[Federal Register Volume 69, Number 129 (Wednesday, July 7, 2004)]
[Notices]
[Pages 40992-40994]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-15330]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49941; File No. SR-Amex-2003-39]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendment Nos. 1, 2, 3, and 4 Thereto and Notice of Filing 
and Order Granting Accelerated Approval to Amendment No. 5 to a 
Proposed Rule Change by the American Stock Exchange LLC To Adopt a 
Clearly Erroneous Transaction Rule and Half-Point Error Guarantee for 
Trades in Nasdaq National Market Securities

June 29, 2004.

I. Introduction

    On April 30, 2003, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with 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 to adopt a ``clearly erroneous'' transaction rule 
and ``half-point error guarantee'' for trades in Nasdaq National Market 
securities. On October 15, 2003, Amex submitted Amendment No. 1 to the 
proposed rule change.\3\ Amex submitted Amendment No. 2 to the proposed 
rule change on November 21, 2003.\4\ Amex submitted Amendment No. 3 to 
the proposed rule change on December 10, 2003.\5\ Amex submitted 
Amendment No. 4 to the proposed rule change on February 2, 2004.\6\ The 
proposed rule change, as amended, was published for comment in the 
Federal Register on March 3, 2004.\7\ The Commission received no 
comments on the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from William Floyd Jones, Associate General 
Counsel, Amex, to Nancy J. Sanow, Assistant Director, Division of 
Market Regulation (``Division''), Commission, dated October 14, 2003 
(``Amendment No. 1'').
    \4\ See Letter from William Floyd Jones, Associate General 
Counsel, Amex, to Nancy J. Sanow, Assistant Director, Division, 
Commission, dated November 20, 2003 (``Amendment No. 2'').
    \5\ See Letter from William Floyd Jones, Associate General 
Counsel, Amex, to Nancy J. Sanow, Assistant Director, Division, 
Commission, dated December 9, 2003 (``Amendment No. 3'').
    \6\ See Letter from William Floyd Jones, Associate General 
Counsel, Amex, to Nancy J. Sanow, Assistant Director, Division, 
Commission, dated January 30, 2004 (``Amendment No. 4'').
    \7\ See Securities Exchange Act Release No. 49319 (February 25, 
2004), 69 FR 10081.
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    On May 17, 2004, Amex submitted Amendment No. 5 to the proposed 
rule change.\8\ This order approves the proposed rule change, as 
amended by Amendment Nos. 1, 2, 3, and 4; solicits comments on 
Amendment No. 5 from interested persons; and grants accelerated 
approval to Amendment No. 5 to the proposed rule change.
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    \8\ See Letter from William Floyd Jones, Associate General 
Counsel, Amex, to Nancy J. Sanow, Assistant Director, Division, 
Commission, dated May 14, 2004 (``Amendment No. 5''). See also infra 
Section III.
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II. Description of the Proposal

    The Exchange is proposing new Amex Rule 118(l) that would provide 
it with authority to break or revise trades in Nasdaq National Market 
securities occurring on the Exchange. Proposed Amex Rule 118(l) would 
be substantively similar to NASD Rule 11890. Like NASD Rule 11890(a), 
proposed Amex Rule 118(l) would set forth the circumstances in which 
trades can be broken or revised at the request of a member who is part 
of a trade or at the motion of the self-regulatory organization itself. 
In the former case, any member who Seeks review of a trade in a Nasdaq 
National Market security must submit the matter to an Amex Floor 
Official \9\ and deliver a written complaint to the Service Desk within 
30 minutes of the trade. Upon such delivery, the complainant would have 
up to 30 minutes to submit any supporting written information necessary 
for a review of the trade. The other member that was part of the trade 
would have up to 30 minutes after being notified of the complaint to 
submit information. Either 30-minute period could be extended at the 
discretion of the Floor Official.
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    \9\ Floor Officials are deemed to be Officers of the Exchange. 
See Amex Rule 22(c). Floor Officials are generally responsible for 
the supervision of operations the Exchange Floor. There are four 
classifications of Floor Official. In ascending order of 
responsibility, these classifications are: (1) Floor Official, (2) 
Exchange Official, (3) Senior Floor Official, and (4) Senior 
Supervisory Officer. The Vice Chairman of the Exchange is a Floor 
Governor and serves as the Senior Supervisory Officer. Governors of 
the Exchange that spend a significant amount of time on the Floor 
are Senior Floor Officials. Numerous provisions of the Exchange's 
rules specifically call for Floor Official involvement in the 
Exchange's operations.
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    The Floor Official would be required to review the trade and make a 
ruling unless both members involved agreed to withdraw the application 
for review before the Floor Official made the ruling. The Floor 
Official would be required to review the trade ``with a view toward 
maintaining a fair and orderly market and the protection of investors 
and the public interest.''\10\ If the Floor Official determined that 
the trade was ``clearly erroneous,'' he or she would be required to: 
(1) Nullify the trade; or (2) modify one or more terms of the trade. In 
the latter case, the Floor Official would be required to adjust the 
price and/or size of the trade ``to achieve an equitable rectification 
of the error that would place the parties * * * in the same position, 
or as close as possible to the same position, as they would have been 
in had the error not occurred.'' \11\ Under Amex Rule 118(l)(i), a 
trade would be ``clearly erroneous'' if ``there is an obvious error in 
any term, such as price, number of shares or the unit of trading, or 
identification of the security.''
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    \10\ See Proposed Amex Rule 118(l)(i).
    \11\ Id.
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    Similar to NASD Rule 11890(b), proposed Amex Rule 118(l)(iii) would 
permit an Exchange Floor Governor \12\ to break or revise a trade in a 
Nasdaq National Market security on his or her own motion. A Floor 
Governor could exercise this authority in the following circumstances:
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    \12\ Four members of the Board of Governors are designated as 
``Floor Governors'' under Section 1 of Amex Rule 9011. Floor 
Governors are members of the Amex Board of Governors who spend a 
substantial part of their time on the floor of the Exchange.
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     A disruption or malfunction in the use or operation of any 
facility of the Exchange;
     A disruption or malfunction in the use or operation of any 
facility of Nasdaq that results in the nullification or modification of 
trades on Nasdaq; or
     Extraordinary market conditions or other circumstances in 
which nullification or adjustment of a trade may be necessary for the 
maintenance of a fair and orderly market or for the protection of 
investors and the public interest.
    Before a Floor Governor could exercise this authority, the Exchange 
must have received confirmation from NASD or Nasdaq that there was a 
disruption or malfunction in the Nasdaq market that resulted in the 
nullification or modification of trades in that market. A Floor 
Governor acting pursuant to proposed Amex Rule 118(l)(iii) could 
nullify or modify a trade if he or she determined that the trade was 
``clearly erroneous'' or such action was ``necessary for the 
maintenance of a fair and orderly market or the protection of investors 
and the public interest.'' A Floor Governor acting under the proposed 
rule, in the absence of extraordinary circumstances, would be required 
to take action within 30 minutes of the detection of the transaction, 
but in no event later than 3 p.m. eastern time on the next trading day 
following the date of the trade at issue.
    A member could Seek review of a Floor Official's ruling pursuant to 
proposed Amex Rule 118(l)(i) and (ii) or

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of a Floor Governor's ruling pursuant to proposed Amex Rule 
118(l)(iii). Such a review would follow the procedures set forth in 
Amex Rule 22(d) and Commentary .02 to Amex Rule 22.
    The Exchange also has proposed new Amex Rule 118(m) that would 
establish a ``half-point error guarantee'' for trades in Nasdaq 
National Market securities occurring on the Exchange. Proposed Amex 
Rule 118(m) would state that Amex Rule 129\13\ would not apply to 
orders for Nasdaq National Market securities of 1,000 shares or less 
received by a specialist through the Exchange's electronic order 
routing system. As to such orders, proposed Amex Rule 118(m) would 
apply instead. Amex has stated that this rule would allow small 
investors to rely upon reports of executions where the report is within 
$0.50 of the execution price. Proposed Amex Rule 118(m) is 
substantively identical to New York Stock Exchange (``NYSE'') Rule 
123B(b)(2).
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    \13\ Amex Rule 129 states: ``The price at which an order is 
executed shall be binding notwithstanding the fact that an erroneous 
report in respect thereto may have been rendered. A report shall not 
be binding if an order was not actually executed but was in error 
reported to have been executed; however, an order which was 
executed, but in error reported as not executed, shall be binding; 
provided, however, when a member who is on the Floor reports in good 
faith the execution of an order entrusted to him by another member 
or member organization and the other party to that transaction does 
not know it, the member or member organization to whom such report 
was rendered and the member broker who made the report shall treat 
the transaction as made for the account of the member who made the 
report, or the account of his member organization, if the price and 
size of the transaction were within the price and volume of 
transactions in the security at the time that the member who made 
the report believed he had executed the order. A detailed memorandum 
of each such transaction shall be prepared and filed with the 
Exchange by the member assuming the transaction.''
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    Finally, the Exchange is proposing new Amex Rule 118(n), stating 
that members and member organizations may share in losses in a 
customer's account when the member or member organization determines 
that the member or firm was responsible for the loss. Amex Rule 118(n) 
is substantively similar to NYSE Rule 352.

III. Amendment No. 5

    In Amendment No. 5, the Exchange revised the text of proposed Amex 
Rule 118(l) to specify that a member seeking to have a trade reviewed 
by a Floor Official must deliver a written complaint to the Service 
Desk ``and to the other member(s) who were part of the trade.'' In 
addition, Amex replaced the term ``party'' with the term ``member'' 
throughout the rule text. The text of Amendment No. 5 is available at 
the Commission's Public Reference Room and at the principal office of 
the Exchange.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 5 to the proposed rule change, 
including whether Amendment No. 5 is consistent with the Act. Comments 
may be submitted by any of the following methods:
    Electronic comments:
     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-Amex-2003-39 on the subject line.
    Paper comments:
     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-Amex-2003-39. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
Exchange. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
Amex-2003-39 and should be submitted on or before July 28, 2004.

V. Discussion

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange. In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\14\ which requires that the 
rules of an exchange be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanism for a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest.\15\ New Amex Rule 118(l) will set 
forth formal procedures to be followed by an Exchange member that seeks 
to have a trade nullified or revised or by an Amex Floor Governor who 
seeks to nullify or revise trades on his or her own motion. The 
Commission believes that it is proper for trade nullification and 
revision procedures to be codified and thus made transparent. The new 
rule also sets forth a procedure for the appeal of a determination made 
by an Exchange Floor Official or Floor Governor pursuant to Amex Rule 
118(l). The Commission believes that the existence of such a procedure 
should help ensure that the rule is exercised in a fair and reasonable 
manner.
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    \14\ 15 U.S.C. 78f(b)(5).
    \15\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    In addition, the Commission believes that Amex Rule 118(m), 
offering a ``half-point error guarantee,'' is reasonable and consistent 
with the Act. In approving an amendment to the NYSE rule (NYSE Rule 
123B(b)(2)) on which Amex Rule 118(m) is based, the Commission stated 
that this guarantee protects customers ``since the specialist absorbs 
any price difference below one-half a point.'' \16\
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    \16\ Securities Exchange Act Release No. 25145 (November 20, 
1987), 52 FR 45699, n.4 (December 1, 1987) (approving SR-NYSE-87-
29).
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    Finally, the Commission believes that Amex Rule 118(n) is 
consistent with the Act because it allows a member to share in customer 
losses that were caused in whole or in part by the member's action or 
inaction.
    Pursuant to Section 19(b)(2) of the Act,\17\ the Commission finds 
good cause for approving Amendment No. 5 to the proposed rule change 
prior to the thirtieth day after the amendment is published for comment 
in the Federal Register. The Commission notes that no comments were 
received in response to the initial notice. Because Amendment No. 5 
makes only minor changes to the rule text that do not alter the 
substance

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of the proposal, the Commission believes that no purpose would be 
served by delaying approval of Amendment No. 5 until the completion of 
another notice-and-comment period. Accordingly, the Commission finds 
good cause for accelerating approval of Amendment No. 5 to the proposed 
rule change.
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    \17\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-Amex-2003-39) and Amendment 
Nos. 1, 2, 3, and 4 are approved, and that Amendment No. 5 is approved 
on an accelerated basis.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-15330 Filed 7-6-04; 8:45 am]
BILLING CODE 8010-01-P