Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Philadelphia Stock Exchange, Inc. Amending the Net Capital Requirements in Rule 703

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-33692; File No. SR-Phlx-94-04]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the Philadelphia Stock Exchange, Inc. Amending the Net

Capital Requirements in Rule 703

February 28, 1994.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on January

28, 1994, the Philadelphia Stock Exchange (``Phlx'' 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 Phlx. The Commission is publishing this

notice to solicit comments on the proposed rule change from interested

persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The Phlx proposes to amend Rule 703 (Financial Responsibility and

Reporting) to correspond to recent Commission amendments to SEC Rule

15c3-1 (``SEC Net Capital Rule'').\1\ Pursuant to these amendments to

the SEC Net Capital Rule, all specialists, except options market

makers, who are currently exempt from the net capital requirements of

Rule 703, will be subject to a minimum net capital requirement of

$100,000.\2\ As a result, the Exchange believes that the amendments to

the SEC Net Capital Rule require the deletion of Phlx Rule 703(a)

(iii), (iv), and (v). Currently Rule 703 (a) (iii), (iv), and (v)

impose a minimum net liquid asset\3\ requirement of $50,000 for equity

specialists, $75,000 for options specialists, and $100,000 for firms

which are both equity and options specialists.

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\1\See Securities Exchange Act Release No. 32737 (August 11,

1993), 58 FR 43555 (August 17, 1993).

\2\In addition, for certain purposes under the SEC Net Capital

Rule, certain specialists will be exempt from the application of the

rules haircut and undue concentration charges with respect to their

specialty securities. Id.

\3\``Net liquid assets'' is defined in Phlx Rule 703(b).

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The Exchange also proposes to amend Rule 703 to require each member

organization and participant organization to notify the Exchange if it

fails to maintain the minimum net capital required by the SEC Net

Capital rule or it fails to maintain liquid assets in accordance with

Phlx Rule 703. Specifically, the Exchange is proposing to add a new

paragraph (v) to Phlx Rule 703(a) which would require a member

organization or participant organization to promptly notify the

Exchange if it ceases to be in compliance with the SEC Net Capital Rule

or Phlx Rule 703(a) (iii) or (iv) (i.e., former sections (a)(vi) or

(a)(vii)).

Lastly, the Phlx proposes to amend paragraph (c)(vi) of Rule 703 to

add the requirement that a floor broker's clearing agent guarantee

orders entrusted on the floor with that floor broker, in addition to

transactions and balances carried in the account.

The text of the proposed rule change is available at the Office of

the Secretary, Phlx, and at the Commission.

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 to 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

On August 11, 1993, the Commission adopted amendments to its rules

regarding minimum net capital requirements for broker-dealers.

Specifically, the amendments to the SEC Net Capital Rule make all

specialists, except options market makers, that previously were exempt

from this rule under subparagraph (b)(1), subject to the rule. The

amendments to the SEC Net Capital Rule will become effective on April

1, 1994.

The Phlx represents that the amendments to the SEC Net Capital Rule

will have the following effects on Phlx specialists: instead of the

current minimum net liquid assets requirements under Phlx Rule 703(a)

of $50,000 for equity specialists, $75,000 for options specialists, and

$100,000 for firms that act as both equity and options specialists, the

SEC's minimum net capital requirement of $100,000 for dealer's would

apply. As a result, existing paragraphs (iii)-(v) of Phlx Rule 703(a)

are proposed to be deleted. Certain aspects of both the SEC Net Capital

Rule and Rule 703 remain unchanged. Options market makers, who remain

exempt from the net capital rule, continue to be subject to the

financial requirements of Phlx Rule 703. New paragraph (a)(iii), which

was previously paragraph (a)(vi), requires $25,000 in net liquid assets

for market makers without a letter of guarantee; and new paragraph

(a)(iv), which was previously paragraph (a)(vii), requires market

makers with a letter of guarantee issued by a clearing member

organization to maintain positive equity. In addition, Rule 703(a)(ii)

continues to require net liquid assets of $25,000 upon admission.

With respect to the proposed notification requirement, new

paragraph (v) of Rule 703(a) would require notification to the Exchange

if a member organization or participant organization falls below the

net capital requirement of the SEC Net Capital Rule or paragraphs (iii)

or (iv) of Phlx rule 703(a).\4\ Currently, Commission Rule 17a-11

requires, among other things, prompt telegraphic notice to a broker-

dealer's designated examining authority, as well as the SEC, when a

broker-dealer falls below its minimum net capital requirement pursuant

to the SEC Net Capital Rule. This rule does not apply to options market

makers, because they are exempt from the SEC Net Capital Rule. The

Exchange's proposed notification provision would apply to all member

organizations and participant organizations, including options market

makers.

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\4\A similar rule is in effect at the Chicago Board Options

Exchange, Inc. (``CBOE''). See CBOE Rule 13.2.

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The Exchange believes that the proposed rule change is consistent

with Section 6 of the Act, in that it is designed to promote just and

equitable principles of trade, to prevent fraudulent and manipulative

acts and practices, and to protect investors and the public interest,

by amending Phlx Rule 703 to correspond to the Commission's recent

amendments to the SEC Net Capital Rule. The Exchange also believes that

the requirement that a floor brokers' clearing agent guarantee orders

entrusted on the floor with that floor broker should promote just and

equitable principles of trade as well as protect investors and the

public interest by promoting liquidity and confidence in the

credibility of floor broker orders, consistent with Section 6(b)(5) of

the Act. In addition, the Exchange believes that the proposed

notification requirement should prevent fraudulent and manipulative

acts and practices and protect investors and the public interest by

providing the Exchange with the ability to respond promptly to such

notification, especially respecting options market makers.

(B) Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed rule change will

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. 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 self-regulatory organization 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. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.

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 Section, 450 Fifth Street, NW.,

Washington, DC. Copies of such filing will also be available for

inspection and copying at the principal office of the above-mentioned

self-regulatory organization. All submissions should refer to the File

No. SR-Phlx-94-04 and should be submitted by March 25, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\5\

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\5\17 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-5000 Filed 3-3-94; 8:45 am]

BILLING CODE 8010-01-M