REG 2008-19

The Specialist's Role and Exchange Rules Affecting the Relationship Between Issuers and Specialists

From time to time, questions are raised regarding the role of specialists in listed stocks on the American Stock Exchange LLC ("Amex"), as well as on the Exchange rules and regulations affecting the relationships and appropriate interactions between issuers of listed companies and their specialists. The following is a synopsis of the most frequently asked questions:

Question 1: What is a listed stock specialist's function?
A specialist is a member of the Amex who acts as both agent and dealer in the securities in which he or she specializes. As agent, a specialist brings buyers and sellers together to facilitate their trading with each other. As dealer, the specialist buys and sells for his or her own account in order to enhance liquidity and stability in the marketplace. A specialist is subject to both affirmative and negative obligations, as described below (see, generally, Amex Rule 170-AEMI).

Question 2: What are the affirmative and negative trading obligations that a specialist is subject to?
As a condition of being registered as a specialist and in addition to using due diligence to execute agency orders (i.e., orders entrusted to a specialist as a broker) and acting as an odd-lot (i.e., an amount of a security that is less than the standard "round-lot" unit of trading which is typically 100 shares) dealer in the stocks in which he or she is registered, a specialist must engage in a reasonable course of dealings for his or her own account to assist in the maintenance of a fair and orderly market on the Exchange in such securities. Furthermore, a specialist must not effect on the Exchange purchases or sales unless they are reasonably necessary to maintain a fair and orderly market or to act as an odd-lot dealer. It is ordinarily expected that a specialist will only engage in transactions which constitute a course of dealings reasonably calculated to contribute to the maintenance of price continuity with reasonable depth, and to the minimizing of the effects of a temporary disparity between supply and demand, whether immediate or reasonably anticipated (see Amex Rules 170-AEMI(b), (c), and (d)).

In addition to the general trading obligations to which a specialist is subject, as described above, some of the other specific affirmative and negative obligations include the following:

• A specialist must give precedence to executable orders entrusted to him or her as agent in any stock in which he or she is registered before executing at the same price any purchase or sale in the same stock for an account in which he or she has an interest (see Amex Rule 155-AEMI);
• A specialist's quotations should be such that a transaction effected at the bid or offer price or within the quoted spread will bear a proper relation to preceding transactions and anticipated succeeding transactions (see Commentary .03 to Amex Rule 170-AEMI);
• When buying or selling stock for his or her own account the specialist should do so in a reasonable and orderly manner, consistent with the specific restrictions set forth in Commentaries .01 and .02 to Amex Rule 170-AEMI; and
• A specialist should avoid participating as a dealer in opening or reopening a stock in such a manner as to reverse the balance of public supply and demand (see Commentary .04 to Amex Rule 170-AEMI).

Question 3: Are there any other obligations and/or restrictions imposed on specialists and their affiliates in listed stocks?
Yes. Neither specialists nor their affiliates are permitted to:

• Own 10% or more of any security in which he or she is registered (see Section 16 of the Securities Exchange Act of 1934, Amex Rules 190(a) and 193(b));
• Acquire, hold or grant an unlisted option in any specialty security (see Amex Rule 175);
• Be an officer or director of any corporation which issues a security in which the specialist is registered (see Amex Rule 186);
• Nominate, directly or indirectly, any person to be on the board of directors of the issuer of any specialty security (see Amex Rule 186);
• Solicit any proxy, directly or indirectly, in any proxy contest involving any specialty security (see Amex Rule 186);
• Vote, directly or indirectly, in any proxy contest involving any specialty security (see Amex Rule 186);
• Effect, directly or indirectly, any business transaction with the issuer of any specialty security or with any officer, director or 10% shareholder of such issuer (see Amex Rule 190);
• Accept an order for the purchase or sale of any stock in which he or she is registered as a specialist directly from the issuer of any specialty security; from any officer, director or 10% shareholder of such issuer; from any pension or profit sharing fund; or from any bank, trust company, insurance company, investment company, or similar institution (see Amex Rule 190);
• Make any recommendation in any specialty security or make public statements, oral or written, for the purpose of encouraging or discouraging the purchase or sale of any such security (see Amex Rule 190); and
• Other than when acting as a specialist in accordance with his or her affirmative obligations, purchase or sell any securities in which the specialist is registered except to reduce or liquidate an existing position (see Amex Rule 170-AEMI(e)).

Specialist affiliates may obtain relief from certain of these restrictions if an Exchange approved information barrier is in place between the specialist and the affiliate (see Amex Rule 193). In addition, specialists must report certain fraudulent or manipulative conduct, unusual activity and trading activity to the Amex.

Question 4: Why can't my specialist prevent my stock from declining?
The specialist system is designed to provide the optimum environment in which a stock can trade at its equilibrium price. A specialist cannot prevent the value of a stock from declining nor cause it to rise to that equilibrium. When a specialist buys and sells for his or her own account, he or she does so in order to minimize price swings caused by a temporary order imbalance or lack of liquidity. However, the specialist cannot determine the price of the stock, nor would it ever be appropriate for an issuer to request that its specialist open, close or maintain its stock at a particular price level. In fact, any such request, acquiescence, or offer to do so by the specialist would likely constitute illegal manipulation, in violation of the federal securities laws as well as Amex rules of acceptable business practice. Any fraudulent or manipulative conduct (or request to engage in such conduct) must be reported to Claudia Crowley, Senior Vice President and Chief Regulatory Officer (212-306-2432) or through the online complaint form accessible through the link below (see Amex Rule 3-AEMI): http://www.amex.com/atamex/regulation/tradecomplaints/TradeComplaintsForm.jsp.

Question 5: What types of market information may be disclosed to an issuer by its specialist?
When requested by a representative of the issuer, the specialist may disclose the names of buying and selling member organizations in either completed or partially executed Exchange transactions to which the specialist is a counterparty unless specifically directed to the contrary by the parties involved in those trades (see Amex Rule 174-AEMI (b)).

A specialist, however, may not provide information about buying or selling interest in a security including the identity of buyers and sellers on the AEMI Book to a representative of the listed company (see Amex Constitution, Article II, Section 3 and Amex Rule 174-AEMI(c) and (d)).

In the event that a representative of a listed company seeks information about buying or selling interest in a security such as the identity of buyers and sellers on the AEMI Book, the specialist should advise the representative that he or she is not eligible to get that information.

Question 6: May an issuer disclose non-public information to its specialist?
No. Specialists are not insiders and must be treated as members of the public by the issuer. Therefore, non-public information may never be disclosed to a specialist, and any such disclosure could constitute a violation of the federal securities laws and/or Amex rules. Examples of such improper communications would include furnishing to the specialist any material information not previously disclosed to the public regarding earnings, forecasts, anticipated dividend action, proposed stock split, secondary offering, merger negotiations or any other undisclosed matter which is likely to have a material effect on the price of the issuer's securities or influence investment decisions.

In the event that a specialist becomes aware of material, non-public information about the issuer of a specialty security, that specialist is required to "give up the book" in that security. Trading will be transferred to another specialist, sometimes within the same specialist unit, who is not aware of the non-public information until such information has been publicly disclosed (see paragraph (d) of the Guidelines under Amex Rule 193). Situations of this nature must be reported immediately to Claudia Crowley, Senior Vice President and Chief Regulatory Officer at 212-306-2432.

Question 7: Is any communication between an issuer's representative(s) and its specialist permissible?
Yes. Periodic communications between an issuer's representative(s) and its specialist, if appropriately conducted, can be beneficial to both parties. In fact, under Commentary .08 to Amex Rule 26, each specialist unit must contact quarterly, off the Exchange Trading Floor or outside of the Exchange's regular business hours, each company in whose securities the specialist unit is registered. Such quarterly contact must be with one or more senior officials of the company, of the rank of Corporate Secretary or higher, or with a member of the company's investor relations staff. During any calendar year, the specialist unit must make every reasonable effort to have at least one of these quarterly contacts consist of an in-person meeting. Such communication does not, however, have to wait for these quarterly meetings. A listed issuer should make available to its specialist promptly after disclosure whatever information it has publicly disclosed, such as data and information concerning general trends relating to its business, as well as industry and general economic developments that may influence its business. While it is not contemplated that an issuer will be in continuous contact with its specialist, the specialist may from time to time inform the issuer of unusual market situations, such as block transactions, and respond to broad questions about the market in the issuer's securities. Amex rules (see, e.g., Rule 174-AEMI) prescribe the types of market information that may be disclosed by specialists to issuers as well as to other Amex members.

Question 8: Is it permissible to give a gift to or accept a gift from my specialist?
In determining whether the exchange of gifts between a listed issuer and its specialist is appropriate, it is important to note that Amex Rule 190(a) prohibits a specialist (or his or her member organization, or any member, officer, employee or approved person of such organization) from directly or indirectly, effecting any business transaction with the issuer of any specialty security (or any officer, director or 10% shareholder of such issuer). Thus, although it is not uncommon for gifts to be exchanged in connection with holidays or significant personal or corporate occasions, specialists and listed issuers should follow several common sense guidelines in this regard to be sure that a "gift" does not rise to the level of constituting (or being perceived as) a business transaction. It is imperative in this regard that a "gift" should not be given or accepted if the purpose of the "gift" is to induce or reward any prohibited behavior or activity. For example, a specialist may not give a gift to anyone affiliated with a listed issuer of any of his or her specialty securities in exchange for the disclosure (present, past, or future) of material non-public information regarding the issuer. Similarly, an issuer may not give a gift to its specialist in order to induce the specialist to open, close or maintain the price of its securities at a particular price or level. In addition, an issuer may not give a gift to its specialist in exchange for the disclosure (present, past, or future) of information regarding orders on the AEMI Book. Furthermore, no cash gifts should be given or accepted, and the value of any non-cash gift should not be excessive in view of the circumstances surrounding the gift. In exchanging gifts, specialists and issuers should avoid even the appearance of any impropriety regarding the purpose of a gift. Finally, pursuant to Amex Rule 324, specialists must keep detailed records of all transactions, including any gifts given and/or received.

Question 9: Why would trading be halted in an individual listed stock?
Trading in a particular security can be halted by Amex officials under one of several possible conditions. First, trading can be halted in response to material news. A "news pending" halt is sometimes imposed when significant news is about to be released by the issuer. A "dissemination of news" halt is sometimes imposed to allow material news to be disseminated and give investors time to digest the news and adjust their orders. Halting acts as a safeguard against the possibility of insider trading on material news and ensures fairness in the marketplace. Occasionally, trading will be halted when there is a significant order imbalance in a particular security. Under these circumstances, trading may be halted to indicate to the public the nature of the imbalance in order to re-establish equilibrium in the stock and permit the specialist to disseminate reasonable quotations in a two-sided market. In addition, trading may be halted for an equipment changeover (see Amex Rules 119-AEMI and 170-AEMI(f)).

Questions regarding this notice should be directed to:

Claudia Crowley
Senior Vice President and Chief Regulatory Officer
212-306-2432
claudia.crowley@amex.com

Richard Farber
Vice President
Rule Interpretations and Training
212-306-5310
richard.farber@amex.com