[Federal Register Volume 63, Number 214 (Thursday, November 5, 1998)]
[Notices]
[Pages 59819-59831]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-29624]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40622; File Nos. SR-Amex-98-32; SR-NASD 98-56; SR-NASD
98-67]
Self-Regulatory Organizations; American Stock Exchange, Inc., and
National Association of Securities Dealers, Inc.; Order Granting
Approval to Proposed Rule Changes and Notice of Filing and Order
Granting Accelerated Approval to Amendment No. 2 Thereto; Relating to
the Combination of the American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc., Including Amendments to the
Composition of the NASD Board and Relating to Policies Regarding
Authority Over American Stock Exchange LLC and Composition of Board of
Governors of American Stock Exchange LLC
October 30, 1998.
I. Introduction
Three separate filings have been submitted to the Securities and
Exchange Commission (``SEC'' or ``Commission'') in connection with the
proposed combination between the National Association of Securities
Dealers, Inc. (``NASD'' or ``Association'') and the American Stock
Exchange, Inc. (``Amex'').
On August 10, 1998, the NASD submitted to the Commission, pursuant
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'' or
``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change (SR-NASD-98-56) to amend the NASD's By-Laws to reserve one NASD
Board of Governors (``NASD Board'') position for a person representing
an NASD member firm having not more than 150 registered persons; to
reserve two Board positions for the Chief Executive Officer and one
Floor Governor of the American Stock Exchange LLC (``New Amex''); and
to make other clarifying amendments, including the addition of certain
definitions. The NASD also proposed to add corresponding clarifying
amendments and definitions to the By-Laws of NASD Regulation, Inc.
(``NASD Regulation'') and The Nasdaq Stock Market, Inc. (``Nasdaq'').
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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On September 3, 1998, Amex submitted to the Commission, pursuant to
Section 19(b)(1) of the Exchange Act \3\ and Rule 19b-4 thereunder,\4\
a proposed rule change (SR-Amex-98-32) to make certain amendments to
its Constitution and Rules that will become effective at the time they
become the Constitution and Rules of New Amex. An amendment to SR-Amex-
98-32 was filed with the Commission on October 29, 1998.\5\
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\3\ 15 U.S.C. 78s(b)(1).
\4\ 17 CFR 240.19b-4.
\5\ See Letter to Michael Walinskas, Deputy Associate Director,
Division of Market Regulation, Commission, from James F. Duffy,
Executive Vice President, Legal and Regulatory Policy, Amex, and
Richard G. Ketchum, President and Chief Executive Officer, NASD,
dated October 29, 1998 (``Amendment No. 2'').
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On September 14, 1998, the NASD submitted to the Commission,
pursuant to Section 19(b)(1) of the Exchange Act \6\ and Rule 19b-4
thereunder,\7\ a proposed rule change (SR-NASD-98-67) to state two
policies regarding NASD's oversight of New Amex and the composition of
the Board of Governors of New Amex.
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\6\ 15 U.S.C. 78s(b)(1).
\7\ 17 CFR 240.19b-4.
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Notice of the proposed rule changes, together with the substance of
the proposals, was published for comment in Exchange Act Release Nos.
40339 (August 19, 1998), 63 FR 45547 (August 26, 1998) (SR-NASD-98-56);
40426 (September 10, 1998), 63 FR 49766 (September 17, 1998) (SR-Amex-
98-32); and 40443 (September 16, 1998), 63 FR 51108 (September 24,
1998) (SR-NASD-98-67). One comment was received on the proposals.\8\
The NASD responded to the comment letter, the substance of which is
discussed in Item III below.\9\
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\8\ See letter from Bill T. Singer, Singer Frumento L.L.P., to
Secretary, Commission, dated September 11, 1998 (incorporating a
report from Bill T. Singer to Alan Davidson, President, Independent
Broker-Dealer Association, Inc., dated September 10, 1998) (``Singer
Letter''). The comment letter was written in opposition of the
proposed combination of the NASD and Amex. Although the comment
letter responded specifically to SR-NASD-98-56, it addressed several
general issues in connection with the proposed combination. As such,
the Commission has determined to treat the comment letter as if it
were a comment on each of the three submitted proposals.
\9\See letter from T. Grant Callery, Senior Vice President and
General Counsel, NASD, to Katherine A. England, Assistant Director,
Market Regulation, Commission, dated October 23, 1998 (``NASD
Response'').
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II. Description
A. Background
On March 18, 1998, Amex and the NASD announced that their
respective Boards of Governors had each agreed to enter into a merger
agreement that, subject to finalization of a definitive agreement and
approval by Amex Members, would result in Amex becoming a subsidiary of
the NASD. On April 8, 1998, the Amex and NASD Boards each unanimously
approved the terms of a definitive agreement (the ``Transaction
Agreement''), which was signed by the NASD and Amex as of May 8, 1998.
At a Special Meeting of Members on June 25, 1998, the Amex Membership
ratified the Transaction Agreement by a vote of 622 to 206.\10\ NASD
members were not required to vote on the merger.
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\10\ Two-thirds approval from the Amex Membership was required
in order for the transaction to pass. The Membership approved the
transaction by roughly 75 percent. In connection with Amex member
approval of the agreement, Amex sent to all 864 Amex Regular Members
and Options Principal Members (referred to collectively as
``Members'') an Information Memorandum, dated May 14, 1998,
describing the transaction in detail. Attached as exhibits to the
Information Memorandum were the Restated Certificate of
Incorporation and the new By-Laws of Amex Corp. (as hereinafter
defined), and the Constitution of New Amex. Members also were
provided with documents relating to the transaction (``Transaction
Documents''). These included, among other items, the Transaction
Agreement and exhibits thereto, including the Limited Liability
Company Agreement of New Amex (``LLC Agreement'') and the Technology
Transfer and Development Agreement. Copies of the Transaction
Agreement, the LLC Agreement, and the Technology Transfer and
Development Agreement are available at the Commission's Public
Reference Room under File No. SR-Amex-98-32.
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[[Page 59820]]
The merger has been represented as an alliance that will combine
the resources of the NASD, including its technology and expertise, with
Amex's auction market. It has further been represented that this
combination has been designed to provide: Amex Member organizations
with more efficient, less costly equity trade executions; issuers with
additional listing choices; and investors with more transparent, less
costly trading. The proposed technology upgrades to Amex center around
a proposed ``New Equity Market Structure'' that, among other things,
will introduce a new electronic limit order book and provide automatic
execution for electronically delivered orders.\11\ Although this
program may be funded through New Amex revenues, NASD has committed up
to $110 million, including through capital contributions, loans, or
guarantees of loans, to complete the New Equity Market Structure and
certain other trading facility and technology upgrades.\12\
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\11\ The New Equity Market Structure, which will be subject to
future SEC review and approval, intends to retain Amex's
centralized, floor-based specialist auction market, but would
enhance the ability to access this market either electronically or
thorough floor brokers. It plans to provide for automatic execution
of electronically delivered orders, and would use a newly developed
electronic order book that would display the aggregate size and
price of orders on the book away from the best bid and offer.
Specialists would be precluded from charging floor brokerage fees on
electronically delivered orders. In order to offset the expected
loss of floor brokerage revenue, New Amex would share its
transaction-based revenue with the specialists. In addition,
specialists may be allowed to hand discretionary orders as agent,
and their specialist affirmative obligations may be liberalized. New
Amex likely will file a rule filing reflecting these proposed
changes following the closing of the transaction (``Closing'').
\12\ See Technology Transfer and Development Agreement.
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B. Reorganization of Amex
The Transaction Agreement provides that, at the Closing, Amex will
transfer its exchange registration and its assets to New Amex. New Amex
will assume all existing liabilities, known and unknown, of Amex. New
Amex will be a national securities exchange registered under Section 6
of the Exchange Act operating a floor-based, specialist auction market
with its own members and listed securities.\13\ New Amex will be
structured as a Delaware Limited Liability Company (``LLC''), and will
be jointly owned by The Amex Corporation (``Amex Corp.'') (the name
that Amex will use following the Closing), and the NASD (through a
holding company, the NASD Market Holding Company (``Holdco'')) pursuant
to the LLC Agreement between the parties.\14\ Under the LLC Agreement,
Amex Corp. will be the holder of the Class A Interest and Holdco will
be the holder of the Class B Interest in New Amex. Only Holdco will
have a voting interest in New Amex. The NASD cannot amend the LLC
Agreement without the consent of the Board of Amex Corp. or the Members
of Amex Corp. (depending upon the type of change, as governed by the
Transaction Documents).\15\
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\13\ Upon succeeding to the exchange registration of Amex, New
Amex promptly will file necessary amendments to New Amex's
registration as a national securities exchange on Form 1-A, pursuant
to Rule 6a-1 under the Act. Current Amex rules will become the rules
of New Amex on the date of the Closing, amended only as described
herein. Any amendments to such rules proposed after the Closing will
be filed by New Amex pursuant to Rule 19b-4. New Amex will also
succeed to any proposed rule change filed with the Commission by
Amex before the Closing but not approved by the Commission by that
time, and if ultimately approved such proposal would change the
rules of New Amex.
\14\ For tax consolidation purposes, the NASD will own its
interest in New Amex and Nasdaq through Holdco, a wholly-owned
subsidiary of the NASD.
\15\ The New Amex Constitution provides that the Constitution
may be amended by a majority vote of the New Amex Board of Governors
and the holder of the Class B Interest, Holdco, without any further
procedures at the SRO level except where the change would require
the consent of Amex Corp. or the Amex Committee. Thus, the NASD, via
its wholly-owned subsidiary Holdco, must approve, and has the power
to veto, any proposed amendments to the New Amex Constitution.
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After the Closing, Amex will continue to exist as a New York not-
for-profit corporation, under the name Amex Corp. Amex Corp.'s
activities will be limited to holding an ownership interest in New Amex
and exercising the rights incident to ownership arising under the
Transaction Documents. Specifically, the Restated Certificate of
Incorporation for Amex Corp. states that, except for those activities
specifically mentioned in the Restated Certificate, Amex Corp. may not
engage in any other business activities. Nor may it incur directly or
indirectly any debt for borrowed money, or incur, without prior written
consent from the Amex Corp. Chairman, any liability or make any
expenditure unless the liability or expenditure is reasonable in amount
and reasonably related to the corporate purpose of Amex Corp.\16\
Except for the voting rights in connection with the request for
consents from New Amex, described below, Amex Corp. will hold an
otherwise nonvoting interest in New Amex. Amex Corp. will have its own
Board, which will consist of the same four Floor Governors as those
serving on the New Amex Board.
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\16\ Amendments to the Restated Certificate of Incorporation of
Amex Corp., which dictates the purposes and powers of Amex Corp.,
may not be made without the approval of the NASD.
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C. New Amex Corporation Governance
1. New Amex Board
The principal management authority of New Amex rests in the New
Amex Board, which will be composed of 18 governors--including four
floor governors (one of whom must be an equity specialist and at least
one of whom must be a Registered Options Trader (``ROT''),\17\ two
Upstairs Industry Governors (i.e., members affiliated with broker-
dealers that have substantial contact with public customers); eight
Public Governors; \18\ the two most senior officers of New Amex; and
two staff representatives from the NASD staff.\19\ The eight Public
Governors and two Upstairs Industry Governors will be nominated and
elected by the NASD. The four Floor Governors will be nominated by Amex
Corp. and elected
[[Page 59821]]
by the NASD.\20\ The NASD may reject a Floor Governor nominee only if
(i) the nominee is subject to a statutory disqualification, (ii) the
nominee is subject to a proceeding or investigation which could result
in a statutory disqualification, or (iii) the nominee has been
disciplined by a securities SRO with respect to a matter involving
fraud or a serious violation of U.S. securities laws. In the event the
NASD rejects a Floor Governor nominee, the Amex Corp. has the right to
select a substitute nominee.
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\17\ The Transaction Agreement provides that on the tenth
anniversary of the closing date, one additional Floor Governor will
be added to the New Amex Board. The fifth Floor Governor is intended
to provide Members with additional representation on the Board upon
the expiration of certain contractual provisions in the Transaction
Agreement.
\18\ ``Public Governor'' is defined in Article II, Section
.01(a)(2) of the New Amex Constitution as someone who is neither a
broker or dealer in securities nor affiliated with one. The
Commission notes that the NASD definition of ``Public Governor''
restricts persons who have material business relationships with a
broker or dealer from serving as Public Governors, whereas the New
Amex definition of ``Public Governor'' does not contain this
restriction.
The NASD and Amex have represented to the Commission that they
will implement certain undertakings with respect to the operation of
New Amex following the Closing of the Transaction Agreement, and
that these undertakings will constitute SRO rules under the Exchange
Act. The NASD and Amex have indicated that there is a likelihood of
overlap of Public Governors between the NASD Board and the New Amex
Board. The NASD and Amex have agreed through the undertakings, and
have represented to the Commission, that not more than three of the
nine non-industry governors on the New Amex Board may simultaneously
serve as governors on the NASD Board. In this instance only, the
term ``non-industry'' is used to refer to the eight Public Governors
on the New Amex Board, as well as to the NASD staff representative
who is required to meet the definition of ``Non-Industry'' as
defined in the NASD By-Laws. See Amendment No. 2. With respect to
those serving on both the New Amex and NASD Boards, the NASD and
Amex also have agreed through the undertakings, and have represented
to the Commission, that New Amex will implement conflict of interest
policies and procedures, consistent with those now in place at the
NASD, to address the potential unique issues facing those persons
that overlap between Boards. See Amendment No. 2.
\19\ The Commission notes that the NASD will appoint as one of
these representatives a person who is not an employee of and has no
material business relationship with a broker or dealer or with the
NASD, NASD Regulation, Nasdaq or New Amex, but who may be an officer
or employee of an issuer of securities listed on Nasdaq or New Amex
or traded in the over-the-counter market. See File SR-NASD-98-56,
described more fully in Section II.C.3. below.
\20\ The NASD, acting through its Board or a Board
representative, will cast the vote of the holder of the Class B
Interest for all elected governors, including the four Floor
Governors.
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New Amex Governors will serve a two year term in office. The four
Floor Governors will be divided into two classes of two each: the first
class will include an equity specialist and the second class will
include an ROT. The other elected governors also will be divided into
two classes, each consisting of one Upstairs Industry Governor and four
Public Governors. The term of the first class will expire in 1999 and
the term of the second class will expire in 2000. Elected governors
will be eligible to serve no more than three consecutive two year
terms, except that governors in the class of 1999 and any elected
governor appointed to serve for one year or less by reason of a vacancy
may be elected to serve three subsequent consecutive two year terms.
The term ``elected governors'' does not include governors who are New
Amex officers or representatives of the NASD staff, who are appointed
by New Amex or the NASD, respectively.
Floor Governor nominees will be proposed either by the Amex
Nominating Committee or by petition signed by at least 25 Members and
will be selected by a plurality of the Regular and Options Principal
Members of Amex Corp. voting together as a single class. The Amex
Nominating Committee will consist of five persons: three Floor Members
and two persons having no affiliation with a registered broker or
dealer (``Public Members''). Each of the three principal business
activities on the floor, registered specialists, registered options
traders, and floor brokers, will be represented on the Amex Nominating
Committee. While the existence and behavior of the Amex Nominating
Committee is described in the New Amex Constitution, the Amex
Nominating Committee is a committee of Amex Corp., under the By-Laws of
Amex Corp. The Amex Nominating Committee will be divided into two
classes: the first (terminating in 1999) will consist of a Public
Member and specialist, and the second (terminating in 2000) will
consist of a Public Member, a floor broker and an ROT. Persons on the
Amex Nominating Committee may not serve consecutive terms. No one
affiliated with a member of the Amex Nominating Committee will be
eligible as a candidate for a ticket named by it. In addition to
proposing Floor Governor nominees, the Amex Nominating Committee also
will propose nominees for Trustees of the Gratuity Fund, the Amex
Nominating Committee, and Amex Adjudicatory Council. Candidates for
these petitions can also be nominated through the independent petition
process described above. Members of the Trustees of the Gratuity Fund,
Amex Nominating Committee and the Amex Adjudicatory Council will be
elected at the annual meeting by a plurality of Members voting together
as a single class.
The filling of vacancies on the New Amex Board requires
recommendation by Amex Corp. in the case of Floor Governors, and from
the NASD for all other Governors. The recommendation from Amex Corp.
will be made by the Amex Nominating Committee, while the NASD
recommendation will be made by the NASD Nominating Committee. As with
current Amex procedures, persons appointed to fill such vacancies will
serve until the next annual election.
2. Role of the Amex Committee and Amex Corp.
Although most of the voting power in New Amex concerning the
operation of New Amex will be vested in the NASD, the Transaction
Agreement provides that certain actions affecting Amex Corp. Members
will require their consent. Consent by Amex Corp. Members will occur
through several means depending on particular circumstances, as
provided for in the Transaction Agreement. The ``Amex Committee'' has
been established under the Transaction Agreement to provide required
consent under some circumstances. The Amex Committee will be required
to represent and exercise its powers in the best interest of Amex Corp.
and its Members, but will exist outside of both New Amex and Amex
Corp.\21\ The Amex Committee has seven members composed of (1) three
non-industry \22\ Members, one of whom will serve as chairman; (2) one
person who is not active on the floor of New Amex but who is associated
with a member organization of New Amex; and (3) three Floor Members who
are active on the floor of New Amex, one whose principal business is as
a specialist on the Equity Market or Options Market, one whose
principal business is as a registered options trader and one whose
principal business is as a floor broker.\23\
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\21\ The initial Amex Committee Floor Members will be nominated
by current Amex floor governors on the Amex Board and agreed to by
Amex and the NASD prior to the Closing. The remaining initial
members of the Amex Committee will be selected by the NASD and
agreed to by the NASD and Amex prior to the Closing. The existence
of the Amex Committee will begin on the Closing Date. Five of the
seven members of the Amex Committee will constitute a quorum for the
transaction of business, and the Committee will act by majority
vote.
\22\ The term ``non-industry'' is used in the Transaction
Agreement. It is intended to mean someone who is neither a broker or
dealer in securities nor affiliated with one. Telephone call between
James Duffy, Amex, and Michael Ryan, NASD, and Christine Richardson,
Commission, on October 29, 1998.
\23\ Amex Committee members will be divided into three classes
with staggered three-year terms. No Amex Committee member may serve
more than two consecutive three-year terms. Vacancies on the Amex
Committee will be filled by a person of the same category as the
vacating member. Replacements for Floor Members will be chosen by
the Floor Governors on New Amex's Board. Replacement members for
other Amex Committee members, including the chairman, will be chosen
by a majority of the remaining members of the Amex Committee or, in
some circumstances, by action of New Amex's Board (including the
approval of at least two Floor Governors of New Amex). All
replacements will be subject to the approval of the NASD's Chairman,
including Floor Member representatives.
The NASD and Amex have agreed through the undertakings, and have
represented to the Commission, that neither the member of the Amex
Committee described in Section 9.9(a)(i) of the Transaction
Agreement nor any of the non-industry members of the Amex Committee
(those described in Section 9.9(a)(v) of the Transaction Agreement)
will simultaneously serve on the Board of Governors of either the
NASD or New Amex. See Amendment No. 2.
The NASD and Amex also have agreed through the undertakings, and
have represented to the Commission, that for the purpose of
confirming the SEC's jurisdiction over members of the Amex
Committee, such persons will be deemed ``directors'' as that term is
used in Section 3(a)(7), and will be deemed directors of an SRO
under Section 19(h)(4), of the Exchange Act.
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The Transaction Agreement provides that, during certain periods,
New Amex will not be able to act on certain matters without the consent
of the Amex Committee, Amex Corp.,\24\ or both. Specifically, during
the period from the Closing to the fifth anniversary of the Facility
Commitment Date
[[Page 59822]]
(approximately six and one-half years after the Closing),\25\ New Amex
will not make any material market structure change \26\ in the equity
market without the consent of both Amex Corp. and the Amex Committee.
From the fifth anniversary of the Facility Commitment Date until the
tenth anniversary of the Closing, New Amex may not make any material
market structure changes in the equity market without the consent of
the Amex Committee and the Board of New Amex. From and after the tenth
anniversary of the Closing, New Amex may not make any material
structure change in the new equity market structure without the consent
of the Amex Committee; however, an affirmative vote of two-thirds of
the entire New Amex Board can override disapproval by the Amex
Committee.\27\ Similar provisions apply to material market structure
changes to the options market.\28\ The Amex Committee also has a role
in a number of other significant matters, including the acquisition by
the NASD of other options or securities exchanges, the timing of the
modernization of the New Amex trading facility, and the monitoring of
amounts spent on new technology by the NASD for New Amex.\29\
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\24\ Promptly after receiving a requested consent in writing
from New Amex, the Secretary of Amex Corp. will call a meeting of
the holders of the Memberships to vote on the requested consent. If,
and only if, the required number of Memberships are voted in favor
of authorizing the requested consent, the proper officers of Amex
Corp. will promptly grant Amex Corp.'s consent to New Amex. Any
requested consent will be granted only upon the affirmative vote of
a majority of the Amex Corp. Regular Memberships and the Options
Principal Memberships voted (as a single class) at a meeting duly
called and convened and at which quorum is present.
\25\ ``Facilities Commitment Date'' is defined in the Technology
Transfer and Development Agreement as the period ``[w]ithin six
months from the Pilot Program Initiation Date.'' The ``Pilot Program
Initiation Date'' is defined in the Technology Transfer and
Development Agreement as ``[b]y the later of nine months form the
Closing Date and June 30, 1999.''
\26\ ``Material Market Structure Change'' is defined in the
Transaction Agreement as ``any change or series of changes in the
Transaction documents, [New] Amex Constitution, rules or methods of
operation of [New] Amex that have the effect of changing in any
material way a material element of the new Equity Market structure,
as described in Exhibit D, or the Options Market, as existing at the
Closing, or in the manner in which a Regular Member or an Options
Principal Member is permitted to conduct business in either the new
Equity Market structure or the Options Market structure, or the
rights or obligations of any such Member in the new Equity Market
structure or the Options Market structure. Notwithstanding the
foregoing or any other provision herein or in the Exhibits hereto, a
change in the market structure specification contained in Exhibit D
which, notwithstanding the best efforts of [New Amex and the NASD],
is required by the SEC and accepted by the New Amex as described in
Section 9.15 [of the Transaction Agreement], shall not be considered
a Material Market Structure Change. Any change in the matching
procedure (e.g., algorithms) or in the fees provided in Exhibit D
shall be deemed a Material Market Structure Change.''
\27\ See Transaction Agreement, Section 9.10.
\28\ See Transaction Agreement, Section 9.11.
\29\ New Amex also must give the Floor Members on the Amex
Committee at least ten business days' prior notice before aggregate
costs and fees to Floor Members and other floor participants on New
Amex can be increased by more than ten percent in any calendar year.
A majority of those persons may vote to submit the matter to binding
arbitration. Such arbitration will last no more than 30 days and
will determine whether the increases were reasonable and fair in
light of all relevant factors, including the costs other major
securities exchanges charge their Members, the costs historically
imposed by New Amex, and changes in the expenses and overall
economic performance of New Amex (other than debt service in
connection with the $110 million Development Program).
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The principal function of Amex Corp., as limited purpose
corporation, will be to implement the voting process to obtain the
consents necessary for New Amex to take action. All Amex Corp. Members
will have equal voting rights and will vote on certain matters together
as a single class.
Although the powers of Amex Corp. are limited, Amex Corp. Members
will have certain voting and other rights. Notably, New Amex may
increase the number of either Regular and Options Principal Memberships
only if such action is consented to by Amex Corp. through a Membership
vote. In addition, the right to trade on New Amex will continue to be
embodied in Memberships which are interests in Amex Corp., although New
Amex will have the authority and responsibility to approve transfers of
such Memberships and changes in the ``approved persons'' of a member or
member organization.\30\ Amex Corp. Members also will have certain
preferential liquidation rights, as set forth in the Transaction
Agreement.
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\30\ There are no changes currently proposed to the rules and
policies governing the Membership approval process.
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3. NASD Plan of Responsibility
In File SR-NASD-98-67, the NASD proposed two policies relating to
the NASD's responsibilities concerning New Amex and the composition of
the Board of Governors of New Amex.\31\ Specifically, this proposed
rule change sets forth certain principles to guide the NASD in
fulfillment of its responsibilities as parent company of New Amex with
ultimate responsibility for New Amex's compliance with its statutory
responsibilities as a self-regulatory organization (``SRO''). The NASD
has represented that it will exercise its powers and its managerial
influence to ensure that the New Amex fulfills its self-regulatory
obligations by directing New Amex to take action necessary to
effectuate its purposes and functions as a national securities exchange
operating pursuant to the Act, and ensuring that New Amex has and
appropriately allocates such financial, technological, technical, and
personnel resources as may be necessary or appropriate to meet its
obligations under the Act. Furthermore, the NASD has committed to
refraining from taking any action with respect to New Amex that, to the
best of its knowledge, would impede, delay, obstruct, or conflict with
efforts by New Amex to carry out its self-regulatory obligations under
the Act and the rules and regulations thereunder. This filing also
provides that the NASD will appoint as one of the two representatives
of the NASD staff on the New Amex Board of Governors a person who is
not an employee of and has no material business relationship with a
broker or dealer or with the NASD, NASD Regulation, Nasdaq or New Amex,
but who may be an officer or employee of an issuer of securities listed
on Nasdaq or New Amex or traded in the over-the-counter market. The
purpose of this change is to ensure compliance with the NASD Delegation
Plan, which reflects the requirements of the Commission's Report
Pursuant to Section 21(a) of the Act and related order and
undertakings, and requires that all boards of NASD subsidiaries equal
or exceed 50% non-industry representation in composition.\32\
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\31\ See Exchange Act Release No. 40443 (September 16, 1998), 63
FR 51108 (September 24, 1998) (NASD-98-67).
\32\ Report and Appendix to Report Pursuant to Section 21(a) of
the Exchange Act of 1934 Regarding the NASD and the Nasdaq Stock
Market (August 8, 1996) and Exchange Act Release No. 37538 (August
8, 1996) (SEC Order Instituting Public Proceedings Pursuant to
Section 19(h)(1) of the Securities Exchange Act of 1934, Making
Findings and Imposing Remedial Sanctions, In the Matter of National
Association of Securities Dealers, Inc. Administrative Proceeding
File No. 3-9056), respectively. The undertakings were included in
the SEC Order. See also Exchange Act Release No. 39326 (November 14,
1997), 62 FR 62385 (November 21, 1997) (File Nos. SR-NASD-97-71, 96-
29 and 96-20).
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D. NASD Corporate Governance
Although NASD Members were not required to vote to approve the
merger, NASD Membership approval was required to amend the NASD By-Laws
to reflect a term of the Transaction Agreement, requiring the inclusion
of the Chief Executive Officer of New Amex and one Floor Governor from
the New Amex Board on the NASD Board. File SR-NASD-98-56 reflects this
proposed change.\33\ Inclusion of these New Amex Members on the NASD
Board is designed to provide for
[[Page 59823]]
representation of New Amex, as a subsidiary of the NASD.
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\33\ See Exchange Act Release No. 40339 (August 19, 1998), 63 FR
45547 (August 26, 1998) (NASD-98-56). This filing also proposed an
additional position on the Board representing an NASD member firm
having not more than 150 registered persons. The portion of SR-NASD-
98-56 addressing the small firm Board representative was approved in
Exchange Act Release No. 40615 (October 28, 1998).
The NASD Membership approved these changes to the NASD By-Laws.
Voting on this proposal closed on September 14, 1998. Of the 2,658
ballots received by the NASD, 2,565 were in favor of the By-Law
change, 82 opposed the change, and 11 ballots were received with no
vote indicated.
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E. Class C Trading Rights
The New Amex Constitution also provides for the creation of up to
25 trading rights that will allow holders to specialize in newly listed
securities that they are responsible for bringing to New Amex (``Class
C Trading Rights''). Class C Trading Rights will have a limited life
and will expire on the earlier of three years from the date of issuance
or the fifth anniversary of the Closing. These permits are intended to
attract firms that are not currently involved in specialist activity on
New Amex to bring substantial new listings to New Amex. Accordingly,
holders of Class C Trading Rights only will be eligible to be allocated
securities that they bring to New Amex, and they may not operate a
joint book with a Regular Member.\34\ The New Amex Board will determine
when and to whom to issue Class C Trading Rights, and the fees, dues
and other charges applicable to such rights. Class C Trading Rights
will not be transferable except by reason of a business combination,
reorganization or other transfer of all or substantially all of the
assets from one member organization to another. Class C Trading Rights
may be issued to qualified individuals or organizations who are
instrumental in obtaining new listings of securities admitted to
dealings on New Amex that are judged by New Amex to constitute
demonstrable product. New Amex will exercise its judgment in this
matter based on both the quantity and quality of listings brought to
New Amex.
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\34\ A specialist holding a Class C Trading Right (``Limited
Specialist Trading Right'') who then becomes a Regular Member will
be considered to have continued his registration as a specialist in
the securities allocated to him without any need to submit to a
further allocation process.
It is anticipated that holders of Class C Trading Rights
generally will not be existing Members of Amex Corp; however, the
Commission notes that nothing in the New Amex Constitution would
preclude current Amex Corp. Members of availing themselves of this
provision.
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F. Discipline
The New Amex Constitution creates the Amex Adjudicatory Council
(``AAC'') to review appeals of right from Disciplinary Panel decisions
(removing the current Board and Executive Committee review).\35\
Modeled on NASD Regulation's National Adjudicatory Council, the AAC
will consist of six persons, three of whom will be New Amex Floor
Governors and three of whom will be New Amex Public Governors.\36\ AAC
members will be nominated by the Amex Nominating Committee or by
independent petition signed by at least 25 Members and will be elected
by the Regular and Options Principal Members of Amex Corp. voting
together as a single class. AAC members will be divided into two
classes. The first class (terminating in 1999) will consist of two
Floor Governors and one Public Governor. The second class (terminating
in 2000) will consist of one Floor Governor and two Public Governors.
Apart from the members of the first class whose terms will expire in
1999, AAC members will be elected to two year terms. Beginning with the
class elected in 2000, no AAC member may serve more than two
consecutive terms unless the member initially is appointed to fill a
term of less than one year, in which case the member may serve up to
two consecutive terms following the expiration of the initial term.
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\35\ The Commission notes that the current hearing process for
Members requiring a hearing before a Disciplinary Panel is not being
changed from the current procedures. See New Amex Constitution,
Article V. Section .01.
\36\ For a description of the National Adjudicatory Council, see
Article V of the By-Laws of NASD Regulation.
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Respondents in contested disciplinary proceedings can take an
appeal of right to the AAC, and any member of the AAC may require the
review of a Disciplinary Panel decision by the full AAC.\37\ A quorum
of the AAC will be four persons. In the event of a tie vote, the
decision that is the subject of the review will be upheld. Proposed
written decisions of the AAC in contested proceedings are provided to
all members of the New Amex Board.
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\37\ The AAC may review settlements of disciplinary proceedings
that have been approved by a Disciplinary Panel. If the AAC rejects
the settlement, the matter would proceed before a Disciplinary Panel
as if the settlement had never occurred. The AAC may reject a
settlement or impose a lesser penalty upon a respondent; it cannot
increase the penalty. AAC decisions to reject a settlement would not
be subject to Board review. AAC decisions with respect to
settlements (other than rejections) would constitute the final
action of New Amex.
---------------------------------------------------------------------------
The New Amex Board will have a discretionary right to review
decisions of the AAC. Any four members of the New Amex Board may
require Board review of an AAC decision. Ten governors will constitute
a quorum at a meeting where a decision by the AAC is reviewed and a
majority vote of the governors present at the meeting will be required
to modify, reverse or remand the decision. In the absence of such
discretionary review by the Board, a decision by the AAC will be the
final action of New Amex, and therefore appealable to the Commission.
G. Arbitration
With regard to New Amex's arbitration program, the New Amex
Constitution provides that any arbitration filed prior to the Closing
will be conducted by means of the arbitration facilities and procedures
that existed as of the date the arbitration was instituted. Actions
filed following the Closing will be conducted pursuant to the NASD Code
of Arbitration Procedure using the arbitration facilities of NASD
Regulation, Inc., although an existing Amex provision is preserved
allowing use of the New York Stock Exchange arbitration procedures if
all parties to the controversy are members there. Certain portions of
Amex's arbitration procedures, including that which permits the Board
to decline to permit the use of New Amex's arbitration facilities in
particular cases, and that which permits arbitration before the
American Arbitration Association in certain circumstances, will be
deleted in view of the complete assumption by NASD Regulation of New
Amex's arbitration program and the adoption of the NASD Code of
Arbitration Procedure.
The New Amex Constitution also states that a failure on the part of
persons within New Amex's jurisdiction to pay an arbitration award of
any exchange or the NASD, shall be deemed a failure to meet his or its
engagements and subject him or it to suspension under Article V,
Section 3 of the New Amex Constitution.
H. Seat Market Program
The Transaction Agreement provides that a Seat Market Program for
Regular and Options Principal Memberships will begin immediately after
the Closing. This program is intended to moderate possible downside
volatility in seat prices following the Closing. The NASD has committed
to fund this program, but no ``trust'' or other segregated fund will be
created. Immediately after the Closing, the NASD will commit $30
million for this program. On January 1, 1999, the NASD will increase
its commitment by $10 million. New Amex will fund this $10 million
increase to the extent that its 1998 earnings allow, and the remainder
will be funded by the NASD.\38\ The
[[Page 59824]]
liquidation, dissolution or winding up of New Amex will not affect the
NASD's funding commitment under the Seat Market Program.
---------------------------------------------------------------------------
\38\ In addition, the NASD will: (1) increase its commitment by
any after-tax net proceeds received from leasing Regular or Options
Principal Memberships purchased under the program; (2) increase or
decrease its commitment, as the case may be, by the after-tax profit
or loss realized from reselling such Memberships; (3) decrease its
commitment by the payments or expenditures pursuant to the program
(other than payments or expenditures for purchasing Memberships
under the program); and (4) increase its commitment by imputed
interest at an annual interest rate of five percent on the amount of
the commitment, for the first five years after the Closing, and on
the difference between the amount of the commitment and the
aggregate purchase price of all Memberships purchased under the
program during the period they are held by the NASD, after the fifth
anniversary of the Closing.
---------------------------------------------------------------------------
The Transaction Agreement provides for control of the program by a
six-member seat committee (the ``Seat Committee''). The Seat Committee
will be composed of three Regular or Options Principal Members (at
least one who is active on the floor of New Amex and one who is not
active on the floor), two Public Members, and the NASD's Chairman (or
his designee). The Regular or Options Principal Members on the Seat
Committee may not be from large multi-service broker-dealer firms.
The Floor Governors of New Amex will choose the Regular or Options
Principal Members to serve on the Seat Committee, and will fill
vacancies in those three positions, subject to approval by the NASD
Chairman. The other members of the Seat Committee will be chosen, and
vacancies filled, by the NASD's Chairman.
During the Seat Market Program, the NASD must purchase Regular and
Options Principal Memberships, as and if directed by the Seat
Committee. Memberships held or leased by the NASD may not be voted. The
NASD may sell or lease Memberships purchased under the program, and net
proceeds will be returned to the program.
On or soon after the fifth anniversary of the Closing, the Seat
Committee may recommend that the NASD apply up to $30 million of the
funds in the Seat Market Program as: (1) Distributions to Members, (2)
reductions in New Amex fees, or (3) investments in technology for New
Amex (which will not count toward the $110 million Development
Program). The Seat Committee also may recommend that no fund amounts be
spent on any of these choices. Every two years after the fifth
anniversary of the closing, the Seat Committee can recommend that the
balance of the commitment be applied in one or more of the ways
described above.
Each of these Seat Committee recommendations will require the
consent of Amex Corp. Upon receiving a Seat Committee recommendation,
Amex Corp. must put the matter to a vote of its Members and give its
consent if, and only if, authorized by the affirmative vote of a
majority of the Regular and Options Principal Memberships voted (as a
single class) at a meeting called for the purpose of considering the
Seat Committee's recommendation. If it receives Amex Corp.'s consent,
the NASD must comply with the Seat Committee's recommendation. If the
Seat Committee's recommendation is not approved, the Seat Committee
must make a new recommendation.\39\
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\39\ In Selma Philipson v. American Stock Exchange, et al., 98
Civ 4219 (DC), United States District Court, Southern District of
New York, filed as a class action, plaintiff challenged the
transaction between the Amex and the NASD on several grounds. The
NASD and the Amex have negotiated an agreement in principle for the
settlement of this litigation which provides that the Seat Committee
shall consider, 18 months and 36 months after the Closing, whether
half of the NASD's initial $30 million commitment to the Member
Equity Program should be distributed to owners of Membership
interests, used to reduce New Amex fees, or invested in technology
for New Amex, rather than continuing to be held for the purchase of
seats. After five years, any remaining portion of the initial $30
million commitment must be used for one of these purposes. In
addition, the agreement provides that the NASD shall contribute to a
separate fund 15% of any amount by which New Amex's annual after-tax
income in each of the first ten years after the Closing exceeds a
specified base amount. A committee consisting of three Members of
New Amex and the Chairman of the NASD will determine whether this
fund shall be distributed to owners of Membership interests,
invested in technology for New Amex, or used to fund pension or
retirement benefits for owners of Membership interests. The proposed
settlement is subject to execution of a formal settlement
stipulation, which will then be subject to court approval following
notice to all members of the plaintiff class.
It is the view of Amex that, once court approval is received,
the terms of the settlement can be implemented without the necessity
of further amendment of the Transaction Agreement or any further
approval from the Commission. Telephone call between James Duffy,
Executive Vice President and General Counsel, Amex, and Michael
Walinskas, Deputy Associate Director, Commission, on September 10,
1998.
The Commission notes that this information has been provided to
the Commission for informational purposes only. Neither Amex nor the
NASD have requested the Commission to approve this in the context of
this rule filing or otherwise.
---------------------------------------------------------------------------
In the case of any vote on the distribution of funds to
Members,\40\ the Regular and Options Principal Members of Amex Corp.
will vote as separate classes on whether to approve the proposed
allocation of the distribution between Regular and Options Principal
Members. If either class of Members fails to approve the proposed
allocation, the Seat Committee will appoint an arbitrator to decide an
equitable allocation between the two classes.
---------------------------------------------------------------------------
\40\ If the Seat Committee's recommendation is other than that
funds be distributed to Members, and two or more Floor Governors of
New Amex disagree with that recommendation, they may require Amex
Corp. to call for a vote of Members. In this case, the Regular and
Options Principal Members, voting as a single class, will decide
between (i) implementing the Seat Committee's recommendation and
(ii) making a cash distribution to Members, in an allocation between
Regular and Options Principal Members as proposed by the Seat
Committee Floor Members. If two-thirds of the Regular and Options
Principal Memberships voted (as a single class) at a meeting called
for the purpose of considering the matter approve the distribution,
the Seat Committee will direct the NASD to make such distribution.
---------------------------------------------------------------------------
I. Gratuity Fund
Certain changes are being made in the Constitution with regard to
New Amex's Gratuity Fund.\41\ Specifically, new language is being added
to provide for proportional credits to each participant \42\ in
reduction of such participant's payments under Article IX in the event
the Gratuity Fund receives any extraordinary payment from any source.
The Trustees of the Gratuity Fund will be appointed by Amex Corp.
following a vote by the Regular and Option Principal Members. This will
essentially maintain the current process by which trustees are
nominated and elected in the same manner, and at the same time, as
governors of Amex. In the even of a vacancy, the Board of Amex Corp.
will appoint a person qualified to serve as Trustee until the next
meeting at which the Trustees to be appointed are selected. Currently,
the Amex Board fills any vacancy, pending the next annual election.
These procedures are consistent with procedures in the New By-Laws of
Amex Corp. that provide for the election by Members of Amex Corp. of
Trustees of the Gratuity Fund, as well as the Amex Nominating
Committee, Amex Adjudicatory Council, and nominees for Floor Governors
to serve on the New Amex Board.
---------------------------------------------------------------------------
\41\ For a description of the Gratuity Fund, see New Amex
Constitution, Article IX, Section 2.
\42\ Participants to the Gratuity Fund include Regular and
Options Principal Members, as well as owners, nominees, lessors and
lessees of Regular and Options Principal Memberships who satisfy
certain eligibility requirements. See New Amex Constitution, Article
IX, Section 1(a).
---------------------------------------------------------------------------
J. Miscellaneous Provisions
The transaction also requires that several miscellaneous changes be
made to the New Amex Constitution. For example, New Amex Constitution
deletes language excepting the Amex Nominating Committee from among the
committees that may be dissolved by the New Amex Board. In addition,
the New Amex Constitution deletes references to the Executive Committee
since New Amex, at least initially, will not have such a committee. The
New Amex Constitution provides that the Chief Executive Officer of New
Amex, who is the Chairman of the Board, will be elected by a majority
of the entire Board. The New Amex Board will have only one Vice
Chairman who must be a Floor
[[Page 59825]]
Governor. The New Amex Constitution eliminates the section of the
``Selection of General Counsel'' in its entirety.
The New Amex Constitution eliminates the New Amex Chairman's status
as an ex-officio member of all committees and further clarifies that
the Chairman is not a member of certain committees (e.g., the AAC). The
New Amex Constitution also provides that the New Amex Chairman is
required to call a special meeting of the Board upon the written
request of three rather than four governors (reflecting the reduced
size of the Board). The Chairman will no longer be permitted to call
special meetings of regular members upon the direction of the Board or
upon the written request of 50 regular members.\43\ The position of
``Executive Vice Chairman'' is being eliminated as unnecessary.
---------------------------------------------------------------------------
\43\ Amex believes that this change is appropriate given that
Amex members will no longer be corporate owners of Amex after the
Closing. Instead, Holdco and Amex Corp. will be the corporate owners
of New Amex. Any meeting of Members will be conducted under the By-
Laws of Amex Corp. in the circumstances specified therein and would
not be governed by the New Amex Constitution.
---------------------------------------------------------------------------
The New Amex Constitution eliminates in its entirety the section on
``Indemnification.'' Indemnification by New Amex of persons associated
with it (e.g., Governors, officers and employees) is covered through
the provisions in the LLC Agreement.
The New Amex Constitution also will reduce the number of Regular
Memberships from 675 to 661 to reflect the fact that only 661 Regular
Memberships currently are outstanding. (675 Memberships had been
authorized, but only 661 were issued.)
The New Amex Constitution also will provide that any Regular Member
or lessee, by exercising any of the rights inherent in a regular
trading right, shall be deemed to have pledged to abide by the New Amex
Constitution. A similar provision will be applicable to Options
Principal Members or lessees. The purpose of these provisions is to
clarify that existing Members will continue to be subject to the
jurisdiction of New Amex.
A New Amex Constitution provision concerning ``Exchange Liability''
will reflect the fact that New Amex provides services as well as
facilities to its members.
The New Amex Construction will provide a procedure by which Members
may challenge New Amex staff determinations. The appeal procedure will
be clarified to eliminate the possibility of a review by a New Amex
Disciplinary Panel which properly should consider only rule violations
and not New Amex staff determinations.
The New Amex Constitution provision concerning ``fixed income
security options trading permits'' and ``options trading permits'' will
be deleted in its entirety since both of these classes of trading
permits have expired. The provisions regarding Limited Trading Permits
(``LTPs'') will reduce the maximum number of such permits from 36 to 10
to reflect the fact that there currently are only 10 outstanding.
The New Amex Constitution provision concerning ``Fees and Duties''
will provide flat rate initiation fee of $2,500 for Regular and Options
Principal Members. This fixed initiation fee replaces the former
graduated initiation fee schedule that has become obsolete with the
increase in seat prices. (The old formula established a base initiation
fee of $1,000 that increased to a maximum of $2,500 when seat prices
rose above $20,000.) Certain other additional obsolete provisions also
will be deleted from this section.
Furthermore, the New Amex Constitution will make explicit the
implicit authority of the New Amex Board to set different charges for
different services and securities. Such charges will be subject to
filing with, and under certain circumstances approval by, the
Commission.
The New Amex Constitution will conform to the current Amex employee
trading policy, which allows employees to trade standardized options
issued by the Options Clearing Corporation unless such options are on
an underlying security listed on the Amex.
The New Amex Constitution will now provide a provision concerning
``Authority to Take Action under Emergency or Extraordinary Market
Conditions'' that will be comparable to Article VII, Section 3 of the
NASD's By-Laws. In addition, the Amex Constitution currently references
emergency by-laws under Subdivision 17 of Section 12 of the New York
State Defense Emergency Act and to the effectiveness of emergency by-
laws of New York Corporations. These references will no longer be
appropriate to New Amex, as a Delaware Limited Liability Company.
Several necessary changes are being made to Amex Rules 345, 590 and
600 in order to make the rules consistent with the terms of the
transaction and the New Amex Constitution.
III. Summary of Comments
The Commission received one comment letter from Bill T. Singer
(``Singer''), who wrote on behalf of the Independent Broker-Dealer
Association (``IBDA'').\44\ The NASD submitted a letter responding to
the Singer Letter.\45\
---------------------------------------------------------------------------
\44\ See supra note 8.
\45\ See supra note 9.
---------------------------------------------------------------------------
A. NASD/Amex Consolidation Issues
Singer is concerned that NASD members were not allowed to vote on
the substantive details of the merger and were not given copies of the
merger transaction agreement. According to Singer, the ballot submitted
to the NASD members did not contain any details about the merger.
Instead, the ballot merely asked the members to approve changes to NASD
by-laws affecting the composition of the Board of Governors. Singer
also contends that the NASD, which did not seek membership approval of
the merger, failed to meet the fair representation provision of Section
15A(b)(4) of the Act. Based on this contention, he asks whether the
Commission will meet with individual constituencies of NASD members
prior to approving the merger. Further, he questions whether the
proposed rule change is consistent with the Act because the NASD failed
to seek member comments about the merger.
In response, the NASD asserts that whether the merger should be
approved by the membership is a matter of state corporate law and the
NASD's certificate of incorporation. The NASD states that it is
incorporated in Delaware and that the Delaware law does not require the
NASD Board to submit the merger to membership approval. Additionally,
the NASD maintains that neither the NASD's certificate of incorporation
nor its by-laws requires it to submit the merger to membership
approval.
The NASD also contends that its members were indirectly given the
opportunity to approve the merger through their vote on a change to the
NASD's by-laws to add two new Board seats,\46\ a change that was
necessary for the Closing to occur. According to the NASD, the members
overwhelmingly approved the merger with a vote of 2,565 for and 82
against the addition of the new seats.
---------------------------------------------------------------------------
\46\ The By-Law change adds two Board positions: one for the
Chief Executive Officer of New Amex and one for a Floor Governor
from the New Amex Board.
---------------------------------------------------------------------------
Additionally, Singer is concerned about the merger's effect on
competition between the various markets, noting that the consolidation
might increase listing fees for issuers and reduce the NASD's incentive
for market innovation. Moreover, after the merger, Singer feels that
the NASD might forsake its traditional role as a market for developing
companies and an
[[Page 59826]]
association of independent/regional members.
In response, the NASD believes that the combination of the two
markets will provide a more efficient mechanism for trading at lower
costs. Furthermore, the NASD notes that the Antitrust Division of the
Department of Justice reviewed the transaction for anticompetitive
effects, and did not object. In sum, the NASD believes these benefits
will improve the markets for investors, issuers, and NASD members.
Singer also asserts that the proposed operation of New Amex as an
independent subsidiary poses significant issues. First, he maintains
that the independent operation of New Amex might result in a loss of
economy of scale and entail additional costs. The NASD, however,
believes that the application of its modern technology to the New Amex
market facilities will provide significant scale economies and result
in cost savings for investors and traders. Second, Singer is concerned
about how the NASD will decide between Nasdaq or New Amex when
allocating listings. He also feels that issuers who would normally list
on Nasdaq might choose New Amex instead. According to Singer, this
choice could reduce the trading revenue of NASD market makers.
The NASD responds by asserting that, after the merger, NASD market
makers will have greater access to the two markets at lower costs. The
NASD also believes the creation of multiple market venues will provide
market choices for issuers and additional business opportunities for
NASD member firms who underwrite securities.
B. Financing the Merger
Singer notes that the NASD does not explain how it will finance the
$30 million seat stabilization program. He believes that the money
might be better spent on the improvement of NASD technology or the
hiring of additional NASD employees. Furthermore, Singer observes that
the NASD does not explain how it will finance the upgrade of Amex's
technology. In both the seat stabilization plan and the technology
upgrade. Singer fears that the NASD will assess its members with the
costs. He believes that, although all NASD members will shoulder the
burden of transferring resources to New Amex, most members will not
receive anything in return.
The NASD responds by maintaining that its Board, after careful
consideration of the transaction, found that the transaction was fair
to the Association and in the best interests of its members. Moreover,
the NASD contends that the money spent on upgrading Amex's technology
will benefit all of the NASD's members, and that the increased
technological capabilities will reduce costs for members trading on
both the Nasdaq and Amex markets.
In addition, Singer suggests that the prior improper conduct of
major Nasdaq market-makers might have contributed to the weakening of
the Amex market. If this weakening did occur, then Singer believes that
the major Nasdaq market-makers should bear the cost of the merger.
C. Regulatory and Other Concerns
Singer suggests that independent/regional members recently have
experienced difficulties in securing permission to make markets in or
to underwrite OTC Bulletin Board or Nasdaq Small Capitalization Issues.
Because of these difficulties, Singer asks whether new NASD and
Commission regulatory initiatives will further restrict these members'
abilities to facilitate transactions in smaller capitalization issues.
Singer also raises other general concerns about the merger.\47\
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\47\ For example, Singer expresses concern about the recent
exodus of senior Commission staff to the NASD, Nasdaq market makers,
and private firms. He feels that these groups might have greater
access to the Commission and the merger approval process because of
their ties with the Commission. Singer also notes that NASD Chairman
Frank Zarb and Chairman Levitt were former business partners.
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IV. Discussion
The Commission believes that Amex's proposed rule changes are
consistent with Section 6(b)(3), 6(b)(5), and 6(b)(8) of the Act in
that they are designed to assure a fair representation of an exchange's
members in the selection of its directors and administration of its
affairs and provide that one or more directors shall be representative
of issuers and investors and not be associated with the exchange,
broker, or dealer; to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanisms of a free and open market and a national market
system, and, in general, to protect investors and the public interest;
and do not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.
The Commission also finds that the NASD's proposed rule changes are
consistent with Sections 15A(b)(6) and 15A(b)(9) of the Act in that
they are designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanisms of a free and open market and a national market
system, and, in general, to protect investors and the public interest;
and do not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.\48\
---------------------------------------------------------------------------
\48\ In approving this rule, the Commission notes that it has
considered the proposed rules' impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
The proposed merger offers the promise of important benefits to the
public. Specifically, the merger should help improve the
competitiveness of New Amex's auction market by making it a more
efficient, technologically advanced alternative to other exchange
auction markets. This technological advance should increase competition
between existing markets to improve their marketplaces in order to be
able to offer the best available market trading mechanisms at the
lowest cost. Of particular note, the proposed future introduction of a
new electronic limit order book providing automatic execution for
electronically delivered orders may offer a more efficient and lower-
cost auction market for Amex equities.
The Commission disagrees with the argument made by the commenter
that the merger is likely to have anticompetitive effects, particularly
the possibility of higher listing fees for issuers and a reduced
incentive for NASD market innovation. The Commission does not believe
that listing fees were a primary form of competition between Amex and
Nasdaq in the past; rather, competition focused on market structures,
quality of executions and services. These alternative choices still
remain between Nasdaq and Amex. Moreover, New Amex would need to file
any proposed fee increases with the SEC pursuant to a rule filing that
must meet the requirements of the Act. With regard to a possible
reduction in market innovation, the Commission believes that the
competition presented by the New York Stock Exchange and the regional
exchanges provides a more than adequate incentive for the NASD and New
Amex to each continue finding ways to create better markets. Moreover,
[[Page 59827]]
the Commission emphasizes that the initial combination between the NASD
and Amex will not result in the closure of any equity or options
markets. Indeed, it is expected that New Amex and Nasdaq will remain as
separate markets and each will retain their separate listings and offer
different market features. The Commission notes that the transaction
will not result in a combination of the Amex equity and options floors
and Nasdaq, but rather results in a change of ownership of Amex. The
basic market structure of Amex and Nasdaq will remain unchanged.
In addition to increased competition, the Commission observes that
the proposal should help improve both the Amex and NASD marketplaces by
combining the strengths of the two organizations, to the benefit of the
markets and investors. Under the terms of the transaction, Amex will
receive an infusion of new capital that will allow it to upgrade its
trading facilities and technology. This should enable Amex to increase
its trading capabilities, and remain competitive with other auction-
based equity and option markets, possibly attracting new listings and
increasing volume. The Commission also believes that the NASD, by
gaining control of an established options exchange and a specialist-
based auction market that complements Nasdaq, its dealer-based equity
market, will be able to offer issues and investors greater choice in
where to list and where to invest.
A. Transfer of Section 6 Registration
As a general matter, the Commission does not view registration as a
national securities exchange under the Act as an asset that is freely
transferable or that can be bought and sold. Based on the unique facts
and circumstances presented by this proposal, however, the Commission
believes it is reasonable under, and consistent with, the Act for Amex
effectively to transfer its Section 6 exchange registration to New
Amex. The Commission notes that, except for the changes currently
proposed to the Amex Constitution and Rules, the Constitution and Rules
of New Amex will remain unchanged from those of existing Amex. In
addition, the Amex Corp. Members will be the same as the current Amex
Members, and the operation of the floor of the exchange will remain
unchanged. If New Amex were not permitted to, in effect, succeed to the
registration of Amex, it would have been forced to undertake the full
process of reregistering, including refiling its entire Constitution,
its By-Laws and Certificate of Incorporation, as well as all of its
current Rules. In addition, New Amex would have had to submit a
complete explanation of New Amex and its operations, its listing and
membership forms and requirements, consolidated and unconsolidated
financial statements, a list of all members and member organizations,
and a list of all the securities listed on New Amex or traded pursuant
to unlisted trading privileges. This process would have added little of
value to the review previously given to these matters in filings made
under Section 19 of the Act and Rule 19b-4 thereunder. The 19b-4 rule
filing process has afforded essentially the same opportunity for public
notice and comment and Commission review as would have been provided by
a New Amex application for exchange registration. Accordingly, on the
facts presented here, the Commission has not required Amex to
deregister as a national securities exchange and New Amex to file an
application for exchange registration.
B. Corporate Structure--Regulation of New Amex and Amex Corp. Members
The Commission believes that the framework of the proposal provides
for sufficient regulatory oversight of Amex Corp. Members and the
operation of New Amex as an SRO, as required by the Act. The Commission
notes that New Amex, as a registered SRO under Section 6 of the Act,
will have the statutory authority and responsibility to, among other
things, discipline its Members, amend its Constitution and Rules
(subject to the consent of the NASD, the parent company), list and
delist securities, and grant or deny Membership in New Amex.\49\
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\49\ The Commission notes that the present filing is silent as
to whether it is the intention of the NASD and New Amex to
consolidate SRO functions. A consolidation of SRO functions
potentially raises important issues under the Exchange Act. The
Commission notes that if Amex were to propose any changes to
consolidate its SRO functions and have them performed by the NASD
(or any other party) it should notify the Commission prior to
implementing such change, so that the Commission may determine if a
rule filing is necessary.
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The Commission notes that Amex Corp. Members are subject to the
jurisdiction of New Amex through the provisions of the New Amex
Constitution. Members (both Regular and Options Principal) are defined
in the New Amex Constitution as those persons holding trading rights
issued by Amex Corp. which grant them the right to transact business on
the floor of New Amex. The New Amex Constitution states that by
exercising the trading rights on the floor of New Amex, both the Amex
Corp. Regular and Options Principal members have pledged to abide by
the New Amex Constitution and all the rules and regulations (or orders,
directives or decisions) adopted pursuant to the New Amex Constitution.
C. NASD Ownership and Responsibility
The Commission believes that the proposal adequately addresses the
role of the NASD, as the parent corporation, in the operation of New
Amex. Particularly, the Commission finds it critical to the proposal
that the NASD, as the parent company with a controlling interest in New
Amex, has committed to ensuring that New Amex meets its obligations as
an SRO. It has been represented that the NASD will bear ultimate
responsibility to ensure that New Amex meets its statutory obligations
and that the necessary and appropriate resources are available to New
Amex so that it can meet the evolving demands of operating a regulatory
and compliance program in an advanced marketplace.\50\ The acceptance
of this responsibility is entirely appropriate given the management and
financial control held by the NASD as a result of the terms of the
merger. In order to codify this responsibility, the NASD submitted a
filing which states that the NASD, as the parent company of New Amex,
will be responsible to ensure that New Amex meets its obligations as a
self-regulatory organization. It will be the policy of the NASD that in
discharging this responsibility the NASD will be governed by the
following principles: The NASD will exercise its powers and its
managerial influence to ensure that New Amex fulfills its self-
regulatory obligations by directing New Amex to take action necessary
to effectuate its purposes and functions as a national securities
exchange operating pursuant to the Act, and ensuring that New Amex has
and appropriately allocates such financial, technological, technical,
and personnel resources as may be necessary or appropriate to meet its
obligations under the Act. Finally, the NASD has also committed to
refrain from taking any action with respect to New Amex that, to the
best of its knowledge, would impede, delay, obstruct, or conflict with
efforts by New Amex to carry out its SRO obligations under the Act, and
the rules and regulations thereunder. The Commission believes it is
reasonable and consistent with the Act for the NASD, as parent company
and controlling owner, to make these commitments. Indeed, the adoption
of this policy statement, which shall constitute a rule of a self-
regulatory
[[Page 59828]]
organization under the Act enforceable by the Commission pursuant to
Section 19 of the Act, is a necessary component to the Commission's
determination that the submitted proposals are consistent with the Act.
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\50\ See Transaction Documents, Information Memorandum, pp. 14
and 40.
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D. New Amex Corporate Governance
The requirement of Section 6(b)(3) of the Act that the rules of an
exchange assure a fair representation of its members in the selection
of its directors and administration of its affairs and provide that one
or more directors shall be representative of issuers and investors and
not be associated with a member of the exchange, broker, or dealer is
designed to ensure in a traditional exchange structure that a member
has a voice in the use of self-regulatory authority that may affect the
member. This requirement, among other things, also helps ensure that
the member's financial stake in its seat and the structure of the
market is considered in the decisions of the exchange, and it protects
members from unfair, unfettered disciplinary actions under the rules of
the exchange. Although the terms of the merger provide the NASD with
ultimate control over New Amex, the merger has been structured to
satisfy the principles of fair representation in several ways.
1. New Amex Board Composition
The Commission believes that the composition of the New Amex Board
of Governors (``New Amex Board'') is consistent with Section 6(b)(3) of
the Act in that it provides for fair representation of its members in
the selection of its directors and administration of its affairs and
provides that one or more directors shall be representative of issuers
and investors and not be associated with a member of the exchange,
broker, or dealer. First, nine of the eighteen New Amex Board members
are ``public'' representatives who are not affiliated with the
securities industry, and no more than three of these nine non-industry
governors may serve on both the New Amex and NASD Boards.\51\ Second,
the proposed New Amex Constitution provides the Amex Corp. Membership
the opportunity to select member representatives on the New Amex Board
by granting Amex Corp. The authority to nominate the four New Amex
Board members that are Floor Governors, one of whom must be an equity
specialist and one whom must be an ROT. Floor Governor nominees would
be proposed by either the Amex Nominating Committee (consisting of
three Floor Members and two Public Members) or a petition signed by 25
Members and would be selected by a plurality of the Amex Corp. Regular
and Options Principal members voting together as a single class. The
Amex Corp. Membership elects the members of the Amex Nominating
Committee, which is an Amex Corp. committee under the By-Laws of Amex
Corp.\52\ The Commission believes that these nominating procedures for
Member representatives on the New Amex Board should help ensure that
the diverse interests of Floor Members are represented. The Commission
notes that even though the NASD must approve the Floor Governors, it
can reject the nominees only on specific regulatory grounds.\53\ In
addition, the proposed rule change provides that the Vice Chairman of
the New Amex Board must be a Floor Governor. The Commission also
believes it is appropriate for the New Amex Board members to be divided
into classes to ensure that the terms of all the Floor Governor New
Amex Board members and the public New Amex Board members do not expire
at one time, and for New Amex to establish limits on the number of
consecutive terms a New Amex Board member can serve.
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\51\ Eight public governors are nominated by the NASD Nominating
Committee, and one of the two NASD representatives on the New Amex
Board is a person that meets the qualifications of Non-Industry
Governor as defined under NASD rules.
\52\ In addition, the members of the Amex Nominating Committee
are also divided into two classes, with a public member in each
class, whose terms expire at different times. Persons on the Amex
Nominating Committee cannot serve consecutive terms and no one
affiliated with a member of the Amex Nominating Committee can be
eligible as a candidate for a ticket named by it.
\53\ The NASD can reject the Floor Governor nominee only if the
nominee is (1) subject to a statutory disqualification, or (2)
subject to a proceeding or investigation which could result in a
statutory disqualification, or (3) has been disciplined by a
securities SRO with respect to a matter involving fraud or a serious
violation of U.S. securities laws.
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Additionally, the Commission believes that inclusion of one New
Amex Floor Governor and the Chief Executive Officer of New Amex on the
NASD on the NASD Board as representatives of New Amex helps fulfill the
fair representation requirements of the Act on the part of New Amex.
The New Amex Floor Governor is nominated by the Amex Corp. Membership
and will be able to most directly express their viewpoint and concerns
within the NASD Board forum. In addition, the Chief Executive Officer
of New Amex will be able to provide information about, and communicate
the needs of, New Amex to the NASD Board.
Under the proposed corporate structure, there is the potential for
members of the boards of the NASD or one of its other subsidiaries and
New Amex to overlap. The Commission believes that such overlap presents
potential conflicts. Conflicts could occur notwithstanding that each
Board member must vote in the best interests of the entity on whose
board he or she is sitting at that time. For example, a dual Board
member could be asked to vote on whether or not to allocate money to
New Amex operations. As a New Amex Board member, he or she could
conclude that it is in the best interest of New Amex to allocate the
funds. However, as an NASD Board member, he or she could conclude that
the money would be better spent on the NASD, or Nasdaq. The Commission
believes that the limitation of three non-industry board members who
can serve on both the NASD Board and the New Amex Board, coupled with
New Amex's assertion that it will implement conflict of interest
policies and procedures to address potential unique issues facing
governors serving on both boards, adequately addresses the issue.
2. Protection of Amex Membership Interests
The Commission believes that the proposal provides for fair
representation and participation of the various types of Amex Corp.
Members in the governance and operation of New Amex. Although the NASD
has majority control over New Amex, several important structures are
provided to better ensure that the interests of Amex Corp. Members are
adequately represented in the critical decisions regarding New Amex.
This is accomplished by requiring consent of either Amex Corp. (through
a Membership vote), the Amex Committee, or both, in situations
impacting certain Membership interests or material changes to New Amex,
as described above in Section II.C.2. Additionally, the Commission
believes that even after the expiration of the express limits on
changes to the New Amex structure, the authority exercised by the Amex
Committee provides on an ongoing basis for significant member and
public input, representation, and participation in the operation of the
equity and options markets and the development of new trading
facilities on New Amex. The Commission notes that no member of the Amex
Committee designated as either a non-industry member or an ``upstairs''
member may overlap with the NASD or New Amex Boards. The Commission
believes that this limitation is appropriate to help avoid potential
conflicts of interest for
[[Page 59829]]
Amex Committee members in the exercise of their duties and to preserve
their independence. The Commission believes that the Amex Committee
should adequately represent the interests of Amex Corp. members as it
exercises its specific powers.
The Commission believes it is appropriate for the Amex Corp.
members, through the Amex Committee, to have a vote in contemplated
changes to the basic structure and operation of Amex's equity and
options trading floors, including the amount of money spent by the NASD
to upgrade the technology used on the floor, as well as certain
increases in member fees, because these areas affect the operation of
the trading floor and financial burdens imposed on the Amex Corp.
Membership. The Commission also believes that it is import for Amex
Corp. Members to have a degree of control over the areas of new
memberships, changes to the basic market structure, and amendments to
the New Amex LLC agreement because they implicate the value of member
seats and member's trading rights on the Amex floor, as well as New
Amex's authority as contained in the LLC agreement. Without these
powers, New Amex and the NASD would have the authority to take steps to
dilute Amex Corp. Memberships and restructure the basic trading
structure on the equity and options floors, and Amex Corp. members
would have little influence over the imposition of fees upon
themselves.
Although the Commission recognizes the need for the Amex Committee,
it also believes that the Amex Committee will be performing certain
functions similar to those performed by the board of New Amex, a
registered self-regulatory organization. For example, the Amex
Committee has the right to review and veto changes to the structure and
operation of Amex's equity and option trading floor, as well as any
changes that would implicate the value of member seats and member
trading rights. Because the Amex Committee will be performing important
functions with respect to the board of an SRO, as a material condition
to this order of approval the Commission is deeming the members of the
Amex Committee to be ``director[s] of [a] self-regulatory
organization'' for purposes of Commission oversight. Exchange Act
Section 19(h)(4).\54\
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\54\ See also Exchange Act Section 3(a)(7) (``The term
`director' means any director of a corporation or any person
performing similar functions with respect to any organization,
whether incorporated or unincorporated.''). The joint letter from
the NASD and Amex, dated October 29, 1998, amending the Amex rule
filing acknowledges and accepts the Commission's interpretation:
``For the purpose of confirming the SEC's jurisdiction over such
persons, the members of the Amex Committee shall be deemed
`directors' as that term is used in section 3(a)(7), and shall be
deemed directors of a self-regulatory organization under Section
19(h)(4), of the Exchange Act.''
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3. Disciplinary Process
The Commission believes that proposed rule changes to the
disciplinary process for New Amex are consistent with the requirement
of Section 6(b)(7) of the Act that the rules of an exchange provide a
fair procedure for the disciplining of members and persons associated
with members because the process, as proposed, provides for review of
all disciplinary matters by a committee composed of both Amex Corp.
Members and public representatives. The Commission notes in particular
that the AAC, which is empowered to act for the full New Amex Board in
reviewing appeals from disciplinary proceedings, is composed of three
Public Members and three Floor Governors, all of whom are nominated by
the Amex Nominating Committee (or by petition signed by twenty-five
Members) and elected by a full Amex Corp. Membership vote. In addition,
all respondents in contested disciplinary proceedings have the right to
appeal the decision of a Disciplinary Panel to the AAC, and all
decisions of the AAC are appealable to the Commission (or by the full
New Amex Board, if at least four Governors desire such review).
E. Seat Market Program
The Commission believes that the Seat Market Program, run by the
Seat Committee, is a reasonable means to help protect the value of Amex
Corp. Member seats from any downside volatility that may occur as a
result of the merger.\55\ The Seat Program may help protect the value
of member seats by authorizing the NASD, upon a recommendation from the
NASD Seat Committee, to buy Memberships. In addition, the Seat Market
Program also provides additional monetary benefits for Amex Corp.
Members in that the Seat Committee may recommend that the NASD apply
the Seat Program funds to reduce fees, invest in technology for New
Amex, or distribute the funds to Members.\56\ A Seat Committee
recommendation that is approved by a majority vote of all Amex Corp.
Members voting as a single class must be complied with by the NASD.
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\55\ The Seat Committee is composed of three members (at least
one who is active on the New Amex floor and one who is not, none of
whom can be from multi-service broker-dealer firms), two Public
Members and the NASD's Chairman. The initial and replacement Regular
and Options Principal Members will be chosen by the floor governors
on the New Amex Board and must be approved by the NASD's Chairman.
The remaining initial and replacement members will be chosen by the
NASD's Chairman.
\56\ The Seat Committee can also recommend that no money be
spent at a particular time.
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F. Class C Trading Rights
The Commission believes that the creation of Class C Trading Rights
is reasonable in that it may serve to encourage new firms to bring new
listings to New Amex without having to become full Members. The
Commission believes that the creation of Class C Trading Rights should
not harm the value of full Membership seats because they are of limited
duration (expiring on the earlier of three years from the date of
issuance or the fifth anniversary of the closing), are limited in
number (25), and the owner of the right is not allowed to operate a
joint book with a regular member. The Commission notes that any person
holding a Class C Trading right would still be bound by New Amex Rules
relating to the obligations of and restrictions on specialists,
including Rule 190 regulating specialist relationships with the issuer
of a stock in which that specialist is registered and Rule 170 and
procedures adopted thereunder for the evaluation of specialist
performance and imposition of non-disciplinary sanctions, including
reallocations for unsatisfactory performance.
G. NASD Compliance With the Act and Its Rules
In response to the commenter's concern that the members of the NASD
neither received any detailed information on the terms of the
transaction nor had the opportunity to approve or disapprove the
substance of the transaction, the NASD represented that it followed
proper corporate governance procedure in approving the transaction and
was not required to submit the transaction to a full NASD membership
vote. The Commission believes there was adequate notice and opportunity
for comment on the substance of the current proposals because the
Commission published the substance and terms of each of the three
proposals for the full notice and comment period. The request for
comments was highlighted on the Commission's website,\57\ and was
published in the Federal Register. The NASD Board, which has the
authority to approve the transaction on behalf of its members,
determined that the
[[Page 59830]]
transaction was fair to the NASD and in the best interests of its
members.\58\
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\57\ See www.sec.gov.
\58\ In response to the commenter's concern over the NASD's
financial commitments under the transaction, the Commission notes
that such commitments were given in consideration of the acquisition
of a controlling interest in New Amex. The Commission also notes
that the NASD's Board determined that the transaction is fair and in
the best interests of its members based upon an independent
assessment of the fairness of the transaction to the NASD. Finally,
the Commission notes that the NASD represents that it plans to
allocate sufficient resources to upgrade its technological
capabilities in order to provide investors with the fastest, fairest
and least expensive marketplace access on a global scale, and that
this will be accomplished within the context of the transaction,
which will benefit all of its members, large or small.
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H. Miscellaneous
The Commission believes that it is consistent with the Act to amend
the language of Article IX, Section 10 of the New Amex Constitution to
provide specifically for the appointment of Trustees of the Gratuity
Fund by the Amex Corp. Membership. Currently, the Trustees are
appointed by the Amex membership, but the wording of Article IX,
Section 10, which states that they are appointed in the same manner as
the Amex governors, will not remain the same under the proposal. The
Commission also believes it is reasonable to provide that the Amex
Corp. Board will appoint interim replacement Trustees, rather than the
New Amex Board, in order to allow for member input. Additionally, the
Commission believes it is consistent with the Act to provide that in
the event of an extraordinary payment received by the Gratuity Fund, a
proportion of such payment shall be credited to each participant in
reduction of his or her payments under the Gratuity Fund.
The Commission believes that the proposed rule change eliminating
Amex's arbitration program and referring cases to the NASD is
consistent with the Act because it will maintain a fair arbitration
forum available for all Amex arbitration claims, despite Amex's small
caseload, which may not sustain an independent program. Merging the
Amex program with the NASD arbitration program, the industry's largest,
takes advantage of economies of scale. The Commission also believes
that procedurally the proposed rule change should adequately ensure
that all arbitration cases that would be subject to Amex's arbitration
process will be provided for under the NASD's arbitration program. The
proposed rule change also provides for adequate enforcement in that any
violation of the NASD's Code of Arbitration Procedure by Amex Corp.
Members would be considered a violation of New Amex rules, subjecting
the violator to New Amex disciplinary action.
The Commission believes that it is consistent with the Act to amend
Section 1(e) of Article IV of the New Amex Constitution relating to New
Amex liability to reflect the fact that New Amex provides services as
well as facilities to its members. The Commission notes that it
approved a similar change to the Chicago Board Options Exchange
(``CBOE'') liability provisions.\59\ The Commission also believes it is
reasonable for Amex to delete Article II, Section 5 of the
Constitution, Indemnification, because the LLC Agreement provides for
indemnification of the persons associated with New Amex.
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\59\ See CBOE rule 6.7(a).
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The Commission believes that the amendment to Article VII, Section
1 of the New Amex Constitution to revise member fees is consistent with
Section 6(b)(4) of the Act in that it provides for the equitable
allocation of reasonable fees among its members. The amendment provides
a flat rate initiation fee of $2,500 for Regular and Options Principal
Members, replacing the former graduated initiation fee schedule that
Amex believes has become obsolete with the increase in seat prices. The
Commission also believes it is consistent with Section 6(b)(4) of the
Act to codify existing practice by granting the New Amex Board the
authority to set different rates for equity or options transactions
effected in different securities or through different mechanisms.
The Commission believes it is consistent with the Act to amend the
Amex employee option trading policy to reflect the policy that Amex
employees can trade standardized options issued by the Options Clearing
Corporation, unless such option is on an underlying security listed on
Amex. The Commission also believes it is reasonable for Amex to delete
current Article XII, relating to an emergency committee that has
authority to act in emergency situations, in its entirety and to
replace it with an emergency provision comparable to Article VII,
Section 3 of the NASD's By-Laws. The provisions of the current Article
XII state that they constitute emergency by-laws under the New York
State Defense Emergency Act, which Amex states will no longer be
applicable because New Amex is an LLC incorporated under Delaware Law,
not New York law. In addition, the Commission believes that new Article
XII provides an adequate procedure for New Amex operations in the case
of emergencies or extraordinary market conditions.\60\
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\60\ The new Article XII provides that in the event of an
emergency or extraordinary market conditions the New Amex Board (or
such person or persons as the Board designates) shall have the
authority to take action regarding the trading of securities on the
Exchange and the operation of any Exchange trading system or
facility, if the Board decides that the action is necessary or
appropriate to protect investors or the public interest or for the
orderly operation of the Exchange or any Exchange system or
facility.
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The proposed rule change makes several other miscellaneous
amendments to the New Amex Constitution and Rules that are dictated by
the Transaction Documents. The Commission believes that these changes,
which are extremely technical in nature, are reasonable in that they
generally are nonsubstantive or address particular corporate governance
requirements that are necessary in order to make the New Amex
Constitution and Rules consistent with the new proposed governance
structure.
No provision contained in the Transaction Documents or in any other
agreement or document, nor any actions taken pursuant to them, shall be
construed to affect, or shall affect, any right or responsibility of
the Commission to take any action under the Federal Securities Laws.
This includes, but is not limited to, the Commission's rights and
responsibilities under Section 19 of the Act (i) to review and approve
rule changes by an SRO, as those terms are defined under the Act and
interpreted by the Commission; (ii) to take appropriate disciplinary
action against an SRO or its officers and directors; or (iii) to amend
the rules of an SRO. The Commission's approval of the rule changes
necessary for the consummation of the merger of the NASD and Amex is
expressly conditioned on this statement.
The Commission finds good cause to approve Amendment No. 2 to SR-
Amex-98-32 prior to the thirtieth day after the date of publication of
notice of filing thereof in the Federal Register. Specifically,
Amendment No. 2 clarifies and strengthens the proposed rule change in
that it limits the number of overlapping public and non-industry
governors on the NASD and New Amex Boards, and restricts the non-
industry and upstairs members of the Amex Committee from also serving
on the NASD or New Amex Boards, thereby furthering the independence of
these bodies. Additionally, Amendment No. 2 provides that New Amex will
implement conflict of interest policies and procedures to address any
potential issues facing overlapping members on
[[Page 59831]]
the NASD and New Amex Boards. This provision will serve to help New
Amex comply with the requirements of the Act. Finally, Amendment No. 2
strengthens the proposed rule change by addressing the Commission's
jurisdiction over Amex Committee members. Accordingly, the Commission
believes that it is consistent with Section 6(b)(5) of the Act to
approve Amendment No. 2 to the proposal on an accelerated basis.
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 2 to SR-Amex-98-32, including
whether Amendment No. 2 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. 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 at the Commission's Public Reference Room. Copies of such
filing also will be available for inspection and copying at the
principal office of the Exchange. All submissions should refer to File
No. SR-Amex-98-32 and should be submitted by November 27, 1998.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\61\ that the proposed rule changes (SR-Amex-98-32; SR-NASD-98-56;
SR-NASD-98-67) are approved, as amended.
\61\ 15 U.S.C. 78s(b)(2).
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By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-29624 Filed 11-4-98; 8:45 am]
BILLING CODE 8010-01-M
