Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change by the Pacific Exchange, Inc. Relating to the Specialist Evaluation Pilot Program

[Federal Register Volume 64, Number 248 (Tuesday, December 28, 1999)]
[Notices]
[Pages 72712-72714]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-33636]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42248; File No. SR-PCX-99-46]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Pacific 
Exchange, Inc. Relating to the Specialist Evaluation Pilot Program

December 17, 1999.
    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 November 2, 1999, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. On 
December 6, 1999, the Exchange submitted Amendment No. 1 to the 
proposed rule change.\3\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons 
and to grant accelerated approval to the proposal, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Robert Pacileo, Staff Attorney, PCX, to 
Richard Strasser, Assistant Director, Division of Market Regulation, 
Commission, dated December 6, 1999 (``Amendment No. 1''). In 
Amendment No. 1, the Exchange requested permanent approval of the 
specialist evaluation pilot program on an accelerated basis.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule change

    The Exchange seeks permanent approval of its Specialist Evaluation 
Pilot Program.

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 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 III below. The PCX has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

[[Page 72713]]

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

1. Purpose
    On October 1, 1996, the Commission approved a nine month pilot 
program for evaluating PCX equity specialists using a number of 
criteria.\4\ On December 22, 1997, the Commission approved a one-year 
extension of the Exchange's pilot program for the evaluation of equity 
specialists.\5\ That rule change established an overall score and 
individual passing scores for specialists, replaced the ``Bettering the 
Quote'' criterion with a ``Price Improvement'' criterion, and lowered 
the weighting of the ``Specialist Evaluation Questionnaire'' criterion 
from 15% to 10%, so that Price Improvement could be given a weight of 
10%. Subsequently, on May 8, 1998, the Commission approved an Exchange 
proposal to codify these changes.\6\ The Commission later approved 
another one-year extension of the Exchange's pilot program to January 
1, 2000.\7\ The program currently measures specialist performance under 
the following criteria, among others, trading between the quote, 
executions in size greater than the National Best Bid or Offer, Price 
Improvement, and answers to specialist evaluation questionnaire.
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    \4\ See Exchange Act Release No. 37770 (October 1, 1996), 61 FR 
52820 (October 8, 1996).
    \5\ See Exchange Act Release No. 39477 (December 22, 1997), 62 
FR 68334 (December 30, 1997).
    \6\ See Exchange Act Release No. 39976 (May 8, 1998), 63 FR 
26834 (May 14, 1998).
    \7\ See Exchange Act Release No. 40817 (December 21, 1998), 63 
FR 71993 (December 30, 1998).
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    The Exchange is now proposing to make the program permanent. On 
October 29, 1999, the Exchange submitted a required report to the 
Commission responding to particular questions set forth in the December 
1997 approval order.\8\ The Exchange believes that this program is 
operating successfully and without any problems and, on that basis, the 
Exchange believes that permanent approval of the Specialist Evaluation 
Pilot Program is warranted.
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    \8\ The December 1998 approval order required the Exchange to 
submit a report containing the information described in the December 
1997 order. See Release No. 40817, supra note 6. The December 1997 
approval order requested a report containing data on (1) the number 
of specialists who, as a result of failing the overall passing score 
in any one quarterly evaluation, appeared before the Equity 
Allocation Committee (``EAC''); (2) the number of specialists who, 
as a result of failing the overall passing score in any three out of 
four quarters, appeared before the EAC; (3) the number of 
specialists who, as a result of failing any individual criterion 
passing score for at least two consecutive quarters, appeared before 
the EAC; (4) the number of specialists who, as a result of scoring 
in the bottom 10% in any one quarterly evaluation, appeared before 
the EAC; and (5) the number of specialists who, as a result of 
scoring in the bottom 10% in any two out of four consecutive 
quarterly evaluations, appeared before the EAC. The report included 
any type of restrictions that were imposed on these specialists, any 
further action that was taken against these specialists, and any 
situation in which the restrictions were not imposed due to 
mitigating circumstances. The report also included the number of 
specialists for whom formal proceedings were initiated and the 
results of such proceedings, and the number of registered 
specialists who scored in the bottom 10% of all registered 
specialists on his or her trading floor in the overall program.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) \9\ of the Act, in general, and furthers the objectives of 
Section 6(b)(5),\10\ in particular, in that it is designed to promote 
just and equitable principles of trade.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposal is 
consistent with the Act. Persons making written submissions should file 
six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0609. Copies 
of the submission, all subsequent amendments, all written statements 
with respect to the proposed rule change that are filed with the 
Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying at the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
PCX. All submissions should refer to File No. SR-PCX-99-46 and should 
be submitted by January 18, 2000.

IV. Commission's Findings and Order Granting Accelerated Approval 
of Proposed Rule Change

    The Commission believes that specialists play a crucial role in 
providing stability, liquidity, and continuity to the trading of 
stocks. Among the obligations imposed upon specialists under the Act is 
the maintenance of fair and orderly markets in their designated 
securities. To ensure that specialists fulfill these obligations, it is 
important that the Exchange conduct effective oversight of their 
performance. The Commission believes that the PCX's specialist 
evaluation program can play an important role regarding to this 
oversight.
    The Exchange's specialist evaluation pilot program has undergone 
several changes since it was first implemented in 1996. However, the 
Commission believes that the pilot program in its current form has 
generated, and will continue to generate, sufficiently, detailed 
information to enable the Exchange to make accurate assessments of 
specialist performance. For example, the overall passing score and 
individual criterion passing scores establish minimum adequate 
performance thresholds. These thresholds allow the Exchange to identify 
specialists who are not operating at an acceptable level of 
performance. In its October 1999 report, the Exchange noted that all 
specialists attained the overall passing score in the first three 
quarters of 1999. The report also noted, however, the number of 
specialists who did not attain a passing score in one or more of the 
individual criteria for the specified period of time (e.g., four out of 
five quarters). The report specified the restrictions placed on the 
failing specialists (e.g., no new allocations).
    For the reasons discussed above, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations under the Act applicable to a national 
securities exchange and, in particular, with the requirements of 
Section 6(b) \11\ of the Act. Specifically, the Commission believes the 
proposal is consistent with the Section 6(b)(5) \12\ requirement that 
the rules of an exchange be designed to facilitate transaction in 
securities, and to remove impediments to and perfect the mechanism of a 
free and open market and a national market system. The criteria used to 
assess the

[[Page 72714]]

performance of PCX equity specialists (e.g., price improvement and 
trading in size greater than the NBBO) are appropriate means of helping 
to determine whether a PCX equity specialist in performing its 
specialist duties to maintain a fair and orderly market.\13\
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ In approving this rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    Further, the Commission finds that the proposal is consistent with 
the Act, particularly section 11(b) \14\ of the Act and Rule 11b-1 \15\ 
under the Act, which allows securities exchanges to permit exchange 
members to register as specialists, providing that the exchange 
requires the specialist to assist in maintaining a fair and orderly 
market. As discussed, the means PCX has chosen to assess those duties 
and the means of sanctioning specialists who fail to meet their 
obligations (e.g., restrictions on further stock allocations) are 
appropriate and consistent with the Act.
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    \14\ 15 U.S.C. 78k(b).
    \15\ 17 CFR 240.11b-1.
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice of the filing in the Federal Register. The Exchange has stated 
that the program is operating successfully and without any problems. 
Accelerated approval will permit the Specialist Evaluation program to 
continue on an uninterrupted basis. In addition, the rule change that 
implemented the pilot program in its current form and the rule change 
that subsequently extended pilot program were noticed for the full 
statutory period and the Commission received no comments on the 
proposed rule changes. Accordingly, the Commission does not believe 
that the current filing raises any regulatory issues not raised in the 
previous filings.
    It is therefore ordered, pursuant to Section 19(b)(2) \16\ of the 
Act, that the proposed rule change (SR-PCX-99-46), as amended, is 
approved on an accelerated basis.

    \16\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-33636 Filed 12-27-99; 8:45]
BILLING CODE 8010-01-M