[Federal Register Volume 72, Number 119 (Thursday, June 21, 2007)]
[Notices]
[Pages 34323-34325]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-12015]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55913; File No. SR-Amex-2007-13]


Self-Regulatory Organizations; American Stock Exchange LLC; Order 
Approving Proposed Rule Change as Modified by Amendment No. 1 Relating 
to the Codification of Exchange Policy Regarding Specialist Commissions

June 15, 2007.

I. Introduction

    On January 29, 2007, 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 amend Amex Rule 154--AEMI and Amex Rule 154--
AEMI-One to expand the scope of its rules that specify when specialists 
may charge commissions. The proposed rule change was published for 
comment in the Federal Register on April 2, 2007.\3\ The Commission 
received three comment letters regarding the proposal.\4\ On May 29, 
2007, Amex filed Amendment No. 1 to the proposed rule change.\5\ This 
order approves the proposed rule change, as modified by Amendment No. 
1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 55533 (March 26, 
2007), 72 FR 15733.
    \4\ See letters to Nancy M. Morris, Secretary, Commission, from 
Samuel F. Lek, Lek Securities Corporation, dated April 26, 2007 
(``Lek Letter''); from Jonathan Q. Frey, Managing Partner, J. 
Streicher & Co. L.L.C., Brendan E. Cryan, Brendan E. Cryan and 
Company, LLC, Robert B. Nunn, Cohen Specialists LLC, and Michael 
Marchisi, AIM Specialists, dated April 17, 2007 (``Equity Specialist 
Firms Letter''); and from Jerry O'Connell, Chief Regulatory Officer, 
Susquehanna Investment Group, to, dated February 13, 2007 
(``Susquehanna Letter'').
    \5\ In Amendment No. 1, Amex removed all references to Amex Rule 
154--AEMI-One in the proposed rule change because the AEMI-One rules 
have been replaced by the AEMI rules. This is a technical amendment 
and is not subject to notice and comment.
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II. Description

    The Exchange proposes to adopt Amex Rule 154-AEMI(k) to prohibit 
specialists from charging a commission for orders or portions of orders 
that have not been executed. The proposed rule would extend the 
prohibitions on specialist commissions contained in Amex Rule 154(b) to 
Exchange-Traded Funds (``ETFs'') and equities trading on the AEMI 
System. These restrictions prohibit specialists from (i) charging a 
commission on off floor orders that are electronically delivered to the 
specialist except in cases of orders that require special handling by 
the specialist or for which the specialist provides a service, and (ii) 
billing customers for electronically delivered orders that are executed 
automatically by the Exchange's order processing facilities upon 
receipt. In addition, proposed Rule 154-AEMI(k) would reference Rule 
152-AEMI(c), which prohibits specialists from charging a commission 
where they act as principal in the execution of an order entrusted to 
them as agent. Lastly, the proposed rule sets forth the types of orders 
specialists would be allowed to bill a commission. These orders would 
include: (i) Limit orders that remain on the book for more than two 
minutes; (ii) tick sensitive orders (e.g., an order to sell short in a 
security subject to the Commission's ``tick-test''); (iii) stop or stop 
limit orders; (iv) fill-or-kill and immediate-or-

[[Page 34324]]

cancel orders; and (v) orders for the account of a competing market 
maker.

III. Summary of Comments

    The Commission received three comment letters regarding the 
proposed rule change. One comment letter, submitted by Lek Securities 
Corporation, supported the proposed rule change, agreeing with the 
Exchange's rationale for the proposed rule change.\6\ In this regard, 
the commenter asserted that commissions on cancellations are 
particularly harmful to fair and orderly markets'' and that 
cancellation fees ``amount to a tax or toll on an instrumentality of 
the exchange.'' \7\ This commenter also asserted that permitting a 
specialist ``to bill for transactions that involve no work sanctions an 
abuse of the specialist's privileged position.'' \8\
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    \6\ See Lek Letter at 2.
    \7\ Id. at 2.
    \8\ Id. at 3.
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    Another comment letter, submitted by a group of equity specialist 
firms active on Amex, stated that they are not taking a position 
regarding the ``substantive terms'' of the proposed rule change but, 
rather, are expressing ``strong disagreement with the Exchange's stated 
rationale'' for the proposed rule change.\9\ The specialist firms noted 
that Amex's stated rationale for the proposed rule change is that 
``specialist commissions weaken the Exchange's competitive position.'' 
\10\ The specialist firms suggested that, rather than focusing on 
costs, the focus should be on whether specialists bring value in excess 
of their costs.\11\ These specialist firms also suggested that it 
``might be more productive for the Amex to focus on reducing its own 
rather more significant costs rather than specialist commissions.'' 
\12\
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    \9\ See Equity Specialist Firms Letter at 1.
    \10\ Id. at 1-2.
    \11\ Id. at 2-4.
    \12\ Id. at 2.
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    The third comment letter, submitted by Susquehanna, opposed the 
Exchange's proposal. Susquehanna, in particular, expressed concern 
about the timing of the proposal, as it believed ``exponential 
increases in order and cancel volume levels are expected with the 
implementation of Regulation NMS.'' \13\ Susquehanna asserted that 
these increased levels of volume on the Exchange could have a 
significant impact on the ability of specialists to fulfill their 
agency obligations.\14\ In this regard, Susquehanna asserted that the 
Exchange should not eliminate the ability of specialists ``to charge 
for providing agency functions'' until the Exchange determines whether 
the increased order and cancel volume levels significantly affect the 
ability of specialists to perform their agency obligations.\15\ 
Susquehanna also requested that ``[i]f this proposal is approved * * * 
any specialist agency responsibility for orders and cancels on AEMI be 
set forth so that the respective specialist is duly advised as to such 
attendant obligations.'' \16\
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    \13\ See Susquehanna Letter at 1-2.
    \14\ Id. at 1-3.
    \15\ Id. at 2-4.
    \16\ Id. at 4.
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IV. Discussion

    The Commission has carefully reviewed the proposed rule change and 
the comment letters received, and the Commission finds that the 
proposed rule change is consistent with the requirements of Section 6 
of the Act \17\ and the rules and regulations thereunder applicable to 
a national securities exchange.\18\ In particular, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\19\ 
because it is designed to promote just and equitable principles of 
trade, 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. The Commission also believes that 
the proposed rule change is consistent with Section 11(A)(a)(1)(C) of 
the Act \20\ which states that it is in the public interest and 
appropriate for the protection of investors and the maintenance of fair 
and orderly markets to assure, among other things, economically 
efficient execution of securities transactions, and fair competition 
among brokers and dealers, among exchange markets, and between exchange 
markets and markets other than exchange markets.
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    \17\ 15 U.S.C. 78f.
    \18\ In approving this proposed rule change the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \19\ 15 U.S.C. 78f(b)(5).
    \20\ 15 U.S.C. 78k-1(a)(1)(C).
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    The Commission notes that it previously approved a substantially 
similar Amex rule that prohibited specialist commissions for equities 
traded on the Exchange's legacy system.\21\ The Exchange is now 
proposing to: (i) Apply the prohibition on specialist commissions to 
equities and ETFs traded on the AEMI System; (ii) expand the 
prohibition on specialist commissions to market at the close orders and 
limit at the close order; and (iii) specify that specialist commissions 
can only be charged for orders that are executed and not for orders 
that are cancelled or expire unexecuted. One commenter, Susquehanna, 
expressed concern about the timing of the proposal in light of the 
implementation of Regulation NMS.\22\ The Commission notes that Amex-
traded equities and ETFs have been trading on the AEMI System, which 
the Exchange designed to comply with Regulation NMS, since February 5, 
2007, a period of nearly four months. In response to Susquehanna's 
request that it be advised of its specialist agency responsibilities 
for orders and cancels on AEMI if the proposed rule change is 
approved,\23\ the Commission notes that its approval of the proposed 
rule change does not change a specialist's agency responsibilities 
under the federal securities laws or agency law principles.
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    \21\ See Securities Exchange Act Release No. 55008 (December 22, 
2006), 72 FR 597 (January 5, 2007) (Approval of amendment to Amex 
Rule 154 regarding prohibition of specialist commissions for equity 
orders). The Commission also approved a rule prohibiting specialist 
commissions on options orders. See Securities Exchange Act Release 
No. 51235 (February 22, 2005), 70 FR 9687 (February 28, 2005) 
(Approval of CBOE Rule 8.85(b)(iv)). The New York Stock Exchange, 
Inc. (``NYSE'') recently adopted a rule prohibiting specialists from 
charging commissions on orders in their speciality securities. See 
Securities Exchange Act Release No. 54850 (November 30, 2006), 71 FR 
71217 (December 8, 2006) (Notice of Filing and Immediate 
Effectiveness of Amendments to NYSE Rule 123B and Adoption of NYSE 
Rule 104B).
    \22\ See Susquehanna Letter at 1-2.
    \23\ Id. at 4.
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    In addition, the Commission finds that the proposal is consistent 
with Section 6(e)(1) of the Act,\24\ because it is not designed to 
permit unfair discrimination between customers, issuers, brokers and 
dealers, or to impose any schedule or fix rates of commissions, 
allowances, discounts, or other fees to be charged by its members. 
Section 6(e) of the Act \25\ was adopted by Congress in 1975 to 
statutorily prohibit the fixed minimum commission rate system. As noted 
on a report of the House of Representatives one of the purposes of the 
legislation was to ``reverse the industry practice of charging fixed 
rates of commission for transaction on the securities exchanges.'' \26\ 
The fixed minimum commission rate system allowed exchanges to set 
minimum commission rates that their members had to charge their 
customers, but allowed members to charge more. Amex's proposal, by 
contrast, does not establish a minimum commission rate, but instead 
prohibits the Exchange's specialists from charging a commission for 
handling an equity

[[Page 34325]]

order that is executed on an opening or reopening or an equity order 
(or portion thereof) that is executed against the specialist as 
principal, or for the execution of an off-floor equities order 
delivered to the specialist through the Exchange's electronic order 
routing systems, subject to certain exceptions. Accordingly, the 
Commission does not believe that the Amex's proposal constitutes fixing 
commissions, allowances, discounts, or other fees for purposes of 
Section 6(e)(1) of the Act.\27\ The Commission also notes that Amex's 
limits on fees that specialists may charge applies only to members who 
choose to be specialists on Amex. By limiting fees, the Amex is merely 
imposing a condition, which is consistent with the Act, on a member's 
appointment as a specialist.
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    \24\ 15 U.S.C. 78f(e)(1).
    \25\ U.S.C. 78f(e).
    \26\ H.R. Rep. No. 94-123, 94th Cong., 1st Sess. 42 (1975).
    \27\ 15 U.S.C. 78f(e)(1).
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V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with Sections 6(b)(5) and 6(e)(1) of the Act.\28\
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    \28\ 15 U.S.C. 78f(b)(5) and 78f(e)(1).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\29\ that the proposed rule change (SR-Amex-2007-13), as modified 
by Amendment No. 1, is approved.
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    \29\15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-12015 Filed 6-20-07; 8:45 am]
BILLING CODE 8010-01-P