Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Notices 27715

6 17 CFR 200.3–3(a)(12).

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

2 17 CFR 240.19b–4.

3This total period of 36 months includes the time

period that the previous pilot programs were in

effect. The first pilot program became effective

upon filing on May 16, 2000 and lasted six months,

expiring on November 16, 2000. See Securities

Exchange Act Release No. 42791 (May 16, 2000), 65

FR 33606 (May 24, 2000) (SR–Phix–00–44). The

pilot program was then extended for an additional

six-month period through May 16, 2001. See

Securities Exchange Act Release No. 43567

(November 15, 2000), 65 FR 71187 (November 29,

2000) (SR–Phlx–00–100). Therefore, the credit

program will be in effect from May 16, 2000 until

May 16, 2003.

4The 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.

5Out-of-pocket expenses include charges for

wireless telephone services, postage, ILX machines

and Dow Jones News Service.

6Pass-through costs include charges for member

health insurance and parcel delivery services.

7Capital funding fees are those fees assessed on

owners to provide for funding for technological

improvements and other capital needs. On June 29,

2000, the Commission permanently approved the

capital funding fee. See Securities Exchange Act

Release No. 4 2993 (June 29, 2000) 65 FR 42415

(July 10, 2000) (SR–Phlx–99–510.

8Payment for order flow fees are those 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), 65 FR 66275 (November 3, 2000) (SR–Phlx–

00–86 and SR–Phlx–00–87); 43481 (October 25,

2000), 65 FR 66277 (November 3, 2000) (SR–Phlx–

00–88 and SR–Phlx–00–89); and 44237 (April 30,

2001) (SR–Phlx–01–43).

9An ECN fee is currently a $2,500 monthly fee,

imposed on a one-year pilot basis, for ECNs that are

member organizations and send order flow to the

Exchange’s equity trading floor. See Securities

Exchange Act Release No. 44155 (April 5, 2001), 66

FR 19274 (April 13, 2001) (SR–Phlx–01–09). 10See Securities Exchange Act Release No. 44198

(April 18, 2001), 66 FR 21035 (April 26, 2001) SR–

Phlx–2001–47). 11See Securities Exchange Act Release No. 43567

(November 15, 2000), 65 FR 71187 (November 29,

2000) (SR–Phlx–00–100). This credit is part of the

Exchange’s long-term financing plan, which

separately includes a $1,500 capital funding fee.

See supra note 7. The Exchange reserves the right

to suspend the credit at any time. 12Pursuant 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.

13 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-in

law, sisters-in-law, stepsisters, children,

stepchildren or any other person living with the

member for whom the member provides at least 50

percent of his/her financial support per year.

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. Copies of such filing will also be

available for inspection and copying at

the principal office of the NYSE. All

submissions should refer to the File

Number SR–NYSE–2001–09 and should

be submitted by June 8, 2001.

For the Commission, by the Division of

Market Regulation, pursuant to the delegated

authority.6

Jonathan G. Katz,

Secretary.

[FR Doc. 01–12544 Filed 5–17–01; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–44292; File No. SR–Phlx–

2001–49]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

Philadelphia Stock Exchange, Inc.

Adopting a Monthly Credit of up to

$1,000 to Qualified Members for an

Aggregate Period of 36 Months

May 11, 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 24,

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 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 adopt for an

aggregate period of 36 months

(‘‘permanently adopt’’) 3 its current pilot

program that allows a monthly credit of

up to $1,000 to be applied against fees,

dues, charges and other amounts as may

from time to time be owed to the

Exchange that month (collectively

referred to as ‘‘credit-eligible fees’’) 4,

except fines, late fees, out-of-pocket

expenses,5 pass-through costs,6 capital

funding fees,7 payment for order flow

fees,8 any fees paid by equity trading

permit holders respecting any trading

permits the Exchange may issue, the fee

for electronic communications

networks,9 and the fee for the print

subscription of the Phlx Guide 10 by

members who own the membership by

which they are a member (‘‘memberowners’’) and certain other categories of

members described below. The

Exchange’s current pilot program 11 is in

effect through May 16, 2001.

In addition to member-owners, a

monthly credit of up to $1,000 may be

applied against credit-eligible fees

incurred by the following persons, who

are so closely connected to the owners

that the Exchange believes they should

be treated as member-owners: (1) all

members who are parties to an A–B–C

Agreement 12 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; 13 (c)

the member is associated with a member

organization in which the owner of that

membership 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

27716 Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Notices

14For 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.

15The Exchange believes, at this time 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 application 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 wil be

given updated instructions as to how to apply for

the credit.

16A 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

Thirteenth of the Exchange’s Certificate of

Incorporation and Phlx By-Law Art. XII, Section

12–6. 17See Phlx Rule 930(b).

(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 than $1,000.14 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 member(s) in

the same member organization may

aggregate their credit(s). 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 credit(s)

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 may

now 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 the

member completing a credit form each

month.15 A member’s eligibility shall be

determined by the opening of trading on

the first business day of each month.

The Exchange reserves the rights 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

Exhange 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.

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 leasees 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 passsive finanical 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.16

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,17 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.

This short-term commitment may also

bear on the quality and quantity of

liquidity provide don 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 and 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

Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Notices 27717

18The Exchange notes that, as part of its overall

strategic financing plan, contemporaneously with

the implementation of the credit described in this

filing, 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 7. 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 (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.

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

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

21 15 U.S.C. 78f(b)(4).

22 15 U.S.C. 78f(b)(5).

23See 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).

24The CTA Plan and the OPRA Plan are approved

by the Commission as national market system plans

under Exchange Act Rule 11Aa3–2, 17 CFR

240.11Aa3–2, governing the dissemination of

market information for certain equity securities and

options, respectively; these plans govern both the

fees that can be charged for such information as

well as the distribution of revenues derived from

those fees among participants in these plans,

including the Exchange.

Exchange, in terms of a lesser inventive

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

groups 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 interests 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.18

Although the credit described in this

filing is available to some Exchange

members and not others, it meets the

criteria set forth in Sections 6(b)(4) 19

and 6(b)(5) 20 of the Act because it: (i)

provides for ‘‘* * * the equitable

allocation of dues, fees and other

charges among its members * * * and

other persons using its facilities;’’ and

(ii) is not designed ‘‘* * * to permit

unfair discrimination between

customers, issuers, brokers or dealers.’’

Although the Exchange is not aware of

precedent sin 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) 21 and (5)) 22 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

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).23 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.24

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

27718 Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Notices

25See supra note 16. 26As of March 31, 2001, 326 memberships were

subject to lease agreements. This number may

change on a monthly basis. 27As of March 31, 2001, 13 seats were dormant

(neither used for active trading nor leased). 28See Phlx Rules 940 and 941. 29See supra note 12.

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.25

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

responsibility 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 this proposed

rule change. 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 326 of the Exchange’s 505

memberships being owned by such

financial investors.26 Of those

memberships owned by passive

financial investors, approximately 13

memberships are currently dormant

(neither used for active trading nor

leased).27 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.28 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.29

iii. Lessees. As stated previously,

although leasing arrangements are

permitted, lessees, other than five types

of qualifying members discussed in

detail below (‘‘non-qualifying lessees’’),

may have a limited stake in the longterm 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,

non-qualifying 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

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 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

Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Notices 27719

30 17 CFR 240.16a–1(a)(2).

31 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 shall include adoptive

relationships. 17 CFR 240.16a–1(e).

32 17 CFR 230.701.

33 15 U.S.C. 77e.

34 17 CFR 230.701(c)(3).

35 17 CFR 240.16a–1.

36See 26 U.S.C. Section 318.

37See 26 U.S.C. Section 301 et seq.

38NASD 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.

39 15 U.S.C. 78p.

40 15 U.S.C. 78l.

41 15 U.S.C. 78p.

42 Id. 43See supra note 38.

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, Commission Rule 16a–

1(a)(2) 30 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 security. Indirect pecuniary

interest is then defined to include

securities held by members of a person’s

immediate family sharing the same

household.31 In addition, Rule 701

under the Securities Act of 1933

(‘‘Securities Act’’) 32 exempts from

Section 5 of the Securities Act 33 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 though

gifts or domestic relations orders.

Family members are defined in Rule

701(c)(3) 34 the same as ‘‘immediate

family’’ is defined in Rule 16a–1(e).35

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.36 The IRC

treats stock owned by these close family

members as owned by the taxpayer in

determining the tax liability of the

taxpayer in various situations.37

A further example is the National

Association of Securities Dealers, Inc.

(‘‘NASD’’) Freeriding and Withholding

Interpretation,38 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 of That Membership 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 39

requires any person who is the

beneficial owner of more than ten

percent of an equity security registered

under Section 12 of the Act 40 to file a

statement with the Commission

indicating his ownership interest.

Section 16 41 also treats such beneficial

owners as company insiders and limits

their ability to realize ‘‘short swing’’

profits. In enacting Section 16,42 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 thus 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,43 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

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. 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 floor

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 long-term 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

27720 Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Notices

44 15 U.S.C. 78f(b).

45 15 U.S.C. 78(b)(4).

46Written comments were received in connection

with the first proposed rule change relating to the

credit, which implemented the initial pilot program

for the credit (in effect May 16, 2000 through

November 16, 2000). Those comments are discussed

in the Commission’s Notice of Filing and Immediate

Effectiveness of that initial pilot program. See

Securities Exchange Act Release Act Release No.

42791 (May 16, 2000), 65 FR 33606 (May 24,

2000)(SR–Phlx–00–44).

47 15 U.S.C. 78s(b)(3)(A)(ii).

48 17 CFR 240.19b–4(f)(2). 49 17 CFR 200.30–3(a)(12).

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

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 tracing

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,44 in general, and with Section

6(b)(4).45

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

No written comments were either

solicited or received respecting the

permanent adoption of the credit for 36

months.46

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 47 and Rule 19b–4(f)(2) thereunder 48

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–2001–

49, and should be submitted by June 8,

2001.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.49

Jonathan G. Katz,

Secretary.

[FR Doc. 01–12543 Filed 5–17–01; 8:45 am]

BILLING CODE 8010–01–M

SMALL BUSINESS ADMINISTRATION

[Declaration of Disaster #3338]

State of Illinois

As a result of the President’s major

disaster declaration on May 9, 2001, I

find that Carroll, Hancock, Henderson,

Jo Daviess, Rock Island and Whiteside

Counties in the State of Illinois

constitute a disaster area due to

damages caused by flooding occurring

between April 18, 2001 and continuing.

Applications for loans for physical

damage as a result of this disaster may

be filed until the close of business on

July 9, 2001 and for economic injury

until the close of business on February

11, 2002 at the address listed below or

other locally announced locations: U.S.

Small Business Administration, Disaster

Area 2 Office, One Baltimore Place,

Suite 300, Atlanta, GA 30308.

In addition, applications for economic

injury loans from small businesses

located in the following contiguous

counties in Illinois may be filed until

the specified date at the above location:

Adams, Bureau, Henry, Lee,

McDonough, Mercer, Ogle, Schuyler,

Stephenson and Warren; Clark and

Lewis Counties in the State of Missouri;

and Grant and Lafayette Counties in the

State of Wisconsin.

The interest rates are:

Percent

For Physical Damage:

Homeowners With Credit

Available Elsewhere .......... 6.625

Homeowners Without Credit

Available Elsewhere .......... 3.312

Businesses With Credit Available Elsewhere .................. 8.000

Businesses and Non-Profit

Organizations Without

Credit Available Elsewhere 4.000

Others (Including Non-Profit

Organizations) With Credit

Available Elsewhere .......... 7.125

For Economic Injury:

Businesses and Small Agricultural Cooperatives Without Credit Available Elsewhere ................................. 4.000

The number assigned to this disaster

for physical damage is 333806. For

economic injury the numbers assigned

are 9L6600 for Illinois; 9L6700 for

Missouri; 9L6800 for Wisconsin. Iowa

counties contiguous to the above named

primary counties are not listed here

because they have been previously

declared.

(Catalog of Federal Domestic Assistance

Program Nos. 59002 and 59008)

Dated: May 11, 2001.

James E. Rivera,

Acting Associate Administrator For Disaster

Assistance.

[FR Doc. 01–12502 Filed 5–17–01; 8:45 am]

BILLING CODE 8025–01–P

SMALL BUSINESS ADMINISTRATION

[Declaration of Disaster #3339]

State of Wisconsin

As a result of the President’s major

disaster declaration on May 11, 2001, I