[Federal Register Volume 59, Number 107 (Monday, June 6, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-13608]


[[Page Unknown]]

[Federal Register: June 6, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34125; File No. SR-Amex-93-41]

 

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

May 27, 1994.
    On December 23, 1993, the American Stock Exchange, Inc. (``Amex'' 
or ``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to limit the Exchange's liability 
in connection with its administration of proprietary indexes and 
products. Notice of the proposed rule change appeared in the Federal 
Register on April 1, 1994.\3\ No comment letters were received on the 
proposed rule change. This order approves the Exchange's proposal.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1992).
    \3\See Securities Exchange Act Release No. 33817 (March 25, 
1994), 59 FR 15466 (April 1, 1994).
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    The Exchange currently has listed for trading, or has received 
approval to trade, options on several broad-based and narrow-based 
stock indexes.\4\ The Exchange represents that there is a great deal of 
work involved in the daily calculation and dissemination of these index 
values and while much of this work is automated, a substantial amount 
of manual input is still required. Human error, such as incorrectly 
inputting a symbol or index value, overlooking a corporate action, or 
inaccurately reporting the number of outstanding shares of a component 
of an index, can occur during the manual input of data which exposes 
the Exchange to potential liability. As options on more new indexes are 
introduced, the chances for human error increase, thus exposing the 
Exchange to an even greater risk of liability.
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    \4\Examples of the broad-based indexes include the Eurotop 100, 
Institutional, Major Market, and S&P MidCap 400 Indexes. Example of 
the narrow-based indexes include the Biotechnology, Broker/Dealer, 
Natural Gas, and Retail Indexes.
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    Currently, Amex Rules 902C and 1003 disclaim Exchange liability 
regarding the calculation or dissemination of any index value, and in 
the creation, redemption, and trading of Portfolio Depositary Receipts, 
respectively. These disclaimers cover errors, omissions, and delays 
resulting from any conduct beyond the reasonable control of the 
Exchange, and include acts of God, power or systems failure, or any 
error, omission, or delay in the reported price of an underlying 
security. 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.
    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 products, the Amex wishes to make clear that in 
addition to the areas specified in Rules 902C and 1003, the Exchange 
also disclaims liability for negligent conduct. The Exchange represents 
that the Amex, as well as other 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 risks and liabilities 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.\5\ Additionally, the New York Stock Exchange (``NYSE'') has a 
rule which is substantively similar to the Exchange's proposed rule 
change.\6\ 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.\7\
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    \5\See e.g., Chicago Board Options Exchange, Inc. Rule 24.14.
    \6\See NYSE Rule 702(b).
    \7\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 Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, the requirements of section 6(b)(5).\8\ Specifically, the 
Commission finds that the proposed rule change provides the Exchange 
with virtually the same protection from liability available to the New 
York Stock Exchange pursuant to NYSE Rule 702(b). Additionally, because 
the Amex represents that the proposed rule change cannot be used to 
limit its liability to non-members arising from negligent conduct or 
for any intentional or negligent violation of federal securities 
laws,\9\ the Commission believes that the proposal may serve to 
facilitate transactions in securities, while also protecting investors 
and the public interest. Specifically, entities such as the Amex may be 
encouraged to continue to calculate and disseminate index values so 
that derivative products based on these indexes, which are found to 
provide hedging or other economic functions, will remain available to 
investors.
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    \8\15 U.S.C. 78f(b)(5) (1988).
    \9\See supra note 7.
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    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-Amex-93-41), is approved.

    \10\15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-13608 Filed 6-3-94; 8:45 am]
BILLING CODE 8010-01-M