Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change and Amendment Nos. 1 and 2 Thereto by the American Stock Exchange LLC Relating to an Obvious Error Rule for Trades on the Exchange in Equity Securities, 10436-10439 [E5-845]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 70, Number 41 (Thursday, March 3, 2005)]
[Notices]
[Pages 10436-10439]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-845]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51248; File No. SR-Amex-2004-11]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment 
Nos. 1 and 2 Thereto by the American Stock Exchange LLC Relating to an 
Obvious Error Rule for Trades on the Exchange in Equity Securities

February 24, 2005.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 3, 2004, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in items I and 
II below, which items have been prepared by the Exchange. On May 21, 
2004 and February 18, 2005, Amex submitted Amendment Numbers 1 \3\ and 
2,\4\ respectively, to the proposed rule change. The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons and is approving the proposal, as 
amended, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange, among other things, 
revised the proposed rule text to state expressly that it would not 
apply to listed options and to more closely mirror the Exchange's 
existing rule concerning clearly erroneous transactions in Nasdaq 
National Market Securities. See letter from Bill Floyd-Jones, 
Associate General Counsel, Amex, to Nancy J. Sanow, Assistant 
Director, Division of Market Regulation (``Division''), Commission, 
dated May 20, 2004 (``Amendment No. 1'') (replacing the original 
Form 19b-4 filing in its entirety).
    \4\ In Amendment No. 2, the Exchange, among other things, made 
technical corrections to its proposed rule text and requested 
accelerated approval of the proposed rule change. Amendment No. 2 
superceded and replaced Amendment No. 1 in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Amex proposes to adopt an obvious error rule for transactions on 
the Exchange in equity securities other than Nasdaq National Market 
securities admitted to dealings on an unlisted basis.\5\ The text of 
the proposed rule change follows. New text is italicized and deleted 
text is bracketed.

    \5\ Telephone conversation between William Floyd-Jones, 
Associate General Counsel, Amex, and Terri L. Evans, Senior Special 
Counsel, Division, Commission, on February 22, 2005 (clarifying that 
the proposed rule change does not apply to Nasdaq National Market 
securities).
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Cancellations of, and Revisions in, Transactions Where Both the Buying 
and Selling Members Agree to the Cancellation or Revision

    Rule 135. (a) A member or member organization effecting a 
transaction on the Exchange shall not cancel or revise such transaction 
unless it was made in error or the cancellation or revision is for 
other proper reason, and unless in each case both buying and selling 
members agree to the cancellation or revision and prior approval of the 
cancellation or revision is obtained from a Floor Official.
    (b) Rule 390 shall not preclude a member, member organization, 
allied member, registered representative, or officer from sharing or 
agreeing to share in any losses in any customer's account with respect 
to securities admitted to dealings on the Exchange after the member 
organization has established that the loss was caused in whole or in 
part by the action or inaction of such member, member organization, 
allied member, registered representative or officer, provided, however, 
that this provision shall not permit a member, member organization, 
allied member, registered representative or officer to guarantee any 
customer against loss in his or her account.
* * * Commentary
    .01 A change or correction in a transaction which previously 
appeared on the tape, or the cancellation of a transaction which 
previously appeared on the tape and was properly rescinded, or the 
occurrence of a transaction which had been omitted from the tape, is to 
be published on the tape on the day of the transaction after approval 
of such publication is obtained from a Floor Official. If not published 
on such day, the same is to be published at a later date in the 
Exchange's Sales and Quotes Report with the approval of a Floor 
Official.
    .02 Rescinded [Where a transaction is not cancelled but the member 
or member organization intends to assume for his or its own account the 
contract made for a customer, the provisions of Rule 390 apply, and any 
required consent of the Exchange under that rule is to be obtained from 
the Compliance and Surveillance Division.]

Cancellations of, and Revisions in, Transactions Where Both the Buying 
and Selling Members Do Not Agree to the Cancellation or Revision

    Rule 135A (a) A Floor Official shall, pursuant to the procedures 
set forth below, have the authority to review any transaction in a 
security admitted to dealings on the Exchange that is claimed to be 
clearly erroneous arising out of the use or operation of any facility 
of the Exchange, provided, however, that the procedures for reviewing 
transactions in Nasdaq National Market securities admitted to dealings 
on the Exchange are separately set forth in Rule 118 and provided 
further that these procedures do not apply to listed options.
    In reviewing a trade that is claimed to be clearly erroneous, a 
Floor Official shall review the transaction with a view toward 
maintaining a fair and orderly market and the protection of investors 
and the public interest. Based upon this review, the Floor Official 
shall decline to ``break'' a disputed transaction if the Floor Official 
believes that the transaction under dispute is not clearly erroneous. 
If the Floor Official

[[Page 10437]]

determines the transaction in dispute is clearly erroneous, however, he 
or she shall declare that the transaction is null and void or modify 
one or more terms of the transaction. When adjusting the terms of a 
transaction, the Floor Official shall seek to adjust the price and/or 
size of the transaction to achieve an equitable rectification of the 
error that would place the parties to a transaction in the same 
position, or as close as possible to the same position, as they would 
have been in had the error not occurred. For the purposes of this Rule, 
the terms of a transaction are clearly erroneous when there is an 
obvious error in any term, such as price, number of shares or other 
unit of trading, or identification of the security.
    (b) Any member who seeks to have one or more transactions reviewed 
pursuant to paragraph (a) above shall submit the matter to a Floor 
Official and deliver a written complaint to the Service Desk and the 
other member(s) who were part of the trade within 30 minutes of the 
transaction. Once a complaint has been received, the complainant shall 
have up to 30 minutes, or such longer period as the Floor Official may 
specify, to submit any supporting written information concerning the 
complaint necessary for a review of the transaction. The other 
member(s) that were part of the trade shall have up to thirty minutes 
after being notified of the complaint, or such longer period as 
specified by the Floor Official, to submit any supporting written 
information concerning the complaint necessary for a review of the 
transaction. Any member on a disputed trade may request the written 
information provided by the other members pursuant to this 
subparagraph. Once a member communicates that he or she does not intend 
to submit any further information concerning a complaint, the member 
may not thereafter provide additional information unless requested to 
do so by the Floor Official. If the members involved in a disputed 
trade indicate that they have no further information to provide 
concerning the complaint before their thirty-minute information 
submission periods have elapsed, then the matter may be immediately 
considered by a Floor Official. Members or persons associated with 
members and member organizations involved in the transaction shall 
provide the Floor Official with any information that he or she requests 
in order to resolve the matter on a timely basis notwithstanding the 
time parameters set forth above. Once a member has applied to a Floor 
Official for a ruling, the Floor Official shall review the transaction 
and make a ruling unless all members on the transaction agree to 
withdraw the application for review prior to the time that the Floor 
Official makes the ruling. A member may seek review of a Floor 
Official's ruling pursuant to the procedures described in Rule 22(d) 
and Commentary .02 to Rule 22.
    (c) In the event of (1) a disruption or malfunction in the use or 
operation of any facility of the Exchange or (2) extraordinary market 
conditions or other circumstances in which the nullification or 
modification of transactions executed on the Exchange may be necessary 
for the maintenance of a fair and orderly market or the protection of 
investors and the public interest, a Floor Governor may review any 
transactions arising out of or reported through any facility of the 
Exchange (other than transactions in Nasdaq National Market securities 
which are covered by Rule 118 or transactions in listed options). A 
Floor Governor acting pursuant to this paragraph may declare any Amex 
transaction null and void or modify the terms of any such transactions 
if the Floor Governor determines that (1) the transaction is clearly 
erroneous, or (2) such actions are necessary for the maintenance of a 
fair and orderly market or the protection of investors and the public 
interest; provided, however, that, in the absence of extraordinary 
circumstances, the Floor Governor shall take action pursuant to this 
subsection within 30 minutes of detection of the transaction, but in no 
event later than 3:00 p.m., Eastern Time, on the next trading day 
following the date of the trades at issue. A member may seek review of 
a Floor Governor's ruling from a three-Governor Panel as described in 
Rule 22(d) and Commentary .02 to Rule 22 without first seeking review 
of the ruling from a Floor Official or Exchange Official.
    (d) Rule 390 shall not preclude a member, member organization, 
allied member, registered representative, or officer from sharing or 
agreeing to share in any losses in any customer's account with respect 
to securities admitted to dealings on the Exchange after the member 
organization has established that the loss was caused in whole or in 
part by the action or inaction of such member, member organization, 
allied member, registered representative or officer, provided, however, 
that this provision shall not permit a member, member organization, 
allied member, registered representative or officer to guarantee any 
customer against loss in his or her account.

* * * Commentary

    .01 A change or correction in a transaction which previously 
appeared on the tape, or the cancellation of a transaction which 
previously appeared on the tape and was properly rescinded, or the 
occurrence of a transaction which had been omitted from the tape, is to 
be published on the tape on the day of the transaction after approval 
of such publication is obtained from a Floor Official. If not published 
on such day, the same is to be published at a later date in the 
Exchange's Sales and Quotes Report with the approval of a Floor 
Official.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
item III below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    According to the Exchange, trades may occur at clearly erroneous 
prices, sizes, securities, and so forth, due to human or system errors. 
The Exchange, accordingly, is proposing to adapt the ``obvious error'' 
rule that was adopted for Nasdaq securities traded at the Exchange \6\ 
to other Amex securities traded under the Exchange's equity trading 
rules. Listed options are not affected by the proposed rule change.\7\ 
The proposed Amex obvious error rule would allow the Exchange to break 
or revise single or multiple trades that are obviously erroneous where 
the parties to the trades do not agree that the trades should be 
cancelled or revised. Under

[[Page 10438]]

the proposed rule, a member may request an Amex Floor Official to 
review one or more transactions that are claimed to be clearly 
erroneous. Once a ruling is requested, a Floor Official must review the 
trade unless both parties agree to withdraw the application before the 
Floor Official makes a ruling.
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    \6\ See Securities Exchange Act Release No. 49941 (June 29, 
2004), 69 FR 40992 (July 7, 2004) (approving Amex-2003-39). 
Telephone conversation between William Floyd-Jones, Associate 
General Counsel, Amex, and Terri L. Evans, Senior Special Counsel, 
Division, Commission, on February 22, 2005.
    \7\ The Exchange has submitted a separate rule filing regarding 
obvious errors involving options transactions. See Amex-2005-11. 
Telephone conversation between William Floyd-Jones, Associate 
General Counsel, Amex, and Terri L. Evans, Senior Special Counsel, 
Division, Commission, on February 22, 2005.
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    The proposed rule would require a Floor Official to review a 
transaction or series of transactions with a view toward maintaining a 
fair and orderly market and the protection of investors and the public 
interest. Based upon this review, the Floor Official would decline to 
``break'' a disputed transaction if the Floor Official believes that 
the transaction under dispute is not clearly erroneous. If the Floor 
Official determines the transaction in dispute is clearly erroneous, 
however, the Floor Official may declare the transaction null and void 
or modify one or more terms of the transaction. When adjusting the 
terms of a transaction, the Floor Official would seek to adjust the 
price and/or size of the transaction to achieve an equitable 
rectification of the error that would place the parties to a 
transaction in the same position, or as close as possible to the same 
position, as they would have been in had the error not occurred.
    The proposed rule establishes deadlines and procedures for Floor 
Official review of a disputed transaction. The procedures require any 
member who seeks to have a transaction or series of transactions 
reviewed to submit the matter to a Floor Official and deliver a written 
complaint to the Service Desk and other members who were part of the 
trade within 30 minutes of the transaction. Once a complaint has been 
received, the complainant has up to 30 minutes, or such longer period 
as the Floor Official may specify, to submit any supporting written 
information concerning the complaint necessary for a review of the 
transaction. The other members involved on the trade have up to 30 
minutes after being notified of the complaint, or such longer period as 
specified by the Floor Official, to submit any supporting written 
information concerning the complaint necessary for a review of the 
transaction. The members involved in a disputed trade may request the 
written information provided by the other members. Once a member 
involved in a disputed trade communicates that he or she does not 
intend to submit any further information concerning a complaint, the 
member may not thereafter provide additional information unless 
requested to do so by the Floor Official. If all members involved in a 
disputed trade indicate that they have no further information to 
provide concerning the complaint before their respective 30 minute 
information submission periods have elapsed, then the matter may be 
immediately considered by a Floor Official. Members or persons 
associated with members and member organizations involved in the 
transaction are required to provide the Floor Official with any 
information that he or she requests in order to resolve the matter on a 
timely basis.
    The proposed rule change also provides that a Floor Governor may 
review any transactions arising out of or reported through any facility 
of the Exchange and cancel or revise these transactions in the event 
of: (1) A disruption or malfunction in the use or operation of any 
facility of the Exchange; or (2) extraordinary market conditions or 
other circumstances in which the nullification or modification of 
transactions may be necessary for the maintenance of a fair and orderly 
market or the protection of investors and the public interest. A Floor 
Governor acting pursuant to this subsection may declare any Amex 
transactions null and void or modify the terms of any such transactions 
if the Floor Governor determines that: (1) The transaction(s) is/are 
clearly erroneous; or (2) such actions are necessary for the 
maintenance of a fair and orderly market or the protection of investors 
and the public interest; provided, however, that, in the absence of 
extraordinary circumstances, the Floor Governor must take action 
pursuant to this subsection within 30 minutes following detection of 
the transactions, but in no event later than 3 p.m., eastern time, on 
the next trading day following the date of the trades at issue.
    A member seeking a prompt review of a Floor Official's ruling under 
the proposed rule would follow the procedures outlined in Amex Rule 
22(d), which provide possible appeals first to an Exchange Official, 
next to a Floor Governor, and finally to a three Governor panel. The 
proposed rule change also provides that a member aggrieved by a Floor 
Governor's ruling under paragraph (c) of the proposed rule may appeal 
the ruling to a three Governor panel. Commentary .02 to Amex Rule 22 
requires Floor Officials to prepare and submit a written record of 
their decisions as soon as practical after making a ruling. Floor 
Officials, consequently, would have to prepare and submit written 
decisions regarding rulings on trades that may be clearly erroneous. 
Since Exchange Officials and Floor Governors are also Floor Officials, 
they, too, would have to prepare and submit a written record of their 
decisions regarding rulings on trades that may be clearly erroneous.
    In conjunction with the revisions to Rule 135 and 135A, the 
Exchange also is proposing to eliminate Commentary .02 to Rule 135 and 
replace it with new paragraph (b) to Rule 135 and paragraph (d) to Rule 
135A. Commentary .02 to Rule 135 currently states that members must 
obtain consent from the Exchange's ``Compliance and Surveillance 
Division'' if they assume a trade made in error. The text of Rule 390, 
however, does not require any such consent. The Exchange also believes 
that the proposed new rule text more accurately indicates that a member 
or member organization does not inappropriately share in the losses of 
a customer account when it assumes a trade made in error.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act,\8\ in general, and further the objectives 
of section 6(b)(5),\9\ in particular, in that the proposed rule change 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest; and is not designed to permit unfair discrimination 
between customers, issuers, brokers and dealers.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change will impose no 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received with respect 
to the proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

[[Page 10439]]

Electronic Comments

     Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-Amex-2004-11 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-Amex-2004-11. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of this filing also will be 
available for inspection and copying at the principal office of the 
Amex. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
Amex-2004-11 and should be submitted on or before March 24, 2005.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder, that are applicable to a national securities exchange. In 
particular, the Commission finds that the proposed rule change is 
consistent with the requirements of section 6(b)(5) of the Act,\10\ 
which requires that the rules of an exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism for a free and open market and a national market system, and, 
in general, to protect investors and the public interest.\11\ New Amex 
Rule 135A will set forth formal procedures to be followed by an 
Exchange member that seeks to have a trade nullified or revised when 
the parties to the trade have not agreed that the trade should be 
cancelled or revised, or by an Amex Floor Governor who seeks to nullify 
or revise trades on his or her own motion. The Commission believes that 
it is proper for trade nullification and revision procedures to be 
codified and thus made transparent to Amex members who are parties to 
trades that are deemed to be clearly erroneous and to Amex Floor 
Officials who are called upon to review such trades. The new rule also 
sets forth the procedure to be followed in the event of any appeal of a 
determination made by an Exchange Floor Official or Floor Governor 
pursuant to proposed Amex Rule 135A. The Commission believes that this 
procedure is designed to help ensure that Amex Rule 135A is exercised 
in a fair and reasonable manner. In addition, the Commission believes 
that proposed Amex Rules 135(b) and 135A(d), which allow a member to 
share in customer losses that were caused in whole or in part by the 
member's action or inaction, are consistent with the Act.
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    \10\ Id.
    \11\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    The Commission finds good cause for approving the proposed rule 
change prior to the 30th day after the date of publication of the 
notice of filing thereof in the Federal Register. The Commission notes 
that the proposed rule change would provide members trading non-Nasdaq 
equity securities with essentially the same procedures recently 
approved by the Commission for the nullification or adjustment of 
clearly erroneous transactions involving Nasdaq National Market 
Securities.\12\ The Commission believes that because the proposal 
raises no new issues of regulatory concern, it is appropriate to 
accelerate approval of the proposed rule change so that members who 
trade any kind of equity securities that are admitted to dealings on 
the Exchange will be afforded similar processes in the event that a 
particular trade to which they are a party is claimed to be clearly 
erroneous.
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    \12\ See Securities Exchange Act Release No. 49941, supra note 
6.
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\13\ that the proposed rule change, as amended (SR-Amex-2004-11), 
is hereby approved, on an accelerated basis.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-845 Filed 3-2-05; 8:45 am]
BILLING CODE 8010-01-P