[Federal Register Volume 60, Number 99 (Tuesday, May 23, 1995)]
[Notices]
[Pages 27353-27357]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-12517]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35723; File No. SR-Amex-95-08]
Self-Regulatory Organizations; American Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change Relating to Membership
Structure and Requirements and the Exchange's Gratuity Fund
May 16, 1995.
I. Introduction
On February 17, 1995, the American Stock Exchange, Inc. (``Amex''
or ``Exchange'') filed with 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 its Construction, Rules
and Membership Lease Plan to allow organizations, including certain
pension plans, to own memberships legally as well as beneficially and
to allow individuals and organizations to own multiple memberships. The
Exchange also is proposing to revise its Gratuity Fund to reflect the
above changes, to increase the death benefit paid thereunder, and to
allow options principal members to participate therein.
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
The proposed rule change was published for comment in Securities
[[Page 27354]] Exchange Act Release No. 35411 (Feb. 22, 1995), 60 FR
11153 (March 1, 1995). One comment was received on the proposal.\3\
This order approves the proposed rule change.
\3\ Letter from Sam G. Marx on behalf of S.G. Marx & Associates
Inc., a member of the Amex, to Brandon Becker, Director, Division of
Market Regulation, DEC, dated May 15, 1995 (``Marx Letter'').
---------------------------------------------------------------------------
II. Overview of Proposal
A. Changes to Amex Membership Structures
At present, the Exchange's Constitution and Rules require that each
member \4\ be a natural person who must either own a membership (i.e.,
a seat on the Exchange) outright, lease a seat from its owner, or hold
the seat under a so-called a-b-c agreement.\5\ Further, a membership
must also be held in the name of a natural person and no individual is
permitted to hold more than one seat. A member organization may own
beneficially one or more memberships in which case the member
organization would be required to designate an individual (typically an
officer, general partner, or employee of the member organization)
nominally to own the seat on the member organization's behalf.
\4\ Both regular members and options principal member are
exchange members as defined in Section 3(a)(3) of the Act. A regular
member may effect transactions in both equities and derivatives on
the floor of the Exchange. In contrast, an options principal member
is limited to trading as principal in options and other derivative
products. Currently, the Amex has 661 regular and 203 options
principal memberships outstanding.
\5\ An a-b-c agreement is an arrangement between the individual
who nominally owns a seat and the member organization with which
such individual is associated and which is the beneficial owner of
the membership. Upon termination of the a-b-c agreement, the
individual must either (1) retain the membership and pay the member
organization the amount necessary to purchase another membership;
(2) sell the membership with the proceeds paid over to the member
organization; or (3) transfer the membership to a person designated
by the member organization.
---------------------------------------------------------------------------
The Exchange proposes to eliminate the requirements that
memberships be individually owned and instead permit both individuals
and organizations to own multiple memberships.
Organizations that own memberships could either lease their seats
directly to lessees or designate individuals as nominees to ``operate''
their seat.\6\ Similarly, individuals who own memberships, but who do
not ``operate'' their seats, would also be able to lease their seats or
designate nominees to operate the seats as their employees. As a
general matter, such nominees and lessees would be deemed to be member
of the Exchange and would be subject to all of the obligations and
privileges of membership under the Exchange Constitution and Rules
except that they would not participate in any distribution of Exchange
assets or funds upon liquidation, dissolution, or winding up of the
affairs of the Exchange and ultimate control of the membership would
rest with its owner.\7\
\6\ The a-b-c agreement would be replaced with another document
to authorize the nominee to act on the member organization's behalf
in all Exchange matters and to provide that the member organization
is responsible for all the nominee's Exchange-related obligations.
Member organizations, however, would be permitted to continue to
utilize their existing a-b-c agreements for so long as the
respective individual members remain in their seats.
\7\ As discussed below, the owner would retain the right to vote
seats held by nominees and certain lessees.
---------------------------------------------------------------------------
The proposal also would permit certain pension plans (generally
comprised of trusts or custodian accounts, including Keoghs and
Individual Retirement Accounts) to acquire ownership of one or more
seats for investment purposes and either to lease their seats or to
designate nominees to operate them.\8\ This option would only be
available to a pension plan where the sponsor of the plan is a member
organization and at least fifty percent (50%) of the pension trust
beneficiaries are active members and/or floor employees of the member
organization or the sponsor is an ``active'' member.\9\ The trust
itself would be the owner of the membership and the trustee would have
to become an approved person.\10\
\8\ The Exchange has been advised that the prohibited
transaction provisions of the Employee Retirement Income Security
Act and the Internal Revenue Code would preclude a member from being
the nominee or lessee of the seat owned by his or her own pension
trust.
\9\ ``Active'' is defined as meeting all Exchange requirements
to be active on the Floor, including passing any necessary
examinations and being registered as, or associated with, a broker-
dealer. See Para. 9176 of the Amex Guide (``Membership Requirements
and Admissions Procedures'').
\10\ See Art. I, Sec. 3(g) of the Amex Construction for a
definition of the term ``Approved Person.''
---------------------------------------------------------------------------
The proposal would make a number of additional changes to the
Exchange's Rules and Constitutions to effectuate the foregoing changes.
These changes are described below.
Subordination of Membership to Trading Losses and Debts
Currently, in the case of a leased seat, the lessor's liability to
the Exchange for his or her lessee's trading losses and other debts
incurred in connection with membership is limited to the value of the
leased seat. In the case of a seat held pursuant to an a-b-c agreement,
however, a member organization is responsible for all such losses and
debts incurred by the a-b-c seatholder, even if such obligations exceed
the value of the seat used by the a-b-c- seatholder. These requirements
would remain the same under the proposal with nominees being treated in
the same manner as a-b-c seatholders currently are.
Claims Procedures
Under the current rules, all transfers of Exchange memberships must
be posted on the Exchange Bulletin Board and published in the
Exchange's Weekly Bulletin for at least seven days.\11\ During this
time, other members and member organizations must file their claims
against the seat with the Exchange. These transfer and claims
procedures would continue to be utilized under the new membership
structure. In addition, the designation of a nominee by a seat owner
would be deemed to be a transfer to which the posting and claims
procedures would apply.
\11\ This includes nominal transfers, i.e., a transfer of
membership within an organization.
---------------------------------------------------------------------------
Fees
Currently, the Exchange imposes an initiation fee of $2,500 for
both a regular and options principal membership when a seat is sold.
The initiation fee on a nominal transfer (i.e., within a firm pursuant
to an a-b-c agreement) is $2,500 for a regular membership but only $500
for an options principal membership. When a membership is transferred
to a lessee, the initiation fee is $1,500 for a regular membership but
again only $500 for an options principal membership.
The proposal would retain the initiation fee of $2,500 for both
regular and options principal memberships when a seat is sold but would
impose an initiation fee of $1,500 on all regular and options principal
memberships for all nominal transfers and transfers by lease.\12\ For
the ninety-day period after these changes become effective, no
initiation fee would be charged for changes in membership ownership,
except for bona fide sales and bona fide changes in lessees or
nominees. A $250 processing fee, however, would be imposed on any
transfer where no initiation fee is charged.
\12\ Except for the above described changes in initiation fees
and, as hereafter described, changes in the Exchange's Gratuity Fund
assessment, the proposal would not effect any change to annual dues,
floor facility fees, or other fees.
---------------------------------------------------------------------------
Voting
Currently, members subject to an a-b-c agreement sign an
irrevocable proxy authorizing their member organizations to vote on
their behalf. The organization then designates an individual (typically
an employee) who is authorized to vote [[Page 27355]] on behalf of the
membership. In the case of leased seats, the vote is negotiable between
the lessor and lessee, provided that if no specification is made, the
lessee would vote the seat.
Under the new rules, organizations and individuals would be
entitled to vote all of the memberships that they own (and do not lease
out). Organizations would have to designate an individual who is
authorized to vote on their behalf. With respect to leased seats, the
vote would be negotiable between lessor and lessee.
B. Changes to the Gratuity Fund
Currently, the Exchange Gratuity Fund (``Fund'') provides that only
families of regular members may receive the death benefit of $100,000.
To fund the death benefit, each regular member contributes $152 to the
Fund upon becoming a participant in the Fund and is assessed $152 each
time a participant dies (subject to reduction in the first assessment
of the year to reflect income earned by the Fund in the previous year).
In the case of leased seats, the lessor, but not the lessee,
participates in the Fund.
The proposal would exclude from participation in the Fund certain
lessors who currently participate in the Fund and would include as
participants, in addition to regular members, options principal members
and both options principal and regular member lessees and nominees.
Under the new rules, lessors would only participate to the extent they
were previously active \13\ on the Floor for at least two continuous
years \14\ commencing on or after June 10, 1993,\15\ or they were
regular members or regular member lessors prior to such date.
Accordingly, the proposal would exclude lessors who were not regular
members or regular member lessors as of June 10, 1993 from
participation in the Fund, notwithstanding that such lessors currently
are participants in the Fund.
\13\ See note 9, supra, for a definition of the term ``active.''
\14\ A person would not have to maintain the same status for the
two-year period. For example, a person who is a lessee for one and a
half years and who then buys the seat (or another seat) and remains
on it for at least six months would satisfy the active requirement.
In addition, a person may be off the seat for up to sixty
consecutive days during the two-year period without being considered
to have interrupted that period.
\15\ June 10, 1993 was the date that the Exchange's Board
approved these proposals.
---------------------------------------------------------------------------
An individual who satisfies the above active requirement but who
then ceases to be a member, lessor, lessee, or nominee, nevertheless,
once again would become a participant in the Fund upon becoming a
lessor so long as no more than five years has elapsed since such
individual last participated in the Fund. To the extent more than five
years has elapsed, however, the individual then would have to be active
for another two continuous years to participate in the Fund as a
lessor.
Individuals who currently own options principal memberships would
have a one-time opportunity to ``opt-in'' or ``opt-out'' of the Fund. A
decision to ``opt-out'' would be irrevocable for the rest of the
person's life (unless the person subsequently buys a regular
membership.\16\ Options principal members who ``opt-in'' would also be
grandfathered for purposes of the active requirement. Current lessees
(both regular and options principal membership) would also have the
right to ``opt-out'' of the Fund, but such decisions would be effective
only for the duration of their current lease, and new leases would
require lessee participation in the Fund. Lease renewals by the same
two parties would not be considered to be new leases. Any new options
principal member seat owner (other than an individual owner who
previously chose to ``opt-out'' irrevocably) would be covered by the
new rules.
\16\ If that person subsequently buys a different options
principal membership, the decision to ``opt-out'' would apply to
that seat as well.
---------------------------------------------------------------------------
Further, under the proposal, the death benefit would be increased
to $125,000. The Exchange, however, would phase-in the full death
benefit over a four-year period. The proposed ``phase-in'' schedule
would be applied only on a prospective basis and would not be
applicable to persons who are already participants or who become
participants by virtue of the proposed amendments (e.g., options
principal members and lessees) regardless of whether such persons have
been participants or members for four years or more.\17\ For
participants subject to the phase-in, the full death benefit would be
based upon the length of time such person had been a participant,
according to the following schedule: \18\
\17\ An existing options principal member or lessee who ``opts-
out'' of the Fund and on some other basis later becomes eligible,
however, would become subject to the phase-in at that time.
\18\ This schedule is similar to that used by the New York Stock
Exchange (``NYSE'') regarding payments from its Gratuity Fund. See
Art. XV, Sec. 3 of the NYSE Constitution.
---------------------------------------------------------------------------
Less than one year--$25,000 (20% ``phase-in'')
One year or more but less than two years--$50,000 (40%
``phase-in'')
Two years or more but less than three years--$75,000 (60%
``phase-in'')
Three years or more but less than four years--$100,000
(80% ``phase-in'')
Four years or more--$125,000 (100% ``phase-in'')
If a participant who has not completed the phase-in period ceases
to be a participant for a continuous period of less than five years,
and thereafter again becomes a participant, he or she would be able to
aggregate his or her periods of participation for purposes of the
``phase-in.'' For example, if an individual is a participant for one
year and then ceases to be a participant for four years, and thereafter
again becomes a participant, such individual would be credited with the
amount of time previously spent as a participant for purposes of the
``phase-in'' schedule. If a participant ceases to be such for a period
of five years or more, however, and thereafter becomes a participant,
he or she would not be able to aggregate his or her prior periods of
participation for purposes of the ``phase-in'' described above. That
is, the ``phase-in'' schedule would be applied to such participant as
if he or she had never been a participant in the past.
Under the proposal, the amount of each assessment would fluctuate
because the number of participants in the Fund would vary based on who
is eligible at the time of a member's death and because the extent to
which participants were ``phased-in'' would vary. As is currently the
case, participants would have to pay both an initial assessment upon
becoming a participant and an assessment each time an eligible
individual dies. The first group of persons to become newly eligible
for the Fund upon the adoption of these changes would be required to
pay an initial assessment of $300.\19\ Thereafter, persons who become
eligible would be required to pay an initial assessment based on the
number of participants in the Fund at that time.
\19\ The Fund currently maintains a reserve of $200,000, the
amount necessary to pay two death benefits. If the benefit is
increased, the reserve would be increased accordingly. The initial
assessment of $300 on new participants is necessary to allow the
Fund to achieve this goal.
---------------------------------------------------------------------------
Each membership would pay at least one assessment.\20\ In some
instances, there would be one assessment per seat and on others two
(i.e., when both lessor and lessee are qualified). Fund assessments
would be based in all cases on the amount of the benefit payable and
would be the same for all [[Page 27356]] memberships assessed,
regardless of whether or to what extent a particular participant being
assessed has already ``phased-in'' to full eligibility.
\20\ The only exception to this would be in the case of an
individual who is both the independent owner of and the user of a
particular options principal membership and who ``opts-out'' of the
Fund under the transition provisions. For such a person's ``opt-
out'' to be able to have any practical effect, his or her options
principal seat would have to be exempt entirely from the obligation
to pay assessments to the Fund for so long as he or she remains the
owner and user of that seat.
---------------------------------------------------------------------------
No member's beneficiaries would be entitled to receive more than
one Fund benefit upon the member's death by virtue of the deceased
member's status as both lessor and lessee, or for any other reason. The
family of a member who owns multiple memberships would be able to
collect only one benefit. A member would be eligible on only one seat,
and must designate that seat to the Exchange. The lessees or nominees
of the other seats, of course, would be eligible on those seats. The
trustees of the Fund would have the authority to resolve disputes with
respect to a person's eligibility to participate in the Fund.\21\
\21\ Options principal members, lessees, and nominees also would
be eligible to become trustees of the Fund. For further discussion
of rules governing trustees of the Fund, see Art. IX of the Amex
Constitution.
---------------------------------------------------------------------------
III. Comments Received by the Commission
The Commission received one comment letter from S.G. Marx &
Associates Inc., a member of the Exchange.\22\ The commenter alleged
that the Exchange had delayed approval of the membership of one of the
company's nominees until after June 10, 1993 so that, under the
proposal, such member would not be able to participate in the Gratuity
Fund. Additionally, the commenter objected to the fact that, under the
proposal, certain of its memberships would be required to pay an
assessment to the Fund, notwithstanding that no one connected with such
membership would be a participant in the Fund.
\22\ See Marx Letter, supra, note 3.
---------------------------------------------------------------------------
IV. Discussion
The Commission believes that the proposed rule changes are
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to national securities exchanges and,
in particular, the requirements of Sections 6(b) (2), (4), and (5) of
the Act.\23\ Section 6(b)(2) of the Act requires the rules of an
exchange, subject to the provisions of Section 6(c) of the Act,\24\ to
ensure that any registered broker or dealer or natural person
associated with a registered broker or dealer may become a member of
the exchange. Section 6(b)(4) of the Act requires the rules of an
exchange to provide for the equitable allocation of reasonable dues and
fees among members and persons using exchange facilities. Section
6(b)(5) requires, among other things, that the rules of an exchange be
designed to promote just and equitable principles of trade, remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, protect investors and the
public interest.
\23\ 15 U.S.C. 78f(b)(2), (4), (5).
\24\ 15 U.S.C. 78f(c). Section 6(c) of the Act allows an
exchange to deny membership to certain classes of persons.
---------------------------------------------------------------------------
A. Changes to Amex Membership Structure
Currently, the Exchange allows organizations to own beneficially
multiple memberships. As beneficial owners, member organizations are
able to vote the memberships that they own (and do not lease out) and
otherwise enjoy all of the financial advantages of membership. Because
they are only beneficial holders, however, member organizations must
designate individuals nominally to own the seat on their behalf.
The Commission believes that the amendment of the Exchange's rules
to permit organizations to own memberships directly and to permit
individuals and organizations to own multiple memberships should not
result in any substantive changes in the operation of the Exchange.
Such changes should have the beneficial effect of allowing member
organizations to simplify the arrangements that they have made with
regard to their ownership and operation of Exchange memberships.
Moreover, several other exchanges permit organizations, as well as
individuals, to own memberships and the Commission is not aware of any
problems that have resulted from such membership structure.\25\
\25\ See e.g., Art. I, Sec. 1.1 and Sec. 2.2 of the Constitution
of the Chicago Board Options Exchange, Inc. and Art. II, Sec. 1 of
the Constitution of the Chicago Stock Exchange, Incorporated.
---------------------------------------------------------------------------
The Commission believes that the amendments to the Exchange's rules
to permit certain pension plans to acquire ownership of one or more
seats for investment purposes and either to lease their seats or to
designate nominees to operate them reasonably balances the Exchange's
interest in having the flexibility to approve entities with new
organizational structures for Exchange membership with the regulatory
interests in protecting the financial and structural integrity of the
Exchange. In the event such an entity designated a nominee to operate
its seat, the pension plan would have to be a broker or dealer
registered with the Commission pursuant to the Act, because this is a
prerequisite to becoming an Exchange member organization,\26\ and would
be subject to all other membership approval requirements generally
applicable to member organizations. If the pension plan leased the
seat, the plan would be subject to all approval requirements generally
applicable to lessors. In either event, the pension plan's trustee
would have to be approved as an approved person under the Constitution
and Rules of the Exchange.
\26\ See Art. IV., Sec. 2(d) of the Amex Constitution.
---------------------------------------------------------------------------
The Commission believes that the changes to the Exchange's fees
relating to the transfer of memberships are consistent with Section
6(b)(4) of the Act, which requires the equitable allocation of
reasonable dues and fees among members and persons using exchange
facilities. The proposed amendments would make two changes to the
Exchange's fee structure. The first change would equalize the
initiation fee for nominal transfers, (i.e., intra-firm) and transfers
by lease of regular memberships and options principal memberships. The
Commission believes that such equalization is proper in view of the
Exchange's representation that the administrative expenses attributable
to the two types of membership are identical. The second change would
impose a substantially reduced processing fee for changes in membership
during the ninety-day period following the effective date of these
changes, except for bona fide sales and bona fide changes in leases or
nominees. The Commission believes that it is appropriate for the
Exchange to offer a reduced fee for a limited period of time as a means
of encouraging members to take advantage of the new alternatives
available in structuring ownership of Amex seats.
B. Gratuity Fund
The Commission is unaware of any reason why the Exchange's proposal
to expand participation in the Gratuity Fund to all active Exchange
members and to increase the death benefit provided thereunder should
not be approved. The Exchange's proposal, however, also limits
participation in the Fund. Specifically, the proposal excludes inactive
members from participation in the Fund, except for such members who
have been active on the Exchange for at least two years or who were
participants in the Fund (or options principal members) as of the date
the Exchange's Board approved such proposal. As a result, the proposal
would exclude lessors who are currently participants in the Fund but
who were [[Page 27357]] not regular members or regular member lessors
as of June 10, 1993 from participation in the Fund. With regard to
these participants, the Commission notes that, before they become
lessors, the Exchange gave them written notice that they would no
longer be participants in the Fund if this proposal were approved.
Further, the Commission previously published this rule change for
comment and received no adverse comments regarding this disparate
treatment.\27\ Additionally, the Commission believes that it is
reasonable for the Exchange to make a distinction in treatment between
participants who became inactive members of the Exchange with the
expectation that they would be participants in the Fund and members who
had no such expectation.\28\ Similarly, the Commission is unaware of
any reason why the Exchange's proposal to phase-in the full death
benefit over a four year period for all new members should not be
approved.\29\
\27\ See Securities Exchange Act Release No. 35411 (Feb. 22,
1995), 60 FR 11153 (March 1, 1995).
\28\ In approving this provision, the Commission does not mean
to dismiss the comment of S.G. Marx and Associates Inc. regarding
the Exchange's alleged delay in the approval of the membership of
one of the company's nominees until after June 10, 1993 so that,
under the proposal, such member would not be able to participate in
the Gratuity Fund. The Commission believes that such allegation
speaks to whether the Exchange applied its rules in a fair and
impartial manner, rather that the advisability of the provision in
question and on that basis is approving this order. The Commission
emphasizes that such approval should not be interpreted as
addressing the merits of the above allegation in any manner.
\29\ As discussed supra at note 17 and the accompanying text,
the phase-in schedule does not apply to persons who are already
participants or who become participants by virtue of these
amendments.
---------------------------------------------------------------------------
Finally, the Commission believes that the changes in the Fund
assessment are consistent with Section 6(b)(4) of the Act, which
requires the equitable allocation of reasonable dues and fees among
members and persons using exchange facilities.\30\ The Commission notes
that, with one exception, the assessment applies equally to all
members\31\ and that there is always at least one individual connected
to each membership who has the right to participate in the Fund.
\30\ The Commission notes that the proposed change, when
combined with the provision that allows current lessees to ``opt-
out'' of participation in the Fund, could result in a membership
being required to pay an assessment to the Fund, notwithstanding
that no one connected with such membership would be a participant in
the Fund. The comment letter of S.G. Marx & Associates Inc.
discussed this situation. See Marx Letter, supra, note 3.
\31\ See note 20, supra, for a discussion of the exception
regarding certain options principal memberships.
---------------------------------------------------------------------------
IV. Conclusion
In summary, the Commission believes that the changes relating to
the Exchange's membership structure will provide the Exchange and its
members with increased flexibility without causing any substantive
changes in the operation of the Exchange. Further, the Commission
believes that the changes relating to the Exchange's Gratuity Fund
should provide enhanced benefits to a wider range of members.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\32\ that the proposed rule change (SR-Amex-95-08) is approved.
\32\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\33\
\33\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-12517 Filed 5-22-95; 8:45 am]
BILLING CODE 8010-01-M
