[Federal Register Volume 66, Number 10 (Tuesday, January 16, 2001)]
[Notices]
[Pages 3638-3640]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-1154]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43812; File No. SR-Phlx-99-50]


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

January 5, 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 November 23, 1999, 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 Phlx filed an amendment to the proposal on December 28, 
2000.\3\ 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.
    \3\ See Letter from Cynthia Hoekstra, Counsel, Phlx, to Nancy 
Sanow, Assistant Director, Division of Market Regulation, 
Commission, dated December 27, 2000 (``Amendment No. 1''). In 
Amendment No. 1, the Phlx represented that the Phlx's Board has the 
authority to adopt Article Nineteen pursuant to Delaware corporate 
law, Pennsylvania contract law, and the Exchange's Certificate of 
Incorporation, by-laws, and rules.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

a. The Original Filing

    The Phlx proposes to amend its Certificate of Incorporation to add 
Article Nineteenth, relating to the leasing of memberships.\4\ A 
complete copy of the text of Article Nineteenth is available at the 
Office of the Secretary, the Phlx, and at the Commission.
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    \4\ In connection with this proposed rule change, the Commission 
approved a propose rule change that adopted Article Twentieth. See 
Securities Exchange Act Release No. 42317 (January 5, 2000), 65 FR 
2215 (January 13, 2000) (SR-Phlx-99-48). Article Twentieth provides, 
in part, that the Exchange's Board of Governors (``Board'') shall 
have the power to assess such fees, dues, and other charges upon 
members, lessors and lessees of memberships and holders of permits 
(or any of them) as the Board may from time to time adopt by 
resolution or set forth in the Rules of the Board. On May 11, 2000 
the Commission approved a proposed rule change, which amended 
Article Twentieth to include the words ``owner'' and ``member 
organization'' and to define the word ``owner'' to clarify the 
original intent of Article Twentieth. See Securities Exchange Act 
Release No. 42773 (May 11, 2000), 65 FR 31622 (May 18, 2000) (SR-
Phlx-00-30).
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    Proposed Article Nineteenth provides that, in addition to all other 
powers granted to the Board by law, the Certificate of Incorporation or 
otherwise, the Board shall have the power 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 such 
rules with respect to lease agreements, lessors and lessees as the 
Board may from time to time determine to be advisable. Such rules may 
include 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 Exchange in connection with, and for 
the privilege of, leasing memberships. In addition, proposed Article 
Nineteenth provides that the Board shall have the power to adopt rules 
relating to the suspension or termination of any or all lease 
agreements with respect to memberships, to issue provisional trading 
privileges on such terms as the Board shall determine to members whose 
lease agreements are suspended or terminated, and to amend, alter, or 
repeal any or all of the Rules of the Board with respect to any of the 
foregoing matters.

b. Amendment No. 1

    As a non-stock corporation organized under the Delaware General 
Corporation Law (``DGCL''), the Exchange represents that it has ample 
authority to adopt proposed Article Nineteenth. Because the Exchange's 
Certificate of Incorporation does not require member approval to adopt 
a charter amendment, proposed Article Nineteenth may be adopted by the 
Board of Governors without approval by the members of the Exchange 
(including lessees of memberships) or the owners of memberships 
(including lessors of memberships). 8 Del. C. Sec. 242(b)93).\5\ 
Therefore, the Exchange's Board adopted Article Nineteenth in 
accordance with Section 242.
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    \5\ Section 242 of the DGCL permits the board of a non-stock 
corporation to adopt amendments to the corporation's Certificate of 
Incorporation.
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    Furthermore, 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); \6\ By-Law Art. IV, Sec. 4-4. In addition, existing 
Article Third of the Phlx Certificate of Incorporation gives the 
Exchange authority to do all things necessary to run a national 
securities exchange.\7\ Numerous provisions of the Exchange's by-laws 
and rules already address matters similar to those addressed by 
proposed Article Nineteenth.\8\ Therefore, the adoption of Article 
Nineteenth falls within the broad authority expressly conferred by 
Delaware law and existing provisions under the Phlx Certificate of 
Incorporation.
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    \6\ 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'').
    \7\ Article Third states, in part, that the Exchange may operate 
as and perform all functions of a national securities exchange and 
engage in any lawful act or activity for which corporations may be 
organized under the DGCL.
    \8\ 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); 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 20th (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).

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[[Page 3639]]

    Pursuant to Article Nineteenth, the Board would have the authority 
to make rules that impact lease arrangements, including adopting rules 
relating to the termination of lease agreements. As discussed, the 
Exchange's Certificate of Incorporation, by-laws and rules already 
include several provisions addressing such authority.\9\ 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 to time.\10\
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    \9\ See, e.g., Certificate of Incorporation, article Thirteenth 
(lessor entitled to vote on compromise or arrangement); Certificate 
of incorporation, Article Seventeenth (lessor entitled to receive 
any distribution of assets upon liquidation); By-Law Article I, 
Section 1-1 defining lessor and lessee); By-Law Article XII, Section 
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); and Rule 930 (setting forth 
required terms of lease agreements).
    \10\ See Exchange By-Law Article XII, Section 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, under the DGCL and the Exchange's Certificate of 
incorporation, by-laws, and rules, the Exchange represents that its 
Board of Governors has the authority to adopt Article Nineteenth 
without approval thereof by members, or by owners, lessors, or lessees 
of memberships.
    Proposed Article Nineteenth is also permissible as a matter of 
Pennsylvania contract law. The provisions of Article Nineteenth 
authorizing the adoption of rules affecting lease agreements between 
lessors and lessees are lawful because, under the terms of its 
relationships with both lessors and lessees, the Exchange has the right 
to adopt by-laws, rules, or regulations that affect those lessors and 
lessees. Pennsylvania law holds that a contracting party may lawfully 
exercise its own contractual rights against another party to the 
contract, even if doing so interferes with the terms of a separate 
agreement of the other party. Here, the potential suspension or 
termination of a lease agreement in accordance with the rules of the 
Exchange is permissible under the terms of the Exchange's separate 
agreements with each of the parties to the lease agreement.
    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, including termination. 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.'' See By-Law Art. XII, Sec. 12-9(b). Lessees (as members) 
likewise make the same commitment. See id. at 12-9(a). By agreeing to 
abide by future by-laws, rules, and regulations, lessors and lessees 
necessarily grant permission to the Exchange to adopt rules pursuant to 
which their lease agreements may be suspended or terminated. Indeed, 
the Exchange has already repeatedly exercised its right to adopt rules 
and by-laws directly impacting lessors and lessees in a variety of 
rules, including Rule 930, which closely regulates the terms and 
conditions of lease agreements.\11\ Accordingly, article Nineteenth, 
which would provide in express form the authorization for the adoption 
of rules suspending or terminating lease agreements, would simply 
authorize that which is countenanced by the terms of the Exchange's 
existing relationships with lessors and lessees, and is thereby 
permissible as a matter of Pennsylvania contract law.
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    \11\ Other examples include By-Law Art. I, Sec. 1-1 (defining 
lessor and lessee); By-Law Art. XII, Sec. 12-1 (a member conducts 
business on the Exchange); By-Law Art. XII, Sec. 12-8 (authorizing 
lessor application fee, lessor initiation fee, and fees upon 
transfer of equitable title); By-Law Art. XIV, Secs. 14-1, 14-2, 14-
5 (the Exchange can impose charges on members, including penalties 
for non-payment of fees); By-Law Art. XV, Sec. 15-1 (the Exchange 
approves lessees); Rule 931 (the Exchange approves lessors); Rule 
960.1 et seq. (the Exchange may discipline members).
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    Proposed Article Nineteenth was properly adopted by the Exchange 
Board under Delaware law and is permissible as a matter of Pennsylvania 
contract law. As a result, the Exchange believes it should take effect 
in accordance with its terms following SEC approval and the filing of 
Article Nineteenth with the Secretary of State of the State of 
Delaware.

II. Self-Regulatory Organization's Statement Regarding 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

    The purpose of the proposed rule change is to amend the Exchange's 
Certificate of Incorporation to provide for specific authority 
regarding the regulation of leases, including the rights and 
obligations of lessors and lessees. Article Nineteen will enable the 
Board to adopt and oversee specific rules relating to the leasing of 
memberships to protect and promote the best interests of the Exchange.
    The Exchange acknowledges that any such rules or resolutions, which 
are adopted by the Board, shall be filed with the Commission to the 
extent required pursuant to Section 19(b) of the Act \12\ and 
Commission rules thereunder. Moreover, it is intended that such rules 
or resolutions proposed by the Exchange and related to the leasing of 
memberships, primarily in connection with the termination or suspension 
of lease agreements, shall delineate, if applicable, the notice and 
procedural requirements that address any potentially adversely affected 
party to be followed prior to terminating or suspending a lease 
agreement.
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    \12\ 15 U.S.C. 78s(b).
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    For these reasons, the Exchange believes that the proposed rule 
change is consistent with Section 6 of the Act,\13\ in general, and 
with Section 6(b)(5),\14\ in particular, in that it promotes just and 
equitable principles of trade and protects investors and the public 
interest by enabling the Board to determine whether, and under what 
terms and conditions, memberships may be leased.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change imposes no 
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

[[Page 3640]]

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 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 
Phlx. All submissions should refer to File No. SR-Phlx-99-50 and should 
be submitted by February 6, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-1154 Filed 1-12-01; 8:45 am]
BILLING CODE 8010-01-M