Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; Order Approving Proposed Rule Change and Amendment Nos. 1, 2 and 3 Thereto Relating to Establishment of a Neutral “Referee”, 36592-36596 [06-5678]

Download as PDF 36592 Federal Register / Vol. 71, No. 123 / Tuesday, June 27, 2006 / Notices Advices,6 and Option Floor Procedure Advices.7 SECURITIES AND EXCHANGE COMMISSION Current Floor Official Program [Release No. 34–54009; File No. SR–Phlx– 2005–42] Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; Order Approving Proposed Rule Change and Amendment Nos. 1, 2 and 3 Thereto Relating to Establishment of a Neutral ‘‘Referee’’ June 16, 2006. I. Introduction On June 10, 2005, the Philadelphia Stock Exchange, Inc. (‘‘Phlx’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) a proposed rule change pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 to establish a neutral ‘‘Referee.’’ The Phlx filed Amendment Nos. 1, 2, and 3 to the proposed rule change on June 20, 2005, February 16, 2006 and March 10, 2006, respectively. The proposed rule change, as amended, was published for comment in the Federal Register on March 31, 2006.3 The Commission received one comment letter on the proposal.4 On May 19, 2006, the Phlx submitted a response to the comment letter.5 This order approves the proposed rule change, as amended. II. Description of the Proposed Rule Change The Exchange proposes to create the new regulatory position of ‘‘Referee’’ to improve the process of resolving trading disputes and Floor Official rulings. This neutral Referee would be either an Exchange employee or an independent contractor. The Referee would have the authority to: (1) Review and rule on appeals from Floor Official rulings concerning the nullification or adjustment of trades; and (2) act in the capacity of a Floor Official respecting initial rulings concerning requests for relief from the requirements of certain Exchange rules, Equity Floor Procedure 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 53548 (March 24, 2006), 71 FR 16389. 4 See letter to Jonathan G. Katz, Secretary, Commission from Matthew B. Hinerfeld, Managing Director and Deputy General Counsel, Citadel Investment Group, L.L.C., on behalf of Citadel Derivatives Group LLC (‘‘Citadel’’), dated April 21, 2006 (‘‘Citadel Letter’’). 5 See letter to Nancy M. Morris, Secretary, Commission from Richard S. Rudolph, Vice President and Counsel, Phlx, dated May 17, 2006 (‘‘Phlx Response Letter’’). sroberts on PROD1PC70 with NOTICES 2 17 VerDate Aug<31>2005 17:33 Jun 26, 2006 Jkt 208001 Pursuant to Exchange By-Law Article VIII, Floor Officials, as designees 8 of the Chairmen of the Options Committee,9 Floor Procedure Committee,10 and Foreign Currency Options Committee,11 respectively, are authorized to administer the provisions of Exchange By-Laws and Rules of the Exchange pertaining to the respective trading floors and the immediately adjacent premises of the Exchange. Floor Officials may impose penalties, as applicable, for breaches of the Exchange’s rules or regulations relating to order, decorum, health, safety and welfare on the respective trading floors. Additionally, they may rule to nullify, or adjust the terms of, executed trades under specific and limited conditions contained in Exchange rules, and may grant relief from certain Exchange requirements imposed on on-floor members and member organizations, if authorized to do so by rule. Currently, Floor Official rulings and appeals for review from such rulings are governed by Exchange Rule 124, Disputes. Rule 124(d) provides that Options Floor Official rulings may be appealed to a Review Panel consisting of three members of the Options Subcommittee on Rules and Rulings (‘‘Subcommittee’’),12 or the Chairperson 6 The Exchange clarified that the Referee also may have the authority to act in the capacity of a Floor Official respecting initial rulings concerning requests for relief from the requirements of Equity Floor Procedure Advices. Telephone conversations between Richard Rudolph, Vice President and Counsel, Phlx, and Jennifer Dodd, Special Counsel, Division of Market Regulation (‘‘Division’’), Commission, on March 10, 2006 (‘‘March 10 Telephone Conversation’’). 7 Floor Officials would retain their authority to make such initial rulings. The Referee simply would have the same authority as a Floor Official concerning such initial rulings. 8 The designees of the respective floor Committee Chairmen are generally members of the respective committees and subcommittees thereof. 9 The Options Committee has general supervision of the dealings of members on the options trading floor. See Exchange By-Law Article X, Section 10– 20. 10 The Floor Procedure Committee has general supervision of the dealings of members on the equity trading floor. See Exchange By-Law Article X, Section 10–16. 11 The Foreign Currency Options Committee has general supervision of the dealings of members on the foreign currency options trading floor. See Exchange By-Law Article X, Section 10–17. 12 Each Standing and Special Committe may appoint such subcommittees as it may deem necessary for the efficient discharge of its duties. See Exchange By-Law Article X, Section 10–3(b). The Options Committee has appointed the Subcommittee to review and recommend the adoption for new rules or the amendment of current rules to the full Options Committee, and to discuss PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 of the Standing Committee (or his designee) if three Subcommittee members cannot be promptly convened, and Equity Floor Official rulings may be appealed to a Review Panel consisting of three members of the Floor Procedure Committee, or the Chairperson of the Floor Procedure Committee (or his designee) if three members cannot be promptly convened.13 Decisions of the Review Panel are considered final decisions of the Standing Committee and may be appealed to an Advisory Committee on Appeals of the Board of Governors (‘‘Board’’). Floor Officials also are authorized to rule on requests for relief from the requirments of rules pertaining to quote spread parameters,14 disengagement of Exchange automatic execution systems under extraordinary circumstances,15 determinations with respect to the Exchange’s Quote Rule,16 and trading halts, opening and reopenings.17 The Referee The Referee would be either an Exchange employee or an independent contractor who is not an employee of the Exchange but who has entered into an employment contract with the Exchange for a fixed period of time. The Referee would be appointed by the Exchange’s Board pursuant to the recommendation of the Audit Committee. Candidates for the Referee position would be recruited in the same fashion as candidates for other Exchange positions through the Exchange’s Human Resources Department. After conducting an interview process with the various candidates, the Audit Committee would recommend its selection to the Board, who then would vote on the Audit Committee’s recommendation. The Exchange notes that, upon the Commission’s approval of this proposal, the Referee would be appointed to the new position. rulings made on the floor of the Exchange by Floor Officials. The Exchange clarified that the Subcommittee also would discuss initial rulings on requests for relief made by the Referee acting in the capacity of a Floor Official. Telephone conversation between Richard Rudolph, Vice President and Counsel, Phlx, and Nancy Sanow, Assistant Director, and Kate Robbins, Attorney, Division, Commission, on June 12, 2006 (‘‘June 12 Telephone Conversation’’). 13 The Exchange clarified the current process for Equity Floor Oficial rulings. March 10 Telephone Conservation. 14 Relief from the established bid/ask differentials may be granted upon the receipt of an approval of two Floor Officials. See OFPA F–6. 15 See Exchange Rule 1080(e) and OFPA A–13. 16 See Exchange Rule; 1080(c)(i). 17 See Exchange rules 1017, 1047, and 1047A and OFPA G–2. E:\FR\FM\27JNN1.SGM 27JNN1 Federal Register / Vol. 71, No. 123 / Tuesday, June 27, 2006 / Notices sroberts on PROD1PC70 with NOTICES To ensure the neutrality of the Referee, the Referee would report to the Exchange’s Audit Committee,18 which would have supervision over the Referee. The Exchange’s General Counsel or his/her designee would be responsible for purely administrative matters such as, without limitation, personnel issues and vacation. Additionally, based on the advice of the Exchange’s General Counsel and Human Resources management, the Audit Committee may recommend the level of compensation of the Referee to the Board, and may establish other conditions of employment of the Referee. The Audit Committee or its designee19 would conduct annual performance evaluations, and would consider any written complaints from members and member organizations concerning the Referee. The Audit Committee would not, however, have the authority to overrule or modify any ruling made by the Referee. The Audit Committee would have the authority to terminate the employee of the Referee for good cause shown, and to otherwise disipline the Referee as appropriate for good cause shown. The Referee would have jurisdiction over all Exchange trading floors and systems, except with regard to issues of order and decorum pursuant to Exchange rule 60. The Options Committee would continue to have jurisdiction over order and decorum issues on the options floor;20 the Floor Procedure Committee would continue to have jurisdiction over order and decorum issues on the equity floor,21 and the Foreign Currency Options Committee would continue to have jurisdiction over order and decorum issues on the foreign currency options floor.22 The Audit Committee would recommend for appointment by the Board other Exchange employee(s) or independent contractor(s) to function as the Referee in the event that the Referee is unavailable (‘‘Backup Referees’’). The Exchange’s rules and procedures, including qualifications, applicable to the Referee also would apply to Backup Referees, and any reference to the Referee in the proposed rules would be deemed to include Backup Referees. The Exchange states that having Backup Referees is necessary if the Referee is not available due to, for example, a 18 See propsoed Exchange By-Law Article X, Section 10–9. 19 The Exchange clarified that the Audit Committee’s designee may include the Exchange’s General Counsel. June 12 Telephone Conservation. 20 See Exchange By-Law Article X, Section 10–20. 21 See Exchange By-Law Article X, Section 10–16 22 See Exchange By-Law Article X, Section 10–17. VerDate Aug<31>2005 18:50 Jun 26, 2006 Jkt 208001 ruling on another matter that is in progress, vacation, or illness. Under the proposal, the Market Surveillance staff would assign available Floor Officials to rule on disputes. The Exchange believes that this provision should ensure the neutrality of Floor Officials by assigning the next available Floor Official to rule on a particular matter. Qualifications of the Referee Under the proposal, the Referee would be required to have sufficient expertise in the area of trading to act in the capacity of a Floor Official concerning initial requests for relief and to conduct reviews of Floor Official rulings concerning the nullification and adjustment of trades. The Referee must possess sufficient knowledge of Exchange rules and the relevant sections of the Act and the rules thereunder to administer the Referee’s responsibilities and authority. To ensure the Referee’s neutrality, the proposal would provide that the Referee may not be a member of the Exchange, may not be directly or indirectly affiliated with any Exchange member or member organization, and may not be an immediate family member of any Exchange member. The Referee may not be a debtor or creditor of any Exchange member or member organization. Duties of the Referee The primary responsibility of the Referee would be to rule on appeals from Floor Official decisions concerning the nullification and adjustment of trades, and to have the same authority as Floor Officials concerning rulings on member requests for relief from the requirements of specified rules, as set forth in proposed Commentary .02(a) to Exchange Rule 124.23 The Referee would replace the current three-member Review Panel, which is currently composed of Floor Officials, and would be authorized to review Floor Official rulings concerning the adjustment of the terms of a trade or the nullification of a trade, and either uphold, overturn, or modify such Floor Official rulings. If the Referee is unavailable or unable to make a ruling for any reason (including, without limitation, absence from the Exchange trading floor, vacation, illness, or in the process of making another Referee ruling), the proposal would require Market Surveillance staff to immediately notify the Exchange’s General Counsel or his or her designee, 23 See Section II, Rulings on Requests for Relief, infra. PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 36593 who then would designate a Backup Referee to make a such a ruling. The Exchange’s General Counsel or his or her designee may assign additional duties and responsibilities to the Referee not related to Referee rulings. In order to ensure the Referee’s neutrality respecting any matter on which he or she is to rule, and to avoid the possibility that the Referee could be biased as a result of his or her knowledge of any pending investigation or disciplinary action concerning a person that is a party to a dispute or that requests relief from the requirements of an Exchange rule, the proposal would prohibit the Referee from: (i) Participating in any Exchange enforcement action, investigation, market surveillance activity, hearing (other than a witness) or other activity related to disciplinary matters; (ii) issuing citations for violations of Exchange rules; (iii) ruling on any matter concerning order and decorum pursuant to Exchange Rule 60 and the regulations thereunder; and (iv) preparing, researching, drafting, reviewing, or filing of a proposed rule change with the Commission pursuant to the Act and the rules thereunder concerning the Exchange’s disciplinary rules. The proposed rules would require the Referee to make fair and impartial decisions in accordance with the Exchange’s rules and By-Laws. Procedures for Review of Floor Official Rulings Under the proposed amendments to Exchange Rule 124(d), OFPA–27, and EFPA F–27, Market Surveillance staff must be advised within 15 minutes of a Floor Official ruling concerning the nullification or adjustment of a trade that a party to such ruling has determined to seek the Referee’s review of such ruling. The purpose of the notification requirement is to provide reasonably prompt notice to Market Surveillance and to participants in a trade that such ruling is subject to appeal and that the process set forth in the proposed rule amendments has begun, and ultimately a decision to sustain, overturn, or modify the initial Floor Official decision concerning the trade will be made.24 As appropriate, the Chairman of the Options Committee, the Foreign 24 The Exchange advises that this notification requirement is consistent with Exchange Rule 1092, Obvious Errors, which establishes a similar notice period. Under the proposal, Floor Official rulings made pursuant to Exchange Rule 1092 would be reviewed by the Referee, provided that the party seeking the review requests such as a review within the time frame required. See proposed Exchange Rule 1092(f). E:\FR\FM\27JNN1.SGM 27JNN1 36594 Federal Register / Vol. 71, No. 123 / Tuesday, June 27, 2006 / Notices Currency Options Committee or of the Floor Procedure Committee, or their respective designees,25 would be required to refer a Referee that fails to make any ruling in accordance with Exchange rules to the Audit Committee for possible disciplinary action, including removal. A Floor Official that fails to make any ruling in accordance with Exchange rules may be subject to possible disciplinary action by the Exchange. To minimize the likelihood of frivolous appeals from Floor Official rulings, a member or member organization seeking the Referee’s review of a Floor Official ruling concerning the nullification or adjustment of a trade would be assessed a fee of $250 for each Floor Official ruling they seek to have reviewed if the Referee upholds the Floor Official decision. No fee would be assessed to the member or member organization seeking a review if the Floor Official decision is overturned or modified. This fee is currently imposed on options floor appeals that are found by the Review Panel to be frivolous.26 The Exchange believes that the proposed $250 fee provides an objective standard for imposition of the fee (i.e., the fee would be imposed in situations where the Referee sustains a Floor Official ruling on the nullification or adjustment of a trade). According to the Exchange, the Referee would not have the discretion to impose the fee that the Review Panel27 currently has, and Exchange members and member organizations would have actual notice of the circumstances giving rise to the imposition of the fee. Rulings on Requests for Relief sroberts on PROD1PC70 with NOTICES Proposed Commentary .02(a) to Exchange Rule 124 would authorize the Referee to act in the capacity of a Floor Official respecting initial rulings concerning requests for relief from the requirements of Exchange Rules relating to: (1) Bid/ask differentials pursuant to Exchange Rule 1014(c) and OFPA F–6; (ii) disengagement of Exchange automatic execution systems pursuant to Exchange Rule 1080(e) and OFPA A– 13; (iii) the determination pursuant to Exchange Rule 1080(c)(i) that quotes in options on the Exchange or another 25 The Exchange clarified that the Chairman of the Foreign Currency Options Committee, or his designee, also would be required to refer a Referee to the Audit Committee for disciplinary action, if appropriate. March 10 Telephone Conversation. 26 This fee is not currently imposed on equity floor appeals. March 10 Telephone Conversation. 27 The Exchange clarified that the Review Panel currently has the discretion to impose the $250 fee. June 12 Telephone conversation. VerDate Aug<31>2005 17:33 Jun 26, 2006 Jkt 208001 market or markets are subject to relief from the firm quote requirement set forth in the SEC Quote Rule,28 as defined in Exchange Rule 1082(a)(iii), and that quotes in options on the Exchange or another market or markets previously subject to such relief are no longer subject to such relief; and (iv) trading halts, openings and re-openings pursuant to Exchange Rules 1017, 1047 and 1047A and OFPAs A–12, A–14 and G–2.29 Exchange Rule 1014(c) and OFPA F– 6 set forth the maximum allowable bid/ ask differentials, or quote widths, that may be disseminated by specialists and Registered Options Traders on the Exchange, depending on the price of the series to be quoted. The Exchange believes that these requirements can have the unintended consequence of requiring those making markets to quote at prices that are unnecessarily narrow, thereby exposing them to great risk if markets move quickly.30 The Exchange has indicated that, under OFPA F–6, two Floor Officials may grant relief from these differentials during times of peak market activity where options markets and/or the market for securities underlying the option move quickly. Under the proposal, the Referee would have the same authority as a Floor Official to make such a ruling under OFPA F–6.31 Exchange Rule 1080(e) and OFPA A–13 provide that, in the event extraordinary circumstances with respect to a particular class of options exist, two Floor Officials may determine to disengage automatic execution systems with respect to that option, in accordance with Exchange procedures. Exchange Rule 1080(e) and OFPA A–13 describe the procedures to be followed to effect such disengagement. Under the proposal, the Referee would have the same authority as a Floor Official to make such a determination under 28 Rule 602 of Regulation NMS, 17 CFR 242.602. the Referee acts in the capacity of a Floor Official and makes an initial ruling on a request for relief from the requirements of Exchange rules, as set forth in proposed Commentary .02(a) to Exchange Rule 124, its decision would be final, as described below. 30 See, e.g.,Securities Exchange Act Release No. 50729 (November 23, 2004), 69 FR 69982 (December 1, 2004) (SR–Phlx–2004–74), (Notice of Filing and Immediate Effectiveness of Proposed Rule Change and Amendment No. 1 by the Philadelphia Stock Exchange, Inc. Relating to $5 Bid/Ask Differentials). 31 The Exchange clarified that the Referee would not be able to act in the capacity of a Floor Official in calling upon a ROT to make a market pursuant to Exchange Rule 1014(c). Telephone conversation between Richard Rudolph, Vice President and Counsel, Phlx, and Kate Robbins, Attorney, Division, Commission, on June 15, 2006 (‘‘June 15 Telephone Conversation’’). 29 If PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 Exchange Rule 1080(e) and OFPA A– 13.32 Exchange Rule 1080(c)(i) provides that the Chairman of the Exchange’s Options Committee or his designee (or if neither is available, two Floor Officials) may determine that quotes in options on the Exchange or another market or markets are subject to relief from the firm quote requirement set forth in the SEC Quote Rule, (thereby excluding such quotes from the Exchange’s calculation of the National Best Bid/Offer (‘‘NBBO’’)) and that quotes in options on the Exchange or another market or markets previously subject to such relief are no longer subject to such relief. The Referee would have the same authority as a Floor Official in making such determinations under Exchange Rule 1080(c)(i). Exchange Rules 1017, 1047 and 1047A and OFPAs A–12, A–14 33 and G–2 govern trading halts, openings and re-openings on the Exchange.34 Under the proposal, the Referee would have the same authority as a Floor Official respecting initial rulings concerning requests for relief from the requirements of Exchange Rules 1017, 1047, 1047A and OFPAs A–12, A–14 and G–2 when Floor Official approval is required.35 Referee’s Decision Final Currently, the decisions of the Review Panel are considered final decisions of the Standing Committee and may be appealed to an Advisory Committee on Appeals of the Board. Initial rulings to grant or deny relief from the requirements of certain Exchange rules are not currently considered final decisions of a Standing Committee and thus are not currently appealable to the Exchange’s Board.36 The proposed rule change would provide that decisions of the Referee concerning the review of Floor Official rulings relating to the nullification or adjustment of transactions, and initial requests for relief from the requirements for the rules specified in Commentary .02(a) to Exchange Rule 124, shall be 32 This authority also would extend to the reengagement of the Exchange’s automatic execution systems. June 15 Telephone Conversation. 33 The Exchange clarified that the Referee also would have the same authority as a Floor Official to make rulings in the capacity of a Floor Official with respect to the requirements in OFPA A–14. March 10 Telephone Conversation. 34 For consistency, the Exchange is proposing a conforming amendment to OFPA G–2, as described below. 35 The Exchange clarified that the Referee would have the authority to make any ruling that a Floor Official may currently make pursuant to these rules. June 12 Telephone Conversation. 36 These rules are set forth in proposed Commentary .02(a) to Exchange rule 124. E:\FR\FM\27JNN1.SGM 27JNN1 Federal Register / Vol. 71, No. 123 / Tuesday, June 27, 2006 / Notices final and may not be appealed to the Exchange’s Board. the Exchange does not believe that these are the types of decisions that are appropriate for such appeals, particularly because of the need for speedy resolution and certainty in resolving trading disputes, whereas other Standing Committee decisions are often prospectively applied. The Exchange notes that this provision would not operate to preclude any aggrieved member or member organization from proceeding with any other legal remedy to which such member or member organization might be entitled (e.g., arbitration or appeal to the Commission if allowable by law). Obvious Errors The Exchange also proposes to amend Exchange Rule 1092, Obvious Errors. Currently, Exchange Rule 1092(f), Request for Review, provides that a Review Panel of Floor Officials will review decisions made under Exchange Rule 1092 in accordance with Exchange Rule 124(d). For consistency, the Exchange proposes to amend Rule 1092(f) to provide that the Referee will review such decisions. Conforming Amendment to OFPA G–2 As a housekeeping matter, the Exchange proposes to amend OFPA G– 2(c), to reflect that trading on the Exchange in any option may be halted with the approval of two Floor Officials, with the concurrence of a Market Surveillance officer. Current Exchange Rule 1047A(c) includes this provision, and the Exchange proposes to amend OFPA G–2 for consistency. sroberts on PROD1PC70 with NOTICES III. Comment Letter and Phlx’s Response The Commission received one comment letter with respect to the proposed rule change.37 In its letter, Citadel applauded the Phlx’s proposal to introduce a neutral Referee into the review process and noted that the proposal is a ‘‘welcome one’’ with the ‘‘laudable’’ goal of providing more fair and professional reviews that could result in substantively better decisions and more fundamentally equitable treatment for users of the Exchange who are not members. Citadel asserted that the success of the proposal would depend on the Referee’s ability, neutrality and training. Although Citadel expressed its preference for having neutral decisionmakers make initial rulings on trading disputes, it surmised that having an independent Referee act in an appellate role might also lead to more thorough, objective and fair decisions by Floor Officials. Citadel, however, expressed some concerns with the proposal. Citadel stated that the proposal to impose a fine of $250 for unsuccessful but nonfrivolous appeals is ‘‘fundamentally unfair.’’ In support of its argument, Citadel noted that initial decisions regarding trade disputes are made by Floor Officials, who are not independent and can lack proper training. Also, Citadel asserted that persons who are not Exchange members may not be able to assess on their own whether an Exchange-specific error has occurred. In addition, Citadel believes that it is unwise to not permit the right to appeal the Referee’s decision to the Exchange’s Board. Citadel acknowledged that the importance of the Board’s role in the review of any specific ruling might be diminished by an independent Referee providing appellate review. Citadel, however, believes that because there is no guarantee that the Referee would always meet the high standards the Exchange hopes to achieve, the ability to appeal to the Board would remain an ‘‘important safeguard’’ and would give the Referee an incentive to make fair rulings. Citadel noted that, if the Exchange were to permit the Referee’s rulings to be appealed to the Board, it would indicate that the Exchange takes trading disputes seriously and would allow the Board to timely address potential problems. In its response letter, the Phlx noted its view that the $250 fee for unsuccessful appeals is an ‘‘objective standard’’ to replace the Review Panel’s current ‘‘subjective discretion’’ over the imposition of fees.38 The Phlx further asserted that the $250 fee for unsuccessful appeals is fair and consistent with Section 6(b)(4) of the Act.39 In addressing Citadel’s concerns regarding the right to appeal the Referee’s ruling, the Phlx remarked that the types of rulings the Referee would make are not appropriate for appeals to the Exchange’s Board because of the need for ‘‘speedy resolution and certainty.’’ The Exchange noted that an aggrieved member or member organization would not be precluded from proceeding with any other legal remedy to which such member or member organization might be entitled. The Exchange further noted that there is a safeguard and an incentive for the Referee to make fair rulings, citing the requirement that the Chairmen of the 38 See 37 See Citadel Letter, supra note 4. VerDate Aug<31>2005 17:33 Jun 26, 2006 39 15 Jkt 208001 PO 00000 Phlx Response Letter, supra note 5. U.S.C. 78f(b)(4). Frm 00080 Fmt 4703 Sfmt 4703 36595 various floor committees, or their respective designees, must refer a Referee that fails to make any ruling in accordance with Exchange rules to the Audit Committee for possible disciplinary action, including removal. Finally, the Exchange stated its view that its proposed process for resolving trading disputes is fair and consistent with the Act. IV. Discussion After careful review, the Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.40 In particular, the Commission finds that the proposed rule change, as amended, is consistent with section 6(b)(1) of the Act,41 which requires an exchange be so organized and have the capacity to be able to carry out the purposes of the Act and to comply, and to enforce compliance by its members and persons associated with its members, with the provisions of the Act, the rules and regulations thereunder, and the rules of the exchange. In addition, the Commission finds that the proposed rule change, as amended, is consistent with section 69(b)(4) of the Act,42 which requires that the rules of the exchange provide for the equitable allocation of reasonable dues, fees, and other charges among its members. Furthermore, the Commission finds that the proposed rule change, as amended, is consistent with section 6(b)(5) of the Act,43 which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, 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. The Commission believes that the Exchange’s proposal to establish an independent Referee to rule on appeals from Floor Official rulings regarding the nullification or adjustment of trades is designed to bring promptness, certainty and objectivity to the Exchange’s process of resolving disputes. In addition, the Commission believes that replacing the Review Panel with an independent Referee should help improve the decisionmaking process 40 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 41 15 U.S.C. 78f(b)(1). 42 15 U.S.C. 78f(b)(4). 43 15 U.S.C. 78f(b)(5). E:\FR\FM\27JNN1.SGM 27JNN1 sroberts on PROD1PC70 with NOTICES 36596 Federal Register / Vol. 71, No. 123 / Tuesday, June 27, 2006 / Notices regarding appeals from trading disputes, because potential conflicts of interest that may occur when members are tasked with ruling on appeals of trading disputes involving other members would be eliminated. Furthermore, the Commission notes that having an independent Referee rule on such appeals should help foster fair and neutral decisions with respect to the resolution of trading disputes. The Commission also notes that replacing the Review Panel with a Referee should help to streamline the Exchange’s process for review of Floor Official rulings, thereby making the process for settling trading disputes more efficient. In addition, the Commission believes that allowing the Referee to act in the capacity of a Floor Official in making initial rulings on requests for relief from the requirements of those Exchange rules set forth in proposed Commentary .02(a) to Exchange Rule 124 should help promote prompt and efficient rulings on such requests. The Commission has carefully considered the comments raised in the Citadel Letter. Specifically, the Citadel Letter asserts that the $250 fee for unsuccessful appeals is unfair. The Commission notes, however, that the proposed $250 fee would employ an objective standard with respect to the imposition of fees on unsuccessful appeals, rather than retaining the current method that permits such a fee to be imposed at the discretion of the Review Panel upon a finding that such appeal is frivolous. The Commission believes that the Exchange’s proposal to impose a $250 fee on unsuccessful appeals is consistent with the Act. The Citadel Letter also expressed concern that the decisions of the Referee would be final and not appealable to the Exchange’s Board. The Commission notes that the Exchange’s proposal is intended to provide for expeditious resolution of trading disputes and believes that the proposal is a reasonable effort to ensure prompt, efficient, and fair review of Floor Officials’ decisions. The Commission further notes that the proposal does not alter any right that a member or member organization may have to pursue any other legal remedy that may be available, such as arbitration. In the Commission’s view, the Exchange’s proposal contains appropriate safeguards, including the requirement that the Chairman of the respective committees or their designees must refer a Referee to the Exchange’s Audit Committee if he or she fails to make a ruling in accordance with Exchange rules. Moreover, the requirements that the Referee may not be a member of the VerDate Aug<31>2005 17:33 Jun 26, 2006 Jkt 208001 Exchange, may not be directly or indirectly affiliated with any Exchange member and may not be a debtor or creditor of any Exchange member or member organization, should help to ensure that the Referee is neutral and that his or her rulings are fair and objective. In addition, the restrictions that provide that duties and responsibilities relating to disciplinary matters, that the issuance of citations for violations of Exchange rules, and that matters relating to order and decorum may not be assigned to the Referee should also further the goal of impartial, unbiased, and objective rulings on the part of the Referee. Finally, the Commission notes that, with respect to the Referee acting in the capacity of a Floor Official and making initial rulings to grant or deny relief from the requirements of the Exchange rules specified in proposed Commentary .02(a) to Exchange Rule 124, such Floor Official rulings currently are not considered final decisions of the Standing Committee and thus are not currently appealable to the Exchange’s Board. For such initial rulings, the proposed rule change would not change the Exchange’s current process with respect to such rulings. Based on these considerations, the Commission believes that the Citadel Letter has not raised any concerns that would preclude approval of the Exchange’s proposal. V. Conclusion It is therefore ordered, pursuant to section 19(b)(2) of the Act,44 that the proposed rule change (SR–Phlx–2005– 42), as amended, is approved. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.45 J. Lynn Taylor, Assistant Secretary. [FR Doc. 06–5678 Filed 6–27–06; 8:45 am] BILLING CODE 8010–01–M SECURITIES AND EXCHANGE COMMISSION [Release No. 54017; File No. SR–Phlx–2006– 38] Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Extend a Pilot Concerning Priority in Trades Involving Synthetic Option Orders 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 8, 2006, 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 and II below, which Items have been prepared by the Phlx. The Exchange filed the proposed rule change pursuant to section 19(b)(3)(A) of the Act 3 and Rule 19b–4(f)(6) 4 thereunder, which renders the proposal effective upon filing with the Commission. 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 Phlx proposes to extend for an additional one-year period a pilot concerning Exchange Rule 1033(e), which affords priority to synthetic option orders (as defined below) traded in an open-outcry over bids and offers in the trading crowd but not over bids (offers) of public customers on the limit order book and not over crowd participants who are willing to participate in the synthetic option order at the net debit or credit price. The rule applies to orders for 100 contracts or more and is subject to a pilot program scheduled to expire on June 30, 2006. The Exchange proposes to extend the pilot through June 30, 2007. The text of the proposed rule change is set forth below. Brackets indicate deletions; italics indicate new text. * * * * * Bids and Offers—Premium Rule 1033. (a)–(d) No change. (e) Synthetic Option Orders. When a member holding a synthetic option order, as defined in Rule 1066, and bidding or offering on the basis of a total 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A). 4 17 CFR 240.19b–(f)(6). 2 17 44 15 45 17 PO 00000 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). Frm 00081 Fmt 4703 Sfmt 4703 E:\FR\FM\27JNN1.SGM 27JNN1

Agencies

[Federal Register Volume 71, Number 123 (Tuesday, June 27, 2006)]
[Notices]
[Pages 36592-36596]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-5678]



[[Page 36592]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54009; File No. SR-Phlx-2005-42]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Amendment Nos. 1, 2 and 3 
Thereto Relating to Establishment of a Neutral ``Referee''

June 16, 2006.

I. Introduction

    On June 10, 2005, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') a proposed rule change pursuant to section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder,\2\ to establish a neutral ``Referee.'' The Phlx filed 
Amendment Nos. 1, 2, and 3 to the proposed rule change on June 20, 
2005, February 16, 2006 and March 10, 2006, respectively. The proposed 
rule change, as amended, was published for comment in the Federal 
Register on March 31, 2006.\3\ The Commission received one comment 
letter on the proposal.\4\ On May 19, 2006, the Phlx submitted a 
response to the comment letter.\5\ This order approves the proposed 
rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 53548 (March 24, 
2006), 71 FR 16389.
    \4\ See letter to Jonathan G. Katz, Secretary, Commission from 
Matthew B. Hinerfeld, Managing Director and Deputy General Counsel, 
Citadel Investment Group, L.L.C., on behalf of Citadel Derivatives 
Group LLC (``Citadel''), dated April 21, 2006 (``Citadel Letter'').
    \5\ See letter to Nancy M. Morris, Secretary, Commission from 
Richard S. Rudolph, Vice President and Counsel, Phlx, dated May 17, 
2006 (``Phlx Response Letter'').).
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II. Description of the Proposed Rule Change

    The Exchange proposes to create the new regulatory position of 
``Referee'' to improve the process of resolving trading disputes and 
Floor Official rulings. This neutral Referee would be either an 
Exchange employee or an independent contractor. The Referee would have 
the authority to: (1) Review and rule on appeals from Floor Official 
rulings concerning the nullification or adjustment of trades; and (2) 
act in the capacity of a Floor Official respecting initial rulings 
concerning requests for relief from the requirements of certain 
Exchange rules, Equity Floor Procedure Advices,\6\ and Option Floor 
Procedure Advices.\7\
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    \6\ The Exchange clarified that the Referee also may have the 
authority to act in the capacity of a Floor Official respecting 
initial rulings concerning requests for relief from the requirements 
of Equity Floor Procedure Advices. Telephone conversations between 
Richard Rudolph, Vice President and Counsel, Phlx, and Jennifer 
Dodd, Special Counsel, Division of Market Regulation (``Division''), 
Commission, on March 10, 2006 (``March 10 Telephone Conversation'').
    \7\ Floor Officials would retain their authority to make such 
initial rulings. The Referee simply would have the same authority as 
a Floor Official concerning such initial rulings.
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Current Floor Official Program

    Pursuant to Exchange By-Law Article VIII, Floor Officials, as 
designees \8\ of the Chairmen of the Options Committee,\9\ Floor 
Procedure Committee,\10\ and Foreign Currency Options Committee,\11\ 
respectively, are authorized to administer the provisions of Exchange 
By-Laws and Rules of the Exchange pertaining to the respective trading 
floors and the immediately adjacent premises of the Exchange. Floor 
Officials may impose penalties, as applicable, for breaches of the 
Exchange's rules or regulations relating to order, decorum, health, 
safety and welfare on the respective trading floors. Additionally, they 
may rule to nullify, or adjust the terms of, executed trades under 
specific and limited conditions contained in Exchange rules, and may 
grant relief from certain Exchange requirements imposed on on-floor 
members and member organizations, if authorized to do so by rule.
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    \8\ The designees of the respective floor Committee Chairmen are 
generally members of the respective committees and subcommittees 
thereof.
    \9\ The Options Committee has general supervision of the 
dealings of members on the options trading floor. See Exchange By-
Law Article X, Section 10-20.
    \10\ The Floor Procedure Committee has general supervision of 
the dealings of members on the equity trading floor. See Exchange 
By-Law Article X, Section 10-16.
    \11\ The Foreign Currency Options Committee has general 
supervision of the dealings of members on the foreign currency 
options trading floor. See Exchange By-Law Article X, Section 10-17.
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    Currently, Floor Official rulings and appeals for review from such 
rulings are governed by Exchange Rule 124, Disputes. Rule 124(d) 
provides that Options Floor Official rulings may be appealed to a 
Review Panel consisting of three members of the Options Subcommittee on 
Rules and Rulings (``Subcommittee''),\12\ or the Chairperson of the 
Standing Committee (or his designee) if three Subcommittee members 
cannot be promptly convened, and Equity Floor Official rulings may be 
appealed to a Review Panel consisting of three members of the Floor 
Procedure Committee, or the Chairperson of the Floor Procedure 
Committee (or his designee) if three members cannot be promptly 
convened.\13\ Decisions of the Review Panel are considered final 
decisions of the Standing Committee and may be appealed to an Advisory 
Committee on Appeals of the Board of Governors (``Board'').
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    \12\ Each Standing and Special Committe may appoint such 
subcommittees as it may deem necessary for the efficient discharge 
of its duties. See Exchange By-Law Article X, Section 10-3(b). The 
Options Committee has appointed the Subcommittee to review and 
recommend the adoption for new rules or the amendment of current 
rules to the full Options Committee, and to discuss rulings made on 
the floor of the Exchange by Floor Officials. The Exchange clarified 
that the Subcommittee also would discuss initial rulings on requests 
for relief made by the Referee acting in the capacity of a Floor 
Official. Telephone conversation between Richard Rudolph, Vice 
President and Counsel, Phlx, and Nancy Sanow, Assistant Director, 
and Kate Robbins, Attorney, Division, Commission, on June 12, 2006 
(``June 12 Telephone Conversation'').
    \13\ The Exchange clarified the current process for Equity Floor 
Oficial rulings. March 10 Telephone Conservation.
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    Floor Officials also are authorized to rule on requests for relief 
from the requirments of rules pertaining to quote spread 
parameters,\14\ disengagement of Exchange automatic execution systems 
under extraordinary circumstances,\15\ determinations with respect to 
the Exchange's Quote Rule,\16\ and trading halts, opening and 
reopenings.\17\
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    \14\ Relief from the established bid/ask differentials may be 
granted upon the receipt of an approval of two Floor Officials. See 
OFPA F-6.
    \15\ See Exchange Rule 1080(e) and OFPA A-13.
    \16\ See Exchange Rule; 1080(c)(i).
    \17\ See Exchange rules 1017, 1047, and 1047A and OFPA G-2.
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The Referee

    The Referee would be either an Exchange employee or an independent 
contractor who is not an employee of the Exchange but who has entered 
into an employment contract with the Exchange for a fixed period of 
time. The Referee would be appointed by the Exchange's Board pursuant 
to the recommendation of the Audit Committee. Candidates for the 
Referee position would be recruited in the same fashion as candidates 
for other Exchange positions through the Exchange's Human Resources 
Department. After conducting an interview process with the various 
candidates, the Audit Committee would recommend its selection to the 
Board, who then would vote on the Audit Committee's recommendation. The 
Exchange notes that, upon the Commission's approval of this proposal, 
the Referee would be appointed to the new position.

[[Page 36593]]

    To ensure the neutrality of the Referee, the Referee would report 
to the Exchange's Audit Committee,\18\ which would have supervision 
over the Referee. The Exchange's General Counsel or his/her designee 
would be responsible for purely administrative matters such as, without 
limitation, personnel issues and vacation. Additionally, based on the 
advice of the Exchange's General Counsel and Human Resources 
management, the Audit Committee may recommend the level of compensation 
of the Referee to the Board, and may establish other conditions of 
employment of the Referee. The Audit Committee or its designee\19\ 
would conduct annual performance evaluations, and would consider any 
written complaints from members and member organizations concerning the 
Referee. The Audit Committee would not, however, have the authority to 
overrule or modify any ruling made by the Referee. The Audit Committee 
would have the authority to terminate the employee of the Referee for 
good cause shown, and to otherwise disipline the Referee as appropriate 
for good cause shown.
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    \18\ See propsoed Exchange By-Law Article X, Section 10-9.
    \19\ The Exchange clarified that the Audit Committee's designee 
may include the Exchange's General Counsel. June 12 Telephone 
Conservation.
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    The Referee would have jurisdiction over all Exchange trading 
floors and systems, except with regard to issues of order and decorum 
pursuant to Exchange rule 60. The Options Committee would continue to 
have jurisdiction over order and decorum issues on the options 
floor;\20\ the Floor Procedure Committee would continue to have 
jurisdiction over order and decorum issues on the equity floor,\21\ and 
the Foreign Currency Options Committee would continue to have 
jurisdiction over order and decorum issues on the foreign currency 
options floor.\22\
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    \20\ See Exchange By-Law Article X, Section 10-20.
    \21\ See Exchange By-Law Article X, Section 10-16
    \22\ See Exchange By-Law Article X, Section 10-17.
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    The Audit Committee would recommend for appointment by the Board 
other Exchange employee(s) or independent contractor(s) to function as 
the Referee in the event that the Referee is unavailable (``Backup 
Referees''). The Exchange's rules and procedures, including 
qualifications, applicable to the Referee also would apply to Backup 
Referees, and any reference to the Referee in the proposed rules would 
be deemed to include Backup Referees. The Exchange states that having 
Backup Referees is necessary if the Referee is not available due to, 
for example, a ruling on another matter that is in progress, vacation, 
or illness.
    Under the proposal, the Market Surveillance staff would assign 
available Floor Officials to rule on disputes. The Exchange believes 
that this provision should ensure the neutrality of Floor Officials by 
assigning the next available Floor Official to rule on a particular 
matter.

Qualifications of the Referee

    Under the proposal, the Referee would be required to have 
sufficient expertise in the area of trading to act in the capacity of a 
Floor Official concerning initial requests for relief and to conduct 
reviews of Floor Official rulings concerning the nullification and 
adjustment of trades. The Referee must possess sufficient knowledge of 
Exchange rules and the relevant sections of the Act and the rules 
thereunder to administer the Referee's responsibilities and authority.
    To ensure the Referee's neutrality, the proposal would provide that 
the Referee may not be a member of the Exchange, may not be directly or 
indirectly affiliated with any Exchange member or member organization, 
and may not be an immediate family member of any Exchange member. The 
Referee may not be a debtor or creditor of any Exchange member or 
member organization.

Duties of the Referee

    The primary responsibility of the Referee would be to rule on 
appeals from Floor Official decisions concerning the nullification and 
adjustment of trades, and to have the same authority as Floor Officials 
concerning rulings on member requests for relief from the requirements 
of specified rules, as set forth in proposed Commentary .02(a) to 
Exchange Rule 124.\23\ The Referee would replace the current three-
member Review Panel, which is currently composed of Floor Officials, 
and would be authorized to review Floor Official rulings concerning the 
adjustment of the terms of a trade or the nullification of a trade, and 
either uphold, overturn, or modify such Floor Official rulings. If the 
Referee is unavailable or unable to make a ruling for any reason 
(including, without limitation, absence from the Exchange trading 
floor, vacation, illness, or in the process of making another Referee 
ruling), the proposal would require Market Surveillance staff to 
immediately notify the Exchange's General Counsel or his or her 
designee, who then would designate a Backup Referee to make a such a 
ruling.
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    \23\ See Section II, Rulings on Requests for Relief, infra.
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    The Exchange's General Counsel or his or her designee may assign 
additional duties and responsibilities to the Referee not related to 
Referee rulings. In order to ensure the Referee's neutrality respecting 
any matter on which he or she is to rule, and to avoid the possibility 
that the Referee could be biased as a result of his or her knowledge of 
any pending investigation or disciplinary action concerning a person 
that is a party to a dispute or that requests relief from the 
requirements of an Exchange rule, the proposal would prohibit the 
Referee from: (i) Participating in any Exchange enforcement action, 
investigation, market surveillance activity, hearing (other than a 
witness) or other activity related to disciplinary matters; (ii) 
issuing citations for violations of Exchange rules; (iii) ruling on any 
matter concerning order and decorum pursuant to Exchange Rule 60 and 
the regulations thereunder; and (iv) preparing, researching, drafting, 
reviewing, or filing of a proposed rule change with the Commission 
pursuant to the Act and the rules thereunder concerning the Exchange's 
disciplinary rules.
    The proposed rules would require the Referee to make fair and 
impartial decisions in accordance with the Exchange's rules and By-
Laws.

Procedures for Review of Floor Official Rulings

    Under the proposed amendments to Exchange Rule 124(d), OFPA-27, and 
EFPA F-27, Market Surveillance staff must be advised within 15 minutes 
of a Floor Official ruling concerning the nullification or adjustment 
of a trade that a party to such ruling has determined to seek the 
Referee's review of such ruling. The purpose of the notification 
requirement is to provide reasonably prompt notice to Market 
Surveillance and to participants in a trade that such ruling is subject 
to appeal and that the process set forth in the proposed rule 
amendments has begun, and ultimately a decision to sustain, overturn, 
or modify the initial Floor Official decision concerning the trade will 
be made.\24\
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    \24\ The Exchange advises that this notification requirement is 
consistent with Exchange Rule 1092, Obvious Errors, which 
establishes a similar notice period. Under the proposal, Floor 
Official rulings made pursuant to Exchange Rule 1092 would be 
reviewed by the Referee, provided that the party seeking the review 
requests such as a review within the time frame required. See 
proposed Exchange Rule 1092(f).
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    As appropriate, the Chairman of the Options Committee, the Foreign

[[Page 36594]]

Currency Options Committee or of the Floor Procedure Committee, or 
their respective designees,\25\ would be required to refer a Referee 
that fails to make any ruling in accordance with Exchange rules to the 
Audit Committee for possible disciplinary action, including removal. A 
Floor Official that fails to make any ruling in accordance with 
Exchange rules may be subject to possible disciplinary action by the 
Exchange.
---------------------------------------------------------------------------

    \25\ The Exchange clarified that the Chairman of the Foreign 
Currency Options Committee, or his designee, also would be required 
to refer a Referee to the Audit Committee for disciplinary action, 
if appropriate. March 10 Telephone Conversation.
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    To minimize the likelihood of frivolous appeals from Floor Official 
rulings, a member or member organization seeking the Referee's review 
of a Floor Official ruling concerning the nullification or adjustment 
of a trade would be assessed a fee of $250 for each Floor Official 
ruling they seek to have reviewed if the Referee upholds the Floor 
Official decision. No fee would be assessed to the member or member 
organization seeking a review if the Floor Official decision is 
overturned or modified. This fee is currently imposed on options floor 
appeals that are found by the Review Panel to be frivolous.\26\ The 
Exchange believes that the proposed $250 fee provides an objective 
standard for imposition of the fee (i.e., the fee would be imposed in 
situations where the Referee sustains a Floor Official ruling on the 
nullification or adjustment of a trade). According to the Exchange, the 
Referee would not have the discretion to impose the fee that the Review 
Panel\27\ currently has, and Exchange members and member organizations 
would have actual notice of the circumstances giving rise to the 
imposition of the fee.
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    \26\ This fee is not currently imposed on equity floor appeals. 
March 10 Telephone Conversation.
    \27\ The Exchange clarified that the Review Panel currently has 
the discretion to impose the $250 fee. June 12 Telephone 
conversation.
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Rulings on Requests for Relief

    Proposed Commentary .02(a) to Exchange Rule 124 would authorize the 
Referee to act in the capacity of a Floor Official respecting initial 
rulings concerning requests for relief from the requirements of 
Exchange Rules relating to: (1) Bid/ask differentials pursuant to 
Exchange Rule 1014(c) and OFPA F-6; (ii) disengagement of Exchange 
automatic execution systems pursuant to Exchange Rule 1080(e) and OFPA 
A-13; (iii) the determination pursuant to Exchange Rule 1080(c)(i) that 
quotes in options on the Exchange or another market or markets are 
subject to relief from the firm quote requirement set forth in the SEC 
Quote Rule,\28\ as defined in Exchange Rule 1082(a)(iii), and that 
quotes in options on the Exchange or another market or markets 
previously subject to such relief are no longer subject to such relief; 
and (iv) trading halts, openings and re-openings pursuant to Exchange 
Rules 1017, 1047 and 1047A and OFPAs A-12, A-14 and G-2.\29\
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    \28\ Rule 602 of Regulation NMS, 17 CFR 242.602.
    \29\ If the Referee acts in the capacity of a Floor Official and 
makes an initial ruling on a request for relief from the 
requirements of Exchange rules, as set forth in proposed Commentary 
.02(a) to Exchange Rule 124, its decision would be final, as 
described below.
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    Exchange Rule 1014(c) and OFPA F-6 set forth the maximum allowable 
bid/ask differentials, or quote widths, that may be disseminated by 
specialists and Registered Options Traders on the Exchange, depending 
on the price of the series to be quoted. The Exchange believes that 
these requirements can have the unintended consequence of requiring 
those making markets to quote at prices that are unnecessarily narrow, 
thereby exposing them to great risk if markets move quickly.\30\ The 
Exchange has indicated that, under OFPA F-6, two Floor Officials may 
grant relief from these differentials during times of peak market 
activity where options markets and/or the market for securities 
underlying the option move quickly. Under the proposal, the Referee 
would have the same authority as a Floor Official to make such a ruling 
under OFPA F-6.\31\
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    \30\ See, e.g.,Securities Exchange Act Release No. 50729 
(November 23, 2004), 69 FR 69982 (December 1, 2004) (SR-Phlx-2004-
74), (Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change and Amendment No. 1 by the Philadelphia Stock Exchange, Inc. 
Relating to $5 Bid/Ask Differentials).
    \31\ The Exchange clarified that the Referee would not be able 
to act in the capacity of a Floor Official in calling upon a ROT to 
make a market pursuant to Exchange Rule 1014(c). Telephone 
conversation between Richard Rudolph, Vice President and Counsel, 
Phlx, and Kate Robbins, Attorney, Division, Commission, on June 15, 
2006 (``June 15 Telephone Conversation'').
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    Exchange Rule 1080(e) and OFPA A-13 provide that, in the event 
extraordinary circumstances with respect to a particular class of 
options exist, two Floor Officials may determine to disengage automatic 
execution systems with respect to that option, in accordance with 
Exchange procedures. Exchange Rule 1080(e) and OFPA A-13 describe the 
procedures to be followed to effect such disengagement. Under the 
proposal, the Referee would have the same authority as a Floor Official 
to make such a determination under Exchange Rule 1080(e) and OFPA A-
13.\32\
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    \32\ This authority also would extend to the re-engagement of 
the Exchange's automatic execution systems. June 15 Telephone 
Conversation.
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    Exchange Rule 1080(c)(i) provides that the Chairman of the 
Exchange's Options Committee or his designee (or if neither is 
available, two Floor Officials) may determine that quotes in options on 
the Exchange or another market or markets are subject to relief from 
the firm quote requirement set forth in the SEC Quote Rule, (thereby 
excluding such quotes from the Exchange's calculation of the National 
Best Bid/Offer (``NBBO'')) and that quotes in options on the Exchange 
or another market or markets previously subject to such relief are no 
longer subject to such relief. The Referee would have the same 
authority as a Floor Official in making such determinations under 
Exchange Rule 1080(c)(i).
    Exchange Rules 1017, 1047 and 1047A and OFPAs A-12, A-14 \33\ and 
G-2 govern trading halts, openings and re-openings on the Exchange.\34\ 
Under the proposal, the Referee would have the same authority as a 
Floor Official respecting initial rulings concerning requests for 
relief from the requirements of Exchange Rules 1017, 1047, 1047A and 
OFPAs A-12, A-14 and G-2 when Floor Official approval is required.\35\
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    \33\ The Exchange clarified that the Referee also would have the 
same authority as a Floor Official to make rulings in the capacity 
of a Floor Official with respect to the requirements in OFPA A-14. 
March 10 Telephone Conversation.
    \34\ For consistency, the Exchange is proposing a conforming 
amendment to OFPA G-2, as described below.
    \35\ The Exchange clarified that the Referee would have the 
authority to make any ruling that a Floor Official may currently 
make pursuant to these rules. June 12 Telephone Conversation.
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Referee's Decision Final

    Currently, the decisions of the Review Panel are considered final 
decisions of the Standing Committee and may be appealed to an Advisory 
Committee on Appeals of the Board. Initial rulings to grant or deny 
relief from the requirements of certain Exchange rules are not 
currently considered final decisions of a Standing Committee and thus 
are not currently appealable to the Exchange's Board.\36\
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    \36\ These rules are set forth in proposed Commentary .02(a) to 
Exchange rule 124.
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    The proposed rule change would provide that decisions of the 
Referee concerning the review of Floor Official rulings relating to the 
nullification or adjustment of transactions, and initial requests for 
relief from the requirements for the rules specified in Commentary 
.02(a) to Exchange Rule 124, shall be

[[Page 36595]]

final and may not be appealed to the Exchange's Board. the Exchange 
does not believe that these are the types of decisions that are 
appropriate for such appeals, particularly because of the need for 
speedy resolution and certainty in resolving trading disputes, whereas 
other Standing Committee decisions are often prospectively applied.
    The Exchange notes that this provision would not operate to 
preclude any aggrieved member or member organization from proceeding 
with any other legal remedy to which such member or member organization 
might be entitled (e.g., arbitration or appeal to the Commission if 
allowable by law).

Obvious Errors

    The Exchange also proposes to amend Exchange Rule 1092, Obvious 
Errors. Currently, Exchange Rule 1092(f), Request for Review, provides 
that a Review Panel of Floor Officials will review decisions made under 
Exchange Rule 1092 in accordance with Exchange Rule 124(d). For 
consistency, the Exchange proposes to amend Rule 1092(f) to provide 
that the Referee will review such decisions.

Conforming Amendment to OFPA G-2

    As a housekeeping matter, the Exchange proposes to amend OFPA G-
2(c), to reflect that trading on the Exchange in any option may be 
halted with the approval of two Floor Officials, with the concurrence 
of a Market Surveillance officer. Current Exchange Rule 1047A(c) 
includes this provision, and the Exchange proposes to amend OFPA G-2 
for consistency.

III. Comment Letter and Phlx's Response

    The Commission received one comment letter with respect to the 
proposed rule change.\37\ In its letter, Citadel applauded the Phlx's 
proposal to introduce a neutral Referee into the review process and 
noted that the proposal is a ``welcome one'' with the ``laudable'' goal 
of providing more fair and professional reviews that could result in 
substantively better decisions and more fundamentally equitable 
treatment for users of the Exchange who are not members. Citadel 
asserted that the success of the proposal would depend on the Referee's 
ability, neutrality and training. Although Citadel expressed its 
preference for having neutral decisionmakers make initial rulings on 
trading disputes, it surmised that having an independent Referee act in 
an appellate role might also lead to more thorough, objective and fair 
decisions by Floor Officials.
---------------------------------------------------------------------------

    \37\ See Citadel Letter, supra note 4.
---------------------------------------------------------------------------

    Citadel, however, expressed some concerns with the proposal. 
Citadel stated that the proposal to impose a fine of $250 for 
unsuccessful but non-frivolous appeals is ``fundamentally unfair.'' In 
support of its argument, Citadel noted that initial decisions regarding 
trade disputes are made by Floor Officials, who are not independent and 
can lack proper training. Also, Citadel asserted that persons who are 
not Exchange members may not be able to assess on their own whether an 
Exchange-specific error has occurred.
    In addition, Citadel believes that it is unwise to not permit the 
right to appeal the Referee's decision to the Exchange's Board. Citadel 
acknowledged that the importance of the Board's role in the review of 
any specific ruling might be diminished by an independent Referee 
providing appellate review. Citadel, however, believes that because 
there is no guarantee that the Referee would always meet the high 
standards the Exchange hopes to achieve, the ability to appeal to the 
Board would remain an ``important safeguard'' and would give the 
Referee an incentive to make fair rulings. Citadel noted that, if the 
Exchange were to permit the Referee's rulings to be appealed to the 
Board, it would indicate that the Exchange takes trading disputes 
seriously and would allow the Board to timely address potential 
problems.
    In its response letter, the Phlx noted its view that the $250 fee 
for unsuccessful appeals is an ``objective standard'' to replace the 
Review Panel's current ``subjective discretion'' over the imposition of 
fees.\38\ The Phlx further asserted that the $250 fee for unsuccessful 
appeals is fair and consistent with Section 6(b)(4) of the Act.\39\
---------------------------------------------------------------------------

    \38\ See Phlx Response Letter, supra note 5.
    \39\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

    In addressing Citadel's concerns regarding the right to appeal the 
Referee's ruling, the Phlx remarked that the types of rulings the 
Referee would make are not appropriate for appeals to the Exchange's 
Board because of the need for ``speedy resolution and certainty.'' The 
Exchange noted that an aggrieved member or member organization would 
not be precluded from proceeding with any other legal remedy to which 
such member or member organization might be entitled. The Exchange 
further noted that there is a safeguard and an incentive for the 
Referee to make fair rulings, citing the requirement that the Chairmen 
of the various floor committees, or their respective designees, must 
refer a Referee that fails to make any ruling in accordance with 
Exchange rules to the Audit Committee for possible disciplinary action, 
including removal. Finally, the Exchange stated its view that its 
proposed process for resolving trading disputes is fair and consistent 
with the Act.

IV. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\40\ In particular, the Commission finds that the 
proposed rule change, as amended, is consistent with section 6(b)(1) of 
the Act,\41\ which requires an exchange be so organized and have the 
capacity to be able to carry out the purposes of the Act and to comply, 
and to enforce compliance by its members and persons associated with 
its members, with the provisions of the Act, the rules and regulations 
thereunder, and the rules of the exchange. In addition, the Commission 
finds that the proposed rule change, as amended, is consistent with 
section 69(b)(4) of the Act,\42\ which requires that the rules of the 
exchange provide for the equitable allocation of reasonable dues, fees, 
and other charges among its members. Furthermore, the Commission finds 
that the proposed rule change, as amended, is consistent with section 
6(b)(5) of the Act,\43\ which requires, among other things, that the 
rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, 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.
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    \40\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \41\ 15 U.S.C. 78f(b)(1).
    \42\ 15 U.S.C. 78f(b)(4).
    \43\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the Exchange's proposal to establish 
an independent Referee to rule on appeals from Floor Official rulings 
regarding the nullification or adjustment of trades is designed to 
bring promptness, certainty and objectivity to the Exchange's process 
of resolving disputes. In addition, the Commission believes that 
replacing the Review Panel with an independent Referee should help 
improve the decisionmaking process

[[Page 36596]]

regarding appeals from trading disputes, because potential conflicts of 
interest that may occur when members are tasked with ruling on appeals 
of trading disputes involving other members would be eliminated. 
Furthermore, the Commission notes that having an independent Referee 
rule on such appeals should help foster fair and neutral decisions with 
respect to the resolution of trading disputes. The Commission also 
notes that replacing the Review Panel with a Referee should help to 
streamline the Exchange's process for review of Floor Official rulings, 
thereby making the process for settling trading disputes more 
efficient. In addition, the Commission believes that allowing the 
Referee to act in the capacity of a Floor Official in making initial 
rulings on requests for relief from the requirements of those Exchange 
rules set forth in proposed Commentary .02(a) to Exchange Rule 124 
should help promote prompt and efficient rulings on such requests.
    The Commission has carefully considered the comments raised in the 
Citadel Letter. Specifically, the Citadel Letter asserts that the $250 
fee for unsuccessful appeals is unfair. The Commission notes, however, 
that the proposed $250 fee would employ an objective standard with 
respect to the imposition of fees on unsuccessful appeals, rather than 
retaining the current method that permits such a fee to be imposed at 
the discretion of the Review Panel upon a finding that such appeal is 
frivolous. The Commission believes that the Exchange's proposal to 
impose a $250 fee on unsuccessful appeals is consistent with the Act.
    The Citadel Letter also expressed concern that the decisions of the 
Referee would be final and not appealable to the Exchange's Board. The 
Commission notes that the Exchange's proposal is intended to provide 
for expeditious resolution of trading disputes and believes that the 
proposal is a reasonable effort to ensure prompt, efficient, and fair 
review of Floor Officials' decisions. The Commission further notes that 
the proposal does not alter any right that a member or member 
organization may have to pursue any other legal remedy that may be 
available, such as arbitration. In the Commission's view, the 
Exchange's proposal contains appropriate safeguards, including the 
requirement that the Chairman of the respective committees or their 
designees must refer a Referee to the Exchange's Audit Committee if he 
or she fails to make a ruling in accordance with Exchange rules. 
Moreover, the requirements that the Referee may not be a member of the 
Exchange, may not be directly or indirectly affiliated with any 
Exchange member and may not be a debtor or creditor of any Exchange 
member or member organization, should help to ensure that the Referee 
is neutral and that his or her rulings are fair and objective. In 
addition, the restrictions that provide that duties and 
responsibilities relating to disciplinary matters, that the issuance of 
citations for violations of Exchange rules, and that matters relating 
to order and decorum may not be assigned to the Referee should also 
further the goal of impartial, unbiased, and objective rulings on the 
part of the Referee. Finally, the Commission notes that, with respect 
to the Referee acting in the capacity of a Floor Official and making 
initial rulings to grant or deny relief from the requirements of the 
Exchange rules specified in proposed Commentary .02(a) to Exchange Rule 
124, such Floor Official rulings currently are not considered final 
decisions of the Standing Committee and thus are not currently 
appealable to the Exchange's Board. For such initial rulings, the 
proposed rule change would not change the Exchange's current process 
with respect to such rulings. Based on these considerations, the 
Commission believes that the Citadel Letter has not raised any concerns 
that would preclude approval of the Exchange's proposal.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\44\ that the proposed rule change (SR-Phlx-2005-42), as amended, 
is approved.
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    \44\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\45\
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    \45\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 06-5678 Filed 6-27-06; 8:45 am]
BILLING CODE 8010-01-M