[Federal Register Volume 61, Number 63 (Monday, April 1, 1996)]
[Notices]
[Pages 14358-14359]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7798]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37013; File No. SR-Amex-95-54]


Self-Regulatory Organizations; the American Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change Relating to 
Restrictions on Specialists

March 22, 1996.

I. Introduction

    On December 19, 1995, 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 amend Exchange Rules 190 and 
950 regarding restrictions on specialists.

    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 36726 (Jan. 17, 1996), 64 FR 1953 (Jan. 24, 
1996). No comments were received on the proposal.

II. Background

    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 commentary on the public statement restriction, prohibiting 
specialists from making, ``an advertisement identifying a firm as a 
specialist in any security.'' \3\ 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 
commentary.

    \3\ 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 material business 
transactions between an options specialist and the issuer of the 
security underlying a specialty option (Rule 950(k)).\4\

    \4\ 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.\5\ 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.\6\

    \5\ Like a specialist, a DPM has primary market making 
responsibilities.
    \6\ 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 speciality 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.

III. Description of Proposal

    The Amex, accordingly, proposes to amend its rules to lift the 
prohibition against ``popularizing'' an option or a derivative 
security. It will leave in place the restriction against popularizing 
the underlying security, subject 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 \7\ 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.\8\

    \7\ 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'').
    \8\ 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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    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 
material 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)).\9\

    \9\ 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 rule 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 the 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

[[Page 14359]]
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.

IV. Discussion

    The Commission finds that the Amex's proposal is consistent with 
the requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange, and, in particular, with 
the requirements of Section 6(b) of the Act.\10\ In particular, and for 
the reasons set forth below, the Commission believes that the proposal 
is consistent with the Section 6(b)(5) requirements that the rules of 
an exchange be designed to promote just and equitable principles of 
trade, to prevent fraudulent and manipulative acts and, in general to 
protect investors and the public interest.\11\ The proposal also is 
consistent with the Section 6(b)(8) requirement that an Exchange have 
rules that do not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.\12\

    \10\ 15 U.S.C. Sec. 78f(b).
    \11\ 15 U.S.C. Sec. 78f(b)(5).
    \12\ 15 U.S.C. Sec. 78f(b)(8).
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    The Commission believes that the Amex's proposal to lift the 
prohibition against ``popularizing'' an option or equity derivative 
security and to lift the prohibition that prevents an equity or options 
specialist from identifying itself as a specialist in its assigned 
securities is appropriate and will make the Amex's rules consistent 
with those that are applicable on other exchanges.
    The Commission believes that Amex's rules relating to dealings and 
communications by specialists with regard to their speciality 
securities (and in the case of options or equity derivatives 
specialists, the underlying securities related to their speciality 
securities), continue to adequately address and prohibit inappropriate 
conduct in this area. Notably, the Amex will leave in place the 
restriction against popularizing the underlying security, subject to 
the exceptions contained in Amex Rule 950. Moreover, all options 
specialists will 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 will remain in place. 
Thus, specialists and their affiliates still will 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 material business transaction with either the 
issuer of a speciality 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)).\13\

    \13\ 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 Commission also believes that the established restrictions on 
material business transactions entered into by an equity derivative 
specialist and the issuer of the security underlying the equity 
derivative are reasonably designed to prevent a potential conflict of 
interest.\14\

    \14\ Absent these restrictions, a conflict of interest could 
arise between the equity derivative specialist's market making 
obligations and any status he or she might attain through business 
dealings with the issuer or an officer, director, or 10% stockholder 
of any such company. The Commission recognizes that certain business 
transactions between equity derivative specialists and issuers may 
exert an improper influence over equity derivative specialists. The 
Commission believes, however, that a specialist may engage in 
certain nonmaterial business dealings with an issuer that would not 
give rise to the potential conflict of interest described above.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-Amex-95-54) is hereby 
approved.

    \15\ 15 U.S.C. Sec. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\

    \16\17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-7798 Filed 3-29-96; 8:45 am]
BILLING CODE 8010-01-M