[Federal Register Volume 61, Number 132 (Tuesday, July 9, 1996)]
[Notices]
[Pages 36100-36102]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-17448]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37391; File No. SR-PSE-96-21]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Stock Exchange, Inc., Relating to the Liability 
of the Exchange and its Governors, Officers, and Agents

July 1, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 17, 1996, the Pacific Stock Exchange, Inc. (``PSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule

[[Page 36101]]

change as described in Items I, II, and III below, which Items have 
been prepared by the self-regulatory organization. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The PSE, pursuant to Rule 19b-4 of the Act, proposes to adopt new 
provisions pertaining to the liability of the Exchange and to amend an 
existing provision. Specifically, the PSE proposes to adopt: new Rule 
13.2, Liability of Exchange, which clarifies and broadens the existing 
limitations on the Exchange's liability; new Rule 13.3, Legal 
Proceedings Against Exchange Governors, Officers, Employees or Agents, 
which prohibits members from instituting certain types of legal 
proceedings against Exchange officials; and new Rule 13.4, Exchange's 
Cost of Defending Legal Proceedings, which provides for the recovery of 
the Exchange's defense costs in certain circumstances. In addition, the 
PSE proposes to amend Rule 6.59, Liability of Exchange for Actions of 
Order Book Officials, to clarify its purposes and to provide a 
reference to the new provisions in Rule 13.

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 self-regulatory organization 
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 self-regulatory organization 
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
Liability of Exchange
    The principal rule concerning Exchange liability is contained in 
Article VI, Section 6 of the PSE Constitution. Article VI, Section 6 
provides that the Exchange is not liable to members for damages arising 
out of the use or enjoyment of Exchange facilities in the conduct of 
their business.
    New Rule 13.2(a) \3\ clarifies that, except as otherwise expressly 
provided in the rules of the Exchange, neither the Exchange nor its 
Governors, officers, committee members, employees, or agents shall be 
liable to members or their associated persons except where the 
Exchange's liability is attributable to willful misconduct, gross 
negligence, bad faith, fraud, or criminal acts. In addition, new Rule 
13.2(a) clarifies that the limitation of the Exchange's liability 
includes interruption, failure or unavailability of Exchange facilities 
or services.
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    \3\ The PSE notes that new Rule 13.2(a) is based on Chicago 
Stock Exchange (``CHX'') Article I, Rule 18(a) and the proposed rule 
changes filed by the Chicago Board Options Exchange (``CBOE'') to 
Rule 6.7(a). See Securities Exchange Act Release No. 36863 (February 
20, 1996), 61 FR 7285 (February 27, 1996) (File No. SR-CBOE-96-02).
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    New Rule 13.2(a) \4\ also adds language which limits the Exchange's 
liability for errors, omissions, or delays in calculating or 
disseminating various kinds of data relating to current or closing 
index values, reports of transactions or quotations for options or 
other securities, and further provides that the Exchange does not 
warrant the results obtained by any person or entity relying on data 
transmitted by or on behalf of the Exchange or any designated reporting 
authority. New Rule 13.2(a) \5\ states that its provisions are in 
addition to, and do not limit, the provisions of the PSE Constitution, 
Article VI, Section 6. Lastly, paragraphs (b) and (c) of new Rule 13.2 
\6\ describe the monetary limits on the Exchange's liability with 
respect to the Exchange's order routing systems, electronic book, and 
automatic execution systems. \7\
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    \4\ The PSE notes that this language to new Rule 13.2(a) is 
based on CBOE Rule 24.12
    \5\ The PSE notes that this aspect of new rule 13.2(a) is based 
on CHX Article 1, Rule 18(b).
    \6\ The PSE notes that new Rules 13.2(b) and (c) are based on 
CBOE Rules 6.7(b) and (c).
    \7\ Under new Rule 13.2(b), the PSE's liability with respect to 
the Exchange's order routing systems, electronic book, and automatic 
execution systems is limited to the larger of any recovery obtained 
by the Exchange under any applicable insurance or: (i) $100,000 as 
to any claim or series of claims made by a single member on a single 
day; (ii) $250,000 as to all claims by all members on any single 
trading day; and (iii) $500,000 as to all claims, in the aggregate, 
by all members in any calendar month.
    Under new Rule 13.2(c), if all of the claims arising out of the 
use or enjoyment of the facilities afforded by the Exchange cannot 
be fully satisfied because in the aggregate they exceed the 
applicable maximum amount of liability provided for in paragraph 
(b), the maximum amount will be allocated based on the proportion 
that each claim bears to the sum of all such claims.
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Legal Proceedings Against Exchange Governors, Officers, Employees or 
Agents
    New Rule 13.3 \8\ prohibits a member or associated person from 
instituting a lawsuit or any other type of legal proceeding against any 
Governor, officer, employee, agent, or other official of the Exchange 
or any of its subsidiaries based on actions taken or omitted to be 
taken while such person is acting on Exchange business or the business 
of any of its subsidiaries. Rule 13.3, however, does not apply where 
private rights of action under the federal securities laws exist, to 
appeals of disciplinary actions, to other actions by the Exchange as 
provided for in its rules, and, with respect to the Governors of the 
Exchange, to the extent such action or omission is inconsistent with 
the Exchange's Certificate of Incorporation.
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    \8\ The PSE notes that new Rule 13.3 is based on CHX Article I, 
Rule 17 and the proposed rule changes filed by the CBOE to Rule 
6.7A. See Securities Exchange Act Release No. 36863, supra note 3.
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    The Exchange notes that new Rule 13.3 does not prohibit a member 
from suing the Exchange as a result of the actions of these 
individuals; rather it merely prohibits suits against the person in his 
or her individual capacity. According to the PSE, the purpose of 
disallowing lawsuits or other legal proceedings against Exchange 
officials or agents when they are acting on Exchange business is to 
eliminate the potential exposure to personal liability of such persons 
which impairs their ability to perform their duties.
Exchange's Costs of Defending Legal Proceedings
    New Rule 13.4 \9\ requires a member or associated person who fails 
to prevail in a legal proceeding instituted by that person against the 
Exchange or other specified persons, and related to the business of the 
Exchange, to pay to the Exchange all reasonable expenses, including 
attorney's fees, incurred by the Exchange in its defense of such 
proceeding. The requirement would apply only where the costs exceed 
fifty thousand dollars ($50,000).
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    \9\ The PSE notes that new Rule 13.4 is based on CHX Article 1, 
Rule 18(c) and the proposed rule changes filed by the CBOE to Rule 
2.24. See Securities Exchange Act Release No. 36863, supra note 3.
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    According to the PSE, this provision is intended to discourage 
unfounded, vexatious litigation against the Exchange where the 
Exchange's costs are significant, without having an undue chilling 
effect on legitimate claims of members. The proposed rule would

[[Page 36102]]

apply to lawsuits or other legal proceedings that might be instituted 
by members against the Exchange or to any of its Governors, officers, 
committee members, employees, or agents. This provision, however, would 
not apply to disciplinary actions, to administrative appeals of 
Exchange actions, or to any specific instance where the Board of 
Governors has granted a waiver of this rule.
Liability of Exchange for Actions of Order Book Officials
    Current Rule 6.59(a) and (g) are being amended for clarification 
purposes.\10\ Rule 6.59 is also adding a reference to the new 
provisions in Rule 13.
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    \10\ The PSE notes that the amendments are based on CBOE Rules 
7.11(b)(1) and 7.11(e), respectively.
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2. Statutory Basis
    The PSE believes that the proposed rule changes are consistent with 
Section 6(b)(5) of the Act in that, by limiting the liability of the 
Exchange and its Governors, officers, employees, and agents, by 
precluding certain types of legal actions by members against such 
persons individually, and by discouraging frivolous lawsuits against 
the Exchange, it will reduce the costs of the Exchange in responding to 
claims and lawsuits, thereby permitting the resources of the Exchange 
to be better utilized for promoting just and equitable principles of 
trade and for protecting investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The self-regulatory organization 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 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 the 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, N.W., Washington, D.C. 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. Sec. 552, will be available for inspection and copying at 
the Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filing also will be available 
for inspection and copying at the principal office of the PSE. All 
submissions should refer to File No. SR-PSE-96-21 and should be 
submitted by July 30, 1996.

    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).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-17448 Filed 7-8-96; 8:45 am]
BILLING CODE 8010-01-M