Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Notices 71187

13See Securities Exchange Act Release Nos.

42235 (December 14, 1999), 64 FR 71839 (December

22, 1999); and 40760 (December 8, 1998), 63 FR

70884 (December 22, 1998). 14See note 6, supra. 15See Amendment No. 1, supra note 3.

16 15 U.S.C. 78f(b)(3).

17 15 U.S.C. 78s(b).

18 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3The extension of the pilot program incorporates

three changes to the initial pilot program: (1)

Payment for order flow fees are not eligible for

inclusion in the credit, (2) daughters-in-law and

sons-in-law are now included in the definition of

an immediate family member, and (3) the amount

of the credit will be included on the member’s

invoice instead of the member submitting a credit

form each month.

4Out-of-pocket expenses include charges for

wireless telephone services, postage, ILX machines

and Dow Jones News Service.

5Pass-through costs include charges for member

health insurance and parcel delivery services.

6Capital funding fees are assessed on owners to

provide funding for technological improvements

and other capital needs. On June 29, 2000, the

Commission approved the capital funding fee for a

36 month period. See Securities Exchange Act

Release No. 42993 (June 29, 2000), 65 FR 42415

(July 10, 2000) (SR–Phlx–99–51).

7Payment for order flow fees are fees imposed on

transactions by Phlx specialists and Registered

Options Traders in the Top 120 Options on the

Phlx. See Securities Exchange Act Release Nos.

43177 (August 18, 2000), 65 FR 51889 (August 25,

2000) (SR–Phlx–00–77); 43480 (October 25, 2000)

(SR–Phlx–00–86 and SR–Phlx–00–87); and 43481

(October 25, 2000), 65 FR 66277 (November 3, 2000)

(SR–Phlx–00–88 and SR–Phlx–00–89).

8The credit-eligible fees are fees assessed on

members and include transaction as well as trading

floor fees. Transaction fees include equity

transaction value charges, equity floor brokerage

transaction fees, option comparison charges and

option transaction charges. Trading floor fees

include charges for trading post/booth, controller

space, shelf space, transmission, execution/

communication charge and floor facility fees. Fees

assessed on foreign currency options participants

are not considered credit-eligible fees.

9See Securities Exchange Act Release No. 42791

(May 16, 2000), 65 FR 33606 (May 24, 2000). The

credit is part of the Exchange’s long-term financing

plan, which includes the $1,500 capital funding fee.

See supra note 6.

perspectives to the governance of an

exchange, and should enhance the

ability of an exchange to address issues

in a non-discriminatory fashion.13

Therefore, the Commission believes that

adding public representatives to the

Nominating Committee should enhance

the integrity of the nominating process.

The Exchange has also proposed to

permit PCX public Governors to serve as

the public representatives on the

Nominating Committee. The

Commission notes that as currently

drafted, the PCX Constitution seems to

permit any governor to serve on the

Nominating Committee. However, in

Amendment No. 1,14 the Exchange

clarified that only public Governors will

be permitted to serve on the Nominating

Committee, and committed to submit a

change to the PCX Constitution to

reflect this limitation to its members.15

The Commission notes that any such

clarification must be submitted to the

Commission as a proposed rule change

and expects such proposed rule change

to be submitted as soon as practicable

after the requisite member vote. Further,

the Commission notes that any change

to the PCX’s interpretation that this

proposal only permits public Governors

to be eligible for positions on the PCX

Nominating Committee would require a

rule change to be submitted to the

Commission. For purposes of this filing,

however, the Commission believes that

it is acceptable to permit public

governors to serve as public members of

the Nominating Committee.

To accommodate the public positions,

the Exchange has eliminated the

requirement that at least two floor

members be represented on the

Nominating Committee. Because the

Commission believes that public

representation on the Nominating

Committee enhances the ability of the

Committee to select eligible candidates

for the PCX Board and PCX Nominating

Committee, the Commission believes

that this change is consistent with the

Act. Further, the Commission notes that

the composition of the Nominating

Committee continues to contemplate all

types of PCX members. Thus, floor

members may continue to be

represented on the Nominating

Committee, if members are elected.

The Commission finds good cause for

approving the proposed rule change, as

amended, prior to the thirteenth day

after publication of notice thereof in the

Federal Register. The Commission

understands that the PCX’s Nominating

Committee is currently considering

candidates for election to the

Nominating Committee in January 2001.

Approval of this proposal on an

accelerated basis will enable the PCX

Nominating Committee to consider

public Governors for the public

representative positions on the January

2001 Nominating Committee, which as

described above, the Commission

believes will enhance the nominating

process. The Commission believes that

good cause exists consistent with

Sections 6(b)(3) 16 and 19(b) 17 of the Act

to approve the proposed rule change, as

amended on an accelerated basis.

V. Conclusion

It is Therefore Ordered, pursuant to

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

proposed rule change (SR–PCX–00–09),

as amended, is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.18

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–30385 Filed 11–28–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43567; File No. SR–Phlx–

00–100]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

Philadelphia Stock Exchange, Inc.

Extending Its Pilot Program To Assess

a Monthly Credit of up to $1,000 to

Qualified Members

November 15, 2000.

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

Securities Exchange Act of 1934

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

notice is hereby given that on November

8, 2000, the Philadelphia Stock

Exchange, Inc. (‘‘Phlx’’ or ‘‘Exchange’’)

filed with the Securities and Exchange

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

the proposed rule change as described

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

have been prepared by the Exchange.

The Commission is publishing this

notice to solicit comments on the

proposed rule change from interested

persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Phlx, pursuant to Rule 19b–4

under the Act, proposes to extend its

current pilot program that allows certain

Exchange members to receive a monthly

credit of up to $1,000.3 The credit will

be applied against fees, dues, charges

and other amounts as may from time to

time be owed to the Exchange that

month, except fines, late fees, out-ofpocket expenses,4 pass-through costs,5

capital funding fees,6 payment for order

flow fees,7 and any fees paid by equity

trading permit holders in respect of any

trading permits the Exchange may issue,

(‘‘credit-eligible fees’’) 8 by members

who own the membership by which

they are a member (‘‘member-owners’’)

and certain other categories of members

described below. The current pilot

program became effective upon filing on

May 16, 2000 and expires on November

16, 2000; 9 the Exchange now proposes

to extend the pilot program for an

additional six-month period through

May 16, 2001.

In addition to member-owners, the

credit may be applied against creditVerDate 11<MAY>2000 17:49 Nov 28, 2000 Jkt 194001 PO 00000 Frm 00102 Fmt 4703 Sfmt 4703 E:\FR\FM\29NON1.SGM pfrm02 PsN: 29NON1
71188 Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Notices

10Pursuant to Phlx Rule 940, the parties to an A–

B–C agreement are an employee, general partner, or

officer and the member organization with which

such person is associated. The member organization

provides all or part of the funds for the purchase

of a membership of which the legal title is placed

in the member and the equitable title is placed in

the member organization. 11 Immediate family member is defined as a

member’s spouse, parents, stepmother, stepfather,

mother-in-law, father-in-law, brothers, sons-in-law,

brothers-in-law, stepbrothers, sisters, daughters-inlaw, sisters-in-law, stepsisters, children,

stepchildren and any other person living with the

member for whom the member provides at least 50

percent of his/her financial support per year.

12For example, if a member has $1,500 in crediteligible fees for the month, such member is entitled

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

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

member is entitled to a $600 credit.

13The Exchange believes that placing the amount

of credit on a member’s invoice should reduce the

burdens associated with completing the credit form

each month. However, the Exchange may revert to

the credit form process at a later date if it is

determined that credits are more efficiently

processed that way. If any changes are made to the

credit form process, members will be given updated

instructions as to how to apply for the credit.

14A lessor is entitled to vote in any decision

relating to a compromise or arrangement between

the Phlx and its creditors or its members, or relating

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

Thirteen of the Exchange’s Certificate of

Incorporation and Phlx By-Law Article XII, Section

12–6.

15See Phlx Rule 930(b).

eligible fees incurred by the following

persons, who are so closely connected

to the owners that the Exchange believes

they should be treated as memberowners: (1) All members who are parties

to an A–B–C agreement 10 with a

member organization who owns that

membership; or (2) all members who are

lessees if: (a) The member is also an

owner of a different membership; (b) the

member is an immediate family member

of the owner of that membership; 11 (c)

the member is associated with a member

organization in which the owner has an

interest of at least ten percent; (d) the

member leases from an owner or a

related entity of the owner who

provides order flow to the Exchange

through the member or member

organization consisting of at least 5,000

equity trades over the preceding twelve

months or 50,000 option contracts over

the preceding twelve months; or (e) the

member leases from a clearing firm or a

related entity of the clearing firm that

provides clearing services to the leasing

member. The aforementioned categories

(including member-owners) are

hereinafter referred to as ‘‘qualified

members.’’

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

be reduced on a monthly basis by an

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

if such fees, dues, charges and other

amounts are equal to or greater than

$1,000, or (2) the amount of such fees,

dues, charges and other amounts if such

fees, dues, charges and other amounts

are less that $1,000.12 Credits may not

be carried over from one month to the

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

is available per membership per month.

Credits cannot be shared among

members, except qualified members in

the same member organization may

aggregate their credits. The monthly

credit of up to $1,000 will be applied

against the invoice of the member or

member organization with which the

member is associated. However, in no

event shall the aggregated credits exceed

$1,000 per membership per month.

Initially, any request to receive the

credit was application driven, with each

applicant submitting an Exchange form

delineating the credit-eligible fees for

that calendar month. To reduce the

burden on members, the Exchange

proposes to include the amount of the

credit directly on a member’s invoice,

once it has been established that the

member is eligible for the credit, in lieu

of requiring the member to complete a

credit form each month.13 A member’s

eligibility shall be determined by the

opening of trading on the first business

day of each month. The Exchange

reserves the right to suspend the credit

at any time.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

Exchange included statements

concerning the purpose of, and basis for,

the proposed rule change and discussed

any comments it received on the

proposed rule change. The text of these

statements may be examined at the

places specified in Item IV below. The

Exchange has prepared summaries, set

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

the most significant aspects of such

statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for the Proposed Rule

Change Purpose

1. Purpose

a. Introduction

The purpose of the proposed rule

change is to amend the Exchange’s

schedule of fees, dues, and charges to

allow for a monthly credit of up to

$1,000 to be applied against certain fees,

dues, charges and other amounts, as

defined above, owed to the Exchange by

a qualified member of the Exchange.

As more fully explained below, the

Exchange believes that the proposed

credit should provide qualified

members with additional liquidity and

an incentive for seat owners to trade on

the Exchange. In turn, the Exchange

believes that this will introduce

additional liquidity into the

marketplace to the benefit of the

investing public.

The Exchange believes that leasing of

memberships by passive holders of

equitable title to lessees who trade on

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

necessarily promote the long-term

interests of the Exchange. Although the

practice of leasing by financial investors

to members is permitted by the rules of

the Exchange, and may provide an

important means by which members can

access trading rights on the Exchange,

the Exchange believes that lessors who

are passive financial investors have a

limited stake and interest in the

liquidity, technology or operations of

the Exchange.

Moreover, such lessors have limited

practical ability to influence the affairs

of the Exchange, because practically all

voting rights are vested in ‘‘members’’

under Phlx’s Certificate of Incorporation

and By-Laws.14

The Exchange also believes that

members who acquire membership and

access trading on the Exchange by

means of a lease may in many cases

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

Although such members may have

voting rights, they have no capital

investment in their membership, and,

because leases typically may be

terminated on 30 days notice,15 they do

not necessarily have the incentive to act

in the long-term best interests of the

Exchange.

Specifically, by terminating a lease

with 30 days notice, lessees who do not

have ‘‘other’’ business interests or

relationships with the Exchange beyond

the mere existence of a lease (such as

those relationships enumerated in part

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

Exchange to trade on another exchange,

perhaps seeking to trade a certain ‘‘hot’’

option or other product. Thus, their

potential commitment to the Exchange’s

long-term well-being and survival is

undercut by their easy ability to pursue

business endeavors that further their

own well-being. Further, although

member-lessees may be appointed to

certain Exchange committees and subcommittees, their motivation to devote

the time to such service may be less, as

is their incentive to make decisions

focused on the long-term. Both daily

and longer term, strategic decisionmaking could thus be affected.

Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Notices 71189

16The Exchange notes that, as part of its overall

strategic financing plan, it separately instituted a

$1,500 monthly capital funding fee upon all

‘‘owners,’’ regardless of their level of activity (if

any) on the Exchange. See supra note 5. Although

the credit is not available to offset all or any portion

of the capital funding fee, the credit will enable

member-owners and others eligible for the credit to

defray a portion of the transaction and other fees

charged by the Exchange (and that, in general,

result from member activity on the Exchange),

thereby effectively reducing, for member-owners

and other eligible members the cost of trading on

the Exchange. Therefore, the credit may also have

the indirect effect of blunting the incremental

economic burden of the capital funding fee for

owners who are active and, directly or indirectly,

trading on (or otherwise providing certain economic

benefits to) the Exchange. In addition, the credit

frees up funds for trading activity on the Exchange

that would otherwise be used for the payment of

credit-eligible Exchange fees.

17 15 U.S.C. 78f(b)(4).

18 15 U.S.C. 78f(b)(5).

19 15 U.S.C. 78f(b)(4).

20 15 U.S.C. 78f(b)(5).

21See e.g., Securities Exchange Act Release Nos.

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

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

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

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

(March 4, 1999) (SR–BSE–99–2).

22The CTA Plan and the OPRA Plan were

approved by the Commission as national market

system plans under SEC Rule 11Aa3–2, 17 CFR

240.11Aa3–2, governing the dissemination of

market information for certain equity securities and

Continued

This sort-term commitment may also

bear on the quality and quantity of

liquidity provided on the Exchange.

Building order flow commitments with

order flow providers is a long-term

endeavor, often requiring regular

performance, evaluation, and most

importantly, a relationship with the

trading crowd providing liquidity. Thus,

familiarity and consistency of crowd

participation are an important

marketing mechanism to order flow

providers. Providing liquidity also

involves a longer-term view of

sacrificing profit today for continued

order flow, as well as acknowledging

that not every order is a profitable one,

but continuous order flow, spawned by

ample liquidity, should, over time,

provide more opportunity for additional

order flow.

Lessees that do not have other

business interests or relationships (such

as those referred to in part b. below)

may also have a limited stake in the

technology of the Exchange, including

participation in any good use of

technology, nor would they necessarily

have an incentive to invest in the

longer-term development of that

technology. Such investment is not only

financial, but also strategic. Such lessees

may also have a limited stake in the

operations of the Exchange, including

the continued long-term refinement and

upgrading of facilities, other equipment

and the pricing of such operations. In

sum, lessees, absent other factors tying

them to the Exchange, may be less

vested in the long-term success of the

Exchange, in terms of a lesser incentive

to create liquidity, invest in technology

and be active in strategic and daily

decision-making.

In contrast, the Exchange is of the

view that members who own their own

memberships (and their functional

equivalents, such as members who lease

their memberships from close family

members), and members who have

certain other business or financial

relationships with owners who are

active on the Exchange (e.g., members

who are associated with member

organizations and hold their

memberships pursuant to ‘‘A–B–C

agreements’’) have a combination of

financial incentives and voting rights (in

some cases, indirectly via the owners

with whom they are closely related or

associated) to create liquidity on the

Exchange, to invest in systems and

compliance infrastructure, to be active

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

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

credit described in this filing to these

group of members, the Exchange expects

to create economic incentives for

owners to trade on the Exchange by

actively using their memberships (or

selling them to persons who would do

so) and for members to organize their

affairs in ways that, in the Exchange’s

view, properly align the interests of the

members with the long-term interest of

the Exchange. The Exchange also

believes that the credit should help

retain or create liquidity on the

Exchange by freeing up funds that

member-owners or their functional

equivalents may otherwise be

expending on credit-eligible fees.16

Although the credit is available to

some Exchange members and not others,

it meets the criteria set forth in Sections

6(b)(4) 17 and 6(b)(5) 18 of the Act

because it: (1) Provides for ‘‘ * * * the

equitable allocation of dues, fees and

other charges among its members * * *

and other persons using its facilities’’;

and (2) is not designed ‘‘ * * * to

permit unfair discrimination between

customers, issuers, brokers or dealers.’’

Although the Exchange is not aware of

precedents in which other exchanges

have established fee or credit programs

based upon ownership of seats or the

connection between lessees and their

lessors, as the Phlx proposes to adopt in

this filing, the Commission has

approved many exchange fee and credit

arrangements that do not treat all

members (or other persons covered by

Sections 6(b)(4) 19 and (5)) 20 equally,

such as credits and discounts based on

transaction volume, fees based upon the

usage by certain members of equipment

or other services or resources of an

exchange, and fee structures that

distinguish among the various activities

of persons and firms (e.g., specialists

versus floor brokers, or specialists

versus market makers). As with the

proposed credit, such measures are

designed to promote and encourage

certain behaviors and/or discourage

others. The Exchange believes that this

is an appropriate, nondiscriminatory

business strategy.

As more fully articulated below, the

Exchange believes that the credit is

equitably distributed and not unfairly

discriminatory, because it is based on

legitimate, reasonable business interests

of the Exchange, and is reasonably

designed to further those interests.

Moreover, it does not unfairly single out

individuals or groups for personal or

political reasons. To the contrary, any

member may become eligible for the

credit by changing the way in which

such member finances his or her access

to the Exchange by purchasing the

membership or by changing the

member’s lease arrangement.

b. More Detailed Rationale Specifically

Applied to the Various Eligibility

Criteria

i. Member-Owners. In many areas of

economic life, businesses and

governments establish incentives to

encourage behavior that is deemed

desirable. In the case of exchanges,

volume discounts and credits encourage

members to direct transaction volume

and trading activity to the exchange;

other fee structures are designed to deter

excessive usage of exchange resources

or to cause scarce resources to be

allocated more efficiently (e.g.,

equipment service fees or fees relating

to use of post/booth space on the

floor).21 The Exchange, as a matter of

policy, believes that owner-membership

or its functional equivalents as

described above, should be encouraged

because:

(A) Unlike passive, financial

investors, owner-members risk their

capital by their trading and other

activities on the floor, thereby (in many

cases) creating liquidity in our market

and generating revenues for the

Exchange, both directly through

transaction-based revenues, and

indirectly, by generating activity that

results in tape revenues, such as under

the Consolidated Tape Association

(‘‘CTA’’) and Options Price Reporting

Authority (‘‘OPRA’’) plans.22

71190 Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Notices

options, respectively; these plans govern both the

fees that can be charges for such information as well

as the distribution of revenues derived from those

fees among participants in these plans, including

the Exchange.

23See supra note 14.

24As of March 31, 2000, 324 memberships were

subject to lease agreements. This number may

change on a monthly basis.

25As of March 31, 2000, 48 seats were dormant

(neither used for active trading nor leased). 26See Phlx Rules 940 and 941.

Seat ownership is one aspect of

Exchange ‘‘investment’’ and the actual

use of that membership by the qualified

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

have additional operational and market

risks. For example, a qualified member

who is also a specialist or market maker

may have additional risks related to

fluctuations in the securities market and

order-processing errors in addition to

market risks associated with seat

ownership. Similarly, a qualified

member who is also a specialist may

have risks (in addition to seat risk)

associated with the specialists’

obligation to promote a fair and orderly

market and, particularly, maintain the

limit order book. Furthermore, in

addition to any fees assessed on owners,

qualified members also contribute to the

Exchange by paying transaction fees,

such as equity transaction value

charges, equity floor brokerage

transaction fees, option comparison

charges and option transaction charges,

and trading floor fees, such as trading

post/booth, controller space, shelf

space, transmission, execution/

communication charges and floor

facility fees.

(B) Unlike members who lease their

seats under typical lease arrangements

that may be cancelled on 30 days’

notice, member-owners have a

significant capital investment at risk;

and

(C) Unlike owners that are not

members, member-owners may have

voting rights under the Exchange’s bylaws, and may participate on certain

Exchange committees. 23

Because of their dual interest in

preserving and increasing the value of

their memberships, and in the

technological, operational, and

regulatory infrastructure that affects the

present and future conditions of

transacting business on or at the

Exchange, the Exchange believes that

member-owners have powerful

incentives to create liquidity on the

Exchange, and to participate responsibly

in the business life of the Exchange

through the exercise of voting rights,

and through service on the Board and

certain Exchange committees. The

concept (and the underlying policy) of

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

government in providing tax incentives

to homeowners that are not available to

renters. The long-term capital stake of

the homeowner in his or her property

promotes various behaviors that have

social utility in that it fosters

community-oriented behavior, and

increases the prospect that the

homeowner will make further socially

useful investments in the property and

in the neighborhood.

The Exchange believes that similar

principles are involved in the instant

case. The ability to lease memberships

has been available for many years. Over

time, the equitable ownership of

memberships by passive financial

investors has become a very pervasive

phenomenon at the Exchange, with 324

of the Exchange’s 505 memberships

being owned by such financial

investors.24 Of those memberships

owned by passive financial investors,

approximately 48 memberships are

currently dormant (neither used for

active trading nor leased).25 Although

the Exchange believes that leasing of

memberships has a legitimate role in

providing members a means of

accessing trading rights on the

Exchange, it also believes that the extent

to which long-term capital investment is

currently divorced from voting rights

and trading interest is not healthy

insofar as it relates to the long-term

viability of the institution and its

membership as a whole. The credit

should create an incentive for owners to

actively use their trading rights through

membership and for members to

reconsider the manner in which they

finance their access to the Exchange.

Furthermore, the Exchange believes that

the credit will free up funds for those

owners who are most likely to put their

capital to work by trading and creating

liquidity on the floor. The credit may

also effectively (but indirectly) lessen

the overall impact of the capital funding

fee on those owners who are trading at

the Exchange and (because the credit

may be applied against transactional

fees) create further incentives to trade.

The Exchange notes that no member

may claim that his or her lack of

eligibility for the credit is unfair or

discriminatory. Any member may obtain

eligibility for the credit by changing his

or her method of financing their access

to the Exchange—e.g., by purchasing

their membership and (if they choose)

borrowing from third-party lenders to

effect that purchase. Any owner may

obtain eligibility for the credit by, for

instance, becoming an Exchange

member (if they qualify for this and

subject to the procedures set forth in the

Exchange’s rules).

ii. Members/Member Organizations

with A-B-C Agreements. By definition,

with respect to A-B-C agreements, there

is a very close nexus between a member

and the member organization with

whom the member is associated; in

general, the member is an employee of

the member organization. This close

connection is reflected in the fact that

the member organization provides all or

part of the funds for the purchase of the

membership of which the legal title is

placed in the member, while the

equitable title remains with the member

organization.26 In addition, the

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

‘‘[a]n A-B-C-Agreement is a contract

between the member and member

organization with which the member is

associated in which a portion of the risk

of fluctuations in the value of the

membership shall rest with the member

organization rather than with the

member.’’

Pursuant to the A-B-C agreement, the

member contributes the use of the

membership to the member organization

and subjects the membership to the

claims of the creditors of the member

organization. Moreover, the member

organization pays the dues, fees and

other charges on behalf of the member.

Thus, given this unique business

relationship, owners who are member

organizations have significant capital

investment at risk and have a long-term

interest in preserving and increasing the

value of their membership, much like

member-owners. For this reason, the

Exchange is providing the credit to

members who are parties to an A-B-C

agreement with a member organization

who owns that membership.

iii. Lessees. As stated previously,

although leasing arrangements are

permitted, lessees, other than the five

types of qualifying members discussed

in detail below (‘‘non-qualifying

lessees’’), may have a limited stake in

the long-term well-being of the

Exchange. In fact, non-qualifying lessees

may lack the incentive to engage in

certain types of behavior that promote

the long-term best interests of the

Exchange, including providing liquidity

and investing in technology

enhancements. Specifically, nonqualifying lessees who do not put their

own (or a member with whom they have

a close nexus) capital at risk with

respect to a membership may provide

liquidity or order flow with less of a

long-term view and more of a focus on

their current market risk only. This view

may be at odds with behavior needed to

Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Notices 71191

27 17 CFR 240.16a–1(a)(2).

28 Immediate family is defined to mean any child,

stepchild, grandchild, parent, stepparent,

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

or sister-in-law, and includes adoptive

relationships. 17 CFR 240.16a–1(e).

29 17 CFR 230.701.

30 15 U.S.C. 77e.

31 17 CFR 230.701(c)(3).

32 17 CFR 240.16a–1(e).

33See 26 U.S.C. Section 318.

34See 26 U.S.C. Section 301 et seq.

35NASD Conduct Rule IM–2110–1. The

Freeriding and Withholding Interpretation is based

on the premise that NASD members have an

obligation to make a bona fide distribution of

securities of a public offering that trade at a

premium in the secondary market.

36 15 U.S.C. 78p.

37 15 U.S.C. 78L.

38 15 U.S.C. 78p.

39 Id.

address long-term Exchange needs.

These non-qualifying lessees who do

not have the types of additional

connections to owners on the Exchange

described below, may only have the

incentive to participate in a self-focused

way for their short-term benefit. If the

credit were made available to all lessees,

it would not serve its purpose as an

inducement to promote ownermembership or other relationships to

the Exchange that the Exchange believes

are the most conducive to its continued

health and success. Therefore, the

Exchange is not making the credit

available to all lessees. However, the

Exchange is seeking to provide the

credit to those qualified members whose

relationship with the owners from

whom they lease their seats is such that

the Exchange believes they (either

individually or indirectly when viewed

in conjunction with their owners) have

incentives properly aligned with the

long-term interests of the Exchange.

(A) Members Who Are Lessees But Who

Also Are Owners of Different

Memberships

Members who are lessees but who

also are owners of a different

membership should be accorded the

same treatment as the traditional

member-owners who were previously

discussed. These members, who are also

owners, have an interest in preserving

and increasing the value of their

membership as well as an interest in

preserving and increasing the standard

of technology and the operational and

regulatory infrastructure that affects the

present and future conditions of

transacting business at the Exchange. As

with traditional member-owners, the

Exchange believes that the credit will

free up funds for those members who

are also owners thereby encouraging

them to put their capital to work by

trading and creating liquidity on the

floor. As previously discussed, the

credit may also effectively (but

indirectly) lessen the overall impact of

the capital funding fee on those owners

who are trading at the Exchange.

(B) Members Who Lease From Close

Family Members

At the Phlx, many member firms are

family businesses, which choose to

structure their operations with the

owner being a relative (rather than that

member) for tax or estate planning

purposes. The Exchange believes that

there is commonality of interest in

property of close family members, thus

affording the credit to members who

lease from close family members. This

concept is one that is widely accepted,

especially in connection with rules

relating to the securities industry and

tax law. For example, Rule 16a–

1(a)(2) 27 under the Act defines the term

‘‘beneficial owner’’ to mean any person

who, directly or indirectly, through any

contract, arrangement, understanding,

relationship or otherwise, has or shares

a direct or indirect pecuniary interest in

the equity securities. Indirect pecuniary

interest is then defined to include

securities held by members of a person’s

immediate family sharing the same

household.28 In addition, Rule 701

under the Securities Act of 1933

(‘‘Securities Act’’)29 exempts from

Section 5 of the Securities Act 30 certain

offers and sales of securities under a

written compensatory benefit plan

established by the issuer for the

participation of their employees and

their family members who acquire such

securities from such persons through

gift or domestic relations orders. Family

members are defined in Rule 701(c)(3) 31

the same as ‘‘immediate family’’ is

defined in Rule 16a–1(e). 32

Tax laws also recognize the

commonality of interest in property of

close family members. For example, the

Internal Revenue Code (‘‘IRC’’)

recognizes the shared interests of family

members by way of attributing the

ownership of stock held by close family

members to the taxpayer. 33 The IRS

treats stock owned by these close family

members as owned by the taxpayer in

determining the tax liability of the

taxpayer in various situations.34

A further example is the National

Association of Securities Dealers, Inc.

(‘‘NASD’’) Freeriding and Withholding

Interpretation,35 which restricts sales by

NASD members to accounts in which

so-called ‘‘restricted persons’’ have a

beneficial interest. Such restrictions are

also applicable, with some exceptions,

to immediate family members of those

restricted persons.

The Exchange believes that it should

not penalize members who choose to

lease memberships from close family

members, as it believes that these

persons are the functional equivalents of

member-owners, and the same rationale

applies to giving the credit to these

members as to member-owners.

(C) Members Who Are Associated With

a Member Organization in Which the

Owner Has an Interest of at Least Ten

Percent

Members who are lessees and are

associated with a member organization

in which the owner has at least a ten

percent interest also should be eligible

for the credit based on their closely

aligned interests with the owner. The

federal securities laws and rules of the

securities industry have long recognized

that a ten percent ownership interest is

a significant capital investment. For

example, Section 16 of the Act 36

requires any person who is the

beneficial owner of more than ten

percent of an equity security registered

under Section 12 of the Act 37 to file a

statement with the Commission

indicating his ownership interest.

Section 16 38 also treats such beneficial

owners as company insiders and limits

their ability to realize ‘‘short swing’’

profits. In enacting Section 16,39 the

Congress found that a ten percent owner

was sufficiently involved in the affairs

of the issuer to be treated as an insider.

Moreover, for purposes of NASD

Conduct Rule 2720, which restricts the

ability of an NASD member to

participate in the distribution of a

public offering of its own securities or

the securities of the member’s parent or

affiliate, a company is presumed to

control a member (and this is an

affiliate) if the company beneficially

owns ten percent or more of the member

firm. Finally, under the NASD’s

Freeriding and Withholding

Interpretation 40 an individual with a

ten percent or more equity interest in an

NASD member firm is deemed restricted

by virtue of his ownership interest, and,

thus, NASD member firms may not sell

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

In each of these examples, Congress or

the NASD found that a ten percent

owner is sufficiently involved in the

affairs of the subject entity to be subject

to the applicable restriction. A similar

analysis is applicable with respect to

owners of Phlx memberships who hold

a ten percent or greater interest in the

very member organization with which

the lessee is associated. The interests of

the owner, the member lessee and the

member organization are sufficiently

71192 Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Notices

41 15 U.S.C. 78f(b).

42 15 U.S.C. 78f(b)(4).

43Written comments were received in connection

with the initial proposed rule change relating to the

credit, which is currently in effect. These comments

are described in the previous Commission release

noticing the filing and immediate effectiveness of

the initial proposal. See Securities Exchange Act

Release No. 42791 (May 16, 2000) 65 FR 33606

(May 24, 2000) (SR–Phlx–00–44).

44 15 U.S.C. 78s(b)(3)(A)(ii).

45 17 CFR 240.19b–4(f)(2).

46 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3Securities Exchange Act Release No. 43415

(October 4, 2000), 65 FR 61014 (File No. SR–PHLX–

00–52).

aligned to allow the lessee member the

benefit of the credit.

(D) Members Who Lease From Owners

or Their Affiliates Who Provide Order

Flow to the Exchange Member

Similar to member-owners and other

eligible members discussed above,

members who lease from owners or

their affiliates who provide order flow

to the Exchange through the member or

member organization have a direct

contractual relationship with that

owner. For example, a floor broker who

executes orders entered by the owner

from whom the member leases his or

her seat has a fiduciary relationship

with that owner. The member derives

income, by way of commissions, from

the order flow provider and the order

flow provider, in turn, provides revenue

to the Exchange mainly by way of

transaction fees (and indirectly via tape

revenues). Giving a credit to members in

this situation should encourage the

member to fully maximize the business

relationship between the floor broker

and order flow provider by encouraging

the member to get more order flow,

which in turn equates to an increase in

fees paid by the floor broker to the

Exchange. The Exchange believes that

by extending the credit to this category

of members who are closely associated

with the owner, it is encouraging

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

providing more order flow.

(E) Members who Lease From a Clearing

Firm or a Related Entity of the Clearing

Firm That Provides Clearing Services to

the Leasing Member

Members who lease from a clearing

firm or related entity of the clearing firm

that provides clearing services to the

leasing member should also be eligible

to receive the credit. Members have a

close connection to their clearing firms,

or a related entity of the clearing firms,

in that the clearing firms provide

important and essential services by

contractual agreement with such

members; for instance, they guarantee

members’ trades. In addition, clearing

firms lend money and extend credit;

they also manage risk by way of tracking

positions and other monitoring

functions. Moreover, the clearing firm

offers various ancillary services to the

members, including stock executions

services, office space and other business

amenities. Therefore, given this close

connection between the members and

clearing firms or their affiliates, the

Exchange believes that the credit is

appropriate and should further their

joint interest in the well-being of the

Exchange.

2. Statutory Basis

For these reasons, the Exchange

believes that the proposed rule change

is consistent with Section 6(b) of the

Act,41 in general, and with Section

6(b)(4) 42 in that it provides for the

equitable allocation of reasonable dues,

fees and other charges.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange believes that the

proposed rule change imposes no

inappropriate burden on competition.

C. Self-Regulatory Organization’s

Statement on Comments on the

proposed Rule Change Received From

Members, Participants or Others

Written comments were neither

solicited nor received regarding an

extension of the monthly credit.43

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

The Exchange has designated the

proposed rule change as a fee change

pursuant to Section 19(b)(3)(A)(ii) of the

Act 44 and Rule 19b–4(f)(2) thereunder 45

because it establishes a due, fee or other

charge. Accordingly, the proposal will

take effect upon filing with the

Commission. At any time within 60

days of the filing of the proposed rule

change, the Commission may summarily

abrogate such rule change if it appears

to the Commission that such action is

necessary or appropriate in the public

interest, for the protection of investors,

or otherwise in furtherance of the

purposes of the Act.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing,

including whether the proposed rule

change is consistent with the Act.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington, DC 20549–0609. Copies of

the submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Room, 450 Fifth Street NW.,

Washington DC 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of the Phlx. All submissions

should refer to File No. SR–Phlx–00–

100, and should be submitted by

December 20, 2000.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.46

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–30380 Filed 11–29–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43584; File No. SR–PHLX–

00–52]

Self-Regulatory Organizations; Order

Approving a Proposed Rule Change by

the Philadelphia Stock Exchange, Inc.,

Relating to Review of Decisions of the

Exchange’s Business Conduct

Committee

November 17, 2000.

On August 18, 2000, the Philadelphia

Stock Exchange Inc. (‘‘PHLX’’ or

‘‘Exchange’’) filed with the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘Commission’’), a proposed rule change

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

Securities Exchange Act of 1934

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

The Exchange proposed amendments to

its rules concerning appeals from

decisions in disciplinary proceedings.

The proposed rule change was

published for comment in the Federal

Register on October 13, 2000.3 The

Commission received no comments on

the proposal. This order approves the

proposed rule change.

I. Description of the Proposal

The Exchange proposes to amend the

text of Phlx Rule 960.9 to incorporate

specific procedures for appeals from

decisions rendered in disciplinary