[Federal Register Volume 62, Number 56 (Monday, March 24, 1997)]
[Notices]
[Pages 13918-13921]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-7342]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38379; File No. SR-Amex-97-12]


Self-Regulatory Organizations; Notice of Filing of, and Order 
Granting Accelerated Approval to, Proposed Rule Change by the American 
Stock Exchange, Inc. Relating to Execution of Specialists' Liquidating 
Transactions

March 10, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on February 28, 1997, 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 and II below, which Items have been 
prepared by the self-regulatory organization. Subsequently, the 
Exchange submitted Amendment No. 1 to the proposed rule change.\2\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and to grant accelerated 
approval to the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Letter from Claudia Crowley, Special Counsel, Amex, to 
Anthony Pecora, Attorney, Division of Market Regulation, SEC, dated 
March 4, 1997 (``Amendment No. 1''). Amendment No 1 added a 
paragraph explaining the Exchange's enforcement policy concerning 
``substantive'' violations of Amex Rule 170 and included an 
interpretation of that rule in the form of an information circular 
that the Exchange has represented to be binding on it.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Amex is proposing permanent approval of a pilot program that 
amended Exchange Rule 170 to permit a specialist to effect a 
liquidating transaction on a zero minus tick,\3\ in the case of a 
``long'' position, or a zero plus tick,\4\ when covering a ``short'' 
position, without Floor Official approval. The pilot program also 
amended Exchange Rule 170 to set forth the affirmative action that 
specialists are required to take subsequent to effecting various types 
of liquidating transactions.
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    \3\ A zero minus tick is a price equal to the last sale where 
the last preceding transaction at a different price was at a higher 
price.
    \4\ A zero plus tick is a price equal to the last sale where the 
last preceding transaction at a different price was at a lower 
price.
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    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 self-regulatory organization 
included statements concerning the purpose of land 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 III 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
    On February 18, 1997, the Commission approved an extension until 
March 7, 1997 of a pilot program that amended exchange Rule 170 to 
permit a specialist to effect a liquidating transaction on a zero minus 
tick, in the case of a ``long'' position, or a zero plus tick, when 
covering a ``short'' position, without Floor Official approval.\5\ The 
Rule continues to require that Floor Official approval be obtained 
prior to effecting a liquidating transaction on a straight 
destabilizing tick (i.e., a minus tick in the case of a ``long'' 
position or a plus tick when covering a ``short'' position). The 
amendments also set forth the affirmative action that specialists are 
required to take subsequent to effecting various types of liquidating 
transactions.
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    \5\ Securities Exchange Act Release No. 38299 (Feb. 18, 1997), 
62 FR 8464 (``February 1997 Approval Order'') (approving File No. 
SR-Amex-97-01).
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    During the course of the pilot program, the Exchange has carefully 
monitored compliance with the requirements of the Rule. The Amex 
believes that the amendments have provided specialists with flexibility 
in liquidating specialty stock positions in order to facilitate their 
ability to maintain fair and orderly markets, particularly during 
unusual market conditions. In addition, the specialist's concomitant 
obligation to participate as dealer on the opposite side of the market 
after a liquidating transaction has been strengthened. The Exchange is 
therefore proposing permanent approval of the amendments to Amex Rule 
170.
    In addition, the Exchange is proposing to adopt a formal policy to 
address its enforcement with respect to ``non-substantive'' (i.e., if 
the approval would have been granted if it had been sought) violations 
of the requirement that specialists obtain Floor Official approval for 
reliquidating transactions on straight destabilizing ticks. Absent 
unusual circumstances, the Exchange will, at a minimum, take the 
following action:

--The Exchange staff will issue a cautionary letter to the 
specialist for an initial violation, during a ``rolling'' twelve-
month period.
--Any subsequent violation(s) by the same specialist during the 
``rolling'' twelve-month period will be referred to the Minor Floor 
Violation Disciplinary Committee for appropriate action. Pursuant to 
Rule 590 and its commentary, the Committee has the authority to 
issue a cautionary letter to the specialist or impose fines ranging 
from $500 to $2,500 ($1,000 to $5,000 for member organizations).

    Of course, the Exchange, even for an initial violation, has the 
authority to take more stringent action either pursuant to Rule 590 or 
in accordance with the Exchange's formal disciplinary procedures. In 
addition, the Exchange's policy with respect to ``substantive'' 
violations of this rule (e.g., failure to properly re-enter the market 
or failure to obtain the required Floor Official approval when such 
approval, if sought, would not have been granted) remains unchanged. 
Such instances of noncompliance will be dealt with according to the 
Exchange's formal disciplinary procedures.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \6\ in general and furthers the objectives of 
Section 6(b)(5) \7\ in particular in that it is designed to promote 
just and equitable principles of trade, remove impediments to and 
perfect the mechanism of a free and open market, and, in general, 
protect investors and the pubic interest. The Exchange also believes 
the proposed rule change is consistent with Section 11(b) of the Act 
\8\ which allows exchanges to promulgate rules relating to specialists 
in order to maintain fair and orderly markets.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
    \8\ 15 U.S.C. 78k(b).

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[[Page 13919]]

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

    The Exchange believes the proposed rule change will impose no 
burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    The Exchange has neither solicited nor received written comments 
with respect to the proposed rule change.

III. 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 at the 
Commission's Public Reference Section, 450 Fifth Street, NW., 
Washington, DC 20549. Also, copies of such filing will be available for 
inspection and copying at the principal office of the Amex. All 
submissions should refer to File No. SR-AMEX-97-12 and should be 
submitted by April 14, 1997.

IV. Commission's Findings and Order Granting Accelerated Approval to 
the Proposed Rule Change

    After careful consideration, 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) and 
Section 11 of the Act.\9\ Specifically, the Commission believes the 
proposal is consistent with the Section 6(b)(5) \10\ requirements that 
the rules of an exchange be designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and, in general, to protect investors and the 
public interest. The Commission also believes the proposal is 
consistent with Section 11(b) of the Act \11\ and Rule 11b-1 \12\ 
thereunder, which allow exchanges to promulgate rules relating to 
specialists in order to maintain fair and orderly markets.
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    \9\ 15 U.S.C. 78f(b) and 78k.
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ 15 U.S.C. 78k(b).
    \12\ 17 CFR 240.11b-1.
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    Both the Act and the Exchange's rules reflect the crucial role 
played by specialists in providing stability, liquidity, and continuity 
in the Exchange's auction market. Recognizing the importance of the 
specialist to the auction market, the Act and the Exchange's rules 
impose stringent obligations upon specialists.\13\ Primary among these 
obligations is the requirement to restrict a specialist's dealings to 
those that are ``reasonably necessary'' to maintain a fair and orderly 
market.\14\
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    \13\ In general specialists' activities are circumscribed by 
Section 11 of the Act and the rules thereunder and by the rules of 
the exchange where the specialist is registered. See 15 U.S.C. 78k 
(prohibiting members of a national securities exchange from 
effecting transactions on such exchange for their own accounts but 
allowing, among other things, market making transactions). Rule 11b-
1(a)(2), which sets forth the primary responsibilities of a 
specialist, states that a specialist's course of dealings for his or 
her own account must assist in the maintenance of a fair and orderly 
market, so far as practicable. 17 CFR 240.11b-1(a)(2). Rule 11b-
(a)(2) also states, however, that a specialist should restrict his 
or her dealings, so far as practicable, to those reasonably 
necessary to permit him or her to maintain a fair and orderly 
market. Id. See also Amex Rule 170(c) (prohibiting a specialist from 
effecting purchases or sales of any security in which that 
specialist is registered for any account in which that specialist is 
directly or indirectly interested, unless such dealings are 
reasonably necessary to maintain a fair and orderly market in such 
security); Amex Rule 170(d) (stating that transactions effected by a 
specialist on the Exchange for his or her own account in the 
securities in which he or she is registered are to constitute a 
course of dealings reasonably calculated to contribute to the 
maintenance of price continuity with reasonable depth and minimize 
the effects of temporary disparities between supply and demand).
    \14\ 17 CFR 240.11b-1(a)(2).
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    The importance of specialist performance to the quality of exchange 
markets was highlighted during the 1987 and 1989 market breaks. In the 
Division of Market Regulation's (``Division'') 1987 Market Break 
Report, the Division examined specialist performance on the Amex on 
October 19 and 20, 1987.\15\ Although some Amex specialists performed 
well under the adverse conditions, the Division found that others 
appeared to perform inadequately.\16\
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    \15\ See SEC, Division of Market Regulation, The October 1987 
Market Break 4-29 to 4-41 (Feb. 1988) [hereinafter 1987 Market Break 
Report].
    \16\ Id. at 4-40 to 4-41.
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    The Division also examined Amex specialist performance during the 
volatile conditions of October 13 and 16, 1989. It found that 
specialist performance during that time was similar in many respects to 
the pattern of specialist performance during the October 1987 Market 
Break.\17\ Specifically, the Division found that specialists were 
confronted with extreme volume and volatility.\18\
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    \17\ See SEC, Division of Market Regulation, Market Analysis of 
October 13 and 16, 1989, at 33 (Dec. 1990) [hereinafter 1989 Market 
Analysis Report].
    \18\ See 1987 Market Break Report, supra note 15, at 4-30; 1989 
Market Analysis Report, supra note 17, at 27.
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    Both the 1987 Market Break Report and the 1989 Market Analysis 
Report reaffirmed the importance of specialist participation in 
countering market trends during periods of market volatility. At the 
same time, the reports emphasized the importance the Commission placed 
on the Amex's ability to ensure that all specialists comply with their 
affirmative and negative market making obligations during such 
periods.\19\
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    \19\ A specialist's dealer responsibilities consist of 
``affirmative'' and ``negative'' obligations. In accordance with 
their affirmative obligations, specialists are obligated to trade 
for their own accounts to minimize order disparities and contribute 
to continuity and depth in the market. Conversely, specialists, 
pursuant to their negative obligations, are precluded from trading 
for their own accounts unless such dealing is necessary for the 
maintenance of a fair and orderly market. In view of these 
obligations, the price trend in a security should be determined by 
the movements of the incoming orders that initiate the trades, not 
by a specialist's proprietary trading activity.
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    One area of specialist performance specifically reviewed by the 
1989 Market Analysis Report involved specialists' compliance with the 
negative obligations imposed by Amex Rule 170.02. Prior to the 
implementation of the Amex's pilot program, this rule stated that, 
unless the specialist had the prior approval of a Floor Official, he or 
she should avoid liquidating all or substantially all of a dealer 
position on a destabilizing tick (i.e., purchases on plus or zero plus 
ticks and sales on minus or zero minus ticks) unless the transaction 
was reasonably necessary in relation to the specialist's overall 
position in the stocks in which he or she was registered. The Division 
requested in the 1989 Market Analysis Report that the Amex examine the 
language of this rule \20\ because it appeared to provide specialists 
with unnecessarily broad latitude for effecting transactions on 
destabilizing ticks.\21\
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    \20\ 1989 Market Analysis Report, supra note 17, at n.56.
    \21\ 1989 Market Analysis Report, supra note 17, at n.31.
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    The proposed rule change is responsive to the request regarding 
Amex Rule 170.02, as well as the conclusions of the two market reports.

[[Page 13920]]

The Amex, recognizing that market conditions may necessitate that a 
specialist participate heavily in a rapidly declining market, proposed 
amendments to Amex Rule 170.02 to provide specialists with flexibility 
in liquidating specialty stock positions in order to facilitate a 
specialist's ability to maintain fair and orderly markets, particularly 
during unusual market conditions. At the same time, the amendments were 
designed to strengthen the specialist's concomitant obligation to 
participate as dealer on the opposite side of the market after a 
liquidating transaction. The Commission approved the proposed 
amendments as a one-year pilot program, and subsequently extended the 
pilot on several occasions.\22\
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    \22\ See Securities Exchange Act Release No. 33957 (Apr. 22, 
1994), 59 FR 22188 (approving File No. SR-Amex-92-26) (``1994 
Approval Order''); Securities Exchange Act Release No. 35635 (Apr. 
21, 1995), 60 FR 20780 (approving File No. SR-Amex-95-11) (``April 
1995 Approval Order''); Securities Exchange Act Release No. 36014 
(July 21, 1995), 60 FR 38870 (approving File No. SR-Amex-95-19) 
(``July 1995 Approval Order''); Securities Exchange Act Release No. 
37448 (July 17, 1996), 61 FR 38487 (approving File No. SR-Amex-96-
16); Securities Exchange Act Release No. 37704 (Sept. 19, 1996), 61 
FR 50525 (approving File No. SR-Amex-96-33); Securities Exchange Act 
Release No. 37958 (Nov. 15, 1996), 61 FR 59476 (approving File No. 
SR-Amex-96-42); February 1997 Approval Order, supra note 5.
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    The Exchange is requesting permanent approval of the pilot program 
procedures. Under the proposal, a specialist may liquidate a position 
by selling stock on a direct minus tick or by purchasing stock on a 
direct plus tick only if such transactions are reasonably necessary for 
the maintenance of a fair and orderly market and only if the specialist 
has obtained the prior approval of a Floor Official. Liquidations on a 
zero minus or zero plus tick, which previously required Floor Official 
approval, can be effected under the pilot procedures without a Floor 
Official's approval, but would continue to be subject to the 
restriction that they be effected only when reasonably necessary to 
maintain a fair and orderly market. In addition, the specialist must 
maintain a fair and orderly market during the liquidation.
    After the liquidation, a specialist is required to re-enter the 
market on the opposite side to offset any imbalances between supply and 
demand. During any period of volatile or unusual market conditions 
resulting in significant price movement in a specialist's specialty 
stock, the specialist's re-entry into the market must reflect, at a 
minimum, his or her usual level of dealer participation in the 
specialty stock. In addition, during such periods of volatile or 
unusual price movements, re-entry into the market following a series of 
transactions must reflect a significant level of dealer participation.
    In the prior approval orders concerning this pilot program, the 
Commission requested that the Amex submit a report setting forth the 
criteria developed by the Exchange to determine whether any 
reliquidating transactions by specialists were necessary and 
appropriate in connection with fair and orderly markets. The Commission 
also asked, among other things, that the Exchange provide information 
regarding the Exchange's monitoring of liquidating transactions 
effected by specialists on any destabilizing tick. In particular, the 
Commission asked the Amex to report any noncompliance with the rule and 
the action the Amex took as a result of such noncompliance.
    The Amex submitted its reports concerning the pilot program to the 
Commission in January 1997, April 1996, and May 1995. As noted above, 
the Amex believes that the pilot procedures appear to be working well 
in enabling specialists to reliquidate appropriately to meet the needs 
of the market.
    After careful review, the Commission finds that it is appropriate 
to approve the amendments to Amex Rule 170.02 on a permanent basis. In 
making this determination, the Commission notes that the pilot period 
has provided the Commission and the Exchange an opportunity to monitor 
the operation of the amendments during unusual or volatile market 
conditions. The Commission believes that the experience with the pilot 
indicates that specialists, for the most part, have been meeting their 
obligations under the Rule and are properly assuming their 
responsibilities of re-entering the market following liquidating 
transactions.
    In sum, the Commission believes the amendments to Amex Rule 170.02 
reinforce a specialist's obligation to maintain a fair and orderly 
market by providing stabilizing dealer participation to the 
marketplace, especially during periods of volatile or unusual market 
activity. For example, during periods of high market volatility, not 
only would specialists continue to be obligated to temper disparities 
between supply and demand, but specialists would specifically have to 
re-enter the market at a specified rate after a liquidating 
transaction. Similarly, the amendments to Amex Rule 170.02 reinforce 
the negative market making obligations of specialists. For example, a 
specialist is not permitted to reliquidate in the absence of a large 
dealer position; rather, he or she is able to do so only if reasonably 
necessary to enable him or her to maintain a fair and orderly market. 
Thus, the amendments to Amex Rule 170.02 do not allow the specialist to 
use the rule as a vehicle for trading.
    The Commission recognizes that future periods of market volatility 
accompanied by increasing volume and selling pressure may place 
specialists under extreme duress to keep the markets orderly and 
continuous by entering the market as buyers. In these instances, the 
Commission believes the amendments should assist specialists in 
tempering sudden price movements and keeping any general price 
movements orderly, thereby furthering the maintenance of fair and 
orderly markets consistent with Section 6 and Section 11 of the 
Act.\23\
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    \23\ 15 U.S.C. 78f and 78k.
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    Finally, the Commission believes aggressive enforcement of this 
rule is warranted given the negative effect noncompliance has on the 
market. Therefore, the Commission expects the Exchange to continue to 
carefully monitor specialist compliance with Amex Rule 170's procedures 
as required under Section 19(g) of the Act.\24\ In particular, the 
Exchange should continue to ensure that specialists are meeting their 
market making obligations and appropriately re-entering the market as 
required under the Rule.\25\ If a specialist fails to properly enter 
the aftermarket or fails to seek Floor Official approval where such 
approval, if sought, would not have been granted, the Commission 
expects the Exchange to bring full disciplinary procedures.
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    \24\ 15 U.S.C. 78s(g) (requiring every self-regulatory 
organization to comply with, and enforce compliance with, the Act, 
the rules thereunder, and its own rules).
    \25\ Although liquidating transactions are not precluded during 
periods of significant price movements, the Commission emphasizes 
that such transactions should be accompanied by the necessary dealer 
participation against the trend of the market, even in situations 
where continuity and depth reflect variations that normally may be 
experienced in the stock.
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    In addition, the Commission expects the Exchange to address all 
``nonsubstantive'' violations of this rule (i.e., instances where a 
specialist fails to seek Floor Official approval where such approval, 
if sought, would have been granted). The Commission recognizes that 
most, if not all, ``nonsubstantive'' violations of these procedures 
will be inadvertent. Nevertheless, given the crucial role that 
specialists play in providing stability to the Exchange's market, it is 
important to reinforce the specialists' obligations. Thus, consistent 
with the interpretation adopted by the Amex in conjunction with its 
request for

[[Page 13921]]

permanent approval, the Commission expects, at a minimum, that the 
Exchange's staff will issue a cautionary letter to a specialist for an 
initial ``nonsubstantive'' violation during a rolling twelve-month 
period and to refer any subsequent ``nonsubstantive'' violations by the 
same specialist during this period to the Minor Floor Violation 
Disciplinary Committee (``Committee'') for a fine pursuant to the 
Amex's Minor Rule Plan (``MRP'').\26\
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    \26\ See Amex Rule 590(h). Although Amex Rule 590 states that 
the Committee ``may'' impose a fine, the Commission believes the use 
of such ``prosecutorial discretion'' to issue a cautionary letter in 
lieu of a fine for ``nonsubstantive'' violations of this rule should 
be exercised only in extraordinary circumstances. This position is 
bolstered by the fact that the specialist, at a minimum, already 
would have received such a letter from the Amex's staff in 
connection with its first ``nonsubstantive'' violation of this rule 
within the last twelve months.
    In addition, each instance of noncompliance should be addressed 
individually. Although instances of noncompliance by a specialist 
that occur between regularly scheduled meetings of the Committee may 
be presented as a single bundle, each infraction should be 
considered a separate offense for calculating the appropriate fine. 
For example, if a specialist fails to properly obtain Floor Official 
approval 15 times during a 5 month period, that specialist should be 
fined for 15 violations, instead of the minimum amount for a first 
offense simply because all 15 violations were presented to the 
Committee at the same meeting.
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    The Commission finds good cause for approving the proposed rule 
change, including Amendment No. 1, prior to the thirtieth day after the 
date of publication of notice of filing thereof. The Exchange will 
continue to use the identical procedures contained in the pilot 
program. These procedures have been published in the Federal Register 
on several occasions for the full comment period, and no comments have 
ever been received. Furthermore, the Commission approved a similar rule 
change for the NYSE, also without receiving comments on that 
proposal.\27\ For these reasons, the Commission finds that accelerating 
approval of the proposed rule change is consistent with Section 6, 
Section 11, and Section 19(b)(2) of the Act.\28\
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    \27\ See Securities Exchange Act Release No. 31797 (Jan. 29, 
1993), 58 FR 7277 (approving File No. SR-NYSE-92-20).
    \28\ 15 U.S.C. 78f, 78k, and 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\29\ that the proposed rule change (SR-Amex-97-12), as amended, is 
approved.

    \29\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 97-7342 Filed 3-21-97; 8:45 am]
BILLING CODE 8010-01-M