SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 39298 / November 5, 1997 Admin. Proc. File No. 3-9076 ____________________________________________________ : In the Matter of the Application of : : REVCON, INCORPORATED : 111 El Brillo Way : Palm Beach, FL 33480 : : For Review of Action Taken by : : THE OPTIONS CLEARING CORPORATION : ____________________________________________________: OPINION OF THE COMMISSION REGISTERED CLEARING AGENCY -- REVIEW OF DENIAL OF MEMBERSHIP Membership Standards Failure to Meet Conditions to Membership Registered clearing agency denied broker-dealer's application for membership because broker-dealer failed to comply with conditions imposed for membership. Held, review proceeding is dismissed. APPEARANCES: Howard M. Rudolph, of Weiss & Handler, P.A., for Revcon, Incorporated. Paul E. Dengel and Janet Angstadt, of Schiff Hardin & Waite, for The Options Clearing Corporation. Appeal filed: September 4, 1996 Last brief received: January 6, 1997 I. Revcon Incorporated ("Revcon" or the "Firm"), a registered broker- dealer, appeals from the decision of The Options Clearing Corporation ("OCC") denying its application for membership. The OCC found that Revcon was not in compliance with certain requirements imposed as a condition to membership. We base our findings on an independent review of the record. II. Revcon operates as a market maker on the Chicago Board Options Exchange, Inc. ("CBOE"). <(1)> Revcon primarily engages in the trading of index options. The Firm originally maintained two offices, one in Florida and another in New York. Both of these offices were located in homes owned by Revcon's President, Gregory Papadopoulos. The Florida office was designated as Revcon's main office and was used from Labor Day until Memorial Day. The New York office was used for the remainder of the year. During the period at issue here, the Firm had four employees. Papadopoulos was responsible for oversight of all trading decisions, position balancing, and collateral and risk management. Claire Papadopoulos, Revcon's Secretary and Vice-President, was responsible for bookkeeping functions, including accounts payable and bank reconciliations. Tom Tiernan, a trader, served as Revcon's registered nominee at the CBOE and David Bickel served as the Firm's floor trader at the Chicago Mercantile Exchange. On June 6, 1995, in order to become a self-clearing firm, Revcon filed an application for membership with the OCC. For the next year, in connection with its authority and responsibilities as a registered clearing agency, as specified in Section 17A of the Securities Exchange Act of 1934 ("Exchange Act"), <(2)> the OCC sought information from Revcon demonstrating that the Firm could discharge its functions as a clearing member. The OCC focused its inquiry on issues relating to Revcon's personnel, operations, financial position, and business plan. During this period, the OCC attempted to obtain from Revcon, among other things, financial documentation and information with respect to the Firm's trading and options risk management strategies. <(3)> Over the year-long <(1)> Revcon also is a member of the American Stock Exchange, Inc. ("AMEX"). Revcon's AMEX membership was inactive during the OCC's review of this matter because Revcon's clearing firm was not an AMEX member. <(2)> 15 U.S.C.  78q-1. Exchange Act Section 17A provides, among other things, that the rules of a clearing agency must be designed to assure the safeguarding of securities and funds in its control or for which it is responsible and to protect investors and the public. A registered clearing agency is authorized to deny or condition participation of any person that does not meet the rules of the clearing agency governing financial responsibility, operational capacity, experience, or competence. <(3)> For example, on June 9, 1995, the OCC staff requested that Revcon, among other things: 1) execute a facilities management agreement with First Options of Chicago ("First Options") setting forth the specific managed services to be provided; 2) employ a qualified (continued...) ======END OF PAGE 2====== period of negotiation between the OCC and Revcon, Revcon furnished only a portion of the requested documents and information. In particular, Revcon declined to furnish much of the options risk management information requested. Throughout the membership process, Revcon pressed the OCC staff to present the Firm's application for membership to the Membership/Margin Committee (the "Committee"). Revcon also expressed concern that the application was being stalled. The OCC staff, however, stated that it had deferred "the presentation of Revcon's application for clearing membership in order to give Revcon an opportunity to address significant concerns . . . ." Ultimately, at Revcon's insistence, the OCC staff notified Revcon, by letter dated December 20, 1995, that it would present the Firm's application to the Committee, but that it would recommend that the OCC disapprove Revcon's membership application. The Committee met in late January 1996 to review Revcon's membership application. The Committee determined that Revcon's personnel and operating structure did not satisfy the OCC's standards for operational capacity, experience, and competence. In addition, the Committee stated that it did not have the benefit of an on-site examination <(4)> and therefore could not assess the impact of changes to the Firm's business that Revcon had suggested in response to the OCC staff's varied concerns. <(5)> The Committee recommended to the OCC Board of <(3)>(...continued) "Limited-Principal-Financial and Operations" ("FINOP") if the facilities management agreement with First Options did not provide for maintenance of the Firm's books and records; 3) obtain its Designated Examining Authority's consent to Revcon's membership in the OCC; 4) submit a FOCUS Part II report for the month ended May 31, 1995 and a second pro forma report reflecting any changes in capitalization and positions should Revcon become a member; 5) submit balance sheets and income statements for March and April 1995; 6) submit year-to-date income statements through May 31, 1995; and 7) authorize the OCC to request funds from Revcon's clearing bank account. <(4)> Revcon initially told the OCC staff that it was not prepared for an on-site examination. Revcon subsequently requested an on-site examination the week before the Committee's January meeting, but the OCC was unable to accommodate this request. <(5)> Revcon, for example, had agreed to secure a permanent office in Florida and proposed that Papadopoulos manage the Florida office on an off-site basis from Memorial Day to Labor Day. Revcon had proposed to hire Michael (continued...) ======END OF PAGE 3====== Directors ("Board") that Revcon's application for membership be disapproved. Revcon, in response, requested an opportunity to address the Committee at its next meeting. Before that meeting, the OCC staff secured Revcon's agreement to perform an on-site examination of Revcon. <(6)> At that examination, the staff questioned Papadopoulos repeatedly about Revcon's anticipated trading strategy and how the Firm would control its risk. Papadopoulos did not provide specific responsive information. <(7)> For instance, in <(5)>(...continued) E. Lewitt, a person with no previous options operational experience, to oversee operational functions at Revcon. Under this proposal, Lewitt also would continue his employment with Harch Capital Management, Inc. as Executive Vice-President and General Counsel. In addition, Revcon proposed to hire as FINOP, on a temporary basis, Joseph Sipkin. Revcon estimated that Sipkin would devote approximately two hours a month to his duties as FINOP and advised that Sipkin would continue as a partner with an accounting firm located in New York. Revcon also had proposed that Papadopoulos would assume FINOP duties within two months of Revcon becoming an OCC member, and notified the OCC that it intended to reactivate its AMEX market maker trading activities. <(6)> Between the two Committee meetings Revcon and the OCC staff continued to communicate by telephone and by letter. In one telephone conversation Papadopoulos suggested that he, in fact, might not employ Lewitt. The OCC staff responded by advising the Firm of the "heightened need" to verify site and personnel arrangements, given the apparently fluid nature of Revcon's business plan. In addition, in a letter dated February 1, 1996, the OCC staff reminded Revcon that each time the Firm modified its proposed structure the staff was required to verify the modification and assess its impact. <(7)> The OCC staff informed Revcon that a review of the Firm's actual positions over several months revealed an average daily margin requirement of $1.39 million with a range from $396 thousand to $2.736 million. The staff then questioned how the Firm proposed to meet the funding requirements on days when the margin requirement reached the top of this range, given the Firm's proposed $1.6 million capitalization. Papadopoulos responded that the OCC's review had yielded an inaccurate daily margin range since the OCC (continued...) ======END OF PAGE 4====== response to questions about Revcon's historic trading positions and anticipated trading positions at the OCC, Papadopoulos stated that "this line of questions really infringes a little bit on our ability to be profitable traders . . . ." Papadopoulos stated, when pressed further about what type of positions Revcon intended to maintain with the OCC, that "[t]he answer is, our position will be whatever we deem would be the position that would maximize our returns . . . ." Similarly, in response to questions concerning Revcon's risk analysis, Papadopoulos stated that Revcon addressed several parameters in assessing risk but did not "care to divulge . . . the more esoteric things of our pricing models." Papadopoulos thereafter addressed the Committee at its March 28, 1996 meeting. He informed the Committee of the changes Revcon had made to its personnel and operating structure in response to the staff's concerns. Papadopoulos also submitted additional documentation, including resumes of proposed employees and an agreement between Harch Capital Management Inc. and Revcon for leased office space. These submissions attempted to address concerns raised about the adequacy of Revcon's personnel and facilities. <(8)> Subsequently, on April 9, 1996, the Committee informed Revcon that it would recommend to the Board that Revcon be admitted to membership, provided that Revcon meet certain conditions by July 24, 1996. Specifically, the Committee recommended that Revcon be required to: 1) provide financial reports reflecting compliance with all membership standards for the three calendar months preceding the calendar month in which Revcon sought to have its membership activated; 2) submit documentation confirming that Revcon had hired a full-time Operations Manager from the candidates identified; 3) submit an executed agreement for a bookkeeping and record maintenance system; <(7)>(...continued) staff did not have access to all of Revcon's records, including activity in other accounts that Papadopoulos asserted typically held hedged positions. The OCC staff then requested copies of account statements for those other accounts, but Revcon never supplied them. <(8)> Papadopoulos also informed the Committee that he had been told by First Options that the firm no longer wished to retain Revcon's business because Revcon's trading strategies were too risky. Papadopoulos asserted, however, that his difficulties with First Options arose because that firm had recruited two of Revcon's former employees. Papadopoulos offered his opinion that Revcon's trading practices were not risky and attempted to demonstrate this to the Committee. ======END OF PAGE 5====== 4) submit written authorization for Papadopoulos and certain other personnel to fund the Firm's settlement account and purchase U.S. Treasury Bills on behalf of the Firm; 5) submit documentation executed by the Firm's custodial bank agreeing to accept instructions on Revcon's behalf from Papadopoulos and certain other personnel; 6) submit written authorization for a specified employee to execute margin forms on Revcon's behalf; 7) agree in writing to provide the OCC with at least three days advance notice of any material change in Revcon's site or staffing arrangements and agree not to implement such changes without Committee approval should the Committee notify Revcon it intends to review the matter; 8) obtain the consent of Revcon's Designated Examining Authority ("DEA") to the Firm's commencing operation as an OCC clearing member; 9) deposit $283,000 as an initial contribution to OCC's non-equity clearing fund; and 10) deposit initial margin of $6.3 million (calculated by applying 150% of OCC's standard margin requirement to Revcon's positions for settlement on March 15, 1996). <(9)> The Committee specified that this last proposed condition responded directly to Revcon's financial position. The Committee further recommended that the OCC Chairman require that Revcon maintain margin on deposit with the OCC in an amount equal to the greater of $6.3 million or 150% of OCC's standard margin requirement on positions carried with the OCC, until such time as the Chairman determined that those margin requirements were no longer necessary. The Committee lastly recommended that, if Revcon did not comply with the specified conditions by July 24, 1996, the OCC immediately disapprove Revcon's membership application. On receipt of the Committee's recommendation, the Chairman advised that, if Revcon became a member, he would invoke OCC Rule 609 and require Revcon to make an initial margin deposit of $6.3 million. On April 25, 1996, Revcon conveyed to the OCC the Firm's "shock" at the recommendation that Revcon make a $6.3 million margin deposit. Revcon <(9)> Initial margin was imposed pursuant to the OCC Chairman's authority under OCC Rule 609. Rule 609 states, in general, that the Chairman may require the deposit of additional margin by any clearing member in any account at any time during any business day to, among other things, protect the OCC, other clearing members, or the general public. ======END OF PAGE 6====== protested that this amount was beyond the Firm's means and referred the OCC to several documents submitted in connection with Revcon's application indicating that Revcon's net worth was approximately $2 million. Revcon asserted that the $6.3 million initial margin deposit was unreasonable and not based on any real risk, exposure, or margin requirements. <(10)> Revcon requested that either the recommended initial margin deposit be reduced or that Papadopoulos be allowed to address the Committee or the Board, alleging that Revcon had not had the opportunity to speak directly to what amount would be a reasonable margin deposit. At its late May 1996 meeting, the Board considered Revcon's application for membership and the Committee's recommendation. The Board determined to approve the application if, and only if, Revcon met by July 24, 1996 the specified conditions recommended by the Committee, including the initial margin deposit required by the Chairman. On May 31, 1996, the Chairman, at Revcon's request, discussed with Papadopoulos the initial margin requirement. By letter dated June 10, 1996, the Chairman notified Revcon that the Firm would be required to make an initial margin deposit of $4.2 million. The Chairman stated that this amount was calculated by applying OCC's standard margin requirements to Revcon's positions for settlement on March 15, 1996. The Chairman stated that, while, in his judgment, the $6.3 million margin deposit requirement he had announced earlier was "appropriate to protect OCC, its clearing members and the public, given Revcon's financial position and the nature and magnitude of Revcon's historic trading compared to its capitalization, . . . this approach [requiring an initial margin deposit of $4.2 million] appropriately balances Revcon's concerns and OCC's need to protect itself, its clearing members and the public." <(11)> <(10)> Revcon advised that it was prepared to give an initial margin deposit of $1.4 million (including the clearing fund deposit). In addition, Revcon stated that it would hedge its positions, that it did not intend to move any positions from the OCC member through which Revcon was currently clearing, and that Revcon would start at the OCC with no positions and build them up. This latter representation was contrary to Revcon's prior statement that it intended to move all of its options positions to the OCC once the Firm was a member. <(11)> The Chairman also specified that Revcon, in order to be admitted as a member, would be required to: 1) deposit 150% of the margin normally required on positions carried with the OCC; 2) agree to deposit excess additional margin if the Firm's positions exceed the $4.2 million initial margin deposit; 3) agree not to clear trades for any person other than Revcon; and 4) agree not to enter into a clearing member trade assignment give-up agreement with any clearing member, (continued...) ======END OF PAGE 7====== On July 24, 1996, after the OCC staff advised the Board that Revcon had not complied with the specified conditions, the Board authorized the staff to deny Revcon's membership application. The OCC staff did so by letter dated July 29, 1996. As required in Article V, Section 2 of the OCC's Bylaws, the OCC subsequently issued a Notice of Final Denial that set forth the basis for denying Revcon's application for membership, concluding that "Revcon never supplied the final commitments or confirmations that were necessary to demonstrate conclusive compliance with these [the OCC's] requirements." The OCC also found that "Revcon demonstrated that it was unwilling or unable to comply with the financial requirements to which it would have been subject immediately upon after [sic] becoming a member." III. Revcon requests that we set aside the OCC's denial of membership. Under Exchange Act Section 19(f), which governs our review, if we determine that the specific grounds on which the OCC's action was taken exist in fact, that such action is in accordance with applicable OCC rules, and that these rules are, and were applied in a manner, consistent with the purposes of the Exchange Act, we must dismiss this appeal unless we find that the OCC's action imposes an unnecessary or inappropriate burden on competition. <(12)> A. Revcon asserts, without basis, that it complied with all of the OCC's conditions to membership, except for the initial margin deposit and clearing fund contribution requirements. While Revcon agreed to comply with many of the conditions that the OCC imposed, it in fact never adequately demonstrated such compliance. For example, although Revcon had been advised at the outset of the process that it must obtain the consent of its DEA to become an OCC clearing member, Revcon failed to obtain the consent of the CBOE (the Firm's DEA). When the CBOE staff offered to review with Revcon the list of CBOE requirements for commencement of options clearing activities, Papadopoulos stated that, until the Firm obtained OCC approval, he did not feel that Revcon needed to address the CBOE's requirements. In addition, when asked to supply documentation confirming that Revcon had, in fact, hired a full-time Operations Manager, Revcon submitted a two-sentence letter from an individual stating that, "after coming to agreement concerning employment with Revcon, I agree to be available in March as their Operations Manager. Pending approval from OCC's board meeting." This letter was submitted after the OCC staff had advised Revcon that it sought a "binding agreement" <(11)>(...continued) other than a clearing member presently carrying a Revcon account. <(12)> 15 U.S.C.  78s(f). See, e.g., Beatrice J. Feins, 51 S.E.C. 918, 921 (1993); Grand Securities Co., 51 S.E.C. 9, 13 (1992); Gershon Tannenbaum, 50 S.E.C. 1138, 1139 (1992). ======END OF PAGE 8====== that "clearly describe(s) the services that would be performed" as well as "the respective duties and obligations" of the employee. <(13)> As the OCC states in its brief to us, "Revcon had cobbled together a series of personnel and structural fixes that would have enabled it minimally to comply with those [OCC's membership] requirements, but [the] OCC had only Revcon's promises that those fixes actually would be implemented" (emphasis in the original). <(14)> Moreover, the commitments Revcon did make were fluid. For example, Papadopoulos suggested at various points in the membership review process that, once Revcon became a member, he would undo some of the staffing arrangements that the Firm had proposed in response to OCC staff's concerns. The OCC accordingly had a basis in fact for denying Revcon's application for membership. B. Section 17A of the Exchange Act provides, among other things, that the rules of a clearing agency must be designed to assure the safeguarding of securities and funds in the custody or control of the clearing agency, or for which the clearing agency is responsible, and to protect investors and the public interest. <(15)> As noted earlier, Section 17A further provides that a registered clearing agency may deny participation to, or condition the participation of, any person not meeting such standards of financial responsibility, operational capacity, experience, and competence as are prescribed by the rules of the clearing agency. <(13)> Revcon also failed to submit current financial reports reflecting Revcon's compliance with the OCC's financial membership standards. The Firm did not demonstrate that it had entered into an agreement for a bookkeeping and record maintenance system; did not obtain the proper authorizations from its custodial bank that allowed designated individuals to instruct the bank, on Revcon's behalf, to purchase additional U.S. Treasury bills as necessary, and to sign margin forms; and did not agree in writing to notify the OCC three days before making any material change in Revcon's site or staffing arrangement and to allow for Committee review before implementing such change if so notified. <(14)> Revcon cites a letter from the OCC acknowledging that Revcon had committed itself to performing all requirements set by the OCC as proof that Revcon complied with all of the OCC's other conditions to membership. This letter does not establish that Revcon, in fact, successfully fulfilled its commitment. The record reflects that Revcon did not. <(15)> See supra n.2 and accompanying text. ======END OF PAGE 9====== Revcon claims that the OCC did not follow its own rules and that it applied certain rules unfairly. <(16)> Revcon asserts that the Firm should have been required to make an initial clearing fund contribution of just $75,000, not the $283,000 contribution specified here. Pursuant to Article V, Section 3 of the OCC By-laws, no applicant can be admitted as a clearing member until the applicant has deposited with the OCC its initial contribution to the clearing fund. An essential purpose of the OCC's Non- Equity Securities Clearing Fund is to make good losses suffered by the Corporation as a result of the failure of any clearing member to perform its obligations. <(17)> Article VIII, Section 2 of the OCC Bylaws states that the initial clearing fund contribution for a non-equity securities clearing member shall be $75,000 or "such greater amount as may be fixed by the Board of Directors in its discretion at the time such clearing Member's application is approved." Based on our review of the record, we conclude that the Board acted in accordance with OCC Rules and applied those rules fairly to Revcon when it required Revcon to deposit an initial clearing fund contribution of $283,000. Given Revcon's reluctance to reveal its trading and risk management strategies, the Board reasonably determined that Revcon posed a heightened risk that the Firm would fail to perform its obligations. Revcon also contends that the Chairman should not have required an initial margin deposit in the amount of $6.3 million. <(18)> Revcon in fact was required to make an initial margin deposit of a significantly lesser amount, $4.2 million. The OCC's margin system, by which the OCC determines margin requirements for its members, is designed to protect the OCC against the cost of liquidating open options positions in the event of <(16)> Revcon does not dispute that the OCC's rules are consistent with the purposes of the Exchange Act. However, Revcon claims that the OCC violated, among other rules, its Rule 301, which, according to Revcon, allows firms with $1.0 million in net capital to become members. Revcon is incorrect. Rule 301 establishes only a minimum initial net capital requirement, stating that "[e]very Clearing Member shall have an initial net capital of not less than $1,000,000 . . . ." <(17)> OCC By-Laws, Article VIII, Section 1(b). <(18)> Revcon asserts that the Chairman should not have invoked Rule 609, as that rule applies only to "clearing members with a deteriorating financial situation." See supra n.9. By its terms, Rule 609 authorizes the Chairman to impose additional margin both in response to intra-day "changes" and generally as needed "otherwise to protect" the OCC, other clearing members, or the general public. ======END OF PAGE 10====== a member's default or insolvency. <(19)> As we have stated previously, "a clearing agency's margin system . . . must provide adequate protection or the margin system would put the clearing agency at an unacceptable level of risk of member default." <(20)> The margin deposit requirement at issue was reasonably directed at protecting the OCC against the risk of Revcon's default, and the Board's determination that it would not approve Revcon for membership if Revcon did not agree to comply with the Chairman's initial margin deposit requirement was consistent with OCC rules. <(21)> Revcon claims a lack of understanding as to how the OCC calculated the amount of its initial margin deposit.<(22)> As the OCC explained to <(19)> See, e.g., Exchange Act Release No. 28928 (March 1, 1991), 56 FR 9995 (order approving proposed rule change relating to a new margin system for equity options). <(20)> Id. at 9998. <(21)> Because the OCC's Chairman had decided to impose an initial margin obligation on Revcon's admission to membership, the Board acted appropriately in directing Revcon to comply with the margin obligation as a condition to membership. <(22)> Revcon has filed a motion with us seeking "additional discovery." Revcon requests documents (relating to the denial of Revcon's membership application and to other membership applications that resulted in imposition of an initial margin requirement and clearing fund contribution), workpapers (reflecting the margin and clearing fund computations), information (the identity of all individuals who participated in the computation of Revcon's initial margin and clearing fund contribution), and testimony (the opportunity to depose three named OCC employees). We deny Revcon's motion. The OCC has certified to us, in accordance with Rule 420(d) of our Rules of Practice, that the record documents it has furnished us comprise "the record upon which the action complained of was taken." There is no Commission rule that provides for additional "discovery" in a proceeding of this nature. The OCC also has filed a Motion to Adduce Additional Evidence. The OCC requests that we admit two letters, dated October 24, 1996 and December 6, 1996, from Lewitt of Harsh Capital, which state that Lewitt would not be entering into employment with Revcon. We deny the OCC's motion, as this evidence postdates the OCC's determination and was not the basis for the OCC's action here. ======END OF PAGE 11====== Revcon, however, the OCC applied its standard margin calculation to Revcon's positions for settlement on March 15, 1996. This Commission, as part of its regulatory oversight responsibilities, has reviewed and approved this standard methodology for calculating margin. <(23)> Revcon also contends that the OCC should not have used Revcon's options positions existing on March 15 (one day prior to expiration on the 16th) because these positions, which already had expired by the time of the calculation, have no relevance to the risk that the OCC might incur subsequent to Revcon's admission to clearing membership. <(24)> As noted at the outset of this opinion, the OCC staff repeatedly asked Revcon about the Firm's anticipated trading strategies and methods for assessing and controlling risk. Revcon was not forthcoming. For example, when asked during the on-site examination for a general idea of the positions Revcon currently maintains, Papadopoulos stated that "[i]t varies from day to day. They're long and short. They're all S&P 500 goods and costs. And it varies day by day." The OCC staff, reflecting understandable frustration with the vagueness of Papadopoulos' responses, stressed repeatedly that the OCC needed to be informed of Revcon's positions because the OCC assumes risk as a guarantor of all clearing firms' options trades. In the absence of detailed information allaying the OCC's reasonable concerns about managing Revcon's risk, the OCC's initial margin deposit 0requirement, based on positions of which it was aware on a date certain, was not arbitrary. Rather, it reflected the OCC's best determination, on the basis of the information it had, of the risk posed by Revcon's trading activities. <(25)> Having refused to give specific and complete information, Revcon cannot now complain that the OCC's determination is somehow flawed because the OCC relied on the only information that was available. Revcon asserts that it was not afforded a meaningful opportunity to be heard before the Committee. Specifically, Revcon contends that, in violation of Article V, Section 2, Revcon was not afforded an opportunity to discuss with the Committee the appropriateness of the initial margin deposit and clearing fund contribution required by the OCC. <(23)> See OCC Rules, Chapter VI, Margins. <(24)> Revcon states that the unreasonableness of this required deposit is evident when one looks to Revcon's then-current capital of approximately $1.8 million, as reflected in Revcon's membership application and financial statements. Revcon's capitalization, however, cannot dictate the level of its initial margin requirement. <(25)> We note that the amount of the margin deposit was subject to change by the Chairman, based upon the trading pattern that Revcon established as a clearing member with the OCC. ======END OF PAGE 12====== Article V, Section 2 provides, among other things, that the Committee will review applications for membership and recommend approval or disapproval to the Board. If the Committee proposes to recommend to the Board that an application for clearing membership be disapproved, it shall provide the applicant with a written recommendation with specific grounds for that recommendation, and afford the applicant an opportunity to be heard and to present evidence on its own behalf. <(26)> If, after a hearing, the Committee still proposes to recommend disapproval, the Committee is required to make its recommendation to the Board in writing, accompanied by a statement of specific grounds. At the applicant's request, a copy of the written recommendation shall be provided. The Board then independently reviews any recommendation, and may, in its discretion, if the applicant so requests, afford the applicant a further opportunity to be heard and to present evidence. Revcon had an opportunity to be heard and to present evidence on its own behalf. Revcon, in fact, was afforded many such opportunities. Papadopoulos engaged in a year-long negotiation with the OCC over various conditions of membership, exchanged numerous letters with the OCC staff, and participated in an on-site examination. Moreover, Papadopoulos addressed the Committee in person and presented evidence on the Firm's behalf at a hearing. Because specification of the initial margin requirement and clearing fund contribution came in a written decision approving Revcon's membership application, Revcon was not entitled under Article V, Section 2 to address the Committee about the amounts imposed. Nevertheless, Papadopoulos personally discussed these matters with the OCC's Chairman. As a result of this discussion, the Chairman reduced the initial margin requirement significantly. We find that the OCC complied with its rules and applied them in a fair manner. C. Revcon lastly asserts that, by failing to approve the Firm's membership application, the OCC has burdened competition unduly. Revcon states, without providing support, that the entities that comprise the OCC have a vested interest in prohibiting a small firm such as Revcon from becoming an OCC clearing member. Revcon also claims that the OCC admitted as a clearing member another firm that has slightly more capital than does Revcon. The record does not include information concerning the circumstances surrounding that firm's membership application, such as the firm's personnel, operations, and business plan. We find no basis in the record for concluding that OCC's action imposed an unnecessary or <(26)> The Committee originally recommended disapproval of Revcon's application for membership. The Committee provided Revcon with a written recommendation with specific grounds therefor, and afforded Revcon the opportunity to be heard and to present evidence on its own behalf. After an on-site examination of Revcon and Papadopoulos' appearance before the Committee, the Committee subsequently recommended that Revcon's membership application be approved, subject to certain conditions. ======END OF PAGE 13====== inappropriate burden on competition. The OCC's ultimate denial of Revcon's application for membership was aimed reasonably at protecting the OCC and the public from the possible risks of admitting a member that cannot demonstrate compliance with the OCC's membership standards. IV. We find that the grounds on which the OCC denied membership to Revcon exist in fact; that the denial of membership was in accordance with OCC rules; and that those rules are, and were applied in a manner, consistent with the purposes of the Exchange Act. We do not find that the OCC's action imposed an unnecessary or inappropriate burden on competition. The OCC worked with Revcon for approximately one year and gave Revcon many opportunities to resolve significant concerns that it had about the Firm's ability to discharge responsibly the functions of a clearing member. Yet, at the end of that year, Revcon failed to comply with a range of conditions imposed for membership. The OCC need not admit members that cannot or will ======END OF PAGE 14====== not comply with its membership standards. Accordingly, we shall dismiss Revcon's appeal. An appropriate order will issue. <(27)> By the Commission (Chairman LEVITT, Commissioners JOHNSON AND HUNT). Jonathan G. Katz Secretary <(27)> All contentions have been considered. They are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed in this opinion. ======END OF PAGE 15====== UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 39298 / November 5, 1997 Admin. Proc. File No. 3-9076 ____________________________________________________ : In the Matter of the Application of : : REVCON, INCORPORATED : 111 El Brillo Way : Palm Beach, FL 33480 : : For Review of Action Taken by : : THE OPTIONS CLEARING CORPORATION : ____________________________________________________: ORDER DISMISSING REVIEW PROCEEDING On the basis of the Commission's opinion issued this day, it is ORDERED that the application for review filed by Revcon Incorporated be, and it hereby is, dismissed. By the Commission. Jonathan G. Katz Secretary