[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]



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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.
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    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'').
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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.
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    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.
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    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.''
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    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.
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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.
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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.
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    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.
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    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.
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    <bullet> Less than one year--$25,000 (20% ``phase-in'')
    <bullet> One year or more but less than two years--$50,000 (40% 
``phase-in'')
    <bullet> Two years or more but less than three years--$75,000 (60% 
``phase-in'')
    <bullet> Three years or more but less than four years--$100,000 
(80% ``phase-in'')
    <bullet> 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.
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    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.
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    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.
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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.
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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.
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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.
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    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.
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    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.
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    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.
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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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-12517 Filed 5-22-95; 8:45 am]
BILLING CODE 8010-01-M