Self-Regulatory Organizations; Pacific Stock Exchange; Notice of Proposed Rule Change Relating to Chinese Wall Procedures for Specialists and Specialist Firms

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-33751; File No. SR-PSE-93-36]

Self-Regulatory Organizations; Pacific Stock Exchange; Notice of

Proposed Rule Change Relating to Chinese Wall Procedures for

Specialists and Specialist Firms

March 10, 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 December

29, 1993, the Pacific Stock Exchange, Inc. (``PSE'' 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 self-regulatory organization. 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 PSE is proposing to adopt a set of Chinese Wall procedures

relating to Exchange specialists and specialist firms. The test of the

proposed rule change is as follows:

Rule 4.19(a). A functional separation must be established (1)

between a specialist firm and any associated approved person; and

(2) between a specialist and any associated integrated member

organization. The approved person or integrated member organization

(collectively referred to as an ``affiliated upstairs firm'') must

establish functional separation (a ``Chinese Wall'') as appropriate

to its operation and further establish, maintain and enforce written

procedures reasonably designed to prevent the misuse of material,

non-public information, which includes review of employee and

proprietary trading, memorization and documentation of procedures,

substantive supervision of interdepartmental communications by the

Exchange specialist firm's Compliance Department and procedures

concerning proprietary trading when the firm is in possession of

material, non-public information. The Exchange specialist firm or

associated integrated member organization must obtain the prior

written approval of the Exchange that it has complied with the

requirements above in establishing functional separation as

appropriate to the operation and that it has established proper

compliance and audit procedures to ensure the maintenance of the

functional separation. A copy of these Chinese Wall procedures, and

any amendments thereto, must be filed with the Exchange's Financial

Compliance Department.

(b) The following are the minimum procedural and maintenance

requirements:

(1) The specialist's book must be kept confidential in

accordance with Rule 5.29(d).

(2) The affiliated upstairs firm can have no influence on

specific specialist trading decisions.

(3) Material, non-public corporate or market information

obtained by the affiliated upstairs firm from the issuer may not be

made available to the specialist.

(4) Clearing and margin financing information regarding the

specialist may be routed only to employees engaged in such work and

managerial employees engaged in overseeing operations of the

affiliated upstairs firm and specialist entities.

(c) Information that may be made available to others.

(1) A broker associated with an affiliated upstairs firm may

make available to the specialist only the market information that he

or she would make available to an unaffiliated specialist in the

normal course of his or her trading and ``market probing'' activity.

(2) A specialist may make known to a broker associated with an

affiliated upstairs firm only has the information about market

conditions in specialty stocks that he or she would make available

in the normal course of specializing to any other broker and in the

same manner as it would make such information available to any other

broker. The specialist may make such market information available

only upon request of the broker of the affiliated upstairs firm and

may not provide such information on its own initiative.

(3) An affiliated upstairs firm can popularize a specialty stock

provided it makes adequate disclosure about the existence of

possible conflicts of interest.

(d) A specialist who becomes privy to material, non-public

information must communicate that fact promptly to his or her firm's

compliance officer or other designated official. The specialist

shall seek guidance from the compliance officer or other designated

official as to what procedures the specialist should follow after

receipt of such information or such other action that should be

taken. Appropriate records shall be maintained by the compliance

officer or other designated official. The record should include a

summary of the information received by the specialist and a

description of the action taken by the compliance officer or other

designated official. If the ``book'' is given up to another member

of the specialist firm who is not in possession of the information

or an independent specialist firm, the book must be transferred in a

neutral fashion to ensure that the transfer itself does not disclose

the material, non-public information and the Exchange must be

immediately informed and a record kept of the time the specialist

reacquired the book reflecting acknowledgement by the compliance

officer that the reacquisition was appropriate.

(e) The Exchange has established the following procedures to

monitor compliance with this rule:

(1) Examination of the Chinese Wall procedures established by

Exchange specialist firms.

(2) Surveillance of proprietary trades effected by an affiliated

upstairs firm and its affiliated specialist or specialist firm.

Accordingly, the Exchange will conduct periodic examinations of

the specialist firm's Chinese Wall procedures to ensure that a

functional separation between the affiliated upstairs firm and the

specialist or specialist firm has been created and thereafter

maintained. The Exchange will also monitor the trading activities of

affiliated upstairs firms and affiliated specialists in the firms'

specialty stock in order to monitor the possible trading while in

possession of material, non-public information through the periodic

review of trade and comparison reports generated by the Exchange,

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 self-regulatory organization

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 self-regulatory organization

has prepared summaries, set forth is 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

The purpose of the proposed rule change is to require approved

persons or integrated member organizations to establish functional

separation as appropriate to their operations and further establish,

maintain and enforce written procedures reasonably designed to prevent

the misuse of material, non-public information. The proposed rule

further requires that a copy of such procedures be provided to the

Exchange for review and approval, and sets forth specific guidelines

for member firms to follow in adopting, maintaining and enforcing

Chinese Wall procedures.

2. Statutory Basis

The proposed rule change is consistent with Section 6(b) of the

Act, in general, and Section 6(b)(5), in particular, in that it is

designed to promote just and equitable principles of trade and to

protect investors and the public interest.

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 that is 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

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 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 the 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 at the

Commission's Public Reference Section, 450 Fifth Street, NW.,

Washington, DC 20549. Copies of such filing will also be available for

inspection and copying at the principal office of the PSE. All

submissions should refer to File No. SR-PSE-93-36 and should be

submitted by April 7, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-6245 Filed 3-16-94; 8:45 am]

BILLING CODE 8010-01-M