# Self-Regulatory Organizations; Filing of Proposed Rule Change by the American Stock Exchange, Inc. Relating to the Limitation of Exchange Liability for Negligent Conduct > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A94-7763 ## Record - **Collection:** Federal Register - **Document type:** Uncategorized Document - **Published:** April 1, 1994 ## Text 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\ --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \2\See Securities Exchange Act Release No. 31591 (December 11, 1992), 57 FR 60253 (December 18, 1992) (approving listing and trading standards for PDRs). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \6\17 CFR 200.30-3(a)(12) (1993). --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 94-7763 Filed 3-31-94; 8:45 am] BILLING CODE 8010-01-M --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A94-7763. Public record. Not legal advice.