[Federal Register Volume 66, Number 211 (Wednesday, October 31, 2001)]
[Notices]
[Pages 55031-55036]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-27326]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44972; File No. SR-Amex-2001-19]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change and Amendment Nos. 1, 2 and 3 by the American Stock 
Exchange LLC Relating to Its Performance Evaluation and Allocations 
Procedures

October 23, 2001.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 19, 2001, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. On May 31, 2001, the Exchange submitted Amendment No. 1 to 
the proposed rule change.\3\ On August 13, 2001, the Exchange submitted 
Amendment No. 2 to the proposed rule change.\4\ On August 27, 2001, the 
Exchange submitted Amendment No. 3 to the proposed rule change.\5\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Bill Floyd-Jones, Jr., Assistant General 
Counsel, Legal and Regulatory, Amex, to Katherine A. England, 
Assistant Director, Division Market Regulation (``Division''), 
Commission (May 31, 2001). Amendment No. 1 adds discussion to the 
purpose section of the proposal regarding the ability of the 
Performance Committee to take appropriate action should a member or 
member organization fail without a reasonable excuse to meet with 
the committee after receiving notice. In addition, Amendment No. 1 
corrects structural and typographical errors that appeared in the 
proposed rule language.
    \4\ See Letter from Bill Floyd-Jones, Jr., Assistant General 
Counsel, Legal and Regulatory, Amex, to Katherine A. England, 
Assistant Director, Division, Commission (August 10, 2001). 
Amendment No. 2 adds a reference to the Special Allocations 
Committee in the proposal and proposed rule text; adds allocations 
procedures for structured products and Exchange Traded Funds; and 
makes technical changes to the proposed rule text.
    \5\ See Letter from Bill Floyd-Jones, Jr., Assistant General 
Counsel, Legal and Regulatory, Amex, to Katherine A. England, 
Assistant Director, Division, Commission (August 24, 2001). 
Amendment No. 3 clarifies the Performance and Allocations Committee 
review procedures.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to adopt Amex Rules 26 and 27 to codify the 
Exchange's performance evaluation and allocations procedures. The text 
of the proposed rule change is available at the Office of the 
Secretary, the Amex and 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 Exchange 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. The Exchange 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
    The Board of Governors of the Exchange is generally responsible for 
the supervision of its members. With regards to (1) evaluating the 
performance of specialists, registered traders, and brokers, and (2) 
allocating securities to specialists, the Board has delegated its 
responsibilities to the Committee on Floor Member Performance (the 
``Performance Committee'' or ``Committee'') and the Allocations 
Committee, respectively.\6\
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    \6\ See Amex Rules 170 and 958, which establish standards for 
specialists and Registered Options Traders. See also Article II, 
Section 3 of the Exchange Constitution, which provides in relevant 
part:
    The Board shall establish standards and requirements for the 
registration of specialists or odd-lot dealers in securities dealt 
in on the Exchange, and may grant to a committee or committees, the 
authority to (i) approve the registration of specialists or odd-lot 
dealers, (ii) revoke or suspend any such registration at any time, 
(iii) allocate to a registered specialist or odd-lot dealer any 
security dealt in on the Exchange, and (iv) revoke any such 
allocation, temporarily or permanently, at any time.
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    Performance evaluation is the non-disciplinary process \7\ by which 
the Exchange reviews Floor member conduct and takes remedial action 
where necessary to improve performance. The registration of specialists 
(``allocations'') is the process by which the Exchange matches 
appropriate specialists to particular securities.
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    \7\ See In the Matter of the Application of Pacific Stock 
Exchange's Options Floor Post X-17, Admin. Proc. File No. 3-7285, 
Securities Exchange Act Release No. 31666 (December 29, 1992), 51 
SEC DOC 261. The Commission determined that performance evaluation 
processes fulfill a combination of business and regulatory interests 
at exchanges and are not disciplinary in nature. The Commission 
states in the Post X-17 case:
    We believe that the reallocation of a market maker's (or a 
specialist's) security due to poor performance is neither an action 
responding to a violation of an exchange rule nor an action where a 
sanction is sought or intended. Instead, we believe that 
performance-based security reallocations are instituted by exchanges 
to improve market maker performance and to ensure quality of 
markets. Accordingly, in approving rules for performance-based 
reallocations, we historically have taken the position that the 
reallocation of a specialist's or a market maker's security due to 
inadequate performance does not constitute a disciplinary sanction.
    We believe that an SRO's need to evaluate market maker and 
specialist performance arises from both business and regulatory 
interests in ensuring adequate market making performance by its 
market makers and specialists that are distinct from the SRO's 
enforcement interests in disciplining members who violate SRO or 
Commission Rules. An exchange has an obligation to ensure that its 
market makers or specialists are contributing to the maintenance of 
fair and orderly markets in its securities. In addition, an exchange 
has an interest in ensuring that the services provided by its 
members attract buyers and sellers to the exchange. To effectuate 
both purposes, an SRO needs to be able to evaluate the performance 
of its market makers or specialists and transfer securities from 
poor performing units to the better performing units. This type of 
action is very different from a disciplinary proceeding where a 
sanction is meted out to remedy a specific rule violation. 
(Footnotes omitted.)
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    The Exchange proposes to codify its performance evaluation and 
allocation procedures as Amex Rules 26 and 27 in order to make them 
readily available to members since these procedures currently are not 
available in one easily accessed location.

Performance Evaluation (Rule 26)

    Paragraph (a) of proposed Rule 26 describes the composition of the 
Performance Committee. The proposed rule states that the Performance 
Committee consists of 16 persons drawn from a larger pool divided as 
equally as possible among specialists, registered traders, brokers and 
upstairs member firm representatives. Specialists, registered traders, 
and brokers are the three classes of market participants on the 
Exchange Floor. Upstairs member firm representatives, while not on the 
Floor, make extensive use of the Exchange's services and have another 
perspective on the operation of the market. A Floor Governor chairs 
meetings of the Performance Committee and only may vote to break a tie. 
A

[[Page 55032]]

Senior Floor Official may chair the Committee in the event that a Floor 
Governor is unavailable.
    Paragraph (a) of the proposed Rule 26 also allows the Performance 
Committee to delegate some or all its responsibilities to one or more 
subcommittees consisting of six persons. Due to the large size of the 
Performance Committee, the Exchange believes that it is impractical to 
convene the full Committee for all matters that might come before it. 
As a result, it is the practice of the Performance Committee to use 
subcommittees to (1) screen matters to determine if they warrant the 
attention of the full Committee, and (2) resolve routine matters (e.g., 
adherence to zone performance standards). A Performance subcommittee 
would have less substantial remedial tools available to it than are 
available to the Performance Committee due to its limited size. The 
remedial actions available to Performance subcommittees are enumerated 
in paragraph (a) of proposed Rule 26.
    Paragraphs (b) through (d) of proposed Rule 26 describe the 
responsibilities of the Performance Committee with respect to 
specialist, registered traders, and brokers. These paragraphs also 
enumerate the remedial actions available to the Committee with respect 
to each group of Floor members.
    With respect to specialists, paragraph (b) of proposed Rule 26 
would provide that the Performance Committee reviews proposed transfers 
to specialist registrations and specified transactions involving 
specialists. Paragraph (b) provides that the Performance Committee will 
approve a proposed transaction unless a ``countervailing institutional 
interest'' indicates that the transaction should be disapproved or 
conditionally approved. In determining the presence of a countervailing 
institutional interest, the Performance Committee would consider 
whether the proposed transaction would maintain or enhance the quality 
of the Exchange's markets. The Performance Committee also would 
consider whether the transaction would create a level of concentration 
among specialists that should be mitigated. Commentary .03 to proposed 
rule 26 describes the Exchange's ``concentration'' policy.
    The Exchange proposes that the Performance Committee disapprove or 
conditionally approve a transaction if it appears to the Committee that 
the proposed transaction (1) would not maintain, or (2) would not 
enhance the quality of markets on the Exchange. The Committee also may 
disapprove or conditionally approve a transaction if it appears to the 
Committee that it would raise concentration issues. This review 
authority gives the Performance Committee an important means for 
ensuring that specialists maintain quality markets on the Exchange and 
thus benefits investors.
    In addition to reviewing transactions of specialists, the 
Performance Committee would review specialist performance relative to 
the quality of markets, competition with other markets, observance of 
ethical standards, and administrative factors. The Exchange believes 
that the Performance Committee of the Amex and its analogues at other 
principal equity and options exchanges traditionally have used these 
factors to review specialists performance to ensure the maintenance of 
quality markets. If the Performance Committee determines that a 
specialist has failed to properly perform as a specialist, the Exchange 
proposes that the Committee may take one or more of the 10 remedial 
actions enumerated in Paragraph (b) of proposed Rule 26. These range 
from relatively mild actions such as counseling the specialists on how 
to improve its performance or issuing an admonitory letter, to more 
intermediate actions such as assigning a performance rating \8\ or 
requiring the adoption of a Performance Improvement Plan,\9\ to 
stronger actions such as directing the reallocation of one or more 
securities.
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    \8\ See Securities Exchange Act Release No. 27455 (Nov. 22, 
1989), 54 FR 49152 (Nov. 29, 1989) (approving File No. SR-Amex-83-
27, regarding the Exchange's ``rating'' system).
    \9\ Commentary .02 to proposed Rule 26 describes Performance 
Improvement Plans and the procedure for implementing them. In 
general, the Performance Improvement Plan procedure permits the 
Performance Committee to require specialists and registered traders 
to implement business plans to improve their performance.
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    The four types of securities that currently trade on the Amex are 
(1) stock and other equities, (2) structured products, (3) standardized 
options, and (4) Exchange Traded Funds (``ETFs'').\10\ Specializing or 
market making in these securities requires different resources, and 
firms or units that specialize in more than one security class 
customarily are staffed and managed along product line. As a result, 
poor performance by a specialist unit in listed equities might not be 
mirrored by poor performance by the same unit in listed options. 
Therefore, the Performance Committee would have the authority to target 
remedial action to a particular class of security traded by a 
specialist or registered trader.
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    \10\ ETFs include, but are not limited to, Portfolio Depositary 
Receipts (e.g., SPDRs, DIAMONDS and Nasdaq-100 Index Tracking 
Stock), Index Fund Shares (e.g., Select Sector SPDRs and iShares) 
and Trust Issued Receipts (e.g., ``HOLDRs''). The Exchange also 
lists corporate and government bonds.
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    Paragraph (c) of proposed Rule 26 describes the responsibilities 
and authority of the Performance Committee with respect to registered 
traders. It is quite similar to paragraph (b) of proposed Rule 26 
(which concerns specialists) in recognition of the fact that the 
Registered Options Traders (``ROTs'') are ``quasi-specialists.'' \11\ 
Since the Exchange does not ``allocate'' securities to registered 
traders, however, there is no provision for reallocations or allocation 
preclusions with respect to registered traders.
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    \11\ See Commentary .01 to Amex rule 958. Unlike a specialist, 
however, a ROT may not handle agency orders. See also Amex Rules 
111(c) and 950(c).
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    Commentary .01 to proposed Rule 26 provides that an Auto-Ex \12\ 
performance standard applicable to ROTs is monitored by the Performance 
Committee. The standard provides that any ROT that trades an option 
during a break-out situation and has signed-on to Auto-Ex for a period 
of two or more days over the ten previous business days must sign on to 
Auto-Ex for the break-out option. LEAPS are excluded from this 
standard. The proposed standard further provides that all ROTs that 
sign on to Auto-Ex for the break-out must remain on Auto-Ex for the 
duration of the break-out. ROTs that have signed-on to Auto-Ex during a 
break-out only are permitted to sign-off with the permission of a Floor 
Governor. The purpose of the standard is to ensure that there is 
sufficient liquidity for an option during times of market stress. The 
Performance Committee may prohibit a ROT, or his or her firm, from 
participating on Auto-Ex for up to six months for deviations from this 
standard.
    Paragraph (d) of proposed Rule 26 describes the responsibilities 
and authority of the Performance Committee with respect to Floor 
Brokers. Since brokers do not act as dealers, they are not evaluated in 
terms of quality or markets and competition with other markets. 
Instead, they are evaluated with respect to order handling, observance 
of ethical standards, and administrative factors. In addition, the 
remedial actions that the Performance Committee may take with respect 
to brokers are more limited than those that may be taken with respect 
to registered

[[Page 55033]]

traders and specialists because many of the Committee's remedial 
measures involve restrictions on acting as a dealer, which is not a 
broker's function.
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    \12\ Auto-Ex is the Exchange system that provides an automatic 
execution to incoming customer orders up to a specific size. 
Specialists and ROTs that sign on to the system take the opposite 
side of incoming customer orders at the displayed bid or offer 
except when a limit order on the book establishes the best bid or 
offer on the Amex.
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    Paragraph (e) of proposed rule 26 describes Performance Committee 
procedures. Paragraph (e) of proposed rule 26 provides that persons 
(i.e., specialists, specialist units, registered traders or brokers) 
that are asked to address the Performance Committee because they may 
have failed to meet minimum performance standards are notified in 
writing of the matter(s) to be considered by the Committee and are 
provided with copies of any written materials that are given to the 
Committee prior to the meeting. Such persons may be questioned by the 
Performance Committee members and Exchange staff present at the 
meeting, and they have an opportunity to present information and 
documents to rebut any concerns about their performance. Anyone 
appearing before the Committee (not just persons that may have failed 
to meet appropriate performance standards) may be represented by 
counsel. Formal rules of evidence do not apply at meetings of the 
Performance Committee. If the Performance Committee determines that a 
member or member organization has failed to meet minimum performance 
standards, the affected person or persons would be notified in writing 
of the Committee's findings, conclusions, and the remedial action to be 
taken.
    Paragraph (f) of proposed Rule 26 provides that the Performance 
Committee may take action against a member or member organization if 
the person or firm fails without reasonable excuse to meet with the 
Committee after receiving notice of the meeting.
    Paragraphs (g) and (h) of proposed Rule 26 describe procedures for 
appealing decisions of the Performance Committee. Members and member 
organizations aggrieved by determinations of the Performance Committee 
or a Performance subcommittee must submit an application to review the 
decisions to the Secretary of the Exchange within five business days of 
receipt of the Committee's or subcommittee's written decision. Filing a 
timely application for review stays the decisions of the Performance 
Committee or subcommittee. Appeals from decisions of a Performance 
subcommittee are reviewed ``de-novo'' by the Performance Committee. 
Appeals from decisions of the Performance Committee are reviewed by the 
Amex Adjudicatory Council (``Adjudicatory Council''). The Exchange 
represents that the Adjudicatory Council may (1) Limit its review to 
the record created by the Performance Committee, (2) consider 
additional matters that were not included in the record, or (3) hear 
the matter ``de novo,'' as the Adjudicatory Council determines is 
appropriate to render a fair decision on the appeal. A verbatim record 
of the proceeding before the Adjudicatory Council is maintained and the 
Adjudicatory Council's decision is in writing. The decision of the 
Adjudicatory Council constitutes final action by the Exchange.

Allocations Procedures (Rule 27)

    Paragraph (a) of proposed Rule 27 describes the composition and 
responsibilities of the Options and Equities Allocations Committees. 
The Options Allocations Committee is responsible for allocating 
standardized equity options. This Committee consists of 11 persons as 
follows: Six Floor brokers, two Registered Options Traders, and three 
representatives of upstairs member firms. The Equities Allocations 
Committee allocates the equity securities of operating companies. It 
consists of ten persons as follows: Six Floor brokers, one specialist, 
and three representatives of upstairs member firms. A Floor Governor, 
who only may vote to break a tie, chairs both Committees. A Senior 
Floor Official may chair a meeting in the event that a Floor Governor 
is unavailable.
    The Special Allocations Committee allocates securities that are not 
allocated by the Options or Equities Allocations Committees and 
securities with special characteristics as may be determined by the 
Chief Executive Officer of the Exchange or his or her designee. It 
consists of six persons as follows: The Chief Executive Officer (or his 
or her designee), two brokers, two Registered Options Traders, and a 
representative of an upstairs member firm. The Special Allocations 
Committee is chaired by the Chief Executive Officer who does not vote 
except to make or break a tie. In the Chief Executive Officer's 
absence, a Floor Governor or Senior Floor Official may chair the 
Committee. The Options, Equities and Special Allocations Committees are 
collectively referred to herein as the ``Allocations Committee.''
    Floor brokers have the greatest number of representatives on the 
Allocations Committee since they tend to have personal familiarity with 
all units on the Floor as a result of their representation of orders at 
different posts. Specialists have the fewest representatives on the 
Allocations Committee since they typically have limited personal 
familiarity with other units. In addition, specialists and the units 
that they are associated with are ineligible to be allocated any 
security that is allocated at a meeting where they participate on the 
Committee. As a result, specialists frequently decline to participate 
at Allocations Committee meetings. Representatives of upstairs member 
firms have an intermediate number of representatives on the Committee 
(as do ROTs with respect to the Options Allocations Committee). 
Upstairs member firms, like brokers, are users of the services provided 
by specialists and have valuable insights as to their relative 
competencies. ROTs, as market makers, also have insights into the 
qualifications of different specialists. The Chief Executive Officer is 
a member of the Special Allocations Committee as a result of the role 
played by the Exchange's staff in securing listings of the securities 
that are allocated by the Special Allocations Committee (e.g., ETFs).
    Paragraph (b) of proposed Rule 27 provides that the Allocations 
Committee shall select the specialist or unit for a security that 
appears best able in the professional judgment of the Committee members 
to perform the functions of a specialist in the security to be 
allocated. The proposed rule also provides a non-exclusive list of the 
criteria that the Allocations Committee uses to decide which unit 
should be allocated a particular security. The Exchange, the New York 
Stock Exchange, Inc., and Chicago Board Options Exchange, Inc. 
customarily use these criteria to ensure that securities are allocated 
consistent with the interests of investors and the Exchange. Issuers of 
equity securities may elect to use the Exchange's ``Issuer Choice'' 
procedures to allocate a security \13\ if they so desire, pursuant to 
paragraph (e) of proposed Rule 27 and Commentary .05 of proposed Rule 
27.
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    \13\ See Securities Exchange Act Release No. 23593 (Sept. 5, 
1986), 51 FR 32985 (Sept. 17, 1986) (order approving File No. SR-
Amex-86-10, regarding the Issuer Choice program).
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    Paragraph (b) of proposed Rule 27 also provides that specialists 
subject to a preclusion on new allocations in one or more classes of a 
security as a result of Performance Committee or a disciplinary action 
only are eligible for allocations of ``related securities '' as 
described in proposed Commentary .05 to Rule 27.
    With respect to equity securities, proposed Commentary .05 to Rule 
27 provides that newly listed convertible securities and securities 
issued in connection with a name change or reverse stock split are 
automatically allocated (i.e., allocated without any involvement of the 
Allocations

[[Page 55034]]

Committee) to the specialist that already trades the issuer's 
securities regardless of an allocation preclusion. In other situations 
involving the allocation for equity securities that are related 
securities, proposed Commentary .05 provides that the Allocations 
Committee would determine whether the trading characteristics of the 
newly listed related security are closely related to the exiting 
security given the Exchange staff's recommendations as to whether the 
newly listed related securities should be allocated to the current 
specialist. If the Allocations Committee determines that the trading 
characteristics of the newly listed related security are closely 
related to the existing listed security, it would allocate the newly 
listed security to the existing regardless of an allocation preclusion. 
If the Allocations Committee determines that the trading 
characteristics of the newly listed related security are not closely 
related to the existing security, the related security is allocated 
either by the Allocations Committee (paragraph (b) of proposed Rule 27) 
or according to the Issuer Choice procedure (paragraph (e) of proposed 
Rule 27). The existing specialist, if subject to an allocation 
preclusion, is eligible for the newly listed related security only if 
the issuer requests its current specialist under the Issuer Choice 
procedure.
    With respect to the standardized options, proposed Commentary .05 
provides that options on related securities are automatically allocated 
to the existing option specialist unless the existing options 
specialist is subject to an allocation preclusion. If the existing 
option specialist is subject to a preclusion on new option allocations, 
the specialist only will be allocated the new option if the Allocations 
Committee determines that the trading characteristics of the newly 
listed option are closely related to the existing option, given the 
Exchange's recommendation as to whether the newly listed related 
securities should be allocated to the current specialist. Unless the 
Allocations Committee makes the required determination, the existing 
specialist that is subject to an allocation preclusion is ineligible 
for the newly listed option on the related security.
    Commentary .05 states that the term ``related security'' does not 
include ETF's. Thus, an ETF specialist that is subject to a preclusion 
on the allocation of ETCs is not eligible for any new ETF allocations 
for the duration of the preclusion.
    Paragraph (e) of proposed Rule 27 describes the Exchange's ``Issuer 
Choice'' program, and should be read in conjunction with Commentary .02 
and .03 to proposed Rule 27, ``Contacts with Unlisted Companies,'' and 
``Specialist and other Member Contacts with Issuers and Sponsors of 
Exchange Traded Funds and Structured Products for the Purpose of 
Securing New Listings.'' Commentary .02 to proposed Rule 27 provides 
that specialists or other members are required to submit a Notice of 
Marketing Interest (``NOMI'') to the Exchange (1) prior to initiating 
any contact with an unlisted company regarding listing, or (2) within 
five business days of an unanticipated contact with a company where 
discussions regarding listing occurred or are anticipated in the 
future. There is an automatic 12-month sunset on the authorization of a 
specialist unit or other member to effect the listing of prospect 
company on the Exchange. This sunset period may be extended for one 
additional six-month period by Amex staff if the specialist or other 
member submits a written request to Amex staff detailing the activities 
that the specialist or other member has undertaken which it believes 
will result in a favorable listing decision. Once a company decides to 
list on the Exchange, specialists and other members can have no further 
communications with the company for the purpose of influencing the 
choice of specialist except for the interview described below.
    Commentary .03 to Rule 27 provides that the Exchange must approved 
proposed contacts between specialists and potential issuers and 
sponsors of ETFs and Structured Products regarding potential new 
listings. The Exchange would approve the contact where it appears that 
the contact would benefit the Exchange's listing effort. The Exchange 
would disapprove the contact where it might hinder the listing effort 
or would be inappropriate. The approval would last for six months and 
could be extended for one or more six-month period where it appears 
that the specialist is making progress in securing the listing. The 
Exchange also could withdraw the approval prior to scheduled 
termination if it appears that the specialist contacts are hindering 
the Exchange's listing efforts.
    Paragraph (e) of proposed Rule 27 provides that the Allocations 
Committee prepares a list of six qualified units based upon the 
criteria used by the Allocations Committee in selecting a specialist 
under its regular allocations process. The issuer or sponsor (in the 
case of an ETF) may request that a unit or units be placed on the list 
of eligible specialist. The Allocations Committee, however, is not 
obligated to honor such requests. In the case of an equity security, 
the Allocations Committee only is advised of a company's preference for 
a particular specialist where the specialist's efforts actually have 
been instrumental in securing the listing as evidenced by the company 
filing a preference with the Exchange for the specialist within two 
weeks of the Exchange initiating a listing qualification review.
    Pursuant to proposed Rule 27, issuers may interview specialists on 
the list of eligible units prepared by the Allocations Committee. 
Exchange staff would arrange these interviews, and in the case of an 
equity security, the Chief Executive Officer of the Exchange or his or 
her designee may require a member of the Exchange staff to attend such 
interviews to answer questions about the Exchange's allocation policies 
and to ensure that any statements by specialists and their 
representatives are consistent with the Exchange's policies on 
communications with unlisted companies. Inappropriate statements to 
issuers and ETF sponsors include, but are not limited to, apparent 
misrepresentations as to market making capabilities or promises 
unrelated to the specialist's role in making a market in the issuer's 
stock. Specialists and their representatives also may not supply 
information concerning another specialist unit or units either orally 
or in writing, except they may refer to overall floor-wide statistics.
    Under proposed Rule 27, the issuer selects its specialist from the 
list of eligible units provided to it. In addition, if an issuer 
becomes dissatisfied with its specialist, it has a one-time right to 
request the reallocation of its securities. This right may be exercised 
at any time between 120 days and one year of listing. In the event that 
the issuer requests a reallocation under this provision, its securities 
may be reallocated either under the Exchange's Issuer Choice or regular 
allocations procedures.
    Paragraph (c) of proposed Rule 27 provides miscellaneous procedures 
that apply to both the regular and Issuer Choice allocation process. 
Paragraph (c) of proposed Rule 27 also provides that all eligible 
specialists are automatically deemed to apply for all new listings. In 
contrast, options specialists must submit an application to be 
considered for a new allocation of options. In addition, the Exchange 
proposes to require that specialists disclose any business transactions 
(e.g., agreements) or other relationships (e.g., ownership of stock or 
other securities) that a specialist, its affiliates, and the employees 
of both the specialist and its

[[Page 55035]]

affiliates have with a newly listed company, its affiliates and the 
employees of the company and its affiliates. Specialists also would be 
required to confirm to the Exchange in writing the absence of any 
disclosable business transactions or relationships if there are none.
    Paragraph (c) of proposed Rule 27 provides that specialists may 
present relevant information to the Allocations Committee for its 
consideration in connection with specific allocation decisions. The 
Allocations Committee would have discretion to permit members of a 
trading crowd to present relevant information to the Allocations 
Committee in appropriate circumstances. Information presented to the 
Allocations Committee could include, for example, undertakings as to 
the size of the markets and quote spreads that the Specialist and crowd 
would maintain, and other information relevant to the factors that the 
Allocations Committee may consider in making its decisions. The 
Allocations Committee may require that all submissions be in writing.
    Paragraph (d) of proposed Rule 27 describes the ``Pre-Allocation'' 
or ``Piggy-Back'' allocation process. This procedure is used in 
situations where the Exchange decides to ``piggy-back'' a listing 
announced by another exchange (i.e., the Amex determines to list an 
option following its designation by another exchange). Due to the delay 
attendant to the regular allocation process and the short time prior to 
the commencement of trading in ``piggy-back'' situations, pre-selected 
units identified by the Allocations Committee as the Exchange's premier 
units are allocated ``piggy-back'' options on a rotating basis.
    Twice a year, the entire Allocations Committee pool meets to 
interview and review applications from all specialists that wish to be 
placed on the pre-allocation list. Following this review process, the 
Allocations Committee prepares a list of the selected units in such 
order of priority as the Allocations Committee designates based on the 
criteria enumerated in paragraph (b) of proposed Rule 27.
    When the Exchange determines to list an option in response to its 
listing by another exchange, the Exchange proposes that the Exchange 
staff may contact available Floor Governors to confirm that no material 
performance situation or other relevant matter has developed that would 
cause the next unit on the list to be inappropriate to receive the 
allocation. If such a situation has developed, the Exchange proposes 
that specialists or specialist units would be by-passed and the 
Allocations Committee would be convened as soon as possible to 
determine if the specialist or specialist unit should be removed from 
the pre-allocation list.
    Paragraphs (f), (g), and (h) of proposed Rule 27 address the role 
of the Allocations Committee in the reallocation of securities. 
Paragraph (f) of proposed Rule 27 provides that the Allocations 
Committee follows its regular allocation procedures (not Issuer Choice) 
in the event that the Exchange reallocates securities because of, among 
other things, (1) A Performance Committee remedial action, (2) a 
specialist request to be relieved of a security for good cause, or (3) 
the registration of a specialist which is cancelled as a result of a 
disciplinary action. Paragraph (f) of proposed Rule 27 also provides 
that the procedures specified in paragraphs (g) and (h) of proposed 
Rule 27 shall apply to reallocations made in connection with the 
emergency reallocations due to financial or operating conditions or to 
reallocations because of business transactions that result in a 
transfer of one or more specialist registration.
    As previously noted by the Exchange, the Performance Committee is 
responsible for reviewing proposed transfers of specialist 
registrations and specified transactions involving specialists 
including the dissolution of specialist units. Since the Performance 
Committee is primarily responsible for reviewing such matters, 
paragraph (g) of proposed Rule 26 provides that the Allocations 
Committee shall follow directions received from the Performance 
Committee with respect to the reallocation of securities in these 
matters. If the Performance Committee directs that there should be some 
other disposition of the securities than provided for by the parties, 
but does not give the Allocations Committee specific instructions as to 
how the securities should be allocated, the Allocations Committed would 
follow its customary (i.e., no Issuer Choice) procedures in 
reallocating these securities. Paragraph (g) of proposed Rule 27 
further provides that the Exchange will defer to the decision of the 
arbitrators in the event of an arbitration between specialists unless 
the Performance Committee determines that a countervailing 
institutional interest dictates that the Exchange either should not 
wait for and/or abide by the decision of the arbitrators. In such 
cases, the Performance Committee may direct the Allocations Committee 
to reallocate the disputed securities in a specified manner. In the 
absence of specific instructions from the Performance Committee, the 
Allocations Committee reallocates the securities in accordance with its 
customary (no Issuer Choice) procedures.
    Paragraph (h) of proposed Rule 27 addresses emergency reallocations 
for reasons of financial or operating condition. It provides that the 
Chief Executive Officer of the Exchange or the Senor Supervisory 
Officer on the Trading Floor, in consultation with the available Floor 
Governors, may request the Allocations Committee to convene to 
reallocate securities on an emergency basis where it appears that a 
unit cannot be permitted to continue to specialize in one or more of 
its securities with safety to investors, its creditors, or other 
members due to financial or operational conditions. The affected 
specialist would be notified of the meeting (the notice does not have 
to be in writing) and, if time and circumstances permit, the specialist 
will be given an opportunity to appear before the Allocations 
Committee. If a prior hearing is not feasible, however, the Exchange 
proposes that the Allocations Committee may proceed with the 
reallocation, and the specialist unit shall be afforded an opportunity 
to address the Committee as soon as reasonably possible after the 
reallocation. If the conditions which led to the reallocation no longer 
exist or are corrected, the Chief Executive Officer in consultation 
with the available Floor Governors, or the specialist unit may request 
the Allocations Committee to reconvene to consider whether the 
securities should be restored to the unit.
    Paragraph (i) of proposed Rule 27 provides for the appeal of 
decisions of the Allocations Committee to the Amex Adjudicatory 
Council. A written application to appeal a decision must be filed with 
the Office of the Secretary within five business days of the decision 
of the Committee. An application to review the Allocations Committee's 
decision, however, does not stay the decision. Unless the Adjudicatory 
Council decides otherwise, the review of Allocations Committee 
decisions is limited to matters raised before the Committee. A verbatim 
record of the proceeding before the Adjudicatory Council is maintained 
and the Council's decision is in writing. The decision of the 
Adjudicatory Council is final and may not be appealed.
2. Statutory Basis
    Proposed Rules 26 and 27 are consistent with section 6(b) of the 
Act \14\ in general, and further the objectives of

[[Page 55036]]

section 6(b)(5) of the Act \15\ in particular, in that the Exchange's 
procedures are designed to promote just and equitable principles of 
trade and protect investors and the public interest by encouraging good 
performance and competition among specialists and other Floor members.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that proposed Rules 26 and 27 will impose no 
burden on competition; rather, the proposed rules will enhance and 
encourage competition both within the Exchange, and, more 
significantly, between and among the Exchange and other exchanges and 
markets by establishing incentives for superior performance and thereby 
ensuring the maintenance of quality markets at the Exchange. In this 
respect, the Exchange believes that it is critical to recognize that 
the most important level of competition occurs not among specialists of 
the same exchange to obtain a particular listing (although this, too, 
is important), rather among specialists of different exchanges trading 
in the same security and actively competing for the business of the 
investing public.\16\
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    \16\ The Exchange represents that much of the new proposed rules 
are merely codifications of existing practices and procedures, and 
thus do not reflect any fundamental changes with respect to the 
allocation of securities to specialists or the evaluation of the 
performance of specialists and other Floor members.
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    Moreover, the Exchange believes that the Commission has expressly 
recognized the types of procedures as are set forth in Rules 26 and 27 
for allocating securities to the most suitable specialists, reviewing 
the performance of specialists and other Floor members, and, if 
applicable, reallocating securities, are necessary to ensure quality 
markets and thereby attract buyers and sellers to the Exchange.\17\
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    \17\ See note 5, supra.
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    The Exchange did not solicit comments on this proposal and, 
therefore, did not receive written comments directly on proposed Rules 
26 and 27. However, criticism was expressed to the Exchange during 
internal meetings to review these rules regarding the practice of 
payment for order flow in options and its alleged impact upon a 
specialist's market share, combined with the concomitant use of market 
share as a criterion for measuring performance by options specialists. 
The criticism expressed was that payment for order flow skews a 
specialist's market share in ways having little or nothing to do with 
the quality of the market provided by the specialist.
    Because the Exchange believes that the Commission has previously 
considered the practice of payment for order flow, it will not address 
the advantages or disadvantages of payment for order flow at this 
time.\18\ Nevertheless, the Exchange acknowledges that payment for 
order flow can in some circumstances be one of many factors capable of 
affecting a specialist's market share in an option. The Exchange 
believes that payment for order flow, however, is never the sole 
determining factor of market share. Furthermore, the Exchange believes 
that, as in any free and competitive market, a loss of market share is 
a warning signal that the customer, in this case the investor, views 
the market as inferior in some respect to a competitor's market. 
According to the Exchange, to ignore the diminishment of market share 
would be tantamount to a declaration of non-competition (i.e., it would 
ignore the fact that the investing public views another market or 
exchange as superior or more competitive). In such circumstances, the 
Exchange believes that the only responsible course is to investigate 
and weigh the reasons for the loss of market share to competitive 
markets and exchanges.
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    \18\ The Exchange notes that on July 20, 2000, the Exchange 
filed a proposed rule change establishing a marketing fee for equity 
option transactions of specialists and registered options traders 
used to attract order flow, which became effective upon filing with 
the Commission. The Exchange further notes that, after soliciting 
comments, the Commission allowed the rule to remain in effect. See 
Securities Exchange Act Release No. 43228 (Aug. 30, 2000), 65 FR 
54330 (Sept. 7, 2000).
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    The Exchange notes that the Performance Committee may in its 
evaluation determine that the loss of market share occurred through no 
fault of the specialist involved, and the security would not be 
reassigned. In any event, the Exchange believes that market share is 
one of a number of appropriate factors for the Performance Committee to 
weigh in evaluating performance by specialists, including options 
specialists, and that inclusion of this criterion promotes competition 
among market makers and among markets. The Exchange believes that the 
failure to include loss of market share as one possible indicator of 
poor performance could leave the Exchange unable to prevent the erosion 
of a viable market in a security, which would reduce or eliminate 
competition with respect to that security.

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

    As set forth above in Item II(B), there were no written comments 
received by the Exchange directly in response to proposed Rules 26 and 
27.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve such proposed rule change or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 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 Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the Exchange. All submissions should refer to File 
No. SR-Amex-2001-19 and should be submitted by November 21, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to the delegated authority.\19\
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    \19\ 17 CFR 200.30-2(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-27326 Filed 10-30-01; 8:45 am]
BILLING CODE 8010-01-M