Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; Notice of Filing of a Proposed Rule Change Relating to an Exchange Member's Conduct of Doing Business With the Public, 42641-42645 [E8-16685]
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Federal Register / Vol. 73, No. 141 / Tuesday, July 22, 2008 / Notices
Book, the individual orders or quotes in
the leg markets will have priority.
Finally, the Commission believes that
the Exchange’s proposal not to provide
a guaranteed allocation to LMMs with
respect to Complex Orders executed in
the Complex Matching Engine is
reasonable and consistent with the Act,
because LMMs do not have any quoting
obligations for complex strategies.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,6 that the
proposed rule change (SR–NYSEArca–
2008–54), as modified by Amendment
No. 1, be, and hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.7
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8–16751 Filed 7–21–08; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–58168; File No. SR–Phlx–
2008–53]
Self-Regulatory Organizations;
Philadelphia Stock Exchange, Inc.;
Notice of Filing of a Proposed Rule
Change Relating to an Exchange
Member’s Conduct of Doing Business
With the Public
July 16, 2008.
sroberts on PROD1PC70 with NOTICES
Pursuant to Section 19(b)(1) of the
Securities and Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on July 11,
2008, the Philadelphia Stock Exchange,
Inc. (‘‘Phlx’’ or ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’ or ‘‘SEC’’)
the proposed rule change as described
in Items I, II, and III below, which items
have been substantially 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
Phlx Rules 1024 (Conduct of Accounts
for Options Trading), 1025 (Supervision
of Accounts), 1027 (Discretionary
Accounts), and 1049 (Communications
to Customers) that govern an Exchange
6 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
7 17
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member’s conduct of doing business
with the public. Specifically, the
proposed rule change would require
that member organizations integrate the
responsibility for supervision of a
member organizations’ public customer
options business into their overall
supervisory and compliance programs.
In addition, the proposed rule change
would strengthen member
organizations’ supervisory procedures
and internal controls as they relate to a
members’ public customer options
business.
The text of the proposed rule change
is available at the Phlx, the
Commission’s Public Reference Room
and https://www.phlx.com/regulatory/
reg_rulefilings.aspx.
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
a. Integration of Options Supervision
The purpose of the proposed rule
change is to create a supervisory
structure for options that is similar to
that required by New York Stock
Exchange (‘‘NYSE’’) Rule 342 and
National Association of Securities
Dealers (‘‘NASD’’) Rule 3010.3 The
proposed rule change would eliminate
the requirement that member
organizations qualified to do a public
customer business in options must
designate a single person to act as
Senior Registered Options Principal
(‘‘SROP’’) for the member organization
and that each such member organization
3 On July 26, 2007, the Commission approved a
proposed rule change filed by NASD to amend
NASD’s Certificate of Incorporation to reflect its
name change to Financial Industry Regulatory
Authority, Inc., or FINRA, in connection with the
consolidation of the member firm regulatory
functions of NASD and NYSE Regulation, Inc. See
Securities Exchange Act Release No. 56146 (July 26,
2007), 72 FR 42190 (August 1, 2007). The FINRA
rule book currently consists of both NASD rules and
certain NYSE Rules that FINRA has incorporated.
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42641
designate a specific individual as a
Compliance Registered Options
Principal (‘‘CROP’’). Instead member
organizations would be required to
integrate the SROP and CROP functions
into their overall supervisory and
compliance programs. The proposed
rule change is substantively similar to
recent amendments to the rules of the
Chicago Board Options Exchange, Inc.
(‘‘CBOE’’) which were approved by the
Commission.4
The SROP concept was first
introduced by Phlx and other options
exchanges during the early years of the
development of the listed options
market. Initially, member organizations
were required to designate one or more
persons qualified as Registered Options
Principals (‘‘ROPs’’) having supervisory
responsibilities in respect of the
member organization’s options business.
As the number of ROPs at larger
member organizations began to increase,
Phlx imposed an additional requirement
that member organizations designate
one of their ROPs as the SROP. This was
intended to eliminate confusion as to
where the compliance and supervisory
responsibilities lay by centralizing in a
single supervisory officer overall
responsibility for the supervision of a
member organization’s options
activities.5 Subsequently, following the
recommendation of the Commission’s
Options Study, Phlx and other options
exchanges required member
organizations to designate a CROP to be
responsible for the member
organization’s overall compliance
program in respect of its options
activities.6 The CROP may be the same
person who is designated as SROP.
Since the SROP and CROP
requirements were first imposed, the
supervisory function in respect of the
options activities of most securities
firms has been integrated into the matrix
of supervisory and compliance
functions in respect of the firms’ other
securities activities. This not only
reflects the maturity of the options
market, but also recognizes the ways in
which the uses of options themselves
have become more integrated with other
securities in the implementation of
particular strategies. Thus, the current
requirement for a separately designated
senior supervisor in respect of all
aspects of a member organization’s
options activities, rather than clarifying
the allocation of supervisory
4 See Securities Exchange Act Release No. 56971
(December 14, 2007), 72 FR 72804 (December 21,
2007) (SR–CBOE–2007–106).
5 See Securities and Exchange Commission, 96th
Cong., 1st Sess., Report of the Special Study of the
Options Markets (Comm. Print 1978) 316 fn. 11.
6 Id. at P. 335
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responsibilities within the member
organization, may have just the opposite
effect by failing to take into account the
way in which these responsibilities are
actually assigned. By permitting
supervision of a member organization’s
options activities to be handled in the
same manner as the supervision of its
other securities and futures activities,
the proposed rule change will ensure
that supervisory responsibility over
each segment of the member
organization’s business is assigned to
the best qualified person in the member
organization, thereby enhancing the
overall quality of supervision. The same
holds true for the compliance function.
For example, member organizations
generally designate one person to have
supervisory responsibility over the
application of margin requirements and
other matters pertaining to the extension
of credit. The proposed rule change
would enable a member organization to
include within the scope of such a
person’s duties the supervision over the
proper margining of options accounts,
thereby assuring that the most qualified
person is charged with this
responsibility and at the same time
eliminating any uncertainty that might
now exist as to whether this
responsibility lies with the senior credit
supervisor or with the SROP.
Similarly, the proposed rule change
would allow a member organization to
specifically designate one or more
individuals as being responsible for
approving a ROP’s acceptance of
discretionary accounts 7 and exceptions
to a member organization’s suitability
standards for trading uncovered short
options.8 The proposed rule changes
would allow member organizations the
flexibility to assign such
responsibilities, which formerly rested
with the SROP and/or CROP, to more
than one ROP qualified individual
where the member organization believes
it advantageous to do so to enhance its
supervisory or compliance structure.
Typically, a member organization may
wish to divide these functions on the
basis of geographic region or functional
considerations. Phlx Rule 1024 would
be amended to clarify the qualification
requirements of individuals designated
as ROPs.9 Rule 1024 would also be
amended to specify the registration
requirements of individuals who accept
orders from non-broker-dealer
customers.10
7 See
proposed Phlx Rule 1027(a)(i).
8 See proposed Phlx Rule 1024(c).
9 See proposed Commentaries .06 and .07 to Phlx
Rule 1024.
10 See proposed Commentary .08 to Phlx Rule
1024.
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The proposed rule change would call
for options discretionary accounts, the
acceptance of which must be approved
by a ROP qualified individual (other
than the ROP who accepted the
account), to be supervised in the same
manner as the supervision of other
securities accounts that are handled on
a discretionary basis.11 The proposed
rule change would eliminate the
requirement that discretionary options
orders be approved on the day of entry
by a ROP (with one exception as
described below).12 This requirement
predates the Options Study and is not
consistent with the use of supervisory
tools in computerized format or
exception reports generated after the
close of a trading day. No similar
requirement exists for supervision of
other securities accounts that are
handled on a discretionary basis.13
Discretionary orders must be reviewed
in accordance with a member
organization’s written supervisory
procedures. The proposed rule change
would ensure that supervisory
responsibilities are assigned to specific
ROP qualified individuals, thereby
enhancing the quality of supervision.
Phlx Rule 1027 would be revised by
adding, as Commentary .01, a
requirement that any member
organization that does not utilize
computerized surveillance tools for the
frequent and appropriate review of
discretionary account activity must
establish and implement procedures to
require ROP qualified individuals who
have been designated to review
discretionary accounts to approve and
initial each discretionary order on the
day entered. The Exchange believes that
any member organization that does not
utilize computerized surveillance tools
to monitor discretionary account
activity should continue to be required
to perform the daily manual review of
discretionary orders.
Under the proposed rule change,
options discretionary accounts will
continue to receive frequent appropriate
supervisory review by designated ROP
qualified individuals. Additionally,
member organizations will continue to
be required to designate ROP qualified
individuals to review and approve the
acceptance of options discretionary
accounts in order to determine whether
the ROP accepting the account had a
reasonable basis for believing that the
customer was able to understand and
bear the risks of the proposed strategies
or transactions.14 This requirement
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11 See
proposed Phlx Rule 1025.
proposed Phlx Rule 1027(a).
13 See e.g., NYSE Rule 408.
14 See proposed Phlx Rule 1027(a).
12 See
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provides an additional level of
supervisory audit over options
discretionary accounts that does not
exist for other securities discretionary
accounts.
In addition, the proposed rule change
would require that each member
organization submit to the Exchange a
written report by April 1 of each year,
that details the member organization’s
supervision and compliance effort,
including its options compliance
program, during the preceding year and
reports on the adequacy of the member
organization’s ongoing compliance
processes and procedures.15
Proposed Phlx Rule 1025(h) would
require that each member organization
submit, by April 1st of each year, a copy
of the Phlx Rule 1025(g) annual report
to one or more of its control persons or,
if the member organization has no
control person, to the audit committee
of its board of directors or its equivalent
committee or group.16
Proposed Phlx Rule 1025(g) would
provide that a member organization that
specifically includes its options
compliance program in a report that
complies with substantially similar
NYSE and NASD rule requirements will
be deemed to have satisfied the
requirements of Phlx Rules 1025(g) and
1025(h).
Although the proposed rule change
would eliminate entirely the positions
and titles of the SROP and CROP,
member organizations would still be
required to designate a single general
partner or executive officer to assume
overall authority and responsibility for
internal supervision, control of the
member organization and compliance
with securities laws and regulations.17
Member organizations would also be
required to designate specific qualified
individuals as having supervisory or
compliance responsibilities over each
aspect of the member organization’s
options activities and to set forth the
names and titles of these individuals in
their written supervisory procedures.18
This is consistent with the integration of
options supervision into the overall
supervisory and compliance structure of
a member organization. In connection
with the approval of these proposed rule
changes, the Exchange intends to review
member organizations’ written
supervisory and compliance procedures
in the course of the Exchange’s routine
examination of member organizations to
15 See proposed Phlx Rule 1025(g), which is
modeled after NYSE Rule 342.30.
16 See proposed Phlx Rule 1025(h) which is
modeled after NYSE Rule 354.
17 See proposed Phlx Rule 1025(a).
18 See proposed Commentary .02 to Phlx Rule
1025.
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ensure that supervisory and compliance
responsibilities are adequately defined.
The Exchange believes that the
proposed rule changes recognize that
options are no longer in their infancy,
have become more integrated with other
securities in the implementation of
particular strategies, and thus should
not continue to be regulated as though
they are new and experimental
products. The Exchange believes that
the proposed rule change is appropriate
and would not materially alter the
supervisory operations of member
organizations. The Exchange believes
the supervisory and compliance
structure in place for non-options
products at most member organizations
is not materially different from the
structure in place for options.
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b. Supervisory Procedures and Internal
Controls
The Exchange also proposes to amend
certain rules to strengthen member and
member organizations’ supervisory
procedures and internal controls as they
relate to the members’ public customer
options business. The proposed rule
changes described below are modeled
after NYSE and NASD rules approved
by the Commission in 2004.19 The
Exchange believes the following
proposal to strengthen member
supervisory procedures and internal
controls is appropriate and consistent
with the preceding proposal to integrate
options and non-options sales practice
supervision and compliance functions.
Phlx Rule 1025(a)(iii) would be
revised to require the development and
implementation of written policies and
procedures reasonably designed to
supervise sales managers and other
supervisory personnel who service
customer options accounts (i.e., who act
in the capacity of a registered
representative).20 This requirement
would apply to branch office managers,
sales managers, regional/district sales
managers, or any person performing a
similar supervisory function. Such
policies and procedures are expected to
encompass all options sales-related
activities. Proposed Phlx Rule
1025(a)(iii)(A) would require that
supervisory reviews of producing sales
managers be conducted by a qualified
ROP who is either senior to, or
otherwise ‘‘independent of’’, the
producing manager under review.21
19 See Securities Exchange Act Release Nos.
49882 (June 17, 2004), 69 FR 35108 (June 23, 2004)
(SR–NYSE–2002–36) and 49883 (June 17, 2004), 69
FR 35092 (June 23, 2004) (SR–NASD–2002–162).
20 See proposed Phlx Rule 1025(a)(iii) which is
modeled after NYSE Rule 342.19.
21 An ‘‘otherwise independent’’ person is defined
in proposed Phlx Rule 1025(a)(iii)(A) as one who:
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This provision is intended to ensure
that all options sales activity of a
producing manager is monitored for
compliance with applicable regulatory
requirements by persons who do not
have a personal interest in such activity.
Proposed Phlx Rule 1025(a)(iii)(B)
would provide a limited exception for
members so limited in size and
resources that there is no qualified
person senior to, or otherwise
independent of, the producing manager
to conduct the review. In this case, the
reviews may be conducted by a
qualified ROP to the extent practicable.
Under proposed Phlx Rule
1025(a)(iii)(C), a member relying on the
limited size and resources exception
must document the factors used to
determine that compliance with each of
the ‘‘senior’’ or ‘‘otherwise
independent’’ standards of Phlx Rule
1025(a)(iii)(A) is not possible, and that
the required supervisory systems and
procedures in place with respect to any
producing manager comply with the
provisions of Phlx Rule 1025(a)(iii)(A)
to the extent practicable.22
Proposed Phlx Rule 1025(c)(i) would
require member organizations to
develop and maintain adequate controls
over each of their business activities.23
The proposed rule would further require
that such controls include the
establishment of procedures to
independently verify and test the
supervisory systems and procedures for
those business activities. Member
organizations would be required to
include in the annual report prepared
pursuant to Phlx Rule 1025(g) a review
of their efforts in this regard, including
a summary of the tests conducted and
significant exceptions identified. The
may not report either directly or indirectly to the
producing manager under review; must be situated
in an office other than the office of the producing
manager; must not otherwise have supervisory
responsibility over the activity being reviewed; and
must alternate such review responsibility with
another qualified person every two years or less.
Further, if a person designated to review a
producing manager receives an override or other
income derived from that producing manager’s
customer activity that represents more than 10% of
the designated person’s gross income derived from
the member organization over the course of a rolling
twelve-month period, the member organization
must establish alternative senior or otherwise
independent supervision of that producing manager
to be conducted by a qualified Registered Options
Principal other than the designated person
receiving the income.
22 Paragraph 1025(a)(iii)(D) of Phlx Rule 1025
would provide that a member organization that
complies with requirements of the NYSE or the
NASD that are substantially similar to the
requirements in Phlx Rules 1025(a)(iii)(A), (a)(iii)(B)
and (a)(iii)(C) will be deemed to have met such
requirements.
23 Current Phlx Rule 1025(c) regarding
designation of foreign currency options principals
was renumbered as 1025(i).
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42643
Exchange believes proposed Phlx Rule
1025(c)(i) would enhance the quality of
member organizations’ supervision.24
Proposed Phlx Rule 1025(d) would
establish requirements for branch office
inspections similar to the requirements
of NYSE Rule 342.24. Specifically, Phlx
Rule 1025(d) would require a member
organization to inspect, at least
annually, each supervisory branch office
and inspect each non-supervisory
branch office at least once every three
years.25 The proposed rule would
further require that persons who
conduct a member organization’s annual
branch office inspection must be
independent of the direct supervision or
control of the branch office (i.e., not the
branch office manager, or any person
who directly or indirectly reports to
such manager, or any person to whom
such manager directly reports). The
Exchange believes that requiring branch
office inspections to be conducted by
someone who has no significant
financial interest in the success of a
branch office should lead to more
objective and vigorous inspections.
Under proposed Phlx Rule 1025(e),
any member organization seeking an
exemption, pursuant to Phlx Rule
1025(d)(ii), from the annual branch
office inspection requirement would be
required to submit to the Exchange
written policies and procedures for
systematic risk-based surveillance of its
branch offices, as defined in Phlx Rule
1025(e). Proposed Phlx Rule 1025(f)
would require that annual branch office
inspection programs include, at a
minimum, testing and verification of
specified internal controls.26 Paragraph
(d)(3) of Phlx Rule 1025 would provide
that a member organization that
complies with requirements of the
NYSE or the NASD that are
substantially similar to the requirements
in Phlx Rules 1025(d), (e) and (f) will be
deemed to have met such requirements.
In conjunction with the proposed
changes to Phlx Rules 1025(d), (e) and
24 See proposed Phlx Rule 1025(c)(i) which is
modeled after NYSE Rule 342.23. Paragraph (c)(ii)
of Phlx Rule 1025 would provide that a member
organization that complies with requirements of the
NYSE or the NASD that are substantially similar to
the requirements in Phlx Rule 1025(c)(i) will be
deemed to have met such requirements.
25 Proposed Phlx Rules 1025(d)(i)(A) and (B)
would provide members with two exceptions from
the annual branch office inspection requirement: a
member may demonstrate to the satisfaction of the
Exchange that other arrangements may satisfy the
Rule’s requirements for a particular branch office,
or based upon a member organization’s written
policies and procedures providing for a systematic
risk-based surveillance system, the member
organization submits a proposal to the Exchange
and receives, in writing, an exemption from this
requirement pursuant to Phlx Rule 1025(e).
26 See proposed Phlx Rules 1025(e) and (f) which
are modeled after NYSE Rules 342.25 and 342.26.
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(f), the Exchange proposes to add new
Commentary .09 to Phlx Rule 1024 to
define ‘‘branch office’’ in a way that is
substantially similar to the definition of
branch office in NYSE Rule 342.10.
Proposed Phlx Rule 1024(g)(iv) would
require a member organization to
designate a Chief Compliance Officer
(CCO). Proposed Phlx Rule 1025(g)(v)
would require each member
organization’s Chief Executive Officer
(CEO), or equivalent, to certify annually
per subsection (A) that the member
organization has in place processes to:
(1) Establish and maintain policies and
procedures reasonably designed to
achieve compliance with applicable
Exchange rules and federal securities
laws and regulations; (2) modify such
policies and procedures as business,
regulatory, and legislative changes and
events dictate; and (3) test the
effectiveness of such policies and
procedures on a periodic basis, the
timing of which is reasonably designed
to ensure continuing compliance with
Exchange rules and federal securities
laws and regulations.
Proposed Phlx Rule 1025(g)(v) would
further require that the CEO attest the
CEO has conducted one or more
meetings with the CCO in the preceding
12 months to discuss the compliance
processes in proposed Phlx Rule
1025(g)(v), that the CEO has consulted
with the CCO and other officers to the
extent necessary to attest to the
statements in the certification, and the
compliance processes are evidenced in
a report, reviewed by the CEO, CCO,
and such other officers as the member
organization deems necessary to make
the certification, that is provided to the
member organization’s board of
directors and audit committee (if such
committee exists).27
Under proposed Phlx Rule 1025(b)(ii),
a member, upon a customer’s written
instructions, may hold mail for a
customer who will not be at his or her
usual address for no longer than two
months if the customer is on vacation or
traveling, or three months if the
customer is going abroad. This
provision would help ensure that
members that hold mail for customers
who are away from their usual
addresses, do so only pursuant to the
customer’s written instructions and for
a specified, relatively short period of
time.28
Proposed Phlx Rule 1025(b)(iii) would
require that, before a customers options
order is executed, the account name or
designation must be placed upon the
memorandum for each transaction. In
addition, only a qualified ROP may
approve any changes in account names
or designations. The ROP also must
document the essential facts relied upon
in approving the changes and maintain
the record in a central location. A
member would be required to preserve
any account designation change
documentation for a period of not less
than three years, with the
documentation preserved for the first
two years in an easily accessible place,
as the term ‘‘easily accessible place’’ is
used in Exchange Act Rule 17a–4.29 The
Exchange believes the proposed rule
would help to protect account name and
designation information from possible
fraudulent activity.30
Phlx Rule 1027(e) allows member
organizations to exercise time and price
discretion on orders for the purchase or
sale of a definite number of options
contracts in a specified security. The
Exchange proposes to amend its Rule
1027(e) to limit the duration of this
discretionary authority to the day it is
granted, absent written authorization to
the contrary. In addition, the proposed
rule would require any exercise of time
and price discretion to be reflected on
the customer order ticket. The proposed
one-day limitation would not apply to
time and price discretion exercised for
orders effected with or for an
institutional account (as defined in the
rule) pursuant to valid Good-TillCancelled instructions issued on a ‘‘not
held’’ basis. The Exchange believes that
investors will receive greater protection
by clarifying the time such discretionary
orders remain pending.31
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,32 in general, and furthers the
objectives of Section 6(b)(5),
specifically,33 in that it is designed to
perfect the mechanism of a free and
open market and the national market
system, protect investors and the public
interest and promotes just and equitable
principles of trade. The proposal would
achieve this by enabling the Exchange to
amend its rules to require member
organizations to integrate the
responsibility for supervision of a
member organization’s public customer
options business into their overall
29 See
17 CFR 240.17a–4.
proposed Phlx Rule 1025(b)(iii) which is
modeled after NASD Rule 3110(j).
31 See proposed Phlx Rule 1027(e) which is
modeled after NASD Rule 2510(d)(1).
32 15 U.S.C. 78f(b).
33 15 U.S.C. 78f(b)(5).
30 See
27 See proposed Phlx Rule 1025(g)(v) which is
modeled after NASD Rule 3013 and NYSE Rule
342.30(e).
28 See proposed Phlx Rule 1025(b)(ii) which is
modeled after NASD Rule 3110(i).
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supervisory and compliance programs,
and to strengthen member
organizations’ supervisory procedures
and internal controls as they relate to a
member’s public customer options
business.
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 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 did not solicit
comments or receive any 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 on 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.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
No. SR–Phlx–2008–53 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street, NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–Phlx–2008–53. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
E:\FR\FM\22JYN1.SGM
22JYN1
Federal Register / Vol. 73, No. 141 / Tuesday, July 22, 2008 / Notices
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). 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, 100 F Street, NE., Washington,
DC 20549, on official business days
between the hours of 10 a.m. and 3 p.m.
Copies of such filing also will be
available for inspection and copying at
the principal office of the Phlx. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–Phlx–2008–53 and should
be submitted on or before August 12,
2008.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.34
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8–16685 Filed 7–21–08; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–58165; File No. SR–DTC–
2008–03]
Self-Regulatory Organizations; The
Depository Trust Company; Notice of
Filing of Proposed Rule Change To
Establish a Fee Relating to DTC’s
Settlement Procedures for the Maturity
of Money Market Instruments With
Unknown Rates
sroberts on PROD1PC70 with NOTICES
July 15, 2008.
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 May 30,
2008, The Depository Trust Company
(‘‘DTC’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
the proposed rule change described in
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
Items I, II, and III below, which items
have been prepared primarily by DTC.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
parties.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The proposed rule change seeks to
establish a fee that relates to DTC’s
settlement procedures for the maturity
of Money Market Instruments (‘‘MMI’’)
with unknown rates (‘‘Unknown Rate
Maturities’’).
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
DTC 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. DTC has prepared
summaries, set forth in sections (A), (B),
and (C) below, of the most significant
aspects of these statements.3
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
DTC initiates MMI maturity
processing automatically each morning
by electronically sweeping all maturing
positions of MMI CUSIPs from
investors’ custodian accounts and
generating the appropriate maturity
payments. The MMI then is delivered to
the account of the appropriate Issuing
Agent or Paying Agent (collectively,
‘‘IPA’’). On the day of delivery, DTC
debits the IPA’s account in the amount
of the maturity proceeds for settlement
and credits the same amount of the
maturity proceeds to the investor’s
custodian account for payment to the
investor.
In order for DTC to process settlement
for Unknown Rate Maturities the IPA
currently is required to send notice to
DTC by 6 p.m. (ET) on the day the
amount of variable income or principal
becomes known to the IPA, but in no
event later than 3 p.m. (ET) on the day
prior to maturity or periodic payment
date. In certain circumstances, DTC may
accept an IPA’s notice after the
applicable deadlines until 2:30 p.m.
(ET) on the date of maturity. If no
maturity rate is provided by 2:30 p.m.
34 17
1 15
VerDate Aug<31>2005
19:47 Jul 21, 2008
3 The
Commission has modified the text of the
summaries prepared by DTC.
Jkt 214001
PO 00000
Frm 00104
Fmt 4703
Sfmt 4703
42645
(ET) on the date of maturity, then the
maturity will roll-over to the next
processing day. This rollover continues
until a rate is provided. The process to
monitor the resolution of payments on
Unknown Rate Maturities is timeconsuming because it involves, among
other things, DTC verifying the IPA of
the Unknown Rate Maturity, calling the
IPA at minimum on a daily basis, and
coordinating within DTC to get the issue
resolved as quickly as possible.
Accordingly, DTC is proposing to
implement a disincentive fee to
encourage timely receipt of the
appropriate maturity rates. DTC submits
that this is an appropriate fee to assess
in order to compensate for the
operational expenses associated with
monitoring the resolution of payments
on Unknown Rate Maturities and
expects such fee to serve as a
disincentive to IPAs’ delayed notice of
the maturity rate. Under the proposed
rule change, if the maturity rate is not
populated in DTC’s system by 2:30 p.m.
(ET) on the date of maturity, DTC will
charge a fee of $5,000 on the maturity
date and for each subsequent MMI
business day, or part thereof, until the
rate is submitted.4 DTC has met with
various industry organizations, all of
whom support the implementation of
this fee.
DTC believes that the proposed rule
change is consistent with the
requirements of Section 17A of the Act 5
and the rules and regulations
thereunder because the proposed
change will deter late submission of
maturity rates, thereby promoting
prompt and accurate clearance and
settlement of securities transactions.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
DTC does not believe that the
proposed rule change will have any
impact or impose any burden on
competition.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments relating to the
proposed rule change have not been
solicited or received. DTC will notify
the Commission of any written
comments received by DTC.
4 DTC also will report any pattern of late
submission of maturity rates to the Commission.
5 15 U.S.C. 78q–1.
E:\FR\FM\22JYN1.SGM
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]]>Agencies
[Federal Register Volume 73, Number 141 (Tuesday, July 22, 2008)]
[Notices]
[Pages 42641-42645]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-16685]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-58168; File No. SR-Phlx-2008-53]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Notice of Filing of a Proposed Rule Change Relating to an Exchange
Member's Conduct of Doing Business With the Public
July 16, 2008.
Pursuant to Section 19(b)(1) of the Securities and Exchange Act of
1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on July 11, 2008, the Philadelphia Stock Exchange, Inc. (``Phlx''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I, II, and III below, which items have been substantially
prepared by the Exchange. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Phlx Rules 1024 (Conduct of Accounts
for Options Trading), 1025 (Supervision of Accounts), 1027
(Discretionary Accounts), and 1049 (Communications to Customers) that
govern an Exchange member's conduct of doing business with the public.
Specifically, the proposed rule change would require that member
organizations integrate the responsibility for supervision of a member
organizations' public customer options business into their overall
supervisory and compliance programs. In addition, the proposed rule
change would strengthen member organizations' supervisory procedures
and internal controls as they relate to a members' public customer
options business.
The text of the proposed rule change is available at the Phlx, the
Commission's Public Reference Room and https://www.phlx.com/regulatory/
reg_rulefilings.aspx.
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
a. Integration of Options Supervision
The purpose of the proposed rule change is to create a supervisory
structure for options that is similar to that required by New York
Stock Exchange (``NYSE'') Rule 342 and National Association of
Securities Dealers (``NASD'') Rule 3010.\3\ The proposed rule change
would eliminate the requirement that member organizations qualified to
do a public customer business in options must designate a single person
to act as Senior Registered Options Principal (``SROP'') for the member
organization and that each such member organization designate a
specific individual as a Compliance Registered Options Principal
(``CROP''). Instead member organizations would be required to integrate
the SROP and CROP functions into their overall supervisory and
compliance programs. The proposed rule change is substantively similar
to recent amendments to the rules of the Chicago Board Options
Exchange, Inc. (``CBOE'') which were approved by the Commission.\4\
---------------------------------------------------------------------------
\3\ On July 26, 2007, the Commission approved a proposed rule
change filed by NASD to amend NASD's Certificate of Incorporation to
reflect its name change to Financial Industry Regulatory Authority,
Inc., or FINRA, in connection with the consolidation of the member
firm regulatory functions of NASD and NYSE Regulation, Inc. See
Securities Exchange Act Release No. 56146 (July 26, 2007), 72 FR
42190 (August 1, 2007). The FINRA rule book currently consists of
both NASD rules and certain NYSE Rules that FINRA has incorporated.
\4\ See Securities Exchange Act Release No. 56971 (December 14,
2007), 72 FR 72804 (December 21, 2007) (SR-CBOE-2007-106).
---------------------------------------------------------------------------
The SROP concept was first introduced by Phlx and other options
exchanges during the early years of the development of the listed
options market. Initially, member organizations were required to
designate one or more persons qualified as Registered Options
Principals (``ROPs'') having supervisory responsibilities in respect of
the member organization's options business. As the number of ROPs at
larger member organizations began to increase, Phlx imposed an
additional requirement that member organizations designate one of their
ROPs as the SROP. This was intended to eliminate confusion as to where
the compliance and supervisory responsibilities lay by centralizing in
a single supervisory officer overall responsibility for the supervision
of a member organization's options activities.\5\ Subsequently,
following the recommendation of the Commission's Options Study, Phlx
and other options exchanges required member organizations to designate
a CROP to be responsible for the member organization's overall
compliance program in respect of its options activities.\6\ The CROP
may be the same person who is designated as SROP.
---------------------------------------------------------------------------
\5\ See Securities and Exchange Commission, 96th Cong., 1st
Sess., Report of the Special Study of the Options Markets (Comm.
Print 1978) 316 fn. 11.
\6\ Id. at P. 335
---------------------------------------------------------------------------
Since the SROP and CROP requirements were first imposed, the
supervisory function in respect of the options activities of most
securities firms has been integrated into the matrix of supervisory and
compliance functions in respect of the firms' other securities
activities. This not only reflects the maturity of the options market,
but also recognizes the ways in which the uses of options themselves
have become more integrated with other securities in the implementation
of particular strategies. Thus, the current requirement for a
separately designated senior supervisor in respect of all aspects of a
member organization's options activities, rather than clarifying the
allocation of supervisory
[[Page 42642]]
responsibilities within the member organization, may have just the
opposite effect by failing to take into account the way in which these
responsibilities are actually assigned. By permitting supervision of a
member organization's options activities to be handled in the same
manner as the supervision of its other securities and futures
activities, the proposed rule change will ensure that supervisory
responsibility over each segment of the member organization's business
is assigned to the best qualified person in the member organization,
thereby enhancing the overall quality of supervision. The same holds
true for the compliance function.
For example, member organizations generally designate one person to
have supervisory responsibility over the application of margin
requirements and other matters pertaining to the extension of credit.
The proposed rule change would enable a member organization to include
within the scope of such a person's duties the supervision over the
proper margining of options accounts, thereby assuring that the most
qualified person is charged with this responsibility and at the same
time eliminating any uncertainty that might now exist as to whether
this responsibility lies with the senior credit supervisor or with the
SROP.
Similarly, the proposed rule change would allow a member
organization to specifically designate one or more individuals as being
responsible for approving a ROP's acceptance of discretionary accounts
\7\ and exceptions to a member organization's suitability standards for
trading uncovered short options.\8\ The proposed rule changes would
allow member organizations the flexibility to assign such
responsibilities, which formerly rested with the SROP and/or CROP, to
more than one ROP qualified individual where the member organization
believes it advantageous to do so to enhance its supervisory or
compliance structure. Typically, a member organization may wish to
divide these functions on the basis of geographic region or functional
considerations. Phlx Rule 1024 would be amended to clarify the
qualification requirements of individuals designated as ROPs.\9\ Rule
1024 would also be amended to specify the registration requirements of
individuals who accept orders from non-broker-dealer customers.\10\
---------------------------------------------------------------------------
\7\ See proposed Phlx Rule 1027(a)(i).
\8\ See proposed Phlx Rule 1024(c).
\9\ See proposed Commentaries .06 and .07 to Phlx Rule 1024.
\10\ See proposed Commentary .08 to Phlx Rule 1024.
---------------------------------------------------------------------------
The proposed rule change would call for options discretionary
accounts, the acceptance of which must be approved by a ROP qualified
individual (other than the ROP who accepted the account), to be
supervised in the same manner as the supervision of other securities
accounts that are handled on a discretionary basis.\11\ The proposed
rule change would eliminate the requirement that discretionary options
orders be approved on the day of entry by a ROP (with one exception as
described below).\12\ This requirement predates the Options Study and
is not consistent with the use of supervisory tools in computerized
format or exception reports generated after the close of a trading day.
No similar requirement exists for supervision of other securities
accounts that are handled on a discretionary basis.\13\ Discretionary
orders must be reviewed in accordance with a member organization's
written supervisory procedures. The proposed rule change would ensure
that supervisory responsibilities are assigned to specific ROP
qualified individuals, thereby enhancing the quality of supervision.
---------------------------------------------------------------------------
\11\ See proposed Phlx Rule 1025.
\12\ See proposed Phlx Rule 1027(a).
\13\ See e.g., NYSE Rule 408.
---------------------------------------------------------------------------
Phlx Rule 1027 would be revised by adding, as Commentary .01, a
requirement that any member organization that does not utilize
computerized surveillance tools for the frequent and appropriate review
of discretionary account activity must establish and implement
procedures to require ROP qualified individuals who have been
designated to review discretionary accounts to approve and initial each
discretionary order on the day entered. The Exchange believes that any
member organization that does not utilize computerized surveillance
tools to monitor discretionary account activity should continue to be
required to perform the daily manual review of discretionary orders.
Under the proposed rule change, options discretionary accounts will
continue to receive frequent appropriate supervisory review by
designated ROP qualified individuals. Additionally, member
organizations will continue to be required to designate ROP qualified
individuals to review and approve the acceptance of options
discretionary accounts in order to determine whether the ROP accepting
the account had a reasonable basis for believing that the customer was
able to understand and bear the risks of the proposed strategies or
transactions.\14\ This requirement provides an additional level of
supervisory audit over options discretionary accounts that does not
exist for other securities discretionary accounts.
---------------------------------------------------------------------------
\14\ See proposed Phlx Rule 1027(a).
---------------------------------------------------------------------------
In addition, the proposed rule change would require that each
member organization submit to the Exchange a written report by April 1
of each year, that details the member organization's supervision and
compliance effort, including its options compliance program, during the
preceding year and reports on the adequacy of the member organization's
ongoing compliance processes and procedures.\15\
---------------------------------------------------------------------------
\15\ See proposed Phlx Rule 1025(g), which is modeled after NYSE
Rule 342.30.
---------------------------------------------------------------------------
Proposed Phlx Rule 1025(h) would require that each member
organization submit, by April 1st of each year, a copy of the Phlx Rule
1025(g) annual report to one or more of its control persons or, if the
member organization has no control person, to the audit committee of
its board of directors or its equivalent committee or group.\16\
---------------------------------------------------------------------------
\16\ See proposed Phlx Rule 1025(h) which is modeled after NYSE
Rule 354.
---------------------------------------------------------------------------
Proposed Phlx Rule 1025(g) would provide that a member organization
that specifically includes its options compliance program in a report
that complies with substantially similar NYSE and NASD rule
requirements will be deemed to have satisfied the requirements of Phlx
Rules 1025(g) and 1025(h).
Although the proposed rule change would eliminate entirely the
positions and titles of the SROP and CROP, member organizations would
still be required to designate a single general partner or executive
officer to assume overall authority and responsibility for internal
supervision, control of the member organization and compliance with
securities laws and regulations.\17\ Member organizations would also be
required to designate specific qualified individuals as having
supervisory or compliance responsibilities over each aspect of the
member organization's options activities and to set forth the names and
titles of these individuals in their written supervisory
procedures.\18\ This is consistent with the integration of options
supervision into the overall supervisory and compliance structure of a
member organization. In connection with the approval of these proposed
rule changes, the Exchange intends to review member organizations'
written supervisory and compliance procedures in the course of the
Exchange's routine examination of member organizations to
[[Page 42643]]
ensure that supervisory and compliance responsibilities are adequately
defined.
---------------------------------------------------------------------------
\17\ See proposed Phlx Rule 1025(a).
\18\ See proposed Commentary .02 to Phlx Rule 1025.
---------------------------------------------------------------------------
The Exchange believes that the proposed rule changes recognize that
options are no longer in their infancy, have become more integrated
with other securities in the implementation of particular strategies,
and thus should not continue to be regulated as though they are new and
experimental products. The Exchange believes that the proposed rule
change is appropriate and would not materially alter the supervisory
operations of member organizations. The Exchange believes the
supervisory and compliance structure in place for non-options products
at most member organizations is not materially different from the
structure in place for options.
b. Supervisory Procedures and Internal Controls
The Exchange also proposes to amend certain rules to strengthen
member and member organizations' supervisory procedures and internal
controls as they relate to the members' public customer options
business. The proposed rule changes described below are modeled after
NYSE and NASD rules approved by the Commission in 2004.\19\ The
Exchange believes the following proposal to strengthen member
supervisory procedures and internal controls is appropriate and
consistent with the preceding proposal to integrate options and non-
options sales practice supervision and compliance functions.
---------------------------------------------------------------------------
\19\ See Securities Exchange Act Release Nos. 49882 (June 17,
2004), 69 FR 35108 (June 23, 2004) (SR-NYSE-2002-36) and 49883 (June
17, 2004), 69 FR 35092 (June 23, 2004) (SR-NASD-2002-162).
---------------------------------------------------------------------------
Phlx Rule 1025(a)(iii) would be revised to require the development
and implementation of written policies and procedures reasonably
designed to supervise sales managers and other supervisory personnel
who service customer options accounts (i.e., who act in the capacity of
a registered representative).\20\ This requirement would apply to
branch office managers, sales managers, regional/district sales
managers, or any person performing a similar supervisory function. Such
policies and procedures are expected to encompass all options sales-
related activities. Proposed Phlx Rule 1025(a)(iii)(A) would require
that supervisory reviews of producing sales managers be conducted by a
qualified ROP who is either senior to, or otherwise ``independent of'',
the producing manager under review.\21\ This provision is intended to
ensure that all options sales activity of a producing manager is
monitored for compliance with applicable regulatory requirements by
persons who do not have a personal interest in such activity.
---------------------------------------------------------------------------
\20\ See proposed Phlx Rule 1025(a)(iii) which is modeled after
NYSE Rule 342.19.
\21\ An ``otherwise independent'' person is defined in proposed
Phlx Rule 1025(a)(iii)(A) as one who: may not report either directly
or indirectly to the producing manager under review; must be
situated in an office other than the office of the producing
manager; must not otherwise have supervisory responsibility over the
activity being reviewed; and must alternate such review
responsibility with another qualified person every two years or
less. Further, if a person designated to review a producing manager
receives an override or other income derived from that producing
manager's customer activity that represents more than 10% of the
designated person's gross income derived from the member
organization over the course of a rolling twelve-month period, the
member organization must establish alternative senior or otherwise
independent supervision of that producing manager to be conducted by
a qualified Registered Options Principal other than the designated
person receiving the income.
---------------------------------------------------------------------------
Proposed Phlx Rule 1025(a)(iii)(B) would provide a limited
exception for members so limited in size and resources that there is no
qualified person senior to, or otherwise independent of, the producing
manager to conduct the review. In this case, the reviews may be
conducted by a qualified ROP to the extent practicable. Under proposed
Phlx Rule 1025(a)(iii)(C), a member relying on the limited size and
resources exception must document the factors used to determine that
compliance with each of the ``senior'' or ``otherwise independent''
standards of Phlx Rule 1025(a)(iii)(A) is not possible, and that the
required supervisory systems and procedures in place with respect to
any producing manager comply with the provisions of Phlx Rule
1025(a)(iii)(A) to the extent practicable.\22\
---------------------------------------------------------------------------
\22\ Paragraph 1025(a)(iii)(D) of Phlx Rule 1025 would provide
that a member organization that complies with requirements of the
NYSE or the NASD that are substantially similar to the requirements
in Phlx Rules 1025(a)(iii)(A), (a)(iii)(B) and (a)(iii)(C) will be
deemed to have met such requirements.
---------------------------------------------------------------------------
Proposed Phlx Rule 1025(c)(i) would require member organizations to
develop and maintain adequate controls over each of their business
activities.\23\ The proposed rule would further require that such
controls include the establishment of procedures to independently
verify and test the supervisory systems and procedures for those
business activities. Member organizations would be required to include
in the annual report prepared pursuant to Phlx Rule 1025(g) a review of
their efforts in this regard, including a summary of the tests
conducted and significant exceptions identified. The Exchange believes
proposed Phlx Rule 1025(c)(i) would enhance the quality of member
organizations' supervision.\24\
---------------------------------------------------------------------------
\23\ Current Phlx Rule 1025(c) regarding designation of foreign
currency options principals was renumbered as 1025(i).
\24\ See proposed Phlx Rule 1025(c)(i) which is modeled after
NYSE Rule 342.23. Paragraph (c)(ii) of Phlx Rule 1025 would provide
that a member organization that complies with requirements of the
NYSE or the NASD that are substantially similar to the requirements
in Phlx Rule 1025(c)(i) will be deemed to have met such
requirements.
---------------------------------------------------------------------------
Proposed Phlx Rule 1025(d) would establish requirements for branch
office inspections similar to the requirements of NYSE Rule 342.24.
Specifically, Phlx Rule 1025(d) would require a member organization to
inspect, at least annually, each supervisory branch office and inspect
each non-supervisory branch office at least once every three years.\25\
The proposed rule would further require that persons who conduct a
member organization's annual branch office inspection must be
independent of the direct supervision or control of the branch office
(i.e., not the branch office manager, or any person who directly or
indirectly reports to such manager, or any person to whom such manager
directly reports). The Exchange believes that requiring branch office
inspections to be conducted by someone who has no significant financial
interest in the success of a branch office should lead to more
objective and vigorous inspections.
---------------------------------------------------------------------------
\25\ Proposed Phlx Rules 1025(d)(i)(A) and (B) would provide
members with two exceptions from the annual branch office inspection
requirement: a member may demonstrate to the satisfaction of the
Exchange that other arrangements may satisfy the Rule's requirements
for a particular branch office, or based upon a member
organization's written policies and procedures providing for a
systematic risk-based surveillance system, the member organization
submits a proposal to the Exchange and receives, in writing, an
exemption from this requirement pursuant to Phlx Rule 1025(e).
---------------------------------------------------------------------------
Under proposed Phlx Rule 1025(e), any member organization seeking
an exemption, pursuant to Phlx Rule 1025(d)(ii), from the annual branch
office inspection requirement would be required to submit to the
Exchange written policies and procedures for systematic risk-based
surveillance of its branch offices, as defined in Phlx Rule 1025(e).
Proposed Phlx Rule 1025(f) would require that annual branch office
inspection programs include, at a minimum, testing and verification of
specified internal controls.\26\ Paragraph (d)(3) of Phlx Rule 1025
would provide that a member organization that complies with
requirements of the NYSE or the NASD that are substantially similar to
the requirements in Phlx Rules 1025(d), (e) and (f) will be deemed to
have met such requirements.
---------------------------------------------------------------------------
\26\ See proposed Phlx Rules 1025(e) and (f) which are modeled
after NYSE Rules 342.25 and 342.26.
---------------------------------------------------------------------------
In conjunction with the proposed changes to Phlx Rules 1025(d), (e)
and
[[Page 42644]]
(f), the Exchange proposes to add new Commentary .09 to Phlx Rule 1024
to define ``branch office'' in a way that is substantially similar to
the definition of branch office in NYSE Rule 342.10.
Proposed Phlx Rule 1024(g)(iv) would require a member organization
to designate a Chief Compliance Officer (CCO). Proposed Phlx Rule
1025(g)(v) would require each member organization's Chief Executive
Officer (CEO), or equivalent, to certify annually per subsection (A)
that the member organization has in place processes to: (1) Establish
and maintain policies and procedures reasonably designed to achieve
compliance with applicable Exchange rules and federal securities laws
and regulations; (2) modify such policies and procedures as business,
regulatory, and legislative changes and events dictate; and (3) test
the effectiveness of such policies and procedures on a periodic basis,
the timing of which is reasonably designed to ensure continuing
compliance with Exchange rules and federal securities laws and
regulations.
Proposed Phlx Rule 1025(g)(v) would further require that the CEO
attest the CEO has conducted one or more meetings with the CCO in the
preceding 12 months to discuss the compliance processes in proposed
Phlx Rule 1025(g)(v), that the CEO has consulted with the CCO and other
officers to the extent necessary to attest to the statements in the
certification, and the compliance processes are evidenced in a report,
reviewed by the CEO, CCO, and such other officers as the member
organization deems necessary to make the certification, that is
provided to the member organization's board of directors and audit
committee (if such committee exists).\27\
---------------------------------------------------------------------------
\27\ See proposed Phlx Rule 1025(g)(v) which is modeled after
NASD Rule 3013 and NYSE Rule 342.30(e).
---------------------------------------------------------------------------
Under proposed Phlx Rule 1025(b)(ii), a member, upon a customer's
written instructions, may hold mail for a customer who will not be at
his or her usual address for no longer than two months if the customer
is on vacation or traveling, or three months if the customer is going
abroad. This provision would help ensure that members that hold mail
for customers who are away from their usual addresses, do so only
pursuant to the customer's written instructions and for a specified,
relatively short period of time.\28\
---------------------------------------------------------------------------
\28\ See proposed Phlx Rule 1025(b)(ii) which is modeled after
NASD Rule 3110(i).
---------------------------------------------------------------------------
Proposed Phlx Rule 1025(b)(iii) would require that, before a
customers options order is executed, the account name or designation
must be placed upon the memorandum for each transaction. In addition,
only a qualified ROP may approve any changes in account names or
designations. The ROP also must document the essential facts relied
upon in approving the changes and maintain the record in a central
location. A member would be required to preserve any account
designation change documentation for a period of not less than three
years, with the documentation preserved for the first two years in an
easily accessible place, as the term ``easily accessible place'' is
used in Exchange Act Rule 17a-4.\29\ The Exchange believes the proposed
rule would help to protect account name and designation information
from possible fraudulent activity.\30\
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\29\ See 17 CFR 240.17a-4.
\30\ See proposed Phlx Rule 1025(b)(iii) which is modeled after
NASD Rule 3110(j).
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Phlx Rule 1027(e) allows member organizations to exercise time and
price discretion on orders for the purchase or sale of a definite
number of options contracts in a specified security. The Exchange
proposes to amend its Rule 1027(e) to limit the duration of this
discretionary authority to the day it is granted, absent written
authorization to the contrary. In addition, the proposed rule would
require any exercise of time and price discretion to be reflected on
the customer order ticket. The proposed one-day limitation would not
apply to time and price discretion exercised for orders effected with
or for an institutional account (as defined in the rule) pursuant to
valid Good-Till-Cancelled instructions issued on a ``not held'' basis.
The Exchange believes that investors will receive greater protection by
clarifying the time such discretionary orders remain pending.\31\
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\31\ See proposed Phlx Rule 1027(e) which is modeled after NASD
Rule 2510(d)(1).
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\32\ in general, and furthers the objectives of Section
6(b)(5), specifically,\33\ in that it is designed to perfect the
mechanism of a free and open market and the national market system,
protect investors and the public interest and promotes just and
equitable principles of trade. The proposal would achieve this by
enabling the Exchange to amend its rules to require member
organizations to integrate the responsibility for supervision of a
member organization's public customer options business into their
overall supervisory and compliance programs, and to strengthen member
organizations' supervisory procedures and internal controls as they
relate to a member's public customer options business.
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\32\ 15 U.S.C. 78f(b).
\33\ 15 U.S.C. 78f(b)(5).
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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 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 did not solicit comments or receive any 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 on 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. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File No. SR-Phlx-2008-53 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2008-53. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your
[[Page 42645]]
comments more efficiently, please use only one method. The Commission
will post all comments on the Commission's Internet Web site (https://
www.sec.gov/rules/sro.shtml). 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, 100 F Street, NE., Washington, DC 20549, on official
business days between the hours of 10 a.m. and 3 p.m. Copies of such
filing also will be available for inspection and copying at the
principal office of the Phlx. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-Phlx-2008-53 and should be submitted on or before August
12, 2008.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
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\34\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-16685 Filed 7-21-08; 8:45 am]
BILLING CODE 8010-01-P
