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Self-Regulatory Organizations; Order Approving Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval to an Amendment to the Proposed Rule Change by the Boston Stock Exchange, Inc. Relating to Its Competing Specialist Initiative

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Information about this document as published in the Federal Register.

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Start Preamble November 7, 2000.

I. Introduction

On November 23, 1998, the Boston Stock Exchange, Inc. (“BSE” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),[1] and Rule 19b-4 thereunder,[2] a proposed rule change to modify the procedures by which a regular specialist may object to competition in a stock.

The proposed rule change was published for comment in the Federal Register on January 12, 1999.[3] The Commission received no comments on the proposal. The Exchange filed amendments on March 26, 1999 [4] and April 13, 2000.[5] The Exchange filed a third amendment to the proposed rule change on August 25, 2000, which superseded the earlier amendments.[6] This order approves the proposed rule change, and grants accelerated approval to the third amendment to the proposed rule change.

II. Description

The Exchange's Competing Specialist Initiative permits multiple specialists to make a market in individual securities traded on the BSE. The Exchange has proposed a rule change to modify the process that governs objections to competition in a security.

The Procedures for Competing Specialists, which are set forth in chapter XV, section 18 of the Exchange's Rules, currently provide that a regular specialist in a security may object to any application by another specialist to act as a competing specialist in that security. The Exchange's Market Performance Committee will consider the regular specialist's objections as one factor in reviewing applications to act as a competing specialist in a security. The Market Performance Committee may not deny applications based solely on such an objection, but only in circumstances wherein the stock at issue requires special treatment such that an entering competitor could jeopardize the fair and orderly market maintained by the regular specialist.[7]

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As presently written, section 18(2) requires the regular specialist to object in writing within 48 hours of notice of another specialist's application to compete in a stock. This section also states that the Market Performance Committee's decision may be appealed to the Executive Committee of the Exchange. Moreover, decisions of the Executive Committee may be appealed to the Board of Governors of the Exchange.[8] Competition may not begin during the appeal process.[9]

The Exchange is proposing to amend its existing rules that govern a regular specialist's ability to object to another specialist's application to serve as a competing specialist in a security. As amended, the proposal would divide section 18(2) into four parts (a to d). Proposed section 18(2)(a) would continue to require that a regular specialist file its objection within 48 hours after receiving notice of the request to compete, and would now require that the specialist submit the objection on a form designated by the Exchange.

Proposed section 18(2)(b) would require that when a specialist objects to competition, the specialist set forth the reasons in writing and deliver them to the Exchange within 24 hours of the filing of the objection.

Proposed section 18(2)(c) would provide that a Market Performance Committee meeting will be scheduled to review the reasons for objection and to determine whether competition could jeopardize the regular specialist's ability to maintain a fair and orderly market in the issue. That section adds that the regular specialist would be permitted to appear before that committee to discuss the reasons for objection, and that the applicant competing specialist would also be permitted to appear before that committee to respond to any issues raised. That section further states that after the committee renders its decision, either party may appeal the decision to the Exchange's Executive Committee, and, if necessary, to the Exchange's Board of Governors. A footnote to proposed section 18(2)(c) further would provide that the appeal must be submitted to the Exchange within 10 days notice of the Market Performance Committee's or the Executive Committee's final decision.

Proposed section 18(2)(d) would provide that if the Market Performance Committee rules in favor of competition, competition will commence pending the outcome of any appeal process.

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.[10] Specifically, the Commission believes that the proposal is consistent with the section 6(b)(5) [11] requirements that the rules of an exchange be designed to promote just and equitable principles of trade, to perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest.

The Commission believes that the proposed rule change is appropriate because it permits the Exchange to evaluate applications to serve as a competing specialist in a security more efficiently. In particular, the Commission believes that proposed chapter XV, sections 18(2)(a), (b) and (c)—which would require the regular specialist to submit objections using an Exchange-designated form and set forth the reasons for objection in writing within 24 hours of the objection, and which would permit the regular specialist and applicant competing specialist to discuss those reasons at a Market Performance Committee meeting scheduled to review the reasons for the objection—would streamline the process for evaluating a regular specialist's objections while paying due regard to the interests of the regular specialist and applicant competing specialist. The Commission also believes that proposed Section 18(2)(d), which would provide that competition will commence during the appeal process, provides a reasonable means of reconciling the interests of the Exchange, the regular specialist, and the applicant competing specialist.

The Commission finds good cause for approving Amendment No. 3 prior to the thirtieth day after the date of publication of notice thereof in the Federal Register. Amendment No. 3, which supplanted two earlier proposed amendments, most significantly modified the Exchange's original language by clarifying that an applicant competing specialist has the right to appear before the Market Performance Committee to respond to issues raised by the regular specialist. The Commission finds that clarifying this right will better enable the committee to make fully informed decisions and will promote the adequate representation of applicant competing specialists. Amendment No. 3 also modified the rule change as it was originally proposed by specifying that appeals of decisions by the Market Performance Committee would go first to the Executive Committee and then, if necessary, to the Board of Governors (in contrast to the original version of the proposed rule change, which would have provided that appeals go directly to the Board of Governors), and by making technical changes to the structure and language of the proposed rule change. The Commission finds that modifying the appeal process is consistent with the Exchange's right to set forth rules governing its own administration, and that the technical changes to the rule language do not change the substance of the proposed rule change. Based on the above, the Commission believes that good cause exists, consistent with sections 6(b)(5) and 19(b)(2) [12] of the Act, to accelerate approval of Amendment No. 3.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning Amendment No. 3, including whether it 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 Exchange. All submissions should refer to File No. SR-BSE-98-11 and should be submitted by December 6, 2000.

V. Conclusion

It Is Therefore Ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change SR-BSE-98-11, Start Printed Page 69082including Amendment No. 3, in approved.

Start Signature

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

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

3.  See Securities Exchange Act Release No. 40883 (January 5, 1999), 64 FR 1839 (January 12, 1999).

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4.  See Letter from Karen Aluise, Vice President, BSE, to Richard Strasser, Assistant Director, Division of Market Regulation (“Division”), Commission, dated March 25, 1999, with attachments (“Amendment No. 1”). Amendment No. 1 proposed to eliminate the right to appeal rulings by the Market Performance Committee regarding applications to serve as a competing specialist.

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5.  See Letter from William Cummings, Manager of Legal and Regulatory Affairs, BSE, to Nancy Sanow, Senior Special Counsel, Division, Commission, dated April 12, 2000, with attachments (“Amendment No. 2”). Amendment No. 2 superseded Amendment No. 1. Amendment No. 2 generally sought to revert the proposed rule change back to a form that was similar to the version that the BSE originally proposed, but which differed from the BSE's original proposal in a few ways: by clarifying that an applicant competing specialist could appear before the Market Performance Committee to respond to issues raised by the regular specialist regarding competition, by omitting language which provided that competition could begin during an appeal of a Market Performance Committee ruling in favor of competition, and by making other changes regarding the appeal process.

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6.  See Letter from John Boese, Assistant Vice President, BSE, to Nancy Sanow, Assistant Director, Division, Commission dated August 24, 2000, with attachments (“Amendment No. 3”). Amendment No. 3, which superseded Amendment No. 2, clarified that competition could begin pending the outcome of an appeal of a pro-competition ruling by the Market Performance Committee, which is consistent with the rule change as it was originally proposed by the BSE.

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7.  See Securities Exchange Act Release No. 37045 (March 29, 1996), 61 FR 15318 (April 5, 1996) (order permanently approving Competing Specialist Initiative).

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8.  See BSE Constitution, Art. II, Section 6, which provides that certain persons affected by a decision of a committee acting under powers delegated by the Board of Governors may require that the Board review the decision.

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9.  The Exchange's existing procedures for handling objections to competition were clarified during a conversation between Karen Aluise, Vice President, BSE, and Joshua Kans, Attorney, Division, Commission, December 2, 1998.

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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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[FR Doc. 00-29180 Filed 11-14-00; 8:45 am]

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