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Notice

Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by the Pacific Exchange, Inc. Relating to Order Service Firms

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Start Preamble August 14, 2001.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) [1] and Rule 19b-4 thereunder,[2] notices is hereby given that on August 7, 2001, the Pacific Exchange, Inc. (“PCX” 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 by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

The Exchange proposes to adopt PCX Rule 6.60 (“Order Service Firms”) to allow members and member organizations to accept orders for the purchase and sale of stocks and futures contracts (and options thereon) from Exchange Market Makers and to forward such orders to the appropriate marketplace for execution. The text of the proposed rule change is available at the Office of the Secretary, the PCX and the Commission.Start Printed Page 43945

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

In its filing with the Commission, the Exchange 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 Exchange 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 purpose of the proposed rule change is to allow PCX members and member organizations to accept orders for the purchase and sale of stocks and futures contracts (and options thereon) from Exchange Market Makers and to forward such orders to the appropriate marketplace for execution. Members or member organizations who conduct an order execution service (“order service”) typically have as its primary function the execution of hedging transactions in underlying stocks or futures for Exchange options Market Makers. The Exchange options floor members and their personnel route such orders to other markets for execution. The Exchange recognizes the order service business as a floor function for which Exchange approval will be required. The Exchange believes that the proposed rule serves to assist the Exchange in regulating the business activities that is members and member organizations engage in.

Under the requirements of the proposed rule change, members or member organizations seeking to act as Order Service Firms (“OSF”) would be required to register with the Exchange. An applicant for registration as an OSF would be required to file a written application with the Membership Department of the Exchange. Applications would be reviewed by the Exchange's Membership Committee. The Membership Committee would consider the applicant's financial condition, regulatory history, and such other factors the Membership Committee deems appropriate. After reviewing the application, the Membership Committee would either approve or disapprove the applicant's registration to become an OSF. Before registration, the Exchange's Membership Department, upon direction of the Membership Committee, would post the names of the member organization and its nominee(s) on the floor of the Exchange for at least three business days. The Exchange also proposes that an OSF be required to make available to Market Maker customers upon request a statement of financial condition as disclosed on its most recent balance sheet, which would be required to be prepared no later than the tenth business day following each calendar month-end. The Exchange believes that this would assist Market Makers in assessing the financial security of entrusting their orders with a particular OSF. The Exchange also believes that the proposed rule change would allow OSFs the ability to accept orders for the purchase or sale of commodity futures contracts (and options thereon). The OSF, however, would be required to comply with the Commodity Exchange Act (“CEA”) and the rules and regulations promulgated thereunder. Such a firm would be required to keep the Exchange's Department of Financial and Operational compliance Department (“FOCD”) apprised of its registration status under the CEA on an ongoing basis and also would be required to keep it appraised regarding any financial reporting or capital requirements.

The Exchange proposes that prior to accepting orders from Market Makers on the Floor of the Exchange, all OSF's would be required to have on file with the Exchange and in effect an updated Letter of Authorization issued for such firm by a member of the Options Clearing Corporation. That Letter of Authorizations would be required to be in a form prescribed by the Exchange and would be required to provide that the issuing Clearing Member accepts financial responsibility for all orders handled by the OSF on the Floor of the Exchange and for all financial obligations of the OSF to the Exchange. Further, the Exchange proposes that Exchange Clearing Members seeking to act as OSFs need not register as such in order to accept orders from Market for which they have an existing letter of Authorization. Clearing Members would not be permitted to authorize more than three OSFs without the prior written approval of the FOCD. In considering a request to authorize more than three such firms, the Exchange proposes that the FOCD considers the Clearing Member's level of access net capital, additional financial resources, and such other factors as the FOCD deems appropriate. Moreover, the Exchange has determined that because of the limited number of clearing firms that operate on its floor, Clearing Members that act as OSFs would not be counted towards the established limit of three.

Finally, the proposal provides that a Letter of Authorization must remain in effect until a written notice of revocation is filled with the Exchange. if the notice is filed within at least one hour prior to the opening of trading, the revocation would not become effective until the close of trading on that particular day. Upon request by the Clearing Members that files the notice of revocation, the Exchange would post the notice on the Floor of the Exchange.

The Exchange notes that the Commission has approved a similar rule filing of the Chicago Board Options Exchange, Inc. (“CBOE”).[3] The Commission approved a proposed rule change that recognized the existence of OSF's under CBOE Rules.[4] The Exchange believes that the proposed rule change would assist its regulatory staff in monitoring the activities of its members and member organizations so as to ensure that investors and the public interest are protected.

2. Statutory Basis

The Exchange believes that the proposed rule change is consistent with section 6(b) of the Act,[5] in general, and furthers the objectives of section 6(b)(5) of the Act,[6] in particular, in that it is designed to promote just and equitable principles of trade, prevent fraudulent and manipulative acts and practices, and protect investors and the public interest by establishing a mechanism for improving the PCX regulatory function.

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 furtherance of the purposes of the Act.Start Printed Page 43946

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

The Exchange has neither solicited nor received written comments on the proposed rule change.

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

Because the foregoing proposed rule change does not (i) significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, and the Exchange provided the Commission with written notice of its intent to file the proposed rule change at least five business days prior to the filing date, it has become effective pursuant to section 19(b)(3)(A) of the Act [7] and Rule 19b-4(f)(6) thereunder.[8] At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.

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 at 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-PCXC-2001-32 and should be submitted by September 11, ,2001.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[9]

Jonathan G. Katz,

Secretary.

End Signature End Preamble

Footnotes

3.  See Securities Exchange Act Release No. 24814 (August 18, 1987), 52 FR 42224 (August 26, 1987) (order approving SR-CBOE-87-07).

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4.  Id. In a subsequent amendment, the Commission approved the expansion of CBOE's OSF Rule to allow for the ability to take Market Maker orders for the purchase or sale of commodity futures contracts and options thereon. See Securities Exchange Act Release No. 34841 (October 14, 1994), 59 FR 52999 (October 20, 1994) (order approving SR-CBOE-94-16).

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[FR Doc. 01-20977 Filed 8-20-01; 8:45 am]

BILLING CODE 8010-01-M