[Federal Register Volume 66, Number 242 (Monday, December 17, 2001)]
[Notices]
[Pages 65015-65017]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-30957]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45144; File No. SR-PCX-2001-45]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Exchange, Inc. Relating to Inactive Lessors' 
Eligibility to Serve on the Board of Governors

December 10, 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 December 7, 2001, the Pacific Exchange, Inc. (``PCX'' of 
``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 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The PCX proposes to amend Article III, Section 2(b) of the PCX 
Constitution and PCX rule 1.1(h) to provide for the eligibility of 
inactive lessors to serve on the PCX Board of Governors (``Board''). 
Below is the text of the proposed rule change. Text in italics 
indicates material to be added.
* * * * *

Article III

Eligibility of Governors

    SEC. 2(b). Any member, allied member or person who is an officer or 
director of the parent or subsidiary corporation of a member firm, or a 
general partner in a partnership which owns or is wholly owned by a 
member firm, or an officer or director of a member firm or of a 
participant firm of any subsidiary of the Exchange performing 
depository or clearing functions, or an officer, director or general 
partner of the parent or a subsidiary corporation of such clearing 
member firm or depository participant firm, or an inactive lessor or 
any person not affiliated with a broker or dealer in securities is 
eligible to be elected as a member of the board of Governors. Of the 
governors, in each of the classes specified in Sec. 2(a), above, at 
least one shall be a member of the Exchange, at least one shall be an 
office member or office allied member of the Exchange,

[[Page 65016]]

and at least three shall be representatives of the public and shall not 
be, or be affiliated with, a broker or dealer in securities. There 
shall be at least two floor members on the board at all times, one of 
which shall be an Equity Trading Permit Holder, and Equity-ASAP Holder 
or an Allied Person of an ETP or an Equity ASAP Holder.
* * * * *

Inactive Lessor

    Rule 1.1(h). Inactive Lessor: The term ``inactive lessor'' shall 
refer to a natural person, firm or other such entity as the Board may 
approve, who owns or inherits a membership for the sole purpose of 
acting as a lessor. For purposes of the composition of the Board of 
Governors, inactive lessors are not deemed to be representatives of the 
public.
* * * * *

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

    In the filing with the Commission, the PCX 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 PCX 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
    The Exchange is proposing to amend the PCX Constitution and Rules 
to clearly establish that PCX inactive lessors are eligible to serve on 
the Exchange's Board. An inactive lessor is defined in the PCX 
Constitution as ``a natural person, firm or other such entity as the 
Board may approve, who owns or inherits a membership for the sole 
purpose of acting as a lessor.'' \3\ Previously, some of the PCX's 
inactive lessors had requested to have their interests represented on 
the Board. A number of these inactive lessors have presented their 
names to the PCX's Nominating Committee so that they may be nominated 
and stand for election to the Board. The Exchange believes that 
permitting these individuals to serve on the Board is appropriate.
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    \3\ See PCX Rule 1.1(h).
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    The PCX requirements relating to the eligibility of persons to 
serve on the Board is set forth in Article III, Section 2(b) of the PCX 
Constitution, which provides, in part, as follows:
    ``Any member,\4\ allied member \5\ or person who is an officer or 
director of the parent or subsidiary corporation of a member firm,\6\ 
or a general partner in a partnership which owns or is wholly owned by 
a member firm, or an officer or director of a member firm or of a 
participant firm of any subsidiary of the Exchange performing 
depository or clearing functions, or an officer, director or general 
partner of the parent or a subsidiary corporation of such clearing 
member firm or depository participant firm, or any person not 
affiliated with a broker or dealer in securities is eligible to be 
elected as a member of the Board of Governors.'' (Footnotes added)
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    \4\ The term ``member'' is defined as ``a natural person in 
whose name the membership is held and who is in good standing.'' See 
PCX Constitution, Article V, Section 3. The term ``floor member'' is 
defined as ``a member of the Exchange, who meets the qualification 
requirements for the purpose of exercising full trading privileges 
on a floor of the Exchange on behalf of a member organization.'' See 
PCX Constitution, Article V, Section 8.
    \5\ The term ``allied member'' refers to a non-member who is one 
of the following: ``(1) An employee of a member firm who controls 
such member firm, or (2) an employee of a member firm corporation 
who is a director or a principal executive officer of such 
corporation, or (3) an employee of a member firm limited liability 
company who is a manager or a principal executive officer of such 
limited liability company, or (4) a general partner in member firm 
partnership; and who has been approved by the Exechange as an allied 
member.'' See PCX Constitution, Article V, Section 6.
    \6\ ``Member firm'' is defined as ``a partnership, corporation, 
limited liability company or other organization in good standing who 
owns or leases a membership or upon whom a member has conferred 
privileges of membership pursuant to and in compliance with Article 
VIII of this Constitution.'' See PCX Constitution, Article V, 
Section 4 and PCX Rule 1.1(j).
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    Article III, Section 2(a) of the PCX Constitution provides that the 
Exchange's elected Governors are divided into three classes, each of 
which is composed of seven Governors. At each Annual Meeting of the 
PCX, a new class (consisting of seven Governors) is elected. Pursuant 
to Article III, Section 2(b), of the seven Governors elected at each 
Annual Meeting, at least one must be a member of the Exchange; at least 
one must be an office member or office allied member of the Exchange; 
and at least three must be representatives of the public. This leaves 
two slots per class (and a total of six slots on the Board at any given 
time) that may be filled by other qualified persons. Under the 
proposal, an inactive lessor would be qualified to fill one of these 
open slots. However, the Exchange notes that Article III, Section 2(b) 
requires that these open slots must otherwise be filled when necessary 
to meet other requirements set forth in Section 2(b), namely that there 
must be at least two floor members on the Board at all times (one of 
which must be an Equity Trading Permit Holder, an Equity-ASAP Holder or 
an Allied Person of an ETP Firm or an Equity ASAP Holder) and that, 
beginning in the year 2001, there must be eleven representatives of the 
public on the Board at all times.
    The proposed rule change is not intended to permit any change to 
the number of public representatives eligible to serve on the PCX's 
Board. The Exchange represents that it will not place an inactive 
lessor on the Board in order to fill a slot designated for a 
``representative of the public.'' According, the Exchange proposes to 
amend PCX Rule 1.1(h), which defines the term ``inactive lessor,'' to 
clarify that for purposes of the composition of the PCX's Board, 
inactivee lessors are not deemed to be representatives of the 
public.\7\
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    \7\ The PCX states that the proposed language in PCX Rule 1.1(h) 
to clarify the role of inactive lessors on the Board is intended as 
an interpretation of Article III, Section 2(b) of the PCX 
Constitution. Telephone conversation between Michael D. Pierson, 
Vice President, Regulatory Policy, PCX, and Kelly M. Riley, Senior 
Special Counsel and Cyndi N. Nguyen, Attorney, SEC on December 5, 
2001.
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    Inactive lessors have an interest in the activities of the Exchange 
because they have a financial interest in the Exchange by virtue of 
owning a membership. The value of their investments is directly tied to 
decisions made by the Board. The PCX Constitution, Article III, Section 
2(c), states that care should ``be taken to have the various interest 
of the membership represented on the Board of Governors.''
    Finally, the Exchange notes that the Constitution of the Chicago 
Board Options Exchange (``CBOE'') has a similar provision that permits 
service by a ``lessor director'' on its Board of Directors. 
Specifically, the CBOE provision permits service by a member ``who 
directly or indirectly owns and controls a membership with respect to 
which he acts solely as lessor and who is not actively engaged in 
business as a `person associated with a broker-dealer' as those terms 
are defined in the Securities Exchange Act of 1034. * * *'' \8\
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    \8\ See CBOE Constitution, Article VI, Section 6.1.

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[[Page 65017]]

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \9\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act \10\ in particular, in that it 
is designed to promote just and equitable principals of trade and to 
protect investors and the public interest.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in the furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
rule Change Received from Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 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 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 
PCX. All submissions should refer to File No. SR-PCX-2001-45 and should 
be submitted by January 2, 2002.


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-30957 Filed 12-14-01; 8:45 am]
BILLING CODE 8010-01-M