Federal Register / Vol. 61, No. 123 / Tuesday, June 25, 1996 / Notices 32875

12 17 CFR 200.30–3(a)(12) (1995).

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

2 17 CFR 240.19b–4.

3The three measures of performance currently

utilized by the PSE are: (1) National Market System

Quote Performance, accounting for 45% of the

overall score, measures the percentage of times in

a given quarter that a specialist’s bid and/or offer

is equal to or greater than the best bid or offer in

the consolidated quote system for each duallytraded security; (2) the Specialist Evaluation

Questionnaire Survey, also accounting for 45% of

the overall score, is composed of questions

designed to evaluate a specialist’s market-making

performance and is to be completed only by floor

brokers who regularly trade with a specialists; and

(3) SCOREX Limit Order Acceptance Performance,

which accounts for the final 10% of the overall

score, measures the percentage of P/COAST

(formerly SCOREX) limit orders accepted by a

specialist. See Securities Exchange Act Release No.

28843 (February 1, 1991), 56 FR 5040 (February 7,

1991) (File No. SR–PSE–87–19) for a more complete

description of each of these measures of

performance.

4The PSE maintains two equity trading floors,

one in Los Angeles and one in San Francisco. See

PSE Rule 4.1(g).

5See PSE Rules 5.37(b)–(e).

6SEE Rules 5.37(g)–(i). The EAC also has the

authority to bypass the second informal proceeding

and commence formal reallocation proceedings

after a specialist’s second quarter of substandard

performance in a rolling twelve-month period. See

PSE Rule 5.37.

7For a description of the procedures followed in

such proceedings, see PSE Rules 5.37(j)–(s).

deadlines in the case of flexibly

structured equity options. Such

departures are not currently anticipated

and adequate prior notice will be given

to all clearing members.

OCC believes the proposed rule

change is consistent with the purposes

and requirements of Section 17A of the

Act because the proposal provides for

the prompt and accurate clearance and

settlement of transactions in flexibly

structured equity options and because it

provides for the safeguarding of related

securities and funds. OCC believes the

proposed rule change meets such

requirements by establishing a

framework in which existing, reliable

OCC systems, rules, and procedures are

extended to the processing of flexibly

structured equity options. Finally, OCC

believes the proposed rule change will

foster cooperation with persons,

including OCC clearing members,

engaged in the clearance and settlement

of securities transactions and will

thereby promote the protection of

investors and the public interest.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

OCC does not believe that the

proposed rule change will impose any

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 not and are

not intended to be solicited with respect

to the proposed rule change, and none

have been received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within thirty-five 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

ninety 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 OCC 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.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549. 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

Section, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such

filing also will be available for

inspection and copying at the principal

office of OCC. All submissions should

refer to File No. SR–OCC–96–03 and

should be submitted by July 16, 1996.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.12

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–16062 Filed 6–24–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37326; File No. SR–PSE–

96–13]

Self-Regulatory Organizations; Pacific

Stock Exchange, Incorporated; Order

Granting Approval to Proposed Rule

Change Relating to Restrictions on

Equity Allocations (10% Rule)

June 19, 1996.

On April 10, 1996, the Pacific Stock

Exchange, Incorporated (‘‘PSE’’ or

‘‘Exchange’’) submitted to the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘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 to

codify a policy that any specialist whose

score on a quarterly specialist

performance evaluation ranks in the

bottom 10% of specialist on his or her

trading floor shall not be eligible for

allocations of securities, absent

mitigating circumstances, until such

ranking rises above the bottom 10%.

The proposed rule change was

published for comment in Securities

Exchange Act Release No. 37142 (April

24, 1996), 61 FR 19328 (May 1, 1996).

No comments were received on the

proposal.

The Exchange’s specialist evaluation

program is governed by PSE Rule 5.37.

Subsection (a) of that Rule provides that

the Equity Allocation Committee

(‘‘EAC’’) shall evaluate all registered

specialists on a quarterly basis. Those

evaluations result in overall ratings of

specialists that are based upon three

separate measures of performance, as

specified in the Rule.3 Subsection (b)

provides that any registered specialists

who is in the bottom 10% of all

registered specialists on that specialist’s

trading floor,4 as determined by the

overall evaluation scores in any one

quarterly evaluation, shall be requested

to meet with the EAC (or a panel

appointed by the EAC) on an informal

basis.5 If a specialist is in the bottom

10% during any two out of four

consecutive quarterly evaluations, the

specialist is requested to appear a

second time before the EAC to explain

his or her performance.6

If the EAC finds in its second informal

meeting with a specialist that there are

no mitigating circumstances that would

demonstrate substantial improvement of

or reasonable justification for the

specialist’s most recent evaluation

score, the EAC will make a

determination that the specialist’s

performance is below acceptable levels,

and notify the specialist of his or her

right to a hearing on such

determination.7 The EAC may take a

number of actions against a registered

specialist found to perform below

acceptable levels, including limitation,

suspension or termination of the

specialist’s registration as a specialist, or

reallocation of his or her stocks.
32876 Federal Register / Vol. 61, No. 123 / Tuesday, June 25, 1996 / Notices

8The PSE has represented that the restriction

applies to both initial allocations and allocations

available as a result of subsequent reallocations.

Furthermore, it also would apply in situations

where two specialists desire to ‘‘swap’’ issues with

each other . See Letter from Michael Pierson, Senior

Attorney, PSE, to John Kroeper, Attorney, SEC,

dated June 7, 1996 (‘‘PSE Letter’’).

9 In the PSE Letter the Exchange gave the

following, non-definitive, examples of ‘‘mitigating

circumstances’’ that have been accepted by the EAC

in the past two years: i) extensive systems problems

existed that clearly were beyond the specialist’s

control; ii) a specialist was able to show that, of the

trades covered in a specialist evaluation, the

percentage of trades involving interaction with a

broker was very low, and undue weight therefore

was placed on the Questionnaire Survey; iii) a

specialist’s financial backer withdrew mid-quarter,

having a negative impact on the specialist’s

performance during that quarter; and iv) the

specialist’s overall score on the quarterly evaluation

(as opposed to the specialist’s ranking) was above

80%. The Exchange further represented that based

on past EAC decisions, relief by mitigation is the

exception, not the rule. See PSE Letter, supra note

8.

10Cf. Securities Exchange Act Release NO. 31539

(November 30, 1992), 57 FR 57851 (December 7,

1992) (File No. SR–PSE–92–32). This order

approved, among other things, the addition of

Commentary .03 to PSE Rule 5.36(d), which

precludes a specialist whose specialist ranking falls

in the bottom 10% of his or her Floor from acting

as an alternate specialist until his or her ranking

raises above the bottom 10%, unless the EAC

determines otherwise.

11 15 U.S.C. 78f(b)(5).

12 15 U.S.C. 78k(b).

13 17 CFR 240.11b–1.

14Rule 11b–1, 17 CFR 240.11b–1; PSE Rules

5.29(f).

15See PSE Rule 5.36(d), Commentary .03. As

discussed previously, under PSE Rule 5.37 the

exchange has the ability to take more significant

action against any specialist who is ranked in the

bottom 10% in any two out of four consecutive

evaluations. See PSE Rule 5.37(j).

16See PSE Letter, supra note 8.

17 15 U.S.C. 78s(b)(2).

18 17 CFR 200.30–3(a)(12).

The Exchange is now proposing to

adopt a rule providing that any

registered specialist who fails into the

bottom 10% of all registered specialists

on his trading floor as determined by

the overall evaluation scores received by

each specialist in any one quarterly

evaluation shall not be eligible for new

allocations until such ranking rises

above the bottom 10%.8 However, the

proposal also provides that the EAC

may make exceptions if there are

sufficient mitigating circumstances.9

At the PSE’s specialist evaluation

results and overall rankings are reported

in the quarter following the quarter of

the evaluation, e.g., the results of the

fourth quarter of 1995 are reported in

the first quarter of 1996. Accordingly, a

specialist who was in the bottom 10%

for the fourth quarter of 1995 will not

be eligible for new allocations of stocks

until, at the earliest, the second quarter

of 1996, when the results from the first

quarter of 1996 are reported.

The Exchange believes that the

restriction on new allocations is an

effective tool in encouraging specialists

to improve their performance, and

thereby to improve their evaluation

scores.10

The Commission finds that the PSE’s

proposal to codify its policy that a

specialist whose quarterly evaluation

score falls in the bottom 10% of

registered specialists on his or her

trading floor shall not be eligible for any

allocations of stock until such specialist

is no longer in the bottom 10% is

consistent with the requirements of

Sections 6 and 11 of the Act and the

rules and regulations thereunder

applicable to a national securities

exchange. Specifically, the Commission

finds that the proposed rule change is

consistent with the Section 6(b)(5) 11

requirement that the rules of an

exchange be designed to promote just

and equitable principles of trade, 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. Further, the Commission

finds that the proposal is consistent

with Section 11(b) of the Act 12 and Rule

11b–1 thereunder 13 which allow

national securities exchanges to

promulgate rules relating to specialists

in order to maintain fair and orderly

markets and to remove impediments to

and perfect the mechanism of a national

market system. For the reasons set forth

below, the Commission believes that the

proposal should encourage improved

specialist performance, consistent with

the protection of investors and the

public interest.

Specialists play a crucial role in

providing stability, liquidity, and

continuity to the trading of stocks.

Among the obligations imposed upon

specialists by the Exchange, and by the

Act and the rules promulgated

thereunder, is the maintenance of fair

and orderly markets in their designated

securities.14 To ensure that specialists

fulfill these obligations, the Commission

has encouraged the Exchange to have an

effective program for evaluating

specialists’ performance. In this regard,

the Commission believes that stocks

should be allocated to those specialists

who are performing the best. Such stock

allocation policies encourage specialists

to strive for optimal market making

performance.

At present, the only incentive to

improved specialist performance found

in the PSE specialist performance

evaluation program that is applicable

beginning with a specialist’s first

quarter of ranking in the bottom 10% is

the restriction on acting as an alternate

specialist while the specialist remains

ranked in the bottom 10%.15 The

proposed rule change will add another

such incentive to the PSE rules by

codifying an existing policy of the

Exchange that restricts specialists whose

ranking falls in the bottom 10% of

specialists on his or her floor from

eligibility for any allocations (i.e.,

allocations of new issues, reallocations

of existing issues, or swapping of issues

with other specialists) until such

specialist is no longer in the bottom

10%.

The Commission believes that the

codification of this policy into the PSE

rules will be an effective and

appropriate means by which to

encourage improved specialist

performance. As a specialist’s

profitability is directly related to the

stocks he or she is allocated, the

possibility of a restriction on allocations

will provide a strong incentive to PSE

specialists to remain out of the bottom

10%. This should translate into

improved market making performance

by specialists, thereby benefitting

investors. Moreover, the imposition of

the restriction on allocations to

specialists in the bottom 10% should

increase the likelihood that stocks are

allocated to specialists who will make

the best markets.

Finally, the Commission notes that

the EAC retains the ability to allow

specialists whose scores are in the

bottom 10% in any quarterly evaluation

to continue receiving allocations if it

finds that sufficient ‘‘mitigating

circumstances’’ are present. While the

Exchange has represented that relief

from the restriction by mitigation is the

exception 16 and the Commission

recognizes the need for the EAC to

retain the discretion to refrain from

imposing this restriction in appropriate

instances, the Commission expects that

findings by the EAC that ‘‘mitigating

circumstances’’ are present will not

become routine, but will remain the

exception and be made only when

appropriately warranted.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,17 that the

proposed rule change (SR–PSE–96–13)

is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.18

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–16166 Filed 6–24–96; 8:45 am]

BILLING CODE 8010–01–M