

[Federal Register: October 18, 2005 (Volume 70, Number 200)]
[Notices]               
[Page 60584-60586]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18oc05-130]                         


[[Page 60584]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52593; File No. SR-Amex-2005-083]

 
Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing and Order Granting Accelerated Approval to Proposed 
Rule Change To Establish Certain Fees With Respect to Transactions 
Executed Through the Intermarket Trading System

October 12, 2005.

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 17, 2005, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II 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, and is approving the proposal on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to enter into arrangements with other self-
regulatory organizations (``SROs'') to pass certain fees they have 
collected from members for transactions executed on another SRO through 
the Intermarket Trading System (``ITS''). This proposal does not 
require changes to Amex rule text.

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 Exchange 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 III below. The Exchange 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Section 31 of the Act\3\ requires each national securities exchange 
to pay the Commission a fee based on the aggregate dollar amount of 
certain sales of securities (``covered sales''). Rules 31 and 31T, 
adopted by the Commission in June 2004,\4\ established procedures for 
the calculation and collection of Section 31 fees on such covered 
sales. Rule 31 requires each national securities exchange that owes 
Section 31 fees to submit a completed Form R31 to the Commission each 
month, beginning with July 2004. Rule 31T required each exchange to 
submit a completed Form R31 for each of the months September 2003 to 
June 2004, inclusive. Each national securities exchange must report its 
covered sales volume based on the data from a designated clearing 
agency, when available. The designated clearing agency for covered 
sales of equity securities is the National Securities Clearing 
Corporation (``NSCC''). These covered sales are reported in Part I of 
Form R31, and each exchange is required to ``provide in Part I only the 
data supplied to it by a designated clearing agency.''\5\ The data 
supplied by NSCC for the period September 2003 through August 2004 did 
not accurately reflect the aggregate dollar value of the covered sales 
occurring on each exchange to permit reports to be made in accordance 
with new Rules 31 and 31T. In particular, the data NSCC reported to 
each national securities exchange included non-covered sales data for 
sales originating on one exchange and executed on another exchange 
through the ITS.\6\
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    \3\ 15 U.S.C. 78ee.
    \4\ See Securities Exchange Act Release No. 49928 (June 28, 
2004), 69 FR 41060 (July 7, 2004) (``Adopting Release'').
    \5\ 17 CFR 240.31(b)(5).
    \6\ As a result of this and other inaccuracies in the data 
reported by NSCC, the national securities exchanges were unable to 
report accurate information on Form R31, unless they made 
adjustments to the NSCC data based on data other than that provided 
by NSCC. On October 6, 2004, the Commission's Division of Market 
Regulation (``Division'') issued a ``no-action'' letter advising 
exchanges for whom NSCC acts as a designated clearing agency under 
Rule 31, that the Division staff would not recommend that the 
Commission take enforcement action if a national securities exchange 
adjusts the data provided by NSCC to accurately reflect covered 
sales occurring on the national securities exchange. See letter from 
Robert L.D. Colby, Deputy Director, Division, Commission to Ellen J. 
Neely, Senior Vice President and General Counsel, Chicago Stock 
Exchange, Inc. (``CHX''), dated October 6, 2004.
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    Section 31 requires that national securities exchanges pay a fee 
based on the aggregate dollar amount of sales of securities transacted 
on the exchange. Given the specific language of Section 31, the 
Commission in the Adopting Release for Rules 31 and 31T advised that 
the current methodology for treating sales of securities that occur 
through ITS\7\ was no longer appropriate and that ``it would be simpler 
and more transparent for each covered [SRO] to report all covered sales 
that occur on its market.'' The Commission further stated:
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    \7\ In the Adopting Release, the Commission described the 
current methodology: ``SRO A sends an ITS commitment to a member of 
SRO B to sell a security, and the commitment is executed on SRO B. 
Under existing arrangements, SRO A pays the Section 31 fee arising 
from this trade and passes the fee to its member that initiated the 
trade. ...[T]he SROs devised this system because SRO B does not have 
the ability to require members of SRO A to reimburse it for the cost 
of its Section 31 fees.'' Adopting Release, 69 FR at 41067.

    The Commission acknowledges that a covered SRO on which a 
covered sale occurs as a result of an incoming ITS order may not be 
able to collect funds to pay the Section 31 fee from one of its own 
members. However, Section 31 does not address the manner or extent 
to which covered SROs may seek to recover the amounts that they pay 
pursuant to Section 31 from their members. Covered SROs may wish to 
devise new arrangements for passing fees between themselves so that 
the funds are collected from the covered SRO that originated the ITS 
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order.\8\

    \8\ Id.
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    The Commission further noted that any such arrangements devised by 
the SROs would have to be established pursuant to Section 19(b) of the 
Act and Rule 19b-4 thereunder.
    A subcommittee of the ITS Operating Committee \9\ 
(``Subcommittee'') has had discussions in order to devise new 
arrangements for passing fees between the ITS participants that (1) 
were collected from their members for the months of September 2003 
through August 2004; and (2) are being collected from their members 
beginning in September 2004 and continuing. This proposed rule change 
is being submitted by the Amex with the understanding that the other 
exchanges participating in the proposed arrangement devised by the 
subcommittee will be submitting substantially similar rule change 
proposals.\10\
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    \9\ The ITS participants are Amex, Boston Stock Exchange 
(``BSE''), Chicago Board Options Exchange (``CBOE''), CHX, National 
Association of Securities Dealers (``NASD''), National Stock 
Exchange (``NSX''), New York Stock Exchange (``NYSE''), Pacific 
Exchange (``PCX''), and Philadelphia Stock Exchange (``Phlx'').
    \10\ NASD has determined not to participate in the arrangement 
for passing fees between exchanges although they participated in 
many of the conference calls regarding the proposed arrangement.

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[[Page 60585]]

    Pursuant to the new arrangement being proposed, each ITS 
participant determines whether it has received and executed more in 
dollar value of covered sales than it has originated and sent to each 
other ITS participant. For example, for the historical period, 
September 2003 through August 2004, SRO A sent ITS commitments for 
covered sales whose dollar value was $150 million to SRO B for 
execution. SRO A collected fees from its members to fund its Section 31 
obligation for those covered sales executed on SRO B. Under the new 
procedures established by the Commission for the calculation and 
collection of Section 31 fees on such covered sales, SRO B, as the 
executing market center, is obligated to pay the Section 31 fee to the 
SEC. During the same period, SRO B sent ITS commitments for covered 
sales whose dollar value was $210 million to SRO A. SRO B collected 
fees from its members for those covered sales executed on SRO A. SRO A, 
as the executing market center, is obligated to pay the Section 31 fee 
to the SEC. Since SRO A executed a greater dollar value of covered 
sales from SRO B than it sent to SRO B, the proposed arrangement 
requires SRO A to determine the amount of the fees collected by SRO B 
from its members based on the aggregate dollar value of covered sales 
from SRO B and executed on SRO A through ITS commitments. When 
invoicing SRO B, SRO A will deduct the amount of the fee it owes to SRO 
B (i.e., the fee amount based on SRO A's $210 million in aggregate 
covered sales less the fee amount based on SRO B's $150 million in 
aggregate covered sales) and will invoice only for the difference of 
$60 million.
    Once the fees have been invoiced and paid for the historical 
period, the ITS participants plan to use the same arrangement for the 
period beginning September 2004 and continuing. It is anticipated that 
the invoicing process will occur twice yearly to coincide with the 
March 15 and September 30 payment schedule for Section 31 fees set 
forth in the Act.
    To implement this proposed arrangement, an ITS participant will 
require access to the aggregate dollar value of buy and sell 
transactions occurring through ITS. Under the proposed arrangement for 
fees collected for the months of September 2003 through August 2004, an 
ITS participant may choose to use data obtained from the Inter-market 
Surveillance Information System (``ISIS'') or data that provides 
comparable information that includes aggregate dollar value of ITS 
transactions.\11\ The ISIS data is sorted by originating market center 
(i.e., the sender of an ITS commitment) and receiving market center 
(i.e., the market center that executes the ITS commitment). Using this 
data, each ITS participant can determine on a monthly basis the dollar 
value of all executed commitments sent to and received from another ITS 
participant.
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    \11\ The NYSE has made available to the ITS participants 
spreadsheets for each month in the period using the ISIS data.
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    At its meeting on February 23, 2005, the Subcommittee asked the 
Securities Industry Automation Corporation (``SIAC'') to determine the 
time and expense involved for SIAC to use the ITS database that it 
maintains to provide reports of the aggregate dollar value of buy and 
sell transactions occurring through ITS to the ITS participants. On 
March 15, 2005, representatives of the Subcommittee authorized SIAC to 
develop new reports. SIAC is in the process of developing these reports 
and expects to complete testing by August 31, 2005. Once SIAC can 
provide this data, it will no longer be necessary for ISIS data to be 
used. The new reports provided by SIAC will be used by ITS participants 
in connection with determining which ITS participant will pay the fee 
for transactions occurring through ITS and which ITS participant has 
collected the fee from its members.
    The Amex believes that the proposed arrangement is a fair and 
efficient means for passing fees collected at one ITS participant based 
upon executions of covered sales occurring at another ITS participant. 
The Amex acknowledges that the legal duty to report and pay the Section 
31 fee remains with the ITS participant on which the sale was in fact 
transacted.
2. Statutory Basis
    This proposal would establish a process for SROs to enter into 
arrangements to pass fees they have collected from members for 
transactions executed on another SRO through ITS. For these reasons, 
the Exchange believes that the proposed rule change is consistent with 
the Act and the rules and regulations thereunder that are applicable to 
a national securities exchange and, in particular, the requirements of 
Section 6(b) of the Act.\12\ Specifically, the Exchange believes the 
proposed rule change is consistent with the requirements of Section 
6(b)(5) of the Act,\13\ in that it is designed to promote just and 
equitable principles of trade, to prevent fraudulent and manipulative 
acts and practices, and, in general, to protect investors and the 
public interest. In addition, the Exchange believes that the proposed 
rule change is consistent with the provisions of Section 6(b)(4) of the 
Act,\14\ which requires that the rules of an exchange provide for the 
equitable allocation of reasonable dues, fees, and other charges among 
its members and issuers and other persons using its facilities.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ 15 U.S.C. 78f(b)(4).
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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 purposes of the Act.

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. 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. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-Amex-2005-083 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number SR-Amex-2005-083. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, 

all written statements with respect to the proposed rule

[[Page 60586]]

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 also will be available for 
inspection and copying at the principal office of the Amex. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-Amex-2005-083 and should be 
submitted on or before November 8, 2005.

IV. Commission's Findings and Order Granting Accelerated Approval of a 
Proposed Rule Change

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\15\ In 
particular, the Commission believes that the proposal is consistent 
with Section 6(b)(4) of the Act,\16\ which requires that the rules of 
an exchange provide for the equitable allocation of reasonable dues, 
fees, and other charges among its members and issuers and other persons 
using its facilities. National securities exchanges obtain funds to pay 
their Section 31 fees to the Commission by charging fees to persons who 
generate the covered sales on which Section 31 fees are based. An 
exchange can obtain most of these funds by imposing a fee on one of its 
members whenever the member is on the sell side of a transaction. 
However, when the exchange accepts an ITS commitment to buy, the 
ultimate seller is a party on another market. The exchange lacks the 
ability to pass a fee to that seller directly, because the seller may 
not be a member of the exchange. Under the proposed arrangement, which 
the Commission understands will be adopted by each of the ITS 
participant exchanges,\17\ the exchange that routed the ITS commitment 
away will continue to collect a fee from the broker-dealer that placed 
the sell order. Then, with respect to each ITS participant exchange, 
the exchange will determine whether it is a net sender or net receiver 
of ITS trades and send fees to or accept fees from each other exchange 
accordingly. The Commission believes this is an equitable manner for 
the exchanges to obtain funds to pay their Section 31 fees on covered 
sales resulting from ITS trades.
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    \15\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. See 15 
U.S.C. 78c(f).
    \16\ 15 U.S.C. 78f(b)(4).
    \17\ See letter from George W. Mann, Jr., Executive Vice 
President and General Counsel, BSE, and Chairman, Subcommittee, to 
Michael Gaw, Assistant Director, Division, Commission, dated 
September 29, 2005.
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    Under Section 19(b)(2) of the Act,\18\ the Commission may not 
approve any proposed rule change prior to the thirtieth day after the 
date of publication of the notice of filing thereof, unless the 
Commission finds good cause for so doing. The Commission hereby finds 
good cause for approving the proposed rule change prior to the 
thirtieth day after publishing notice of filing thereof in the Federal 
Register. In this case, the Commission does not believe a comment 
period is necessary because all of the parties affected by the proposed 
fee--the other ITS participant exchanges--have already consented to and 
will adopt the same fee arrangement.\19\
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    \18\ 15 U.S.C. 78s(b)(2).
    \19\ See supra note 17.
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    For the reasons set forth above, the Commission finds good cause to 
accelerate approval of the proposed rule change pursuant to Section 
19(b)(2) of the Act.\20\
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    \20\ Id.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule change (SR-Amex-2005-083) is hereby 
approved on an accelerated basis.
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    \21\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-5721 Filed 10-17-05; 8:45 am]

BILLING CODE 8010-01-P
