6664 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Notices

11The Exchange notes that this proposed change

is consistent with the rules relating to conflicts of

interest that apply to Nasdaq issuers and NYSE

issuers. See NASD Rules 4310(c)(25)(G) and 4460(h)

and NYSE Listed Company Manual Section 307.00.

12See Exchange Act Release No. 36079 (Aug. 9,

1995), 60 FR 42926 (Aug. 17, 1995) (SE–Amex–95–

23). Companies that were listed at the time the

Emerging Company Marketplace was discontinued

were permitted to continue their listing, subject to

all the rules applicable to issuers on that Emerging

Company Marketplace.

13 15 U.S.C. 78f(b)(5). 14 17 CFR 200.30–3(a)(12).

to delete existing Sections 820 through 830,

inclusive, and Section 841 of the Listing

Standards. Likewise, the Exchange rules

governing the replacement of lost certificates

in Section 840 are no longer necessary in

light of current practices followed by issuers

and transfer agents.

Treasury Shares

Existing Exchange rules require an issuer

to report changes in the number of treasury

shares. Given the changes proposed to the fee

calculation for issuers, resulting in the

exclusion of treasury shares from the fee

base, the Exchange no longer needs this

information. Accordingly, the Exchange

proposes to eliminate Section 901 of the

Listing Standards. Furthermore, Section 903,

on repurchases of listed company securities,

in unnecessary because it does not impose

any Exchange requirements, but merely refers

issuers to federal securities laws. Finally, the

Exchange notes that Section 902 allows an

issuer to redeem securities only in a pro rata

fashion or by lot. The Exchange notes that

issuers are governed by state law

requirements in the redemption of securities

and that as a practical matter, one of these

methods is invariably applied. Therefore, the

Exchange believes that Section 902 is

unnecessary and proposes its deletion and

conforming amendments to Sections 103(d),

104, and 105(b).

Other Changes to the Exchange’s Listing

Requirements

The Exchange proposes certain changes to

the listing requirements for issuers listed on

the Amex. The Exchange proposes to change

the definition of ‘‘public distribution’’ and

‘‘public shareholders’’ as defined in Section

102. Currently, in determining the number of

shares in the public, Exchange rules exclude

concentrated holdings of 5% or greater. The

comparable rules on Nasdaq, as well as the

NYSE, only exclude holdings of 10% or

greater. The Exchange believes that it is

appropriate to exclude holdings of between

5% and 10% from the definition of public

distribution and accordingly, proposes to

modify Section 102.

Next, the Exchange proposes to modify

Section 120, relating to conflicts of interest.

The existing Exchange rule states that the

Exchange will consider conflicts situations in

connection with the original listing of an

issuer. The Exchange believes that a broader,

ongoing review of related party transactions

is appropriate and that the issuer’s Audit

Committee (or a comparable body) is an

appropriate body for conducting such a

review. Furthermore, the Exchange notes that

under the proposed change, as in all cases,

it may review a transaction using the

Exchange’s general discretionary authority if

a transaction involved a conflict that raised

public interest concerns. Accordingly, the

Exchange proposes to adopt this revised

listing requirement to better protect

investors.11

The Exchange also proposes to amend its

rules relating to shareholder approval

contained in Section 713 to clarify that

shareholder approval is required prior to

issuance of a security that has the potential

to result in the issuance of 20% of the pretransaction common shares outstanding for

less than the greater of book or market value

of the stock. While the present language of

the rule does not include the word potential,

it is fairly implied and Exchange staff has

consistently applied the rule to require

approval in cases where an issuance may

potentially exceed the state threshold.

Accordingly, the Exchange proposes to

modify the existing rule to clarify that an

issuance is not permissible without

shareholder approval when there is the

potential to issue more than 20% of the pretransaction common shares outstanding for

less than the greater of book or market value

of the stock.

Emerging Company Marketplace

In May 1995, the Exchange determined to

discontinue the listing of new companies on

the Emerging Company Marketplace and

subsequently received Commission

approval.12 Accordingly, the Exchange

proposes to delete from the Supplement the

criteria for new listing on the Emerging

Company Marketplace given that no new

issues are permitted to be listed on that

market. Furthermore, the Exchange proposes

to delete from the Supplement the continued

listing criteria with respect to all issues other

than common stock because no existing

issuers rely on these provisions and no new

issuers can be listed that would rely on these

provisions. This conforming change is

consistent with the SEC’s order approving

the elimination of the Energing Company

Market.

2. Statutory Basis

The Exchange believes that the proposed

rule change is consistent with Section 6(b)(5)

of the Act,13 which requires, among other

things, the Exchange’s rules to be designed to

prevent fraudulent and manipulative acts

and practices and, in general, to protect

investors and the public interest.

B. Self-Regulatory Organization’s Statement

on Burden on Competition

The Exchange does not believe that the

proposed rule change will impose any

burden on competition that is not necessary

or appropriate in furtherance of the Act.

C. Self-Regulatory Organization’s 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.

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 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 in the Commission’s Public

Reference Room. Copies of such filing will

also be available for inspection and copying

at the principal office of the Amex. All

submissions should refer to the File No. SR–

Amex–99–39 and should be submitted by

March 2, 2000.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.14

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–3034 Filed 2–9–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

(Release No. 34–42383; File No. SR–Amex–

99–35)

Self-Regulatory Organizations;

American Stock Exchange LLC; Order

Approving Proposed Rule Change To

Rescind Exchange Rule 106,

‘‘Substitute Principals’’

February 3, 2000.

I. Introduction

On September 1, 1999, the American

Stock Exchange LLC (‘‘Amex’’ or

‘‘Exchange’’) submitted to the Securities

and Exchange Commission (‘‘SEC’’ or

‘Commission’’) pursuant to Section

Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Notices 6665

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

2 17 CFR 240.19b–4.

3Securities Exchange Act Release No. 42010 (Oct.

14, 1999), 64 FR 57167.

4Section 7 of the Article XXIV of the 1921

Constitution of the New York Curb Market stated:

‘‘No party to a contract shall be compelled to accept

a substitute principal, unless the name proposed to

be substituted shall be declared in marking the offer

and as a party thereof.’’

5 15 U.S.C. 78f(b)(5).

6 In approving this proposed rule change, the

Commission has considered the proposal’s impact

on efficiency, competition, and capital formation.

15 U.S.C. 78c(f).

7See American Stock Exchange Constitution,

Article X, Section 2.

8 15 U.S.C. 78s(b)(2).

9 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3Letter from Timothy H. Thompson, Director,

Regulatory Affairs, Legal Department, CBOE, to

Richard Strasser, Assistant Director, Division of

Market Regulation (‘‘Division’’), SEC, dated June 23,

1998 (‘‘Amendment No. 1’’).

19(b)(1) of the Securities Exchange Act

of 1934 (‘Act’’),1 and Rule 19b–4

thereunder,2 a proposed rule change to

rescind Exchange Rule 106. The

proposed rule change was published for

comment in the Federal Register on

October 22, 1999.3 The Commission did

not receive any comment letters with

respect to the proposal. This order

approves the Exchange’s proposal.

II. Description of the Proposal

The Amex proposes to delete

Exchange Rule 106, ‘‘Substitute

Principals.’’ Exchange rule 106

currently provides that: ‘‘No party to a

contract shall be compelled to accept a

substitute principal unless the name

proposed to be substituted was declared

in, and as part of, the bid or offer giving

rise to the contract.’’ Rule 106 dates

back to the 1921 Constitution of the

New York Curb market,4 a predecessor

of the Exchange. The Rule’s original

purpose appears to be related to the

clearance and settlement of trades,

specifically, the terms of contracts and

the creditworthiness of counterparties.

The proposed rule change was filed in

response to a recent dispute where an

Exchange member invoked Rule 106 in

an attempt to renege on a contract.

Apparently, the Exchange member’s

counterparty provided an incorrect giveup at the time of the trade, and later

sought to correct the error by

substituting the correct clearing

member.

III. Discussion

For the reasons discussed below, the

Commission finds that the proposed

rule change is consistent with the Act

and the rules and regulations under the

Act applicable to national securities

exchange. In particular, the Commission

believes the proposed rule change is

consistent with the Section 6(b)(5) 5

requirements that the rules of an

exchange be designed to promote just

and equitable principles of trade,

prevent fraudulent and manipulative

acts and practices, and protect investors

and the public interest.6 The

Commission also finds that the proposal

may serve to remove impediments to

and perfect the mechanism of a free and

open market by rescinding Rule 106,

which provides a potential basis for

parties to Exchange contracts to break

trades without appropriate justification.

Since Exchange Rule 106 was adopted

in 1921 the process of clearance and

settlement has evolved. Broker-dealers

no longer compare individual trades as

was the case at the time of the inception

of Exchange Rule 106. Today, trades

executed on the Amex are required to be

cleared and settled through a registered

clearing agency.7 Typically, clearing

agencies guarantee the completion of a

transaction by becoming the

counterparty to each side of the

transaction. This has substantially

reduced the risk of trade default and

made concerns about counterparty

identity largely irrelevant.

Clearing agencies perform

comparison, clearance, and settlement

of trades. Clearance activities confirm

the identity and quantity of the security

being bought or sold, the transaction

price and date, and the identity of the

buyer and the seller, Settlement is the

fulfillment, by the parties to the

transaction, of the obligations of the

trade.

The largest clearing agency is the

National Securities Clearing Corporation

(‘‘NSCC’’), which acts as the contraside

to every trade it processes. The NSCC

guarantees the trades of its member

participants and incurs the risk of

default from the time of the guarantee

until the settlement of obligations and

payments. Thus, it is the NSCC and not

the Exchange member—as was the case

in 1921—who assumes counterparty

risk. When the NSCC guarantees a trade,

it becomes the buyer to every seller and

the seller to every buyer. As a result, the

clearing corporation incurs the risk that

a counterparty to a transaction might

default on its obligations.

Rule 106 was adopted in another era,

prior to the utilization of modern

clearing practices. The total assumption

of default risk by clearing agencies has

obviated the need for Exchange

members to maintain strict control over

the identify of trading counterparties.

Because clearing corporations like

NSCC eliminate the risk of trade default,

trades are guaranteed irrespective of the

identity of a counterparty. Thus, in light

of clearance corporations and modern

clearance and settlement practices, Rule

106 no longer serves the purpose of

protecting a counterparty from the

default risks associated with a trade.

Furthermore, Rule 106 may have the

disruptive effect of permitting parties to

Exchange contracts to break trades

without appropriate justification. This

kind of action is contrary to the goals of

preserving the public’s interest and

protecting investors. The Commission

therefore believes it is appropriate for

the Exchange to rescind Rule 106.

IV. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,8 that the

proposed rule change (SR–Amex–99–

35) is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.9

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–3036 Filed 2–9–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42379; File No. SR–CBOE–

98–27]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change and

Notice of Filing and Order Granting

Accelerated Approval of Amendment

No. 6 to the Proposed Rule Change by

the Chicago Board Options Exchange,

Inc. Relating to Enhancements to the

Exchange’s Processing of Live Ammo

Orders

February 2, 2000.

I. Introduction

On June 16, 1998, the Chicago Board

Options Exchange, Inc. (‘‘CBOE’’ or

‘‘Exchange’’) submitted to the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘Commission’’), pursuant to Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Act’’) 1 and Rule 19b–4

thereunder,2 a proposed rule change

amending its rule governing the

execution of orders on the ‘‘live ammo’’

screen. On June 23, 1998, the CBOE

submitted Amendment No. 1 to the

proposed rule change to the

Commission.3 On July 15, 1998, the

CBOE submitted Amendment No. 2 to

the proposed rule change to the