[Federal Register Volume 73, Number 89 (Wednesday, May 7, 2008)]
[Notices]
[Pages 25805-25809]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-10019]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57738; File No. SR-Amex-2007-129]


Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing of Amendment No. 1 and Order Granting Accelerated 
Approval of Proposed Rule Change as Modified by Amendment No. 1 
Relating to an Exchange Member's Conduct in Doing Business With the 
Public

April 29, 2008.

I. Introduction

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\, as amended, and Rule 19b-4 thereunder,\2\ on November 29, 
2007, the American Stock Exchange LLC (``Amex'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change relating to the Exchange's rules governing doing 
business with the public. On March 19, 2008, the Commission issued a 
release noticing the proposed rule change, which was published for 
comment in the Federal Register on March 25, 2008.\3\ The comment 
period expired on April 15, 2008. The Commission did not receive any 
comment letters in response to the proposed rule change. On April 17,

[[Page 25806]]

2008, the Exchange filed Amendment No. 1 to make a technical edit to 
the proposed rule change.\4\ This order provides notice of the proposed 
rule change, as modified by Amendment No. 1, and approves the proposed 
rule change as amended on an accelerated basis.
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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. 57527 (Mar. 19, 
2008), 73 FR 15810 (Mar. 25, 2008).
    \4\ Amendment No. 1 corrects an internal cross-reference and 
does not contain any substantive modifications to the rule text.
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II. Description of Amex Proposal

    Amex proposes to amend certain Amex Rules that govern an Exchange 
member's conduct in doing business with the public. Specifically, the 
proposed rule change would require member organizations (also referred 
to as ``member firms'' or ``firms'') to integrate the responsibility 
for supervision of their public customer options business into their 
overall supervisory and compliance programs. In addition, the proposal 
would require member firms to strengthen their supervisory procedures 
and internal controls as related to their public customer options 
business.

A. Integration of Options Supervision

    The purpose of the proposed rule change is to create a supervisory 
structure for options that is similar to that required by New York 
Stock Exchange, LLC (``NYSE) Rule 342 and National Association of 
Securities Dealers, Inc. (``NASD'') Rule 3010.\5\ The proposed rule 
change would also conform Amex rules to those of the Chicago Board of 
Options Exchange (``CBOE'') by eliminating the requirement that a 
member firm, qualified to do a public customer business in options, 
designate a single person to act as a Senior Registered Options 
Principal (``SROP'') for the member organization and that each such 
member organization designate a specific individual as a Compliance 
Registered Options Principal (``CROP'').\6\ The Exchange proposes to 
eliminate the SROP and CROP supervisory categories, allowing member 
firms to supervise their options activities through their overall 
supervisory and compliance programs that monitor all other securities 
products.
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    \5\ On July 26, 2007, the Commission approved a proposed rule 
change filed by NASD to amend NASD's Certificate of Incorporation to 
reflect its name change to Financial Industry Regulatory Authority, 
Inc., or FINRA, in connection with the consolidation of the member 
firm regulatory functions of NASD and NYSE Regulation, Inc. See 
Securities Exchange Act Release No. 56146 (July 26, 2007), 72 FR 
42190 (Aug. 1, 2007). The FINRA rule book currently consists of both 
NASD rules and certain NYSE rules that FINRA has incorporated.
    \6\ See Securities Exchange Act Release No. 56492 (Sept. 21, 
2007), 72 FR 54952 (Sept. 27, 2007) (SR-CBOE-2007-106).
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    The SROP concept was first introduced during the early years of 
development of the listed options market. Previously under Amex rules, 
member firms were required to designate one or more persons qualified 
as Registered Options Principals (``ROPs'') to have supervisory 
responsibilities with respect to the firms' options business. As the 
number of ROPs at larger firms began to increase, the Amex imposed an 
additional requirement that member firms designate one of their ROPs as 
the SROP. This was intended to eliminate confusion as to where the 
compliance and supervisory responsibilities lay by centralizing in a 
single supervisory officer overall responsibility for the supervision 
of a firms options activities.\7\ Subsequently, following the 
recommendation of the Special Study of the Options Market,\8\ the Amex 
and the other options exchanges required firms to designate a CROP to 
be responsible for each firm's overall compliance program with respect 
to its options activities. The CROP could be the same person designated 
as a SROP, but while the CROP generally was not permitted to have sales 
functions in the firm, whereas the SROP was not so restricted.
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    \7\ Report of the Special Study of the Options Market, p. 316 
note 11 (Dec. 22, 1978).
    \8\ Id. at 335.
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    Since the SROP and CROP requirements were first imposed, the 
supervisory function with respect to options activities of most 
securities firms has been integrated into their supervisory function 
for securities activities overall. This not only reflects the maturity 
of the options market, but also recognizes the ways in which the uses 
of options themselves have become more integrated with other securities 
in the implementation of particular strategies. By permitting 
supervision of a firm's options activities to be handled in the same 
manner as the supervision of its securities and futures activities, the 
proposed rule change would ensure that supervisory responsibility over 
each segment of a firm's business is assigned to the best qualified 
persons in the firm, thereby enhancing the overall quality of 
supervision and compliance.
    The proposed rule change would allow firms the flexibility to 
assign such supervisory and compliance responsibilities, which formerly 
resided with the SROP and/or CROP, to more than one individual. For 
example, the proposed rule change would permit a member firm to 
designate certain ROPs to be responsible for a variety of supervisory 
compliance functions such as approving acceptance of discretionary 
accounts,\9\ approving communications to customers,\10\ and allowing 
exceptions to a member firm's suitability standards for trading 
uncovered short options.\11\ A firm would be likely to do this in 
instances where the firm believes it advantageous to do so to enhance 
its supervisory or compliance structure. Typically, a firm may also 
wish to divide these functions on the basis of geographic region or 
functional considerations. Amex Rule 920 would be amended to clarify 
the qualification requirements of individuals designated as ROPs and 
also to specify the registration requirements of individuals who accept 
orders from non-broker-dealer customers.
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    \9\ See proposed Amex Rule 924(a) and Commentary .05 to Rule 
920.
    \10\ See proposed Amex Rule 991(b).
    \11\ See proposed Amex Rule 921(g)(3).
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    With respect to discretionary accounts, the proposal would require 
acceptance of such accounts to be assigned to individuals who are 
qualified ROPs.\12\ Further, the proposal would require that the 
individual who reviews the acceptance of a discretionary account (who 
is an individual other than the ROP who accepted the account as 
required by Amex Rule 924(a)) to be Series 4 qualified because such a 
review is not a routine sales supervisory function and requires more 
in-depth knowledge of options than that covered by the Series 9/10 
examination.\13\ The proposed rule change would eliminate the 
requirement that discretionary options orders be approved on the day of 
entry by a ROP (with one exception as discussed below) because such 
requirement is not consistent with the use of supervisory tools in 
computerized format or exception reports generated after the close of 
trading day. No similar requirement exists for supervision of other 
securities accounts that are handled on a discretionary basis.\14\ 
Discretionary orders would be required to be reviewed in accordance 
with a firm's written supervisory procedures. Amex believes that the 
proposed rule change would ensure that supervisory responsibilities are 
assigned to specific qualified individuals, thereby enhancing the 
quality of supervision.
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    \12\ See proposed Amex Rule 924(a) and Commentary .04 to Rule 
920.
    \13\ See supra note 9.
    \14\ See, e.g., NYSE Rule 408.
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    The proposed rule change would revise Amex Rule 924 by adding as 
Commentary .01, a requirement that any firm that does not utilize 
computerized surveillance tools for the frequent and

[[Page 25807]]

appropriate review of discretionary account activity must establish and 
implement procedures to require ROP-qualified individuals (``Qualified 
Individuals'') who have been designated to review discretionary 
accounts to approve and initial each discretionary order on the day 
entered. The Exchange believes that any firm that does not utilize 
computerized surveillance tools to monitor discretionary account 
activity should continue to be required to perform the daily manual 
review of discretionary orders.
    Under the proposed rule change, firms would continue to be required 
to designate Qualified Individuals to provide frequent appropriate 
supervisory review of options discretionary accounts.\15\ Qualified 
Individuals would review the accounts to determine whether the ROP 
accepting the account had a reasonable basis for believing that the 
customer was able to understand and bear the risks of the proposed 
strategies or transactions. This requirement would provide an 
additional level of supervisory audit over options discretionary 
accounts that does not exist for other securities discretionary 
accounts.
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    \15\ See proposed Amex Rule 924(a).
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    In addition, the proposed change to Amex Rule 922 would require 
that each member organization provide for the preparation and 
submission of a written annual report to one or more of its control 
persons or, if the firm has no control person, to the audit committee 
of its board of directors or its equivalent group (collectively 
referred to as, ``Control Person''). The firm would be required to 
submit the report to the Exchange and to its Control Person by April 
1st of each year. The firm would be required to detail in the report 
its supervision and compliance effort, including its options compliance 
program, during the preceding year and the adequacy of its ongoing 
compliance processes and procedures.\16\
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    \16\ See proposed Amex Rules 922(g) and 922(h), which are 
modeled after NYSE Rules 342.30 and 354, respectively.
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    Proposed Amex Rule 922(g) would further provide that a member 
organization that specifically includes its options compliance program 
in a report that complies with substantially similar NYSE and NASD 
rules will be deemed to have satisfied the requirements of Amex Rules 
922(g) and 922(h).
    Where appropriate, the proposed rule changes would delete 
references to SROP and CROP in Amex Rules 421, 920, 921, 922, 924 and 
991.
    Although the proposed rule change would eliminate entirely the 
positions and titles of SROP and CROP, firms would still be required to 
designate a single general partner or executive officer to assume 
overall authority and responsibility for internal supervision, control 
of the organization and compliance with securities laws and 
regulations.\17\ A firm would also be required to designate specific 
qualified individuals as having supervisory or compliance 
responsibilities over each aspect of the firm's options activities and 
to set forth the names and titles of these individuals in its written 
supervisory procedures.\18\
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    \17\ See proposed Amex Rule 922(a).
    \18\ See proposed Amex Rule 922(a).
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    The Exchange is a party to an options sales practice compliance 
plan, amended on March 26, 2007, entered into pursuant to Section 17(d) 
of the Act and Rule 17d-2, promulgated thereunder.\19\ For Exchange 
members that are also FINRA members, the amended plan allocates 
responsibility for examination and enforcement of members' compliance 
with options sales practice rules primarily to FINRA (the ``Options 
17d-2 Plan''). For non-FINRA members, the Options 17d-2 Plan provides 
that the exchange which is the Designated Examining Authority (``DEA'') 
pursuant to Rule 17d-1 under the Act, shall perform the regulatory 
responsibilities designated to it in the Options 17d-2 Plan. Under 
these provisions the Amex currently has responsibility for examination 
and enforcement of options sales practice rules as to three members 
(one of which is a dual member of the Philadelphia Stock Exchange and 
Amex and two Amex only members). FINRA will be primarily responsible 
for options sales practice examination and enforcement as to other dual 
members. In connection with the approval of these proposed changes, the 
Exchange intends to closely review written supervisory and compliance 
procedures of firms, for which it is the DEA, in the course of its 
routine examinations of member firms to ensure that supervisory and 
compliance responsibilities are adequately defined.
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    \19\ Securities Exchange Act Release No. 55532 (Mar. 26, 2007), 
72 FR 15729 (Apr. 2, 2007).
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    The Exchange believes the proposed rule changes will increase 
accountability and eliminate impractical and unrealistic supervisory 
standards applicable solely to listed options. The Exchange believes 
that the proposed rule changes are appropriate and will not materially 
alter the supervisory operations of firms.

B. Supervisory Procedures and Internal Controls

    The Exchange also proposes to amend certain rules to strengthen 
member firms' supervisory procedures and internal controls relating to 
their public customer options business. The proposed rule changes 
discussed below are modeled after NYSE and NASD rules approved by the 
Commission in 2004.\20\ The Exchange believes this proposal is 
appropriate and consistent with the proposal discussed above to 
integrate the responsibility for supervision of a member firm's public 
customer options business into its overall supervisory and compliance 
program.
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    \20\ See Securities Exchange Act Release Nos. 49882 (June 17, 
2004), 69 FR 35108 (June 23, 2004) (SR-NYSE-2002-36) (approval 
order), 49883 (June 17, 2004), 69 FR 35092 (June 23, 2004) (SR-NASD-
2002-162) (approval order).
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    The proposed revisions to Amex Rule 922(a)(3) would require member 
firms to develop and implement written policies and procedures 
reasonably designed to supervise sales managers and other supervisory 
personnel who service customer options accounts.\21\ This would 
encompass branch office managers, sales managers, regional/district 
sales managers, or any person performing a similar supervisory 
function. Such policies and procedures are expected to encompass all 
options sales-related activities. Proposed Amex Rule 922(a)(3)(i) would 
require that supervisory reviews of producing sales managers be 
conducted by a qualified ROP who is either senior to, or otherwise 
``independent of'', the producing manager under review.\22\ This 
provision is intended to ensure that all options sales activity of a 
producing manager is monitored for compliance with applicable 
regulatory requirements by persons who do not have a personal interest 
in such activity.
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    \21\ Proposed Amex Rule 922(a)(3) is modeled after NYSE Rule 
342.19.
    \22\ An ``otherwise independent'' person is defined in proposed 
Amex Rule 922(a)(3)(i).
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    Proposed Amex Rule 922(a)(3)(ii) would provide an exception for 
firms so limited in size and resources that there is no qualified 
person senior to, or otherwise independent of, the producing manager to 
conduct the review. In this situation, the review would be conducted by 
a qualified ROP to the extent practicable. Under proposed Amex Rule 
922(a)(3)(iii), a member relying on the limited size and resources 
exception must document the factors used to determine that compliance 
with each of the ``senior'' or ``otherwise independent'' standards of 
proposed Amex Rule 922(a)(3)(i) is not

[[Page 25808]]

possible, and that the required supervisory systems and procedures in 
place with respect to any producing manager comply with the provisions 
of proposed Amex Rule 922(a)(3)(i) to the extent practicable.\23\
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    \23\ Proposed Amex Rule 922(a)(3)(iv) would provide that a 
member organization that complies with the NYSE or NASD rules that 
are substantially similar to the requirements in Rules 922(a)(3)(i), 
(a)(3)(ii) and (a)(3)(iii) will be deemed to have met such 
requirements.
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    Proposed Amex Rule 922(c)(i) would require member organizations to 
develop and maintain adequate controls over each of their business 
activities. The proposed rule would require such controls to include 
the establishment of procedures to independently verify and test the 
supervisory systems and procedures for those business activities. A 
firm would be required to include in the annual report prepared 
pursuant to proposed Amex Rule 922(g), a review of the firm's efforts 
in this regard, including a summary of the tests conducted and 
significant exceptions identified. The Exchange believes proposed Amex 
Rule 922(c)(i) would enhance the overall quality of each member 
organization's supervision and compliance function.\24\
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    \24\ Proposed Amex Rule 922(c)(i) is modeled after NYSE Rule 
342.23. Paragraph (c)(ii) of proposed Amex Rule 922 would provide 
that a member organization that complies with NYSE or NASD rules 
that are substantially similar to the requirements in paragraph 
(c)(i) of proposed Amex Rule 922 will be deemed to have met such 
requirements.
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    Paragraph (d) of proposed Amex Rule 922 would establish 
requirements for branch office inspections similar to the requirements 
of NYSE Rule 342.24. Specifically Amex Rule 922(d) would require a 
member organization to inspect, at least annually, each supervisory 
branch office and inspect each non-supervisory branch office at least 
once every three years.\25\ The proposed rule would further require 
persons who conduct a firm's annual branch office inspection to be 
independent of the direct supervision or control of the branch office 
(i.e., not the branch office manager, or any person who directly or 
indirectly reports to such manager, or any person to whom such manager 
directly reports). The Exchange believes that requiring branch office 
inspections to be conducted by someone who has no significant financial 
interest in the success of a branch office should lead to more 
objective and vigorous inspections.
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    \25\ Proposed Amex Rules 922(d)(1)(i) and (ii) would provide 
members with two exceptions from the annual supervisory branch 
office inspection requirement.
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    Under proposed Amex Rule 922(e), any firm seeking an exemption, 
pursuant to Rule 922(d)(1)(ii), from the annual branch office 
inspection requirement would be required to submit to the Exchange 
written policies and procedures for systematic risk-based surveillance 
of its branch offices, as defined in Rule 922(e). Proposed Amex Rule 
922(f) would require the annual branch office inspection programs to 
include, at a minimum, testing and verification of specified internal 
controls.\26\ Proposed Amex Rule 922(d)(3) would provide that a firm 
that complies with the requirements of NASD or the NYSE that are 
substantially similar to the requirements of Rules 922(d), (e) and (f) 
will be deemed to have met such requirements. The Exchange also 
proposes to amend Commentary .04 of Amex Rule 922 to define ``branch 
office'' in a way that is substantially similar to the definition of 
branch office in NYSE Rule 342.10.
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    \26\ Proposed Rules 922(e) and (f) are modeled after NYSE Rules 
342.25 and 342.26, respectively.
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    Proposed Amex Rule 922(g)(4) would require a firm to designate a 
Chief Compliance Officer (CCO). Proposed Rule 922(g)(5) would require 
each firm's Chief Executive Officer (CEO), or equivalent, to certify 
annually that the member organization has in place processes to (1) 
Establish and maintain policies and procedures reasonably designed to 
achieve compliance with applicable Exchange rules and federal 
securities laws and regulations, (2) modify such policies and 
procedures as business, regulatory, and legislative changes and events 
dictate, and (3) test the effectiveness of such policies and procedures 
on a regular basis, the timing of which is reasonably designed to 
ensure continuing compliance with Exchange rules and federal securities 
laws and regulations.
    Proposed Amex Rule 922(g)(5) would also require the CEO to attest 
(1) that he or she has conducted one or more meetings with the CCO in 
the preceding 12 months to discuss the compliance processes in proposed 
Rule 922(g)(5)(i), (2) that he or she has consulted with the CCO and 
other officers to the extent necessary to attest to the statements in 
the certification, and (3) that the compliance processes are evidenced 
in a report, reviewed by the CEO, CCO and such other officers as the 
member firm deems necessary to make the certification, that is provided 
to the member firm's board of directors and audit committee (if such 
committee exists).\27\
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    \27\ Proposed Amex Rule 922(g)(5) is modeled after NASD Rule 
3013 and NYSE Rule 342.30(e).
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    Under proposed Amex Rule 922(b)(2), a member, upon a customer's 
written instructions, may hold mail for a customer who will not be at 
his or her usual address for no longer than two months if the customer 
is on vacation or traveling, or three months if the customer is going 
abroad. This provision would help ensure that members that hold mail 
for customers who are away from their usual addresses do so only 
pursuant to the customer's written instructions and for a specified, 
relatively short period of time.\28\
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    \28\ Proposed Amex Rule 922(b)(2) is modeled after NASD Rule 
3110(i).
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    Proposed Amex Rule 922(b)(3) would require that before a customer 
options order is executed, the account name or designation to be placed 
upon the memorandum for each transaction. Only a Qualified Individual 
would be permitted to approve any changes in account names or 
designations. The ROP would be required to document the essential facts 
relied upon in approving the changes and maintain the record in an 
easily accessible place. A member would be required to preserve any 
documentation which provides for an account designation change for a 
period of not less than three years, with the documentation preserved 
for the first two years in an easily accessible place, as the term 
``easily accessible place'' is used in Rule 17a-4 of the Act.\29\ The 
Exchange believes the proposed rule would help to protect account name 
and designation information from possible fraudulent activity.\30\
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    \29\ 17 CFR 240.17a-4.
    \30\ Proposed Amex Rule 922(b)(3) is modeled after NASD 3110(j).
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    Amex Rule 924(d) allows firms to exercise time and price discretion 
on orders for the purchase or sale of a definite number of options 
contracts in a specified security. The Exchange proposes to amend Amex 
Rule 924(d) to limit the duration of this discretionary authority to 
the day it is granted, absent written authorization to the contrary. 
The proposed rule would require any exercise of time and price 
discretion to be reflected on the customer order ticket. The proposed 
one-day limitation would not apply to time and price discretion 
exercised for orders effected with or for an institutional account (as 
defined in Rule 924(d)) pursuant to valid Good-Till-Cancelled 
instructions issued on a ``not held'' basis. The Exchange believes that 
investors will receive greater protection by clarifying the time such 
discretionary orders remain pending.\31\
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    \31\ Proposed Amex Rule 924(d) is modeled after NASD Rule 
2510(d)(1).

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[[Page 25809]]

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder.\32\ In particular, the Commission 
finds the proposed rule change, as amended, would integrate the 
supervision and compliance functions relating to member organizations' 
public customer options activities into the overall supervisory 
structure of a member organization, thereby eliminating any uncertainty 
over where supervisory responsibility lies. In addition, the proposed 
rule change would foster the strengthening of members' and member 
organizations' internal controls and supervisory systems. As such, the 
Commission finds the proposal to be consistent with the objectives of 
Section 6(b)(5) of the Act,\33\ in that it is designed to promote just 
and equitable principles of trade, to prevent fraudulent and 
manipulative acts and practices, and in general, to protect investors 
and the public interest.
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    \32\ In approving this rule change, as amended, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \33\ 15 U.S.C. 78f(b)(5).
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    The Commission also finds good cause for approving Amendment No.1 
to the proposed rule change prior to the 30th day after its publication 
in the Federal Register. Amendment No. 1 corrects an internal cross-
reference and does not contain any substantive modifications to the 
rule text. The Commission finds that it is in the public interest to 
approve the proposed rule change as soon as possible to expedite its 
implementation. Accordingly, the Commission believes good cause exists, 
consistent with Sections 6(b)(5) and 19(b) of the Act to approve 
Amendment No. 1 to the proposed rule change on an accelerated basis.

IV. Solicitation of Comments Concerning Amendment No. 1

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1, including whether Amendment No. 1 
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-2007-129 on the subject line.

Paper comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-Amex-2007-129. 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 Room, 100 F Street, 
NE., Washington, DC 20549 on official business days between the hours 
of 10 a.m. and 3 p.m. 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-2007-129 and should be 
submitted on or before May 28, 2008.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\34\ that the proposed rule change (SR-Amex-2007-129), as amended 
by Amendment No. 1, be, and hereby is, approved on an accelerated 
basis.
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    \34\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
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    \35\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-10019 Filed 5-6-08; 8:45 am]
BILLING CODE 8010-01-P