Self-regulatory organizations; proposed rule changes: Pacific Exchange, Inc.,

[Federal Register: January 12, 2004 (Volume 69, Number 7)]

[Notices]

[Page 1771-1773]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr12ja04-119]

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49018; File No. SR-PCX-2003-49]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 by the Pacific Exchange, Inc. Eliminating the Requirement that Market Makers With No Public Accounts and Who Do Not Solicit Public Accounts, Maintain Certain Information Barriers

January 5, 2004.

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 September 16, 2003, the Pacific Exchange, Inc. (``PCX'' or ``Exchange''), through its subsidiary, PCX Equities,

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Inc. (``PCXE''), filed with the Securities and Exchange Commission (``Commission'') the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the PCX. On December 16, 2003, the Exchange amended the proposal.\3\ The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons.

\1\ 15 U.S.C. 78s(b)(1).

\2\ 17 CFR 240.19b-4.

\3\ See December 15, 2003 letter from Steven B. Matlin, Senior Counsel, Regulatory Policy, PCX, to Nancy J. Sanow, Assistant Director, Division of Market Regulation, Commission, and attachment (``Amendment No.1''). Amendment No. 1 replaces and supersedes the original proposed rule change in its entirety.

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

   The Exchange, through PCXE, proposes to eliminate the Information Barrier requirement set forth in PCXE Rule 7.26 in the limited circumstances where a Market Maker, which also functions as a General Authorized Trader,\4\ engages solely in proprietary trading and does not, under any circumstance, maintain customer accounts or solicit or accept orders from or on behalf of public customers. The text of the proposed rule change is available at the PCX and at the Commission.

   \4\ See PCXE Rule 1.1(o) (definition of ``General Authorized Trader'').

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

   In its filing with the Commission, PCX 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. PCX has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements.

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

      1. Purpose

         The Information Barrier requirements set forth in PCXE Rule 7.26 provide critical safeguards to prevent the use or communication of material non-public information by market making firms (and affiliated broker-dealers) to inappropriately benefit other business activities in which they may engage, such as investment banking or options market making. Such information could relate to, for example, the Market Maker's customer and directed order flow or other information obtained by the Market Maker in the course of its business. Such barriers help to ensure that market making firms do not illegally take advantage of or communicate such information to benefit their other business activities, to the detriment of investors, customers, issuers and the integrity of the market.

         For business reasons, certain registered Market Makers, or broker- dealers with which such Market Makers are affiliated, engage solely in proprietary trading. Accordingly, such firms do not maintain public customer accounts or solicit or accept orders or funds (and hence, would not accept directed order flow) from or on behalf of public customers, including broker-dealers and other securities firms. Under such circumstances, because the market making firm does not engage in any other business activities that may benefit from information obtained by the Market Maker in the course of the firm's market making activities, the Exchange believes that the concerns noted above which form the basis for the Information Barrier requirements set forth in Rule 7.26 do not apply. \5\ Nevertheless, Rule 7.26 would require such a firm to develop and implement Information Barriers.

         \5\ The proposed rule change is designed to accommodate the needs of these market makers. The current rule did not foresee the business conditions that currently exist which necessitate this change.

         Under such circumstances, the Exchange believes that an Information Barrier requirement is not necessary and would impose an undue burden on the market making firm. Accordingly, this rule filing proposes to eliminate this requirement in the limited circumstances where a market making firm and its affiliated broker-dealer do not maintain public customer accounts, nor solicit or accept public customer orders, including from broker-dealers and other securities firms (and does not accept directed order flow or utilize any order type which presupposes the participation of public customers), and engage solely in proprietary trading. The Exchange believes that this limited modification is consistent with the purposes of the rule. However, if the market making firm or its affiliated broker-dealer subsequently decides to maintain public customer accounts or solicit public customer accounts (and directed order flow or order types which presuppose the participation of public customers), then the requirements of Rule 7.26 would apply. Further, this limited modification would not alter or adjust any other obligation imposed on Market Markers, including those set forth in PCXE Rules 7.21 (Obligations of Market Maker Authorized Traders) \6\ and 7.23 (General Obligations of Market Makers).

         \6\ See PCXE Rule 1.1(v) (definition of ``Market Maker Authorized Trader'').

      2. Statutory Basis

         The Exchange believes that the proposal furthers the objectives of Section 6(b)(5) of the Act \7\ in that it is designed to promote just and equitable principles of trade and to protect investors and the public interest.

         \7\ 15 U.S.C. 78(b)(5).

   2. Self-Regulatory Organization's Statement on Burden on Competition

      The PCX does not believe that the proposed rule change will impose any burden on competition.

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

      Written comments were neither solicited nor received with respect to the proposed rule change.

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

   Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the Exchange consents, the Commission will:

   (A) By order approve such proposed rule change, or

   (B) Institute proceedings to determine whether the proposed rule change should be disapproved.

4. Solicitation of Comments

   Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. Comments may also be submitted electronically at the following e-mail address: rule-comments@sec.gov. All comment letters should refer to File No. SR-PCX-2003-49. This file number should be included on the subject line if e-mail is used. To help the

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   Commission process and review your comments more efficiently, comments should be sent in hardcopy or by e-mail but not by both methods. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Room. Copies of such filing will also be available for inspection and copying at the principal office of the PCX. All submissions should refer to File No. SR-PCX-2003-49 and should be submitted by February 2, 2004.

   For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\8\

   \8\ 17 CFR 200.30-3(a)(12).

   Jill M. Peterson, Assistant Secretary.

   [FR Doc. 04-523 Filed 1-9-04; 8:45 am]

   BILLING CODE 8010-01-P