[Federal Register Volume 61, Number 16 (Wednesday, January 24, 1996)]
[Notices]
[Pages 1953-1954]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1030]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36726; File No. SR-Amex-95-54]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the American Stock Exchange, Inc. Relating to Restrictions on 
Specialists

January 17, 1996.
    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 
19, 1995, 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 Exchange Rules 190 and 950 regarding 
restrictions on specialists.
    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 Exchange 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Amex adopted most of its restrictions on the activities of 
specialists in the early 1960s. The effect of these restrictions was to 
limit the business activities of specialists (and their affiliates) to 
acting as a ``broker's broker'' and as a dealer on the Exchange Floor. 
These restrictions also precluded specialists from making public 
statements regarding their specialty securities. In 1973, the Exchange 
added a gloss on the public statement restriction, prohibiting 
specialists from making, ``an advertisement identifying a firm as a 
specialist in any security.'' \1\ Even though the New York Stock 
Exchange (``NYSE'') and Amex generally have comparable rules with 
respect to restrictions on specialists, the NYSE never adopted the 1973 
gloss.

    \1\ See Commentary to Amex Rule 190.
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    In 1975, with the implementation of trading in standardized 
options, the Exchange generally extended the restriction on stock 
specialists to options specialists. It modified, however, the 
prohibition on business transactions between specialists and the issuer 
of a specialty security (Rule 190(a)), to prohibit business 
transactions between an options specialist and the issuer of the 
security underlying a specialty option (Rule 950(k)).\2\

    \2\ Since the Options Clearing Corporation (``OCC'') is the 
issuer of all listed options and the ``business transaction'' 
prohibition was intended as a prophylactic measure to prevent the 
passage of non-public information between specialist and issuer, the 
policy reason behind Rule 190(a) would not have been advanced had 
the Exchange simply prohibited business transactions between the OCC 
and an options specialist.
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    In 1987, the Chicago Board Options Exchange (``CBOE'') instituted 
its Designated Primary Market-Maker (``DPM'') system for trading listed 
options.\3\ While the CBOE adopted a number of the restrictions 
applicable to Amex options specialists, it did not apply any of the 
restrictions applicable to Amex specialist communications to its 
DPMs.\4\

    \3\ Like a specialist, a DPM has primary market making 
responsibilities.
    \4\ See CBOE Rules 8.80 and 8.81, and Securities Exchange Act 
Release Nos. 24934 (September 22, 1987), 52 FR 36122 (September 25, 
1987) and 25151 (November 23, 1987), 52 FR 45417 (November 27, 
1987). The CBOE's rules provide that an integrated broker-dealer 
affiliated with a DPM must establish an exchange approved ``Chinese 
Wall'' between the upstairs firm and the DPM and make certain 
disclosures if it intends to issue recommendations or research 
reports regarding DPM securities and the underlying. There are no 
specific restrictions, however, on DPM communications regarding 
their specialty securities.
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    The discrepancy between the rules of the Amex and the CBOE 
regarding specialist communications had little practical significance 
prior to the general implementation of multiple options trading. The 
Exchange is now finding, however, that the disparate regulation of 
specialists and DPMs has placed it at a disadvantage in the competition 
for order flow in a multiple trading environment. The Amex, 
accordingly, proposes to amend its rules to lift the prohibition 
against ``popularizing'' an option or a derivative 

[[Page 1954]]
security. It will leave in place the restriction against popularizing 
the underlying security, subject of course to the exceptions that have 
long been contained in Amex Rule 950. This will better conform the Amex 
rules to those applicable to DPMs at the CBOE regarding communications 
concerning specialty securities.
    In addition, the Exchange is also proposing two other changes to 
the restrictions on popularizing by specialists. The Exchange seeks to 
conform its rules to those of the NYSE to eliminate generally the 
prohibition on communications that simply identify a firm as the 
specialist in a particular security. Finally, the Exchange seeks to 
amend its rules regarding equity derivative\5\ specialists to harmonize 
them with restrictions on options specialists. Thus, the Exchange would 
amend its rules to prohibit material business transactions between 
certain equity derivative specialists and the issuer of the security 
underlying the equity derivative.\6\

    \5\ The term ``equity derivative'' refers to an underwritten 
security the value of which is determined by reference to another 
security, or to a currency, commodity, interest rate or index of the 
foregoing. Such securities are commonly listed pursuant to Amex 
Company Guide (``Guide'') Sections 106 (``Index and Currency 
Warrants''), 107 (``Other Securities''), 118 (``Investment 
Trusts''), or Amex Rule 1002 (``Portfolio Depositary Receipts'').
    \6\ It is in the case of listings under sections 107 and 118A of 
the Guide that the underlying can be a single security, so that 
restrictions analogous to those applicable to equity options are 
appropriate.
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    Of course, all options specialists would remain subject to the 
rules regulating the conduct and public communications of members 
generally (e.g., Exchange Rule 991, the ``options advertising'' rule). 
In addition, all other restrictions applicable to specialists and their 
affiliates would remain in place. Thus, specialists and their 
affiliates still would be prohibited from trading a specialist security 
outside the specialist function (Rules 170(e) and 950(n)), holding or 
granting an option on a specialty stock (Rule 175), engaging in a 
business transaction with either the issuer of a specialty security or 
the underlying security in the case of options (Rules 190(a) and 
950(k)), and accepting orders from the issuer of a specialty security, 
its insiders and enumerated institutional investors (Rules 190(b) and 
950(k)).\7\

    \7\ Exchange Rule 193 permits the affiliates of specialists to 
obtain an exemption from most specialist restrictions through the 
use of an Exchange-approved ``Chinese wall''.
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    The Exchange represents that the respective proposed rule changes 
either seek to conform the Exchange's rules to those of the CBOE and 
NYSE, or represent a rational harmonization of the regulation of listed 
options and equity derivatives. In addition, the Exchange believes that 
changes in market structure, the role of the specialist in the 
secondary market, and enhanced surveillance capabilities over the last 
thirty years have eliminated the need for continuation of at least 
certain of the original specialist prohibitions. This is most clearly 
true with respect to the wholesale application of restrictions on stock 
specialists to options specialists, due to the derivative pricing of 
the specialty securities. This is most clearly demonstrated by the 
experience of the CBOE, which has been able to adequately regulate its 
DPMs without the use of such wholesale restrictions. Finally, the 
Exchange believes that the experience of the NYSE demonstrates that 
with respect to all specialists there is no need to go so far as to 
preclude even the public identification of a particular firm as the 
specialist in particular securities.
2. Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act, in general, and further the objectives of 
section 6(b)(5) in particular, in that they are designed to prevent 
fraudulent and manipulative acts and practices, 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.

B. Self-Regulatory Organization's Statement on Burden 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-95-54 and should be 
submitted by February 14, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\

    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-1030 Filed 1-23-96; 8:45 am]
BILLING CODE 8010-01-M