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Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Boston Stock Exchange, Inc. Relating to Competing Specialists and Objections to Competing Specialist Competition

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Start Preamble July 19, 2002.

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 June 25, 2002, the Boston Stock Exchange, Inc. (“BSE” 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 amend certain sections of its rules related to competing specialists (as defined in BSE Rules, Chapter XV, Dealer Specialists, section 18, Procedures for Competing Specialists) and objections to competition that may be raised by Start Printed Page 49379regular specialists when competing specialists apply for the right to compete with regular specialists. The text of the proposed rule change is below. Proposed new language is in italics; proposed deletions are in brackets.

* * * * *

Chapter XV

Dealer Specialists

Procedures for Competing Specialists

Sec. 18 * * *

* * * 2. Objections to Competition

a. A specialist may object to competition.[3] After notice of such objection to permit competition is provided by the regular specialist, the specialist must reduce his objection, and the reason(s) therefore, to writing [Any objection by the regular specialist to permit competition in one or more of such specialist's stocks must be in writing on a form designated by the Exchange] and file it [filed] with the Exchange within 48 hours [4] of notice [5] of the competing specialist's application.

[b. Once a specialist has objected to competition, the reasons for objection must be set forth in writing and delivered to the Exchange within 24 hours of the objection.]

[c] b. A Market Performance Committee meeting will be scheduled to review the reasons for objection, and to determine whether an entering competitor could jeopardize the fair and orderly market maintained by the regular specialist in relation to the stock at issue. The regular specialist will be permitted to appear before the Committee to give the Committee the opportunity to question the regular specialist in regard to the reasons for objection. The applicant (competitor) will also be permitted to appear before the Committee to respond to any issues raised. After the Market Performance Committee renders its decision, either party may appeal to the Executive Committee and then, if necessary, to the Board of Governors.[6]

d. [In the event that the Market Performance Committee rules in favor of competition and the regular specialist seeks to appeal that decision] Pending Market Performance Committee review of any objection, competition in the security may be permitted upon the affirmative determination of a majority of the floor members of the Market Performance Committee, based on the standard set forth in Paragraph b. of this section 18. Pending the outcome of any appeal process, competition in the security at issue will [commence] be permitted. The results of such competition may be used by either the regular specialist in support of their objection, or considered by the Market Performance Committee, Executive Committee, or Board of Governors, in their respective determinations. [pending the outcome of the appeal process.]

* * * * *

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 amend the section of the Exchange's Competing Specialist Initiative (“CSI”) procedures relating to objections to competition filed by a regular specialist. The Exchange is seeking to implement a procedure that would permit competition pending a review of any objection to competition filed by a regular specialist.

Under current CSI procedures set forth in Chapter XV, Dealer Specialists, section 18, Procedures for Competing Specialists, any objection to competition by a regular specialist will prevent a competing specialist from trading, and competing with the regular specialist, in the security at issue, until the objection is adjudicated by the Exchange's Market Performance Committee (“MPC”). The result of this procedure is that competition is therefore prohibited during the period between the time a specialist first states an objection, and the time when an MPC meeting can be convened, and the objection fully vetted and decided upon by the committee. By current design, this process takes several days, as the specialist is permitted 48 hours to formally present his objection and the reason therefore to the Exchange, and a meeting of the 15 person Market Performance Committee is then convened. In the meantime, competition is not permitted in the security in question, regardless of the reasons supporting the regular specialist's objection, and regardless of the volatility or other characteristics of the security.

In order to streamline this process, the Exchange is proposing that a majority of the floor members of the MPC can vote to permit competition in a security pending the formalization of a regular specialist's objection and the subsequent convening of a full meeting of the MPC to review the objection. This will enhance competition to the ultimate benefit of investors, while still offering the regular specialist the opportunity to formalize an objection, and have that objection be heard before the full MPC. At the same time, it will allow competition in instances in which a majority of the floor members of the MPC deem it, after consideration of the pertinent facts, to be warranted.

The standard by which the MPC judges whether competition is warranted is the “fair and orderly maintenance of the market.” This standard will be imposed, as it is currently, on the full MPC during their ultimate hearing of any objection, but also on the floor members of the MPC during any interim decisions. By mandating this standard, the Exchange is ensuring that at all stages of objection, each MPC member is consistent in his consideration and decision making. Moreover, the Exchange is preventing a situation whereby a regular specialist may object for competitive or other reasons unrelated to the fair and orderly maintenance of the market.

It should be noted that nothing in this proposal will affect the MPC's ultimate decision making authority relating to whether competition in a security should be permitted. If competition is permitted based on an affirmative vote of the majority of the floor members of the MPC, it can be withdrawn at a subsequent meeting of the full committee, if the full committee agrees that the fair and orderly maintenance of the market would be adversely affected by continued competition. It should also be noted that, since the establishment of the CSI program at the Exchange in 1996, there have been only three objections to competition by regular specialists, only one of which was upheld by the MPC based on the Start Printed Page 49380standard of the maintenance of a fair and orderly market.

2. Statutory Basis

The Exchange believes that the proposed rule change is consistent with the provisions of section 6(b) of the Act,[7] in general, and section 6(b)(5) of the Act,[8] in particular, which requires, among other things, that the rules of an exchange be designed to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating transactions in securities, 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.

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.

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

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 Exchange 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. 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-2002-07 and should be submitted by August 20, 2002.

Start Signature

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

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble


3.  Only the regular specialist can object to competition in his/her stocks.

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4.  Unless the regular specialist is unavailable, in which case within [48] 24 hours of becoming available.

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5.  Once an application is received by the Exchange [a written] notification will be issued to the regular specialist(s) in whose stocks competition is being sought.

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6.  All appeals must be submitted within ten (10) business days of the final decision of either the Market Performance Committee or the Executive Committee.

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[FR Doc. 02-19156 Filed 7-29-02; 8:45 am]