[Federal Register Volume 65, Number 5 (Friday, January 7, 2000)]
[Notices]
[Pages 1205-1206]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-386]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42308; File No. SR-Amex-99-23]


Self-Regulatory Organizations; American Stock Exchange LLC; Order 
Approving Proposed Rule Change and Amendment No. 1 Thereto and Notice 
of Filing and Order Granting Accelerated Approval to Amendment No. 2 
Relating to the Amendment of Commentary .05 to Rule 155

January 3, 2000.

I. Introduction

    On July 9, 1999, the American Stock Exchange LLC (``Amex'' 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 permitting members to break certain trades only 
with Floor Official approval. The Exchange submitted Amendment No. 1 to 
its proposal on August 2, 1999.\3\ The proposed rule change, as 
amended, was published for comment in the Federal Register on September 
21, 1999.\4\ The Commission received no comments on the proposal. On 
October 25, 1999, the Amex file Amendment No. 2.\5\ This order approves 
the proposal, as amended, and solicits comments from interested persons 
on Amendment No. 2.
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    \1\ 15 U.S.C. 87s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Letter from William Floyd-Jones, Assistant General Counsel, 
Legal & Regulatory Policy, Amex, to Terri Evans, Attorney, Division 
of Market Regulation (``Division''), Commission, dated July 29, 1999 
(``Amendment No. 1'').
    \4\ Securities Exchange Act Release No. 41866 (September 13, 
1999) 64 FR 5115.
    \5\ In Amendment No. 2, the Exchange clarified what constitutes 
``prompt'' notice that a member wants to break a trade, as well as 
the procedure for Floor Official review. The Exchange also 
represented that it has sufficient surveillance to determine whether 
a specialists is acting consistently with his obligation to maintain 
a fair and orderly market. See Letter from William Floyd-Jones, 
Assistant General Counsel, Legal & Regulatory Policy, Amex, to Terri 
Evans, Attorney, Division, Commission dated October 21, 1999 
(``Amendment No. 2'').
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II. Description of Proposal

    Under the proposal, a member must first obtain written Floor 
Official approval before breaking a trade because the specialist acted 
as both agent and principal. The member seeking the rejection must 
request, in writing, Floor Official review of the transaction promptly 
after receiving notice of the trade.\6\ As is currently the case, the 
basis for the request to break the trade would be that the specialist 
acted in a dual capacity on the trade. Under the proposed procedure, a 
Floor Official would review the facts and circumstances of the trade to 
determine whether the specialist acted consistently with his obligation 
to maintain a fair and orderly market.\7\ This review would include 
discussions with the aggrieved member, the specialist and other members 
with knowledge of the transaction. It is incumbent on the Floor 
Official (who has received training on the rules of the Exchange) to 
investigate the transaction and make a ruling. Members aggrieved by a 
Floor Official's ruling may seek review of the ruling pursuant to 
Exchange Rule 22.\8\
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    \6\ The amount of time that constitutes ``prompt'' notice will 
vary according to conditions in the market and the member or member 
organization seeking to break the trade act diligently. The Exchange 
has represented that the member or member organization seeking to 
break the trade will have sufficient time to review the notice of 
the trade and to prepare and deliver the written request for Floor 
Official review of the transaction. Id.
    \7\ In Amendment No. 2, the Exchange deleted the requirement 
that the member seeking to reject the trade show good cause for the 
Floor Official to form the belief that the execution was 
inconsistent with the specialist's responsibility to maintain a fair 
and orderly market. It is up to the Floor Official to review the 
facts and circumstances of the trade to determine whether the 
specialist acted consistently with his obligation to maintain a fair 
and orderly market. Id.
    \8\ Id.
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    The Exchange believes that the current rule, which permits a party 
to an Exchange contract to break the trade even though the specialist 
has not acted inappropriately with respect to the trade,\9\ interjects 
an element of financial risk into the market. This risk is magnified in 
the context of options due

[[Page 1206]]

to the leverage of these securities. In the Exchange's view, the risk 
of financial instability created by giving persons an unfettered right 
to cancel trades merely because the executing specialist acted both as 
principal and agent outweighs whatever residual benefits the rule may 
have.
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    \9\ Telephone conversation between William Floyd-Jones, 
Assistant General Counsel, Legal & Regulatory Policy, Amex, and 
Terri Evans, Attorney, Division, Commission, on January 3, 2000.
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    The Exchange, however, is not proposing to eliminate a member's 
ability to rescind a trade where the specialist may have acted 
inappropriately. The proposed rule change is intended to eliminate the 
unchecked right to break trades due to the capacity in which the 
specialist acted. The Exchange believes that the proposal appropriately 
limits the financial risk of specialists that provide liquidity to 
investors by acting as principal while maintaining the ability of 
members to break trades where the specialist acts inconsistently with 
his obligations. The Exchanges believes that brokers have developed 
sophisticated systems for reviewing execution quality in response to 
the Commission's statements on ``best execution'' of customer orders. 
Further, the Exchange notes that it has developed sophisticated 
surveillance systems backed by extensive staff resources for reviewing 
trading by its members. The Exchange believes that its current 
surveillance capabilities are sufficient to determine whether 
specialists are acting consistently with their obligations to maintain 
fair and orderly markets. In addition, the Exchange plans to automate 
its order ticket review procedures, which will further enhance its 
market surveillance.\10\
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    \10\ Id.
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulation thereunder applicable to a national securities exchange.\11\ 
In particular, the Commission believes that the proposal is consistent 
with the requirements of Section 6(b)(5) of the Act.\12\ Section 
6(b)(5) of the Act \13\ requires, among other things, that the rules of 
an exchange be designed to prevent fraudulent and manipulative acts and 
practices, promote just and equitable principles of trade, facilitate 
transactions in securities, remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and 
in general to protect investors and the public interest.
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    \11\ In approving this proposed rule change, the Commission has 
considered its impact on efficiently, competition and capital 
formation. 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ Id.
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    The Commission finds that requiring written Floor Official approval 
before breaking a trade due to the specialist acting as agent and 
principal (for good cause shown in relation to the specialist's 
responsibility to maintain a fair and orderly market) promotes just and 
equitable principles of trade, facilitates transactions in securities, 
and removes impediments to and perfects the mechanism of a free and 
open market and a national market system. By requiring Floor Official 
approval, the proposal should limit the instances in which a trade can 
be rejected which could enhance the stability of the marketplace, while 
providing members with an opportunity to break a trade when a 
specialist acted in a manner that was not consistent with his or her 
duty to maintain a fair and orderly market.
    The Commission also finds that Amendment No. 2 is consistent with 
Section 6(b)(5) of the Act, because it promotes just and equitable 
principles of trade, facilities transactions in securities and removes 
impediments to and perfects the mechanism of a free and open market 
and, in general, protects investors and the public interest. The 
Commission notes that the theory underlying Amex Rule 155, Commentary 
.05, is that a member who places an order, which the specialist 
executes as principal, should have a special opportunity to evaluate 
the execution and decide whether to reject the transaction. As stated 
above, the purpose would continue to be served, because members will 
continue to receive notices when a specialist has acted as both 
principal and agent and members may continue to reject a specialist's 
principal transactions upon a finding of good cause when the specialist 
has failed to maintain a fair and orderly market. Thus, a member's 
ability to rescind a trade in that instance should ensure that the 
interest of investors are protected. In addition, the Exchange has 
represented that it has sufficient surveillance for monitoring the 
activity of its specialists, thus helping to ensure investor 
protection.
    The Commission finds good cause to approve Amendment No. 2 to the 
proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing of the amendment in the Federal 
Register. Specifically, Amendment No. 2 merely clarifies the process by 
which a member can reject a trade and conveys Amex's representation 
that it has adequate surveillance to monitor its specialists. 
Accordingly, the Commission believes that there is good cause, 
consistent with Section 6(b)(5) and 19(b) of the Act \14\ to approve 
Amendment No. 2 on an accelerated basis.
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    \14\ 15 U.S.C. 78f(b)(5) and 78s(b).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 2, including whether the amendment 
is consistent with the Act. Persons making written submissions should 
fix 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 Amendment No. 2 that are filed with the Commission, and 
all written communications relating to Amendment No. 2 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 Room in Washington, D.C. Copies of such filings will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-Amex-99-23 and 
should be submitted by January 28, 2000.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change, as amended, (SR-Amex-99-23) is 
approved.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulations, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-386 Filed 1-6-00; 8:45 am]
BILLING CODE 8010-01-M