[Federal Register Volume 62, Number 58 (Wednesday, March 26, 1997)]
[Notices]
[Pages 14488-14490]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-7643]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38420; International Series Release No. 1066; File No. 
SR-PSE-96-46]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 1 Thereto by the Pacific Stock Exchange, Inc. Relating to 
Foreign Broker/Dealers

March 19, 1997.
    On December 16, 1996, the Pacific Stock Exchange, Inc. (``PSE'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to modify its rules to specify 
that the term ``broker/dealer,'' as used in PSE Rules 6.52(a), 6.86 and 
6.87, includes foreign broker/dealers. The PSE also proposed to adopt a 
definition of the term ``foreign broker/dealer.'' Notice of the 
proposed rule change was published for comment and appeared in the 
Federal Register on January 30, 1997.\3\ No comment letters were 
received on the proposal. On March 12, 1997, the Exchange filed 
amendment No. 1 to the proposed rule change.\4\ This order approves the 
PSE proposal, as amended.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 38203 (January 24, 
1997), 62 FR 4564 (January 30, 1997).
    \4\ In amendment No. 1 the Exchange revises the definition of 
``foreign broker/dealer'' to include those persons or entities which 
are required to be registered, authorized or licensed by a foreign 
governmental agency or foreign regulatory organization, even if they 
are not so registered, authorized or licensed. See letter from 
Michael D. Pierson, Senior Attorney, Regulation Policy, PSE, to 
James T. McHale, Attorney, Office of Market Supervision (``OMS''), 
Division of Market Regulation (``Division''), Commission, dated 
March 11, 1997 (``Amendment No. 1'').
---------------------------------------------------------------------------

I. Description of the Proposal

    PSE Rules 6.52(a), 6.86 and 6.87, relating to option transactions 
only, currently distinguish between orders for broker/dealers and 
orders for non-broker/dealers. Under these rules, only non-broker/
dealer customer orders are eligible to be placed on the public limit 
order book,\5\ to be entered for automatic execution,\6\ or are 
eligible for a guaranteed minimum execution of 20 contracts on the 
floor of the Exchange.\7\
---------------------------------------------------------------------------

    \5\ Rule 6.52(a) provides in part that ``[o]nly non-broker/
dealer customer orders may be placed with an Order Book Official 
pursuant to this Rule.'' Cf. SEC Rule 11Ac1-4(a)(6) (equity 
``customer limit orders'' that must be displayed pursuant to Rule 
11Ac1-4 include those that are ``not for the account of either a 
broker or dealer'') (effective January 20, 1997).
    \6\ Rule 6.87(a) provides: ``Only non-broker/dealer customer 
orders are eligible for execution on the Exchange's Automatic 
Execution System (``Auto-Ex'').''
    \7\ Rule 6.86(a) provides: ``Each trading crowd is required to 
provide a depth of twenty (20) option contracts for all non-broker/
dealer customer orders, at the bid/offer that is displayed as the 
disseminated market quote at the time such orders are announced or 
displayed at the trading post designated for trading the subject 
option class.''
---------------------------------------------------------------------------

    The purpose of the proposed rule change is to clarify the meaning 
of the term ``broker/dealer,'' as used in Rules 6.52(a), 6.86 and 6.87, 
by specifying that it includes foreign broker/dealers. The Exchange is 
also proposing to adopt the following definition of ``foreign broker/
dealers,'' which would be applicable to PSE Rules 6.52(a), 6.86 and 
6.87:
    Foreign Broker/Dealer: The term ``foreign broker/dealer''

means any person or entity that is registered, authorized or 
licensed by a foreign governmental agency or foreign regulatory 
organization (or should be so registered, authorized or licensed) to 
perform the function of a broker or dealer in securities, or both. 
The terms ``broker'' and ``dealer'' mean the same as set out in 
Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934, 
provided that a ``broker'' or ``dealer'' may be a bank.\8\

    \8\ Sections 3(a)(4) and 3(a)(5) of the Act provide:
    (4) The term ``broker'' means any person engaged in the business 
of effecting transactions in securities for the account of others, 
but does not include a bank.
    (5) The term ``dealer'' means any person engaged in the business 
of buying and selling securities for his own account, through a 
broker or otherwise, but does not include a bank, or any person 
insofar as he buys or sells securities for his own account, either 
individually or in some fiduciary capacity, but not as a part of a 
regular business.
---------------------------------------------------------------------------

    In light of the current globalization of the securities markets, 
the Exchange believes that the subject rules should be applied 
consistently. In this regard, PSE asserts that an exchange specialist 
(or functional equivalent) in Canada or Mexico, for example, should be 
subject to the same rules applicable to trading on the PSE as an 
exchange specialist in the United States, and should not have a 
competitive advantage over United States broker/dealers.\9\
---------------------------------------------------------------------------

    \9\ The Commission notes that a non-broker/dealer customer 
executing a trade through a foreign broker/dealer would be treated 
as a public customer for purposes of PSE Rules 6.52(a), 6.86 and 
6.87, as revised. Telephone conversation between Michael D. Pierson, 
Senior Attorney, Regulation Policy, PSE, and James T. McHale, 
Attorney, OMS, Division, Commission, on March 3, 1997.

---------------------------------------------------------------------------

[[Page 14489]]

    The Exchange believes that the proposed definition is sufficiently 
specific to ensure fair enforcement of the affected rules.\10\ The PSE 
asserts that it will be able to verify whether a person or entity is 
registered, authorized or licensed by a foreign governmental agency or 
a foreign regulatory organization to perform the specified functions of 
a broker/dealer. The PSE notes that, as a member of the Intermarket 
Surveillance Group (``ISG''),\11\ the Exchange may promptly obtain from 
ISG members and affiliates information on the accounts of persons or 
entities entering orders for execution on the PSE, including whether 
such orders have been entered for the account of a broker or dealer. 
The Exchange may also obtain such information from foreign exchanges or 
foreign regulatory authorities with whom the Exchange has an effective 
surveillance sharing agreement or from a foreign exchange or regulatory 
authority that is subject to a memorandum of understanding with the 
Commission that would require those entities to provide such 
information to the Exchange upon request.
---------------------------------------------------------------------------

    \10\ See Securities Exchange Act Release No. 37695 (September 
17, 1996), 61 FR 50366 (September 25, 1996) (order approving SR-PSE-
96-19).
    \11\ ISG was created in February 1981 to design, develop and 
implement a coordinated intermarket surveillance system among 
securities markets in the United States. On July 14, 1983, the 
exchanges participating in the ISG entered into an agreement to 
coordinate more effectively surveillance and investigative 
information sharing agreements in stock and options markets. In 
1989, with the active participation of the SEC and Commodity Futures 
Trading Commission, the ISG created an ``affiliate'' category for 
futures exchanges and non-U.S. self-regulatory organizations. 
Currently, the ISG is comprised of nine members and 13 affiliates.
---------------------------------------------------------------------------

    Based upon its review of the applicable regulatory structures of 
various foreign jurisdictions, the Exchange believes that the proposed 
definition is sufficiently specific to cover the foreign equivalents of 
U.S. brokers and dealers. These foreign jurisdictions include, but are 
not limited to, the following: Australia, Canada, the Czech Republic, 
France, Germany, Hong Kong, Hungary, Japan, Luxembourg, Mexico, the 
Netherlands, Poland, South Africa, South Korea, the Slovak Republic, 
Switzerland, and the United Kingdom.\12\
---------------------------------------------------------------------------

    \12\ See generally H. Bloomenthal & S. Wolff, International 
Capital Markets and Securities Regulation (1996).
---------------------------------------------------------------------------

    The Exchange also believes that the proposed definition of 
``foreign broker/dealer'' contains objective criteria for its 
application and is narrower in scope than the definition of ``foreign 
broker or dealer'' specified in SEC Rule 15a-6(b)(3).\13\ In addition, 
the Exchange notes the proposed definition is substantially similar in 
form and substance to SEC Rule 17a-7(c) (definition of nonresident 
brokers and dealers) and Exchange Act Sections 3(a)(50) (definition of 
foreign securities authority) and 3(a)(52) (definition of foreign 
financial regulatory authority).
---------------------------------------------------------------------------

    \13\ SEC Rule 15a-6(b)(3) provides: the term `foreign broker or 
dealer' shall mean any non-U.S. resident person (including any U.S. 
person engaged in business as a broker or dealer entirely outside 
the United States, except as otherwise permitted by this rule) that 
is not an office or branch of, or a natural person associated with, 
a registered broker or dealer, whose securities activities, if 
conducted in the United States, would be described by the definition 
of `broker' or `dealer' in sections 3(a)(4) or 3(a)(5) of the Act.
---------------------------------------------------------------------------

II. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, the requirements of Section 6(b)(5)\14\ in that it is 
designed to facilitate transactions in securities, promote just and 
equitable principles of trade, protect investors and the public 
interest, and is not designed to permit unfair discrimination between 
customers, issuers, brokers, and dealers. Additionally, the PSE's 
proposal is consistent with Section 11A(a)(1)(c)(ii) of the Act \15\ 
because it will promote fair competition among brokers and dealers.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78f(b)(5).
    \15\ 15 U.S.C. 78k-1(a)(1)(c)(ii).
---------------------------------------------------------------------------

    Specifically, with regard to PSE Rule 6.87, the Commission notes 
that it has previously determined that limiting execution of options 
orders through Auto-Ex to non-broker/dealer customer orders is 
appropriate and consistent with the Act, because automatic execution 
systems were developed, in part, to aid public customers by providing 
nearly instantaneous execution of small orders at a guaranteed 
price.\16\ Although the originally adopted rule and related Commission 
order did not specifically address or define the term ``non-broker/
dealer,'' it is consistent with the purpose of the rule to treat 
foreign broker/dealers in a manner similar to U.S. broker/dealers. 
Therefore, the amendment to Rule 6.87 properly clarifies that all 
broker/dealers, whether U.S. registered or foreign, are prohibited from 
utilizing Auto-Ex for execution of their own trades.
---------------------------------------------------------------------------

    \16\ See Securities Exchange Act Release No. 37695 (September 
17, 1996), 61 FR 50366 (September 25, 1996). (order approving SR-
PSE-96-19).
---------------------------------------------------------------------------

    With regard to Rule 6.86, PSE's ``firm quote'' or ``20-up'' rule, 
the Commission finds that the amendment similarly serves to clarify 
which market participants are entitled to a guaranteed execution of 20 
option contracts. The Commission believes that it is reasonable and 
consistent with the purpose of Rule 6.86 to not require PSE market 
makers to provide a guaranteed minimum level of liquidity to broker/
dealer option orders, regardless of whether the broker/dealer is 
registered in the United States or is a foreign broker/dealer. Limiting 
the 20 contract minimum to non-broker/dealers also furthers the 
purposes of the Act by helping to ensure that market makers' volume 
guarantees will not be exhausted by competitors to the detriment of 
public customers.\17\ Similarly, the Commission also believes that 
interpreting ``broker/dealer'' to include foreign broker/dealers in 
determining which orders may be placed with an Order Book Official 
pursuant to Rule 6.52, is reasonable and consistent with the Act. 
Prohibiting the entry of limit orders by broker/dealers, whether U.S. 
registered or foreign, is consistent with the purpose of Rule 6.52 to 
provide bona fide public customers only with the benefits of the 
Exchange's customer limit order book, including certain enhanced order 
priority.\18\
---------------------------------------------------------------------------

    \17\ See Securities Exchange Act Release Nos. 34891 (October 25, 
1994), 59 FR 54653 (November 1, 1994); and 34400 (July 19, 1994), 59 
FR 38011 (July 26, 1994).
    \18\ See PSE Rule 6.75, ``Priority of Bids and Offers.''
---------------------------------------------------------------------------

    Finally, the Commission believes that the PSE's proposed definition 
of foreign broker/dealer provides an objective and verifiable standard 
that is capable of fair enforcement.\19\ Specifically, the Exchange's 
Options Surveillance staff should be able to confirm relatively quickly 
whether a person or entity is registered, authorized or licensed by a 
foreign governmental agency or foreign regulatory organization to 
perform the functions of a broker or dealer as defined in the Act. 
Moreover, the Exchange has represented that an attorney in their 
Compliance Department will review the determination made by the Options 
Surveillance staff.\20\
---------------------------------------------------------------------------

    \19\ The discussion and analysis in this approval order is 
intended only to address the PSE's proposed definition of foreign 
broker/dealer. It is not intended to address the meaning of foreign 
broker/dealer under the statutes, rules and regulations of the 
federal securities laws.
    \20\ Telephone conversation between Michael D. Pierson, Senior 
Attorney, Regulation Policy, PSE, and James T. McHale, Attorney, 
OMS, Division, Commission, on March 5, 1997.
---------------------------------------------------------------------------

    The Commission finds good cause for approving Amendment No. 1 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice thereof in the Federal Register. Amendment No. 1

[[Page 14490]]

revises the PSE's definition of ``foreign broker/dealer'' to include 
those persons or entities which are required to be registered, 
authorized or licensed by a foreign governmental agency or foreign 
regulatory organization even if they are not so registered, authorized 
or licensed.\21\ The Commission finds that Amendment No. 1 strengthens 
the proposal by including within the Exchange's definition those 
individuals or entities performing the function of a broker or dealer, 
but not complying with foreign regulatory requirements to become 
registered, authorized, or licensed. Essentially, the amendment 
attempts to avoid a potential loophole under the original proposal 
whereby a party could assert that it was technically a public customer 
because it was not formally registered as a foreign broker/dealer, even 
though it performs broker/dealer functions and is required to be 
approved for such activity. The Commission believes that the amendment 
properly provides that an individual or entity attempting to avoid the 
registration, authorization, or licensing process of a foreign 
regulator is not deemed a public customer on the Exchange. The 
Commission also notes that no comments were received on the original 
PSE proposal, which was subject to the full 21-day comment period. 
Accordingly, the Commission believes that it is consistent with Section 
6(b)(5) of the Act to approve Amendment No. 1 to the proposed rule 
change on an accelerated basis.
---------------------------------------------------------------------------

    \21\ See note 4, supra.
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1 to the proposed rule change. 
Persons making written submissions should file six copies thereof with 
the Secretary, Securities and Exchange Commission, 450 Fifth Street, 
N.W., Washington, D.C. 20549. Copies of the submission, all subsequent 
amendments, all written statements with respect to the proposed rule 
change that are filed with the Commission, and all written 
communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for inspection and copying in the Commission's Public 
Reference Section, 450 Fifth Street, N.W., Washington, D.C. Copies of 
such filing with also be available for inspection and copying at the 
principal office of the PSE. All submissions should refer to File No. 
SR-PSE-96-46 and should be submitted by April 16, 1997.
    For the foregoing reasons, the Commission finds that the PSE's 
proposal, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder.
    It therefore is ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-PSE-96-46) is approved.

    \22\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
---------------------------------------------------------------------------

    \23\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jonathan G. Katz,
Secretary.
[FR Doc. 97-7643 Filed 3-25-97; 8:45 am]
BILLING CODE 8010-01-M