieved of

their obligations under said paragraph (c)(2)

with respect to such bid or offer;

(E)–(G)—No change.

(c) Complaints and Responses to

Complaints.

(1) When a trade-through complaint is

received by the Corporation, it shall be the

duty of the ETP Holder [or ETP Firm] who

initiated the trade-through to respond as

promptly as practicable to the aggrieved

party. Such a response shall notify the

aggrieved party either:

(A)–(B)—No change.

(2)—No change.

(A)—No change.

(B) the loss proximately caused by the

trade-through that would have been suffered

by the aggrieved party had he or she

purchased or sold the security subject to the

trade-through so as to mitigate his or her loss

and had such purchase or sale been effected

at the ‘‘loss basis price.’’

For purposes of this paragraph, the ‘‘loss

basis price’’ shall be the price of the next

transaction, as reported by the high speed

line of the consolidated last sale reporting

system, in the security in question, after one

hour has lapsed from the time the complaint

is received by the Corporation (or, if the

complaint is so received within the last hour

of trading on the Corporation on any day,

then the price of the opening transaction in

such security being displayed through the

facilities of [on] the Corporation on the next

day on which the Corporation trades that

security).

(3) Any ETP Holder [or ETP Firm] who is

an aggrieved party may at any time, at his or

her discretion, take steps to establish and

mitigate any loss he or she might incur as a

result of the trade-through. He or she shall

give prompt notice to the other market

[exchange] center of any such action.

(4) If a complaint of a purported tradethrough is received by the Corporation and

the complained-of transaction resulted from

an ETP Holder’s [or ETP Firm’s] execution

[on] through the facilities of the Corporation

of a commitment to trade received from

another ITS participating market center, the

ETP Holder [or ETP Firm] should, if

circumstances permit, make reasonable

efforts to notify the complaining party as

promptly as practicable following receipt of

the complaint, (A) that the transaction was

not initiated [on] through the facilities of the

Corporation and (B) of the identity of the ITS

participating market center that originated

the commitment. Neither compliance nor

non-compliance with the preceding sentence

shall be the basis for any liability of the ETP

Holder [or ETP Firm] for any loss associated

with the complained-of transaction.

(5) If a transaction that resulted from the

[an] ETP Holder’s [or ETP Firm’s] execution

[on] through the facilities of the Corporation

of a commitment to trade constitutes a tradethrough under the rules of the originating ITS

participating market center, then:

(A) if the broker/dealer on such market

center who initiated the transaction requests

that the ETP Holder [or ETP Firm] correct the

price of such transaction in accordance with

the counterpart in such market center’s tradethrough rule to paragraph (b)(2)(A)(ii)(b) of

this Rule, the ETP Holder [or ETP Firm] may,

but need not, acquiesce and so correct the

price; and

(B) paragraph (b)(2)(C) of this Rule [rule]

shall apply as if the ETP Holder [or ETP

Firm] were a contra party within the meaning

of that paragraph.

(d) Locked Markets.

(1) Except as provided in paragraph (d)(2)

below, an ETP Holder [or ETP Firm] who

makes a bid for an Eligible Listed Security

[on] through the facilities of the Corporation

and, in so doing, causes a locked market with

another ITS participating market center, and

the Corporation receives a complaint through

the System [system] from the market center

whose offer was locked, the ETP Holder [or

ETP Firm] responsible for the locking shall,

as specified in the complaint, either

promptly (A) send, via the facilities of the

Corporation, a commitment to trade to such

other market center seeking the offer he or

she has equaled or exceeded, which

commitment shall be for either the number

of shares he or she has bid for or the number

of shares offered on the other market center,

whichever is less; or (B) ‘‘unlock’’ (i.e., adjust

his or her locking bid so as not to cause a

locked market). If the complaint specifies

‘‘unlock’’, he or she may nevertheless ship

instead. The same principle shall apply to an

ETP Holder [or ETP Firm] who makes an

offer for an Eligible Listed Security through

the facilities of [on] the Corporation and

causes a locked market with another ITS

participating market center.

(2) The provisions of paragraph (d)(1)

above shall not apply when:

(A)—No change.

(B) the ETP Holder [for ETP Firm] who

caused a locked market makes every

reasonable effort to comply with paragraph

(d)(1) above, but is unable to comply because

of a system/equipment failure or

malfunction;

(C)—No change.

(D) the locked market occurred at a time

when, with respect to the Eligible Listed

Security which was the subject of the locked

market, ETP Holders [or ETP Firms either] on

[through the facilities of] the Corporation or

members in the ITS participating market

center in which the aggrieved member is

located were relieved of their obligations

under paragraph (c)(2) of Rule 11Ac1–1

pursuant to the ‘‘unusual market’’ exception

of paragraph (b)(3) of Rule 11Ac1–1; or

(E)—No change.

(F) the locking bid or offer no longer

prevails [on the Floor] at the time the

complaint is received [on the Floor]. This

exemption is not intended to discourage a

locking member from electing to send a

commitment if the complaint requests him or

her to do so.

Commentary

.01 The provisions of this Rule shall not

apply to (1) purchases and sales effected by

members participating in the opening (or

reopening) transaction in an Eligible Listed

Security, or (2) any ‘‘block trade’’ as defined

in Rule 7.57 [7.68].

[.02—Deleted.]

.02 [.03] A Market Maker [Specialist]

utilizing an automatic quotation system for

quotation changes cannot quote a size greater

than one round lot bid and offer.

.03 [.04]—No change.

Block Trade Policy

Rule 7.57[7.68](a). Definitions.

(1) A ‘‘block trade,’’ as that term is used in

this Rule, means a trade executed [on]

through the facilities of the Corporation that:

(A)–(B)—No change.

(C) involves either:

(i) a cross of block size (where the ETP

Holder [member] represents all of one side of

the transaction and all or a portion of the

other side); or

(ii) any other transaction of block size (i.e.,

in which the ETP Holder [or ETP Firm]

represents an order of block size on one side

of the transaction only) that is not the result

of an execution at the current bid or offer on

the Corporation.

Contemporaneous transactions at the same

price filling an order or orders then or

theretofore represented through the facilities

of [on] the Corporation by an ETP Holder [or

ETP Firm] (including transactions resulting

from commitments to trade sent, via the

facilities of the Corporation, by the ETP

Holder [or ETP Firm] pursuant to paragraph

(b) below) shall be deemed to constitute a

single transaction for the purpose of this

definition.

(2) A ‘‘current bid or offer on the

Corporation,’’ as that term is used in

paragraph (a)(1)(c)(ii) above, means the price

of the current quotation on the facilities of

the Corporation established independently of

the order to buy or sell that is represented by

the ETP Holder [or ETP Firm].

(3) A ‘‘bid or offer displayed from another

ITS participating market center’’ (or any

derivative phrase), as that term is used in this

Rule, means the current quotation from

another ITS participating market center

displayed through the facilities [on the Floor]

of the Corporation as required by the ITS

Plan, and does not include ‘‘away-from-themarket’’ limit orders or other interests that

may be represented in such other ITS

participating market center.

(b) Obligation to Send Commitments.

Unless one or more of the conditions

described in paragraph (c) below exist, the

ETP Holder [or ETP Firm] representing the

block-size order(s) shall at the time of

execution of a block trade send, or cause to

be sent, via the facilities of the Corporation,

through ITS to each other ITS participating

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78873

market center displaying a bid (offer)

superior to the execution price, a

commitment to trade at the execution price

and for the number of shares displayed with

that market center’s better-priced bid (offer).

(c) Inapplicability. Paragraph (b) above

shall not apply under the following

conditions:

(1)—No change.

(2) the ETP Holder [or ETP Firm]

representing the block-size order(s) made

every reasonable effort to satisfy through ITS

a better-priced bid or offer displayed by

another ITS participating market center but

was unable to because of a systems/

equipment failure or malfunction;

(3)—No change.

(4) the block was executed during a period

when, with respect to the Eligible Listed

Security that was the subject of the block

trade, ETP Holders [on of the Corporation]

were relieved of their obligations under

paragraph (c)(2) of Rule 11Ac1–1 pursuant to

the ‘‘unusual market’’ exception of paragraph

(b)(3) of Rule 11Ac1–1; provided, however,

that, unless one of the conditions of this

paragraph (c) (other than that of this

subparagraph (4)) applies, an ETP Holder [or

ETP Firms] shall nevertheless make every

reasonable effort during any such period to

satisfy through ITS, via the facilities of the

Corporation, any better-priced bid or offer

displayed through the facilities of [on] the

Corporation from another ITS participating

market center whose members are not so

relieved of their obligations with respect to

such bid or offer under paragraph (c)(2) of

Rule 11Ac1–1;

(5)—No change.

(6) the better-priced bid or offer had caused

a ‘‘locked marked,’’ as that term is defined in

Rule 7.56[7.67], in the Eligible Listed

Security that was the subject of the block

trade.

Commentary

.01 A transaction not subject to this Rule

may be subject to the trade-through

provisions of Rule 7.56[7.67]. An ETP Holder

or ETP Firm who makes a bid or offer

through the facilities of [on] the Corporation

otherwise than in connection with a block

trade may be subject to the locked market

provisions of Rule 7.56[7.67].

[Rule 7.69—Deleted.]

Rule 7.58[7.45]—No change.

Rule 7.59. Reserved.

Section 6[8]. Contracts in Securities

Definitions and General Provisions

Rule 7.60[7.50]—No change.

Rule 7.61[7.51](a). ETP [or Equity ASAP]

Contracts. All contracts in the ordinary

course of business of an ETP Holder[, Equity

ASAP Holder, or ETP Firm of the

Corporation] with any other ETP Holder[,

Equity ASAP Holder, or ETP Firm of the

Corporation] for the purchase, sale,

borrowing, loaning or hypothecating of

securities, or for the borrowing, loaning or

payment of money, whether occurring

through the facilities [upon the Floors] of the

Corporation or elsewhere, are ETP [or Equity

ASAP] contracts of the Corporation unless

made subject to the rules [Rules] of another

exchange.

(b) Provisions Included in ETP [or Equity

ASAP] Contracts. All bids made and

accepted, and all offers made and accepted

in accordance with the Bylaws, Rules, and

procedures of the Corporation shall be

binding. The applicable provisions of the

Bylaws, Rules, and procedures of the

Corporation and all other regulations adopted

pursuant thereto, shall be part of the terms

and conditions of all ETP contracts [or Equity

ASAP Contracts] and all contracts thereby

effected, and shall be subject to said

provisions and to the exercise by the Board

of Directors of the Corporation of the powers

in respect thereto vested in them.

(c) Extend or Postpone Time, Prescribe

Special Terms. Notwithstanding the

foregoing subparagraphs (a) and (b) of this

Rule or any other provisions of the Bylaws

or Rules of the Corporation to the contrary,

the Board of Directors may extend or

postpone the time or prescribe special terms

and conditions for the performance or

settlement of ETP contracts [or Equity ASAP

Contracts] whenever such action is called for

by the public interest or by just and equitable

principles of trade.

Delivery of Securities

Rule 7.62 [7.53](a). Depository Eligibility.

(1)—No change.

(2) A security depository’s inclusion of the

CUSIP number identifying a security in its

file of eligible issues does not render a

security ‘‘depository eligible’’ within the

meaning of Rule 7.60(a)(2) [7.50(a)(2)] until:

(A)–(B)—No change.

(3)—No change.

(b) Book Entry Settlement of Transactions.

(1) An ETP Holder[, Equity ASAP Holder,

ETP Firm] shall use the facilities of a

securities depository for the book-entry

settlement of all transactions in depository

eligible securities with another financial

intermediary or a member of a national

securities exchange or a registered securities

association.

(2) An ETP Holder[, Equity ASAP Holder,

ETP Firm] shall not effect a delivery-versuspayment or receipt-versus-payment

transaction in a depository eligible security

with a customer unless the transaction is

settled by book-entry using the facilities of a

securities depository.

(3) This Rule [rule] shall not apply to

transactions that are settled outside of the

United States.

(4) The requirements of this Rule [rule]

shall supersede any inconsistent

requirements under the Bylaws and Rules of

the Corporation.

(5) This Rule [rule] shall not apply to any

transaction where the securities to be

delivered in settlement of the transaction are

not on deposit at a securities depository and

(A)–(B)—No change.

Section 7. Special Offerings

Approval

Rule 7.63E[7.79](a). The Corporation may,

subject to the following conditions and

provisions, permit a ‘‘Special Offering’’ as

defined hereinafter, to be made through the

facilities of the Corporation, provided that

the Corporation shall have determined that

the regular market on the facilities [Floor] of

the Corporation cannot, within a reasonable

time and at a reasonable price or prices,

absorb the particular block of stock which is

to be the subject of such Special Offering. In

making such determination the following

factors may be taken into consideration:

(1) Price range and the volume of

transactions in such stock on the facilities

[Floor] of the Corporation during the

preceding month;

(2) Attempts which have been made to

dispose of the stock in the regular market on

the facilities [Floor] of the Corporation;

(3) The existing condition of the Arca Book

[specialist’s book] with respect to such stock;

(4) The apparent past and current interest

in such stock in such regular market on the

facilities of the Corporation [Floor]; and

(5)—No change.

Except in special circumstances a ‘‘Special

Offering’’ will not be permitted unless the

offering involves at least 1,000 shares of stock

or shares having an aggregate market value of

$25,000, whichever is greater.

Definition—Price—Special Commission

(b) A Special Offering is defined as an

offering (designated as a fixed price offering)

by one or more ETP Holders[, Equity ASAP

Holders, or ETP Firms] acting for his, her or

their own account or for the account of one

or more other persons, for the sale of a block

of stock dealt in on the Corporation, through

the facilities of the Corporation, at a price not

in excess of the last sale of such stock or the

current offer of such stock, in the regular

market on the facilities [Floor] of the

Corporation, whichever is the lower; but not

lower than the current bid for such stock in

such market, unless otherwise specifically

permitted by the Corporation, whereby the

offeror may agree to pay a special

commission to such ETP Holders[, Equity

ASAP Holders, or ETP Firms] as may accept

all or any part of such Offering for the

account of his, her or their customers.

(c) Conditions. No Special Offering, as

provided by this Rule [rule], shall be made

unless all of the following conditions are

satisfied:

(1) Stabilizing. The person for whose

account such Special offering is to be made

shall at the time of such offering be the

owner of the entire block of stock so to be

offered, except that, for the purpose of

stabilizing, there also may be sold for such

person’s account, or for the account of any

ETP Holder[, Equity ASAP Holder or ETP

Firm] offering the block of stock on his or her

behalf as part of the Special Offering, an

amount not to exceed 10% of the shares

owned and originally offered in the Special

Offering by such person.

(2) All to be Offered within Reasonable

Time. The person for whose account such

Special Offering is to be made shall include

within the Offering all of the security which

he or her then intends to offer within a

reasonable time; and there shall be furnished

to the Corporation before the Offering is

made a written statement by the offeror to

that effect, or a written statement by his or

her broker stating that the broker has been so

advised by the offeror.

(3)—No change.

(4) Agreement by Offeror. The person for

whose account such Special Offering is made

78874 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

shall agree that during the period such

offering is open he or her will not offer in

the regular market on the facilities [floor] of

the Corporation any shares of the stock

which is the subject of such Special Offering,

unless the prior permission of the

Corporation is first obtained.

(5) No Special Commission Member, Etc.

No ETP Holder[, Equity ASAP Holder, or ETP

Firm] shall directly or indirectly receive any

pat of the special commission referred to in

Section 1(b) in connection with any purchase

for his, her or its own account or the account

of any participant therein or for the account

of any other ETP Holder[, Equity ASAP

Holder, or ETP Firm] or any participant

therein, made pursuant to a Special Offering,

except that an ETP Holder[, Equity ASAP

Holder, or ETP Firm] may accept and retain

such special commission for his, her or its

own account in respect of securities

purchased as principal for the bona fide

purpose of distribution, even though such

firm has been unable to distribute the

securities.

(6)–(7)—No change.,

(8) Allotments. The offeror may, at the time

of the announcement of a Special Offering,

allot on a firm basis to ETP Holder[, Equity

ASAP Holder, or ETP Firms] engaged in the

distributing business not more than 50% of

the securities involved in the offering. When

buying orders in a Special Offering exceed

the amount of the offering, the remainder of

the offered securities will be allocated in

reasonably proportionate amounts.

(d)—No change.

(e) Information on Tape. The terms of a

Special Offering shall be printed on the tape

before it is effective, with statement, if such

be the fact, that stabilizing transaction have

been effected or are contemplated and that it

is intended to over allot shares as permitted

by Rule 7.63(c)(1) [7.79(c)(1)]. Transactions

effected pursuant to a Special Offering shall

when feasible be printed currently on the

tape, and the tape shall show the gross price

and the special commission in a legend such

as ‘‘SPOFF 100 XYZ 40 COM .50 or 1⁄2,’’ as

well as the number of orders involved in

such transaction where more than one order

is involved; and after the close of the market,

any unprinted remainder of such transactions

executed during the day shall be so printed.

When the offering is terminated, an

announcement to that effect shall be printed

on the tape; and when the intention to

stabilize is terminated, such fact shall be

announced on the tape together with a

statement that stabilizing transactions have

been effected, if such be the fact.

(f)–(g)—No change.

(h)(1) Confirmations. An ETP Holder[,

Equity ASAP Holder, or ETP Firm] effecting

for the account of a customer, a purchase

pursuant to a Special Offering, shall confirm

such transaction to such customer at the

offering price and shall not charge to or

collect from such customer any commission

on account of such transaction.

The confirmation by an ETP Holder[,

Equity ASAP Holder, or ETP Firm] to a buyer

or seller in a Special Offering shall state in

full the terms and conditions of the Special

Offering. The confirmation to a buyer shall

state at least:

(A)–(B)—No change.

(C) That the seller is to pay a special

commission to the ETP Holder[, Equity ASAP

Holder, or ETP Firm], if such be the fact;

(D)–(E)—No change.

(F) The nature of the ETP Holder[, Equity

ASAP Holder, or ETP Firm] interest in the

special offering, if any, other than its interest

as a recipient of the special commission.

(2) Soliciting Orders. An ETP Holder[,

Equity ASAP Holder, or ETP Firm] soliciting

purchase orders for execution pursuant to a

Special Offering shall advise the person so

solicited of the terms and conditions of such

Offering before effecting any transaction for

such person pursuant thereto. Such

disclosure shall include at least the items

described in paragraphs (A) to (F) of Rule

7.63(h)(1) [(a) to (f) of Rule 7.79(h)(1)].

(3) More Advantageous Price. An ETP

Holder[, Equity ASAP Holder, or ETP Firm]

(A)–(B)—No change.

(C) Proposing, pursuant to discretionary

authority from a customer, to effect a

purchase of stock which is the subject of a

Special Offering then in effect, shall, before

executing any such order or effecting any

such purchase pursuant to such Special

Offering make a bona fide attempt to execute

such order or to effect such purchase in the

regular market on the facilities [Floor] of the

Corporation at a price more advantageous to

the customer than the gross offering price

under the Special Offering.

(i) Size of Offering. Rule 7.63(a) [7.79(a)]

places a general limitation on the size of

Special Offerings, except in special

circumstances. Such an exception might be a

Special Offering of a stock designated as an

‘‘inactive’’ stock.

(j) Preliminary Information Required. The

broker for the offeror will be required to

furnish the following information to the

Corporation, prior to the announcement of

the Special Offering on the tape:

(1)–(7)—No change.

(8) Description of efforts to dispose of the

security through the facilities [in the auction

market on the Floor] of the Corporation.

(9) Written assurance of the offeror, or the

broker upon advice from the offeror, that the

shares contained in the Offering are all of the

security which he or she then intends to offer

within a reasonable time, as required in Rule

7.63(c)(2) [7.79(c)(2)]

(10)–(11)—No change.

(12) Statement as to whether the offeror or

his or her agent intends, for the purpose of

stabilizing, to sell stock in the Special

Offering in excess of that owned and

included in the original offer as permitted to

Rule 7.63(c)(1) [7.79(c)(1)].

(13)—No change.

The foregoing information should be given

to the Corporation as soon as possible in

advance of the time it is proposed to make

the Special Offering. Announcement will not

be made on the tape of the Special Offering

(and the Special Offering thus cannot become

effective) until the Corporation has the

requisite information and has approved it.

(k) Ownership. The offeror in a Special

Offering must be the owner of the entire

block of stock offered for sale, except for the

purpose of stabilizing as permitted by Rule

7.63(c)(1) [7.79(c)(1)].

(l)—No change.

(m) Other Offers. It should be noted that

under Rule 7.63(c)(4) [7.79(c)(4)], an offeror

may not, while his or her Special Offering is

open, offer any shares of the same stock in

the regular trading through the facilities

[auction market] without prior permission of

the Corporation.

(n) Orders After Close. Orders accumulated

after the close shall be completed on the

facilities [Floor] of the Corporation at the

opening of the next market session.

(o) Special Offering Transactions.

[Purchases in Special Offerings shall be

completed on the Floor of the Corporation at

the Post or Posts where the stock is traded.]

The handling of the order on either the

purchase or the offering side may be

entrusted to a Market Maker [Floor broker or

specialist] in the same manner as in the case

of regular orders. In connection with a

special Offering, the broker for the buyer is

acting in an agency capacity and the agency

obligation to buy at the most advantageous

price to the customer shall be observed.

(p)—No change.

(q) Odd Lot Stop Orders. Transactions

effected pursuant to Special Offerings shall

not elect Stop Orders or open odd lot orders

for execution in the regular [auction] market.

(r) Confirmations. Confirmation need not

be on a specially prepared form but must

show clearly in type no smaller than 8-point

that the purchase was part of a Special

Offering; that no commission is to be charged

to the customer; that the seller is to pay a

special commission to the ETP Holder[,

Equity ASAP Holder, or ETP Firm], if such

be the fact; the amount of such special

commission; the information printed on the

tape regarding stabilizing transactions or the

intention to stabilize; and the nature of ETP

Holder’s[, Equity ASAP Holder’s, or ETP

Firm’s] interest in the Special Offering, if

any, other than its interest as a recipient of

the special commission.

Confirmations used by the broker for the

seller similarly need not be on a specially

prepared form, but must show clearly in type

no smaller than 8-point that the sale is part

of a Special Offering of * * * shares of * * *

stock at * * * per share less * * * special

commission, and, separately, the selling

commission charged by the broker for the

seller.

(s)—No change.

Section 8 [12]. Exchange Distributions

Rule 7.64 [7.80](a). Definition. An

important feature of an Exchange

Distribution is that an ETP Holder[, Equity

ASAP Holder, or ETP Firm] may now pay

compensation to its registered representatives

for soliciting others to purchase through the

facilities [in the regular auction market on

the Floor] of the Corporation a security

admitted to dealing which is the subject of

an approved Exchange Distribution. Or it

may on its own behalf or on behalf of a

customer make an arrangement to pay a

special commission, as mutually agreed, for

distributing the security to one or more ETP

Holders [members firms], who may in turn

give special compensation to their registered

representatives for purchases they have

solicited in connection with the distribution.

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78875

Under an Exchange Distribution, purchase

orders may be grouped from time to time, as

they are received, and sent to the facilities of

the Corporation [Floor] together with an

order to sell an equal amount and ‘‘crossed’’

under the rules of the Corporation.

(b) Similar to Special Offering. An

Exchange Distribution is somewhat similar to

a Special Offering in the following respects:

(1)—No change.

(2) Approval will be given only when it is

determined that the regular market on the

facilities [Floor] could not, within a

reasonable time and at a reasonable price or

prices, otherwise absorb the block of

securities;

(3)—No change.

(4) All transactions will take place on the

facilities of the Corporation [(but unlike a

Special Offering, will be done in the regular

auction market)];

(5) Only ETP Holders[, Equity ASAP

Holders, or ETP Firms] are eligible for

participation in the solicitation of purchase

orders and in the special commission, if any,

paid by the offeror on purchases resulting

from such solicitation;

(6) The person for whose account the

distribution is to be made shall, at the time

of the distribution, be the owner of the entire

block of the security to be so distributed, and

shall include within the distribution all of

the security which he or she then intends to

offer within a reasonable time;

(7) Each ETP Holder[, Equity ASAP Holder,

or ETP Firm] soliciting purchase orders in

connection with an Exchange Distribution

must advise the person being solicited, before

effecting any transaction for such person

pursuant thereto, that the securities being

offered are part of a specified number of

shares being offered in an Exchange

Distribution and that he or she is receiving

a special commission from the seller or his

or her broker, if that is the case.

(c) Differences from Special Offering. An

Exchange Distribution differs from a Special

Offering in that:

(1) It is effected in the regular [auction]

market and not at a fixed price;

(2)–(3)—No change.

(4) During the period when the distribution

is being made, neither the person for whose

account the distribution is being made nor

the ETP Holders, [Equity ASAP Holders, or

ETP Firms] who are parties to the

distribution, shall bid for or purchase any of

the securities for an account in which the

ETP Holder, [, Equity ASAP Holder, or the

ETP Firm] has a direct or indirect interest;

(5) No ETP Holder[, Equity ASAP Holder,

or ETP Firm] who is connected in any way

with an Exchange Distribution may, with

respect to such distribution, (A) effect

stabilizing transactions, (B) effect short sales,

(C) make firm allotments, (D) accept oversubscriptions.

(d) Procedure. To effect an ‘‘Exchange

Distribution’’ of a block of a security

admitted to dealing on the Corporation, an

ETP Holder[, Equity ASAP Holder, or ETP

Firm] for his, her or its own account, or the

account of a customer, may

(1) Make an arrangement with one or more

other ETP Holders[, Equity ASAP Holders, or

ETP Firms] under which

(A) The ETP Holders[, Equity ASAP

Holders, or ETP Firms], with whom the

arrangement is made, solicit others to

purchase such security;

(B) The selling ETP Holder[, Equity ASAP

Holder, or ETP Firm] may pay to the ETP

Holders[, Equity ASAP Holders, or ETP

Firms], whom the arrangement is made, a

special commission which is mutually

agreeable; and

(C) ETP Holders[, Equity ASAP Holders, or

ETP Firms], with whom the arrangement is

made, may pay a special commission to their

registered representatives; and/or

(2) Pay a special commission to his, her or

its registered representatives for soliciting

others to purchase such security.

(E) Approval Required. An ‘‘Exchange

Distribution’’ may be made only with the

prior approval of the Corporation. Such a

Distribution shall not be approved unless the

Corporation shall have determined that the

regular market on the facilities [Floor] of the

Corporation cannot, within a reasonable time

and at a reasonable price or prices, otherwise

absorb the block of securities which is to be

the subject of the ‘‘Exchange Distribution.’’ In

making such determination, the following

factors may be taken into consideration:

(1) Price range and the volume of

transactions in such security on the facilities

[Floor] of the Corporation during the

preceding month;

(2) Attempts which have been made to

dispose of the security on the facilities

[Floor] of the Corporation;

(3) The existing conditions of the Arca

Book [specialist’s book and Floor quotations]

with respect to such security;

(4) The apparent past and current interest

in such security on the facilities [Floor]; and

(5)—No change.

(f) Conditions. No ‘‘Exchange Distribution’’

shall be made unless all of the following

conditions are satisfied:

(1)—No change.

(2) The person for whose account the

Distribution is to be made shall include

within the Distribution all of the security

which he or she then intends to offer within

a reasonable time; and there shall be

furnished to the Corporation, before the

Distribution is made, a written statement by

the offeror to the effect or a written statement

by his or her broker stating that the broker

has been so advised by the offeror;

(3) The person for whose account the

Distribution is made shall agree that during

the period the Distribution is being made he

or she will not bid for or purchase any of the

security for any account in which he or she

has a direct or indirect interest;

(4) The ETP Holders[, Equity ASAP

Holders, or ETP Firms] who are parties to the

arrangement for the Distribution shall not,

during the period the Distribution is being

made, bid for or purchase any of the security

for an account in which they have a direct

or indirect interest;

(5) No ETP Holder[, Equity ASAP Holder,

or ETP Firm] shall be granted approval to

effect an ‘‘Exchange Distribution’’ of a block

of a security for an account in which he or

she has a direct or indirect interest if he or

she is registered as a Market Maker

[specialist] in such security, unless the

Corporation has determined that such Market

Maker [specialist] has been unable, within a

reasonable period of time, to dispose of the

block of the security in the ordinary course

of his or her dealings as a Market Maker

[specialist]. Such approval shall stipulate

that the Market Maker [specialist] may not

deal directly with the public but must make

an arrangement with one or more other ETP

Holders[, Equity ASAP Holders, or ETP

Firms] to solicit others to purchase the

security, and pay, if any, a special

commission to such other ETP Holders[,

Equity ASAP Holders, or ETP Firm] as

provided under Section 1(a) of this Rule

[rule];

(6) Each ETP Holder[, Equity ASAP Holder,

or ETP Firm] soliciting purchase orders for

execution in the Distribution shall advise the

person so solicited, before effecting any

transaction for such person pursuant thereto,

that the securities being offered are part of a

specified number of shares or bonds being

offered in an ‘‘Exchange Distribution,’’ and

that he or she or it

(A) is acting for the seller and will receive

a special commission from the seller or his

or her broker if that is the case, or is acting

as a principal; and

(B) is charging the buying customer a

commission, if any, or is making the sale at

a net amount, whichever the case may be.

(7) No ‘‘short’’ sale may be made in

connection with the Distribution except that

securities may be borrowed to make delivery

where the person owns the securities sold

and intends to deliver such securities as soon

as possible without undue inconvenience or

expense.

The conditions set forth in (2)(3) and (4)

above shall not apply

(A) To transactions effected on the

Corporation, for the purpose of maintaining

a fair and orderly market, by an ETP Holder

[a member] in a security in which he or she

is registered as a Market Maker [specialist]

and which is the subject of an Exchange

Distribution for an account in which he or

she has an interest, except that, when such

Distribution is in effect, he or she shall not

bid for or purchase such stock [on] through

the facilities of the Corporation for an

account in which he or she has an interest:

(i) at a price above the preceding sale, or

(ii) at a price above the next preceding sale,

or

(B) To transactions effected by an ETP

Holder[, Equity ASAP Holder or ETP Firm]

on the Corporation in less than the unit of

trading for the purpose of purchasing odd

lots offered to him or her in a security in

which he or she is registered as a Market

Maker [specialist] and which is the subject of

an Exchange Distribution in which he or she

has an interest.

The conditions set forth in (3) and (4)

above shall not apply to purchases

necessitated solely in connection with

‘‘crossing’’ orders pursuant to the

Distribution.

(g) Execution. In effecting an ‘‘Exchange

Distribution’’ the orders for the purchase of

the securities being distributed must be sent

to the facilities of the Corporation [Floor]

together with an order to sell an equal

amount to be ‘‘crossed’’ in accordance with

78876 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

the Rules [rules] applicable to the crossing of

orders on the facilities [Floor], and such

transactions shall be printed on the ticker

tape.

(h) Reports. The ETP Holder[, Equity ASAP

Holder, or ETP Firm] selling securities in an

‘‘Exchange Distribution’’ shall report to the

Corporation all transactions in such

securities effected by him, her or it for any

account in which the seller had a director

indirect interest, commencing with the time

arrangements for the Distribution were made

and ending with the time the Distribution

was completed.

Rule 8

Trading of Certain Equity Derivatives

Section 1. Currency and Index Warrants

Rule 8.1–8.3—No change.

Account Approval

Rule 8.4. No ETP Holder[, Equity ASAP

Holder, or ETP Firm] shall accept and order

from a customer to purchase or sell a stock

index, currency index or currency warrant

unless the customer’s account has been

approved for options trading pursuant to

Rule 9.18(b).

Rule 8.5—No change.

Discretionary Accounts

Rule 8.6. Rule 9.6(a) shall not apply to

customer accounts insofar as an ETP Holder[,

Equity ASAP Holder, or ETP Firm] exercises

discretion to trade in stock index, currency

index and currency warrants, and any such

account shall instead be subject to the

provisions of Rule 9.18(e) with respect to

such trading. For purposes of this Rule, the

term ‘‘option’’ as used in Rule 9.18(e) shall

be deemed to include such warrants.

Supervision of Accounts

Rule 8.7. Rule 9.18(d) shall not apply to all

customer accounts of an ETP Holder[, Equity

ASAP Holder, or ETP Firm] in which

transactions in stock index, currency index

or currency warrants are effected. The term

‘‘option’’ as used in Rule 9.18(d) shall be

deemed to include such warrants.

Customer Complaints

Rule 8.8 Rule 9.18(1) shall apply to all

customer complaints received by an ETP

Holder[, Equity ASAP Holder or ETP Firm]

regarding stock index, currency index or

currency warrants. The term ‘‘options’’ as

used in Rule 9.18(1) shall be deemed to

include such warrants.

Prior Approval of Certain Communications to

Customers

Rule 8.9(a) No ETP Holder[, Equity ASAP

Holder, or ETP Firm] or person associated

with an ETP Holder[, Equity ASAP Holder,

or ETP Firm] shall utilize any advertisement,

educational material, sales literature or other

communication to any customer or member

of the public concerning stock index,

currency index or currency warrants that:

(1)–(3)—No change.

(b) All advertisements, sales literature and

educational material issued by an ETP

Holder[, Equity ASAP Holder or ETP Firm]

to any customer or member of the public

pertaining to stock index, currency index or

currency warrants shall comply with the

requirements set forth in the Commentaries

to Rule 9.28. For purposes or this Rule, the

term ‘‘option’’ as used in such Commentaries

shall be deemed to include such warrants,

and the term ‘‘The Options Clearing

Corporation’’ as used in such Commentaries

shall be deemed to mean the issuer(s) of such

warrants.

(c) All advertisements, sales literature

(except completed worksheets) and

educational materials issued by an ETP

Holder[, Equity ASAP Holder or ETP Firm]

to any customer or member of the public

pertaining to stock index, currency index or

currency warrants shall be approved in

advance by a Compliance Registered Options

Principal or designee thereof. Copies of such

advertisements, literature or materials,

together with the names of the persons who

prepared them, the names of the persons who

approved them and, in the case of sales

literature, the source of any

recommendations contained therein, shall be

retained by the ETP Holder[, Equity ASAP

Holder or ETP Firm] and be kept in an easily

accessible place for examination by the

Corporation for a period of three years.

(d) In addition to the approval required by

subsection (c) of this Rule, every

advertisement and all educational material of

an ETP Holder[, Equity ASAP Holder or ETP

Firm] pertaining to stock index, currency

index and currency warrants shall be

submitted to the Corporation at least ten days

prior to use (or such shorter time as the

Corporation may allow in particular

instances) for approval and, if changed or

expressly disapproved by the Corporation,

shall be withheld from circulation until any

changes specified by the Corporation have

been made or, in the event of disapproval,

until such material has been resubmitted for,

and has received, Corporation approval. The

requirements of this paragraph shall not be

applicable to:

(1)—No change.

(2) advertisements in which the only

reference to stock index, currency index or

currency warrants is contained in a listing of

services of an ETP Holder[, Equity ASAP

Holder or ETP Firm].

(e)—No change.

Position Limits

Rule 8.10(a). Except with prior written

approval of the Corporation in each instance,

no ETP Holder[, Equity ASAP Holder, or ETP

Firm] shall effect for any account in which

such ETP Holder[, Equity ASAP Holder, or

ETP Firm] has an interest or for the account

of any partner, officer, director or employee

thereof or for the account of any customer,

a purchase or sale transaction (whether on

the Corporation or on or through the facilities

of, or otherwise subject to the rules of,

another national securities exchange or

national securities association) in a stock

index warrant if the ETP Holder[, Equity

ASAP Holder, or ETP Firm] has reason to

believe that as a result of such transaction the

ETP Holder[, Equity ASAP Holder, or ETP

Firm] or partner, officer, director or employee

thereof or customer would, acting alone or in

concert with others, directly or indirectly,

control an aggregate position in an index

warrant issue, or in all warrants issued on the

same stock index group, on the same side of

the market, in excess of the following

position limits:

(1)–(2)—No change.

(b) Whenever the Corporation determines

that a person or group of persons acting in

concert holds or controls an aggregate

position (whether long or short) in stock

index warrants in excess of the applicable

position limits established pursuant to

paragraph (a) of this Rule 8.10, it may direct

all ETP Holders[, Equity ASAP Holders, or

ETP Firms] carrying a position in stock index

warrants for such person or persons to

liquidate such position, as expeditiously as

possible consistent with the maintenance of

an orderly market, to the extent necessary to

assure that such person or persons are in

compliance with applicable position limits.

Whenever such a directive is issued by the

Corporation, no ETP Holder[, Equity ASAP

Holder, or ETP Firm] receiving notice thereof

shall accept any order to purchase or sell any

stock index warrants based on the same stock

index for the account of the person or

persons named in such directive, unless in

each instance the Corporation provides its

express approval therefor, or until such

directive is rescinded.

Commentary

.01—No change.

.02 The Corporation may establish higher

position limits for [specialists’] Market Maker

transactions than those applicable with

respect to other accounts. Whenever a

[specialist] Market Maker reasonably

anticipates that he or she may exceed such

position limits in the performance of his

[specialist] or her Market Maker functions, he

or she must consult with and obtain the prior

approval of [a Trading Official] the regulatory

staff.

Exercise Limits

Rule 8.11. Except with the prior approval

of the Corporation in each instance, no ETP

Holder[, Equity ASAP Holder, or ETP Firm]

shall exercise, for any account in which such

ETP Holder[, Equity ASAP Holder, or ETP

Firm] has an interest, or for the account of

any partner, officer, director or employee

thereof, or, for the account of any customer,

a long position in any stock index warrant

dealt in on the Corporation if as a result

thereof such ETP Holder[, Equity ASAP

Holder, or ETP Firm] or partner, officer,

director or employee thereof or customer,

acting alone or in concert with others,

directly or indirectly, has or will have

exercised within any five (5) consecutive

business days aggregate long positions in the

number of stock index warrants set forth in

Rule 8.10. The Corporation may from time to

time institute other limitations concerning

the exercise of stock index warrants. All such

exercise limitations are separate and distinct

from any other exercise limitations imposed

by the issuers of index warrants.

Trading Halts or Suspensions

Rule 8.12—No change.

Reporting of Warrant Positions

Rule 8.13(a). Each ETP Holder[, Equity

ASAP Holder, and ETP Firm] shall file with

the Corporation a report with respect to each

account in which the ETP Holder[, Equity

ASAP Holder, or ETP Firm] has an interest,

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78877

each account of a partner, officer, director, or

employee of such ETP [Firms or Equity

ASAP] Holder and each customer account,

that has established an aggregate position

(whether long or short) of 100,000 warrants

covering the same underlying index,

currency or currency index, combining for

purposes of this [rule] Rule: (1) long

positions in put warrants and short positions

in call warrants, and (2) short positions in

put warrants with long positions in call

warrants. The report shall be in such form as

may be prescribed by the Corporation and

shall be filed no later than the close of

business on the next day following the day

on which the transaction or transactions

requiring the filing of such report occurred.

Whenever a report shall be required to be

filed with respect to an account pursuant to

this Rule, the ETP Holder[, Equity ASAP

Holder, or ETP Firm] filing the same file with

the Corporation such additional periodic

reports with respect to such account as the

Corporation may from time to time prescribe.

In computing reportable positions, warrants

on a stock index shall not be aggregated with:

(1) warrants on any other stock index, (2)

options on any stock index or (3) options or

warrants on any stock or group of stocks

included in such index.

(b) In addition to the reports required by

subsection (a) of this rule, each ETP Holder[,

Equity ASAP Holder, or ETP Firm] shall

report promptly to the Corporation any

instance in which such ETP Holder[, Equity

ASAP Holder, or ETP Firm] has reason to

believe that a person, acting alone or in

concert with others, has exceeded or is

attempting to exceed the position limits

prescribed in Rule 8.10 or the exercise limits

prescribed in Rule 8.11.

(c)—No change.

Section 2. Portfolio Depository Receipts

Portfolio Depositary Receipts

Rule 8.100(a)–(b)—No change.

(c) ETP Holders[, Equity ASAP Holders, or

ETP Firms] shall provide to all purchasers of

a series of Portfolio Depositary Receipts a

written description of the terms and

characteristics of such securities, in a form

approved by the Corporation, not later than

the time a confirmation of the first

transaction in such series is delivered to such

purchaser. In addition, ETP Holders[, Equity

ASAP Holders, and ETP Firms] shall include

such a written description with any sales

material relating to a series of Portfolio

Depositary Receipts that is provided to

customers or the public. Any other written

materials provided by [a] an ETP Holders[,

Equity ASAP Holder, or ETP Firms] to

customers or the public making specific

reference to a series of Portfolio Depositary

Receipts as an investment vehicle must

include a statement in substantially the

following form: ‘‘A circular describing the

terms and characteristics of [the series of

Portfolio Depositary Receipts] is available

from your broker. It is recommended that you

obtain and review such circular before

purchasing [the series of Portfolio Depositary

Receipts]. In addition, upon request you may

obtain from your broker a prospectus for [the

series of Portfolio Depositary Receipts].’’

An ETP Holder[, Equity ASAP Holder, or

ETP Firm] carrying an omnibus account for

a non-ETP Holder [or non-Equity ASAP

Holder] broker-dealer is required to inform

such non-ETP Holder [or non-Equity ASAP

Holder] that execution of an order to

purchase a series of Portfolio Depositary

Receipts for such omnibus account will be

deemed to constitute agreement by the nonETP Holder [or non-equity ASAP Holders] to

make such written description available to its

customers on the same terms as are directly

applicable ETP Holders[, Equity ASAP

Holders and ETP Firms] under this [rule]

Rule.

Upon request of a customer, and ETP

Holders[, Equity ASAP Holder, or ETP Firm]

shall also provide a prospectus for the

particular series of Portfolio Depositary

Receipts.

(d)–(e)—No change.

Rule 8.100(f)–(g)—No change.

Rule 9

Conducting Business with the Public

Section 1. Conducting Business with the

Public

Register with the Corporation

Rule 9.1(a). Each office of an [Equity

ASAP] ETP Holder [or ETP Firm] shall be

registered with the Corporation.

Joint Quarters

Rule 9.1(b). ETP Holders[, Equity ASAP

Holders, and ETP Firms] may not occupy

joint quarters with anyone other than another

ETP Holder[, Equity ASAP Holder, or ETP

Firm] without the prior and continuing

approval of the Corporation.

Office Supervision

Rule 9.1(c) (1) Each office of an [Equity

ASAP] ETP Holder [or ETP Firm] shall be

under the supervision and control of such

[Equity ASAP] ETP Holder [or ETP Firm] to

assure compliance with applicable securities

laws and regulations and rules of the

Corporation.

(2) The ETP Holders[, Equity ASAP

Holders, ETP Firms] and Allied Persons

thereof shall designate from among their

group a person or persons to assume

authority and responsibility for supervision

of the firm’s activities and establishment and

maintenance of appropriate procedures and

follow-up and review to determine that such

control and supervision is maintained.

Rule 9.1(d). ETP Holders[, Equity ASAP

Holders, and ETP Firms] shall at all times

have responsibility for the proper

supervision and control of their registered

employees and as provided in Rule 9.1(c)

shall designate a principal of the firm to be

responsible for the execution of such

supervisory procedures.

Guarantees

Rule 9.1(e) (1) No registered employee

shall guarantee the payment of the debit

balance in a customer’s account to his or her

employer or to any other creditor carrying

such account without the prior consent of the

Corporation.

(2) No registered employee shall represent

to any customer that he or she will

personally guarantee the account of such

customer.

(3) No registered employee shall guarantee

any customer against losses in his or her

account, or in any way represent to any

customer that he or she or his or her

employer will guarantee the customer against

such losses.

Rule 9.1(f).—No change.

Compensation Rebate

Rule 9.1(g). No registered employee shall

directly or indirectly, rebate to any person,

firm or corporation any part of the

compensation he or she may receive as a

registered employee; nor shall he or she pay

such compensation or any part thereof,

directly or indirectly, to any person, firm, or

corporation, as a bonus, commission, fee or

other consideration, for business sought or

produced for him or her or any ETP Holder[,

Equity ASAP Holder, or ETP Firm].

Registered Employee Compensation

Rule 9.1(h). No registered employee shall,

directly or indirectly, take, accept or receive,

from any person, firm, corporation or

association, other than the ETP Holder[,

Equity ASAP Holder, or ETP Firm] with

whom he or she is registered, compensation

of any nature, as a bonus, commission fee,

gratuity or other consideration, in connection

with any securities transactions, unless the

provisions of Rule 4.3(b) have been

previously complied with.

Diligence As To Accounts

Rule 9.2(a). Every ETP Holder, [Equity

ASAP Holder or ETP Firm,] through a general

partner, a principal executive officer or a

designated authorized person, shall use due

diligence to learn the essential facts relative

to every customer, every order, every account

accepted or carried by such ETP Holder[,

Equity ASAP Holder or ETP Firm] and every

person holding power of attorney over any

account accepted or carried by such ETP

Holder[, Equity ASAP Holder or ETP Firm].

Account Supervision

Rule 9.2(b). Every ETP Holder[, Equity

ASAP Holder or ETP Firm] shall supervise

diligently all accounts accepted or carried by

such firm and shall exercise diligence in

supervising the business practices of its

registered persons and otherwise licensed

persons. An ETP Holder[, Equity ASAP

Holder or ETP Firm] shall adopt appropriate

procedures for the opening and the

maintaining of accounts, including the

maintaining of records prescribed by the

Bylaws and Rules of the Corporation and by

the rules and regulations of the Securities

and Exchange Commission, which shall

include:

(1)–(5)—No change.

Customer Records

Rule 9.2(c). The ETP Holder[, Equity ASAP

Holder or ETP Firm] shall keep and preserve

records concerning all accounts of customers

in such form and substance as to disclose at

least the following information:

(1)–(4)—No change.

(5) Signature of a general partner, a

principal executive officer or an authorized

person who approved the opening of the

account prior to or promptly after the

completion of any transaction for the account

of or with a customer; provided, however,

that in the case of branch offices, the opening

of an account for a customer may be

78878 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

approved by the manager of such branch

office but the action of such branch office

manager shall within a reasonable time be

approved by a general partner, a principal

executive officer or an authorized person

designated as having such authority by the

general partner or by the principal executive

officer who has the overall authority and

responsibility for account supervision and

control. The general partner, principal

executive officer or authorized person

approving the opening of the account shall,

prior to giving his or her approval, be

personally informed as to the essential facts

relative to the customer and to the nature of

and the investment objectives of the

proposed account and shall indicate his or

her approval in writing.

Commentary

.01 In the case of a margin account

carried by an ETP Holder[, Equity ASAP

Holder or ETP Firm] for a non-ETP [or nonEquity ASAP] corporation, definite

knowledge should be had to the effect that

the non-ETP [or non-Equity ASAP]

corporation has the right under its charter

and by-laws to engage in margin transactions

for its own account and that the persons from

whom orders and instructions are accepted

have been duly authorized by the corporation

to act on its behalf. It is advisable in each

such case for the carrying firm to have in its

possession a copy of the corporate charter,

by-laws and authorizations. Where it is not

possible to obtain such documents, an Allied

Person in the ETP [Firm or Equity ASAP]

Holder carrying the account should prepare

and sign a memorandum for its files

indicating the basis upon which he or she

believes that the corporation may properly

engage in margin transactions and that the

persons acting for the corporation have been

duly authorized to do so.

In the case of a cash account carried for a

non-ETP [or non-Equity ASAP] corporation,

the ETP [Firm or Equity ASAP] Holder

should assure itself through a general partner

or an officer who is a holder of voting stock

that persons entering orders and issuing

instructions with respect to the account do so

upon the proper authority.

.02 When an agency account is carried by

an ETP [Firm or Equity ASAP] Holder its

files should contain the name of the principal

for whom the agent is acting and written

evidence of the agent’s authority.

.03 When Estate and Trustee accounts are

involved an ETP [Firm or Equity ASAP]

Holder should obtain counsel’s advice as to

the documents which should be obtained.

Employee Accounts

Rule 9.3(a). No ETP Holder[, Equity ASAP

Holder, or ETP Firm] shall, without the prior

consent of the employer, make:

(1) A cash or margin transaction or carry

a margin account in securities or in

commodities in which an employee of the

Corporation, or of any ETP Holder, [Equity

ASAP Holder, or ETP Firm,] is directly or

indirectly interested. Duplicate reports and

statements shall be sent promptly to the

employer.

(2) A margin transaction or carry a margin

account in securities or in commodities in

which an employee of a bank, trust company,

savings institution, insurance company or

any individual or firm engaged in the

business of dealing in securities, is directly

or indirectly interested.

This [rule] Rule applies to all employees of

insurance companies regardless of whether

they are compensated on a salary or

commission basis. However, it is not

considered applicable to independent

insurance agents.

A person who is clearly designated by the

charter or by-laws of a bank, trust company,

insurance company, etc., as an officer of such

institution is not considered an ‘‘employee’’

for the purpose of this Rule.

ETP Holder and Allied Person Accounts

Rule 9.3(b). No ETP Holder[, Equity ASAP

Holder or ETP Firm] shall carry an account

for [an] another ETP Holder[, Equity ASAP

Holder,] or Allied Person of another ETP

Holder[, Equity ASAP Holder or ETP Firm]

without the prior written consent of another

person who is an ETP Holder[, Equity ASAP

Holder,] or Allied Person of such other firm.

Duplicate reports and statements shall be

sent to such general partner or an officer who

is a holder of voting stock designated in such

consent unless their submission is waived in

writing and a permanent record of such

waiver is retained by both the carrying firm

and the consenting firm.

Proxies Voting

Rule 9.4. No ETP Holder[, Equity ASAP

Holder, or ETP Firm] shall sign or give a

proxy to vote any stock registered in the

name or under control of such ETP Holder[,

Equity ASAP Holder, or ETP Firm] unless (a)

the ETP Holder[, Equity ASAP Holder, or

firm] is the actual owner thereof, (b) pursuant

to the written instructions of such actual

owner, or (c) pursuant to the rules of another

national securities exchange to which he or

she or his or her firm is responsible.

Solicitation Expense

Rule 9.5. Any expense incident to the

securing of proxy instructions shall be

charged by the ETP Holder[, Equity ASAP

Holder, or ETP Firm] to the party or parties

requesting their solicitation.

Discretion as to Customers’ Accounts

Rule 9.6(a). No ETP Holder[, Equity ASAP

Holder, or ETP Firm] shall permit any person

employed by such ETP Holder[, Equity ASAP

Holder, or ETP Firm] or by any other ETP

Holder[, Equity ASAP Holder, or ETP Firm]

to exercise discretion in the handling of a

transaction for a customer of such ETP

Holder[, Equity ASAP Holder, or ETP Firm],

and no ETP Holder[, Equity ASAP Holder, or

ETP Firm] or any participant therein shall

delegate to any such employee any

discretionary power vested by a customer in

such ETP Holder[, Equity ASAP Holder, or

ETP Firm] unless in either case the prior

written authorization of the customer has

been received; and if such discretionary

authority runs, directly or by redelegation, to

an employee of another ETP Holder[, Equity

ASAP Holder, or ETP Firm,] the carrying ETP

Holder[, Equity ASAP Holder, or ETP Firm]

must obtain the prior written consent of the

employer of the individual authorized to

exercise discretion. An ETP Holder[, Equity

ASAP Holder, or ETP Firm] or Allied Person

of the carrying ETP [Firm or Equity ASAP]

Holder shall approve and initial each

discretionary order entered by an employee

of such ETP [Firm or Equity ASAP] Holder

of another ETP [Firm or Equity ASAP] Holder

on the day the order is entered. The

provisions of this Rule shall not apply to

discretion as to the price at which or the time

when an order given by a customer for the

purchase or sale of a definite amount of a

specified security shall be executed.

Records of Discretionary Accounts

Rule 9.6(b). The ETP Holder[, Equity ASAP

Holder, or ETP Firm] shall keep and preserve

records of all customer discretionary

accounts pursuant to the provisions of this

[rule] Rule which shall include the signature

of the individual who may exercise

discretion in handling the account. All such

accounts shall be reviewed by a general

partner or principal executive officer at

frequent intervals.

Marking Discretionary Orders

Rule 9.6(c). Every ETP Holder[, Equity

ASAP Holder, or ETP Firm] shall identify

each discretionary order by appropriately

marking each discretionary order

accordingly.

Pledging Customer Securities

Rule 9.7(a). An agreement between an ETP

Holder[, Equity ASAP Holder, or ETP Firm]

and a customer authorizing the ETP Holder[,

Equity ASAP Holder, or ETP Firm] to pledge

securities carried for the account of a

customer or to lend such securities does not

justify pledging or loaning more of such

securities than is fair and reasonable in view

of the indebtedness of said customer to said

ETP Holder[, Equity ASAP Holder, or ETP

Firm].

Use of Customer Securities

Rule 9.7(b). The improper use of customer

fully-paid and excess margin securities is

inconsistent with just and equitable

principles of trade, and no form of general

agreement between an ETP Holder[, Equity

ASAP Holder, or ETP Firm] and a customer

shall warrant the use or lending of such

securities by the ETP Holder[, Equity ASAP

Holder, or ETP Firm].

Customer Protection—Reserves and Custody

of Securities

Rule 9.7(c). An ETP Holder[, Equity ASAP

Holder, or ETP Firm] shall obtain custody

and control of securities and maintain

reserves as prescribed by Rule 15c3–3

promulgated under the Securities Exchange

Act of 1934.

Agreements for Use of Customer Securities

Rule 9.7(d). No ETP Holder[, Equity ASAP

Holder, or ETP Firm] shall lend, either to

itself as a broker-dealer or to others,

securities which are held on margin for a

customer and which are eligible to be

pledged or loaned, unless such ETP Holder[,

Equity ASAP Holder, or ETP Firm] shall first

have obtained a separate written

authorization from such customer permitting

the loaning of such securities by the ETP

Holder[, Equity ASAP Holder, or ETP Firm].

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Business Connections

Rule 9.8. No ETP Holder[, Equity ASAP

Holder, or ETP Firm] shall be directly or

indirectly interested in or associated in

business with, or have his or her office

directly or indirectly connected by public or

private wire or other method or contrivance

with, or transact any business directly or

indirectly with or for

(a)–(c)—No change.

Margin Agreements

Rule 9.9. No ETP Holder[, Equity ASAP

Holder, or ETP Firm] shall hypothecate or

rehypothecate customer securities unless

such ETP Holder[, Equity ASAP Holder, or

ETP Firm] has obtained from its customer an

executed margin agreement in a form

satisfactory to the Corporation.

Assuming Losses

Rule 9.10. No ETP Holder[, Equity ASAP

Holder or ETP Firm] shall assume for his or

her own account of his or her firm, a contract

made for a customer after a loss to the

customer has been established or ascertained,

unless the contract was made by mistake or

unless approval of the Corporation has first

been obtained.

Confirmations

Rule 9.11. No ETP Holder[, Equity ASAP

Holder or ETP Firm] shall address

confirmations, statements or other

communications to a non-ETP [or non-Equity

ASAP] customer in care of a person holding

power of attorney over the customers’

account unless either (a) the customer has

instructed the ETP Holder[, Equity ASAP

Holder or ETP Firm] in writing to send such

confirmations, statements or other

communications in care of such person, or

(b) duplicate copies are sent to the customer

at some other address designated in writing

by him or her, or at the address of any ETP

Holder[, Equity ASAP Holder or ETP Firm,]

or in care of a partner or employee of any

firm.

Upon written request, the Corporation may

waive these requirements.

COD Orders—Partial Delivery

Rule 9.12(a). No ETP Holder[, Equity ASAP

Holder or ETP Firm] shall accept an order

from a customer pursuant to an arrangement

whereby payment for securities purchased or

delivery of securities sold is to be made to

or by an agent of the customer unless all of

the following procedures are complied with:

(1) The ETP Holder[, Equity ASAP Holder

or ETP Firm] shall have received from the

customer prior to or at the time of accepting

the order, the name and address of the agent

and the name and account number of the

customer on file with the agent;

(2)—No change.

(3) The ETP Holder[, Equity ASAP Holder

or ETP Firm] delivers to the customer a

confirmation, or all relevant data customarily

contained in a confirmation with respect to

the execution of the order, in whole or in

part, not later than the close of business on

the next business day after any such

execution; and

(4) The ETP Holder[, Equity ASAP Holder

or ETP Firm] has obtained an agreement from

the customer that the customer will furnish

his or her agent instructions with respect to

the receipt or delivery of the securities

involved in the transaction promptly upon

receipt by the customer of each confirmation,

or the relevant data as to each execution,

relating to such order (even though such

execution represents the purchase or sale of

only a part of the order), and that in any

event the customer will assure that such

instructions are delivered to his or her agent

no later than:

(A)–(B)—No change.

(5) The customer or its agent shall utilize

the facilities of a securities depository for the

confirmation, acknowledgement, and book

entry settlement of all depository eligible

transactions.

(A) For the purpose of this [rule] Rule

‘‘securities depository’’ shall mean a clearing

agency as defined in Section 3(a)(23) of the

Securities Exchange Act of 1934 that is

registered with the Securities and Exchange

Commission pursuant to Section 17A(b)(2) of

the Act.

(B) For the purpose of this [rule Rule,

‘‘depository eligible transactions’’ shall mean

transactions in those securities for which

confirmation, acknowledgement, and book

entry settlement can be performed through

the facilities of a securities depository as

defined in Rule 9.12(a)(5)(A).

(b) The following transaction shall be

exempt from the provisions of paragraph

(a)(5) of this [rule] Rule:

(1)—No change.

(2) Transactions wherein both an ETP

Holder[, Equity ASAP Holder or ETP Firm]

and its agent are not participants in a

securities depository;

(3)—No change.

Long Sales

Rule 9.13(a). For the purposes of effecting

delivery within the time period required

under regular settlement procedures:

(1) Any sale of a security for a customer

which is designated as a ‘‘long’’ sale may be

effected only if:

(A) The customer is ‘‘long,’’ in good

deliverable form, the security to be sold on

the books [on] of the selling ETP Holder,

[Equity ASAP Holder or ETP Firm,] or

(B) The selling ETP Holder[, Equity ASAP

Holder or ETP Firm] notes on he order ticket

that

(i)–(ii)—No change.

(2)—No change.

(3) the customer presents to the selling ETP

Holder, [Equity ASAP Holder or ETP Firm,]

with proper instructions, a security

convertible into or exchangeable for, or an

option, warrant or right which entitles him

or her to purchase, together with the

necessary funds, prior to settlement date, the

security to be sold.

Account Designation

Rule 9.14. Before any order for a customer

of an ETP Holder[, Equity ASAP Holder or

ETP Firm] is executed, including the case

where an order is to be executed by the

issuance [from the Floor] of a commitment to

trade through ITS or any other Application

of the System, there shall be placed upon the

order slip or other record the name or

designation of the account for which such

order is to be executed. No change in such

account name or designation shall be made

unless the change has been authorized by the

ETP Holder[, Equity ASAP Holder or ETP

Firm] or a partner, who shall, prior to giving

his or her approval of such change, be

personally informed of the essential facts

relative thereto and shall indicate his or her

approval of such change in writing on the

order.

Statements of Account to Customers

Rule 9.15. Except with the permission of

the Corporation, ETP Holders[, Equity ASAP

Holders or ETP Firms] shall send their

customers statements of account showing

security and money positions and entries at

least quarterly to all accounts having an

entry, money or security position during the

preceding quarter. (See also SEC Rule 15c3–

2 concerning quarterly notices of free credit

balances on statements.)

Statement or Notice on Interest

Rule 9.16—No change.

Books and Records

Rule 9.17. ETP Holders[, Equity ASAP

Holder or ETP Firms] shall make and retain

all the books and records prescribed by the

Bylaws and Rules of the Corporation, the

rules and regulations of the Securities and

Exchange Commission and the constitution,

rules and regulations of other regulatory or

governmental bodies to which such ETP

Holders[, Equity ASAP Holders or ETP

Firms] are subject. Such books and records

shall be retained for periods as prescribed

and shall be made available for inspection by

the Corporation.

Doing a Public Business in Options

Rule 9.18. Rule 9.18 shall be applicable to

ETP Holder[, Equity ASAP Holders, or ETP

Firms] transacting business with the public

in option contracts issued by the Options

Clearing Corporation. Except to the extent

that specific provisions of Rule 9.18 govern,

or unless the context otherwise requires, the

provisions of all other sections of this [rule]

Rule shall be applicable to the conduct of

accounts.

(a) Registration of Principals and

Representatives.

No ETP Holder[, Equity ASAP Holder, or

ETP Firm] shall be approved to transact

business with the public in option contracts,

unless those persons associated with the ETP

Holder[, Equity ASAP Holder, or ETP Firm]

who are designated as Options Principals or

who are designated as Registered

Representatives have been approved by and

registered with the Corporation as such,

pursuant to the provisions of Rule 9.26 and

Rule 9.27, as appropriate.

(b) Opening of Accounts

No ETP Holder[, Equity ASAP Holder, or

ETP Firm] shall accept an order from a

customer for the purchase or sale (writing) of

an option contract unless the customer’s

account has been approved for options

trading in accordance with the provisions of

Rule 9.18.

(1) Diligence in Opening Account—In

approving a customer’s account for options

transactions, and ETP Holder[, Equity ASAP

Holder, or ETP Firm] shall exercise due

diligence to learn the essential facts as to the

customer and his or her investment

78880 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

objectives and financial situation, and shall

make a record of such information which

shall be retained in accordance with Rule

9.18(d). Based upon such information, the

branch office manager or other Registered

Options Principal shall approve in writing

the customer’s account for options

transactions; provided, that if the branch

office manager is not a Registered Options

Principal, his or her approval shall within a

reasonable time be confirmed by a Registered

Options Principal.

(2) Disclosure—At or prior to the time a

customer’s account is approved for options

trading, the ETP Holder[, Equity ASAP

Holder or ETP Firm] shall deliver to the

customer a current Options Disclosure

Document in accordance with the

requirements of paragraph (g) of this Section.

(3) Account Agreement—Within 15 days

after a customer’s account has been approved

for options transactions an ETP Holder[,

Equity ASAP Holder or ETP Firm] shall

obtain from the customer a written agreement

that (A) the customer is aware of and agrees

to be bound by the Rules of the Corporation

and the PCX Parent applicable to the trading

of option contracts and the Rules of the

Options Clearing Corporation and (B) the

customer agrees not to violate, either alone or

in concert with others, the position limits or

the exercise limits established by the PCX

Parent.

(4) Verification of Customer Background

and Financial Information—The background

and financial information upon which the

account of every new customer that is a

natural person has been approved for options

trading, unless the information is included in

the customer’s account agreement, shall be

sent to the customer for verification within

fifteen (15) days after the customer’s account

has been approved for options transactions.

A copy of the background and financial

information on file with the ETP Holder[,

Equity ASAP Holder or ETP Firm] shall also

be sent to the customer for verification

within fifteen (15) days after the ETP Holder[,

Equity ASAP Holder or ETP Firm] becomes

aware of any material change in the

customer’s financial situation.

(5) Options Disclosure document to be

Furnished—At or prior to the time a

customer’s account is approved for options

transactions, an ETP Holder[, Equity ASAP

Holder or ETP Firm] shall furnish the

customer with a current Options Disclosure

Document in accordance with the

requirements of Rule 9.18(g).

(6) Every ETP Holder[, Equity ASAP

Holder or ETP Firm] transacting business

with the public in uncovered options

contracts shall develop, implement, and

maintain specific written procedures

governing the conduct of such business

which shall include, but not be limited to,

the following:

(A)–(E)—No change.

Commentary

.01 In fulfilling its obligations pursuant to

paragraph (b)(1) of Rule 9.18 with respect to

options customers that are natural persons,

an ETP Holder[, Equity ASAP Holder or ETP

Firm] shall seek to obtain the following

information at a minimum (information shall

be obtained for all participants in a joint

account):

1.–8.—No change.

In addition, the customer’s account records

shall contain the following information, if

applicable:

a.–g.—No change.

The ETP Holder[, Equity ASAP Holder, or

ETP Firm] should consider utilizing a

standard account approval form so as to

ensure the receipt of all the required

information.

.02—No change.

.03 The requirement of paragraph (b)(4) of

Rule 9.18 for the initial and subsequent

verification of customer background and

financial information may be satisfied by

sending to the customer the information

required in Items 1 through 6 of Commentary

.01 above as contained in the ETP [Holder,

Equity ASAP Holder or ETP Firm’s] Holder’s

records and providing the customer with an

opportunity to correct or complete the

information. In all cases, absent from the

customer to the contrary, the information

will be deemed to be verified.

.04 Before approving an account of a

trust, pension fund, profit sharing plan or

other fiduciary for options trading, an ETP

Holder[, Equity ASAP Holder or ETP Firm]

shall be satisfied that the instruments under

which the fiduciary is acting permit options

trading.

.05 Before approving an account with

respect to which trading authorization has

been granted to a third person who is not an

employee of the ETP Holder[, Equity ASAP

Holder or ETP Firm] for options trading, the

ETP Holder[, Equity ASAP Holder or ETP

Firm] shall obtain written evidence of the

agent’s authority to act and that such

authority specifically includes options

trading.

.06 Before approving an account of an

investment partnership or an investment club

for options trading, the ETP Holder[, Equity

ASAP Holder or ETP Firm] shall obtain

written evidence of the authority of the

person signing the agreement required by this

paragraph to sign such agreement on behalf

of such partnership or club, as the case may

be, and that such authority specifically

includes options trading. Information shall

also be obtained with respect to any current

long or short option positions of the

respective partners or member of the

partnership or investment club.

.07—No change.

(c) Suitability.

(1) No ETP Holder[, Equity ASAP Holder

or ETP Firm] or registered person thereof

shall recommend to any customer any

transaction for the purchase or sale (writing)

of an option contract, currency warrant, or an

index warrant unless such ETP Holder[,

Equity ASAP Holder or ETP Firm] or

registered person has reasonable grounds to

believe that the entire recommended

transaction is not unsuitable for such

customer on the basis of information

furnished by such customer after reasonable

inquiry concerning the customer’s

investment objectives, financial situation and

needs and any other information known by

such ETP Holder[, Equity ASAP Holder or

ETP Firm] or registered person.

(2) No ETP Holder[, Equity ASAP Holder

or ETP Firm,] Registered Options Principal or

Registered Representative shall recommend

to a customer an opening transaction in any

option contract, currency warrant, or index

warrant unless the person making the

recommendation has a reasonable basis for

believing at the time of making the

recommendation that the customer has such

knowledge and experience in financial

matters that he or she may reasonably be

expected to be capable of evaluating the risks

of the recommended transaction, and is

financially able to bear the risks of the

recommended position in the option

contract, currency warrant, or index warrant.

(d) Supervision of Accounts.

Every ETP Holder[, Equity ASAP Holder or

ETP Firm] shall comply with the provisions

of rule 9.1(b) in exercising its supervisory

responsibilities. In addition to such

provisions, every ETP Holder[, Equity ASAP

Holder or ETP Firm] shall comply with the

following provisions as they relate to its

options business.

(1) Senior Registered Options Principal—

Every ETP Holder[, Equity ASAP Holder or

ETP Firm] shall develop and implement a

written program for the review of the

organization’s non-ETP [or non-Equity

ASAP] customer accounts and all orders in

such accounts, insofar as such accounts and

orders relate to option contracts. This

program shall be under the supervision of a

designated Senior Registered Options

Principal (‘‘Senior ROP’’) who is an officer

(in the case of a corporation) or general

partner (in the case of a partnership) of the

ETP Holder[, Equity ASAP Holder or ETP

Firm] who is specifically identified to the

Corporation as the senior ROP.

(2) Compliance Registered Options

Principal—ETP [Holder, Equity ASAP Holder

or ETP Firm] Holders shall designate and

specifically identify to the Corporation a

Compliance Registered Options Principal,

(who may be the Senior Registered Options

Principal), who shall have no sales functions

and shall be responsible to review and to

propose appropriate action to secure the ETP

[Holder, Equity ASAP Holder or ETP Firm’s]

Holder’s compliance with securities laws and

regulations in respect of its options business.

The Compliance Registered Options

Principal shall regularly furnish reports

directly to the compliance officer (if the

Compliance Registered Options Principal is

not himself or herself the compliance officer)

and to other senior management of the ETP

Holder[, Equity ASAP Holder or ETP Firm].

The requirement that the Compliance

Registered Options Principal shall have no

sales functions does not apply to an ETP

Holder[, Equity ASAP Holder or ETP Firm]

that has received less than $1,000,000 in

gross commissions on options business as

reflected in its FOCUS Report for either of

the preceding two fiscal years or that

currently has 10 or fewer Registered Options

Representatives.

(3)—No change.

(4) Each ETP Holder[, Equity ASAP Holder

or ETP Firm] shall maintain at the principal

supervisory office having jurisdiction over

the office servicing the customer’s account,

or have readily accessible and promptly

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78881

retrievable, information to permit review of

each customer’s options account, on a timely

basis to determine (i) the compatibility of

options transactions with investment

objectives and with the types of transactions

for which the account was approved; (ii) the

size and frequency of options transactions;

(iii) commission activity in the account; (iv)

profit or loss in the account; (v) undue

concentration in any options class or classes,

and (vi) compliance with the provisions of

Regulation T of the Federal Reserve Board.

Commentary

.01—No change.

.02 Every ETP Holder[, Equity ASAP

Holder or ETP Firm] shall establish, maintain

and enforce written procedures which detail

the methods used to supervise exchange

options transactions. These procedures

should also detail the methods used to

supervise all non-ETP [or non-Equity ASAP]

customer accounts including all orders in

such accounts, insofar as such accounts and

orders relate to option contracts.

.02 Every ETP Holder[, Equity ASAP

Holder or ETP Firm] shall also develop and

implement specific written procedures

concerning the manner of supervision of

customer accounts maintaining uncovered

short (written) option positions and

specifically providing for frequent

supervisory review of such accounts.

(e) Discretionary Accounts

(1) Authorization and Approval Required—

No ETP Holder[, Equity ASAP Holder or ETP

Firm] shall exercise any discretionary power

with respect to trading in option contracts,

currency warrants, or index warrants in a

customer’s account, or accept orders for

currency warrants, index warrants or option

contracts for an account from a person other

than the customer, except in compliance

with the provisions of Rule 9.6(a) and in

addition (i) the written authorization of the

customer required by Rule 9.6(a) shall

specifically authorize options trading in the

account; (ii) the account shall have been

accepted in writing by a Registered Options

Principal. The Senior Registered Options

Principal shall review the acceptance of each

discretionary account to determine that the

Registered Options Principal accepting the

account has a reasonable basis for believing

that the customer was able to understand and

bear the risks of the strategies or transactions

proposed, and he or she shall maintain a

record of the basis for his or her

determination. Each discretionary order shall

be approved and initiated on the day entered

by the branch office manager or other

Registered Options Principal, provided that if

the branch office manager is not a Registered

Options Principal, his or her approval shall

be confirmed within a reasonable time by a

Registered Options Principal. Every

discretionary order shall be identified as

discretionary on the order at the time of

entry. Discretionary accounts shall receive

frequent appropriate supervisory review by

the Compliance Registered Options Principal.

The provisions of this subparagraph shall not

apply to discretion as to the price at which

or the time when an order given by a

customer for the purchase or sale of a definite

number of option contracts in a specified

security shall be executed.

(2) Prohibited Transactions—No ETP

Holder[, Equity ASAP Holder or ETP Firm]

having discretionary power over a customer’s

account shall, in the exercise of such

discretion, execute or cause to be executed

therein any purchases or sales of option

contracts, currency warrants, or index

warrants which are excessive in size or

frequency in view of the financial resources

in such account.

(3) Record of Transactions—A record shall

be made of every transaction in option

contracts, currency warrants, or index

warrants in respect to which an ETP Holder[,

Equity ASAP Holder or ETP Firm] has

exercised discretionary authority, clearly

reflecting such fact and indicating the name

of the customer, the designation and number

of the option contracts, currency warrants, or

index warrants the premium and the date

and time when such transaction was effected.

(4)—No change.

Commentary

.01—No change.

(f) Confirmations.

Every ETP Holder[, Equity ASAP Holder or

ETP Firm] shall promptly furnish to each

customer a written confirmation of each

transaction in option contracts for such

customer’s account. Each such confirmation

shall show the type of option, the underlying

stock, the expiration month, the exercise

price, the number of option contracts, the

premium, commissions, the transaction and

settlement dates, whether the transaction was

a purchase or a sale (writting) transaction,

whether the transaction was an opening or a

closing transaction, and whether the

transaction was effected on a principal or

agency basis. The confirmation shall by

appropriate symbols distinguish between

exchange option transactions and other

transactions in option contracts and between

such transactions and transactions in other

options.

(g) Delivery of Current Options Disclosure

Document and Prospectus

(1) Options Disclosure Documents. Every

ETP Holder[, Equity ASAP Holder or ETP

Firm] shall deliver a current Options

Disclosure Document (the formal title of

which is ‘‘Understanding the Risks and Uses

of Listed Options’’) to each customer at or

prior to the time each customer’s account is

approved for options trading. Thereafter,

each amended Options Disclosure Document

shall be distributed to every customer having

an account approved for options trading, or,

in the alternative, shall be distributed not

later than the time a confirmation of a

transaction is delivered to each customer

who enters into an options transaction. The

term ‘‘current Options Disclosure Document’’

means, as to any category of underlying

security, the most recent edition of such

document that meets the requirements of

Rule 9b–1 under the Securities Exchange Act

of 1934.

(2) Prospectus. Every ETP Holder[, Equity

ASAP Holder or ETP Firm] shall deliver a

copy of the current prospectus of the Options

Clearing Corporation to each customer who

requests one. The Corporation will advise

ETP Holder[, Equity ASAP Holder or ETP

Firm] when a new prospectus is available.

The term ‘‘current prospectus of the Options

Clearing Corporation’’ means the prospectus

portion of Form S–20 which then meets the

delivery requirements of Rule 153(b) of the

Securities Act of 1933.

(3) The written description of risks

required by Rule 9.18(b)(6) shall be in a

format prescribed by the Corporation or in a

format developed by the ETP Holder[, Equity

ASAP Holder or ETP Firm,] provided it

contains substantially similar information as

the prescribed Corporation format and has

received prior written approval of the

Corporation.

Commentary

.01 Where the customer of an ETP

Holder[, Equity ASAP Holder or ETP Firm]

is a broker or dealer entering his or her orders

with the ETP Holder[, Equity ASAP Holder

or ETP Firm] in a single omnibus account,

such ETP Holder[, Equity ASAP Holder or

ETP Firm] shall take reasonable steps to

assure that the broker or dealer is furnished

reasonable quantities of current Options

Disclosure Documents, as requested by him

or her in order to enable him or her to

comply with the requirements of this

paragraph (g).

.02 Where a broker or dealer enters orders

for his or her customers with, or clears

transactions through, an ETP Holder[, Equity

ASAP Holder or ETP Firm] on a fully

disclosed basis and such ETP Holder[, Equity

ASAP Holder or ETP Firm] carries the

accounts of such customers, the

responsibility for delivering a current

Options Disclosure Document as provided

herein shall rest with the carrying ETP

Holder[, Equity ASAP Holder or ETP Firm].

However, such ETP Holder[, Equity ASAP

Holder or ETP Firm] may rely upon the good

faith representation of the introducing broker

or dealer that a current Options Disclosure

Document has been delivered in compliance

with this paragraph (g).

(h) Transactions with Issuers.

No ETP Holder[, Equity ASAP Holder or

ETP Firm] shall accept an order for the

account of any corporation which is the

issuer of an underlying stock for the sale

(writing) of an option contract with respect

to that underlying stock.

(i) Restricted Stock.

For the purposes of: (i) Covering a short

position in a call option contract, or (ii)

delivery pursuant to the exercise of a put

option contract, or (iii) satisfying an exercise

notice assigned in respect of a call option

contract, no ETP Holder[, Equity ASAP

Holder or ETP Firm] shall accept shares of an

underlying stock, which may not be sold by

the holder thereof except upon registration

pursuant to the provisions of the Securities

Act of 1933 or pursuant to SEC rules

promulgated under the Securities Act of

1933, unless, at the time such securities are

accepted and at any later time such securities

are delivered, applicable provisions of the

Securities Act of 1933 and the rules

thereunder have been complied with by the

holder of such securities.

(j) Statement of Accounts.

Every ETP Holder[, Equity ASAP Holder or

ETP Firm] shall send to its customers

statements of account showing security and

money positions entries, interest charges and

any special charges that have been assessed

78882 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

against such account during the period

covered by the statement; provided, however,

that such charges need not be specifically

delineated on the statement if they are

otherwise accounted for on the statement and

have been itemized on transaction

confirmations. With respect to options

customers having a general (margin) account,

such statement shall also provide the markto-market price and market value of each

options position and other security position

in the general (margin) account, the total

market value of all positions in the account,

the outstanding debit balance in the account,

and the general (margin) account equity. The

statement shall bear a legend stating that

further information with respect to

commissions and other charges related to the

execution of listed option transactions has

been included in confirmations of such

transactions previously furnished to the

customer, and that such information will be

made available to the customer promptly

upon request.

Statements of account shall be sent at least

quarterly to all accounts having a money or

a security position during the preceding

quarter and not less frequently than once

every month to each customer in whose

account there has been an entry during the

preceding month with respect to an option

contract.

The statement shall also bear a legend

requesting the customer to promptly advise

the ETP Holder[, Equity ASAP Holder or ETP

Firm] of any material change in the

customer’s investment objectives or financial

situation.

Commentary

.01 For purposes of the foregoing Section,

general (margin) account equity shall be

computed by subtracting the total of the

‘‘short’’ security values and any debit balance

from the total of the ‘‘long’’ security values

and any credit balance.

(k) Doing Business with the Public.

An [individual] sole proprietor ETP

[Holder or Equity ASAP Holder] may not

transact business with the public, unless

such Holder receives prior written approval

from the Corporation. To qualify to transact

business with the public, the [individual]

sole proprietor ETP [Holder or Equity ASAP]

Holder shall demonstrate compliance with

the general requirements of the Corporation

as prescribed by the Bylaws, Rules and

procedures of the Corporation.

(l) Customer Complaints.

(1) Every ETP Holder[, Equity ASAP

Holder or ETP Firm] conducting a non-ETP

[or non-Equity ASAP] customer business

shall make and keep current a separate

central log, index or other file for all optionsrelated complaints, through which these

complaints can easily be identified and

retrieved. The term ‘‘options-related

complaint’’ shall mean any written statement

by a customer or person acting on behalf of

a customer alleging a grievance arising out of

or in connection with listed options. The

central file shall be located at the principal

place of business of the ETP Holder[, Equity

ASAP Holder or ETP Firm] or such other

principal office as shall be designated by the

ETP Holder[, Equity ASAP Holder or ETP

Firm]. At a minimum, the central file shall

include: (i) Identification of complainant, (ii)

date complaint was received, (iii)

identification of Registered Representative

servicing the account, (iv) a general

description of the matter complained of, and

(v) a record of what action, if any, has been

taken by the ETP Holder[, Equity ASAP

Holder or ETP Firm] with respect to the

complaint. Each options-related complaint

received by a branch office of an [Equity

ASAP] ETP Holder [or ETP Firm] shall be

forwarded to the office in which the separate,

central file is located not later than thirty (30)

days after receipt by the branch office. A

copy of every options-related complaint shall

be maintained at the branch office that is the

subject of the complaint.

(m) Branch Offices of [Equity ASAP] ETP

Holders [or ETP Firms].

No branch office of an [Equity ASAP] ETP

Holder [or ETP Firm] shall transact options

business with the public unless the manager

of such branch office has been qualified as

a Registered Options Principal; provided,

that this requirement shall not apply to

branch offices in which not more than three

Registered Representatives are located so

long as the [Equity ASAP] ETP Holder [or

ETP Firm] can demonstrate that the options

activities of such branch offices are

appropriately supervised by a Registered

Options Principal.

Transfer of Accounts

Rule 9.19. Every ETP Holder[, Equity

ASAP Holder or ETP Firm] shall, upon

written request of a customer, expedite the

transfer of a customer’s account pursuant to

such customer’s instructions.

Transactions for Public Customers

Rule 9.20(a). Where an ETP Holder[, Equity

ASAP Holder or ETP Firm] is doing business

with the public in accordance with these

Rules and is also associated with a Market

Maker, such ETP Holder[, Equity ASAP

Holder or ETP Firm] shall file such reports

as the Corporation may require of

transactions for customers in classes of

option contracts to which such Market Maker

has been appointed pursuant to PCX Parent

Rule 6.35.

Telemarketing

Rule 9.20(b). No ETP Holder[, Equity ASAP

Holder or ETP Firm] or associated person of

such Holder [or Firm] may:

(1)—No change.

(2) Make an outbound telephone call to any

person for the purpose of soliciting the

purchase of securities or related services

without disclosing promptly and in a clear

and conspicuous manner to the called person

the following information:

(A) the identity of the caller and the ETP

Holder[, Equity ASAP Holder or ETP Firm];

(B)–(C)—No change.

(3) The prohibitions of subsections (b)(1)

and (b)(2), above, do not apply to telephone

calls by any person associated with an ETP

Holder[, Equity ASAP Holder or ETP Firm,]

or another associated person acting at the

direction of such person for the purpose of

maintaining and servicing an account of an

existing customer of the ETP Holder[, Equity

ASAP Holder or ETP Firm] under the control

of or assigned to such associated person if

such person places such calls:

(A)–(C)—No change.

The scope of this Rule 9.20(b) is limited to

the telemarketing calls described herein. The

terms of this Rule do not otherwise expressly

or by implication impose on ETP Holders[,

Equity ASAP Holders or ETP Firms] or

participants any additional requirements

with respect to the relationship between at

ETP Holder[, Equity ASAP Holder or ETP

Firm] or participant and a customer or

between a person associated with an ETP

Holder[, Equity ASAP Holder or ETP Firm]

or participant organization and a customer.

For the purposes of subsection (b)(3), the

term ‘‘existing customer’’ means a customer

for whom the broker or dealer, or a clearing

broker or dealer on behalf of such broker or

dealer, carries an account.

(c) Each ETP Holder[, Equity ASAP Holder

or ETP Firm] shall make and maintain a

centralized list of persons who have

informed the ETP Holder[, Equity ASAP

Holder or ETP Firm] or any employee

thereof, that they do not wish to receive

telephone solicitations, and shall refrain from

engaging in telephone solicitations of persons

named on that list.

(d) No ETP Holder[, Equity ASAP Holder

or ETP Firm] or person associated with an

ETP Holder, [Equity ASAP Holder or ETP

Firm,] may obtain from a customer or submit

for payment a check, draft, or other form of

negotiable paper drawn on a customer’s

checking, savings, share, or similar account,

without that person’s express written

authorization, which may include the

customer’s signature on the negotiable

instrument. Each ETP Holder[, Equity ASAP

Holder or ETP Firm] shall maintain the

authorization required by this subsection (d)

for a period of three years.

Commentary

.01 ETP Holders[, Equity ASAP Holders

or ETP Firms] that engage in telephone

solicitation to market their products and

services (‘‘telemarketing’’ or ‘‘cold calling’’)

are subject to the requirements of the rules

of the Federal Communications Commission

and the Securities and Exchange Commission

relating to telemarketing practices and the

rights of telephone users. This includes, but

is not limited to, the requirement to make

and maintain a list of persons who do not

want to receive telephone solicitation (a ‘‘donot-call’’ list).

Section 2. Advertising and Sales Literature

Policy

Rule 9.21(a). It shall be considered conduct

inconsistent with just and equitable

principals of trade for an ETP Holder, [Equity

ASAP Holder or ETP Firm,] directly or

indirectly, to publish, circulate or distribute

any advertisement, sales literature or market

letter that the ETP Holder[, Equity ASAP

Holder or ETP Firm] knows or has reason to

know contains any untrue statement of a

material fact or is otherwise false or

misleading.

Exemptions

Rule 9.21(b). The following [rules] Rules

shall apply to all ETP Holders[, Equity ASAP

Holders or ETP Firms] of the Corporation

unless the ETP Holder[, Equity ASAP Holder

or ETP Firm] is subject to the jurisdiction of

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78883

another national securities exchange or

association designated by the Board of

Directors as having comparable standards.

Advertisements

Rule 9.22(a). All advertisements prior to

publication shall be submitted to the

Corporation for approval as to form and

presentation, except such routine

advertisements as (1) Business cards or socalled tombstone ads, (2) announcements

that specific securities are bought, sold or

quoted, (3) offering literature concerning a

specific security or securities, (4)

announcements relating to changes in an ETP

Holder, [Equity ASAP Holder or ETP Firm,]

(5) inclusion of an ETP [Holder, Equity ASAP

Holder or ETP Firm’s] Holder’s name in an

underwriting advertisement, or (6)

advertisements complying with any rule or

regulations of the Securities and Exchange

Commission under the Securities Act of

1933, or Securities Exchange Act of 1934.

Copies of all ads should be retained by the

ETP Holder[, Equity ASAP Holder or ETP

Firm] for at least 3 years.

Refer to Pacific Exchange

Rule 9.22(b). Advertisements by ETP

Holders[, Equity ASAP Holders or ETP

Firms] for insertion in local papers or other

media should refer to the Archipelago

Exchange, a facility of PCX Equities, Inc. and

the Pacific Exchange, Inc., when a reference

is made to membership in any securities

exchange.

Sales Literature—Market Letters

Rule 9.23. Each market letter, research

report and all sales literature prepared and

issued by an ETP Holder[, Equity ASAP

Holder or ETP Firm] for general distribution

to customers or the public shall be approved

in advance by a principal of the firm who has

been designated such authority. Market

letters, research reports and sales literature

that refer to the market or to companies or

securities, listed or unlisted, must be retained

by the issuing ETP Holder[, Equity ASAP

Holder or ETP Firm] for at least 3 years. The

copies retained must contain the name of the

individual approving its issuance and will be

subject to delivery upon request to the

Corporation and must at all times within the

3 year period be readily available. For

purposes of this Rule, scripts that are used

for telemarketing calls as described in Rule

9.20(b), are deemed to be ‘‘sales literature.’’

Radio, Television, Telephone and Other

Reports

Rule 9.24. ETP Holders[, Equity ASAP

Holders, or ETP Firms] for which the

Corporation is the designated examining

authority (‘‘DEA’’) desiring to broadcast

Corporation quotations on radio or television

programs, or in public telephone market

reports, or to make use of radio or television

broadcasts for any business purpose, or to

make use of the Internet for the purpose of

providing market quotations or advertising to

the general public, must first obtain the

consent of the Corporation by submitting an

outline of the program to the Corporation.

The text of all commercials and program

material (except lists of market quotations)

about securities or investing sponsored by

ETP Holders[, Equity ASAP Holders, or ETP

Firms] on radio, television or public

telephone market reports, or the Internet, or

program material supplied to these media

must be sent to the Corporation promptly

following the program in which it is used.

Standards

Rule 9.25. The Corporation cannot be

responsible for the accuracy and

completeness of factual information, nor the

opinions of ETP Holders[, Equity ASAP

Holders, or ETP Firms] in advertisements,

sales literature or radio or television

broadcasts. However, general policy to be

followed in written communications with the

public should be substantially as follows:

(a) In making recommendations there

should be a reasonable basis for the

recommendation and the following facts

disclosed:

(1)–(2)—No change.

(3) If (2) applies, whether the ETP Holder[,

Equity ASAP Holder, or ETP Firm] intends

to buy or sell the securities recommended for

his or her own account;

(4)–(5)—No change.

(6) If material issued refers to past

recommendations, all such recommendations

as to the same type, kind, grade or

classification of securities made by an ETP

Holder[, Equity ASAP Holder, or ETP Firm]

within the last year should be set forth.

Longer periods of years may be covered if

they are consecutive and include the most

recent year. The material must name each

security recommended, the date and nature

of recommendation (buy or sell), the price at

the time, the price range within which to act

upon, and if the period was one of generally

rising or falling markets;

(7) Material that makes no

recommendations, but offers to furnish a list

of all recommendations made by an ETP

Holder[, Equity ASAP Holder, or ETP Firm]

within the past year or over a longer period

of consecutive years shall contain same

information as stated in item (6) above.

(b)–(d)—No change.

(e) Claims for research:

No claim or implication may be made for

research or other facilities beyond those

which the ETP Holder[, Equity ASAP Holder,

or ETP Firm] actually posses or has

reasonable capacity to provide.

(f)–(g)—No change.

Registration of Options Principals

Rule 9.26. No ETP Holder[, Equity ASAP

Holder, or ETP Firm] shall transact any

business with the public in option contracts

unless those persons engaged in the

management of the ETP [Holder, Equity

ASAP Holder, or ETP Firm’s] Holder’s

business pertaining to option contracts are

registered with and approved by the

Corporation as Options Principals. No

individual ETP Holder [or Equity ASAP

Holder] shall transact any business directly

with the public in option contracts unless he

or she is registered with and approved by the

Corporation as an Options Principal. In

connection with their registration, Options

Principals shall file an application with the

Corporation on a form prescribed by the

Corporation and shall be required to

successfully complete an examination

prescribed by the Corporation for the purpose

of demonstrating an adequate knowledge of

options trading generally, the Rules of the

Corporation applicable to trading of option

contracts and theRules of the Options

Clearing Corporation. In the event the

employment of any Registered Options

Principal is terminated or any Registered

Options Principal ceases to act in such

capacity, such fact shall be reported

promptly to the Corporation together with a

brief statement of the reason therefore.

Commentary

.01 Each ETP Holder[, Equity ASAP

Holder, or ETP Firm] shall be required to

designate a Registered Options Principal who

is a general partner or officer as the person

responsible for overall supervision and

training in areas relating to transactions in

option contracts.

.02—No change.

Registration of Representatives

Rule 9.27(a). General. No ETP Holder[,

Equity ASAP Holder, or ETP Firm] shall be

approved to transact business with the public

until those persons associated with it who

are designated as Representatives have been

registered with and approved by the

Corporation pursuant to the provisions of

Rule [2.23(a)] 2.21(a) through Rule [2.23(d)]

2.21(d). Persons who perform duties for the

ETP Holder[, Equity ASAP Holder, or ETP

Firm] which are customarily performed by

sales representatives, solicitors, customers’

men or branch office managers shall be

designated as Representatives.

(b) Registered Options Representatives. No

person associated with an ETP Holder[,

Equity ASAP Holder, or ETP Firm] shall

transact any business with the public in

option contracts, unless those persons are

registered with and approved by the

Corporation pursuant to the provisions of

paragraph (a) of this Section and are

registered with and approved by the

Corporation as Options Representatives. In

connection with their registration as Options

Representatives, such persons shall file an

application with the Corporation on a form

prescribed by the Corporation, shall

successfully complete a training course and

an examination for the purpose of

demonstrating adequate knowledge in the

trading of option contracts, and shall sign an

agreement to abide by the Bylaws, Rules and

procedures of the Corporation and the Rules

of the Options Clearing Corporation;

provided, however, that representatives of an

ETP Holder[, Equity ASAP Holder, or ETP

Firm] which is a member of another national

securities exchange or association which has

standards of approval acceptable to the

Corporation may be deemed to be registered

with and approved by the Corporation, so

long as such representatives are registered

with and approved by the Corporation, so

long as such representatives are registered

with and approved by such other exchange

or association. An ETP Holder[, Equity ASAP

Holder, or ETP Firm] whose representatives

are deemed registered and approved

pursuant to the last clause of the preceding

sentence shall inform their representatives of

their obligation to adhere to the Bylaws,

Rules and procedures of the Corporation and

the Rules of the Options Clearing

78884 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

Corporation. Termination of employment or

affiliation of any Registered Options

Representative in such capacity shall be

reported promptly to the Corporation

together with a brief statement of the reason

for such termination, pursuant to Rule

[2.23(h)] 2.21(h).

Commentary

.01–.03—No change.

Regulatory Element

Rule 9.27(c). No ETP Holder[, Equity ASAP

Holder or ETP Firm] shall permit any

registered person to continue to, and no

registered person shall continue to, perform

duties as a registered person, unless such

person has complied with the continuing

education requirements of this Rule 9.27(c).

Each registered person shall complete the

Regulatory element of the continuing

education program on three occasions, after

the occurrence of their second, fifth and

tenth registration anniversary dates, or as

otherwise prescribed by the Corporation. On

each of these three occasions, the Regulatory

Element must be completed within one

hundred twenty (120) days after the person’s

registration anniversary date. The content of

the Regulatory Element of the program shall

be prescribed by the Corporation.

(1) Registered person who have been

continuously registered for more than ten

years as of the effective date of this Rule shall

be exempt from participation in the

Regulatory Element of the continuing

education program, provided such persons

have not been subject to any disciplinary

action within the last ten (10) years as

enumerated in subsection [(c)(3)(i)–

(ii)](c)(3)(A)–(B) of this Rule. Persons who

have been currently registered for ten (10)

years or less as of the effective date of this

Rule shall initially participate in the

Regulatory Element of the continuing

education program within one hundred

twenty days (120) after the occurrence of the

second, fifth or tenth registration anniversary

date, whichever anniversary date first

applies, and on the applicable registered

anniversary date(s) thereafter. Such persons

will have satisfied the requirements of the

Regulatory Element of the program after

participation on the tenth registration

anniversary.

All registered persons who have satisfied

the requirements of the Regulatory Element

shall be exempt from further participation in

the Regulatory Element of the program,

subject to re-entry into the program as set

forth in subsection (c)(3) of this Rule.

(2)–(3)—No change.

Re-entry shall commence with the initial

participation within 120 days of the

registered person becoming subject to the

statutory disqualification, in the case of [(i)]

(A) above, or the disciplinary action

becoming final, in the case of [(ii) (B) or [(iii)]

(C) above, and on three additional occasions

thereafter, at intervals of two, five and ten

years after re-entry, notwithstanding that

such person has completed all or part of the

program requirements based on length of

time as a registered person or completion of

ten years of participation in the program.

(d) Firm Element

(1) Persons Subject to the Firm Element—

The requirements of this Rule 9.27(d) shall

apply to any registered person who has direct

contact with customers in the conduct of the

ETP [Holder, Equity ASAP Holder or ETP

Firm’s] Holder’s securities sales, trading or

investment banking activities, and to the

immediate supervisors of such persons

(collectively, ‘‘covered registered persons’’).

(2) Standards.

(A) Each ETP Holder[, Equity ASAP Holder

or ETP Firm] must maintain a continuing and

current education program for its covered

registered person to enhance their securities

knowledge, skills and professionalism. At a

minimum, each ETP Holder[, Equity ASAP

Holder or ETP Firm] shall at least annually

evaluate and prioritize its training needs and

develop a written training plan. The plan

must take into consideration the ETP

[Holder, Equity ASAP Holder or ETP Firm’s]

Holder’s size, organizational structure, and

scope of business activities, as well as

regulatory developments and the

performance of covered registered persons in

the Regulatory Element.

(B) Minimum Standards for Training

Programs—Programs used to implement an

ETP [Holder, Equity ASAP Holder or ETP

Firm’s] Holder’s training plan must be

appropriate for the business of the ETP

Holder[, Equity ASAP Holder or ETP Firm]

and, at a minimum, must cover the following

matters concerning securities products,

services and strategies offered by the ETP

Holder[, Equity ASAP Holder or ETP Firm]:

(i)–(iii)—No change.

(C) Administration of Continuing

Education Program—Each ETP Holder[,

Equity ASAP Holder or ETP Firm] must

administer its continuing education program

in accordance with its annual evaluation and

written plan and must maintain records

documenting the content of the programs and

completion of the programs by covered

registered persons.

(3) Participation in the Firm Element—

Covered registered persons included in an

ETP [Holder, Equity ASAP Holder or ETP

Firm’s] Holder’s plan must take all

appropriate and reasonable steps to

participate in continuing education programs

as required by the ETP Holder[, Equity ASAP

Holder or ETP Firm].

(4) Specific Training Requirements—The

Corporation may require an ETP Holder[,

Equity ASAP Holder or ETP Firm,] either

individually or as part of a larger group, to

provide specific training to its covered

registered persons in such areas that the

Corporation deems appropriate. Such a

requirement may stipulate the class of

covered registered persons for which it is

applicable, the time period in which the

requirement must be satisfied and, where

appropriate, the actual training content.

Commentary

.01 For purposes of this Rule, the term

‘‘registered person’’ means any ETP Holder,

[Equity ASAP Holder or ETP Firm,] Allied

Person thereof, registered representative or

other person registered or required to be

registered under the Rules of the Corporation,

but does not include any such person whose

activities are limited solely to the transaction

of business on the facilities of the

Corporation with ETP Holders[, Equity ASAP

Holders, ETP Firms] or registered brokerdealers.

.02 For purposes of this Rule, the term

‘‘customer’’ means any natural person or any

organization, other than a registered broker or

dealer, executing transactions in securities or

other similar instruments with or through, or

receiving investment banking services from,

an ETP Holder[, Equity ASAP Holder or ETP

Firm].

.03 A registered person who has been

continuously registered for more than ten

(10) years as of the date of implementation

of this Rule who has been subject to a

disciplinary action as enumerated in

subsections [(c)(3)(i)–(ii)] (c)(3)(A)–(B) of the

Rule within the last ten years, will be

required to satisfy the requirements of the

Regulatory Element of the continuing

education program by participation for the

period from the date of implementation of

this Rule to ten years after the occurrence of

the disciplinary action.

.04–.05—No change.

Advertisements, Market Letters and Sales

Literature Relating to Options

Rule 9.28(a). General Rule. No ETP

Holder[, Equity ASAP Holder or ETP Firm]

or person associated therewith shall utilize

any advertisement, educational material,

sales literature or other communications to

any customer or member of the public

concerning options which:

(1)–(4)—No change.

(b) Approval by Compliance Registered

Option Principal. All advertisements, sales

literature (except completed worksheets), and

educational material issued by an ETP

Holder[, Equity ASAP Holder or ETP Firm]

pertaining to options shall be approved in

advance by the Compliance Registered

Options Principal or designee. Copies

thereof, together with the names of the

persons who prepared the material, the

names of the persons who approved the

material and, in the case of sales literature,

the source of any recommendations

contained therein, shall be retained by the

ETP Holder[, Equity ASAP Holder or ETP

Firm] and be kept at an easily accessible

place for examination by the Corporation for

a period of three years.

(c) Approval Required for Options

Advertisements. In addition to the approval

required by paragraph (b) of this Rule, every

advertisement of an ETP Holder[, Equity

ASAP Holder or ETP Firm] pertaining to

options shall be submitted to the Corporation

at least ten days prior to use (or such shorter

period as the Corporation may allow in

particular instances) for approval and, if

changed or expressly disapproved by the

Corporation, shall be withheld from

circulation until any changes specified by the

Corporation have been made or, in the event

of disapproval, until the advertisement has

been resubmitted for, and has received,

Corporation approval. The requirements of

this paragraph shall not be applicable to:

(1)—No change.

(2) advertisements in which the only

reference to options is contained in a listing

of the services of an ETP Holder[, Equity

ASAP Holder or ETP Firm].

(d)–(e)—No change.

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78885

Commentary

.01 The special risks attendant to options

transactions and the complexities of certain

options investment strategies shall be

reflected in any advertisement, educational

material or sales literature which discusses

the uses or advantages of options. Such

communications shall include a warning to

the effect that options are not suitable for all

investors. In the preparation of written

communications respecting options, the

following guidelines should be observed:

A. Any statement referring to the potential

opportunities or advantages presented by

options shall be balanced by a statement of

the corresponding risks. The risk statement

shall reflect the same degree of specificity as

the statement of opportunities, and broad

generalities should be avoided. Thus, a

statement such as ‘‘with options, an investor

has an opportunity to earn profits while

limiting his or her risk of loss’’, should be

balanced by a statement such as ‘‘of course,

an options investor may lose the entire

amount committed to options in a relatively

short period of time.’’

B.–C.—No change.

.02—No change.

.03 Written communications (other than

advertisements) pertaining to options shall

conform to the following standards:

A.–D.—No change.

E. Options worksheets utilized by ETP

Holders, [Equity ASAP Holders or ETP

Firms,] or associated persons must comply

with the requirements applicable to sales

literature.

F.—No change.

Rule 10

Disciplinary Proceedings, Other Hearings,

and Appeals

Disciplinary Jurisdiction

Rule 10.1.

(a) An ETP Holder[, ETP Firm, Equity

ASAP Holder,] or associated person of an

ETP [Firm or Equity ASAP] Holder who is

alleged to have violated or aided and abetted

a violation of any provision of the Securities

Exchange Act of 1934, as amended, the rules

and regulations promulgated thereunder, any

provision of the Corporation’s Bylaws or

Rules or any commentary thereof, any

resolution of the Board of Directors of the

Corporation regulating the conduct of

business of the Corporation, or any policy or

procedure of the Corporation shall be subject

to the disciplinary jurisdiction of the

Corporation under this Rule, and after notice

and opportunity for a hearing may be

appropriately disciplined by cancellation of

trading privileges, suspension, limitation of

activities, functions, and operations,

suspension or bar from association with an

ETP [Firm or Equity ASAP] Holder, fine,

censure or any other fitting sanction, in

accordance with the provisions of this Rule.

An ETP [Firm or Equity ASAP] Holder may

be charged with any violation committed by

its employees or [its ETP Holder or] other

person who is associated with such ETP

[Firm or Equity ASAP] Holder, as though

such violation were its own.

(b) Any ETP Holder, [ETP Firm, Equity

ASAP Holder,] or associated person of an

ETP [Firm or Equity ASAP] Holder shall

continue to be subject to the disciplinary

jurisdiction of the Corporation following

suspension or cancellation of ETP [or Equity

ASAP] trading privileges or termination of

association with an ETP [Firm or Equity

ASAP] Holder with respect to matters that

occurred prior to such termination, provided

that written notice of the commencement of

an inquiry into such matters is given by the

Corporation to such former ETP Holder[, ETP

Firm, Equity ASAP Holder,] or associated

person of an ETP [Firm or Equity ASAP]

Holder within one year of receipt by the

Corporation of written notice of the

termination of such person’s status as an ETP

Holder[, ETP Firm, Equity ASAP Holder,] or

associated person of an ETP [Firm or Equity

ASAP] Holder.

Investigations and Regulatory Cooperation

Rule 10.2(a). The Corporation’s Chief

Regulatory Officer and his or her delegees

will function independently of the

commercial interest of the Corporation and

the commercial interests of the ETP Holders[,

ETP Firms and Equity ASAP Holders] and

the Chief Regulatory Officer or his or her

delegees will have the discretion to

investigate, and will investigate, possible

violations within the disciplinary

jurisdiction of the Corporation. The

Regulatory Staff may consult as necessary

with the PCX Parent Regulatory Staff. No

member of the Board of Directors or nonRegulatory Staff may interfere with or

attempt to influence the process or resolution

of any pending investigation or disciplinary

proceeding.

(b)—No change.

(c) An ETP Holder[, ETP Firm, Equity

ASAP Holder,] or associated person of an

ETP Firm or Equity ASAP Holder is entitled

to be represented by counsel during any

investigation by the Corporation.

(d) No ETP Holder, [ETP Firm, Equity

ASAP Holder,] associated person of an ETP

[Firm or Equity ASAP] Holder, or other

person or entity over whom the Corporation

has jurisdiction pursuant to Rule 10.1 may

impede or delay a regulatory investigation

with respect to possible violations within the

disciplinary jurisdiction of the Corporation

nor refuse to furnish testimony, documentary

materials or other information requested by

the Corporation during the course of its

investigation. Failure to furnish such

testimony, documentary materials, or other

information requested by the Corporation

pursuant to this Rule on the date or within

the time period required by the Corporation

will be considered obstructive of an inquiry

or investigation and subject to formal

disciplinary action.

(e) An ETP Holder[, ETP Firm, Equity

ASAP Holder,] or associated person of an

ETP [Firm or Equity ASAP] Holder must

submit such trade data elements specified in

Commentary .01 below in such automated

format as may be prescribed by the

Corporation from time to time, in regard to

such transactions or transactions as may be

the subject of a particular request for

information made by the Corporation. Failure

to submit such data in the required format

will be considered obstructive of an inquiry

or investigation and subject to formal

disciplinary action.

Commentary

.01(A) If the transaction [was] were a

proprietary transaction effected or caused to

be effected by the ETP Holder[, ETP Firm or

Equity ASAP Holder] for any account in

which such ETP [Holder, ETP Firm, Equity

ASAP] Holder or associated person of an ETP

[Firm or Equity ASAP] Holder is directly or

indirectly interested, such ETP [Holder, ETP

Firm, or Equity ASAP] Holder shall submit

or cause to be submitted the following

information:

(i) Clearing house number(s), or alpha

symbol(s), as used by the ETP Holder[, ETP

Firm, or Equity ASAP Holder] submitting the

data;

(ii) Clearing house number(s), or alpha

symbol(s) as may be used from time to time,

of the ETP Holder(s)[, ETP Firm(s), or Equity

ASAP Holder(s)] on the opposite side of the

transaction;

(iii)–(viii)—No change.

(B) If the transaction [was] were effected or

caused to be effected by the ETP [Holder,

ETP Firm, or Equity ASAP] Holder for any

customer account, such ETP [Holder, ETP

Firm, or Equity ASAP] Holder shall submit

or cause to be submitted the following

information:

(i)–(ii)—No change.

(iii) If the transaction [was] were effected

for a customer of a broker-dealer, whether the

broker-dealer was acting as principal or agent

on the transaction that is the subject of the

Corporation’s request.

(C) In addition to the above trade data

elements, an ETP [Holder, ETP Firm, or

Equity ASAP] Holder shall submit such other

information in such automated format as may

be prescribed by the Corporation, as may

from time to time be required.

(D)—No change.

(f) No ETP Holder, [ETP Firm, Equity

ASAP Holder,] associated person of an ETP

[Firm or Equity ASAP] Holder, or other

person or entity over whom the Corporation

has jurisdiction pursuant to Rule 10.1 may

refuse to appear and testify before another

exchange or self-regulatory organization in

connection with a regulatory investigation,

examination, or disciplinary proceeding or

refuse to furnish documentary materials or

other information or otherwise impede or

delay such investigation, examination or

disciplinary proceeding if the Corporation

requests such information or testimony in

connection with any inquiry resulting from

an agreement entered into by the Corporation

or its self-regulatory organization. The

requirements of this Rule 10.2(f) will apply

regardless of whether the Corporation has

initiated an investigation pursuant to Rule

10.2(a) or a disciplinary proceeding pursuant

to Rule 10.4.

Commentary

.01–.02—No change.

Ex Parte Communications

Rule 10.3(a). Prohibited Communications.

Unless on adequate notice and reasonable

opportunity for all parties to participate:

(1) No person who is a subject of a pending

investigation by the Corporation (‘‘Subject’’)

78886 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

or a Respondent in a pending disciplinary

proceeding, or counsel for a representative of

the Subject or the Respondent, or any

interested Corporation staff, with knowledge

of a pending investigation or disciplinary

proceeding, may make or knowingly cause to

be made an ex parte communication, as

defined below, relevant to the facts or

allegations of the investigation or the

disciplinary proceeding to: (a) a member of

the Board of Directors; (b) a person who

advises the Board of Directors; (c) any

member of the Corporation’s Regulatory Staff

that is not participating in the resolution of

the investigation or the disciplinary

proceeding; (d) a member of the Business

Conduct Committee or Board Appeals

Committee; or (e) a member of the PCX Board

of Governors.

(2) No person who is a member of the

Business Conduct Committee or Conduct

Panel with knowledge of a pending

investigation or disciplinary proceeding, or

any interested Corporation staff, may make or

knowingly cause to be made an ex parte

communication, as defined below, relevant to

the facts or allegations of the investigation or

the disciplinary proceeding to: (a) a member

of the Board of Directors; (b) a person who

advises the Board of Directors; (c) any

member of the Corporation’s Regulatory Staff;

(d) the Subject of a pending investigation by

the Corporation or a Respondent in a pending

disciplinary proceeding, or counsel for or a

representative of the Subject or the

Respondent; or (e) a member of the PCX

Board of Governors.

(3) No person who is a member of the

Board of Directors, or any person who

advises the Board of Directors, or any

interested Corporation staff, with knowledge

of a pending investigation or disciplinary

proceeding, may knowingly make or cause to

be made an ex parte communication, as

defined below, relevant to the facts or

allegations of the investigation or the

disciplinary proceeding to: (a) any member of

the Corporation’s Regulatory Staff; (b) the

Subject to a pending investigation by the

Corporation or a Respondent in a pending

disciplinary proceeding, or counsel for or a

representative of the Subject or the

Respondent; (c) a member of the Business

Conduct Committee; or (d) a member of the

PCX Parent Board of Governors.

(b) Disclosure of Prohibited

Communications. Any person who receives,

makes or knowingly causes to be made a

communication prohibited by this Rule must

promptly submit to the Regulatory Staff for

inclusion in the record of the investigation or

disciplinary proceeding:

(1) all such written communications;

(2) memoranda stating the substance of all

such oral communications; and

(3) all written responses and memoranda

stating the substance of any oral responses to

such communications.

(c) Remedies. Any ETP Holder, [ETP Firm,

Equity ASAP Holder,] or associated person of

an ETP [Firm or Equity ASAP] Holder who

made or knowingly caused to be made [a] an

ex parte communication prohibited by

subsection (a) will be subject to disciplinary

action. Furthermore, the Business Conduct

Committee, to the extent consistent with the

interests of justice, may issue to the ETP

Holder, [ETP Firm, Equity ASAP Holder,] or

associated person of an ETP [Firm or Equity

ASAP] Holder, or interested Corporation

staff, responsible for the communication or

who benefited from the communication an

order to show cause why the claim, defense

or interest of the ETP Holder, [ETP Firm,

Equity ASAP Holders,] or associated person

of an ETP [Firm or Equity ASAP] Holder, or

interested Corporation staff, should not be

adversely affected by reason of such ex parte

communication, including but not limited to

the entry of an adverse summary decision.

All parties to a disciplinary proceeding and

the Regulatory Staff will be provided with

adequate notice and a reasonable opportunity

to respond to any allegations or contentions

contained in the prohibited communication

and any responses will be included in the

record of the investigation or disciplinary

proceeding.

(d) Permitted Communications. Nothing in

this Rule prohibits the members of a

disciplinary committee or the Regulatory

Staff from discussing a pending investigation

or disciplinary proceeding at a meeting of the

committee in connection with: (1) the

adjudication of the investigation pursuant to

the Minor Rule Plan; (2) the determination of

whether to impose informal discipline; (3)

the determination of whether to authorize a

complaint or take no further action; or (4) the

determination of whether to accept an offer

of settlement.

(e) No member of the Business Conduct

Committee or Conduct Panel, as defined in

Rule 10.5(a), may participate in a matter

governed by Rule 10.3(c) as to which that

person has a conflict of interest or bias, or if

circumstances otherwise exist where his or

her fairness might reasonably be questioned.

In such a case, the person shall recuse

himself or herself or shall be disqualified as

follows:

(1) The Chief Regulatory Officer shall have

the authority to direct the disqualification of

the interested member of the Business

Conduct committee or Conduct Panel.

(2) The Chief Executive Officer shall have

the authority to direct the disqualification of

the Chief Regulatory Officer.

Commentary

.01 ‘‘Ex parte communication’’ means an

oral or written communication made without

notice to all parties, i.e., the Corporation’s

Regulatory Staff and the Subjects of

investigations or Respondents in disciplinary

proceedings. A written communication is ex

parte unless a copy has been previously or

simultaneously delivered to all interested

parties. An oral communication is ex parte

unless it is made in the presence of all

interested parties except those who, on

adequate prior notice, declined to be present.

.02 A disciplinary proceeding will be

considered to be pending from the date that

a Complaint has been issued pursuant to

Rule 10.4 until the proceeding, including any

appeals, becomes final.

Complaints

Rule 10.4(a). The Chief Regulatory Officer

and his or her delegee(s) have the authority

to determine whether there is probable cause

for finding that a violation within the

disciplinary jurisdiction of the Corporation

has occurred and if further proceedings are

warranted. If the Regulatory Staff, on behalf

of the Corporation, (‘‘the Complainant’’ )

determines that further proceedings are

warranted, [the] then the Corporation will

initiate a formal disciplinary action by

preparing a statement of charges (‘‘the

Complaint’’) against any ETP Holder, [ETP

Firm, Equity ASAP Holder,] or associated

person of an ETP [Firm or Equity ASAP]

Holder alleged to have committed a violation

(‘‘the Respondent’’) specifying the acts in

which the Respondent is alleged to have

engaged in, or which the Respondent is

alleged to have omitted, and alleging the

specific provisions of the Bylaws, Rules,

policies or procedures of the Corporation, or

the rules, regulations and procedures

promulgated under the Securities Exchange

Act of 1934, of which such acts or omissions

are alleged to be in violation.

(b)–(c)—No change.

Commentary

.01—No change.

Hearing

Rule 10.5

(a)–(c)—No change.

(d) At the hearing, both the Complainant

and the Respondent shall be entitled to be

heard in person and to present any relevant

matter. Any witnesses, testimony or evidence

offered by the Complainant or the

Respondent shall be subject to crossexamination by the other party. The Conduct

Panel shall determine all questions

concerning the admissibility of evidence and

shall otherwise regulate the conduct of the

hearing. Formal rules of evidence shall not

apply. The charges shall be presented by the

Corporation, who along with Respondent and

any other party, may present evidence and

produce witnesses who shall testify under

oath and are subject to being questioned by

the Conduct Panel and other parties. The

Conduct Panel, upon its own motion or the

motion of the Complainant or Respondent,

may request the production of documentary

materials and witnesses. No ETP Holder,

[ETP Firm, Equity ASAP Holder,] or

associated person of an ETP [Firm or Equity

ASAP] Holder shall refuse to furnish relevant

testimony, documentary materials or other

information requested by the Conduct Panel

during the course of the hearing. The

Respondent and intervening parties are

entitled to be represented by counsel who

may participate fully in the hearing. A

transcript of the hearing shall be made and

shall become part of the record.

(e)—No change.

Rule 10.6–10.7—No change.

Review

Rule 10.8(a)—No change.

(b) The Board Appeals Committee may

appoint a Board Appeals Committee Panel

(‘‘Appeals Panel’’) to conduct reviews of

disciplinary proceedings, or may decide to

conduct review proceedings on its own. The

composition of the Appeals Panel will be

determined by the Board Appeals Committee

in accordance with Rule 3.3. The body

conducting the review, either the Board

Appeals Committee itself or the Appeals

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78887

Panel, is referred to herein as ‘‘the Review

Board.’’ Unless the Review Board shall

decide to open the record for the

introduction of new evidence or to hear

argument, such review shall be based solely

upon the record and the written exceptions

filed by the parties. The standard of review

shall be de novo. Based upon such review,

the Review Board may affirm, reverse or

modify in whole or in part, the decision of

the Conduct Panel. Such modification may

include an increase or decrease of the

sanction. The decision of the Review Board

shall be in writing and, shall become fifteen

(15) calendar days after notifying the parties;

provided, however, that if a request for

review of such determination is filed

pursuant to Rule 10.8(c) or Rule 10.8(d)

below, the penalty shall be stayed pending

the outcome of that review.

Each Review Board member shall be

required to disclose to the Board Appeals

Committee any circumstances which might

preclude such Review Board member from

rendering an objective and impartial

determination. Prior to the commencement of

the first hearing session, the Board Appeals

Committee may remove a Review Board

member who discloses such information. The

Board Appeals Committee shall also inform

the parties of any information disclosed

pursuant to this section, if the Review Board

member who disclosed the information is not

removed.

In the event that any Review Board

member, after the commencement of the

Review, but prior to the rendition of the

decision, should become disqualified, resign,

die, refuse or be unable to perform or

discharge his or her duties, the Board

Appeals Committee, upon such proof as they

deem satisfactory, shall either (a) appoint a

new member to the Review Board to replace

such member; or (b) direct that the review

proceed without the substitution of a new

member.

(c)–(e)—No change.

Judgment and Penalty

Rule 10.9(a). An ETP Holder, [ETP Firm,

Equity ASAP Holder,] or associated person of

an ETP [Firm or Equity ASAP] Holder shall

be subject to appropriate discipline by the

Corporation for violations under this Rule

including: cancellation or suspension of

trading privileges, limitation of activities,

functions and operations, suspension or bar

from association with an ETP Holder, [ETP

Firm or Equity ASAP Holder,] fine, censure,

or any other fitting sanction.

(b)–(c)—No change.

Miscellaneous Provisions

Rule 10.10—No change.

Appeal of [Floor Citations and] Minor Rule

Plan Sanctions

Rule 10.11(a). This Section provides the

following procedures for persons aggrieved

by action taken by the Corporation pursuant

to the provisions of the Bylaws and Rules of

the Corporation for which action an ETP

Holder, [ETP Firm, Equity ASAP Holder,] or

associated person of an ETP [Firm or Equity

ASAP] Holder has been sanctioned [via floor

citation or] pursuant to Rule 10.12 (the Minor

Rule Plan), and applies for an opportunity to

make an oral presentation or to have the

matter reviewed on the papers alone. (This

Section shall not apply to disciplinary action

taken pursuant to Rule 10.4 herein, nondisciplinary action taken pursuant to Rule

[10.14] 10.13 herein, or to an action in

Arbitration.)

(b) Submission of Application to

Corporation. Any ETP Holder, [ETP Firm,

Equity ASAP Holder,] or associated person of

an ETP [Firm or Equity ASAP] Holder who

is aggrieved by any action of the Corporation

within the scope of this Section and who

desires the opportunity to make an oral

presentation with respect to such action or to

have such action reviewed on the papers

alone shall file a written application with the

Business Conduct Committee within five (5)

business days after notification that such

action has been taken. The notification

submitted by the Corporation shall state the

specific grounds for the action taken by the

Corporation, and shall notify the party of the

party’s right to make an oral presentation or

to have the matter reviewed on the papers

alone. The application shall contain: (1) An

identification of the Corporation action over

which the review is being requested; (2) the

reason(s) why the applicant disagrees with

such action; and (3) the relief sought. In

addition, the application shall indicate

whether the applicant desires to make an oral

presentation, in which event it shall be

considered a ‘‘request for a hearing,’’ or to

proceed only upon the existing and/or any

additional documents or materials, in which

event it shall be considered a ‘‘request for a

review on the papers.’’ Hereinafter, the terms

‘‘hearing’’ and ‘‘review on the papers’’ shall

be referred to jointly as the ‘‘Proceeding(s).’’

(c)—No change.

(d) Procedure Following Application for

Hearing and/or Review on the Papers.

(1)–(2)—No change.

(3) Conduct of the Proceeding. Whether the

Proceeding is a hearing or a review on the

papers alone, the Conduct Panel shall

determine all questions concerning the

admissibility of evidence and shall otherwise

regulate the conduct of the Proceeding. The

formal rules of evidence shall not apply. In

the event of a hearing, each of the parties

shall be permitted to make an opening

statement, present witnesses pursuant to

paragraph (d)(2), present documentary

evidence, cross-examine witnesses and

present closing arguments. The Conduct

Panel shall have the right to question all

parties and witnesses to the Proceeding. The

Conduct Panel may also request the

production of documentary evidence and

witnesses. No ETP Holder, [ETP Firm, Equity

ASAP Holder,] or associated person of an

ETP [Firm or Equity ASAP] Holder shall

refuse to furnish relevant testimony,

documentary materials or other information

requested by the Conduct Panel during the

course of the Proceeding. All parties are

entitled to be represented by counsel who

may participate fully in the Proceeding. In

the event of a hearing, a transcript of the

hearing shall be made and shall become part

of the record.

(4)—No change.

(5) If after a hearing or review on the

papers pursuant to subsection (d) of this

Rule, the Conduct Panel determines that an

ETP Holder, [ETP Firm, Equity ASAP

Holder,] or associated person of a ETP [Firm

or Equity ASAP] Holder has violated one or

more rules of the Corporation, as alleged, the

Conduct Panel: (i) may impost any one or

more of the disciplinary sanctions authorized

by the Corporation’s Bylaws and Rules; and

(ii) shall impose a forum fee against the

person charged in the amount of two

hundred fifty dollars ($250) if the

determination was reached based on a review

of the papers, or in the amount of five

hundred dollars ($500) if a hearing was

conducted. However, notwithstanding the

foregoing, in the event that the Conduct

Panel determines that the ETP Holder, [ETP

Firm, Equity ASAP Holder,] or associated

person of an ETP [Firm or Equity ASAP]

Holder has violated one or more Rules of the

Corporation, as alleged, and the sole

disciplinary sanction imposed by the

Conduct Panel for such rule violation(s) is a

fine which is less than the total fine initially

imposed by the Regulatory Staff for the

subject violation(s), the Conduct Panel shall

have the discretion to waive the imposition

of a forum fee.

(6)—No change.

(e)–(f)—No change.

Minor Rule Plan

Rule 10.12.

(a) In lieu of initiating a formal disciplinary

action or proceeding, the Corporation may,

subject to the requirements set forth in this

Rule, impose a fine not to exceed five

thousand dollars ($5,000) on any ETP

Holder[, ETP Firm, Equity ASAP Holder,] or

associated person of an ETP [Firm or Equity

ASAP] Holder, for any violation of a Rule of

the Corporation that has been determined to

be minor in nature.

(b) Whenever it appears that an ETP

Holder, [ETP Firm, Equity ASAP Holder,] or

associated person of an ETP [Firm or Equity

ASAP] Holder has violated a [rule] Rule

under this Minor Rule Plan, the Corporation

shall serve on such person or organization a

written statement setting forth (i) the Rule(s)

alleged to have been violated; (ii) the act or

omission constituting each such violation;

and (iii) notice that such person or

organization may submit a written statement

to a designated committee for its

consideration.

(c)–(e)—No change.

(f) Nothing in this Rule shall require the

Corporation to impose a fine for a violation

of any [rule] Rule under this Minor Rule

Plan. If the Corporation determines that any

violation is not minor in nature, the

Corporation may, at its discretion, proceed

under Rule 10.4 rather than under this Rule.

[(g) Floor Citations. A Trading Official may

issue a Floor Citation to any ETP Holder, ETP

Firm, or associated person of an ETP Firm,

when it appears to such Official(s) that a

Minor Rule Plan violation specified in

subsection (h) or (i) of this Rule has occurred.

In issuing a Floor Citation, the Trading

Official shall:

(1) Apprise the person cited of the alleged

violation;

(2) Ask the person cited to indicate by

signature on the citation acknowledgement of

receipt of the citation; provided that the

78888 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

requested signature is for receipt purposes

only and a failure or unwillingness to sign is

not to be considered as invalidating the

issuance of the citation;

(3) Give the top copy of the citation to the

person alleged to have committed the

violation; and

(4) Give the remaining copies of the

citation to the appropriate staff person, who

will then forward such copies of the

Regulatory Staff for processing.]

[Except as provided in Rule 10.13 (the

Summary Sanction Procedure), the] The

circumstances underlying the issuance of

each [floor] citation shall be reviewed by the

Business Conduct Committee for a

determination of whether the evidence is

sufficient to find a violation of any Rules of

the Corporation.

[(h)] (g) Minor Rule Plan: [Floor Decorum

and] Minor Trading Rule Violations.

[(1)–(8)—Deleted.]

[(9)] (1) Short Sale Rules. (Rule [7.40] 7.16)

[(10) Dissemination of Quotations in Local

Issues. (EFPA 2–B)]

[(11)] (2) Failure to follow the provisions

of the rules and regulations governing the use

of the Intermarket Trading System (‘‘ITS’’).

(Rules [7.67–7.69)] 7.55–7.57)

[(12) failure to Clear the Post Properly.

(EFPA 1–B)]

[(i)] (h) Minor Rule Plan: Record Keeping

and Other Minor rule Violations.

(1)–(3)—No change.

(4) Failure to notify the Corporation of any

change of address where notices may be

served. (Rule [2.18(b))] 2.16(b))

(5)–(6)—No change.

[(j)] (i) Minor Rule Plan: Recommended

Fine Schedule.

Fines

1st

violation

2nd

violation

3rd

violation

(1) [Floor Decorum and] Minor Trading Rule Violations 1

[1.–.8—Deleted.]

[9] 1. Short Sale Rules. (Rule [7.40)] 7.16) ............................................................................................. $500.00 $1,000.00 $2,500.00

[10. Dissemination of Quotations in Local Issues (EFPA 2–B))] ............................................................ .................... .................... $100.00

[11] 2. Failure to follow the provisions of the rules and regulations governing the use of the Intermarket Trading System (‘‘ITS’’). (Rules 7.55–7.57) [7.67–7.69)] ........................................................ $500.00 $1,000.00 $2,000.00

[12. Failure to Clear the Post Properly. (EFPA 1–B)) ............................................................................. Official

Warning]

$250.00 $500.00

(2) Record Keeping and Other Minor Rule

1. Failure to submit trade data to the [Exchange] Corporation in a timely manner. (Rule 10.2(e)) ....... $250.00 $500.00 $750.00

2. Failure to file a Securities Investor Protection Corporation form and assessment in a timely manner. (Rule 4.11(b)) ................................................................................................................................ $500.00 $1,000.00 $1,500.00

3. Failure to furnish in a timely manner [books,] records or other requested information or testimony

in connection with an examination of financial responsibility and/or operational conditions. (Rule

4.11(c)) ................................................................................................................................................. $250.00 $500.00 $750.00

4. Failure to notify the Corporation of a change of address where notices may be served. (Rule

[2.18(b))] 2.16(b)) ................................................................................................................................. $250.00 $500.00 $750.00

5. Failure to file a financial report or financial information in the type, form, manner and time prescribed by the [Exchange] Corporation. (Rule 4.11(a)) ....................................................................... $250.00 $500.00 $750.00

6. Delaying, impeding or failing to cooperate in [an Exchange] a Corporation investigation. (Rule

10.2(d)) ................................................................................................................................................. $500.00 $1,000.00 $2,000.00

1Fines for multiple violations of [Equity Floor Decorums and] Minor Trading Rules are calculated on a running two-year basis, except that violations denoted with an asterisk are calculated on a running one-year basis.

[Summary Sanction Procedure]

[Rule 10.13—Deleted.]

Hearings and Review of Decisions by the

Corporation

Rule [10.14] 10.13.

(a) General Provisions. This Rule provides

the procedure for persons aggrieved by any

of the following actions taken by the

Corporation to apply for an opportunity to be

heard and to have the action reviewed. These

actions are:

(1) the denial of an ETP [or Equity ASAP];

(2) the barring of any person from

becoming associated with an ETP [Firm or

Equity ASAP] Holder;

(3) the suspension or cancellation of ETP

trading privileges [or Equity ASAP trading

privileges];

(4) the prohibition or limitation with

respect to access to services provided by the

Corporation, or the access to services of any

ETP [Firm or Equity ASAP] Holder taken

pursuant to the Bylaws, or Rules or

procedures of the Corporation; or

(5) actions taken by the Corporation

pursuant to Rule 7.22, including the denial

of the application for, or the termination or

suspension of, a Market Maker’s registration

in a security or securities;

[(5)] (6) actions taken by the Corporation

pursuant to [rule 7.22] Rule 7.23 [and 7.29];

[(6)] (7) actions taken by the Corporation

pursuant to Rule 7.25, including the denial

of the application for, or the termination or

suspension of, an Odd Lot Dealer’s

registration in a security or securities. [denial

of an applicant specialist for the appointment

as a registered specialist].

The provisions of this Rule shall not apply

to reviews of the following:

(A)–(C)—No change.

For purposes of this Section, a person must

be ‘‘aggrieved’’ in an economic sense.

(b)—No change.

(c) Extension of Time. An application not

filed within the time specified in Rule

[10.14(b)] 10.13(b) shall not be considered by

the Board Appeals Committee, unless an

extension of time is allowed by the Board

Appeals Committee upon a showing of good

cause. In order to obtain an extension of time

within which to file an appeal, the applicant

must, within the time specified in Rule

[10.14(b)] 10.13(b) file with the Secretary of

the Corporation a request for an extension of

time within which to submit the application.

The request for extension will be ruled upon

by the Board Appeals Committee, whose

ruling will be given in writing. Rulings on

requests for extension of time are not subject

to appeal under Rule 10.

(d)–(m)—No change.

Miscellaneous Provision

Rule [10.15] 10.14.—No change.

Rule 11

Cancellation, Suspension and Reinstatement

Notice of Expulsion or Suspension

Rule 11.1(a) An ETP Holder[, ETP Firm, or

Equity ASAP Holder] which is expelled or

suspended from any self-regulatory

organization, encounters financial difficulty

or operating inadequacies, fails to perform

contracts, or become insolvent shall give

prompt written notification to the

Corporation of any such occurrence.

(b) An ETP [Firm or Equity ASAP] Holder

shall give prompt written notification to the

Corporation with respect to the expulsion or

suspension of any [nominee or any other]

associated person of such ETP [Firm or

Equity ASAP] Holder by any self-regulatory

organization.

Procedures for Suspension

Rule 11.2(a) This Rule sets forth the

procedures for certain suspensions,

cancellations, bars, limitations and

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78889

prohibitions on access to the Corporation’s

services.

(1) Summary Suspension. In accordance

with Section 6(d)(3) of the Exchange Act, the

Board of Directors of the Corporation or a

committee thereof may summarily:

(i) suspend the trading privileges of an ETP

Holder, [ETP Firm, Equity ASAP Holder,] or

associated person of an ETP [Firm or Equity

ASAP] Holder who has been and is expelled

or suspended from any self-regulatory

organization or barred or suspended from

being associated with a member of any selfregulatory organization;

(ii) suspend the trading privileges of an

ETP Holder, [ETP Firm, Equity ASAP

Holder,] who is in such financial or operating

difficulty that the Corporation determines

and so notifies the Commission that such

suspension is necessary for the protection of

the investors, creditors, ETP [Holders, ETP

Firms, Equity ASAP] Holders or the

Corporation;

(iii) suspend the trading privileges of an

ETP Holder, [ETP Firm, Equity ASAP

Holder,] or associated person of an ETP [Firm

or Equity ASAP] Holder who is found in

violation of any of the prohibited acts as

specified in Rule 6.2(a)–(f) that are violations

of Rules of the Corporation; or

(iv) limit or prohibit any person with

respect to access to services offered by the

Corporation if subparagraph (i) or (ii) is

applicable to such person or, in the case of

a person who is not an ETP Holder, [ETP

Firm or Equity ASAP Holder,] if the

Corporation determines that such person

does not meet the qualification requirements

or prerequisites for such access with safety to

investors, creditors, ETP [Holders, ETP

Firms, Equity ASAP] Holders or the

Corporation.

(2) Non-Summary Suspension. The

Corporation also may take the following

actions, after written notice, after the passage

of any grace period and/or applicable cure

period, and after opportunity for hearing:

(i) cancel ETP trading privileges of an ETP

Holder [or ETP Firm] that becomes ineligible

for ETP trading privileges, or that continues

to be associated with an ineligible person, or

suspend or bar a person from continuing to

be associated with an ETP Holder [or ETP

Firm] because such person is or becomes

ineligible for association under Rule [2.21(a)]

2.19(a);

[(ii)—Deleted.]

[(iii)](ii) suspend or cancel trading

privileges of an ETP [Holder, ETP Firm or

Equity ASAP] Holder for failure to pay any

fees, charges, assessments, or fines to the

Corporation under Rule 3.8; or failure to

comply with an arbitration award or

settlement agreement related to an arbitration

or mediation under Rule 12;

[(iv)](iii) cancel trading privileges of an

ETP [Holder, ETP Firm, or Equity ASAP]

Holder for failure to file or submit or request

any report, document, or other information

required to be filed with or requested by the

Corporation under Rule 10.2(d); or

[(v)](iv) limited or prohibit any ETP

[Holder, ETP Firm, Equity ASAP] Holder, or

associated person of an ETP [Firm or Equity

ASAP] Holder or other person with respect

to access to services offered by the

Corporation, if the Corporation determines

that such person does not meet the

qualification requirements or prerequisites

for such access or such person cannot be

permitted to continue to have access with

safety to investors, creditors, ETP [Holders,

ETP Firms, Equity ASAP] Holders or the

Corporation.

(b)—No change.

(c) Any action taken pursuant to Rule

11.2(a)(1) or (2) shall also be subject to the

applicable provisions of Rule [10.14]10.13.

Commentary

.01—No change.

Effect of Suspension or Cancellation

Rule 11.3. When an ETP Holder, [ETP

Firm, Equity ASAP Holder,] or associated

person of an ETP [Firm or Equity ASAP]

Holder has its trading privileges suspended

or canceled by the Corporation for any reason

specified in Rule 11.2(a)(1) or (2), such a

person or organization shall be deprived

during the term of the suspension of all rights

and trading privileges conferred by the ETP

[or Equity ASAP], except as otherwise

provided in the Rules of the Corporation. The

person or organization having trading

privileges suspended or canceled shall

remain subject to the disciplinary power of

the Corporation with respect to any

disciplinary action as provided by the Rules

of the Corporation.

Disciplinary Measures During Suspension

Rule 11.4. An ETP Holder, [ETP Firm,

Equity ASAP Holder,] or associated person of

an ETP [Firm or Equity ASAP] Holder whose

trading privileges are suspended under the

provisions of Rule 11.2(a)(1) or (2) may be

disciplined pursuant to the Rules of the

Corporation for any offense committed either

before or after the announcement of the

suspension, in all respects as if no

suspension were in effect.

Investigation Following Summary

Suspension

Rule 11.5. Every ETP Holder, [ETP Firm,

Equity ASAP Holder,] or associated person of

an ETP [Firm or Equity ASAP] Holder whose

trading privileges are suspended under the

provisions of Rule 11.2(a)(1) shall

immediately afford every facility required by

the Corporation for the investigation of its

affairs as required by the Board of Directors

and shall, after the notification of the

suspension, file with the Corporation a

written statement covering all information

required by the Corporation.

Grounds for Cancellation

Rule 11.6. If an ETP Holder, [ETP Firm,

Equity ASAP Holder,] or associated person of

an ETP [Firm or Equity ASAP] Holder has

had privileges suspended under the

provisions of Rule 11.2(a)(1) and such person

or organization does not request a hearing

within thirty (30) calendar days to review

such suspension or at such hearing it is

determined that the suspension was properly

imposed, and such person or organization,

has not within forty-five (45) calendar days

after the suspension remedied the reason for

such suspension and has not applied for

reinstatement, the Board may cancel the

trading privileges of such person or

organization. If application for reinstatement

is made within forty-five (45) calendar days

of suspension as provided in this Rule, and

such application is disapproved, the Board

may cancel the trading privileges of such

[the] person or organization.

Reinstatement

Rule 11.7. When an ETP Holder, [ETP

Firm, Equity ASAP Holder,] or associated

person of an ETP [Firm or Equity ASAP]

Holder has had trading privileges suspended

under the provisions of Rule 11.2(a)(1) or (2)

applies for reinstatement, it must be

demonstrated to the satisfaction of the

Corporation that the problem or problems

responsible for such suspension have been

satisfactorily resolved. If such problem

involves financial difficulty or operating

inadequacies, the person or organization

shall furnish to the Corporation

comprehensive financial and operating

reports in a form and manner to be

prescribed by the Corporation. If the ETP

Holder[, ETP Firm, Equity ASAP] Holder, or

associated person of an ETP [Firm or Equity

ASAP] Holder furnishes satisfactory proof of

a resolution of the problem or problems

responsible for such suspension, the

Corporation shall notify in writing all ETP

[Holders, ETP Firms, and Equity ASAP]

Holders of the application for reinstatement

and that a meeting of the Board to consider

it will be held on a designated date which

shall be not less than ten (10) business days

subsequent to such notice. At such meeting

at which a quorum is present the ETP Holder,

[ETP Firm, Equity ASAP Holder,] or

associated person of an ETP [Firm or Equity

ASAP] Holder may be reinstated provided

not less than a majority of the Directors

voting approve the application.

Failure To Obtain Reinstatement

Rule 11.8. If an ETP Holder[, ETP Firm,

Equity ASAP Holder,] or associated person of

an ETP [Firm or Equity ASAP] Holder whose

trading privileges have been suspended

under the provisions of this Rule fails or is

unable to apply for reinstatement in

accordance with Rule 11.7, or fails to obtain

reinstatement as therein provided, trading

privileges conferred by an ETP [or Equity

ASAP] will terminate.

Rule 12

Arbitration

Matters Subject to Arbitration

Rule 12.1. For purposes of this Rule, the

following definitions apply:

(a) [the term ‘‘ETP’’ shall mean both ETP

and Equity ASAP permits.]

[(b)] the terms ‘‘service’’ or ‘‘serve’’ shall

mean effecting the delivery of a document to

persons via first class mail, overnight

delivery, hand delivery, or facsimile.

[(c)] (b) the term ‘‘associated person’’ shall

also include ‘‘affiliated’’ person ‘‘approved

person’’ and ‘‘allied person’’.

[(d)] (c) the term ‘‘Director of Arbitration’’

shall mean any person appointed or

designated by the Corporation’s Chief

Executive Officer to direct the Corportion’s

arbitration program.

Rule 12.2.

(a) Any dispute, claim or controversy

between parties who are ETP Holders [,ETP

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Firms] or associated persons arising in

connection with the securities business of

such parties shall, at the request of any such

party, be submitted for arbitration in

accordance with this Rule.

(b)—No change.

(c) Any dispute, claim or controversy

between a customer or non-ETP Holder and

an ETP Holder[, ETP Firm] and/or associated

person arising in connection with the

securities business of such ETP Holder[, ETP

Firm] and/or associated person shall be

arbitrated under this Rule as provided by any

duly executed and enforceable written

agreement, or upon the request of the

customer or non-ETP Holder.

(d)—No change.

(e) Class Action Claims

(1)–(2)—No change.

(3) No ETP Holder[, ETP Firm] or

associated person shall seek to enforce any

agreement to arbitrate against a customer that

has initiated in court a putative class action

or is a member of a putative or certified class

with respect to any claims encompassed by

the class action unless and until: (i) the class

certification is denied; (ii) the class is

decertified; (iii) the customer is excluded

from the class by the court; or (iv) the

customer elects not to participate in the

putative or certified class action or, if

applicable, has complied with any conditions

for withdrawing from the class prescribed by

the court.

(4) No ETP Holder[, ETP Firm] and/or

associated person shall be deemed to have

waived any of its rights under this Rule or

under any agreement to arbitrate to which it

is party except to the extent stated in this

paragraph (e).

(f)–(g)—No change.

(h) It may be deemed conduct inconsistent

with just and equitable principles of trade for

an EPT Holder or [an ETP Firm, or] a person

associated with an ETP Holder [or an ETP

Firm] to fail to submit to arbitration on

demand under the provisions of this Rule, or

to fail to appear or to provide any document

in his or her or its possession or control as

directed pursuant to the provisions of this

Rule or to fail to honor an award of

arbitrators properly rendered pursuant to the

provisions of this Rule where a timely

motion has not been made to vacate or

modify such award pursuant to applicable

law.

(i)—No change.

(j) For purposes of this Rule, the terms ETP

Holder, [ETP Firm,] associated person and

employee of an ETP Holder [or ETP Firm]

shall be deemed to encompass those persons

who were ETP Holders, [ETP Firms] or

associated persons or employees thereof at

the time the circumstances occurred which

gave rise to the controversy.

Simplified Arbitration for Public Customers

Rule 12.3(a). Any dispute, claim or

controversy arising between a public

customer(s) and an ETP Holder[, an ETP

Firm] and/or person associated with an ETP

Holder [or an ETP Firm] required to be

arbitrated under the Bylaws and Rules of the

Corporation and involving a dollar amount

not exceeding $10,000, exclusive of attendant

costs and interest, shall upon demand of the

customer(s) or by written consent of the

parties be arbitrated as hereinafter provided.

(b)–(1)—No change.

Rule 12.4–12.8—No change.

Designation of Number of Arbitrators

Rule 12.9.

(a)—No change.

(b In arbitration matters involving public

customers and where the amount in

controversy exceeds $30,000, or where the

matter in controversy does not involve or

disclose a money claim, the Director of

Arbitration shall appoint an arbitration panel

which [consist] consists of no fewer than

three (3) arbitrators, nor more than five (5),

at least a majority of whom shall not be from

the securities industry, unless the public

customer requests a panel consisting of at

least a majority from the securities industry.

(c) An arbitrator will be deemed as being

from the securities industry if he or she:

(1) is a person associated with an ETP

Holder, [ETP Firm,] broker/dealer,

government securities broker, government

securities dealer, municipal securities dealer

or registered investment advisor, or

(2)–(4)—No change.

(d)—No change.

(e) ETP Holder Controversies. In all

arbitration matters not involving public

customers, the Director of Arbitration shall

assign the matter to a panel consisting of ETP

Holders [or ETP Firm] representatives. Such

members of the arbitration panel shall not be

affiliated with any of the parties to the

controversy or have any interest in the matter

to be heard. For controversies involving an

amount of $10,000 or less, the panel shall

consist of one (1) ETP Holder [or ETP Firm]

representative. For all other controversies,

the panel shall consist of three (3) ETP

[Holders or ETP Firm] Holder

representatives.

(f)–(g)—No change.

Rule 12.10–12.13—No change.

Initiation of Proceedings

Rule 12.14. Except as otherwise provided

herein, an arbitration proceeding under this

Rule shall be instituted as follows:

(a)–(b)—No change.

(c) Service and Filing with the Director of

Arbitration

(1)—No change.

(2) If an ETP [Firm] Holder and a person

associated with the ETP [Firm] Holder are

named parties to an arbitration proceeding at

the time of the filing of the Statement of

Claim, service on the associated person may

be made by service on the named ETP [Firm]

Holder and the ETP [Firm] Holder shall then

perfect service upon the associated person. If

the ETP [Firm] Holder does not undertake to

represent the associated person, the ETP

[Firm] Holder shall serve the associated

person with the Statement of Claim, shall

advise all parties and the Director of

Arbitration of that fact, and shall provide

such associated person’s current address.

(d) Joining and Consolidation

(1) Permissive Joinder. All persons may

join in one action as claimants if they assert

any right to relief jointly, severally, or arising

out of the same transaction, occurrence or

series of transactions or occurrences and if

any questions of law or fact common to these

claimants will arise in the action.

All persons may be joined in one action as

respondents if there is asserted against them

jointly or severally, any right to relief arising

out of the same transaction, occurrence or

series [or] of transactions or occurrences and

if any questions of law or fact common to all

respondents will arise in the action.

A claimant or respondent need not assert

rights to or defend against all the relief

demanded. Judgment may be given for one or

more claimants according to their respective

rights to relief, and against one or more

respondents according to their respective

liabilities.

(2)–(4)—No change.

Rule 12.15–12.21—No change.

Power To Direct Appearances and

Production of Documents

Rule 12.22. The arbitrators shall be

empowered without resort to the subpoena

process to direct the appearance of any

person employed or associated with any ETP

Holder [or ETP Firm] and/or direct the

production of any records in the possession

or control of such persons, ETP Holders [or

ETP Firms]. Unless the arbitrator(s) direct

otherwise, the party requesting the

appearance of a person or the production of

documents under this section shall bear all

reasonable costs of such appearance and/or

production.

Rule 12.23–12.31—No change.

Schedule of Fees

Rule 12.32(a)–(i)—No change.

(j) In an industry or clearing controversy,

where the ETP Holder [or ETP Firm] claim

or controversy does not involve or disclose

a money claim, or is unspecified, the filing

fee will be $300 and the hearing session

deposit shall be $1,000 per hearing session.

Schedule of Fees

PUBLIC CUSTOMER CLAIMANT

(E.g., public customer v. ETP [Firm and/or ETP] Holder)

Amount in dispute (exclusive of interest and expenses) Filing fee

Hearing session deposit

Documents

only

Hearing w/1

arbitrator

$.01–$1,000.00 ........................................................................................................................................ $15 $15 $15

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78891

PUBLIC CUSTOMER CLAIMANT—Continued

(E.g., public customer v. ETP [Firm and/or ETP] Holder)

Amount in dispute (exclusive of interest and expenses) Filing fee

Hearing session deposit

Documents

only

Hearing w/1

arbitrator

$1,000.01–$2,500.00 ............................................................................................................................... 25 25 25

$2,500.01–$5,000.00 ............................................................................................................................... 50 75 100

$5,000.01–$10,000.00 ............................................................................................................................. 75 75 200

Amount in dispute (exclusive of interest and expenses) Filing fee

Hearing session deposit

One arbitrator or

pre-hearing

conference

Three

arbitrators

$10,000.01–$30,000.00 ........................................................................................................................... $100 $300 $400

Amount in dispute (exclusive of interest and expenses) Filing fee

Hearing session deposit

Pre-hearing

conference

Three

arbitrators

$30,000.01–$50,000.00 ........................................................................................................................... 120 *$300 400

$50,000.01–$100,000.00 ......................................................................................................................... 150 **300 500

$100,000.01–$500,000.00 ....................................................................................................................... 200 **300 750

$500,000.01–$5,000,000.00 .................................................................................................................... 250 **300 1,000

Above $5,000.00 ...................................................................................................................................... 300 **300 1,500

INDUSTRY/CLEARING CLAIMANT

(E.g., ETP Holder [or Firm] v. customer

Amount in dispute (exclusive of interest and expenses) Filing fee

Hearing session deposit

Documents

only

Hearing w/1

arbitrator

$01–$10,000.00 ....................................................................................................................................... $500 $75 $300

Amount in dispute (exclusive of interest and expenses) Filing fee

Hearing session deposit

One

arbitrator

Three

arbitrators

$10,000.01–$30,000.00 ........................................................................................................................... $500 *$300 $600

$30,000.01–$100,000.00 ......................................................................................................................... 500 **300 600

Amount in dispute (exclusive of interest and expenses) Filing fee

Hearing session deposit

Pre-hearing

conference

Three

arbitrators

$100,000.01–$500,000.00 ....................................................................................................................... $500 **$300 $750

$500,000.01–$5,000,000.00 .................................................................................................................... 500 **300 1,000

Above $5,000,000.00 ............................................................................................................................... 500 **300 1,500

* This would apply to the following cases:

(a) where parties elect to have claims between $10,000 and $30,000 resolved by a single arbitrator pursuant to Rule 12.9.

(f) pre-hearing conferences with a single arbitrator in cases where a three person panel has been appointed.

** For pre-hearing conferences only.

ETP HOLDER [OR ETP FIRM] CONTROVERSIES

(E.g., associated person v. ETP Holder [ or Firm])

Amount in dispute (exclusive of interest and expenses) Filing fee

Hearing session deposit

One

arbitrator

Three

arbitrators

$.01–$10,000.00 ...................................................................................................................................... $100 $200 –NA–

$10,000.01–$100,000 .............................................................................................................................. 200 –NA– $750

$100,000.01 or more ............................................................................................................................... 300 –NA– 1,000

78892 Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices

ETP Holder Surcharge

Rule 12.33(a). Each ETP Holder[, ETP

Firm] or associated person who is named a

party to an arbitration proceeding, whether in

a claim, counterclaim, third-party claim, or

cross-claim shall be assessed a nonrefundable surcharge pursuant to the

schedule in Rule 12.33(c) when the

Arbitration Department perfects service of

the claim naming the ETP Holder[, ETP Firm]

or associated person on any party to the

proceeding.

For each associated person who is named,

the surcharge shall be assessed against the

ETP Holder(s) [or ETP firm(s)] which

employed the associated person at the time

of the events which gave rise to the dispute,

claim or controversy.

No ETP Holder [or ETP Firm] shall be

assessed more than a single surcharge in any

arbitration proceeding. The surcharge shall

not be subject to reimbursement under rule

12.32.

(b) For purposes of this Rule, service is

perfected when the Arbitration Department

properly serves the Respondent(s) to the

arbitration proceeding under Rule 12.14(c).

(c) Schedule of Surcharge Rates:

Amount in dispute Surcharge

$0.01 to $10,000 ........................ $100

$10,000.01 to $50,000 ............... 200

$50,000.01 to $100,000 ............. 300

$100,000.01 to $500,000 ........... 350

About $500,000 .......................... 500

Requirements when Using Pre-Dispute

Arbitration Agreements With Customers

Rule 12.34—No change.

Rule 13

Liability of Directors and Corporation

Liability of Directors

Rule 13.1. Any provision of the [Articles]

Certificate of Incorporation, Bylaws, or the

Rules of the Corporation that provides or

purports to provide that the members of the

Board of Directors shall not be liable to the

Corporation or its ETP Holders[, Equity

ASAP Holders, and ETP Firms] for monetary

damages for breach of fiduciary duty as a

Director shall not be applied in any instance

in which such liability arises directly or

indirectly as a result of a violation of federal

securities laws.

Liability of Corporation

Rule 13.2(a). Except as otherwise expressly

provided in these [rules] Rules, neither the

Corporation nor its Directors, officers,

committee members, employees or agents

shall be liable to the ETP Holders[, Equity

ASAP Holders, and ETP Firms] of the

Corporation or to persons associated

therewith for any loss, expense, damages or

claims that arise out of the use or enjoyment

of the facilities or services afforded by the

Corporation, any interruption in or failure or

unavailability of any such facilities or

services, or any action taken or omitted to be

taken in respect to the business of the

Corporation except to the extent such loss,

expense, damages or claims are attributable

to the willful misconduct, gross negligence,

bad faith or fraudulent or criminal acts of the

Corporation or its officers, employees or

agents acting within the scope of their

authority. The limitation of liability set forth

in this paragraph shall not apply to violations

of federal securities laws.

Without limiting the generality of the

foregoing and subject to the same exception,

the Corporation shall have no liability to any

person for any loss, expense, damages or

claims that result from any error, omission or

delay in calculating or disseminating any

current or closing index value, or any reports

of transactions in or quotations for securities

traded on the Corporation.

The Corporation makes no warranty,

express or implied, as to results to be

obtained by any person or entity from the use

of any data transmitted or disseminated by or

on behalf of the Corporation or any reporting

authority designated by the Corporation,

including but not limited to reports of

transactions in or quotations for securities

traded on the Corporation, or reports index

values or related data, and the Corporation

makes no express or implied warranties of

merchantability or fitness for a particular

purpose or use with respect to any such data.

The foregoing limitations of liability and

disclaimers shall be in addition to, and not

in limitation of, any other provisions of the

Bylaws or Rules.

(b) Whenever custody of an unexecuted

order is transmitted by an ETP Holder[,

Equity ASAP Holder, or ETP Firm] to or

through the Corporation’s order routing

systems, electronic book or automatic

executions systems or to any other automated

facility of the Corporation whereby the

Corporation assumes responsibility for the

transmission or execution of the order,

provided that the Corporation has

acknowledged receipt of such order, the

Corporation’s liability for the negligent acts

or omissions of its employees or for the

failure of its systems or facilities shall not

exceed the limits provided in this paragraph

(b), and no assets of the Corporation shall be

applied or shall be subject to such liability

in excess of the following limits:

(1) As to any one or more claims made by

a single ETP Holder[, Equity ASAP Holder,

or ETP Firm] growing out of the use or

[employment] enjoyment of the facilities

afforded by the Corporation on a single

trading day, the Corporation shall not be

liable in excess of the larger of $100,000, or

the amount of any recovery obtained by the

Corporation under any applicable insurance

maintained by the Corporation;

(2) As to the aggregate of all claims made

by all ETP Holders[, Equity ASAP Holders,

and ETP Firms] growing out of the use or

[employment] enjoyment of the facilities

afforded by the Corporation on a single

trading day, the Corporation shall not be

liable in excess of the larger of $250,000 or

the amount of the recovery obtained by the

Corporation under any applicable insurance

maintained by the Corporation.

(3) As to the aggregate of all claims made

by all ETP Holders[, Equity ASAP Holders,

and ETP Firms] growing out of the use or

enjoyment of the facilities afforded by the

Corporation during a single calendar month,

the Corporation shall not liable in excess of

the larger of $500,000, or the amount of the

recovery obtained by the Corporation under

any applicable insurance maintained by the

Corporation.

(c)—No change.

Legal Proceedings Against Directors, Officers,

Employees or Agents

Rule 13.3. No ETP Holder[, Equity ASAP

Holder, ETP Firm], or any other associated

person shall institute a lawsuit or other legal

proceeding against any Director, officer,

employee, agent or other official of the

Corporation or any subsidiary of the

Corporation, for actions taken or omitted to

be taken in connection with the official

business of the Corporation or any

subsidiary, except to the extent such actions

or omissions constitute violations of federal

securities laws for which a private right of

action exists and except with respect to the

Directors of the Corporation, to the extent

inconsistent with the [Articles] Certificate of

Incorporation. This Rule shall not apply to

appeals of disciplinary actions or other

actions by the Corporation as provided for in

the Rules.

Corporation’s Costs of Defending Legal

Proceedings

Rule 13.4. Any ETP Holder[, Equity ASAP

Holder, ETP Firm,] or any other associated

person who fails to prevail in a lawsuit or

other legal proceeding instituted by such

person against the Corporation or any of its

Directors, officers, committee members,

employees or agents, and related to the

business of the Corporation, shall pay to the

Corporation all reasonable expenses,

including attorney’s fees, incurred by the

Corporation in the defense of such

proceeding, but only in the event that such

expenses exceed Fifty Thousand Dollars

($50,000.00). This provision shall not apply

to disciplinary actions by the Corporation, to

administrative appeals of actions of the

Corporation or in any specific instance where

the Board of Directors has granted a waiver

of this Rule.

Rule 14

Plan of Delegation of Functions by the

Pacific Exchange, Inc. to PCX Equities, Inc.

Pacific Exchange, Inc.

Rule 14.1. The Pacific Exchange, Inc.

(‘‘PCX’’), the registered national securities

exchange, is the parent company of the

wholly-owned subsidiary PCX Equities Inc.

(‘‘PCX Equities). The term ‘‘Exchange’’ shall

refer to the PCX and PCX Equities

collectively.

(a) Functions and Authority of the PCX.

The PCX shall have ultimate responsibility

for the rules and regulations of the Exchange

and its operation and administration. As set

forth below in Rule 14.2(a), the PCX has

delegated certain authority and functions to

PCX Equities. Actions taken pursuant to

delegated authority, however, remain subject

to review, ratification or rejection by the PCX

Board of Governors (‘‘PCX Board’’) in

accordance with procedures established by

that Board. Any function or responsibility as

a registered national securities exchange

under the Securities Exchange Act of 1934

(‘‘Act’’), or as set forth in the [Certification]

Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / Notices 78893

Certificate of Incorporation, the Constitution

or the PCX Rules is hereby reserved, except

as expressly delegated to PCX Equities. In

addition, the PCX expressly retains the

following authority and functions:

(1)–(9)—No change.

(b) Access to and Status of Officers,

Directors, Employees, Books, Records, and

Premises of PCX Equities. Notwithstanding

the delegation of authority to PCX Equities,

as set forth in Rule 14.2(a) below, the staff,

books, records, premises, officers, directors,

employees and agents of the PCX Equities are

subject to the oversight of the PCX pursuant

to the Act, and all officers, directors,

employees, and agents of PCX Equities are

officers, directors, employees, and agents of

the PCX for purposes of the Act. The books

and records of PCX Equities shall be subject

at all times to inspection and copying by the

PCX.

PCX Equities Inc. (‘‘PCX Equities’’)

Rule 14.2(a) Delegation of Functions and

Authority.

(1) Subject to Rule 14.1(a)(9), the PCX

hereby delegates to PCX Equities and its

subsidiary Pacific Clearing Corporation and

PCX Equities assumes the following

responsibilities and functions with respect to

the equities business of the Exchange:

(A) To establish and interpret rules and

regulations and provide exemptions for ETP

Holders[, ETP Firms, Equity ASAP Holders]

or associated persons including, but not

limited to trading rules, fees, access to and

use of system facilities and arbitration

procedures.

(B) To determine regulatory and trading

policies, including the development and

adoption of necessary or appropriate rule

changes, relating to the business conduct and

trading activities of ETP Holders[, ETP Firms,

Equity ASAP Holders] and associated

persons. This includes, but is not limited to,

(i) arbitration of disputes among and

between ETP Holders[, ETP Firms, Equity

ASAP Holders] and associated persons and

customers arising from transactions on the

facility;

(ii)—No change.

(iii) qualifications for ETP Holders[, ETP

Firms, Equity ASAP Holders] and associated

persons;

(iv) clearance and settlement of securities

transactions and other financial

responsibility and operational matters

affecting ETP Holders[, ETP Firms, Equity

ASAP Holders] and associated persons in

general and securities traded on PCX

Equities;

(v)–(vi)—No change.

(C) To take necessary or appropriate action

to assure compliance with the [rules] Rules

and procedures of PCX Equities, the federal

securities laws, and other laws, rules and

regulations that the PCX Equities has the

authority to administer or enforce, through

examination, surveillance, investigation,

enforcement, disciplinary, and other

programs.

(D) To administer programs and systems

for the surveillance and enforcement of rules

governing ETP Holders[, ETP Firms, Equity

ASAP Holders] and associated persons’

conduct and trading activities on PCX

Equities.

(E) To examine and investigate ETP

Holders[, ETP Firms, Equity ASAP Holders]

and associated persons to determine if they

have violated the [rules] Rules or procedures

of PCX Equities, the federal securities laws,

and other laws, rules, and regulations that

the Exchange has the authority to administer,

interpret, or enforce.

(F)–(G)—No change.

(H) To determine whether ETP Holder [and

Equity ASAP Holder] applicants have met

the requirements established by PCX Equities

for holding an ETP [or Equity ASAP].

(I) To determine whether persons seeking

to register as associated persons of ETP

Holders[, ETP Firms or Equity ASAP

Holders] have met such qualifications for

registration as may be established by PCX

Equities, including whether statutorily

disqualified persons will be permitted to

associate with particular ETP Holders[, ETP

Firms or Equity ASAP Holders] and the

conditions of such association.

(J) To place restrictions on the business

activities of ETP [Holders, ETP Firms, Equity

ASAP] Holders and associated persons

consistent with the public interest, the

protection of investors, and the federal

securities laws.

(K) To establish and assess fees and other

charges on ETP Holders, [ETP Firms, Equity

ASAP Holders,] associated persons, issuers

and others using the products, services or

facilities of PCX Equities.

(L)–(O)—No change.

(P) To develop and adopt [rules] Rules,

interpretations, policies, and procedures and

provide exemptions to maintain and enhance

the integrity, fairness, efficiency, and

competitiveness of PCX Equities.

(Q)—No change.

(R) To develop, adopt, administer and

enforce policies and [rules] Rules of PCX

Equities governing listing standards

applicable to securities traded on PCX

Equities and the issuers of those securities.

(S)–(U)—No change.

(2)–(c)—No change.

Archipelago Exchange, L.L.C., and Archipelago

Holdings, L.L.C.

Rule 14.3(a) Access to and Status of Books,

Records, Premises, Officers, Directors, Agents

and Employees of Archipelago Exchange,

L.L.C. The books, records, premises, officers,

directors, agents and employees of

Archipelago Exchange, L.L.C., shall be

deemed to be the books, records, premises,

officers, directors, agents and employees of

PCX and PCX Equities for purposes of and

subject to oversight pursuant to the Securities

Exchange Act. The books and records of

Archipelago Exchange, L.L.C., shall be

subject at all times to inspection and copying

by the PCX, PCX Equities and the SEC.

(b) Access to and Status of Officers and

Directors of Archipelago Holdings, L.L.C. All

officers and directors of Archipelago

Holdings, L.L.C., shall be deemed to be

officers and directors of PCX and PCX

Equities for purposes of and subject to

oversight pursuant to the Securities Exchange

Act.

(c) Paragraphs (a) and (b) above shall not

be deemed to create any rights or benefits for

any person or entity other than the SEC.

[PCX Equities, Inc.]

[Equity Floor Procedure Advices]

[1–A—3–A—Deleted.]

[FR Doc. 00–30518 Filed 12–14–00; 8:45 am]

BILLING CODE 8010–01–P