Federal Register / Vol. 65, No. 88 / Friday, May 5, 2000 / Notices 26251

1The term ‘‘Contract Value’’ refers to the total

value of the Contract which includes amounts

allocated to the Subaccounts and the Fixed Account

as well as any amount set aside in the loan account

to secure loans.

Filing Date: The application was filed

on March 2, 2000.

Applicant’s Address: 111 Center

Street, Little Rock, Arkansas 72201.

For the Commission, by the Division of

Investment Management, pursuant to

delegated authority.

Jonathan G. Katz,

Secretary.

[FR Doc. 00–11225 Filed 5–4–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

Security Benefit Life Insurance

Company, et al.

April 28, 2000.

AGENCY: Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’).

ACTION: Notice of Application for an

order under section 6(c) of the

Investment Company Act of 1940

(‘‘1940 Act’’), as amended granting

exemptions from the provisions of

Sections 2(a)(32), 22(c), and 27(i)(2)(A)

of the 1940 Act and Rule 22c–1

thereunder to permit the recapture of

credit enhancements applied to the

contract value of certain flexible

premium deferred variable annuity

contracts.

Summary of Application: Applicants

seek an order under Section 6(c) of the

1940 Act, to permit, under specified

circumstances, the recapture of certain

credit enhancements (‘‘Credit

Enhancements’’) applied to: (i) The

Variflex Extra Credit contract (‘‘Variflex

Credit’’ or ‘‘Contract’’), a flexible

premium deferred variable annuity

contract that Security Benefit issues

through the Variflex Account: and (ii)

other variable contracts and future

variable contracts offered by the SBL

Insurers and funded by the Separate

Accounts or a Future Account (‘‘Future

Variable Contracts’’), provided that the

Future Variable Contract is substantially

similar in all material respects to the

Contract.

Applicants: Security Benefit Life

Insurance Company (‘‘Security

Benefit’’); First Security Benefit Life

Insurance and Annuity Company of

New York (‘‘First Security Benefit’’);

SBL Variable Annuity Account VIII

(Variflex Extra Credit) (‘‘Variflex

Account,’’ and, together with any other

separate account of Security Benefit or

First Security Benefit supporting

variable annuity contracts, collectively

referred to as the ‘‘Separate Accounts’’);

any other separate account that will be

established in the future by Security

Benefit or First Security Benefit to

support variable annuity contracts

(‘‘Future Accounts’’) issued by Security

Benefit or First Security Benefit

(collectively, the ‘‘SBL Insurers’’); and

Security Distributors, Inc. (‘‘SDI’’),

(collectively referred to herein as

‘‘Applicants’’).

Filing Dates: The Application was

filed with the Commission on January

27, 2000, and amended and restated on

March 22, 2000 and April 27, 2000.

Hearing or Notification of Hearing: An

order granting the Application will be

issued unless the Commission orders a

hearing. Interested persons may request

a hearing by writing to the

Commission’s Secretary and serving

Applicants with a copy of the request

personally or by mail. hearing requests

should be received by the Commission

by 5:30 p.m., on May 23, 2000, and

should be accompanied by proof of

service on Applicants, in the form of an

affidavit, or, for lawyers, a certificate of

service. Hearing requests should state

the nature of the writer’s interest, the

reason for the request, and the issues

contested. Persons who wish to be

notified of a hearing may request

notification by writing to the

Commission’s Secretary.

ADDRESSES: Secretary, Securities and

Exchange Commission, 450 Fifth Street

NW., Washington, DC 20549–0609.

Applicants, c/o Amy J. Lee, Esq.,

Associate General Counsel, Security

Benefit Life Insurance Company, 700

Harrison Street, Topeka, KS 66636–

0001.

FOR FURTHER INFORMATION CONTACT:

Ronald A. Holinsky, Attorney, or Susan

M. Olson, Branch Chief, Office of

Insurance Products, Division of

Investment Management, at (202) 942–

0670.

SUPPLEMENTARY INFORMATION: The

following is a summary of the

application. The complete application

may be obtained for a fee from the

Public Reference Branch of the SEC, 450

Fifth Street NW Washington, DC 20549–

0102 (tel. (202) 942–8090).

Applicant’s Representations

1. Security Benefit is a stock life

insurance company organized under the

laws of the state of Kansas. Security

Benefit offers life insurance policies and

annuity contracts, as well as financial

and retirement services. It is authorized

to conduct life insurance and annuity

business in the District of Columbia and

all states except New York. Together

with its subsidiaries, Security Benefit

has total funds under management of

approximately $8 billion.

2. First Security Benefit is a stock life

insurance company organized under the

laws of the State of New York. First

Security Benefit offers variable annuity

contracts in New York and is admitted

to do business in that state. First Benefit

is a wholly-owned subsidiary of

Security Benefit Group, Inc. (‘‘Security

Benefit Group’’), a financial services

holding company which is whollyowned by Security Benefit.

3. Variflex Account was established

on September 12, 1994 as a segregated

asset account of Security Benefit and is

registered with the Commission as a

unit investment trust (File No. 811–

8836). Security Benefit is the legal

owner of the assets in Variflex Account.

Variflex Account currently has 17

subaccounts. Each subaccount invests

exclusively in shares of a specific series

of the SBL Fund, an open-end

management investment company for

which Security Management Company,

LLC, a wholly-owned subsidiary of

Security Benefit, serves as investment

adviser. Variflex Account funds the

variable benefits available under

Variflex Credit. Security Benefit has

filed a registration statement on Form

N–4 under the 1940 Act and the

Securities Act of 1933, as amended (the

‘‘1993 Act’’) to register interests in the

Variflex Account under Variflex Credit

(File No. 333–93947).

4. SDI, an affiliate of Security Benefit,

serves as the principal underwriter for

the Variable Contracts issued by

Security Benefit, including Variflex

Credit. SDI is registered with the

Commission as a broker-dealer under

the Securities Exchange Act of 1934, as

amended, and is a member of the NASD.

SDI is a wholly-owned subsidiary of

Security Benefit Group.

5. Variflex Credit is a flexible

premium deferred variable annuity

contract. Variflex Credit may be

purchased as a non-tax qualified

retirement plan for an individual, or on

an individual basis, in connection with

a retirement plan qualified under

sections 403(b), 408, or 408A, of the

Internal Revenue Code of 1986, as

amended.

6. Variflex Credit offers a ‘‘Credit

Enhancement’’ feature under which

Security Benefit may add an amount to

each contractholder’s ‘‘Contract Value’’ 1

at the time of any purchase payment.

Credit Enhancements are allocated

among the subaccounts in the same

proportion that the applicable purchase

payment is allocated. The amount of

any Credit Enhancement is based on the

total purchase payments made into

26252 Federal Register / Vol. 65, No. 88 / Friday, May 5, 2000 / Notices

2Under the laws of a number of states, if FreeLook rights are exercised, the sponsoring insurance

company is required to refund purchase payments.

Variflex Credit less total withdrawals,

including any withdrawal changes, from

the Contract as of the date the purchase

payment is applied. The percentage

amounts are set forth in the table below:

Total purchase payments, less

withdrawals and withdrawal

charges

Credit enhancement (in

percent)

Less than $10,000 ........................ 0

At least $10,000 but no more than

$1,000,000 ................................ 4

$1,000,000 or more ...................... 5

7. The Variflex Credit provides for

various withdrawal options, annuity

benefits and payout annuity options, as

well as transfer privileges among

investment options.

8. The Variable Contracts issued by

the SBL Insurers permit contractholders

to cancel their Variable Contracts and to

receive a refund during the Free-Look

Period.

9. In most instances, a contractholder

who returns the Variable Contract

during the Free-Look Period will receive

a refund of Contract Value plus any

charges deducted from such Contract

Value, minus the value of any Credit

Enhancement.2 Contractholders also

receive a refund of any amounts that

may have been deducted for state

premium taxes and/or other taxes. The

value of the Credit Enhancement, not

the amount originally credited, id

deducted if the Variable Contract is

canceled using the Free-Look Period.

10. Variflex Credit provides for a

death benefit upon the death of the

contractholder prior to the annuity start

date. The death benefit proceeds will be

the death benefit reduced by any unpaid

loan balance including loan interest

(‘‘Contract Debt’’), any pro rata account

charge and any uncollected premium

tax. If a contractholder dies before the

annuity start date, the amount of the

death benefit generally will be the

greater of: (i) The sum of all purchase

payments (not including Credit

Enhancements), less any reductions

caused by previous withdrawals; or (ii)

the Contract Value on the date due proof

of death and instructions regarding

payment are received by Security

Benefit less any Credit Enhancements

applied during the 12 months prior to

the date of the contractholder’s death.

11. Variflex Credit provides for

withdrawal charge waivers upon a full

or partial withdrawal in the event of

confinement to a hospital or nursing

facility or diagnosis of a terminal illness

(‘‘Eligible Withdrawal’’). In the event of

an Eligible Withdrawal, the

contractholder would forfeit all or part

of any Credit Enhancement applied

during the 12 months preceding the

withdrawal. The amount of Credit

Enhancements to be forfeited is a

percentage determined by dividing the

amount of the Eligible Withdrawal by

the total purchase payments made in the

12 months preceding that Eligible

Withdrawal. For example, a withdrawal

of $50,000 relative to $100,000 in

purchase payments in the 12 months

preceding the withdrawal would result

in forfeiture of 50% of the Credit

Enhancements applied during that 12

month period.

12. Applicants seek relief to: (1)

Deduct from the death benefit the

amount of any Credit Enhancement

applied 12 months prior to the date of

the contractholder’s death; and (ii)

deduct from an Eligible Withdrawal the

amount of any Credit Enhancement

applied 12 months before an Eligible

Withdrawal. The requested relief would

also apply to Future Variable Contracts

that are substantially similar in all

material respects to the Contracts.

Applicant’s Legal Analysis

1. Section 6(c) of the 1940 Act

authorizes the Commission to exempt

any person, security or transaction, or

any class or classes of persons,

securities or transactions from the

provisions of the 1940 Act and the rules

promulgated thereunder if and to the

extent that such exemption is necessary

or appropriate in the public interest and

consistent with the provisions of

investors and the purposes fairly

intended by the policy and provisions of

the 1940 Act.

2. Applicants seek exemptive relief

pursuant to section 6(c) from sections

2(a)(32), 22(c), and 27(i)(2)(A) of the

1940 Act and Rule 22c–1 thereunder, to

the extent necessary to permit the SBL

Insurers to recapture: (1) The amount of

any Credit Enhancement applied 12

months prior to the date of the

contractholder’s death from the amount

of any death benefit; and (ii) the amount

of any Credit Enhancement applied 12

months before an Eligible Withdrawal

from the amount of that Eligible

Withdrawal.

3. Subsection (i) of Section 27 of the

1940 Act provides that section 27 does

not apply to any registered separate

account funding variable insurance

contracts, or to the sponsoring insurance

company and principal underwriter of

such separate account, except as

provided in paragraph (2) of that

subsection. Paragraph (2) provides that

it shall be unlawful for such separate

account or sponsoring insurance

company to sell a contract funded by

the registered separate account unless

such contract is redeemable security.

4. Section 2(a)(32) of the 1940 Act

defines ‘‘redeemable security’’ as any

security, other than short-term paper,

under the terms of which the holder,

upon presentation to the issuer, is

entitled to receive approximately his or

her proportionate shares of the issuer’s

current net assets, or the cash equivalent

thereof.

5. Applicants state that a beneficiary’s

or contractholder’s interest in the

amount of a Credit Enhancement

allocated to Contract Value is not vested

until 12 months after the Credit

Enhancement has been applied to the

Variable Contract. Unless and until the

beneficiary’s and contractholder’s

interests in the amount of the Credit

Enhancement have vested (i.e., 12

months after it has been applied to the

Variable Contract), Security Benefit

retains a right and interest in the Credit

Enhancement. Thus, when Security

Benefit recaptures any Credit

Enhancement, it is simply retrieving its

own assets, and because a

contractholder’s interest in the Credit

Enhancement is not vested, the

contractholder is not deprived of a

proportionate share of the net assets of

the Separate Account.

6. Applicants state that because the

amount paid as a death benefit does not

include the amount of any Credit

Enhancement applied to the Variable

Contract 12 months prior to the date of

death, the beneficiary arguably is not

receiving the contractholder’s

proportionate share of the Separate

Account’s current net assets. Similarly,

because the full or partial withdrawal

amount of an Eligible Withdrawal

results in the forfeiture of all or a

portion of any Credit Enhancements

applied during the 12 months preceding

the Eligible Withdrawal, the

contractholder arguably is not receiving

his or her proportionate share of the

Separate Account’s current net assets.

Applicants submit, however, that the

recapture of the amount of any Credit

Enhancement applied to the Variable

Contract in the 12 months prior to the

date of the contractholder’s death or

prior to an Eligible Withdrawal, as

described herein, would not deprive a

contractholder of his or her

proportionate share of the issuer’s

current net assets. The prospectus

clearly discloses that, for purposes of

the death benefit, the beneficiary’s

interest in a Credit Enhancement will

vest only if it has been added to

Contract Value more than 12 months

Federal Register / Vol. 65, No. 88 / Friday, May 5, 2000 / Notices 26253

prior to the date of the contractholder’s

death.

As described above, the Contract

provides that if a contractholder dies

before the annuity start date, the amount

of the death benefit generally will be the

greater of: (i) The sum of all purchase

payments (not including Credit

Enhancements), less any reductions

caused by previous withdrawals; or (ii)

the Contract Value on the date due proof

of death and instructions regarding

payment are received by Security

Benefit less any Credit Enhancements

applied during the 12 months prior to

the date of death.

Similarly, the Contract provides in

relevant part that in the event of an

Eligible Withdrawal, a contractholder

would forfeit all or part of any Credit

Enhancement applied 12 months before

the Eligible Withdrawal, depending

upon the amount of the Eligible

Withdrawal relative to the total

purchase payments made in the 12

months preceding that Eligible

Withdrawal. Furthermore, since a

contractholder’s interest in the Credit

Enhancement allocated to Contract

Value is only vested 12 months after the

Credit Enhancement has been applied to

the Variable Contract, Security Benefit

asserts that it is simply retrieving its

own assets when recapturing any Credit

Enhancement when it pays a death

benefit or in connection with an Eligible

Withdrawal.

7. Applicants content that annuity

contracts, unlike life insurance

contracts, are not intended to insure

against the risk of premature death.

Instead, annuity contracts are intended

to provide an income stream to the

contractholder or a named beneficiary,

for the life of the annuitant or for a

period of years. The risk to an insurer

under an annuity contract typically is

that the annuitant lives longer than the

insurer’s prediction.

8. Applicants assert that if Credit

Enhancements are applied to the death

benefit under an annuity contract before

a minimum period of time has elapsed

from the time that a Credit

Enhancement has been credited, the

insurer runs the risk of adverse

selection. Similarly, the insurer runs the

risk of adverse selection if Credit

Enhancements are applied to

withdrawals not subject to a withdrawal

charge due to the confinement of the

insured to a hospital or nursing facility

or diagnosis of a terminal illness, unless

a minimum period of time has elapsed

from the time that a Credit

Enhancement has been credited. With

respect to the death benefit, the insurer

runs the risk that, for example, a

terminally ill contractholder will make

a large purchase payment in order to

leverage the amount of money he or she

is able to transfer to the beneficiary.

With respect to the withdrawal charge

waiver due to the confinement of the

contractholder to a hospital or nursing

facility or diagnosis of a terminal

illness, the insurer runs the risk that, for

example, a contractholder will make a

large purchase payment in order to

leverage the amount of money he or she

is able to apply to medical care

payments. SBL believes that requiring a

year to elapse before a Credit

Enhancement may be included in a

death benefit or in an Eligible

Withdrawal is an appropriate means to

ensure that the Variable Contracts are

not used as a risk-free vehicle to

leverage the amount of money someone

may wish to transfer to a beneficiary or

to a medical care facility.

9. Section 22(c) of the 1940 Act

authorizes the Commission to make

rules and regulations applicable to

registered investment companies and to

principal underwriters of, and dealers

in, the redeemable securities of any

registered investment company to

accomplish the same purposes as

contemplated by section 22(a). Rule

22c–1 thereunder prohibits a registered

investment company issuing a

redeemable security, a person

designated in such issuer’s prospectus

as authorized to consummate

transactions in such security, and a

principal underwriter of, or dealer in,

such security, from selling, redeeming,

or repurchasing any such security

except as a price based on the current

net asset value of such security which

is next computed after receipt of a

tender of such security for redemption

or of an order to purchase or sell such

security.

10. Applicants state that Security

Benefit’s recapture of the Credit

Enhancement in instances in which: (i)

Fewer than 12 months have elapsed

between the time that the Credit

Enhancement has been applied to the

Contract, and the death of the

Contractholder; or (ii) fewer than 12

months have elapsed between the time

that the Credit Enhancement ;has been

applied to the Contract, and an Eligible

Withdrawal, might arguably be viewed

as resulting in the redemption of

redeemable securities for a price other

than one based on the current net asset

value of the applicable subaccount of a

Separate Account. In other words,

because any such Credit Enhancement

paid by Security Benefit is immediately

added, on a conditional basis, to the

Contract Value of certain

contractholders, and further because

these amounts are allocated to certain

subaccounts for the benefit of the

contractholder, the net asset value of

each subaccount arguably is affected by

these credits.

11. Applicants contend, however, that

the recapture of the Credit Enhancement

under the circumstances summarized

herein should not be deemed to be a

violation of section 22(c) and Rule 22c–

1. To the extent that the recapture

practices summarized herein are

considered to be technical violations of

these provisions. Applicants

respectfully request relief from section

22(c) and Rule 22c–1 in order to

recapture Credit Enhancements as

discussed above for Contracts and

Future Variable Contracts provided

within 12 months of: (i) The

contractholder’s death before the

annuity start date; or (ii) an Eligible

Withdrawal.

12. Applicants content that the

recapture of the Credit Enhancement

does not involve either of the practices

that Rule 22c–1 was intended to

eliminate or reduce as far as reasonably

practicable, namely: (i) The dilution of

the value of outstanding redeemable

securities of registered investment

companies through their sale at a price

below net asset value or their

redemption or repurchase at a price

above it; and (ii) other unfair results,

including speculative trading practices.

13. Applicants argue that the

proposed recapture of the Credit

Enhancement poses no threat of

dilution. To effect a recapture of a

Credit Enhancement, Security Benefit

redeems (and other SBL Insurers will

redeem) interests in a contractholder’s

subaccounts at a price determined on

the basis of the current accumulation

unit value of each of the subaccounts of

the Separate Account in which the

contractholder’s Contract Value is

allocated. The amount recaptured in the

event of a death benefit, or an Eligible

Withdrawal, will be equal to the amount

of the Credit Enhancement paid out of

the assets of Security Benefit. That

amount will be redeemed at the current

accumulation unit value of the

applicable subaccount(s) as of the date

of receipt of the death claim, or

withdrawal request, in proper order.

Thus, Applicants assert that no dilution

will occur upon the recapture of a

Credit Enhancement. Applicants further

submit that the second practice that

Rule 22c–1 was designed to address,

namely, speculative trading practices

calculated to take advantage of

backward pricing, will not occur as a

result of the recapture of the Credit

Enhancement. However, to avoid any

uncertainty as to full compliance with

the 1940 Act, Applicants request an

26254 Federal Register / Vol. 65, No. 88 / Friday, May 5, 2000 / Notices

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3 15 U.S.C. 78s(b)(3)(A).

4 17 CFR 240.19b–4(f)(6).

5The Exchange provided written notice to the

Commission on April 20, 2000, that it intended to

file this proposal. See Rule 19b–4(f)(6)(iii). 17 CFR

240.19b–4(f)(6)(iii).

exemption from the provisions of

section 22(c) and Rule 22c–1 to the

extent deemed necessary to permit them

to recapture the Credit Enhancement

that is or will be made available under

the Variable Contracts and Future

Variable Contracts.

Conclusion

Applicants submit that their request

for an order for the exemptive relief

described above is appropriate in the

public interest and consistent with the

protection of investors and the purposes

fairly intended by the policy and

provisions of the 1940 Act, and that,

therefore, the Commission should grant

the requested order.

For the Commission, by the Division of

Investment Management, under delegated

authority.

Jonathan G. Katz,

Secretary.

[FR Doc. 00–11224 Filed 5–5–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42732; File No. SR–Amex–

00–24]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

American Stock Exchange LLC

Relating to Rule 2(a) of the Rules of

Procedure Applicable to Exchange

Disciplinary Proceedings

April 28, 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 27,

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. The

Exchange filed the proposal pursuant to

Section 19(b)(3)(A) of the Act,3 and Rule

19b–4(f)(6) thereunder,4 which renders

the proposal effective upon filing with

the Commission.5 The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Exchange proposes to amend

Rule 2(a) of the Rules of Procedure

Applicable to Exchange Disciplinary

Proceedings for purposes of authorizing

the Chief Hearing Officer (or the Deputy

Chief Hearing Officer) at the National

Association of Securities Dealers

Regulation, Inc. (‘‘NASDR’’) Office of

Hearing Officers to appoint NASDR

hearing officers to act as Chairmen of

Amex disciplinary panels. The text of

the proposed rule change is below. New

language is italics.

K. Exchange Disciplinary Proceedings

Rule

Rule 02(a). Selection of Hearing Officers

Whenever the Chairman of the Exchange

shall be advised that a charge or charges have

been served upon a member, member

organization, approved person, or a

registered or non-registered employee or

prospective employee of a member or

member organization, or that a written

stipulation of facts and consent to a specified

penalty has been entered into between any

such person or persons and an officer of the

Exchange, or that a member or member

organization has been suspended or expelled

from any other securities exchange or any

national securities association, or has been

suspended or barred from being associated

with any member of such exchange or

association, or has been suspended or barred

by any governmental securities agency from

dealing in securities or being associated with

any broker or dealer in securities and such

member or member organization has not

consented in writing to similar action by the

Exchange, or that an employee or prospective

employee of a member or member

organization has been suspended or expelled

from any other securities exchange or any

national securities association, or has been

suspended or barred from being associated

with any member of such exchange or

association, or has been suspended or barred

by any governmental securities agency from

dealing in securities or being associated with

any broker or dealer in securities and such

employee or prospective employee has not

consented in writing to similar action by the

Exchange, the Chairman, (or such person(s)

as the Chairman may designate with Board

approval), shall select, from among hearing

officers appointed to serve on Exchange

Disciplinary Panels, one such hearing officer

to act as a chairman of a Disciplinary Panel

which shall conduct a hearing with respect

to such matter and take such action as may

be authorized pursuant to the Constitution

and rules of the Exchange.

* * * * *

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

its proposal and discussed any

comments it received regarding the

proposal. The text of these statements

may be examined at the places specified

in Item IV below. The Amex 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

Under Article V, Section 1(b)(2) of the

Amex Constitution, the Chairman of the

Board, subject to the approval of the

Board, designates Exchange Officials

and other persons to serve on the

Hearing Board. Those who are

designated to serve on the Hearing

Board make up a pool of persons who

can be asked to serve as members of

disciplinary panels in Exchange

disciplinary proceedings. Under Article

V, Section 1(b)(3), the Chairman, again

subject to Board approval, designates

one or more hearing officers, who have

no Exchange duties or functions relating

to the investigation or preparation of

disciplinary matters, to act as Chairmen

of Amex disciplinary panels.

These two pools of people (i.e., the

people who serve as members of

disciplinary panels, and the people who

act as Chairmen of the disciplinary

panels) are approved on an annual basis

at the Board’s organization meeting each

January. Rule 2(a) of the Rules of

Procedure Applicable to Exchange

Disciplinary Proceedings then requires

the Amex Chairman, each time an Amex

disciplinary proceeding is initiated, to

select the specific hearing officer that

will chair that particular Amex

disciplinary panel.

Last year, the Amex entered into a

formal agreement with the National

Association of Securities Dealers

(‘‘NASD’’) under which the NASDR’s

Office of Hearing Officers provides

hearing officers to chair all Amex

disciplinary panels. The hearing officers

are responsible for fulfilling the panel

chair’s duties as set forth in the Amex

Constitution and Rules. The NASD has

followed the above described procedure

under Rule 2(a) with respect to the

selection of a hearing officer to chair

each Amex disciplinary panel, obtaining

the approval of the Amex Chairman in

each instance.

Amex proposes to amend Rule 2(a) to

expedite the selection process by

authorizing the Amex Chairman, or

such person(s) as the Chairman may

designate with Board approval, to