[Federal Register Volume 66, Number 85 (Wednesday, May 2, 2001)]
[Notices]
[Pages 22059-22061]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-10887]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44220; File No. SR-Phlx-2001-45]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. Amending Rule 930

April 25, 2001.
    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 April 20, 2001, 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 Phlx. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Phlx, pursuant to Rule 19b-4 of the Act, proposes to amend 
Exchange Rule 930, Lease Agreement,  to add new paragraph (k). Proposed 
Rule 930(k) relates to the Exchange's ability to allow a member who 
leases a membership (``leasee'') to pay past-due fees owed to the 
Exchange by the lessor under a lease agreement, on behalf of the 
lessor. The Exchange also proposes to amend Rule 930 to make certain 
minor technical amendments to the text of the rule in order to make the 
various paragraphs contained in the rule more consistent.
    Proposed Rule 930(k) states that the Exchange is a third party 
beneficiary of the lease agreement, and shall have the right to permit 
payment by a lessee of past-due fees owed to the Exchange by the 
lessor. The proposed rule further states that should the lessee pay 
such past due amounts, the lessee shall provide written notice to the 
lessor and the Exchange. Once the lessee has elected to make such 
payments, the lessee may continue to make such payments for a period of 
up to three months and set off such amounts, with notice to the 
Exchange and lessor against amounts due the lessor by the lessee. 
Furthermore, proposed Rule 930(k) states that notwithstanding the terms 
of the lease agreement, a lessee will not be considered in default of 
the lease agreement solely by virtue of having elected to make such 
payments.
    In addition, certain minor technical amendments will be made to 
Rule 930 in order to make the text more consistent. For example, the 
word ``agreement'' will be added after the word ``lease'' in order to 
make it consistent with other references to ``lease agreements.'' Also, 
the words ``Certificate of Incorporation'' are added to make the text 
more consistent and to clarify that various terms of a lease agreement 
must be in accordance with the Exchange's Certificate of Incorporation, 
as well as its by-laws and rules.

A. Discussion

1. Authority Under Delaware Law
    The Exchange represents that, as a non-stock corporation organized 
under the Delaware General Corporation law (``DGCL''), it has the 
authority to adopt proposed Rule 930(k). Article Nineteenth of the 
Exchange's Certificate of incorporation expressly empowers the Board of 
Governors (``Board'') of the Exchange:

to determine whether, and under what terms and conditions, 
memberships may be leased, and to adopt by resolution or to set 
forth in the Rules of the Board of Governors such rules with respect 
to lease agreements, lessors and lesses as the board may from time 
to time determine to be advisable, including, without limitation, 
rules regulating and setting forth the rights and obligations of 
lessors and lessees, the required terms of lease agreements, and the 
fees, dues and other charges required to be paid by lessors and 
lessees (or either of them) to the Corporation in connection with 
and for the privilege of leasing memberships.\3\
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    \3\ See Securities Exchange Act Release No. 43987 (February 20, 
2001), 66 FR 12582 (February 27, 2001) (approving adoption of 
Article Nineteenth, SR-Phlx-99-50.

Thus, the Exchange represents that Rule 930(k) clearly falls within 
Article Nineteenth's grant of authority.
    In addition, Section 141(j) of the DGCL empowers the Board to 
direct the business and affairs of the Exchange, and the Exchange's by-
laws give the Board broad power to adopt rules of the Exchange. 8 Del. 
C.Sec. 141(j); \4\ By-Law Art. IV, Sec. 4-4.
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    \4\ See also 8 Del. C. Sec. 121(a) (providing that in addition 
to powers expressly granted by law or the Certificate of 
Incorporation, the corporation and its directors may exercise ``any 
powers incidental thereto, so far as such powers and privileges are 
necessary or convenient to the conduct, promotion or attainment of 
the business or purposes set forth in its certificate of 
incorporation''); Certificate of Incorporation, Article Third 
(stating, in part, that the Exchange may operate in any lawful act 
or activity for which corporations may be organized under the DGCL).
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    The Exchange represents that numerous provisions of its by-laws and 
rules already address matters similar to those addressed by proposed 
Rule 930(k).\5\ Moreover, the Exchange's by-laws require lessors and 
lessees (as members) to pledge to abide by the rules as they may be 
amended from time time.\6\
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    \5\ See, e.g., By-Law Art, XV, Sec. 15-1(a) (providing that a 
membership may be leased in accordance with such rules as the Board 
may adopt); By-Law Art. XII, Sec. 12-8 (authorizing lessor 
application fee as fixed from time to time by the Board, lessor 
initiation fee and fee upon transfer of equitable title to a 
membership); Rule 930 (setting forth required terms of lease 
agreement and providing, among other things, that the Exchange may 
dispose of a membership subject to a lease agreement); Rule 960.1 
(providing that all members, member organizations and any persons 
associated with any member are subject to expulsion, suspension, 
termination as to activities at the Exchange or any other fitting 
sanction for violation of the Rules of the Exchange); see also 
Certificate of Incorporation, Article Twentieth (giving Board 
plenary authority to assess fees, dues and other charges and to 
impose penalties, including cancellation of a membership and 
forfeiture of all rights as a lessor or lessee, for nonpayment.)
    \6\ See Exchange By-Law Art. XII, Sec. 12-9. As a condition of 
the right to lease their seats, lessors agree ``to abide by the 
[Exchange's] By-laws as they have or shall be from time to time 
amended, and by all rules and regulations adopted pursuant to the 
By-Laws.'' Lessees, as members, likewise make the same commitment.
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    Accordingly, the Exchange states that the Board has the authority 
to adopt Rule 930(k) under the DGCL and the Exchange's Certificate of 
Incorporation, by-laws and rules.
2. Permissibility Under Pennsylvania Contract Law
    The Exchange believes that proposed Rule 930(k) is also permissible 
as a matter of Pennsylvania contract law. The terms of the Exchange's 
contractual relationships with both lessors and lessees permit adoption 
of the rule, and, in any event, the Exchange is already a

[[Page 22060]]

third party beneficiary to the lease agreements as a matter of law. 
Each of these reasons separately provides a sufficient legal basis 
under Pennsylvania contract law for the adoption of Rule 930(k). 
(Future lease agreements would of course by deemed to incorporate the 
terms of Rule 930(k) within them, and thus obviate any contract law 
question).

a. Lease Terms Incorporate Relevant Terms of the Exchange's Certificate 
of Incorporation, By-Laws and Rules

    Under the terms and conditions pursuant to which the Exchange 
awards the privileges of membership and approves the right to lease a 
seat, the Exchange reserves the right to adopt authorized by-laws, 
rules, or regulations that affect those lessors and lessees; 
accordingly, the Exchange represents that any potential impact on lease 
agreements of Rule 930(k) would be contractually permissible. Both 
lessors and lessees (as members) agree respectively as a condition of 
approval of the right to lease seats and as a condition of approval for 
membership that the Exchange may effectuate changes to their lease 
agreements. As a condition of the right to lease their seats, lessors 
agree ``to abide by the [Exchange's] By-Laws as they have or shall be 
from time-to-time amended, and by all rules and regulations adopted 
pursuant to the By-Laws.'' \7\ Lessees (as members) likewise make the 
same commitment.\8\ By agreeing to abide by future by-laws, rules, and 
regulations, lessors and lessors and lessees necessarily grant 
permission to the Exchange to adopt rules pursuant to which their lease 
agreements may be affected.
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    \7\ See By-Law Art. XII, Sec. 12-9(b).
    \8\ See id. at 12-9(a).
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    Accordingly, the Exchange represents that Rule 930(k), which would 
provide in express form the authorization for the modification of lease 
agreements, would simply authorize that which is countenanced by the 
terms of the Exchange's existing relationships with lessors and 
lessees. It is thereby permissible as a matter of Pennsylvania contract 
law.

b. The Exchange Is a Third-Party Beneficiary of All Lease Agreements

    The Exchange is already, as a matter of Pennsylvania law, a third 
party beneficiary of lease agreements and would as such be entitled to 
collect Exchange fees from a lessee upon the default of a lessor, and 
to permit set-off by the lessee. Pennsylvania law provides that as a 
third-party beneficiary the Exchange is entitled to enforce, in its own 
name, as a real party in interest, the rights that accrue to it under 
the lease agreement. Generally, a non-party to a contract is a third 
party beneficiary either (i) when the parties to a contract express an 
intention in the contract itself to benefit the third party, or (ii) if 
the surrounding circumstances are sufficiently compelling that 
recognition of the beneficiary's right is appropriate to effectuate the 
intention of the parties, and the performance satisfies an obligation 
of the parties to pay money to the beneficiary or the circumstances 
indicate that the parties intend to give the beneficiary the benefit of 
the promised performance.
    Here, the Exchange represents that it is a third party beneficiary 
of lease agreements in accordance with the intention expressed in the 
lease agreements themselves even in the absence of Rule 930(k). Rule 
930(c) provides that the lease agreement ``shall require a lessee to 
pay the Corporation [the Exchange] * * * all applicable dues, fees, 
charges, and other debts arising from the use of membership.'' As the 
purpose of the lease agreement is to permit the lessee the ``use of 
membership,'' proposed Rule 930(k) specifies the circumstances in which 
the Exchange, rather than requiring payment by the lessee of one such 
fee, is simply allowing payment by a lessee.
    In addition, the Exchange believes that many of the other terms of 
the lease agreements also manifest the parties' clear intent to make 
the Exchange a beneficiary. See for example, Rule 930(a) (the Exchange 
must approve the transfer of membership); 930(d) (the lessee may not 
encumber legal title to the membership during the lease agreement); 
930(e) (legal title to the membership must be transferred to the lessor 
in accordance with the Exchange's by-laws upon the expiration of the 
lease agreement or other such event); and 930(j) (the Exchange may 
dispose of a membership subject to a lease agreement in accordance with 
its by-laws and rules).
    Moreover, in addition to the intent manifested in the lease 
agreements, which is itself sufficient to render the Exchange a third 
party beneficiary, the Exchange represents and the circumstances 
surrounding the lease agreements independently compel the same 
conclusion. As noted, the lease agreements are required to contain 
mandatory provisions that make reference to the Exchange, see Rule 930. 
Reference to a third party in the contract itself is a strong 
indication that the party is a third party beneficiary. The Exchange 
also exercises numerous rights related to the lease agreements. It 
approves lessors, as well as lessers, Rule 931 (approval of lessors); 
By-Law Art, XV, Sec. 51-1 (approval of lessees), and requires lessors 
and lessees to abide by the Exchange's by-laws, By-Law Art. XII, 
Sec. 12-9(a), (b); Rule 930(j). Indeed, the purpose of the lease 
agreement is to permit trade on the Exchange.\9\ The Exchange also 
reserves the right to approve all transfers of membership pursuant to a 
lease agreement.\10\ Finally, as noted, Rule 930 already requires that 
lessees be responsible for payment to the Exchange of all applicable 
dues, fees, charges and other debts, and proposed Rule 930(k) 
identifies under what circumstances the lessee may, at his or her 
option, remit one such fee to the Exchange.\11\
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    \9\ See By-Law Art. XII, Sec. 21-1 (a member conducts business 
on the Exchange).
    \10\ See Rule 930(a), (d) and (e).
    \11\ Indeed, the Exchange may well be a constructive party to 
the lease agreement. While Pennsylvania courts have not had the 
opportunity to address the issue of constructive parties, there 
exists persuasive caselaw elsewhere that when the contracting 
parties, and a third party have a sufficiently intertwined business 
relationship, the third party is deemed to be constructive party to 
the contract. Here, for the various reasons outlined in the text, 
the Exchange, lessors, and lessees, possess such an extraordinarily 
intertwined business relationship that the Exchange could be 
considered a constructive party to lease agreements. This would 
provide yet another alternate basis for the legal adequacy of the 
Exchange's proposed Rule 930(k)
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    Accordingly, the Exchange represents that it is a third party 
beneficiary to the lease agreements with the right to enforce the 
provisions of Rule 930(k).
    In sum, the Exchange states that adoption by the Exchange of 
proposed Rule 930(k) would be consistent with applicable corporate 
governance and contract law.

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 Phlx 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 maybe examined at the places specified in Item 
IV below. The Phlx has prepared summaries, set forth in Sections A, B, 
and C below, of the most significant aspects of such statements.

[[Page 22061]]

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

1. Purpose
    The purpose of the proposed rule change is to amend Exchange Rule 
930 to add paragraph (k), which allows the lessee of membership to pay 
fees owed to the Exchange by the lessor that are past due and to set 
off such amounts from amounts due the lessor by the lessee.\12\ This 
provision, which the Phlx represents is in accordance with proposed 
Exchange Rule 51,\13\ allows a lessee to pay, on behalf of the lessor, 
any fees, including the capital funding fee,\14\ owed to the Exchange 
by the lessor. Proposed Rule 930(k) helps to protect innocent lessees 
from being unexpectedly dispossessed from their membership and trading 
rights in the event of nonpayment by their lessors. Pursuant to 
proposed Rule 930(k), the lessee should be able to continue trading 
under his/her current lease provisions, for a period of up to three 
months. Therefore, the lessee's trading privileges should not be 
interrupted if the lessor does not pay its fees, including the capital 
funding fee referred to in footnotes 12, 13 and 14. In addition, the 
provisions of proposed Rule 930(k) should give the lessee sufficient 
time to execute a new lease agreement, if necessary.\15\ The Exchange 
believes that provisions (contained in its Certificate of Incorporation 
and by-laws) give the Exchange the authority to modify lease agreements 
in the manner described above.\16\
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    \12\ The principal fee that the Phlx currently charges to 
lessors and other owners of memberships in the ``capital funding 
fee.'' See Securities Exchange Act Release No. 42993 (June 29, 
2000), 65 FR 42415 (July 10, 2000) (approving adoption of capital 
funding fee, SR-Phlx-99-51). See footnote 14 below for a further 
discussion of the capital funding fee.
    \13\ On December 6, 1999, the Exchange submitted a proposed rule 
change relating to the adotion of new Rule 51, Enforcement, which 
relates to the ability of the Exchange's Board to take certain 
specified measures if any owner of a membership fails to pay (or 
have paid on its behalf) any capital funding fee when due. The 
roposal is ending (SR-Phlx-99-52).
    \14\ On January 5, 2000, the Commission approved as a three-
month pilot program, a capital funding fee applicable to owners of 
memberships. See Securities Exchange Act Release No. 42318 (January 
5, 2000), 65 FR 2216 (January 13, 2000) (SR-Phlx-99-49). On April 
24, 2000, the Commission approved the extension of the three-month 
pilot program until July 6, 2000. See Securities Exchange Act 
Release No. 42714 (April 24, 2000), 65 FR 25782 (May 3, 2000) (SR-
Phlx-00-29). Permanent approval of the capital funding fee was 
received on June 29, 2000. See Securities Exchange Act Release No. 
42993 (June 29, 2000), 65 FR 42415 (July 10, 2000)(SR-Phlx-99-51).
    \15\ Under proposed Rule 51, supra note 13, the Exchange may 
issue temporary trading rights to members whose leases are suspended 
due to nonpayment of the capital funding fee by the lessor.
    \16\ See Certificate of Incorporation Article Third, proposed 
Article Nineteenth and Article Twentieth, By-Law Art. XII, Sec. 12-
9, and proposed Rule 51.
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    The Phlx further represents that the purpose of the minor technical 
amendments to Rule 930 is to make the language in the paragraphs of the 
existing rule more consistent with each other. References to the 
Certificate of Incorporation are being added throughout Rule 930. For 
example, paragraph (a) of Rule 930 would state that a lease agreement 
shall not be effective unless the transfer of membership was approved 
under the Exchange's Certificate of Incorporation, by-laws or rules. 
The Exchange represents that, as a matter of Delaware corporation law, 
a certificate of incorporation is preeminent and accordingly, by-laws 
and any rules adopted thereto cannot conflict with the certificate of 
incorporation.\17\ Further, the Exchange is amending Rule 930 to 
consistently refer to the lease as a ``lease agreement.''
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    \17\ See 8 Del. C. Sec. 102 and 109(b)
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2. Statutory Basis
    For these reasons, the Exchange believes that the proposed rule 
change is consistent with Section 6 of the Act,\18\ in general, and 
with Section 6(b)(5),\19\ in particular, in that it is designed to 
promote just and equitable principles of trade and protects investors 
and the public interest by enabling lessees to continue trading, even 
with their respective lessors fail to pay fees owed the Exchange when 
due.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    Written comments were neither solicited nor received on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which Phlx consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change in 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 
Phlx. All submissions should refer to File No. SR-Phlx-2001-45 and 
should be submitted by May 23, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \1\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-10887 Filed 5-1-01; 8:45 am]
BILLING CODE 8010-01-M