[Federal Register Volume 61, Number 163 (Wednesday, August 21, 1996)]
[Notices]
[Pages 43285-43287]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21234]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37563; File No. SR-PSE-96-21]
Self-Regulatory Organizations; Order Granting Approval to
Proposed Rule Change by the Pacific Stock Exchange, Inc., Relating to
the Liability of the Exchange and Its Governors, Officers, and Agents
August 14, 1996.
I. Introduction
On June 17, 1996, the Pacific Stock Exchange, Inc. (``PSE'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``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 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, which clarifies
and broadens the existing limitations on the Exchange's liability; new
Rule 13.3, which prohibits members from instituting certain types of
legal proceedings against Exchange officials; and new Rule 13.4, which
provides for the recovery of the Exchange's defense costs in certain
circumstances. In addition, the PSE proposes to amend Rule 6.59, to
clarify its purposes and to provide a reference to the new provisions
in Rule 13.
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\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4.
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Notice of the proposed rule change appeared in the Federal Register
on July 3, 1996.\3\ No comments were received on the proposed rule
change.\4\ This order approves the PSE's proposal.
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\3\ See Securities Exchange Act Release No. 37391 (July 1,
1996), 61 FR 36100 (July 9, 1996).
\4\ The PSE submitted a letter regarding the enforceability of
the proposed rules under state law. See letter from Rosemary A.
MacGuiness, Senior Counsel, Director of Arbitration, PSE, to Glenn
Barrentine, Branch Chief, Office of Market Supervision, Division of
Market Regulation, Commission, dated August 7, 1996.
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II. Background and Description
A. 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)\5\ 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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\5\ 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)\6\ 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
[[Page 43286]]
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)\7\ 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\8\ describe the
monetary limits on the Exchange's liability with respect to the
Exchange's order routing systems, electronic book, and automatic
execution systems.\9\
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\6\ The PSE notes that this language to new Rule 13.2(a) is
based on CBOE Rule 24.12.
\7\ The PSE notes that this aspect of new Rule 13.2(a) is based
on CHX Article 1, Rule 18(b).
\8\ The PSE notes that new Rules 13.2 (b) and (c) are based on
CBOE Rules 6.7 (b) and (c).
\9\ 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 of 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 the all such claims.
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B. Legal Proceedings Against Exchange Governors, Officers, Employees,
or Agents
New Rule 13.3 \10\ 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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\10\ 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 5.
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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.
C. Exchange's Costs of Defending Legal Proceedings
New Rule 13.4 \11\ requires a member or associated person who fails
to prevail in a lawsuit or other 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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\11\ The PSE notes that new Rule 13.4 is based on CHX Article I,
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 5.
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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 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.
D. Liability of Exchange for Actions of Order Book Officials
Current Rule 6.59 (a) and (g) are being amended for clarification
purposes.\12\ Rule 6.59 is also adding a reference to the new
provisions in Rule 13.
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\12\ The PSE notes that the amendments are based on CBOE Rules
7.11(b)(1) and 7.11(e), respectively.
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III. Discussion
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, with the requirements of Section 6(b)(5).\13\ Specifically,
the Commission believes that by limiting the liability of the Exchange
and its Governors, officers, committee members, employees, and agents,
by precluding certain types of legal actions by members against such
persons individually, and by discouraging frivolous lawsuits against
the Exchange, the costs of the Exchange in responding to claims and
lawsuits will be reduced, 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.
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\13\ 15 U.S.C. 78f(b)(5) (1988).
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A. Liability of Exchange
The Commission believes the rule change limiting the liability of
the Exchange and its Governors, officers, committee members, employees,
and agents, to situations attributable to willful misconduct, gross
negligence, bad faith, fraud, or criminal acts, will adequately
preserve members' right to pursue actions in circumstances where the
Exchange and its officials should be held accountable, or where there
has been a violation of the federal securities laws.
B. Legal Proceedings Against Exchange Governors, Officers, Employees,
or Agents
The Commission believes that the rule change prohibiting members
from instituting legal proceedings against Exchange officials should be
approved. Specifically, the rule change prohibits members and
associated persons from instituting lawsuits or any other legal
proceedings against any Governor, officer, employee, agent, or other
official of the Exchange or any subsidiary of the Exchange, for actions
taken or omitted to be taken by these parties in connection with
official business of the Exchange or any subsidiary. New Rule 13.3,
however, does not impair members' ability to initiate legal action
based upon violations of the federal securities laws for which a
private right of action exists, appeals of disciplinary actions, other
actions by the PSE as provided for in the Exchange's 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. The Commission believes that new Rule 13.3 is consistent
with the Act because it will help to ensure that the covered persons
will be able to carry out their duties under the Act, and to enforce
compliance with the Act and the rules thereunder, as well as the rules
of the Exchange, without the threat of personal liability.
C. Exchange's Cost of Defending Legal Proceedings
The Commission believes that the rule change requiring members or
associated persons who fail to prevail in a lawsuit
[[Page 43287]]
or other legal proceeding instituted by that person against the
Exchange or other specified persons, and related to the business of the
Exchange, to pay all reasonable expenses, including attorneys' fees;
incurred by the PSE in its defense during such proceedings if such
expenses exceed $50,000, is consistent with Section 6(b)(4) of the
Act.\14\ Section 6(b)(4) requires that the rules of the exchange
provide for the equitable allocation of reasonable dues, fees, and
other charges among its members.
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\14\ 15 U.S.C. 78f(b)(4) (1988).
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The Commission believes that because the funds to pay the legal
expenses incurred by the Exchange in defending legal suits are
generated, in part, by membership fees, the rule change reflects a
reasonable business decision by the membership to shift the financial
burden of litigation to the responsible member under certain
circumstances. Moreover, as the Exchange's legal expenses must be
reasonable and must accrue to at least $50,000 before a member would be
obligated to compensate the Exchange, the Commission believes that the
rule change should not provide an undue disincentive to litigation, in
so far as it will permit the discovery needed to assess the merits of
members' cases.
The Commission also notes that new Rule 13.4 specifically excludes
disciplinary actions brought by the Exchange, administrative appeals of
Exchange actions, as well as any other specific instance where the
Board of Governors grants a waiver of this rule. The Commission
believes that this provision will ensure that members will be able to
freely pursue their right to appeal any action brought by the Exchange
for violations of its rules.\15\
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\15\ The Commission notes that if the minimum amount in the fee
provision were substantially lower it might have a more difficult
time concluding that the provision was consistent with Section
6(b)(4). This is because such a lower threshold amount could be
found to represent an inequitable allocation of fees to the
disadvantage of certain members.
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D. Liability of Exchange for Actions of Order Book Officials
The Commission believes that because the PSE's proposal regarding
the Exchange's order book officials clarifies the application of the
rules governing Exchange liability, it should be approved.
IV. Conclusion
For the foregoing reasons, the Commission finds that the PSE's
proposal to limit the liability of the Exchange and its directors,
officers, employees, and agents, to preclude certain types of legal
actions by members against such persons individually, and to require
members to pay the Exchange's costs of litigation under specified
circumstances is consistent with the requirements of the Act and the
rules and regulations thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\16\ that the proposed rule change (SR-PSE-96-21) is approved.
\16\ 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.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-21234 Filed 8-20-96; 8:45 am]
BILLING CODE 8010-01-M