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Self Regulatory Organizations; Order Approving Proposed Rule Change by the Philadelphia Stock Exchange, Inc. Relating to the Disqualification of Governors

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Information about this document as published in the Federal Register.

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Start Preamble October 3, 2000.

I. Introduction

On April 14, 2000, the Philadelphia Stock Exchange, Inc. (“Phlx” or “Exchange”) filed with the Securities and Exchange 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 relating to the disqualification of governors. On August 16, 2000, the Phlx filed Amendment No. 1 to the proposals.[3] The proposed rule change was published for comment in the Federal Register on July 13, 2000.[4] No comments were received on the proposal. This order approves the proposed rule change.

II. Description of the Proposal

Phlx By-Law, Article IV, Section 4-8 describes the discussions and decisions in which members of the Phlx Board of Governors (“Board Members”) must refrain from participation. The provision further specifies discussions and decisions that do not require Board Members to refrain from participation. The Exchange proposes to amend Phlx By-Law, Article IV, Section 4-8 to conform to the new Phlx 1999 Code of Conduct for Board Members and Committee Members (“1999 Code of Conduct”). The Phlx Code of Conduct, which was adopted in 1997 (“1997 Code of Conduct”), describes, among other things, the discussions and decisions in which Covered Persons must refrain from participation.[5] The Phlx Board of Governors revised the 1997 Code of Conduct in July 1999, modifying the language regarding the disqualification of Covered Persons.

The Phlx's proposed rule change will amend its By-Law, Article IV, Section 4-8 to prohibit Covered Persons from participating in matters in which they or their immediate family have an interest.[6] The Exchange proposes to allow participation in matters where the Covered Person's interest arises solely from membership in the Exchange or a sub-class of membership, unless their impartiality might reasonably be questioned.[7]

III. Discussion

The Commission finds that the proposed rule change 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) of the Act.[8] Specifically, the Commission believes that the proposal is consistent with the requirements of Section 6(b)(3) [9] that the rules of an Exchange be designed to assure a fair representation of its members in the administration of the Exchange's affairs.[10] The Commission believes that the proposal will prohibit the discussion and determination of Exchange matters by Covered Persons or their immediate family who have an interest in the matter, unless that interest is impartial and arises solely from membership in the Exchange or a sub-class of membership. The proposal will also add to the Exchange's present framework of conflict of interest provisions.[11]

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IV. Conclusion

For the reasons discussed above, the Commission finds that the proposal is consistent with the Act and the rules and regulations thereunder.

It is therefore ordered, pursuant to Section 19(b)(2) of the Act,[12] that the proposed rule change, SR-Phlx-00-39, be and hereby is approved.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[13]

Margaret H. McFarland,

Depyty Secretary.

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3.  Letter from John Dayton, Assistant Secretary and Counsel, Phlx, to Nancy Sanow, Assistant Director, Division of Market Regulation, Commission (August 16, 2000) (“Amendment No. 1”). Amendment No. 1 made a technical correction to the language of the proposed rule.

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4.  Securities Exchange Act Release No. 43161 (August 16, 2000), 65 FR 51396 (August 23, 2000).

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5.  Following the adoption of the 1997 Code of Conduct, the Exchange conformed the language in Phlx By-Law, Article IV, Section 4-8 to the language in the 1997 Code of Conduct. See Securities Exchange Act Release No. 39722 (March 4, 1998), 63 FR 12569 (March 13, 1998).

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6.  The 1999 Code of Conduct and the proposed amendment to Phlx By-Law Article IV, Section 4-8 define “immediate family” as a spouse, a parent, a mother-in-law, a father-in-law, a brother, a sister, a child, any other person living with the individual or any person for whom the individual provides at least 50 percent of that person's financial support per year.

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7.  The phrase “a sub-class of membership” refers to the various categories of Phlx membership. Examples of sub-classes include: equity members and options members; on-floor and off-floor members; and specialists and floor brokers on each floor. The Exchange represents that many decisions in Board and committee meetings, such as fees on equity floor transactions or requirements for arbitration in customer contracts, apply to only one or more of these sub-classes and not to others. The Exchange represents that it does not intend to disqualify persons from making decisions solely because they are part of a sub-class, such as market makers or off-floor members, which will be affected by the outcome of the decision.

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10.  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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11.  See e.g., 1999 Code of Conduct (requiring Covered Persons to make prompt disclosure of any interest that could reasonably appear to violate the 1999 Code of Conduct( and Phlx By-Law Article X, Section 10-9(b) (authorizing the Exchange's Audit Committee to conduct reviews of any alleged improper conduct and recommend appropriate action to the Board).

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[FR Doc. 00-26111 Filed 10-11-00; 8:45 am]