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Notice

Self Regulatory Organizations; Notice of Filing of Proposed Rule Change by the American Stock Exchange LLC Relating to Member Firm Transactions With Exchange Employees

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Information about this document as published in the Federal Register.

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Start Preamble October 20, 2000.

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 April 13, 2000, the American Stock Exchange LLC (“Amex” or “Exchange”) filed with the Securities and Exchange Commission (“Commission or SEC”) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. On September 25, 2000, the Amex filed Amendment No. 1 to the proposal.[3] The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change.

The Exchange is proposing to amend Amex rules relating to member firm transactions with Exchange employees. proposed new language is italicized, proposed deletions are in brackets.

* * * * *

Rule 416. [Accounts of Employees of Exchange and Members]

Member Employee Transactions with Another Member Organization

No member or member organization shall open a cash or margin account or execute any transaction in securities or commodities in which an employee of [the Exchange or of any corporate subsidiary of the Exchange or of any] another is directly or indirectly interested without the prior written consent of the employer. Where such prior consent has been obtained, duplicate confirmations and account statements shall be sent to the employer.

CommentaryStart Printed Page 65035

[.01 Employees of Exchange—An employee of the Exchange, who wishes to open a securities or commodities account shall apply for permission from the Human Resources Department of the Exchange.]

[.02] .01 The requirement to send duplicate conformations and statements shall be as stated in Commentary .02 to Rule 415.

Amendments.

March 3, 1954.

December 9, 1993.

May 16, 1995.

* * * * *

Rule 15. Loans by [Exchange Officers] Members

Without the prior approval of the Board of Governors, (i) no member, member organization, approved person, employee or any employee or any employee pension, retirement or similar plan of any member organization (“Member”) shall directly or indirectly make any loan of money or securities to, or obtain any such loan from, any member of the Board of Governors, any member of any committee of the Exchange, or any Trustee of the Gratuity Fund (“Designated Person”) and (ii) no [member of the Board of Governors or of any committee of the Exchange, no Trustee of the Gratuity Fund and no officer or employee of the Exchange] Such Designated Person shall directly or indirectly make any such loan [of money or securities] to, or obtain any such loan form, any [member, member organization, approved person, employee or any employee pension, retirement or similar plan of any member organization] Member, unless such loan be:

(a) Fully secured by readily marketable collateral, or

(b) Made by a Governor, committee member of Trustee to, or obtained by a Governor, committee member or Trustee from, the member organization of which he is a member or employee or a member or employee therein or a party to a registered joint account in which such Governor, committee member or Trustee participates.

Amendments.

September 6, 1962.

June 1, 1970.

* * * * *

[Rule 348. Gratuities to Employees of Exchange]

[No member or member organization may, without the prior written approval of the Exchange, employ or give any compensation or gratuity to any employee of the Exchange or any employee of any corporate subsidiary of the Exchange.]

[Amendment.

July 29, 1965, effective August 16, 1965.]

[Commentary]

[.01 Gratuity Defined.—A gratuity is a gift of any nature. Pursuant to Exchange policy, however, gratuities valued at $50 or less in total to any one person during a calendar year are considered an exception to Rule 348, and prior written approval of the Exchange is not required.]

[.02 Records.—Records must be retained by members and member organizations as to any gratuity as required by Commentary 2 to Rule 347 above.]

[.03 Obtaining Written Approval.—Requests for approval of any employment or gratuity under Rule 348 should be directed to the Secretary's Office.]

[Amendments.

Adopted July 29, 1965, effective August 16, 1965.

December 14, 1977.]

* * * * *

Rule 417. Transactions Involving Exchange Employees

(a) When a member or member organization has actual notice that an Exchange employee has a financial interest in, or controls trading in, an account, the member or member organization shall promptly obtain and implement an instruction from the Exchange employee directing that duplicate account statements be provided by the member or member organization to the Exchange.

(b) No member or member organization shall directly or indirectly make any loan of money or securities to any Exchange employee; provided, however, that this prohibition does not apply to loans made in the context of disclosed, routine banking and brokerage agreements, or loans that are clearly motivated by a personal or family relationship.

(c) No member or member organization shall directly or indirectly give, or permit to be given, anything of more than nominal value to any Exchange employee who has responsibility for a regulatory matter that involves the member or member organization. For purposes of this subsection, the term “regulatory matter” includes, but is not limited to, examinations, disciplinary proceedings, membership applications, listing applications, delisting proceedings, and dispute resolution proceedings that involve the member or member organization. Members and member organizations may not otherwise give business gifts or courtesies to Exchange employees other than to the extent Exchange employees are permitted to accept such gifts and courtesies under the Code of Conduct applicable to Exchange employees. Records of all gifts and courtesies shall be kept and retained by the member or member organization for the period specified in SEC Rule 17a-4.

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 IV 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 Statutory Basis for, the Proposed Rule Change

1. Purpose

In 1998, the Amex completed a transaction pursuant to which it joined the family of companies headed by the NASD. The American Stock Exchange, Inc. transferred substantially all of its assets and liabilities to the American Stock Exchange LLC, a new limited liability company controlled by the NASD.[4] The Exchange therefore proposes to amend its rules relating to member firm transactions with Exchange employees so that they conform with the NASD Code of Conduct. Specifically, the Exchange proposes to amend Amex Rule 15 (Loans by Exchange Officers) and Amex rule 416 (Accounts of Employees of Exchange and Members), to delete Amex Rule 348 (Gratuities to Employees of Exchange), and to add new Amex Rule 417 (Transactions Involving Exchange Employees).[5]

a. Member Loans to Exchange Employees. The NASD and Amex employees from accepting loans from members, issuers, or any person with whom the NASD or Amex transacts Start Printed Page 65036business.[6] Amex Rule 15 also prohibits Exchange employees from accepting loans from members without prior written approval of the Exchange, but does not specifically prohibit members from making those loans to Exchange employees.

The SEC staff has recommended that the Amex adopt a rule expressly prohibiting members from making loans to Amex employees, outside routine brokerage or banking relationships.[7] The SEC's recommendation resulted from an OCIE examination of the ethical conduct and conflicts of interest rules, policies, and procedures of the Exchange. The SEC staff report noted a 1996 incident in which an Amex member made a $70,000 loan to an Amex floor employee. When the Amex through its own internal procedures became aware of the loan, it promptly terminated the employees for violating its conflict of interest policies in accepting the loan. The SEC staff has stated that rules of self-regulatory organizations (“SROs”) should explicitly prohibit SRO members from extending loans to SRO employees.[8]

The Amex therefore proposes to amend Amex Rule 15 to expressly provide that no member shall make a loan to an Exchange employee without prior approval of the Amex Board of Governors. Paragraph (b) of new Amex Rule 417(b) would prohibit members from making loans to Exchange employees outside of disclosed, routine banking and brokerage agreements. Consistent with existing Code of Conduct provisions, the prohibition on member loans to Exchange employees in new Amex Rule 417(b) would not apply to loans that are clearly motivated by a family or personal relationship. Thus, for example, a registered representative would not be precluded from making a personal loan to an adult child who works at the Amex.

b. Brokerage Accounts of Exchange Employees. The NASD Code of conduct requires disclosure of all security and commodity accounts that an employee maintains and accounts in which an employee has a financial interest or controls trading.[9] Employees are required to instruct the institutions where such accounts are maintained to provide duplicate account statements (but not confirmations) to the NASD Office of General Counsel, which records transaction information in a database. The database can generate certain types of exception reports (i.e., reports of apparent Code violations). These reports are forwarded to department heads for follow-up action.

Commentary .01 to Amex Rule 416 currently requires members to obtain the Exchange's prior written approval before opening an account for an Exchange employees and to provide duplicate confirmations and statements to the Exchange. To conform Amex rules to the NASD Code of Conduct, the Exchange approval requirement for the opening of accounts and the requirement to furnish duplicate confirmations are being deleted. The requirements to provide duplicate statements to the Exchange is being retained. The Amex also proposes to adopt new Amex Rule 417(a), which provides that when a member has actual notice that an Exchange employee has a financial interest in an account or controls trading in an account, duplicate account statements shall be provided by the member to the Exchange.

The Amex believes that the elimination of the Amex approval requirement for the opening of employee accounts will substantially lessen the NASD's administrative burden with respect to these accounts. The Amex represents that the proposed rule change will simply require employees to obtain a duplicate instruction form (available on OASIS, the NASD's Intranet), complete and sign the form, and provide it to the broker/dealer at which the employee has, or wishes to open, an account. The provision of duplicate statements by the member would allow the NASD to then properly monitor trading in employee accounts.

c. Member Gifts to Exchange Employees. Currently under Amex Rule 348, Amex members must obtain approval from the Corporate Secretary's Office before giving an Exchange employee gifts valued at over $50 per year. The Secretary's Office does not approve gifts that exceed the $50 threshold for employees in the Exchange's Member Firm Regulation area.

There is no pre-approval mechanism under the NASD Code of Conduct.[10] Employees are prohibited from accepting any business gifts, including cash or cash equivalents (e.g., gift certificates) and gifts of tickets (e.g., tickets to a sporting event), from any NASD or Amex member, Nasdaq or Amex issuer, or any person or entities that are involved in any matter in which the employee is involved.[11] Where gifts are permissible, they may not exceed $100 in aggregate value from a single source during a calendar year. All gifts, regardless of value, must be reported.[12] At least once each quarter, department heads are required to review all gifts reported by their staffs.[13]

To conform Amex rules to the NASD Code of Conduct, Amex Rule 348 (Gratuities to Employees of Exchange) will be deleted and replaced with new Amex Rule 417(c), a provision that parallels the NASD Code of Conduct. Under paragraph (c) of new Amex Rule 417, members are permitted to give non-cash business gifts with an aggregate annual value of $100 to Exchange employees when no conflict of interest exists, but members are prohibited from giving business gifts or courtesies of more than nominal value to any Exchange employee who has responsibility for a specific regulatory matter that involves the member. A “regulatory matter” would include such matters as examinations, disciplinary proceedings, membership applications, listing applications, delisting proceedings, and dispute resolution proceedings involving the member. The proposed rule would permit members to give items of nominal value to employees responsible for regulatory matters affecting the member. The Amex represents that, for example, a member would be permitted to offer minor refreshments, such as a soft drink or coffee, to Amex employees conducting an on-site examination.

2. Statutory Basis

The Exchange believes that the proposed rule change is consistent with section 6(b) of the Act [14] in general, and furthers the objectives of section 6(b)(5) [15] in particular, in that it is designed to prevent fraudulent and manipulative acts and practices.

B. Self-Regulatory Organization's Statement on Burden or Competition

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

The Exchange did not solicit or receive written comments on the proposed rule change.Start Printed Page 65037

III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the Exchange consents, the Commission will:

(A) By order approve such proposed rule change, or

(B) Institute proceedings to determine whether the proposed rule change should be disapproved.

IV. 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. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 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 will also be available for inspection and copying at the principal office of the Exchange. All submissions should refer to File No. SR-Amex-00-23 and should be submitted by November 21, 2000.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 16

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

3.  Letter from Bruce Ferguson, Associate General Counsel, Legal & Regulatory policy, Amex, to Jack Drogin, Assistant Director, Division of Market Regulation, Commission, September 25, 2000 (“Amendment No. 1”). Amendment No. 1 made a revision to the text of Amex Rule 417(c) to remove a specific reference to the Code of Conduct of the National Association of Securities Dealers, Inc. (“NASD”).

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4.  See Letter, from James F. Duffy, Executive Vice President and General Counsel, Legal and Regulatory Policy, Amex, to Lori Richards, Director, Office of Compliance Inspections and Examinations (“OCIE”), Commission, February 5, 1999.

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5.  The NASD has filed a proposed rule change to adopt a new rule very similar to new Amex Rule 471 (SR-NASD-00-50).

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6.  NASD Code of Conduct, Section IX, Paragraph C.3.

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7.  See Letter from Lori Richards, Director, OCIE, Commission, to Richard Syron, Chairman and Chief Executive Officer, Amex, November 6, 1998.

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9.  NASD Code of Conduct, Section VIII, Paragraph C.

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10.  NASD Code of Conduct, Section IX, Paragraph B.1.

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11.  NASD Code of Conduct, Section IX, Paragraph C.

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12.  NASD Code of Conduct, Section IX, Paragraph B.1.

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13.  NASD Code of Conduction, Section IX, Interpretation 3.

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[FR Doc. 00-27860 Filed 10-30-00; 8:45 am]

BILLING CODE 8010-01-M