Document ID: SEC-2008-0816-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Philadelphia Stock Exchange, Inc.
Posted Date: 2008-06-12T04:00Z

[Federal Register: June 12, 2008 (Volume 73, Number 114)]
[Notices]               
[Page 33479-33481]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12jn08-115]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57923; File No. SR-Phlx-2008-12]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 
1 Thereto, Relating to an Exemption From Examination Requirements for 
Off-Floor Traders

June 4, 2008.
    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 April 14, 2008, 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 substantially by the 
Exchange. On May 30, 2008, Phlx filed Amendment No. 1 to the proposed 
rule change.\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\ Amendment No. 1 supersedes and replaces the original rule 
filing in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Phlx proposes to amend Phlx Rule 604(e)(iii) to modify the category 
of persons subject to an exemption from the requirement that Off-Floor 
Traders \4\ complete the Series 7 General Securities Registered 
Representative Examination (``Series 7'').
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    \4\ Phlx Rule 604(e)(i) defines an off-floor trader as a 
``person who is compensated directly or indirectly by a member or 
participant organization for which the Exchange is the DEA 
[Designated Examining Authority], or any other associated person of 
such member or participant organization, and who executes, makes 
trading decisions with respect to, or otherwise engages in 
proprietary or agency trading of securities, including, but not 
limited to, equities, preferred securities, convertible debt 
securities or options off the floor of the Exchange.''
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    The text of the proposed rule change is available on Phlx's Web 
site at http://www.phlx.com, at Phlx's principal office, and at the 
Commission's Public Reference Room.

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

    In its filing with the Commission, 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. Phlx 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
    Phlx Rule 604(e)(i) states that Off-Floor Traders must successfully 
complete the Series 7. Currently, Phlx Rule 604(e)(iii) provides 
exceptions to the Series 7 requirement for Off-Floor Traders. The 
purpose of the proposed rule change is to modify the category of 
persons allowed an exemption from the requirement that Off-Floor 
Traders complete the Series 7. Phlx believes this proposed change would 
better capture the floor-based activities of Former Floor Participants, 
as defined below, in the exception from the Series 7 requirement, make 
the administration of the Series 7 requirements for Off-Floor Traders 
more efficient, and improve Phlx's examination and enforcement efforts.
    Background. Phlx adopted Rule 604(e) in 1999. At that time, Phlx 
stated that it believed the Series 7 requirement would primarily apply 
to persons ``associated with limited liability companies (``LLC'') for 
the purpose of trading securities off the floor of the Exchange for the 
firm's account.'' \5\ These persons are also known as ``Day Traders.'' 
Phlx stated that these Day Traders ``generally become members of an LLC 
to avail themselves of good faith margin provided through the LLC's 
Joint Back Office agreement with its clearing agent.'' \6\ In 1999, 
equity trading on Phlx took place on a physical trading floor. Persons 
who traded on Phlx's equity trading floor were associated with either a 
specialist organization, or a floor brokerage organization that 
executed orders on an agency basis and were not, by definition, Off-
Floor Traders. Therefore, they were not subject to the requirement in 
Phlx Rule 604(e)(i) to successfully complete the Series 7.
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    \5\ See Securities Exchange Act Release No. 41776 (August 20, 
1999), 64 FR 47214 (August 30, 1999) (SR-Phlx-99-07).
    \6\ Id., at 47215.
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    Phlx eliminated the physical equity trading floor in 2006 and 
replaced it with XLE, an electronic equity trading system.\7\ At the 
time of the transition to XLE, persons trading on Phlx's equity trading 
floor were associated with either a specialist organization or a floor 
brokerage organization that executed orders on an agency basis. Those 
persons (``Former Floor Participants'') then became participants in 
XLE; however, because there was no longer any physical trading floor, 
these Former Floor Participants became Off-Floor Traders for purposes 
of Phlx Rule 604(e)(i) and were, therefore, subject to the Series 7 
requirement.
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    \7\ See Securities Exchange Act Release No. 54538 (September 28, 
2006), 71 FR 59184 (October 6, 2006) (SR-Phlx-2006-43).
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    Phlx did not intend for the transition to XLE to require Former 
Floor Participants to become subject to the Series 7 requirement, so 
Phlx adopted an exception to the Series 7 requirement (``XLE 
Participant Exemption'').\8\ The XLE Participant Exemption is available 
to those persons who are ``primarily engaged'' in either submitting 
orders to XLE, or making trading decisions with respect to trading on 
XLE. Phlx intended that the XLE Participant Exemption would cover 
Former Floor Participants and maintain the status quo ante; Former 
Floor Participants would not be subject to the Series 7 requirement. 
Phlx proposes to modify this XLE Participant Exemption as discussed 
below.
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    \8\ The XLE Participant Exemption is in the second half of Phlx 
Rule 604(e)(iii) and refers to an Off-Floor Trader ``who is 
primarily engaged in (A) submitting proprietary or agency orders for 
execution on XLE, or (B) making trading decisions with respect to 
trading on XLE.'' Phlx proposes to modify this provision.
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    Current Situation. Currently, there are approximately 27 persons in 
four member organizations that are Former Floor Participants. In order 
to determine if a Former Floor Participant qualifies for the XLE 
Participant Exemption, first, the Former Floor Participant and then, 
Phlx examination staff consider all of the activity performed by a 
Former Floor Participant and compare that to trading activity on XLE. 
If Phlx determines to bring an enforcement action for non-compliance 
with Phlx Rule 604(e), Phlx enforcement staff must successfully allege 
that the Former Floor Participant was not ``primarily engaged'' in the 
activity stated in the XLE Participant Exemption. Phlx wants to 
continue to exempt Former Floor

[[Page 33480]]

Participants from the Series 7 requirement but believes a modification 
of the XLE Participant Exemption would assist its examination and 
enforcement efforts regarding the Series 7 requirement.
    Proposal. Phlx therefore proposes to modify the exemption to apply 
to Market Maker Authorized Traders \9\ (``MMATs'') and Off-Floor 
Traders who solely handle and/or make trading decisions regarding 
agency orders and any bona fide errors \10\ related to those agency 
orders (``Agency Brokers''). Phlx believes that the proposal would 
maintain an exemption for Former Floor Participants who are Off-Floor 
Traders but would still require Day Traders to successfully complete 
the Series 7.\11\
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    \9\ See Phlx Rule 1(m).
    \10\ If an Agency Broker makes an error in executing an order 
for its customer, for example purchasing 100 shares of symbol IBC 
instead of symbol IBM as instructed by the customer, the Agency 
Broker has an error. The method used to correct this error involves 
the Agency Broker taking the security purchased in error, 100 shares 
of IBC, in its error account (See Phlx Rule 703(c)(vi)), which is a 
proprietary account solely for the handling of errors. Then the 
Agency Broker purchases the correct security for its customer. The 
Agency Broker then must make a proprietary transaction to close out 
the position in its error account, in this case a sale of the 100 
shares of IBC.
    \11\ Phlx believes that, at the time of filing of Amendment No. 
1, everyone that would have qualified for the XLE Participant 
Exemption would also qualify for the proposed exemption, and no 
person other than Former Floor Participants would qualify for the 
proposed exemption.
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    MMATs are those persons associated with Market Makers \12\ who 
perform the market maker functions for the Market Maker. MMATs 
correspond to specialists, the former market makers on the physical 
equity trading floor. MMATs are required to register with Phlx and 
therefore are easily identified. MMATs, by virtue of their 
responsibilities to constantly maintain orders on XLE, focus on trading 
on XLE and are not functioning as Day Traders that routinely trade at 
multiple venues. Also, because Day Traders trade for their own account, 
they would not, by definition, qualify for the exemption for Agency 
Brokers. Agency Brokers correspond to former floor brokerage 
organizations that handled agency orders while on the former physical 
equity trading floor.\13\ Some Agency Brokers, including Former Floor 
Participants, may trade primarily on markets other than Phlx and would 
therefore not qualify for the XLE Participant Exemption.\14\ Further, 
Phlx has proposed Supplementary Material to Phlx Rule 604 which states 
that the Series 7 requirement and exemption for MMATs in Phlx Rule 
604(e) is independent of the requirements applicable to MMATs in Phlx 
Rule 171(b)(5).
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    \12\ See Phlx Rule 1(l).
    \13\ Phlx Rule 604(a) requires anyone who conducts a public 
business or has duties customarily performed by a Registered 
Representative to maintain an effective Series 7 or equivalent 
predecessor examination/registration. This provision is independent 
of Phlx Rule 604(e)(iii) and not affected by this proposal.
    \14\ The proposed exemption at Phlx would not preclude the 
effect of the rules regarding the Series 7 at other markets.
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    The proposed exemption would focus on either the status of or the 
type of activity performed by the Former Floor Participant, not on the 
relative amount of activity done on XLE. This should simplify the 
process for Phlx examination staff because XLE Participants need to 
register with the Exchange to be a MMAT, so the determination of MMAT 
status is straightforward. In addition, Phlx staff can examine what 
type of orders (agency or proprietary) Off-Floor Traders handle for net 
capital purposes and could identify whether Off-Floor Traders would 
qualify for the proposed exemption. Phlx believes that the proposed 
exemption would enable Phlx staff to more efficiently examine for 
compliance with Phlx Rule 604(e) and, if necessary, to conduct 
enforcement activities than the current XLE Participant Exemption.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \15\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \16\ in particular, in that it is 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. Phlx believes that modifying the category of persons allowed 
an exemption from the requirement that Off-Floor Traders complete the 
Series 7 will make the administration of the Series 7 requirements for 
Off-Floor Traders at Phlx more efficient, improve Phlx's examination 
and enforcement efforts, and better capture the former floor-based 
activities of Former Floor Participants that are excepted from the 
Series 7 requirement.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Phlx does not believe that the proposed rule change will impose any 
burden on competition not necessary or appropriate in 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 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 Phlx 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. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2008-12 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2008-12. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). 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

[[Page 33481]]

provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of the filing 
also will be available for inspection and copying at the principal 
office of the Exchange. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly. All submissions should refer to File Number 
SR-Phlx-2008-12 and should be submitted on or before July 3, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-13157 Filed 6-11-08; 8:45 am]

BILLING CODE 8010-01-P