[Federal Register Volume 65, Number 5 (Friday, January 7, 2000)]
[Notices]
[Pages 1205-1206]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-386]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-42308; File No. SR-Amex-99-23]
Self-Regulatory Organizations; American Stock Exchange LLC; Order
Approving Proposed Rule Change and Amendment No. 1 Thereto and Notice
of Filing and Order Granting Accelerated Approval to Amendment No. 2
Relating to the Amendment of Commentary .05 to Rule 155
January 3, 2000.
I. Introduction
On July 9, 1999, the American Stock Exchange LLC (``Amex'' or
``Exchange'') submitted to 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 permitting members to break certain trades only
with Floor Official approval. The Exchange submitted Amendment No. 1 to
its proposal on August 2, 1999.\3\ The proposed rule change, as
amended, was published for comment in the Federal Register on September
21, 1999.\4\ The Commission received no comments on the proposal. On
October 25, 1999, the Amex file Amendment No. 2.\5\ This order approves
the proposal, as amended, and solicits comments from interested persons
on Amendment No. 2.
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\1\ 15 U.S.C. 87s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Letter from William Floyd-Jones, Assistant General Counsel,
Legal & Regulatory Policy, Amex, to Terri Evans, Attorney, Division
of Market Regulation (``Division''), Commission, dated July 29, 1999
(``Amendment No. 1'').
\4\ Securities Exchange Act Release No. 41866 (September 13,
1999) 64 FR 5115.
\5\ In Amendment No. 2, the Exchange clarified what constitutes
``prompt'' notice that a member wants to break a trade, as well as
the procedure for Floor Official review. The Exchange also
represented that it has sufficient surveillance to determine whether
a specialists is acting consistently with his obligation to maintain
a fair and orderly market. See Letter from William Floyd-Jones,
Assistant General Counsel, Legal & Regulatory Policy, Amex, to Terri
Evans, Attorney, Division, Commission dated October 21, 1999
(``Amendment No. 2'').
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II. Description of Proposal
Under the proposal, a member must first obtain written Floor
Official approval before breaking a trade because the specialist acted
as both agent and principal. The member seeking the rejection must
request, in writing, Floor Official review of the transaction promptly
after receiving notice of the trade.\6\ As is currently the case, the
basis for the request to break the trade would be that the specialist
acted in a dual capacity on the trade. Under the proposed procedure, a
Floor Official would review the facts and circumstances of the trade to
determine whether the specialist acted consistently with his obligation
to maintain a fair and orderly market.\7\ This review would include
discussions with the aggrieved member, the specialist and other members
with knowledge of the transaction. It is incumbent on the Floor
Official (who has received training on the rules of the Exchange) to
investigate the transaction and make a ruling. Members aggrieved by a
Floor Official's ruling may seek review of the ruling pursuant to
Exchange Rule 22.\8\
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\6\ The amount of time that constitutes ``prompt'' notice will
vary according to conditions in the market and the member or member
organization seeking to break the trade act diligently. The Exchange
has represented that the member or member organization seeking to
break the trade will have sufficient time to review the notice of
the trade and to prepare and deliver the written request for Floor
Official review of the transaction. Id.
\7\ In Amendment No. 2, the Exchange deleted the requirement
that the member seeking to reject the trade show good cause for the
Floor Official to form the belief that the execution was
inconsistent with the specialist's responsibility to maintain a fair
and orderly market. It is up to the Floor Official to review the
facts and circumstances of the trade to determine whether the
specialist acted consistently with his obligation to maintain a fair
and orderly market. Id.
\8\ Id.
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The Exchange believes that the current rule, which permits a party
to an Exchange contract to break the trade even though the specialist
has not acted inappropriately with respect to the trade,\9\ interjects
an element of financial risk into the market. This risk is magnified in
the context of options due
[[Page 1206]]
to the leverage of these securities. In the Exchange's view, the risk
of financial instability created by giving persons an unfettered right
to cancel trades merely because the executing specialist acted both as
principal and agent outweighs whatever residual benefits the rule may
have.
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\9\ Telephone conversation between William Floyd-Jones,
Assistant General Counsel, Legal & Regulatory Policy, Amex, and
Terri Evans, Attorney, Division, Commission, on January 3, 2000.
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The Exchange, however, is not proposing to eliminate a member's
ability to rescind a trade where the specialist may have acted
inappropriately. The proposed rule change is intended to eliminate the
unchecked right to break trades due to the capacity in which the
specialist acted. The Exchange believes that the proposal appropriately
limits the financial risk of specialists that provide liquidity to
investors by acting as principal while maintaining the ability of
members to break trades where the specialist acts inconsistently with
his obligations. The Exchanges believes that brokers have developed
sophisticated systems for reviewing execution quality in response to
the Commission's statements on ``best execution'' of customer orders.
Further, the Exchange notes that it has developed sophisticated
surveillance systems backed by extensive staff resources for reviewing
trading by its members. The Exchange believes that its current
surveillance capabilities are sufficient to determine whether
specialists are acting consistently with their obligations to maintain
fair and orderly markets. In addition, the Exchange plans to automate
its order ticket review procedures, which will further enhance its
market surveillance.\10\
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\10\ Id.
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III. Discussion
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulation thereunder applicable to a national securities exchange.\11\
In particular, the Commission believes that the proposal is consistent
with the requirements of Section 6(b)(5) of the Act.\12\ Section
6(b)(5) of the Act \13\ requires, among other things, that the rules of
an exchange be designed to prevent fraudulent and manipulative acts and
practices, promote just and equitable principles of trade, facilitate
transactions in securities, 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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\11\ In approving this proposed rule change, the Commission has
considered its impact on efficiently, competition and capital
formation. 15 U.S.C. 78c(f).
\12\ 15 U.S.C. 78f(b)(5).
\13\ Id.
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The Commission finds that requiring written Floor Official approval
before breaking a trade due to the specialist acting as agent and
principal (for good cause shown in relation to the specialist's
responsibility to maintain a fair and orderly market) promotes just and
equitable principles of trade, facilitates transactions in securities,
and removes impediments to and perfects the mechanism of a free and
open market and a national market system. By requiring Floor Official
approval, the proposal should limit the instances in which a trade can
be rejected which could enhance the stability of the marketplace, while
providing members with an opportunity to break a trade when a
specialist acted in a manner that was not consistent with his or her
duty to maintain a fair and orderly market.
The Commission also finds that Amendment No. 2 is consistent with
Section 6(b)(5) of the Act, because it promotes just and equitable
principles of trade, facilities transactions in securities and removes
impediments to and perfects the mechanism of a free and open market
and, in general, protects investors and the public interest. The
Commission notes that the theory underlying Amex Rule 155, Commentary
.05, is that a member who places an order, which the specialist
executes as principal, should have a special opportunity to evaluate
the execution and decide whether to reject the transaction. As stated
above, the purpose would continue to be served, because members will
continue to receive notices when a specialist has acted as both
principal and agent and members may continue to reject a specialist's
principal transactions upon a finding of good cause when the specialist
has failed to maintain a fair and orderly market. Thus, a member's
ability to rescind a trade in that instance should ensure that the
interest of investors are protected. In addition, the Exchange has
represented that it has sufficient surveillance for monitoring the
activity of its specialists, thus helping to ensure investor
protection.
The Commission finds good cause to approve Amendment No. 2 to the
proposed rule change prior to the thirtieth day after the date of
publication of notice of filing of the amendment in the Federal
Register. Specifically, Amendment No. 2 merely clarifies the process by
which a member can reject a trade and conveys Amex's representation
that it has adequate surveillance to monitor its specialists.
Accordingly, the Commission believes that there is good cause,
consistent with Section 6(b)(5) and 19(b) of the Act \14\ to approve
Amendment No. 2 on an accelerated basis.
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\14\ 15 U.S.C. 78f(b)(5) and 78s(b).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 2, including whether the amendment
is consistent with the Act. Persons making written submissions should
fix six copies thereof with the Secretary, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0609. Copies
of the submission, all subsequent amendments, all written statements
with respect to Amendment No. 2 that are filed with the Commission, and
all written communications relating to Amendment No. 2 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 in Washington, D.C. Copies of such filings will also be
available for inspection and copying at the principal office of the
Exchange. All submissions should refer to File No. SR-Amex-99-23 and
should be submitted by January 28, 2000.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\14\ that the proposed rule change, as amended, (SR-Amex-99-23) is
approved.
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\14\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulations,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-386 Filed 1-6-00; 8:45 am]
BILLING CODE 8010-01-M
