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

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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Less than one year--$25,000 (20% ``phase-in'')

One year or more but less than two years--$50,000 (40%

``phase-in'')

Two years or more but less than three years--$75,000 (60%

``phase-in'')

Three years or more but less than four years--$100,000

(80% ``phase-in'')

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