[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]


-----------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \12\ The PSE notes that the amendments are based on CBOE Rules 
7.11(b)(1) and 7.11(e), respectively.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78f(b)(5) (1988).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78f(b)(4) (1988).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

    \17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-21234 Filed 8-20-96; 8:45 am]
BILLING CODE 8010-01-M