Federal Register / Vol. 66, No. 250 / Monday, December 31, 2001 / Notices 67609

7 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3Securities Exchange Act Release No. 43692 (Dec.

8, 2000), 65 FR 78240.

4See Form 19b–4 dated May 14, 2001

(‘‘Amendment No. 1’’).

5Securities Exchange Act Release No. 44533 (July

10, 2001), 66 FR 37083.

6See letter from Diana Tenenbaum, Phlx, to

Nancy J. Sanow, Senior Special Counsel [sic],

Division of Market Regulation, SEC, dated June 21,

2001 (‘‘Amendment No. 2’’). In Amendment No. 2,

the Exchange corrected a citation to SEC ‘‘Rule

11Ac1–1’’ on page 22 of the amended Form 19b–

4, deleted a reference to subsection ‘‘(ii)’’ on page

25 of the amended Form 19b–4, and changed all

references to ‘‘issue’’ and ‘‘issues’’ in the proposed

Rule 516 to read ‘‘security’’ and ‘‘securities,’’

respectively.

7See letters to Jonathan G. Katz, Secretary, SEC,

from Michael T. Dorsey, Senior Vice President and

General Counsel, Knight Trading Group, Inc., dated

December 19, 2000 (‘‘Knight Letter’’); William W.

Uchimoto, Executive Vice President and General

Counsel, Ashton Technology Group, Inc., dated

February 23, 2001 (‘‘Ashton Letter’’); and Edith

Hallahan, Deputy General Counsel, Phlx, dated

April 2, 2001 (‘‘Phlx Letter’’).

8 15 U.S.C. 781(f).

9The Commission notes that the Phlx began

trading Nasdaq/NM Securities pursuant to the Pilot

in February 1993. See Securities Exchange Act

Release No. 31672 (Dec. 30, 1992), 58 FR 3054 (Jan.

7, 1993). The effectiveness of the Pilot was

extended four times before the Phlx decided to

cease trading such securities pending

reorganization of its OTC/UTP Pilot Program as a

whole. See Securities Exchange Act Release No.

36087 (Aug. 10, 1995), 60 FR 42637, 42638 (Aug.

16, 1995). The Phlx OTC/UTP Pilot Program

expired on February 12, 1996. Id.

10See note 7 supra.

11 15 U.S.C. 781(f)(1)(E)(i).

12 17 CFR 240.11Ac1–1.

13NASD Rule 4613(e).

14NASD Rule 4613(b)(2).

15The OTC/UTP Plan refers to the Joint SelfRegulatory Organization Plan Governing the

Collection, Consolidation, and Dissemination of

Quotation and Transaction Information for NasdaqListed Securities Traded on Exchanges on an

Unlisted Trading Privileges Basis. The participants

of the OTC/UTP Plan are the American Stock

Exchange LLC, the Chicago Stock Exchange, Inc.,

the Cincinnati Stock Exchange, Inc., the National

Association of Securities Dealers, Inc., the Pacific

Exchange, Inc., and the Philadelphia Stock

Exchange, Inc.

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–2001–33 and should be

submitted by January 22, 2002.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.7

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–32083 Filed 12–28–01; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–45182; File No. SR–PHLX–

2000–20]

Self-Regulatory Organizations;

Philadelphia Stock Exchange, Inc.;

Order Approving Proposed Rule

Change and Amendment Nos. 1 and 2

Thereto Relating to the Trading of

Nasdaq Securities on the Floor of the

Exchange

December 20, 2001.

I. Introduction

On November 16, 2000, the

Philadelphia Stock Exchange, Inc.

(‘‘Phlx’’ 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 regarding the trading of Nasdaq

securities on the floor of the Exchange,

pursuant to unlisted trading privileges

(‘‘UTP’’). Notice of the proposed rule

change was published in the Federal

Register on December 14, 2000.3 On

May 14, 2001, the Exchange submitted

Amendment No. 1 to the proposed rule

change.4 Amendment No. 1 was

published in the Federal Register on

July 16, 2001.5 On June 22, 2001, the

Exchange submitted Amendment No. 2

to the proposed rule change.6 The

Commission received two comment

letters on the proposed rule change and

a response from Phlx.7 This order

approves the proposed rule change, as

amended.

II. Description of the Proposal

The Phlx proposes to reinstate trading

in certain over-the-counter (‘‘OTC’’)

securities, i.e., Nasdaq National Market

Securities (‘‘Nasdaq/NM Securities’’), on

the floor of the Exchange, pursuant to

UTP under section 12(f) of the Act.8

Therefore, Phlx seeks reinstatement of

the pilot program and accompanying

rules to permit the trading of Nasdaq/

NM Securities on the Exchange

pursuant to UTP (‘‘Phlx OTC/UTP Pilot

Program’’ or ‘‘Pilot’’).9 Generally, the

Exchange proposes to make only minor

changes to the Phlx rules that

specifically govern trading of Nasdaq/

NM Securities, such as to revise the

term ‘‘Nasdaq/NM Securities.’’ The Phlx

has, however, proposed a new

allocation procedure for Nasdaq/NM

Securities. The Phlx has proposed to

reinstate its Pilot to trade Nasdaq/NM

Securities on a six-month pilot basis.

III. Summary of Comments

The Commission received two

comments on the proposed rule change

and a response from Phlx.10 One

commenter, Knight, opposed the

proposal. In its letter, Knight argued that

the proposal should not be approved

because: (1) Phlx has failed to

demonstrate how permitting Phlx

specialists to trade certain Nasdaq/NM

Securities pursuant to the Pilot will

maintain fair and orderly markets (as

required by section 12(f)(1)(E)(i) of the

Act 11) (of particular concern to Knight

is the fact that members of regional UTP

exchanges will be held to the less

stringent rules of regional exchanges

than NASD market maker members); (2)

members of regional UTP exchanges

trading Nasdaq/NM Securities currently

act in a manner inconsistent with the

SEC Rule 11Ac1–1 12 (the ‘‘Firm Quote

Rule’’), by failing to execute transactions

at prices that were displayed in the

Nasdaq Montage; and (3) members of

regional UTP exchanges trading Nasdaq/

NM Securities currently act in a manner

inconsistent with NASD’s Locked/

Crossed Market Rule 13 and Trade-orMove Rule.14

The Phlx responded to the Knight

Letter. In its response letter, the Phlx

countered each of Knight’s arguments

by contending that: (1) The SEC has

already determined that permitting

regional exchanges and their specialists

and dealers to trade Nasdaq/NM

Securities pursuant to the OTC/UTP

Plan 15 is consistent with fair and

orderly markets; (2) the Knight Letter

offers no evidence that members of

regional UTP exchanges routinely

violate the Firm Quote Rule; and (3)

even through regional exchange

specialists are not bound by the NASD’s

Locked/Crossed Market and Trade-orMove Rules, regional specialists on a

voluntary basis routinely comply with

Trade-or-Move messages received by

them pre-opening. Moreover, the Phlx

noted that it does not intend to trade or

quote during the pre-opening session.

The other commenter, Ashton,

supported the proposal. Ashton operates

the eVWAP trading system (‘‘eVWAP’’)

as a facility of the Phlx through its

Universal Trading Technologies

Corporation subsidiary. eVWAP is a preopening order matching session for the

electronic execution of large-sized stock

orders at a standardized volume

weighted average price. Ashton noted

that the Phlx soon will be filing

amendments to Phlx Rule 237 (The

eVWAP Morning Session) to expand

eligibility of certain Nasdaq/NM

67610 Federal Register / Vol. 66, No. 250 / Monday, December 31, 2001 / Notices

16 15 U.S.C. 78f(b)(5).

17The Commission notes that trading in Nasdaq/

NM Securities will occur on the Phlx’s equity floor,

which is separate from the Phlx’s options floor.

Therefore, Phlx’s proposal does not raise any sideby-side trading concerns. In addition, Phlx Rule

1014, which prohibits Registered Options Traders

(‘‘ROTs’’) from executing proprietary options

transactions in Phlx-listed options on OTC

securities, if, during the preceding hour, the ROT

was physically at the trading post where such OTC

security trades, will apply during the Pilot.

18 In approving this proposal, the Commission has

considered its impact on efficiency, competition,

and capital formation. 15 U.S.C. 78c(f).

19The Commission notes that the Phlx’s rules

regarding short sales do not require an exemption

from the Commission’s short sale rule, Rule 10a–

1, since Nasdaq securities currently are excluded

from the Rule. See CFR 240.10a–1(a)(ii), However,

Nasdaq has applied to become a national securities

exchange. See Securities Exchange Act Release No.

44396 (June 7, 2001), 66 FR 31952 (June 13, 2001).

If Nasdaq becomes a registered exchange, Nasdaq

securities will be exchange-listed and the

exemption in subparagraph (ii) of Rule 10a–1 will

no longer be available. Accordingly, trading in

Nasdaq securities would be subject to Rule 10a–1

unless Phlx obtains an exemption from the Rule.

The Commission notes that Nasdaq has requested

an exemption from Rule 10a–1.

20 15 U.S.C. 781(f)(2).

21 15 U.S.C. 78s(b)(2).

22Phlx has advised the Commission that it

expects to begin trading in January 2002.

23 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See letter from Carla Behnfeldt, Director, Legal

Department New Product Development Group,

PHLX, to Nancy Sanow, Division of Market

Regulation (‘‘Division’’), Commission, dated

September 26, 2000 (‘‘Amendment No. 1’’). In

Amendment No. 1, the PHLX indicated that in the

event the PHLX proposes to list and trade a series

of Trust Shares that do not satisfy the generic

criteria provided in the proposal, the PHLX will

submit to the Commission a proposed rule change

pursuant to Rule 19b–4 with respect to the series.

4See letter from Carla Behnfeldt, Director, Legal

Department New Product Development Group,

PHLX, to Yvonne Fraticelli, Special Counsel,

Division, Commission, dated September 12, 2001

(‘‘Amendment No. 2’’). Amendment No. 2 indicates

that: (1) The PHLX currently does not list any Trust

Shares, although it trades shares of the Nasdaq 100

Trust pursuant to unlisted trading privileges

(‘‘UTP’’); (2) the PHLX is amending PHLX Rule

803(i)(11)(e) to indicate that the minimum trading

increment for a series of Trust Shares will be $0.01;

(3) the PHLX will issue a circular to members for

each Trust Shares series listed pursuant to Rule

19b–4(e) under the Act, which will describe the

unique characteristics and risks of Trust Shares,

and inform members of any obligation to deliver a

written product description or prospectus, as

applicable to purchasers of Trust Shares, and

inform members of their responsibilities under

PHLX Rules 746, ‘‘Diligence as to Accounts,’’ and

747, ‘‘Approval of Accounts,’’ in connection with

customer transactions in Trust Shares; (4) Trust

Shares are subject to, among others, the PHLX’s

general agency-auction rules, trading rules,

clearance and settlement rules, equity margin rules,

priority, parity, and precedence rules, rules

governing the responsibilities of specialists, trading

halt rules and procedures, and account opening

requirements; (5) any series of Trust Shares traded

pursuant to the standards in PHLX Rule 803(i)(11)

must meet the eligibility criteria in PHLX Rule

803(i)(11) as of the date of the initial deposit of

securities and cash into the trust; (6) the initial

deposit of a specified portfolio of securities in

connection with the issuance of shares of a series

of Trust Shares must be made before the start of

trading on the PHLX; (7) unless the PHLX maintains

an index, the current index value will be

disseminated every 15 seconds over the

Consolidated Tape Association’s (‘‘CTA’’) Network

B by or through the primary exchange or an entity

working with that exchange; and (8) Trust Shares

are subject to PHLX Rules 133, ‘‘Trading Halts Due

to Extraordinary Market Volatility,’’ and 136,

‘‘Trading Halts in Certain Exchange Traded Funds.’’

5See letter from Carla Behnfeldt, Director, Legal

Department New Product Development Group,

PHLX, to Yvonne Fraticelli, Special Counsel,

Division, Commission, dated December 17, 2001

(‘‘Amendment No. 3’’). In Amendment No. 3, the

PHLX revised the text of PHLX Rule 803(i)(11) to

indicate: (1) that the provisions of PHLX Rule

803(i)(11) apply to Trust Shares listed or traded

pursuant to UTP; and (2) that the minimum trading

increment for Trust Shares will be $0.01. In

addition, in Amendment No. 3 the PHLX

represented that it will use its existing surveillance

procedures for Trust Shares to monitor trading in

Trust Shares traded pursuant to Rule 19b–4(e).

Amendment No. 3 also stated that the PHLX will

issue a circular to members for each Trust Shares

series listed or traded on a UTP basis pursuant to

Rule 19b–4(e) under the Act, and reiterated the

Securities to eVWAP. Ashton stated that

many eVWAP participants have

requested the addition of Nasdaq issues

for eVWAP matching.

Ashton also responded to the Knight

Letter. In the Ashton Letter, Ashton

counters two of Knight’s arguments by

contending that: (1) The SEC has

already determined that UTP trading of

Nasdaq/NM securities is in furtherance

of fair and orderly markets; and (2) the

federal statutory and regulatory scheme

dictates that self-regulatory

organizations’ rules govern their own

members (Ashton questions whether

Knight is requesting a complete

overhaul of the Act to impose a single

self-regulatory, NASDR, over all market

participants trading Nasdaq/NM

Securities).

IV. Discussion

The Commission finds that the

proposed rule change, as needed, is

consistent with the requirements of the

Act and the rules and regulations

thereunder applicable to a national

securities exchange, and in particular,

with the requirements of section 6(b)(5)

of the Act.16 The Commission believes

that Phlx has proposed rules that should

ensure that trading in Nasdaq/NM

Securities on its floor occurs in an

orderly fashion,17 consistent with the

requirements of the Act. The

Commission, therefore, believes that the

proposal should remove impediments to

and perfect the mechanism of a free and

open market in a manner that is

consistent with the protection of

investors and the public interest.18 The

Commission also notes that Phlx’s

response to the comments raised in the

Knight Letter were sufficient.19

Furthermore, the proposed rule

change is consistent with section

12(f)(2) of the Act,20 which grants the

Commission explicit authority to

approve UTP in OTC securities. Section

12(f)(2) of the Act requires the

Commission, before approving UTP, to

determine that the granting of UTP is

consistent with the maintenance of fair

and orderly markets and the protection

of investors. The Commission believes

that the proposed rule change is

consistent with these goals and thus, the

Commission is approving the proposed

rule change, subject to the Phlx

complying with the requirements of the

OTC/UTP Plan.

V. Conclusion

It is therefore ordered, pursuant to

section 19(b)(2) of the Act,21 that the

proposed rule change (SR–Phlx–2000–

20), as amended, is approved on a pilot

basis effective for a six month period

beginning on the date trading begins.22

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.23

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–32031 Filed 12–23–01; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–45178; File No. SR–PHLX–

00–68]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval of a Proposed

Rule Change and Amendment Nos. 1,

2, and 3 by the Philadelphia Stock

Exchange, Inc. Related to Generic

Listing Standards Applicable to Trust

Shares Pursuant to Rule 19–4(e) Under

the Securities Exchange Act of 1934

December 20, 2001.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Exchange Act’’),1 and Rule 19b–4

thereunder,2 notice is hereby given that

on September 7, 2000, the Philadelphia

Stock Exchange, Inc. (‘‘PHLX’’ or

‘‘Exchange’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’ or ‘‘SEC’’) the proposed

rule change as described in Items I, II,

and III below, which Items have been

prepared by the PHLX. The PHLX filed

Amendment Nos. 1, 2, and 3 to the

proposal on September 7, 2000,3

September 12, 2001,4 and December 18,

2001,5 respectively. The Commission is