[Federal Register Volume 68, Number 50 (Friday, March 14, 2003)]
[Notices]
[Pages 12393-12395]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-6129]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47469; File No. SR-Amex-2002-104]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the American Stock Exchange LLC Relating to Amex Rules 26, 
29, 171, and 950 To Revise Specialist Capital Requirements and the 
Method for Computing Specialist Capital Requirements and To Create an 
Early Warning Level With Respect to Specialist Capital

March 7, 2003.
    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 December 10, 2002, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in items I, II, 
and III below, which items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Amex proposes to amend Amex rules 26, 29, 171, and 950 to (1) 
revise specialist capital requirements and the method for computing 
specialist capital requirements, and (2) to create an early warning 
level with respect to specialist capital. The text of the proposed rule 
change is below. Text in brackets indicates material to be deleted, and 
text in italics indicates material to be added.
* * * * *

Performance Committee

    Rule 26. (a) No change.
    (b) The Performance Committee shall review, and approve, disapprove 
or conditionally approve, mergers and acquisitions of specialist units, 
transfers of one or more specialist registrations, specialist joint 
accounts, and changes in control or composition of specialist units. 
The Performance Committee shall approve a proposed transaction 
involving a specialist unit unless it determines that a countervailing 
institutional interest indicates that the transaction should be 
disapproved or conditionally approved. In determining whether there is 
a countervailing institutional interest, the Performance Committee 
shall consider the maintenance or enhancement of the quality of the 
Exchange's market, taking into account the criteria that the 
Allocations Committee may consider in making an initial allocation 
determination (Rule 27(b)) and other considerations as may be relevant 
in the particular circumstances.
    The Performance Committee shall evaluate specialists, individually 
and/or collectively as units, to determine whether they have fulfilled 
performance standards relating to, among other things: (1) Quality of 
markets, (2) competition with other markets, (3) observance of ethical 
standards, and (4) administrative factors. The Performance Committee 
may consider any relevant information, including but not limited to the 
results of the Specialist Floor Broker Questionnaire, trading data, a 
member's regulatory history, order flow statistics, and such other 
factors and data as may be pertinent in the circumstances. The 
Performance Committee also may review specialists, individually and/or 
collectively as units, with respect to capital requirements and the 
``early warning level'' set forth in Commentary .06 to rule 171. The 
Performance Committee may take one or more of the following actions if 
it finds that a specialist or unit has failed to properly perform as a 
specialist: (1) Send admonitory letters, (2) refer matters to the Minor 
Floor Violation Disciplinary Committee for possible action pursuant to 
Exchange rule 590, (3) refer matters to the Exchange's Enforcement 
Department for investigation and possible disciplinary proceedings, (4) 
counsel specialists on how to improve their performance, (5) require 
specialists to adopt a performance improvement plan, (6) reorganize 
specialist units, (7) require the reallocation of securities, (8) 
suspend a specialist's or unit's registration as a specialist for a 
specific period of time, or (9) prohibit a specialist or unit from 
receiving allocations in a particular situation or for a specified 
period of time. In appropriate circumstances, the Performance Committee 
may confine a prohibition on new allocations to one of the three 
classes of securities traded on the Exchange (i.e., equities, Exchange 
Traded Funds or options), or otherwise target a remedial action to a 
particular class of security traded by a specialist or unit.
    (c) and (d) No change.
    (e) The Performance Committee may meet with one or more 
specialists, specialist units, registered traders or brokers that may 
have failed to meet minimum performance standards, capital 
requirements, or the ``early warning level'' set forth in Commentary 
.06 to rule 171. In such an event, the member or members shall be 
notified in writing of the grounds to be considered by the Performance 
Committee and afforded an opportunity to make a presentation of 
relevant information in rebuttal. Such member or members shall be given 
access to all written material to be reviewed by the Performance 
Committee, and all persons appearing before the Performance Committee 
may be represented by counsel. However, formal rules of evidence shall 
not apply in Performance Committee meetings. A failure to meet minimum 
performance standards, capital requirements, or early warning level may 
form the basis for Performance Committee remedial action against one or 
more specialists, specialist units, registered traders or brokers. Any 
member or member organization affected by a decision of the Performance 
Committee shall be informed in writing of the decision, which decision 
shall include the findings, conclusions, any remedial action to be 
taken (hereinafter ``written notification''). (f) through end. No 
Change.
* * * * *

Market Quality Committee

    Rule 29. (a) No change.
    (b) The Market Quality Committee shall evaluate the performance of 
specialists registered in securities admitted to dealings on an 
unlisted basis (``UTP Specialists'') with respect to, among other 
things: (1) Quality of markets, (2) competition with other market 
centers, (3) administrative matters, and (4) willingness to promote the 
Exchange as a marketplace. The Market Quality Committee may consider 
any relevant information, including but not limited to trading data, 
order flow statistics, market quality statistics, and such other 
factors and data pertaining to both the Amex and other market centers 
as may be relevant in the circumstances. The Market Quality Committee 
also may review specialists, individually and/or collectively as units, 
with respect to capital requirements and the ``early warning level'' 
set forth in Commentary .06 to rule 171. The Market Quality Committee 
may take one or more of the following actions if it finds that the 
performance of the UTP Specialist is inadequate relative to one or more 
of the above factors: (1) Send advisory letters, (2) counsel UTP 
Specialists on how to improve their market quality, (3) require UTP 
Specialists to adopt a performance improvement plan, (4) require the 
reallocation of securities, (5) suspend a

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UTP Specialist's registration as a specialist for a specific period of 
time, or (6) prohibit a UTP Specialist from receiving allocations in a 
particular situation or for a specified period of time.
    (c) No change.
    (d) The Market Quality Committee may meet with a UTP Specialist 
that may have failed to meet minimum performance standards with respect 
to UTP Securities, capital requirements, or the ``early warning level'' 
set forth in Commentary .06 to rule 171. In such an event, the UTP 
Specialist shall be notified in writing of the grounds to be considered 
by the Market Quality Committee and afforded an opportunity to make a 
presentation of relevant information. Such UTP Specialist shall be 
given access to all written material to be reviewed by the Market 
Quality Committee, and all persons appearing before the Market Quality 
Committee may be represented by counsel. However, formal rules of 
evidence shall not apply in meetings of the Market Quality Committee. A 
failure to meet minimum standards relating to: (1) Quality of markets, 
(2) competition with other market centers, (3) administrative matters, 
[or] (4) willingness to promote the Exchange as a marketplace, or (5) 
capital requirements, or early warning level may form the basis for 
remedial action by the Market Quality Committee against a UTP 
Specialist. Any UTP Specialist affected by a decision of the Market 
Quality Committee shall be informed in writing of the decision, which 
decision shall include the findings, conclusions, and any remedial 
action to be taken (hereinafter ``written notification'').
    (e) through end. No change.
* * * * *

Specialist Financial Requirements

    Rule 171. Every registered specialist shall maintain [a cash or 
liquid asset position] tentative net capital in the amount of 
[$600,000] $1,000,000 or in an amount sufficient to assume a position 
of sixty trading units of each security in which such specialist is 
registered, whichever amount is greater. In the event that two or more 
specialists are associated with each other and deal for the same 
specialists account, the above requirement of this rule shall apply to 
such specialists as one unit, rather than to each specialist 
individually.

Commentary

    .01 through .03. No change.
    .04 For each security in which a specialist is registered which is 
principally traded or priced in a U.S. marketplace other than the 
Exchange, such specialist shall maintain [a cash or net liquid asset 
position] tentative net capital sufficient to assume a position of 
twenty trading units of such security.
    .05 The term ``tentative net capital'' means net capital, computed 
in accordance with Securities Exchange Act rule 15c3-1 before 
application of haircuts and undue concentration charges.
    .06 Each specialist or specialist unit subject to this rule, shall 
promptly notify the Exchange in writing if the tentative net capital of 
such specialist or specialist unit after deduction of all capital 
withdrawals including maturities, if any, scheduled during the next six 
months, falls below 125% of the minimum dollar amount required hereby 
(the ``early warning level'').
    .07 In the event the tentative net capital of any specialist or 
specialist unit subject to this rule falls below the early warning 
level, such specialist or specialist unit shall attempt to reach a 
written agreement with the Exchange's Financial Regulatory Services 
Department (FRSD) on a plan for raising the specialist or specialist 
unit's capital to an appropriate level or taking other appropriate 
action. In the event of the failure to reach such agreement within five 
business days following the initial response or involvement of FRSD, 
FRSD may refer such matter to the Committee on Floor Member Performance 
or the Market Quality Committee as appropriate to take such action as 
it shall decide is appropriate.
    .08 For purposes of rule 171, the amount sufficient to assume a 
position of sixty trading units shall be equal to 15% of the current 
market value of the position.
* * * * *

Rules of General Applicability

    Rule 950. (a) through (g). No change.
    (h) The provisions of rule 171 and Commentary thereto shall apply 
to the trading of option contracts, however, the option specialist 
financial requirement shall be equal to a minimum of [$600,000] 
$1,000,000 plus $25,000 for each option issue in excess of the initial 
[ten] twenty-five issues in which such specialist is registered.
    .01 For an option specialist that is also an equity security 
specialist subject to the requirements of rule 171, the minimum 
[$600,000] $1,000,000 referred to in rule 171 shall apply to the 
entirety of the specialist's business, in both equities and options. 
For example, a specialist maintaining a book in both equity securities 
and options that is allocated only one equity security and one option 
(assuming the cost to carry 60 units of the equity stock does not 
exceed [$600,000] $1,000,000) would be required to satisfy the minimum 
financial requirement of [$600,000] $1,000,000.
    (i) through end. No change.
* * * * *

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 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. The Amex 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
    Change in Specialist Capital Requirements. Amex rule 171 currently 
requires specialist units to maintain a cash or ``liquid asset 
position'' in the greater of $600,000 or an amount sufficient to assume 
a position of sixty trading units of each security in which such 
specialist unit is registered. In the case of options specialists, the 
requirements of Amex rule 171 are superceded by Amex rule 950(h), which 
requires option specialist units to maintain a cash or ``liquid asset 
position'' in the amount of $600,000 plus $25,000 for each option issue 
in excess of the initial ten issues in which the specialist unit is 
registered. The proposal would amend Amex rule 171 and Amex rule 950(h) 
to raise the minimum capital requirement for both equity and option 
specialists to $1,000,000.
    For specialists whose position requirement already exceeds 
$1,000,000, this increase would be offset by reductions in the position 
requirements. Specifically, the proposal would reduce the position 
requirement for equity specialists from 25% of sixty trading units of 
each security in which such specialist is registered to 15% of such 
amount. In the case of option specialists, the proposal would reduce 
the position requirement from an additional $25,000 for each option 
issue in excess of the initial ten issues in which such specialist is 
registered to an additional $25,000 for each issue in excess of the 
initial 25.

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    Change in Specialist Capital Computation Method. The proposal would 
amend Amex rule 171, and indirectly Amex rule 950(h), to require that 
specialist units meet their capital requirements with ``tentative net 
capital,'' i.e., net capital computed in accordance with Rule 15c3-1 of 
the Act,\3\ before haircut and undue concentration charges, rather than 
with cash or liquid assets. Use of a tentative net capital standard 
would provide a better measure of a specialist unit's financial 
strength than the current ``cash or liquid asset'' requirement, since 
it would take into account all of the specialists' assets and 
liabilities--not just those held in the clearing account. Moreover, 
since all specialists on the Amex are now subject to the net capital 
rule, use of such a standard should not present any computational or 
operational difficulties for our specialists. Indeed, those Amex 
specialists who also act as specialists on the NYSE are already 
calculating their capital in a similar manner.
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    \3\ 17 CFR 240.15c3-1.
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    Creation of an Early Warning Level. As currently drafted, the 
Exchange's capital standards for specialists units suffer from an ``all 
or nothing'' approach. That is, a specialist either meets the financial 
requirements or it does not. The Exchange has little actual control or 
authority over a specialist that, although perhaps headed for financial 
difficulty, has not yet fallen below the minimum requirement.
    Rather than the current ``all or nothing'' approach, the Exchange 
is proposing the creation of a so-called early warning level that, if 
triggered, would allow the Exchange to subject the breaching specialist 
unit to closer oversight and impose conditions on its operations. The 
proposed early warning level would be set at 125% of the actual 
financial requirement and would be calculated in a conservative manner 
by assuming that subordinated debt and other scheduled capital 
distributions coming due in less than 180 days have already been paid.
    While the Exchange's Financial Regulatory Services Department 
(``FRSD'') would monitor for compliance with the early warning level, 
specialist units would also be required to provide the Exchange with 
notice in the event they breach the early warning level. In the event 
of such a breach, the specialist unit would have five business days to 
reach a written agreement with FRSD on an action plan for raising its 
capital to an appropriate level. The plan would specify a timetable for 
bringing capital above the early warning level or taking other 
appropriate actions.
    In the event the specialist and FRSD are not able to reach 
agreement on a plan, FRSD would refer the specialist either to the 
Committee on Floor Member Performance or to the Market Quality 
Committee with respect to UTP securities. Either of these Committees 
would have the authority to impose a performance improvement plan on 
the specialist to increase the specialist's capital or take other 
appropriate action. In no event could a written action plan provide for 
capital requirements below, or otherwise violate, the Exchange's 
minimum requirements. A failure by the specialist to meet the 
conditions in the Committee's plan could result in disciplinary action, 
the reallocation of securities, and/or other remedial action to the 
extent necessary to bring the breaching specialist within continued 
compliance.
    The proposed rule change would not go into effect until one year 
after approval by the Commission to give firms an opportunity to adjust 
to the changes.
2. Statutory Basis
    The proposed rule change is consistent with section 6(b) of the Act 
\4\ in general, and furthers the objectives of section 6(b)(5) of the 
Act \5\ in particular, in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to 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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    \4\ 15 U.S.C. 78f(b).
    \5\ 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 the proposed rule change will impose no 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.

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 in response to the 
proposed rule change.

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

    Within 35 days of the date of 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 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 
Amex. All submissions should refer to File No. SR-Amex-2002-104 and 
should be submitted by April 4, 2003.
    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-6129 Filed 3-13-03; 8:45 am]
BILLING CODE 8010-01-P