[Federal Register Volume 61, Number 63 (Monday, April 1, 1996)]
[Notices]
[Pages 14358-14359]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7798]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37013; File No. SR-Amex-95-54]
Self-Regulatory Organizations; the American Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change Relating to
Restrictions on Specialists
March 22, 1996.
I. Introduction
On December 19, 1995, the American Stock Exchange, Inc. (``Amex''
or ``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend Exchange Rules 190 and
950 regarding restrictions on specialists.
\1\ 15 U.S.C. Sec. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 36726 (Jan. 17, 1996), 64 FR 1953 (Jan. 24,
1996). No comments were received on the proposal.
II. Background
The Amex adopted most of its restrictions on the activities of
specialists in the early 1960s. The effect of these restrictions was to
limit the business activities of specialists (and their affiliates) to
acting as a ``broker's broker'' and as a dealer on the Exchange Floor.
These restrictions also precluded specialists from making public
statements regarding their specialty securities. In 1973, the Exchange
added a commentary on the public statement restriction, prohibiting
specialists from making, ``an advertisement identifying a firm as a
specialist in any security.'' \3\ Even though the New York Stock
Exchange (``NYSE'') and Amex generally have comparable rules with
respect to restrictions on specialists, the NYSE never adopted the 1973
commentary.
\3\ See Commentary to Amex Rule 190.
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In 1975, with the implementation of trading in standardized
options, the Exchange generally extended the restriction on stock
specialists to options specialists. It modified, however, the
prohibition on business transactions between specialists and the issuer
of a specialty security (Rule 190(a)), to prohibit material business
transactions between an options specialist and the issuer of the
security underlying a specialty option (Rule 950(k)).\4\
\4\ Since the Options Clearing Corporation (``OCC'') is the
issuer of all listed options and the ``business transaction''
prohibition was intended as a prophylactic measure to prevent the
passage of non-public information between specialist and issuer, the
policy reason behind Rule 190(a) would not have been advanced had
the Exchange simply prohibited business transactions between the OCC
and an options specialist.
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In 1987, the Chicago Board Options Exchange (``CBOE'') instituted
its Designated Primary Market-Maker (``DPM'') system for trading listed
options.\5\ While the CBOE adopted a number of the restrictions
applicable to Amex options specialists, it did not apply any of the
restrictions applicable to Amex specialist communications to its
DPMs.\6\
\5\ Like a specialist, a DPM has primary market making
responsibilities.
\6\ See CBOE Rules 8.80 and 8.81, and Securities Exchange Act
Release Nos. 24934 (September 22, 1987), 52 FR 36122 (September 25,
1987) and 25151 (November 23, 1987), 52 FR 45417 (November 27,
1987). The CBOE's rules provide that an integrated broker-dealer
affiliated with a DPM must establish an exchange approved ``Chinese
Wall'' between the upstairs firm and the DPM and make certain
disclosures if it intends to issue recommendations or research
reports regarding DPM securities and the underlying. There are no
specific restrictions, however, on DPM communications regarding
their speciality securities.
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The discrepancy between the rules of the Amex and the CBOE
regarding specialist communications had little practical significance
prior to the general implementation of multiple options trading. The
Exchange is now finding, however, that the disparate regulation of
specialists and DPMs has placed it at a disadvantage in the competition
for order flow in a multiple trading environment.
III. Description of Proposal
The Amex, accordingly, proposes to amend its rules to lift the
prohibition against ``popularizing'' an option or a derivative
security. It will leave in place the restriction against popularizing
the underlying security, subject to the exceptions that have long been
contained in Amex Rule 950. This will better conform the Amex rules to
those applicable to DPMs at the CBOE regarding communications
concerning specialty securities.
In addition, the Exchange is also proposing two other changes to
the restrictions on popularizing by specialists. The Exchange seeks to
conform its rules to those of the NYSE to eliminate generally the
prohibition on communications that simply identify a firm as the
specialist in a particular security. Finally, the Exchange seeks to
amend its rules regarding equity derivative \7\ specialists to
harmonize them with restrictions on options specialists. Thus, the
Exchange would amend its rules to prohibit material business
transactions between certain equity derivative specialists and the
issuer of the security underlying the equity derivative.\8\
\7\ The term ``equity derivative'' refers to an underwritten
security the value of which is determined by reference to another
security, or to a currency, commodity, interest rate or index of the
foregoing. Such securities are commonly listed pursuant to Amex
Company Guide (``Guide'') Sections 106 (``Index and Currency
Warrants''), 107 (``Other Securities''), 118 (``Investment
Trusts''), or Amex Rule 1002 (``Portfolio Depositary Receipts'').
\8\ It is in the case of listings under Sections 107 and 118A of
the Guide that the underlying can be a single security, so that
restrictions analogous to those applicable to equity options are
appropriate.
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All options specialists would remain subject to the rules
regulating the conduct and public communications of members generally
(e.g. Exchange Rule 991, the ``options advertising'' rule). In
addition, all other restrictions applicable to specialists and their
affiliates would remain in place. Thus, specialists and their
affiliates still would be prohibited from trading a specialist security
outside the specialist function (Rules 170(e) and 950(n)), holding or
granting an option on a specialty stock (Rule 175), engaging in a
material business transaction with either the issuer of a specialty
security or the underlying security in the case of options (Rules
190(a) and 950(k)), and accepting orders from the issuer of a specialty
security, its insiders and enumerated institutional investors (Rules
190(b) and 950(k)).\9\
\9\ Exchange Rule 193 permits the affiliates of specialists to
obtain an exemption from most specialist restrictions through the
use of an Exchange-approved ``Chinese wall''.
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The Exchange represents that the respective proposed rule changes
either seek to conform the Exchange's rules to those of the CBOE and
NYSE, or represent a rational harmonization of the regulation of listed
options and equity derivatives. In addition, the Exchange believes that
changes in market structure, the rule of the specialist in the
secondary market, and enhanced surveillance capabilities over the last
thirty years have eliminated the need for continuation of at least
certain of the original specialist prohibitions. this is most clearly
true with respect to the wholesale application of the restrictions on
stock specialists to options specialists, due to the derivative pricing
of the specialty securities. This is most clearly demonstrated by the
experience of the CBOE, which has been able to adequately regulate its
DPMs without the use of such wholesale restrictions. Finally, the
Exchange
[[Page 14359]]
believes that the experience of the NYSE demonstrates that with respect
to all specialists there is no need to go so far as to preclude even
the public identification of a particular firm as the specialist in
particular securities.
IV. Discussion
The Commission finds that the Amex's proposal is consistent with
the requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange, and, in particular, with
the requirements of Section 6(b) of the Act.\10\ In particular, and for
the reasons set forth below, the Commission believes that the proposal
is consistent with the Section 6(b)(5) requirements that the rules of
an exchange be designed to promote just and equitable principles of
trade, to prevent fraudulent and manipulative acts and, in general to
protect investors and the public interest.\11\ The proposal also is
consistent with the Section 6(b)(8) requirement that an Exchange have
rules that do not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.\12\
\10\ 15 U.S.C. Sec. 78f(b).
\11\ 15 U.S.C. Sec. 78f(b)(5).
\12\ 15 U.S.C. Sec. 78f(b)(8).
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The Commission believes that the Amex's proposal to lift the
prohibition against ``popularizing'' an option or equity derivative
security and to lift the prohibition that prevents an equity or options
specialist from identifying itself as a specialist in its assigned
securities is appropriate and will make the Amex's rules consistent
with those that are applicable on other exchanges.
The Commission believes that Amex's rules relating to dealings and
communications by specialists with regard to their speciality
securities (and in the case of options or equity derivatives
specialists, the underlying securities related to their speciality
securities), continue to adequately address and prohibit inappropriate
conduct in this area. Notably, the Amex will leave in place the
restriction against popularizing the underlying security, subject to
the exceptions contained in Amex Rule 950. Moreover, all options
specialists will remain subject to the rules regulating the conduct and
public communications of members generally (e.g. Exchange Rule 991, the
``options advertising'' rule). In addition, all other restrictions
applicable to specialists and their affiliates will remain in place.
Thus, specialists and their affiliates still will be prohibited from
trading a specialist security outside the specialist function (Rules
170(e) and 950(n)), holding or granting an option on a specialty stock
(Rule 175), engaging in a material business transaction with either the
issuer of a speciality security or the underlying security in the case
of options (Rules 190(a) and 950(k)), and accepting orders from the
issuer of a specialty security, its insiders and enumerated
institutional investors (Rules 190(b) and 950(k)).\13\
\13\ Exchange Rule 193 permits the affiliates of specialists to
obtain an exemption from most specialist restrictions through the
use of an Exchange-approved ``Chinese wall.''
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The Commission also believes that the established restrictions on
material business transactions entered into by an equity derivative
specialist and the issuer of the security underlying the equity
derivative are reasonably designed to prevent a potential conflict of
interest.\14\
\14\ Absent these restrictions, a conflict of interest could
arise between the equity derivative specialist's market making
obligations and any status he or she might attain through business
dealings with the issuer or an officer, director, or 10% stockholder
of any such company. The Commission recognizes that certain business
transactions between equity derivative specialists and issuers may
exert an improper influence over equity derivative specialists. The
Commission believes, however, that a specialist may engage in
certain nonmaterial business dealings with an issuer that would not
give rise to the potential conflict of interest described above.
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\15\ that the proposed rule change (SR-Amex-95-54) is hereby
approved.
\15\ 15 U.S.C. Sec. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
\16\17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-7798 Filed 3-29-96; 8:45 am]
BILLING CODE 8010-01-M
