[Federal Register Volume 68, Number 122 (Wednesday, June 25, 2003)]
[Notices]
[Pages 37880-37882]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-16006]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48053; File No. SR-Amex-2003-50]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the American Stock Exchange 
LLC and Amendment No. 1 Thereto Relating to a Marketing Fee To Be 
Imposed on Certain Transactions of Specialists and Registered Options 
Traders

June 17, 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 May 29, 2003, 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 the Amex has prepared. On June 16, 2003, the Amex 
filed Amendment No. 1 to the proposed rule change.\3\ The Amex has 
designated this proposal as one establishing or changing a due, fee, or 
other charge imposed by the Amex under Section 19(b)(3)(A)(ii) of the 
Act,\4\ which renders the proposal effective upon filing with the 
Commission. The Commission is publishing this notice to solicit 
comments from interested persons on the proposed rule change, as 
amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Claire P. McGrath, Senior Vice-President and 
Deputy General Counsel, NASD, to Nancy Sanow, Assistant Director, 
Division of Market Regulation, Commission, dated June 13, 2003 
(``Amendment No. 1''). For purposes of calculating the 60-day 
abrogation period, the Commission considers the proposed rule change 
to have been filed on June 16, 2003, when Amendment No. 1 was filed.
    \4\ 15 U.S.C. 78s(b)(3)(A)(ii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Amex proposes to reinstate a marketing fee to be imposed on 
certain transactions of specialists and registered options traders. The 
revenue generated by this fee would be used to compete with other 
exchanges for order flow in equity options traded on the Exchange.
    The text of the proposed rule change is available at the Amex and 
at the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Amex included statements 
concerning the purpose of and basis for its proposal and discussed any 
comments it had received regarding the proposal. 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
    In July 2000, the Amex imposed a marketing fee of $0.40 per 
contract on the transactions of specialists and registered options 
traders in equity options. The Exchange collected the fee and allocated 
the funds to the specialists, who then used the funds to pay broker-
dealers for orders they directed to the Exchange. In August 2001, the 
Exchange suspended the collection of the fee. At the time Amex 
suspended its marketing fee, some of the other options exchanges also 
suspended their marketing fee programs. Now, however, payment for order 
flow programs are again in place at each of the other options 
exchanges. The Amex believes that these programs operate to the 
competitive disadvantage of the Amex. The Exchange has traditionally 
opposed all forms of payment for order flow, especially SRO-sponsored 
programs,\5\ believing, among other

[[Page 37881]]

things, that they create the appearance of serious conflicts of 
interest between the business objectives of the self-regulatory 
organization and its statutory duties, and can compromise a broker's 
fiduciary obligation to achieve best execution of its customers' 
orders. However, given the institution of payment for order flow 
programs at all other options exchanges and the continuation of payment 
for order flow programs by some specialist and market making 
organizations, the Amex believes that it may be necessary to re-
institute its payment for order flow program in order to respond to 
these competitive pressures. Notwithstanding the Amex's decision to 
reinstate a payment for order flow program, the Amex continues to urge 
the Commission to ban all forms of payment for order flow.
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    \5\ See, e.g., letter from James R. Jones, Chairman, Amex, to 
Jonathan Katz, Secretary, Commission dated December 8, 1992; 
Testimony of James R. Jones, Chairman, Amex, before the House 
Subcommittee on Telecommunications and Finance, dated, April 14, 
1993; Answers to Post-Hearing Questions Relating to April 14, 1993, 
Hearing on the Future of the Stock Market, American Stock Exchange, 
Inc.; letter from Jules L. Winters, Chief Operating Officer, Amex, 
to Jonathan Katz, Secretary, Commission, dated December 21, 1993; 
letter from Jules L. Winters, Chief Operating Officer, Amex, to The 
Honorable Edward J. Markey, Chairman, and The Honorable Jack Fields, 
Ranking Republican Member, House Subcommittee on Telecommunications 
and Finance, dated April 7, 1994; letter from James F. Duffy, 
Executive Vice President and General Counsel, Amex, to Jonathan 
Katz, Secretary, Commission, dated January 12, 1995; letters from 
Richard F. Syron, Chairman & CEO, Amex, to The Honorable Thomas J. 
Bliley, Jr., Chairman, House Committee on Commerce, and The 
Honorable Jack Fields, Chairman, House Subcommittee on 
Telecommunications and Finance, dated August 4, 1995; letter from 
Thomas F. Ryan, Jr. President and COO, Amex, to Jonathan Katz, 
Secretary, Commission, dated February 1, 1996; letter from Thomas F. 
Ryan, Jr., President and COO, Amex, to Jonathan Katz, Secretary, 
Commission, dated February 26, 1997; letter from Michael J. Ryan, 
Jr., Executive Vice President and General Counsel, Amex, to Annette 
Nazareth, Director, Division of Market Regulation, Commission, dated 
December 10, 2001; letter from Michael J. Ryan, Jr., Executive Vice 
President and General Counsel, Amex, to Jonathan Katz, Secretary, 
Commission, dated October 28, 2002; letter from Michael J. Ryan, 
Jr., Executive Vice President and General Counsel, Amex, to Chairman 
Harvey L. Pitt, Chairman, Commission, and Cynthia A. Glassman, 
Harvey J. Goldschmid, Paul S. Atkins, and Roel Campos, 
Commissioners, Commission, dated November 19, 2002; letter from 
Michael J. Ryan, Jr., Executive Vice President and General Counsel, 
Amex, to Jonathan Katz, Secretary, Commission, dated November 19, 
2002; letter from Michael J. Ryan, Jr., Executive Vice President and 
General Counsel, Amex, to Chairman Harvey L. Pitt, Chairman, 
Commission, and Cynthia A. Glassman, Harvey J. Goldschmid, Paul S. 
Atkins, and Roel Campos, Commissioners, Commission, dated January 
31, 2003; letter from Salvatore F. Sodano, Chairman & Chief 
Executive Officer, Amex, to Harvey L. Pitt, Chairman, Commission, 
dated February 6, 2003; and letter from Salvatore F. Sodano, 
Chairman & Chief Executive Officer, Amex, to Harvey L. Pitt, 
Chairman, Commission, dated February 10, 2003.
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    After thorough consideration, the Exchange has determined to 
reinstate its marketing fee program in a modified form effective June 
2, 2003. The revenue generated by these marketing fees would be used to 
compete for order flow in equity options listed for trading on the 
Exchange. The fee would be imposed at a rate of $.40 per contract on 
specialist and registered option trader transactions.
    The Exchange has determined to collect the marketing fee on only 
those specialist and registered option trader transactions involving 
customer orders from firms that accept payment for directing their 
orders to the Exchange (``payment-accepting firms''). In addition, the 
specialists would be solely responsible for negotiating payment for 
order flow arrangements with payment-accepting firms. Specialists would 
not be required to negotiate with any payment-accepting firms. 
Accordingly, the marketing fee would be assessed only on those 
specialist and registered option trader transactions resulting from 
orders from customers of payment-accepting firms with whom a specialist 
has negotiated a payment for order flow arrangement. If a specialist 
has negotiated a payment to a firm of less than $.40 per contract, the 
difference between $.40 and the actual payment would be refunded to the 
specialist and the registered options traders. In addition, the 
marketing fee would be assessed only on transactions of specialists and 
registered option traders with orders from customers of payment-
accepting firms that are for 200 contracts or less.
    The Exchange would not have any role with respect to the 
negotiations between specialists and payment-accepting firms. Rather, 
the Exchange proposes to collect and administer the payment of the fee 
collected on those transactions for which the specialist has advised 
the Exchange that it has negotiated with a payment-accepting firm to 
pay for the firm's order flow. The Exchange would provide general 
administrative support for the program; in particular, the Exchange 
would keep track of the number of qualified orders sent by a payment-
accepting firm, bill specialists and registered options traders through 
their clearing firms, and issue payments to payment-accepting firms to 
reflect the collection and payment of the marketing fee. All of the 
funds generated by the fee would be used only for the purpose of paying 
the firms for order flow they send to the Exchange.
    According to Amex, it is important to note that although specialist 
and registered option trader transactions resulting from customer 
orders from firms that do not accept payment for their orders are not 
subject to the fee, Exchange specialists and registered options traders 
would have no way of identifying prior to execution whether a 
particular order is from a payment-accepting firm, or from a firm that 
does not accept payment for their order flow.
    In connection with the reinstitution of a payment for order flow 
program that is funded by an Amex marketing fee, the Exchange will 
issue an Information Circular to its members that emphasizes the 
disclosure and best execution obligations of members who accept such 
payment.
    The Exchange believes that the marketing fee program would provide 
for the equitable allocation of a reasonable fee among Exchange 
members, and that it is designed to enable the Exchange to compete with 
other markets in attracting order flow in multiply traded options from 
firms that include payment as a factor in their order-routing 
decisions. Because the marketing fee would be collected only on those 
transactions resulting from customer orders of a payment-accepting firm 
that the specialist has independently negotiated with to pay for that 
firm's order flow, the Amex believes that there would be a direct and 
fair correlation between those members who fund the marketing fee 
program and those who receive the benefits of the program.
    The Amex states that, as the Commission knows, it strenuously 
objects to all forms of payment for order flow because it believes that 
they create an inappropriate and unnecessary appearance of conflict of 
interest between the business interest of receiving payment for order 
flow and the fiduciary duty to achieve best execution. The Amex 
believes that SRO-sponsored payment for order flow programs are 
particularly inappropriate because, in its view, the self-regulatory 
organization's statutory duty to oversee and enforce its members' best 
execution obligations with respect to their order-routing decisions, 
while simultaneously paying for the members' order flow, creates an 
obvious appearance of a conflict of interest. Nevertheless, the 
Exchange believes that this rule filing is consistent with the Act 
because it would allow the Exchange to maintain its competitive 
position in relation to other self-regulatory organizations that have 
in place either a Commission-approved payment for order flow program 
\6\ or programs that have otherwise become effective under the Act. In 
addition, the Amex believes that the proposed marketing fee would serve 
to enhance the competitiveness of the Amex and its members and that 
this proposal therefore is consistent with and furthers the objectives 
of the Act, including specifically Section 6(b)(5) thereof,\7\ which 
requires the rules of exchanges to be designed to remove impediments to 
and to perfect the mechanism of a free and open market and a national 
market system, and Section 11A(a)(1) thereof,\8\ which reflects the 
findings of Congress that it is in the public interest and appropriate 
for the protection of investors and the maintenance of fair and orderly 
markets to assure fair competition among brokers and dealers and among 
exchange markets.
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    \6\ See Securities Exchange Act Release No. 43833 (January 10, 
2001) 66 FR 7822 (January 25, 2001).
    \7\ 15 U.S.C. 78f(b)(5).
    \8\ 15 U.S.C. 78k-1.
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2. Statutory Basis
    The Amex believes the proposed rule change is consistent with 
Section 6(b) of

[[Page 37882]]

the Act,\9\ in general, and with Section 6(b)(4)\10\ in particular, in 
that it would provide for the equitable allocation of reasonable dues, 
fees, and other charges among its members.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Amex does not believe that the proposed rule change would 
impose any burden on competition.

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

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

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

    Because the foregoing rule change establishes or changes a due, 
fee, or other charge imposed by the Amex, it has become effective 
pursuant to Section 19(b)(3)(A)(ii) of the Act \11\ and Rule 19b-
4(f)(2) thereunder.\12\ At any time within 60 days after the filing of 
Amendment No. 1 to the proposed rule change, the Commission may 
summarily abrogate the rule change if it appears to the Commission that 
such action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.
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    \11\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \12\ 17 CFR 240.19b-4(f)(2).
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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 proposal 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 number SR-Amex-2003-50 and should be 
submitted by July 16, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-16006 Filed 6-24-03; 8:45 am]
BILLING CODE 8010-01-P