[Federal Register Volume 66, Number 3 (Thursday, January 4, 2001)]
[Notices]
[Pages 822-824]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-156]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43766; File No. SR-BSE-00-13]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval to 
Amendments No. 2 and 3 to the Proposed Rule Change by the Boston Stock 
Exchange, Inc. to Issue Electronic Trading Permits for BEACON Remote 
Units

December 22, 2000.

I. Introduction

    On September 21, 2000, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change that would add rules regarding the issuance of 
Electronic Trading Permits (``ETPs'') to specialists and registered 
floor clerks of Exchange members for remote specialist operations. The 
ETPs will allow Exchange members access to the BEACON trading system 
from remote locations using authorized terminals and related equipment. 
The proposed rule change was published for comment in the Federal 
Register on October 12, 2000.\3\ No comments were received on the 
proposal.
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    \1\ 15 U.S.C. 78s(b)(1). This notice incorporated typographical 
changes made by the Exchange in letter Amendment No. 1 filed 
September 29, 2000.
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 43394 (September 29, 
2000), 65 FR 60705.
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    The Exchange filed Amendment No. 2 to the proposed rule on December 
4, 2000 and on December 21, 2000, the Exchange filed Amendment No. 3. 
This order approves the proposed rule change and grants accelerated 
approval to Amendments No. 2 and 3 of the proposed rule change. The 
Commission is also soliciting comments on Amendments No. 2 and 3.

II. Description of the Proposal

    In August 2000,\4\ the Commission approved the Exchange's remote 
specialist program that generally permitted Exchange specialists to 
conduct regular trading activities off the Exchange's trading floor 
using the BEACON trading system. The Exchange's pending filing 
supplements its remote specialists filing. As noted by the Exchange, it 
is proposing to issue ETPs primarily as a surveillance tool to monitor 
its remote specialists operations.\5\
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    \4\ Securities Exchange Act Release No. 43127 (August 14, 2000), 
65 FR 49617.
    \5\ The approval order was conditioned on the Exchange putting 
into place specific information barrier policies and surveillance 
policies that are consistent with the Exchange's existing rules and 
that are acceptable to the Commission's Office of Compliance 
Inspections and Examinations (``OCIE''). Id. at 49620. Nothing 
herein is intended to change the requirement that the Exchange get 
its surveillance plan approved by OCIE.
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    The Exchange proposes to add paragraph (o) to Chapter XXXIII, 
Section 9, BEACON Remote, to require and establish guidelines for 
Electronic Trading Permits (``ETP'') for remote specialist operations. 
Each BEACON Remote terminal will be individually identified and 
associated with (an) authorized and qualified specialist(s) and/or 
registered clerk(s). The Exchange will specifically authorize and 
approve each ETP based on certain qualifications. Each ETP will provide 
remote access to the BEACON system from remote locations using 
authorized terminals and related equipment. The ETP is in addition to 
the membership requirements, and even a specialist who holds a 
membership will be required to hold an ETP. Each Beacon remote 
specialist operation still requires a membership in the Exchange 
notwithstanding the ETP requirements. According to the Exchange, the 
ETP's are non-transferable permits that will be primarily used for 
surveillance purposes.\6\
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    \6\ See Letter from John A. Boese, Assistant Vice President, to 
Madge Hamilton, Division of Market Regulation, Commission, dated 
December 1, 2000 (``Amendment No. 2'').
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    The Exchange states that remote specialists and associated 
registered clerks with ETPs, like current Exchange floor specialist 
units, will receive orders, commitments over the Intermarket Trading 
system (``ITS'') and administrative messages through the BEACON system. 
The existing Exchange systems and rules will support remote specialists 
as they currently support the physical trading floor. As noted above, 
the BSE has also adopted specific rules applicable to remote specialist 
operations. All executions occurring within BEACON, whether conducted 
on the floor or electronically from remote locations, will be 
considered to be executions occurring on the Exchange.
    The proposal, among other things, requires that all registered 
specialists and clerks complete a floor-training program, unless waived 
as discussed below, as well as successfully complete a BSE floor 
examination and the Series 63 (NASAA Uniform State Law Exam).\7\

[[Page 823]]

Amendment No. 2 clarified when the two week on-floor training 
requirement could be waived for ETP applicants. Training would be 
waived for current floor specialists and registered clerks who transfer 
to remote specialist operations. The two week on-site floor training 
period could also be waived for other people in exceptional 
circumstances, if other arrangements are made with and approved by the 
Exchange. In such exceptional circumstances, a waiver will only be 
permitted if the Exchange is assured that the person requesting the 
waiver has made other arrangements that ensure that the person meet all 
of the training requirements listed in the BSE proposal.\8\ However, 
the two week on-site floor training period could not be waived for 
easily remedied reasons such as geographical location or inconvenience. 
Furthermore, Amendment No. 2 clarified that a registered clerk in a 
remote specialist operation, who qualified for an ETP, would be 
operating under the direct supervision of a registered specialist, just 
as a registered clerk is supervised in the on-floor environment.
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    \7\ The proposal originally allowed the floor examination to be 
waived. Amendment No. 3 deletes the provision that permitted this 
waiver. BSE notes that this deletion will ensure the remote 
specialist examination requirements are consistent with the floor 
examination requirements for on-floor specialists and registered 
clerks. These requirements currently do not permit waivers.
    \8\ The on-site floor training includes, among other things: 
communication procedures with Floor Brokers, Front Desk Operations, 
Surveillance, Systems Support, and ITS coordination with the Floor; 
Competing Specialist Initiative and Unlisted Trading Privilege 
applications and procedures, stock allocation procedures; trading 
halt procedures; and books and records/reports available.
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III. Discussion

    The Commission finds that the proposed rule change is consistent 
with section 6(b)(5) of the Act \9\ and section 11A of the Act.\10\ 
Section 6(b)(5) of the Act \11\ requires, among other things, that the 
rules of an exchange be designed to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest. Section 11A of the Act 
promotes, among other things, the development of a national market 
system for securities to assure economically efficient execution of 
securities transactions and fair competition among brokers and dealers, 
among exchange markets and markets other than exchange markets.\12\
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    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 15 U.S.C. 78k(a)(1)(B).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ 15 U.S.C. 78k-1.
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    After having carefully reviewed the proposal, the Commission finds 
that the proposed rule is designed to protect investors and the public 
interest by permitting the Exchange to better surveil the activities of 
specialists and registered clerks that utilize the BEACON remote access 
system.\13\ The Commission also finds for the same reasons that the 
proposed rule is designed to promote just and equitable principles of 
trade.
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    \13\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition and capital 
formation. 15 U.S.C. 78c(f).
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    Each BEACON Remote terminal will be specifically identified and 
associated, by the use of the ETP, with an authorized and qualified 
specialist or registered clerk.\14\ Any activity taking place on each 
terminal will be directly attributable to an individual specialist or 
registered clerk. According to the Exchange, the ETP is a necessary 
device which should assist it in attempting to replicate the visual 
surveillance of user terminals on the Exchange floor.
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    \14\ The Commission notes that the Exchange's ETPs are separate 
and distinct from other trading permits that the Commission has 
previously reviewed. The Exchange's ETP will be a non-transferable 
permit which will be used primarily for surveillance purposes, by 
allowing the BSE to identify each BEACON terminal with an individual 
specialist or registered clerk. Each BEACON Remote Specialist 
operation requires a membership in the Exchange. Therefore, only 
specialists and registered clerks who work for a member can be 
issued an ETP. The ETP is in addition to the membership requirement 
of the Exchange. The Exchange notes that the ETP does not constitute 
membership on the Exchange, nor does it carry with it any of the 
benefits or responsibilities of membership. Accordingly, the ETPs do 
not raise the same fair representation issue that have been at issue 
with other trading permits that confer certain membership rights to 
non-members.
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    Although BEACON Remote registered clerks will be required to obtain 
an ETP, there is nothing in the ETP which will grant them any more 
rights or privileges than a current on-floor registered clerk 
possesses. Registered clerks will be under the direct physical 
supervision of a specialist at all times. It should also be noted that 
if an ETP registered clerk were to leave a firm a new ETP application 
would be required for a new clerk.
    Under the Exchange's proposal, ETPs must be approved by the 
Exchange. In addition, each specialist unit must have a registered seat 
assigned to it and meet certain other requirements to issue an ETP, 
such as completion of the required floor training program; successful 
completion of the Exchange floor examination within 90 days of 
application; successful completion of the Series 63 (NASAA Uniform 
State Law Exam) and registrations with the Commonwealth of 
Massachusetts; and submission of fingerprint records to the Exchange. 
The Commission generally believes that the ETPs should provide the BSE 
with an adequate monitoring tool for remote operations. In addition, 
the training and examination requirements should help to ensure that 
remote specialists are adequately trained to operate from a remote 
location.
    The proposed rule requires all specialists to complete a floor 
training program.\15\ Under the Exchange's rule, there is a mandatory 
two-week training period required of all ETP applicants. This two week 
training period would be waived for current on floor specialists and 
registered clerks who transfer to remote specialist operations. The 
Commission believes this waiver is reasonable because these on-floor 
specialists and registered clerks already have had the required 
training.
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    \15\ This requirement is in concert with the two-week training 
program mandated in BEACON Remote rule for specialists specifically 
(see Chapter XXXIII, BEACON, Section 9, BEACON Remote, Commentary).
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    The rule also allows for a waiver of the floor training requirement 
in exceptional circumstances if other arrangements are made with and 
approved by the Exchange. The BSE may only grant the waiver if it is 
assured that the person requesting the waiver has made other 
arrangements that ensure the person meets all of the specific training 
requirements designated in the BSE rule. The rule also states that the 
on-floor training period will not be waived for easily remedied reasons 
such as geographical location or inconvenience. The BSE stated, 
however, that there may be other situations whereby the Exchange may 
deem it appropriate to accept an alternative training venue or program. 
In justification for this waiver the Exchange has stated that it does 
not want to limit itself from considering other circumstances which may 
arise in the future, which could delay or prevent a firm from 
commencing or conducting business.
    While the Commission would be extremely concerned about waivers of 
appropriate training, it appears that the Exchange has drafted its rule 
narrowly to only deal with exceptional circumstances. Further, the rule 
specifically requires anyone receiving a waiver to be appropriately 
trained and

[[Page 824]]

meet all the training requirements.\16\ Accordingly, the Commission has 
decided to approve this portion of the Exchange's proposal. The 
Commission, however, requests the Exchange to carefully monitor the use 
of exceptional waivers to ensure they are only used in accordance with 
the standards in the rule.
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    \16\ See supra note 8.
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    The Commission also finds that the proposed rule should assist the 
Exchange in promoting economically efficient execution of securities 
transactions and fair competition consistent with section 11A of the 
Act.\17\ The proposed rule is designed to support remote access of the 
BEACON trading system. Each specialist unit identified by the member 
firm will be assigned an account (``give up'') and will be evaluated 
under the Exchange's Specialist Performance Evaluation Program, which 
currently measures performance in several separate categories 
comprising a relative overall performance ranking. This provision, 
along with other provisions of the proposed rule, should assist the 
Exchange in efficient and effective market operations.
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    \17\ 15 U.S.C. 78k-1.
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    In summary, the Commission believes that the issuance of ETPs under 
the requirements outlined above should aid and support the development 
of the Exchange's remote specialists operation. All of the requirements 
in the remote specialists rules will remain in place and must be 
followed. As noted above, the ETPs are not intended to transfer any 
specialist membership or trading rights but are primarily a 
survelliance tool. In addition, remote specialists and registered 
clerks are not permitted to do anything different from Exchange 
specialist units operating on the floor. Based on the above, the 
Commission believes the proposal should be approved consistent with the 
Act.
    The Commission finds good cause for approving Amendments No. 2 and 
3 prior to the thirtieth day after the date of publication of notice 
thereof in the Federal Register. Amendment No. 2 clarifies when BSE may 
waive the required two week on-floor training for ETP applicants. In 
addition, Amendment No. 2, clarifies that a registered clerk in a 
remote specialist operation, who has qualified for an ETP, will be 
operating under the direct supervision of a registered specialist, just 
as a registered clerk is supervised on the floor of the Exchange. 
Amendment No. 3 deletes the privison that permitted BSE to waive the 
floor examination requirement for BEACON Remote specialists. Both 
Amendments clarify and strengthen BSE's proposal. In addition, the 
Amendments modify the proposal to make it consistent with other BSE 
rules. Those Amendments did not change the underlying nature of the 
original proposal that was noticed for comment, and for which no 
comments were received. Based on the above the Commission believes that 
good cause exists, consistent with section 6(b)(5) \18\ and 19(b)(2) 
\19\ of the Act, to accelerate approval of Amendments No. 2 and 3.
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    \18\ 15 U.S.C. 78f(b)(5).
    \19\ 15 U.S.C. 78s(b)(2).
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III Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendments No. 2 and 3, including whether it 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 at the Commission's 
Public Reference Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the above-mentioned 
self-regulatory organization. All submissions should refer to file 
number SR-BSE-00-13 and should be submitted by January 25, 2001.

V. Conclusion

    It is Therefore Ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change SR-BSE-00-13, including Amendments, No. 
1, No. 2 and No. 3, is approved.
For the Commission, by the Division of Market Regulation, pursuant to 
delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).

Jonathan G. Katz,
Secretary.
[FR Doc. 01-156 Filed 1-3-01; 8:45 am]
BILLING CODE 8010-01-M