[Federal Register Volume 66, Number 108 (Tuesday, June 5, 2001)]
[Notices]
[Pages 30258-30260]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-14028]



[[Page 30258]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44366; File No. SR-Phlx-2001-36]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 by the Philadelphia Stock Exchange, Inc. To 
Revise the Fine Schedule for Options Floor Procedure Advices

May 29, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on May 17, 2001, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The Phlx 
amended the proposal on May 29, 2001.\3\ The Commission is publishing 
this notice to solicit comments on the proposed rule change, as 
amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See May 25, 2001 letter from Louise Corso, Vice President 
Director of Enforcement, Phlx, to Joseph P. Morra, Special Counsel, 
Division of Market Regulation, Commission (``Amendment No. 1''). In 
Amendment No. 1, the Phlx added language to the proposal regarding 
Advice B-12, PHLX ROTs and Specialists Entering Orders for Execution 
on Other Exchanges in Multiply Traded Options, which was 
inadvertently omitted in the original filing.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend the fine schedule applicable to 
Option Floor Procedure Advices (``Advices'') such that there would be 
two fine schedules: a minor fine schedule and a major fine schedule.\4\ 
The minor fine schedule is proposed to be:

    \4\ The Phlx does not propose to make changes to advices A-11; 
B-6, Sections C and D; and F-2. Changes to those Advices will be 
made in separate rule filings. No changes have been proposed for the 
Advices that relate to foreign currency options: B-7, F-16, F-17, F-
18, F-20, and F-21. Finally, no change is proposed for Advice F-27 
because the Phlx considers it to be more akin to a fee than a fine.
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1st Occurrence--$250.00
2nd Occurence--$500.00
3rd Occurrence--$1,000.00
4th Occurrrence and Thereafter--Sanction is discretionary with Business 
Conduct Committee

    For purposes of determining which fine schedule applies, the 
following Advices and portions of Advices are considered to be minor:

<bullet> A-1, Responsibility of Displaying Best Bids and Offers
<bullet> A-2, Types of Orders to be Accepted onto the Specialist's Book
<bullet> A-6, Cancel/Replacement Process
<bullet> A-7, Responsibility to Cancel
<bullet> A-12, Opening Rotations and SORT Procedures
A-13, paragraph (b), Failure to Receive Approval to Disengage Auto-X
<bullet> A-14, Equity and Index Option Opening Parameters
<bullet> B-2, Crowd Courtesy
<bullet> B-3, Trading Requirements
<bullet> B-8, Use of Floor Brokers by an ROT While on the Floor
<bullet> B-12, PHLX ROTs and Specialists Entering Orders for Execution 
on Other Exchanges in Multiply Traded Options
<bullet> C-1, Ascertaining the Presence of ROTs in a Trading Crowd
<bullet> C-8, Option Specialist Evaluations
<bullet> F-1, Use of Identification Letters and Numbers
<bullet> F-3, Members' Requests for Sold Sale Designation
<bullet> F-4, Orders Executed as Spreads, Straddles, Combinations or 
Synthetics and Other Order Ticket Marking Requirements
<bullet> F-6, Option Quote Parameters
<bullet> F-15(b)(i), Minor Infractions of Position/Exercise Limits and 
Hedge Exemptions
<bullet> F-23, Clerks in the Crowd
<bullet> F-24(c)(iii), Signing-on/off the Wheel
<bullet> F-25, Fingerprinting Floor Personnel
<bullet> G-1, Index Option Exercise Advice Forms

    The major fine schedule is proposed to be:

1st Occurrence--$500.00
2nd Occurence--$1,000.00
3rd Occurrence--$2,000.00
4th Occurrrence and Thereafter--Sanction is discretionary with Business 
Conduct Committee

    For purposes of determining which fine schedule applies, the 
following Advices or portions of the Advices are considered to be 
major:

<bullet> A-13, paragraph (a), Auto Execution Engagement/Disengagement 
Responsibility
<bullet> B-1, Responsibility to Make Markets
<bullet> B-4, Phlx ROTs Entering Orders From On-Floor and Off-Floor for 
Execution on the Exchange
<bullet> B-5, Agency-Principal Restrictions
<bullet> B-6, Section B, Priority Of Options Orders for Equity and 
Index Options by Account Type
<bullet> C-2, Clocking Tickets for Time of Entry on the Floor
<bullet> C-3, Handling Orders of Phlx ROTs and Other Registered Options 
Market Makers
<bullet> C-4, Floor Brokers Handling Orders for Same Firm
<bullet> C-5, ROTs Acting as Floor Brokers
<bullet> C-7(b), Responsibility to Represent Orders to the Trading 
Crowd
<bullet> E-1, Required Staffing of Options Floor
<bullet> F-5, Changes or Corrections to Material Terms of a Matched 
Trade
<bullet> F-8, Failure to Comply with an Exchange Inquiry
<bullet> F-9, Dual Affiliations
<bullet> F-11, Splitting Orders
<bullet> F-12, Responsibility for Assigning Participation
<bullet> F-13, Supervisory Procedures Relating to ITSFEA
<bullet> F-15(a) and (b)(ii), Minor Infractions of Position/Exercise 
Limits and Hedge Exemptions
<bullet> F-19, Clearing Agents' Responsibility for Carrying Positions 
in Market Maker Accounts
<bullet> F-30, Options Trading Floor Training.

    The Exchange proposes that violations of Advice C-9, Floor Brokers 
and Clerks Trading in their Customer Accounts, be immediately referred 
to the Business Conduct Committee to determine the appropriate 
sanction.
    The Exchange also proposes to change all the fine schedules that 
currently operate on a one-year calendar basis to a two-year calendar 
basis.\5\ For example, a second violation of the same Advice that 
occurs within a 24-month period would be considered a second 
occurrence.
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    \5\ The following Advices are affected by the proposed change to 
a two-year calendar basis: A-1, A-7, A-12, A-13, A-14, B-2, B-3, B-
5, B-6, C-1, C-2, C-5, C-7, C-8, E-1, F-1, F-3, F-4, F-6, F-11, F-
12, F-15, F-24(c)(iii), F-25, and G-1.
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    The text of the proposed rule change is available at the principal 
office of the Exchange and at the Commission.

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 may be 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 30259]]

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

1. Purpose
    The Phlx proposes to amend the fine schedule applicable to Advices 
such that there would be two fine schedules: a minor fine schedule and 
a major fine schedule. The fine schedules associated with these Advices 
are administered pursuant to Phlx Rule 970, which codifies the 
Exchange's minor rule violation enforcement and reporting plan 
(``Plan'').\6\
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    \6\ Securities Exchange Act Rule 19d-1(c)(1), 17 CFR 19d-
1(c)(1), requires any self-regulatory organization for which the 
Commission is the appropriate regulatory agency that takes any final 
disciplinary action with respect to any person to promptly file a 
notice thereof with the Commission. However, minor rule violations 
not exceeding $2,500 are not deemed final and therefore not subject 
to the same reporting requirements.
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    This proposal would increase the fines above their current levels, 
delete ``warnings'' as a sanction for the first occurrence, and ease 
the burden of floor officials in administering fines by having only two 
fine schedules. For example, Advice B-6, Priority of Options Orders for 
Equity Options and Index Options by Account Type, misrepresenting a 
broker-dealer order in order to receive priority over a customer, the 
first violation of section B of this Advice currently only receives a 
warning. Under the proposal, the first violation would be subject to a 
fine of $500. The Phlx believes that the Advices designated as major 
are particularly important to the maintenance of fair and orderly 
markets in options on the Exchange as well as for the protection of 
investors and the public interest. For example, the Phlx proposes that 
violations of Advice B-1, Responsibility to Make Markets, be considered 
a major violation because the ability of customers to receive certain 
execution guarantees may be compromised where floor traders fail to 
provide the liquidity required under Advice B-1.
    In addition, certain fine schedules have not been updated for a 
long time, or at all. For example, Advice A-1, Responsibility of 
Displaying Best Bids and Offers, still applies the original fine 
schedule from when it was first adopted.\7\ The Exchange believes that 
the fine schedules should be updated to better reflect the severity of 
the violations.
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    \7\ See Securities Exchange Act Release No. 23296 (June 4, 1986) 
51 FR 21430 (June 12, 1986) (SR-Phlx-86-11). See also Securities 
Exchange Act Release No. 43126 (Aug. 7, 2000), 65 FR 49621 (Aug. 14, 
2000) (SR-Phlx-00-34).
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    Certain Advices currently do not have a fine schedule because they 
do not contain a finable offense.\8\ These appear in the Advice 
handbook for ease of reference on the trading floor or merely contain 
explanatory (as opposed to obligatory) language. Certain other Advices 
require referral to the Business Conduct Committee for sanctions due to 
the severity of the violation.\9\ For these two types of Advices, the 
Phlx does not propose any modifications at this time.
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    \8\ See Advices A-3, A-4, B-9, B-10, D-1, D-2, F-7, F-10, and F-
22.
    \9\ See Advices A-5, A-9, A-10, B-3(b), B-11, C-7(a), C-9, F-14, 
F-24 (except (c)(iii)), F-28, and G-2.
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    The Exchange also proposes to increase the time period for relating 
back to prior violations for all fine schedules, such that those on a 
one-year running calendar basis shall be increased to a two-year 
running calendar basis.\10\ Some fine schedules operate on a three-year 
running calendar basis.\11\ This proposed increase in the time period 
would subject violators to greater sanctions. The Phlx believes that 
imposing higher penalties for violations of an Advice which occur more 
than once during a two-year period is consistent with the existing 
framework of graduated fines and should increase the Exchange's ability 
to deter repeat offenders.
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    \10\ A ``two-year running calendar basis'' means that a 
violation of an Advice that occurs within two years of the first 
violation of that Advice will be treated as a second occurrence, and 
any violation of an Advice within two years of the previous 
violation of that Advice will be subject to the next highest fine 
specified in the Advice. See Securities exchange Act Release No. 
41201 (March 22, 1999), 64 FR 15391 (March 31, 1999) (SR-Phlx-99-
06). The terms ``running'' and ``rolling'' calendar basis are often 
used interchangeably. See, e.g., Securities Exchange Act Release No. 
33130 (November 2, 1993), 58 FR 59502 (November 9, 1993) (SR-Phlx-
93-28).
    \11\ See Advices A-2, B-1, B-4, B-8, C-4, F-2, F-5, F-8, F-9, F-
13, F-19, F-23, and F-30.
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2. Statutory Basis
    The Phlx believes the proposed rule change is consistent with 
Section 6 of the Act \12\ in general, and furthers the objectives of 
Section 6(b)(5) \13\ in particular, in that it is designed to promote 
just and equitable principles of trade, and to remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system, and protect investors and the public interest because it 
should provide an appropriate form of deterrence for violation of 
certain Advices. In addition, the Phlx believes that the proposed rule 
change is consistent with Section 6(b)(6) of the Act \14\ which 
requires that rules of the Exchange provide that its members be 
appropriately disciplined for violations of the Act as well as the 
rules and regulations thereunder; specifically, the proposal provides 
prompt, appropriate, and effective discipline for repeat violations of 
Advices.
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    \12\ 15 U.S.C. 78f.
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ 15 U.S.C. 78f(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Phlx does not believe that the proposed rule change would 
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

    No written comments were either solicited or received.

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 the Exchange 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 20529-0609. 
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 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

[[Page 30260]]

the Commission's Public Reference Room. Copies of such filings will 
also be available for inspection and copying at the principal office of 
the Phlx. All submissions should refer to File No. SR-Phlx-2001-36 and 
should be submitted by June 26, 2001.

    For the Commission, By the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Kaz,
Secretary.
[FR Doc. 01-14028 Filed 6-4-01; 8:45 am]
BILLING CODE 8010-01-M