[Federal Register Volume 59, Number 63 (Friday, April 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-7763]


[[Page Unknown]]

[Federal Register: April 1, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-33817; File No. SR-Amex-93-41]

 

Self-Regulatory Organizations; Filing of Proposed Rule Change by 
the American Stock Exchange, Inc. Relating to the Limitation of 
Exchange Liability for Negligent Conduct

March 25, 1994.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on December 
23, 1993, the American Stock Exchange, Inc. (``Amex'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Amex. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.

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

    The Exchange proposes to amend rules 902C and 1003 to limit the 
Exchange's liability in connection with its administration of 
proprietary indexes and products. The text of the proposed rule change 
is available at the Office of the Secretary, the Amex, and at the 
Commission.

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

    In its filing with the Commission, the Amex 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 Amex 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 the 
Statutory Basis for, the Proposed Rule Change

    In the early 1980s the Exchange began trading options on a number 
of proprietary indexes that it developed--two broad-based indexes (the 
Major Market Index and the Institutional Index) and two narrow-based 
indexes (the Computer Technology and Oil Indexes). In the last several 
years, the Exchange has developed additional sector indexes (e.g., the 
Pharmaceutical and Biotechnology Indexes) and acts as the calculation 
agent for certain third party indexes (the Morgan Stanley Consumer and 
Cyclical Indexes). The Exchange has also developed broad market indexes 
on two foreign markets (the Japan Index and the Amex Hong Kong 30 
Index). Other indexes have recently been developed and are awaiting 
approval by the SEC.\1\
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    \1\See e.g., Securities Exchange Act Release No. 33312 (December 
9, 1993), 58 FR 65740 (December 16, 1993) (proposal to list and 
trade options on the Natural Gas Index); Securities Exchange Act 
Release No. 33305 (December 9, 1993), 58 FR 65605 (December 15, 
1993) (proposal to list and trade options on the Securities Broker/
Dealer Index).
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    The Exchange represents that there is a great deal of work involved 
in the daily calculation and dissemination of these indexes and while 
much of such work is automated, a substantial amount of manual input is 
still required. Thus, the potential for human error exists, which 
exposes the Exchange to a risk of liability. Potential human errors 
include inputting a symbol or index value incorrectly, missing a 
corporate action, or inaccurately reporting the number of outstanding 
shares. With the introduction of new indexes, particularly those 
involving foreign stocks where current information may be unavailable 
on a timely basis, the chance for human error increases, thus exposing 
the Exchange to an even greater risk of liability.
    Currently, rule 902C disclaims Exchange liability for damages 
caused by errors, omissions, or delays in the calculation or 
dissemination of any index value resulting from any conduct beyond the 
reasonable control of the Exchange. This includes an act of God, a 
power or systems failure, or any error, omission, or delay in the 
reported price of the underlying security. Rule 1003 disclaims Exchange 
liability in a similar manner with respect to the creation, redemption, 
and trading of Portfolio Depositary Receipts (``PDRs''), which covers 
the SPDRs products introduced on the S&P 500 Index.\2\ The Exchange 
believes, however, that these disclaimer provisions are arguably 
ambiguous with respect to whether the Exchange remains potentially 
liable for damages caused by any human error or omission by an Exchange 
employee in connection with the performance of the Exchange's index 
responsibilities.
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    \2\See Securities Exchange Act Release No. 31591 (December 11, 
1992), 57 FR 60253 (December 18, 1992) (approving listing and 
trading standards for PDRs).
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    In view of the increased potential for Exchange liability as a 
result of the Exchange's expanding role in the administration of new 
proprietary indexes and product, the Amex wishes to make clear that the 
Exchange disclaims liability for negligent conduct, in addition to 
conduct beyond the Exchange's reasonable control which is presently 
covered by the Amex rules. The Exchange represents that the Amex, as 
well as the other major self-regulatory organizations, currently 
disclaim liability for negligent conduct associated with the 
dissemination of their market data to vendors, as well as generally in 
connection with the use of their facilities, except as they otherwise 
provide. The Exchange believes that it is inappropriate for exchanges 
to bear the risk and liability associated with the use of such 
information and facilities. In the area of index administration, the 
Exchange represents that Standard & Poor's and all the other major 
index providers likewise routinely disclaim liability for any negligent 
conduct.\3\ Additionally, the New York Stock Exchange has a rule which 
is substantively similar to the Exchange's proposed rule change.\4\ 
Finally, the Exchange acknowledges that rules 902C and 1003 cannot be 
relied upon by the Exchange to limit its liability to non-members or 
for any intentional or negligent violation of federal securities 
laws.\5\ The Exchange is therefore proposing that Amex Rules 902C and 
1003 be amended accordingly to clearly disclaim Exchange liability for 
negligent conduct.
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    \3\See, e.g., Chicago Board Options Exchange, Inc. Rule 24.14.
    \4\See, e.g., New York Stock Exchange, Inc. Rule 813.
    \5\See Letter from Bruce Ferguson, Associate General Counsel, 
Legal & Regulatory Policy, Amex, to Brad Ritter, Attorney, Office of 
Derivatives and Equity Oversight, Division of Market Regulation, 
Commission, dated March 21, 1994.
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    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act, in general, and furthers the objectives 
of section 6(b)(5) in particular, in that it is intended to facilitate 
transactions in securities.

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

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

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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will: 
(A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Section, 450 Fifth Street, NW., 
Washington, DC. Copies of such filing will also be available for 
inspection and copying at the principal office of the Amex. All 
submissions should refer to File No. SR-Amex-93-41 and should be 
submitted by April 22, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-7763 Filed 3-31-94; 8:45 am]
BILLING CODE 8010-01-M