[Federal Register Volume 64, Number 113 (Monday, June 14, 1999)]
[Notices]
[Pages 31886-31889]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-14990]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41488; File No. SR-AMEX-98-42]


Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change Regarding the Confirmation and Affirmation of Securities 
Transactions

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on October 27, 1998, the 
American Stock Exchange, Inc. (``AMEX'') filed with the Securities and 
Exchange Commission (``Commission'') and on may 21, 1999, amended the 
proposed rule change as described in Items I and II below, which items 
have been prepared primarily by AMEX.\2\ The Commission is publishing 
this notice and order to solicit comments from interested persons and 
to grant accelerated approval of the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Since the filing of the proposed rule change, AMEX has 
merged with the National Association of Securities Dealers and as a 
result has changed its full name from American Stock Exchange, Inc. 
to American Stock Exchange LLC.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Under the rule change, AMEX will amend Rule 423 to permit 
electronic confirmation/affirmation of depository eligible COD 
transactions \3\ by a qualified vendor or by an entity that has 
obtained an exemption from registration as a clearing agency.\4\
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    \3\ COD transaction are those in which a member firm extends 
receipt versus payment or delivery versus payment privileges to a 
customer.
    \4\ The text of the amendments is attached as Exhibit A to this 
notice.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, AMEX 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. AMEX has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of such statements.

[[Page 31887]]

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    AMEX Rule 423 (``COC Orders'') currently requires that the 
facilities of a Commission registered clearing agency be used by AMEX 
member organizations for the confirmation, affirmation, and book-entry 
settlement of COD transactions in depository eligible securities. 
Certain vendors of electronic trade confirmation (``ETC'') services 
have requested that they be allowed to provide confirmation/affirmation 
services for institutional trades (i.e., COD transaction) even though 
they are not registered clearing agencies. Under the proposed rule 
change, AMEX will amend Rule 423 to allow its broker-dealer members to 
use a qualified vendor for the confirmation and affirmation of 
institutional trades. In addition, Rule 423 is being amended to allow 
AMEX's broker-dealer members to use the confirmation/affirmation 
services of any entity that has obtained an exemption from registration 
as a clearing agency specifically so that it can provide confirmation/
affirmation services for institutional trades.
    In order to become a qualified vendor under the rule change, and 
ETC vendor will be required to certify to its customers that:

    (1) With respect to its electronic trade confirmation/
affirmation system, it has a capacity requirements, evaluation, and 
monitoring process that allows it to formulate current and 
anticipated estimated capacity requirements;
    (2) Its electronic trade confirmation/affirmation system has 
sufficient capacity to process the specified volume of data that it 
reasonably anticipates to be entered into its electronic trade 
confirmation/affirmation service during the upcoming year;
    (3) Its electronic trade confirmation/affirmation system has 
formal contingency procedures, the entity has followed a formal 
process of reviewing the likelihood of contingency occurrences, and 
the contingency protocols are reviewed and updated on a regular 
basis;
    (4) Its electronic trade confirmation/affirmation system has a 
process for preventing, detecting, and controlling any potential or 
actual systems integrity failures and its procedures designed to 
protect against security breaches are followed; and
    (5) Its current assets exceed its current liabilities by at 
least $500,000.

    In addition, a qualified vendor will be required initially and 
annually to submit to AMEX and to the Commission staff a report 
prepared by independent audit personnel (referred to in the rule change 
as ``Auditor's Report''). Each Auditor's Report must: (1) verify the 
certifications described above; (2) contain a risk analysis of all of 
the entity's information technology systems; and (3) contain the 
written response of the entity's management to the Auditor's Report's 
verifications and risk analysis. The Auditor's Report must be deemed 
not unacceptable by Commission staff.\5\
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    \5\ At this time, the Commission staff intends to indicate that 
an entity's initial Auditor's Report is not unacceptable by issuing 
a letter to the entity stating that it will not recommend 
enforcement action against any of AMEX's member organizations that 
elect to use the confirmation/affirmation systems of the entity. 
Subsequent Auditor's Reports submitted to the Commission staff by 
the qualified vendor will be considered acceptable unless the 
Commission staff otherwise informs the qualified vendor.
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    Qualified vendors will be subject to ongoing requirements under the 
rule change. For each transaction in which it provides confirmation/
affirmation services, a qualified vendor will be required to: (1) 
Deliver a trade record to a registered clearing agency in the clearing 
agency's format; (2) obtain a control number for the trade record from 
the clearing agency; (3) cross reference the control number to the 
confirmation and subsequent affirmation of the trade; and (4) include 
the control number when delivering the affirmation of the trade to the 
clearing agency. A qualified vendor will be required to notify AMEX and 
the Commission staff in writing of any changes to its systems that 
significantly affect or have the potential to significantly affect its 
electronic trade confirmation/affirmation system. In addition, a 
qualified vendor will be required to supply supplemental information 
regarding its confirmation/affirmation system as requested by AMEX or 
by the Commission staff. If a qualified vendor intends to cease 
providing confirmation/affirmation services as requested by AMEX or by 
the Commission staff. If a qualified vendor intends to cease providing 
confirmation/affirmation services, it must notify AMEX and the 
Commission staff in writing.
    The Municipal Securities Rulemaking Board (``MSRB''), the National 
Association of Securities Dealers (``NASD''), and the New York Stock 
Exchange (``NYSE'') have made amendments to their rules similar to 
those being proposed here by AMEX.\6\ The proposed Rule 423 amendments 
are responsive to the Commission staff's request that the self-
regulatory organizations have uniform rules with respect to qualified 
vendors providing confirmation/affirmation services.
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    \6\ Securities Exchange Act Release No. 41378 (May 7, 1999), 64 
FR 25940 [File Nos. SR-MSRB-98-06, SR-NASD-98-20, SR-NYSE-98-07 
(order approving proposed rule changes).
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(2) Statutory Basis
    AMEX believes that the proposed rule change is consistent with 
Section 6(b) of the Act \7\ in general and furthers the objectives of 
Section 6(b)(5) in particular in that it is designed to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities.
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    \7\ 15 U.S.C. 78f.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    AMEX believes that 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

    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

    Section 6(b)(5) of the Act \8\ requires, among other things, that 
AMEX's rules be designed to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities. In addition, Section 6(b)(8) of the Act \9\ requires that 
AMEX's rules not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. The Commission 
believes that AMEX's proposed rule change is consistent with its 
obligations under the Act because it will require unregulated entities 
that wish to provide confirmation/affirmation services to establish 
links and interfaces with a registered clearing agency. This 
requirement should increase cooperation and coordination among AMEX's 
members, registered clearing agencies, and entities that become 
qualified vendors under the rule change.
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    \8\ 15 U.S.C. 78f(b)(5).
    \9\ 15 U.S.C. 78f(b)(8).
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    In addition, in reviewing the proposed rule change the Commission 
has considered whether the proposed rule change would impose any burden 
on competition that is not necessary or appropriate in furtherance of 
the purposes of the Act. The Commission believes that the rule change 
has been carefully designed to allow unregistered ETC vendors to 
provide confirmation/affirmation services for institutional

[[Page 31888]]

trades in a manner which is not unduly burdensome for ETC vendors and 
which preserves the safety and soundness of the national system for the 
clearance and settlement of securities transactions. Therefore, the 
Commission believes that AMEX's proposed rule change should not impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the publication of notice of 
the filing. Approving prior to the thirtieth day after publication of 
notice will allow AMEX to immediately conform its Rule 423 to the 
recently amended confirmation/affirmation rules of the MSRB, NASD, and 
NYSE.\10\
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    \10\ Supra note 4.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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-
0609. 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 in 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 AMEX. All 
submissions should refer to File No. SR-AMEX-98-42 and should be 
submitted by July 6, 1999.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (File No. SR-AMEX-98-42) be and 
hereby is approved.

    \11\ 15 U.S.C. 78s(b)(2).
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    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR. 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.

Exhibit A

Proposed Amendments to Rule 423

Additions Italicized
Deletions [bracketed]

COD Orders

    Rule 423. No member or member organization shall accept an order 
from a customer pursuant to an arrangement whereby payment for 
securities purchased is to be made to the member or member 
organization upon delivery of the securities to an agent of the 
customer, or whereby payment for securities sold is to be made by 
the member or member organization to an agent of the customer upon 
receipt of the securities from such agent, unless all of the 
following procedures are followed:
    (1) through (4) No change.
    [(5) The customer or its agent shall utilize the facilities of a 
securities depository for the confirmation, acknowledgment and book 
entry settlement of all depository eligible transactions.]
    (5) The facilities of a Clearing Agency shall be utilized for 
the book-entry settlement of all depository eligible transactions. 
The facilities of either a Clearing Agency or a Qualified Vendor 
shall be utilized for the electronic conformation and affirmation of 
all depository eligible transactions.

Commentary

    .01 through .03 No change.
    [.04  The following transactions shall be exempt from the 
provisions of paragraph (5) of this Rule:
    (1) Transactions that are to be settled outside of the United 
States.
    (2) Transactions wherein both a member organization and its agent 
are not participants in a securities depository.
    (3) Transactions wherein both a customer and its agent are not 
participants in a securities depository.]
    .04  Transactions that are to be settled outside of the United 
States shall be exempt from the provisions of paragraph (5) of this 
rule.
    .05  No Change.
    .06  For the purposes of this rule, a [``securities 
depository''] ''Clearing Agency'' shall mean a Clearing Agency as 
defined in Section 3(a)(23) of the Securities Exchange Act of 1934, 
that is registered with the Securities and Exchange Commission 
(``Commision'') pursuant to Section 17A(b)(2) of the Act or has 
obtained from the Commission and exemption from registration granted 
specifically to allow the Clearing Agency to provide confirmation 
and affirmation services.
    07.  For the purposes of this rule, ``depository eligible 
transactions'' shall mean transactions in those securities for which 
confirmation, [acknowledgment] affirmation, and book-entry 
settlement can be performed through the facilities of a [securities 
depository] Clearing Agency as defined in Commentary .06 of this 
rule.
    [.08  Rule 423(5) and Commentary .04, .05, .06, and .07 shall 
become effective January 1, 1983.]
    .08  ``Qualified Vendor'' shall mean a vendor of electronic 
confirmation and affirmation services that:
    (A) shall, for each transaction subject to this rule; (i) 
deliver a trade record to a Clearing Agency in the Clearing Agency's 
format; (ii) obtain a control number for the trade record from the 
Clearing Agency; (iii) cross-reference the control number to the 
confirmation and subsequent affirmation of the trade; and (iv) 
include the control number when delivering the affirmation of the 
trade to the Clearing Agency;
    (B) certifies to its customers: (i) with respect to its 
electronic trade confirmation/affirmation system, that it has a 
capacity requirements, evaluation, and monitoring process that 
allows the vendor to formulate current and anticipated estimated 
capacity requirements; (ii) that its electronic trade confirmation/
affirmation system has sufficient capacity to process the specified 
volume of data that it reasonably anticipates to be entered into its 
electronic trade confirmation/affirmation service during the 
upcoming year; (iii) that is electronic trade confirmation/
affirmation system has formal contingency procedures, that the 
entity has followed a formal process of reviewing the likelihood of 
contingency occurrences, and that the contingency protocols are 
reviewed and updated on a regular basis; (iv) that its electronic 
trade confirmation/affirmation system has a process for preventing, 
detecting, and controlling any potential or actual systems integrity 
failures, and its procedures designed to protect against security 
breaches are followed; and (v) that its current assets exceed its 
current liabilities by the lease five hundred thousand dollars;
    (C) has submitted, and shall continue to submit on an annual 
basis, an Auditor's Report to the Commission staff which is not 
deemed unacceptable by the Commission staff. An Auditor's Report 
will be deemed unacceptable if it contains any findings of material 
weakness;
    (D) notifies the Commission staff immediately in writing of any 
changes to its systems that significantly affect or have the 
potential to significantly affect its electronic trade confirmation/
affirmation systems including, without limitation, changes that: (i) 
affect or potentially affect the capacity or security of its 
electronic trade confirmation/affirmation system; (ii) rely on new 
or substantially different technology; or (iii) provide a new 
service to the Qualified Vendor's electronic trade confirmation/
affirmation system;
    (E) immediately notified the Commission staff in writing if it 
intends to cease providing services;
    (F) provides the Exchange with copies of any submissions to the 
Commission staff made pursuant to .08 (B), (C), (D) and (E) of this 
rule within ten business days; and
    (G) supplies supplemental information regarding their electronic 
trade confirmation/

[[Page 31889]]

affirmation services as requested by the Exchange or the Commission 
staff.
    .09  ``Auditor's Report'' shall mean a written report which is 
prepared by competent, independent, external audit personnel in 
accordance with the standards of the American Institute of Certified 
Public Accountants and the Information Systems Audit and Control 
Association and which (i) verifies the certifications contained in 
.08(B) above; (ii) contains a risk analysis of all aspects of the 
entity's information technology systems including, without 
limitation, computer operations, telecommunications, data security, 
systems development, capacity planning and testing, and contingency 
planning and testing; and (iii) contains the written response of the 
entity's management to the information provided pursuant to (i) and 
(ii) above.

[FR Doc. 99-14990 Filed 6-11-99; 8:45 am]
BILLING CODE 8010-01-M