[Federal Register: March 31, 2006 (Volume 71, Number 62)]
[Notices]
[Page 16389-16396]
[DOCID:fr31mr06-106]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53548; File No. SR-Phlx-2005-42]

Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Notice of Filing of Proposed Rule Change and Amendment Nos. 1, 2 and 3
Thereto Relating to Establishment of a Neutral ``Referee''

March 24, 2006.
    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 June 10, 2005, the Philadelphia Stock Exchange, Inc. (``Phlx'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the Phlx.
On June 20, 2005, the Phlx filed Amendment No. 1 to the proposed rule
change.\3\ On February 16, 2006, the Phlx filed Amendment No. 2 to the
proposed rule change.\4\ On March 10, 2006, the Phlx filed Amendment
No. 3 to the proposed rule change.\5\ The Commission is publishing this
notice to solicit comments on the proposed rule change, as amended,
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Phlx indicated that the Exchange's
Board of Governors approved the proposed amendment to Exchange By-
Law Article X, Section 10-9 for filing with the Commission on June
15, 2005.
    \4\ Amendment No. 2 superseded and replaced in their entirety
the orginal filing and Amendment No. 1 thereto.
    \5\ In Amendment No. 3, the Phlx made minor changes to the
purpose section and rule text of the proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Phlx proposes to amend: (1) Exchange By-Law Article X, Section
10-9, Audit Committee; (2) Exchange Rule 124, Disputes; Exchange Rule
1092, Obvious Errors; (3) Option Floor Procedure Advice (``OFPA'') F-
27, Floor Official Rulings--Options; OFPA G-2, Trading Rotations, Halts
or Reopenings; and (4) Equity Floor Procedure Advice (``EFPA'') F-27,
Floor Official Rulings--Equity. The proposal would establish a neutral
``Referee,'' an Exchange employee or independent contractor who would
have authority to review and rule on appeals from Floor Official
rulings concerning the nullification and adjustment of trades, and
authorize the Referee to make other initial rulings currently made only
by Floor Officials. The text of the proposed rule change is set forth
below. [Brackets] indicate deletions; italics indicate new text.

PHILADELPHIA STOCK EXCHANGE, INC. BY-LAWS

* * * * *

Article X

Standing Committees

    Sec. 10-1.-10-8. No change.

Audit Committee

    Sec. 10-9. (a)-(c) No change.
    (d) The Audit Committee shall recommend for appointment by the
Board of Governors a qualified Exchange employee or independent
contractor, the Referee, to review Floor Official rulings concerning
the nullification and/or adjustment of transactions, and to act in the
capacity of a Floor Official respecting initial rulings concerning
requests for relief from the requirements of certain Exchange rules,
Equity Floor Procedure Advices and Option Floor Procedure Advices. The
Audit Committee shall determine that the Referee has sufficient
expertise in the area of securities trading to act in the capacity of a
Floor Official respecting initial rulings concerning requests for
relief and to conduct reviews of Floor Official rulings, and possesses
sufficient knowledge of Exchange rules and the relevant sections of the
Securities Exchange Act of 1934, as amended, and the rules thereunder.
* * * * *

PHILADELPHIA STOCK EXCHANGE, INC. RULES OF THE BOARD OF GOVERNORS

* * * * *

Disputes

    Rule 124. (a) Disputes occurring on and relating to the trading
floor, if not settled by agreement between the members interested,
shall be settled, if practicable, by vote of the members knowing of the
transaction in question; if not so settled, they shall be settled by a
Floor Official [summoned to the trading crowd] designated by Market
Surveillance to rule on the dispute.
    In issuing decisions for the resolution of trading disputes, Floor
Officials [may] shall institute the course of action deemed to be most
fair to all parties under the circumstances at the time. A Floor
Official may direct the execution of an order on the floor, or adjust
the transaction terms or participants to an executed order on the
floor. However, two Option Floor Officials may nullify a transaction if
they determine the transaction to have been in violation of

Rules 1014 (Obligations and Restrictions Applicable to Specialist and
ROTs), 1015 (Quotation Guarantees), 1017 (Priority and Parity at
Openings in Options), 1033 (Bids and Offers) or 1080 (AUTOM). Two
Equity Floor Officials may nullify a transaction if they determine the
transaction to have been in violation of Rules 110 (Bids and Offers--
Precedence), 111 (Bids and Offers--Binding), 118 (Bids and Offers
Outside Best Bid and Offer), 119 (Precedence of Highest Bid), 120
(Precedence of Offers at Same Price), 126 (Crossing), 203 (Agreement of
Specialists), 218 (Customer Order Receives Priority), 229 (PACE
System), 232 (Handling Orders When the Primary Market is Not Open for
Free Trading), or 455 (Short Sales). This Rule 124(a) shall not apply
to options transactions that are the result of an Obvious Error (as
defined in Rule 1092). Options transactions that are the result of an
Obvious Error shall be subject to the provisions and procedures set
forth in Rule 1092.
    (b) All rulings rendered by Floor Officials or the Referee (as
defined in Commentary .02 to this Rule) are effective immediately and
must be complied with promptly. Failure to promptly comply with an
initial Floor Official ruling or a Referee [ruling] decision upon
review of a Floor Official ruling concerning a trading dispute may
result in referral to the Business Conduct Committee. Failure to
promptly comply with other Floor Official rulings issued pursuant to
Order and Decorum Regulations (Rule 60) or Floor Procedure Advices
(Rule 970) and not concerning a trading dispute may result in an
additional violation.
    (c) Review--Floor Official [R] rulings issued pursuant to Order and
Decorum Regulations are reviewable pursuant to Rule 60. Floor Official
rulings issued pursuant to Floor Procedure Advices are reviewable
pursuant to Rule 970. All other Floor Official rulings are reviewable
pursuant to paragraph (d) of this Rule.
    (d) Review of Floor Official Rulings (Trading Disputes)--[Options]
All Floor Official rulings are reviewable by [a] the Referee [minimum
of three members of the Sub-Committee on Rules and Rulings, a sub-
committee of the standing committee, which shall be empowered to review
such rulings, or the Chairperson of the standing committee (or his
designee) if three Sub-Committee members cannot be promptly convened.
Equity Floor Official Rulings are reviewable by a minimum of three
members of the Floor Procedure Committee, or the Chairperson of the
Floor Procedure Committee (or his designee) if three members cannot be
promptly convened. This constitutes a Review Panel for Floor Official
rulings. Any person who appeals an Options Floor Official ruling
concerning a trading dispute and loses will be subject to a $250.00 fee
upon a finding by the Review Panel, that such appeal is frivolous].
    (i) Market Surveillance staff must be advised within 15 minutes of
a Floor Official's ruling that a party to such ruling has determined to
appeal from such ruling to the Referee. The Exchange may establish the
procedures for the submission of a request for a review of a Floor
Official ruling. Floor Official rulings concerning the nullification or
adjustment of transactions may be sustained, overturned or modified by
the Referee [a majority vote of the Review Panel members present]. In
making a determination, the [Review Panel] Referee may consider facts
and circumstances not available to the ruling Floor Official as well as
action taken by the parties in reliance on the Floor Official's ruling
(e.g., cover, hedge and related trading activity). [Decisions of the
Review Panel will be considered final decisions of a standing floor
committee and may be appealed to the Exchange's Board of Governors
pursuant to Exchange By-Law Article XI.]
    (ii) All decisions made by the Referee in connection with initial
rulings on requests for relief and with the review of a Floor Official
ruling pursuant to this paragraph (d) shall be documented in writing
and maintained by the Exchange in accordance with the record keeping
requirements set forth in the Securities Exchange Act of 1934, as
amended, and the rules thereunder.
    (iii) A member or member organization seeking the Referee's review
of a Floor Official ruling shall be assessed a fee of $250.00 for each
Floor Official ruling to be reviewed that is sustained and not
overturned or modified by the Referee.
    (iv) Decisions of the Referee concerning (A) the review of Floor
Official rulings relating to the nullification or adjustment of
transactions, and (B) initial requests for relief shall be final and
may not be appealed to the Exchange's Board of Governors.
    (v) As appropriate, the Chairman of the Options Committee, Foreign
Currency Options Committee, or of the Floor Procedure Committee, or
their respective designees, shall refer a Referee that fails to make
any ruling in accordance with Exchange rules to the Audit Committee for
possible disciplinary action, including removal. A Floor Official that
fails to make any ruling in accordance with Exchange rules may be
subject to possible disciplinary action by the Exchange.
    (vi) Failure to promptly comply with a Floor Official or Referee
decision under this Rule may result in referral to the Business Conduct
Committee.
    Commentary:
    .01. No change.
    .02. The Referee.
    (a) An Exchange employee or independent contractor, the Referee,
shall be appointed by the Board of Governors on the recommendation of
the Audit Committee to review Floor Official rulings concerning the
nullification and adjustment of transactions in accordance with Rule
124(d), and to act in the capacity of a Floor Official respecting
initial rulings concerning requests for relief from the requirements of
Exchange Rules relating to:
    (i) bid/ask differentials pursuant to Rule 1014(c) and Options
Floor Procedure Advice (``OFPA'') F-6;
    (ii) disengagement of Exchange automatic execution systems pursuant
to Rule 1080(e) and OFPA A-13;
    (iii) the determination pursuant to Rule 1080(c)(i) that quotes in
options on the Exchange or another market or markets are subject to
relief from the firm quote requirement set forth in the SEC Quote Rule,
as defined in Exchange Rule 1082(a)(iii) (the ``Quote Rule''), and that
quotes in options on the Exchange or another market or markets
previously subject to such relief are no longer subject to such relief;
and
    (iv) trading halts, openings and re-openings pursuant to Rules
1017, 1047 and 1047A and OFPAs A-12, A-14 and G-2.
    (b) The Audit Committee shall recommend for appointment by the
Board of Governors any other Exchange employee(s) or independent
contractor(s) to function as the Referee in the event that the Referee
is unavailable (``Backup Referees'') as set forth in Commentary .02(f)
below. The Exchange's rules and procedures applicable to the Referee
shall also apply to Backup Referees, and any reference to the Referee
in these rules shall be deemed to include Backup Referees.
    (c) The Referee shall be an employee of the Exchange or an
independent contractor designated by the Audit Committee. The Referee
shall not be a member of the Exchange nor affiliated with any Exchange
member or member organization and shall not be an immediate family
member of any Exchange member. The Referee shall not be a debtor or
creditor of any

Exchange member or member organization.
    (d) The Audit Committee shall have supervision over the Referee,
and, based on the advice of the Exchange's General Counsel and Human
Resources management, may recommend the level of compensation of the
Referee to the Board of Governors, and may establish other conditions
of employment of the Referee. The Audit Committee or its designee shall
conduct annual performance evaluations, and shall consider any written
complaints from members and member organizations concerning the
Referee. The Audit Committee shall not have the authority to overrule
or modify any ruling made by the Referee. The Audit Committee may
terminate the employment of the Referee for good cause shown, and may
otherwise discipline the Referee as appropriate for good cause shown.
    (e) The Exchange's General Counsel or his or her designee may
assign additional duties and responsibilities to the Referee not
related to Referee rulings. Notwithstanding the foregoing, the Referee
shall not:
    (i) participate in any Exchange enforcement action, investigation,
market surveillance activity, hearing (other than as a witness) or
other activity related to disciplinary matters;
    (ii) issue citations for violations of Exchange rules;
    (iii) rule on any matter concerning order and decorum pursuant to
Exchange Rule 60 and the regulations thereunder; and
    (iv) prepare, research, draft, review, or file a proposed rule
change with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934 and the rules thereunder concerning the
Exchange's disciplinary rules.
    (f) If the Referee is unavailable or unable to make a ruling for
any reason (including, without limitation, absence from the Exchange
trading floor, vacation, illness, or in the process of making another
Referee ruling), Market Surveillance staff will immediately notify the
Exchange's General Counsel, or his/her designee, who would designate a
Backup Referee to make such a ruling.
    (g) The Referee shall make fair and impartial rulings in accordance
with Exchange rules and By-Laws.
* * * * *

PHILADELPHIA STOCK EXCHANGE, INC. OPTIONS RULES

* * * * *

Obvious Errors

    Rule 1092. The Exchange shall either nullify a transaction or
adjust the execution price of a transaction that results in an Obvious
Error as provided in this Rule.
    (a)-(e) No change.
    (f) Request for Review. If a party affected by a determination made
under this Rule so requests within the time permitted, [a Review Panel
of Floor Officials] the Referee will review decisions made under this
Rule in accordance with Exchange Rule 124(d). A request for review
under this paragraph must be made within thirty minutes after a party
receives verbal notification of a final determination by the Floor
Official(s) under this Rule, except that if such notification is made
after 3:30 p.m. Eastern Time, either party has until 9:30 a.m. Eastern
Time on the next trading day to request a review. Such a request for
review must be in writing or otherwise documented. The [Review Panel]
Referee shall review the facts and render a decision on the day of the
transaction, or the next trade day in the case where a request is
properly made after 3:30 p.m. on the day of the transaction or where
the request is properly made the next trade day.
* * * * *

PHILADELPHIA STOCK EXCHANGE, INC. OPTIONS FLOOR PROCEDURE ADVICES AND
ORDER AND DECORUM REGULATIONS

* * * * *

F-27 Floor Official Rulings-Options

    Floor Officials are empowered to render rulings on the trading
floor to resolve trading disputes occurring on and respecting
activities on the trading floor. All rulings rendered by Floor
Officials are effective immediately and must be comp[i]lied with
promptly. Failure to promptly comply with a ruling concerning a trading
dispute may result in referral to the Business Conduct Committee.
Failure to promptly comply with other rulings issued pursuant to Order
and Decorum Regulations or Floor Procedure Advices and not concerning a
trading dispute may result in an additional violation. Floor Officials
need not render decisions in any instance where the request for a
ruling was not made within a reasonable period of time. A Floor
Official should not render a decision or authorize a citation where
such Floor Official was involved in or affected by the dispute, as well
as in any situation where the Floor Official is not able to objectively
and fairly render a decision.
    Floor Officials shall endeavor to be prompt in rendering decisions.
However, in any instance where a Floor Official has determined that the
benefits of further discovery as to the facts and circumstances of any
matter under review outweigh the monetary risks of a delayed rulings,
the Floor Official may determine to delay rendering the ruling until
such time as that further discovery is completed. In issuing decisions
for the resolution of trading disputes, Floor Officials shall institute
the course of action deemed by the ruling [f]Floor Official to be more
fair to all parties under the circumstances at the time. A Floor
Official may direct the execution of an order on the floor, o[f]r
adjust the transaction terms or participants to an executed order on
the floor. However, two Floor Officials may nullify a transaction if
they determine the transaction to have been in violation of Rules 1014
(Obligations and Restrictions Applicable to specialist and ROTs), 1015
(Quotation Guarantees), 1017 (Priority and Parity at Openings in
Options), 1033 (Bids and Offers) or 1080 (AUTOM).
    [A minimum of three members of the Sub-Committee on Rules and
Rulings, a sub-committee of the standing committee, or the Chairperson
of the standing committee (or his designee) if three Sub-Committee
members cannot be promptly convened, shall be empowered by the standing
committee to review Floor Official rulings (``Review Panel''). Requests
for a review must be submitted to the Director of the Market
Surveillance Department of the Exchange (or his designee) within 15
minutes from the time the contested ruling was rendered. Any person who
appeals a Floor Official ruling concerning a trading dispute and loses
will be subject to a $250.00 fee upon a finding by the Review Panel
that such appeal is frivolous. The Review Panel shall endeavor to meet
on the matter as soon as practicable after notice of a request for a
review of a Floor Official ruling. Floor Official rulings may be
sustained, overturned or modified by a majority vote of the Review
Panel members present. In making a determination, the Review Panel may
consider facts and circumstances not available to the ruling Floor
Official as well as action taken by the parties in reliance on the
Floor Official's ruling (e.g., cover, hedge, and related trading
activity). Decisions of the Review Panel will be considered final
decisions of the standing committee and may be appealed to the
Exchange's Board of Governors pursuant to Exchange By-Law Article XI.
Neither Floor Official

rulings nor Review Panel decisions reviewing Floor Official rulings
preclude a person from also availing upon the Exchange's Arbitration
facilities.]
    Exchange staff may determine that a Floor Official is ineligible to
participate in a particular ruling where it appears that such Floor
Official has a conflict of interest. For purposes of this Rule, and
without limitation, a conflict of interest exists where a Floor
Official: (a) Is directly or indirectly affiliated with a party seeking
a Floor Official ruling; (b) is a participant or is directly or
indirectly affiliated with a participant in a transaction that is the
subject of a Floor Official ruling; (c) is a debtor or creditor of a
party seeking a Floor Official ruling; or (d) is an immediate family
member of a party seeking a Floor Official ruling. Exchange staff may
consider other circumstances, on a case-by-case basis, in determining
the eligibility or ineligibility of a particular Floor Official to
participate in a particular ruling due to a conflict of interest.
    All Floor Official rulings concerning the adjustment and
nullification of transactions are reviewable by the Referee (as defined
in Rule 124).
    (i) Market Surveillance staff must be advised within 15 minutes of
a Floor Official's ruling that a party to such ruling has determined to
appeal from such ruling to the Referee. The Exchange may establish the
procedures for the submission of a request for a review of a Floor
Official ruling. Floor Official rulings concerning the nullification or
adjustment of transactions may be sustained, overturned or modified by
the Referee. In making a determination, the Referee may consider facts
and circumstances not available to the ruling Floor Official as well as
action taken by the parties in reliance on the Floor Official's ruling
(e.g., cover, hedge and related trading activity).
    (ii) All decisions made by the Referee in connection with initial
rulings on requests for relief and with the review of a Floor Official
ruling pursuant to Rule 124(d) shall be documented in writing and
maintained by the Exchange in accordance with the record keeping
requirements set forth in the Securities Exchange Act of 1934, as
amended, and the rules thereunder.
    (iii) A member or member organization seeking the Referee's review
of a Floor Official ruling shall be assessed a fee of $250.00 for each
Floor Official ruling to be reviewed that is sustained and not
overturned or modified by the Referee.
    (iv) Decisions of the Referee concerning (A) the review of Floor
Official rulings relating to the nullification or adjustment of
transactions, and (B) initial requests for relief shall be final and
may not be appealed to the Exchange's Board of Governors.
    (v) As appropriate, the Chairman of the Options Committee, Foreign
Currency Options Committee, or of the Floor Procedure Committee, or
their respective designees, shall refer a Referee that fails to make
any ruling in accordance with Exchange rules to the Audit Committee for
possible disciplinary action, including removal. A Floor Official that
fails to make any ruling in accordance with Exchange rules may be
subject to possible disciplinary action by the Exchange.
    (vi) Failure to promptly comply with a Floor Official or Referee
decision under this Rule may result in referral to the Business Conduct
Committee.
    FINE SCHEDULE
    $250.00
* * * * *

G-2 Trading Rotations, Halts or Reopenings

    (a)-(b) No change.
    (c) Halts: Trading on the Exchange in any option may be halted with
the approval of [one] two Floor Officials, with the concurrence of a
Market Surveillance officer, whenever trading on the primary market in
underlying securities representing more than 10% of the current index
value is halted or suspended. Trading shall be halted whenever [the
Exchange] two Floor Officials, with the concurrence of a Market
Surveillance officer, deem[s] such action appropriate in the interests
of a fair and orderly market and to protect investors. Among the
factors that may be considered are the following:
    (i)-(iii) No change.
    (d)-(f) No change.
* * * * *

PHILADELPHIA STOCK EXCHANGE, INC. EQUITY FLOOR PROCEDURE ADVICES AND
ORDER & DECORUM REGULATIONS

* * * * *

F-27 Floor Official Rulings--Equity

    Floor Officials are empowered to render rulings on the trading
floor to resolve disputes occurring on and respecting activities on the
trading floor. All rulings rendered by Floor Officials are effective
immediately and must be compiled with promptly. Failure to promptly
comply with a ruling concerning a trading dispute may result in
referral to the Business Conduct Committee. Failure to promptly comply
with other rulings issued pursuant to Order and Decorum Regulations of
Floor Procedures Advices and no[r]t concerning a trading dispute may
result in an additional violation. Floor Officials need not render
decisions in any instance where the request for a ruling was not made
within a reasonable period of time. A Floor Official should not render
a decision or authorize a citation where such Floor Official was
involved in or affected by the dispute, as well as in any situation
where the Floor Official is not able to objectively and fairly render a
decision.
    Floor Officials shall endeavor to be prompt in rendering decisions.
However, in any instance where a Floor Official has determined that the
benefits of further discovery as to the facts and circumstances of any
matter under review outweigh the monetary risks of a delayed ruling,
the Floor Official may determine to delay rendering the ruling until
such time as that further discovery is completed. In issuing decisions
for the resolution of trading disputes, Floor Officials shall institute
the course of action deemed by the ruling Floor Official to be most
fair to all parties under the circumstances at the time. A Floor
Official may direct the execution of an order on the floor, or adjust
the transaction terms or participants to an executed order on the
floor. However, two Floor Officials may nullify a transaction if they
determine the transaction to have been in violation of Rules 110 (Bids
and Offers--Precedence), 111 (Precedence of Highest Bid), 120
(Precedence of Offers at Same Price), 126 (Crossing), 203 (Agreement of
Specialists), 218 (Customer's Order Receives Priority), 229 (PACE
System), 232 (Handling Orders When the Primary Market is Not Open for
Free Trading), or 455 (Short Sales).
    [Equity Floor Official Rulings are reviewable by a minimum of three
members of the Floor Procedure Committee, or the Chairperson of the
Floor Procedure Committee (or his designee) if three members cannot be
promptly convened (``Review Panel''). Requests for a review must be
submitted to the Director of the Market Surveillance Department of the
Exchange (or his designee) within 15 minutes from the time the
contested ruling was rendered. The Review Panel shall endeavor to meet
on the matter as soon as practicable after notice of a request for a
review of a Floor Official ruling. Floor Official rulings may be
sustained, overturned or modified by a majority vote of the Review
Panel members present. In making a determination, the Review Panel may

consider facts and circumstances not available to the ruling Floor
Official as well as action taken by the parties in reliance on the
Floor Official's ruling (e.g., cover, hedge, and related trading
activity). Decisions of the Review Panel will be considered final
decisions of a standing floor committee and may be appealed to the
Exchange's Board of Governors pursuant to Exchange By-Law Article XI.
Neither Floor Official rulings nor Review Panel decisions reviewing
Floor Official rulings preclude a person from also availing upon the
Exchange's Arbitration facilities.]
    All Floor Official rulings concerning the adjustment and
nullification of transactions are reviewable by the Referee (as defined
in Rule 124).
    (i) Market Surveillance staff must be advised within 15 minutes of
a Floor Official's ruling that a party to such ruling has determined to
appeal from such ruling to the Referee. The Exchange may establish the
procedures for the submission of a request for a review of a Floor
Official ruling. Floor Official rulings concerning the nullification or
adjustment of transactions may be sustained, overturned or modified by
the Referee. In making a determination, the Referee may consider facts
and circumstances not available to the ruling Floor Official as well as
action taken by the parties in reliance on the Floor Official's ruling
(e.g., cover, hedge and related trading activity).
    (ii) All decisions made by the Referee in connection with initial
rulings on requests for relief and with the review of a Floor Official
ruling pursuant to Rule 124(d) shall be documented in writing and
maintained by the Exchange in accordance with the record keeping
requirements set forth in the Securities Exchange Act of 1934, as
amended, and the rules thereunder.
    (iii) A member or member organization seeking the Referee's review
of a Floor Official ruling shall be assessed a fee of $250.00 for each
Floor Official ruling to be reviewed that is sustained and not
overturned or modified by the Referee.
    (iv) Decisions of the Referee concerning (A) the review of Floor
Official rulings relating to the nullification or adjustment of
transactions, and (B) initial requests for relief shall be final and
may not be appealed to the Exchange's Board of Governors.
    (v) As appropriate, the Chairman of the Options Committee, Foreign
Currency Options Committee, or of the Floor Procedure Committee, or
their respective designees, shall refer a Referee that fails to make
any ruling in accordance with Exchange rules to the Audit Committee for
possible disciplinary action, including removal. A Floor Official that
fails to make any ruling in accordance with Exchange rules may be
subject to possible disciplinary action by the Exchange.
    (vi) Failure to promptly comply with a Floor Official or Referee
decision under this Rule may result in referral to the Business Conduct
Committee.
    NO FINE SCHEDULE APPLICABLE.
* * * * *

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 Phlx 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 Phlx 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
    The purpose of the proposed rule change is to improve the process
of resolving trading disputes and Floor Official rulings by creating a
new regulatory position on the Exchange, who would be either an
Exchange employee or an independent contractor known as a neutral
``Referee.'' The Referee would have the authority to: (1) Review and
rule on appeals from Floor Official rulings concerning the
nullification or adjustment of trades; and (2) act in the capacity of a
Floor Official respecting initial rulings concerning requests for
relief from the requirements of certain Exchange rules, Equity Floor
Procedure Advices,\6\ and Option Floor Procedure Advices.\7\
---------------------------------------------------------------------------

    \6\ The Exchange clarified that a Referee may also have the
authority to act in the capacity of a Floor Official respecting
initial rulings concerning requests for relief from the requirements
of Equity Floor Procedure Advices. Telephone conversation between
Richard Rudolph, Vice President and Counsel, Phlx, and Jennifer
Dodd, Special Counsel, Division of Market Regulation, Commission, on
March 10, 2006 (``Telephone Conversation'').
    \7\ Floor Officials would retain their authority to make such
initial rulings. The Referee would simply have the same authority as
a Floor Official concerning such initial rulings.
---------------------------------------------------------------------------

    Current Floor Official Program. Pursuant to Exchange By-Law Article
VIII, Floor Officials, as designees \8\ of the Chairmen of the Options
Committee,\9\ Floor Procedure Committee,\10\ and Foreign Currency
Options Committee,\11\ respectively, are authorized to administer the
provisions of Exchange By-Laws and Rules of the Exchange pertaining to
the respective trading floors and the immediately adjacent premises of
the Exchange. They may impose penalties as applicable, for breaches of
the Exchange's rules or regulations relating to order, decorum, health,
safety and welfare on the respective trading floors. Additionally, they
may rule to nullify, or adjust the terms of, executed trades under
specific and limited conditions contained in Exchange rules, and may
grant relief from certain requirements of on-floor members and member
organizations if authorized to do so by rule.
---------------------------------------------------------------------------

    \8\ The designees of the respective floor Committee chairmen are
generally members of the respective committees and subcommittees
thereof.
    \9\ The Options Committee has general supervision of the
dealings of members on the options trading floor. See Exchange By-
Law Article X, Section 10-20.
    \10\ The Floor Procedure Committee has general supervision of
the dealings of members on the equity trading floor. See Exchange
By-Law Article X, Section 10-16.
    \11\ The Foreign Currency Options Committee has general
supervision of the dealings of members on the foreign currency
options trading floor. See Exchange By-Law Article X, Section 10-17.
---------------------------------------------------------------------------

    Currently, Floor Official rulings and appeals for review from such
rulings are governed by Exchange Rule 124, Disputes. Rule 124(d)
provides that Options Floor Official rulings may be appealed to a
Review Panel consisting of three members of the Options Subcommittee on
Rules and Rulings (the ``Subcommittee''),\12\ or the Chairperson of the
standing committee (or his designee) if three Subcommittee members
cannot be promptly convened, and Equity Floor Official rulings may be
appealed to a Review Panel consisting of three members of the Floor
Procedure Committee, or the Chairperson of the Floor Procedure
Committee (or his designee) if three members cannot be promptly
convened.\13\ Decisions of the Review Panel are considered final
decisions of the standing committee and may be appealed to an Advisory

Committee on Appeals of the Board of Governors.
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    \12\ Each Standing and Special Committee may appoint such
subcommittees as it may deem necessary for the efficient discharge
of its duties. See Exchange By-Law Article X, Section 10-3(b). The
Options Committee has appointed the Subcommittee to review and
recommend the adoption of new rules or the amendment of current
rules to the full Options Committee, and to discuss rulings made on
the floor of the Exchange by Floor Officials.
    \13\ The Exchange clarified the current process for Equity Floor
Official rulings. Telephone Conversation.
---------------------------------------------------------------------------

    Floor Officials are also authorized to rule on requests for relief
from the requirements of certain rules, including, without limitation,
quote spread parameters,\14\ and disengagement of Exchange automatic
execution systems under extraordinary circumstances.\15\
---------------------------------------------------------------------------

    \14\ Relief from the established bid/ask differentials may be
granted upon the receipt of an approval of two Floor Officials. See
OFPA F-6.
    \15\ See Exchange Rule 1080(e).
---------------------------------------------------------------------------

    The Referee. The Referee would be either an Exchange employee or an
independent contractor who is not an employee of the Exchange who has
entered into an employment contract with the Exchange for a fixed
period of time. The Referee would be appointed by the Exchange's Board
of Governors pursuant to the recommendation of the Audit Committee.
Candidates for the Referee position would be recruited in the same
fashion as candidates for other Exchange positions through the
Exchange's Human Resources Department. After conducting an interview
process with the various candidates, the Audit Committee would
recommend its selection to the Board of Governors, who would then vote
on the Audit Committee's recommendation. Upon the Commission's approval
of this proposal, the Referee would be appointed to the new position.
    The proposal would provide that decisions of the Referee concerning
both (i) the review of Floor Official rulings relating to the
nullification or adjustment of transactions, and (ii) and initial
requests for relief, would be final and may not be appealed to the
Exchange's Board of Governors.\16\ The Referee would be authorized to
sustain, overturn, or modify rulings made by Floor Officials and to
make initial rulings in certain instances (as described below).
---------------------------------------------------------------------------

    \16\ The Exchange clarified that a Referee may review Floor
Official rulings relating to the nullification or adjustment of
transactions. Telephone Conversation.
---------------------------------------------------------------------------

    Because the Referee would be authorized to review Floor Official
decisions to nullify or adjust trades on both the Exchange's equity and
options floors, the proposed rule change includes conforming amendments
to OFPA F-27 and to EFPA F-27 concerning such reviews of Floor Official
rulings, as discussed more fully below.
    As stated above, Floor Officials are authorized to rule on requests
for relief from the requirements of certain rules, including, without
limitation, quote spread parameters and disengagement of Exchange
automatic execution systems under extraordinary circumstances. The
proposed rule change would authorize the Referee to make such rulings
in the same manner as Floor Officials.
    In order to ensure the neutrality of the Referee, the Referee would
report to the Exchange's Audit Committee,\17\ which would have
supervision over the Referee. The Exchange's General Counsel or his/her
designee would be responsible for purely administrative matters such
as, without limitation, personnel issues and vacation. Additionally,
based on the advice of the Exchange's General Counsel and Human
Resources management, the Audit Committee may recommend the level of
compensation of the Referee to the Board of Governors, and may
establish other conditions of employment of the Referee. The Audit
Committee or its designee would conduct annual performance evaluations,
and would consider any written complaints from members and member
organizations concerning the Referee. The Audit Committee would not,
however, have the authority to overrule or modify any ruling made by
the Referee. The Audit Committee would have the authority to terminate
the employment of the Referee for good cause shown, and to otherwise
discipline the Referee as appropriate for good cause shown.
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    \17\ See proposed Exchange By-Law Article X, Section 10-9.
---------------------------------------------------------------------------

    The Referee would have jurisdiction over all Exchange trading
floors and systems, except with regard to issues of order and decorum
pursuant to Exchange Rule 60. The Options Committee would continue to
have jurisdiction over order and decorum issues on the options floor;
\18\ the Floor Procedure Committee would continue to have jurisdiction
over order and decorum issues on the equity floor; \19\ and the Foreign
Currency Options Committee would continue to have jurisdiction over
order and decorum issues on the foreign currency options floor.\20\
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    \18\ See Exchange By-Law Article X, Section 10-20.
    \19\ See Exchange By-Law Article X, Section 10-16.
    \20\ See Exchange By-Law Article X, Section 10-17.
---------------------------------------------------------------------------

    The proposed rule change would provide that the Audit Committee
would recommend for appointment by the Board of Governors other
Exchange employee(s) or independent contractor(s) to function as the
Referee in the event that the Referee is unavailable (``Backup
Referees''). The Exchange's rules and procedures, including
qualifications, applicable to the Referee would also apply to Backup
Referees, and any reference to the Referee in the proposed rules would
be deemed to include Backup Referees. This is to ensure that a Backup
Referee would be available if the Referee is not available due to, for
example, a ruling on another matter that is in progress, vacation,
illness, etc.
    The proposal also would provide that the Market Surveillance staff
would assign available Floor Officials to rule on disputes. The
Exchange believes that this provision should ensure the neutrality of
Floor Officials by assigning the next available Floor Official to rule
on a particular matter.
    Qualifications of the Referee. Under the proposal, the Referee
would be required to have sufficient expertise in the area of trading
to act in the capacity of a Floor Official concerning requests for
relief and to conduct reviews of Floor Official rulings concerning the
nullification and adjustment of trades. The Referee must possess
sufficient knowledge of Exchange rules and the relevant sections of the
Act (and the rules thereunder) to administer the Referee's
responsibilities and authority.
    In order to ensure neutrality, the proposal would provide that the
Referee may not be a member of the Exchange, may not be directly or
indirectly affiliated with any Exchange member or member organization,
and may not be an immediate family member of any Exchange member. The
Referee may not be a debtor or creditor of any Exchange member or
member organization.
    Duties of the Referee. The primary responsibility of the Referee
would be to rule on appeals from Floor Official decisions concerning
the nullification and adjustment of trades, and to have the same
authority as Floor Officials concerning rulings on member requests for
relief from the requirements of certain rules. The Referee would
replace the current three-member Review Panel, which is currently
comprised of Floor Officials, and would be authorized to review Floor
Official rulings concerning the adjustment of the terms of a trade, or
the nullification or ``bust'' of trades on appeal, and either uphold,
overturn, or modify appealed Floor Official rulings pursuant to
proposed amended Rule 124. If the Referee is unavailable or unable to
make a ruling for any reason (including, without limitation, absence
from the Exchange trading floor, vacation, illness, or in the process
of making another Referee ruling), Market Surveillance staff will
immediately notify the Exchange's General Counsel, or his designee, who
would designate a Backup Referee to make such a ruling.
    The proposed rule change would provide that the Exchange's General
Counsel or his or her designee may assign additional duties and

responsibilities to the Referee not related to Referee rulings. In
order to ensure the Referee's neutrality respecting any matter on which
he or she is to rule, and to avoid the possibility that the Referee
could be biased as a result of his or her knowledge of any pending
investigation or disciplinary action concerning a person that is a
party to a dispute or that requests relief from the requirements of an
Exchange rule, the proposal would prohibit the Referee from: (i)
Participating in any Exchange enforcement action, investigation, market
surveillance activity, hearing (other than as a witness) or other
activity related to disciplinary matters; (ii) issuing citations for
violations of Exchange rules; (iii) ruling on any matter concerning
order and decorum pursuant to Exchange Rule 60 and the regulations
thereunder; and (iv) preparing, researching, drafting, reviewing, or
filing of a proposed rule change with the Commission pursuant to the
Act and the rules thereunder concerning the Exchange's disciplinary
rules.
    The proposed rules would require the Referee to make fair and
impartial decisions in accordance with Exchange rules and By-Laws.
    Procedures for Review of Floor Official Rulings. Proposed amended
Rule 124(d), OFPA F-27, and EFPA F-27 would require that Market
Surveillance staff be advised within 15 minutes of a Floor Official
ruling concerning the nullification or adjustment of a trade that a
party to such ruling has determined to seek the Referee's review of
such ruling. The purpose of the notification requirement is to provide
reasonably prompt notice to Market Surveillance and to participants in
a trade subject to the rule that such ruling is subject to appeal and
that the process set forth in the proposed rule has begun, and
ultimately a decision to sustain, overturn, or modify the initial Floor
Official decision concerning the trade will be made.\21\
---------------------------------------------------------------------------

    \21\ This is consistent with Exchange Rule 1092, Obvious Errors,
which establishes a similar notice period. Under the proposal, Floor
Official rulings made pursuant to Rule 1092 would be reviewed by the
Referee, provided that the party seeking the review so requests
within the time permitted. See proposed Rule 1092(f).
---------------------------------------------------------------------------

    As appropriate, the Chairman of the Options Committee, the Foreign
Currency Options Committee or of the Floor Procedure Committee, or
their respective designees,\22\ would be required to refer a Referee
that fails to make any ruling in accordance with Exchange rules to the
Audit Committee for possible disciplinary action, including removal. A
Floor Official that fails to make any ruling in accordance with
Exchange rules may be subject to possible disciplinary action by the
Exchange.
---------------------------------------------------------------------------

    \22\ The Exchange clarified that the Chairman of the Foreign
Currency Options Committee, or his designee, would also be required
to refer a Referee to the Audit Committee for disciplinary action,
if appropriate. Telephone Conversation.
---------------------------------------------------------------------------

    In order to minimize the likelihood of frivolous appeals from Floor
Official rulings, a member or member organization seeking the Referee's
review of a Floor Official ruling concerning the nullification or
adjustment of a trade would be assessed a fee of $250.00 for each Floor
Official ruling they seek to have reviewed if the Referee upholds the
Floor Official decision. No fee would be assessed to the member or
member organization seeking a review if the Floor Official decision is
overturned or modified. This fee is currently imposed on options floor
appeals that are found by the Review Panel to be frivolous.\23\ The
Exchange believes that the proposed rule concerning the $250.00 fee
provides an objective standard for imposition of the fee (i.e., the fee
would be imposed in situations where the Referee sustains a Floor
Official ruling on the nullification or adjustment of a trade). Thus,
the Referee would not have the discretion to impose the fee that Floor
Officials currently have, and Exchange members and member organizations
would have actual notice of the circumstances giving rise to the
imposition of the fee.
---------------------------------------------------------------------------

    \23\ This fee is not currently imposed on equity floor appeals.
Telephone Conversation.
---------------------------------------------------------------------------

    Rulings on Requests for Relief. Proposed Rule 124, Commentary
.02(a) would authorize the Referee to act in the capacity of a Floor
Official respecting initial rulings concerning requests for relief from
the requirements of Exchange Rules relating to: (i) Bid/ask
differentials pursuant to Rule 1014(c) and OFPA F-6; (ii) disengagement
of Exchange automatic execution systems pursuant to Rule 1080(e) and
OFPA A-13; (iii) the determination that quotes in options on the
Exchange or another market or markets are subject to relief from the
firm quote requirement pursuant to Exchange Rule 1080(c)(i); and (iv)
trading halts, openings and re-openings pursuant to Rules 1017, 1047
and 1047A and OFPAs A-12, A-14 and G-2.
    Rule 1014(c) and OFPA F-6 set forth the maximum allowable bid/ask
differentials, or quote widths, that may be disseminated by specialists
and ROTs on the Exchange, depending on the price of the series to be
quoted. The Exchange believes that these requirements can have the
unintended consequence of requiring those making markets to quote at
prices that are unnecessarily narrow, thereby exposing them to great
risk if markets move quickly.\24\ Therefore, as stated in OFPA F-6, two
Floor Officials may grant relief from these differentials during times
of peak market activity where options markets and/or the market for
securities underlying the option move quickly. Under the proposal, the
Referee would have the same authority as a Floor Official to make such
a ruling.
---------------------------------------------------------------------------

    \24\ See, e.g., Securities Exchange Act Release No. 50728
(November 23, 2004), 69 FR 69982 (December 1, 2004) (SR-Phlx-2004-
74) (Notice of Filing and Immediate Effectiveness of Proposed Rule
Change and Amendment No. 1 by the Philadelphia Stock Exchange, Inc.
Relating to $5 Bid/Ask Differentials).
---------------------------------------------------------------------------

    Rule 1080(e) and OFPA A-13 provide that, in the event extraordinary
circumstances with respect to a particular class of options exist, two
Floor Officials may determine to disengage AUTO-X with respect to that
option, in accordance with Exchange procedures. The rule and OFPA go on
to describe the procedures to be followed to bring about such
disengagement. Under the proposal, the Referee would have the same
authority as a Floor Official to make such a determination.
    Rule 1080(c)(i) provides that the Chairman of the Exchange's
Options Committee or his designee (or if neither is available, two
Floor Officials) may determine that quotes in options on the Exchange
or another market or markets are subject to relief from the firm quote
requirement set forth in the SEC Quote Rule,\25\ (thereby excluding
such quotes from the Exchange's calculation of the National Best Bid/
Offer (``NBBO'')) and that quotes in options on the Exchange or another
market or markets previously subject to such relief are no longer
subject to such relief. The Referee would have the same authority as a
Floor Official in making determinations concerning the above enumerated
rules that require Floor Official rulings.
---------------------------------------------------------------------------

    \25\ 17 CFR 242.602.
---------------------------------------------------------------------------

    Rules 1017, 1047 and 1047A and OFPAs A-12, A-14 \26\ and G-2 govern
trading halts, openings and re-openings on the Exchange.\27\ Under the
proposal, the Referee would have the same authority as a Floor Official
to make rulings in the capacity of a Floor Official

concerning rules that require Floor Official approval, as enumerated
above.
---------------------------------------------------------------------------

    \26\ The Exchange clarified that the Referee would also have the
same authority as a Floor Official to make rulings in the capacity
of a Floor Official under OFPA A-14. Telephone Conversation.
    \27\ For consistency, the Exchange is proposing a conforming
amendment to OFPA G-2, as described below.
---------------------------------------------------------------------------

    Referee's Decision Final. As stated above, currently decisions of
the Review Panel are considered final decisions of the standing
committee and may be appealed to an Advisory Committee on Appeals of
the Board of Governors. Initial rulings to grant or deny relief from
the requirements of certain rules are not currently considered final
decisions of a standing committee and are thus not currently appealable
to the Exchange's Board of Governors.
    The proposed rule change would provide that decisions of the
Referee concerning (A) the review of Floor Official rulings relating to
the nullification or adjustment of transactions, and (B) initial
requests for relief, shall be final and may not be appealed to the
Exchange's Board of Governors. The Exchange does not believe that these
are the types of decisions that are appropriate for such appeals
particularly because the need for speedy resolution and certainty are
important, whereas other standing committee decisions are often
prospectively applied.
    This provision would not operate to preclude any aggrieved member
or member organization from proceeding with any other legal remedy to
which such member or member organization might be entitled (e.g.,
arbitration or appeal to the Commission if allowable by law).
    Obvious Errors. The Exchange also proposes to amend Exchange Rule
1092, Obvious Errors. Currently, Rule 1092(f), Request for Review,
provides that a Review Panel of Floor Officials will review decisions
made under the Rule in accordance with Exchange Rule 124(d). For
consistency, the Exchange proposes to amend Rule 1092(f) to provide
that the Referee will review such decisions.
    Conforming Amendment to OFPA G-2. As a housekeeping matter, the
Exchange proposes to amend OFPA G-2(c), to reflect that trading on the
Exchange in any option may be halted with the approval of two Floor
Officials, with the concurrence of a Market Surveillance officer.
Current Rule 1047A(c) includes this provision, and the Exchange
proposes to amend OFPA G-2 for consistency.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section
6(b) of the Act \28\ in general, and furthers the objectives of Section
6(b)(5) of the Act \29\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest, by establishing a neutral Referee to rule on appeals from
Floor Official decisions and to rule initially on requests for relief
from certain requirements under Exchange rules. The Exchange further
believes that the proposal is consistent with 6(b)(1) of the Act,\30\
in that the proposal is designed to enable the Exchange to continue to
comply, and to enforce compliance by its members and persons associated
with its members, with the provisions of the Act, the rules and
regulations thereunder, and the rules of the Exchange by improving the
Exchange's Floor Official process and improving the review process of
Floor Official rulings.
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78f(b).
    \29\ 15 U.S.C. 78f(b)(5).
    \30\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

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

    No written comments were either solicited or 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 Phlx 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, as amended, is consistent with the Act. Comments may be
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to<EMAIL_ADDRESS>Please include

File Number SR-Phlx-2005-42 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2005-42. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://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. Copies of the 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 -2005-42 and should be submitted on or before April 21, 2006.

    For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\31\
---------------------------------------------------------------------------

    \31\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-4701 Filed 3-30-06; 8:45 am]

BILLING CODE 8010-01-P