Self-Regulatory Organizations; Filing of Proposed Rule Change by the American Stock Exchange, Inc. Relating to the Limitation of Exchange Liability for Negligent Conduct

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-33817; File No. SR-Amex-93-41]

Self-Regulatory Organizations; Filing of Proposed Rule Change by

the American Stock Exchange, Inc. Relating to the Limitation of

Exchange Liability for Negligent Conduct

March 25, 1994.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on December

23, 1993, the American Stock Exchange, Inc. (``Amex'' or ``Exchange'')

filed with the Securities and Exchange Commission (``Commission'') the

proposed rule change as described in Items I, II, and III below, which

Items have been prepared by the Amex. 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 rules 902C and 1003 to limit the

Exchange's liability in connection with its administration of

proprietary indexes and products. The text of the proposed rule change

is available at the Office of the Secretary, the Amex, and at the

Commission.

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 Amex 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 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 the

Statutory Basis for, the Proposed Rule Change

In the early 1980s the Exchange began trading options on a number

of proprietary indexes that it developed--two broad-based indexes (the

Major Market Index and the Institutional Index) and two narrow-based

indexes (the Computer Technology and Oil Indexes). In the last several

years, the Exchange has developed additional sector indexes (e.g., the

Pharmaceutical and Biotechnology Indexes) and acts as the calculation

agent for certain third party indexes (the Morgan Stanley Consumer and

Cyclical Indexes). The Exchange has also developed broad market indexes

on two foreign markets (the Japan Index and the Amex Hong Kong 30

Index). Other indexes have recently been developed and are awaiting

approval by the SEC.\1\

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\1\See e.g., Securities Exchange Act Release No. 33312 (December

9, 1993), 58 FR 65740 (December 16, 1993) (proposal to list and

trade options on the Natural Gas Index); Securities Exchange Act

Release No. 33305 (December 9, 1993), 58 FR 65605 (December 15,

1993) (proposal to list and trade options on the Securities Broker/

Dealer Index).

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The Exchange represents that there is a great deal of work involved

in the daily calculation and dissemination of these indexes and while

much of such work is automated, a substantial amount of manual input is

still required. Thus, the potential for human error exists, which

exposes the Exchange to a risk of liability. Potential human errors

include inputting a symbol or index value incorrectly, missing a

corporate action, or inaccurately reporting the number of outstanding

shares. With the introduction of new indexes, particularly those

involving foreign stocks where current information may be unavailable

on a timely basis, the chance for human error increases, thus exposing

the Exchange to an even greater risk of liability.

Currently, rule 902C disclaims Exchange liability for damages

caused by errors, omissions, or delays in the calculation or

dissemination of any index value resulting from any conduct beyond the

reasonable control of the Exchange. This includes an act of God, a

power or systems failure, or any error, omission, or delay in the

reported price of the underlying security. Rule 1003 disclaims Exchange

liability in a similar manner with respect to the creation, redemption,

and trading of Portfolio Depositary Receipts (``PDRs''), which covers

the SPDRs products introduced on the S&P 500 Index.\2\ The Exchange

believes, however, that these disclaimer provisions are arguably

ambiguous with respect to whether the Exchange remains potentially

liable for damages caused by any human error or omission by an Exchange

employee in connection with the performance of the Exchange's index

responsibilities.

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\2\See Securities Exchange Act Release No. 31591 (December 11,

1992), 57 FR 60253 (December 18, 1992) (approving listing and

trading standards for PDRs).

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In view of the increased potential for Exchange liability as a

result of the Exchange's expanding role in the administration of new

proprietary indexes and product, the Amex wishes to make clear that the

Exchange disclaims liability for negligent conduct, in addition to

conduct beyond the Exchange's reasonable control which is presently

covered by the Amex rules. The Exchange represents that the Amex, as

well as the other major self-regulatory organizations, currently

disclaim liability for negligent conduct associated with the

dissemination of their market data to vendors, as well as generally in

connection with the use of their facilities, except as they otherwise

provide. The Exchange believes that it is inappropriate for exchanges

to bear the risk and liability associated with the use of such

information and facilities. In the area of index administration, the

Exchange represents that Standard & Poor's and all the other major

index providers likewise routinely disclaim liability for any negligent

conduct.\3\ Additionally, the New York Stock Exchange has a rule which

is substantively similar to the Exchange's proposed rule change.\4\

Finally, the Exchange acknowledges that rules 902C and 1003 cannot be

relied upon by the Exchange to limit its liability to non-members or

for any intentional or negligent violation of federal securities

laws.\5\ The Exchange is therefore proposing that Amex Rules 902C and

1003 be amended accordingly to clearly disclaim Exchange liability for

negligent conduct.

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\3\See, e.g., Chicago Board Options Exchange, Inc. Rule 24.14.

\4\See, e.g., New York Stock Exchange, Inc. Rule 813.

\5\See Letter from Bruce Ferguson, Associate General Counsel,

Legal & Regulatory Policy, Amex, to Brad Ritter, Attorney, Office of

Derivatives and Equity Oversight, Division of Market Regulation,

Commission, dated March 21, 1994.

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The Exchange believes that the proposed rule change is consistent

with section 6(b) of the Act, in general, and furthers the objectives

of section 6(b)(5) in particular, in that it is intended to facilitate

transactions in securities.

(B) Self-Regulatory Organization's Statement on Burden on Competition

The Amex does not believe that the proposed rule change will impose

any inappropriate burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the

Proposed Rule Change Received From Members, Participants or Others

No written comments were solicited or received with respect to 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 self-regulatory organization 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. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.

Copies of the submission, all subsequent amendments, all written

statements with respect to the proposed rule change that are filed with

the Commission, and all written communications relating to the proposed

rule change between the Commission and any person, other than those

that may be withheld from the public in accordance with the provisions

of 5 U.S.C. 552, will be available for inspection and copying in the

Commission's Public Reference Section, 450 Fifth Street, NW.,

Washington, DC. Copies of such filing will also be available for

inspection and copying at the principal office of the Amex. All

submissions should refer to File No. SR-Amex-93-41 and should be

submitted by April 22, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\6\

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\6\17 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-7763 Filed 3-31-94; 8:45 am]

BILLING CODE 8010-01-M