[Federal Register Volume 63, Number 207 (Tuesday, October 27, 1998)]
[Notices]
[Pages 57340-57342]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28644]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40568; File No. SR-CSE-98-02]
Self-Regulatory Organizations; Cincinnati Stock Exchange, Inc.;
Order Approving Proposed Rule Change and Amendment No. 1 Relating to
Regulatory Jurisdiction and Proceedings
October 19, 1998.
I. Introduction
On July 7, 1998, the Cincinnati Stock Exchange, Inc. (``CSE'' or
``Exchange'') submitted to 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 update and clarify the
Exchange's rules concerning disciplinary jurisdiction and practice.
Amendment No. 1 was submitted to the Commission on July 30, 1998.\3\
The proposed rule change was published for comment in the Federal
Register on August 31, 1998.\4\ The Commission received no comments on
the proposal. This order approves the proposal, as amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Amendment No. 1, the Exchange added Section 6(b)(6) of
the Act as a statutory basis for the proposed rule change. The
Exchange also set forth the procedure, under proposed CSE Rule 8.3,
to be utilized upon the rejection of a letter of consent by the
Business Conduct Committee. Finally, the Exchange clarified language
in proposed CSE Rule 8.1(a). Letter from Adam Gurwitz, Vice
President Legal, CSE, to Kelly McCormick, Attorney, Division of
Market Regulation, Commission, dated July 30, 1998 (``Amendment No.
1'').
\4\ Exchange Act Release No. 40356 (August 24, 1998) 63 FR 46259
(August 31, 1998).
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II. Description of the Proposal
The CSE proposes to clarify and codify the Exchange's disciplinary
jurisdiction by amending and renumbering the rules found in Chapter
VIII of the Exchange Rules. According to the CSE, the proposed rule
change is not intended to expand the Exchange's existing grant of
regulatory jurisdiction, but rather to codify existing Exchange
practices.\5\
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\5\ The proposal renumbers a number of existing rules to
accommodate for the addition of new rules. The rule numbers
referenced in this order correlate to the rules as proposed.
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CSE Rule 8.1
Subsection (a) of proposed CSE Rule 8.1 provides for the Exchange's
general regulatory jurisdiction and authority and states that the
Exchange's jurisdiction extends to any violation of the Act, as
amended, the rules and regulations promulgated thereunder, any
provision of the Exchange's Articles of Incorporation, By-Laws or
rules, any interpretation thereof, of any resolution or order of the
Board of Trustees or appropriate Exchange committee (hereinafter
collectively referred to as the ``Rules''). In addition, proposed CSE
Rule 8.1(a) states that any violation of the Rules, after notice and an
opportunity for a hearing, be addressed by expulsion, suspension,
limitation of activities, functions and operations, fine, censure,
suspension or bar from association with a member or any other fitting
sanction.
Proposed CSE Rule 8.1(a) also clarifies that individual Exchange
members as well as responsible parties or persons associated with a
member organization may be charged with violations of the Rules
committed by employees or member organizations. Similarly, member
organizations may be charged with violations committed by individuals.
This provision is designed to ensure adequate supervision by members of
their employees. The Exchange also explained that discipline for the
failure to supervise is common in the industry and the proposed rule
change merely clarifies the Exchange's existing authority.
Proposed CSE Rule 8.1(b) provides that members and associated
persons remain subject to the Exchange's disciplinary jurisdiction upon
termination of membership or association for violations that occurred
prior to such termination. The Exchange notes that this proposed
subsection expresses long-standing industry practice and prevents
members and associated persons from avoiding disciplinary actions
simply by terminating their membership or association with a member.
Finally, CSE Rule 8.1(c) clarifies that summary suspensions or
other actions taken pursuant to Chapter VII of the Exchange Rules are
not considered disciplinary actions. Accordingly, the provisions of
Chapter VIII are not applicable to such Chapter VII actions.
CSE Rule 8.2
Proposed CSE Rule 8.2, addressing complaints and investigations,
adds new subsections (c) through (f). Subsection (c) sets forth that a
member or person associated with a member has
[[Page 57341]]
an obligation to furnish information that the Exchange may request in
connection with any investigation, hearing, or appeal. In addition,
proposed CSE Rule 8.2(c) provides that a member or person associated
with a member is entitled to be represented by counsel during such an
investigation, proceeding, or inquiry. Proposed CSE Rule 8.2(e)
provides that any failure to provide requested information is
considered a violation of proposed CSE Rule 8.2.
Upon notice by the Exchange of an alleged violation of any of the
Rules, the person who is suspected of the violation is entitled to
submit a statement stating why no disciplinary action should be taken--
a so-called ``Wells submission.'' Subsections (d) and (f) of proposed
CSE Rule 8.2 provide for such a statement to be made either in writing
or by videotape and submitted to the Business Conduct Committee
(``BCC'').
Additional Changes
Proposed CSE Rule 8.3 provides for expedited proceedings. Pursuant
to this rule, a member or person associated with a member may attempt
to resolve a matter by negotiating a letter of consent. The Exchange
explains that for certain cases such a procedure facilitates a fair and
equitable resolution to potential disciplinary matters.
Settlement offers in response to a statement of charges are
addressed in proposed CSE Rule 8.8. In subsection (b), the Exchange
provides that a respondent may submit a written statement in support of
a settlement offer. If the Exchange staff does not recommend acceptance
of a settlement offer, the respondent may make an oral statement to the
BCC addressing why the settlement offer should be accepted. Subsection
(c) limits the number of written settlement offers that may be
submitted to the BCC to a maximum of two. The Exchange believes the
limitation balances the desire to facilitate settlements with a need to
bring closure to disciplinary proceedings.
The Exchange also proposes CSE Rule 8.10(d), which addresses the
review of decisions not to initiate charges. Pursuant to this new
subsection, the Board of Trustees may review a decision not to initiate
upon application by the President or the Chairman.
Finally, the proposed rule change adds new Interpretation .01 to
proposed CSE Rule 8.11. This Interpretation states the Exchange's
policy concerning staff compliance with the procedural requirements of
the Rules. In addition, the Interpretation provides the policy
concerning publication of disciplinary matters. The proposal explains
that the CSE does not routinely release such information, but if
circumstances warrant such a release, the Exchange's Executive
Committee may direct release to the public by the staff.
III. Discussion
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange.\6\
In particular, the Commission finds that the proposed rule change is
consistent with the requirements of Sections 6(b)(1), 6(b)(5), 6(b)(6),
and 6(b)(7) of the Act.\7\
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\6\ In reviewing this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\7\ 15 U.S.C. 78f(b)(1); 15 U.S.C. 78f(b)(5); 15 U.S.C.
78f(b)(6); and 15 U.S.C. 78f(b)(7).
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Section 6(b)(1) of the Act \8\ requires exchanges to possess the
capacity to enforce compliance by their members and persons associated
with members with the provisions of the Act, the rules and regulations
thereunder and the rules of the Exchange. Proposed CSE Rule 8.1 helps
provide such capacity by expressly stating the Exchange's disciplinary
jurisdiction. Moreover, the rule notes the Exchange's authority to
pursue, discipline, and sanction members and persons associated with
members for violations of the Rules. Proposed CSE Rule 8.1 should
further strengthen the Exchange's enforcement authority by holding
employers responsible for violations committed by employees and by
stating that the Exchange has continuing jurisdiction over terminated
members or persons associated with members.
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\8\ 15 U.S.C. 78f(b)(1).
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Proposed CSE Rule 8.2 (c) and (e) also enhance the CSE's
enforcement capacity. By requiring the submission of information
pertinent to disciplinary actions, this rule should help ensure that
Exchange officials making disciplinary decisions have the facts
necessary to enforce the Rules. In addition, the mechanism for Board of
Trustees review of BCC decisions not to initiate charges contained in
proposed CSE Rule 8.10(d) should ensure further oversight of the
enforcement of the Rules.
The Commission also finds that the proposed rule change is
consistent with the requirements of Section 6(b)(5) of the Act \9\
which provides, among other things, that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices and
to protect investors and the public. The proposed rule change clarifies
and codifies the disciplinary jurisdiction of the Exchange, providing
notice to members and persons associated with members that violations
of the Rules can lead to disciplinary proceedings. Such notice should
discourage fraudulent and manipulative acts and practices and result in
the protection of investors and the public.
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\9\ 15 U.S.C. 78f(b)(5).
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In addition, the Commission finds that the proposed rule change is
consistent with the requirements of Section 6(b)(6) of the Act,\10\
because it provides that members and persons associated with members
shall be appropriately disciplined for violations of the Rules. For
example, CSE Rule 8.1(a) expressly provides that the Exchange may
appropriately discipline members or persons associated with members by
expulsion, suspension, limitation of activities, functions and
operations, fine, censure, suspension or bar from association with a
member or any other fitting sanction.
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\10\ 15 U.S.C. 78f(b)(6).
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The proposed rule change also is consistent with the fair
disciplinary procedure requirements of Section 6(b)(7) of the Act.\11\
The Commission finds that the proposed rule change is designed to
improve the transparency, speed, and efficiency of the disciplinary
process, thereby promoting a fair procedure for disciplining members
and persons associated with members. Chapter VIII of the Exchange Rules
increases transparency by setting forth the disciplinary process to be
employed for disciplining members and persons associated with members.
Moreover, proposed CSE Rule 8.3 and 8.8 specifically provide for the
prompt resolution of charges. CSE Rule 8.3 offers a member or person
associated with a member the opportunity to resolve a matter by
negotiating a letter of consent. In addition, CSE Rule 8.8 furnishes
the procedures to be employed for settlement offers. A member or person
associated with a member may submit an offer of settlement in lieu of
the disciplinary procedures. When a settlement offer is not accepted,
limiting a member or person associated with a member to one additional
settlement offer should give appropriate and fair closure to the
disciplinary process.
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\11\ 15 U.S.C. 78f(b)(7).
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Proposed CSE Rule 8.2 further ensures fair disciplinary procedures
by notifying subjects of allegations made against them and by allowing
members to submit either a written or video ``Wells submission'' in
response to a notice of charges. This provision
[[Page 57342]]
provides an efficient method for responding to a violation charge and
for identifying where a disciplinary action may be inappropriate. CSE
Rule 8.2 also expresses that a member or person associated with a
member has the right to be represented by counsel during an
investigation, proceeding or inquiry, thereby helping to ensure the
fairness of the proceedings.
Finally, the proposed rule change promotes the fairness of
disciplinary procedures in proposed Interpretation .01 to CSE Rule
8.11. Interpretation .01 to CSE Rule 8.11 emphasizes the Exchange's
commitment to a fair disciplinary process. It states that the staff
shall comply with all procedural requirements of the Rules. The
interpretation also addresses public disclosure of disciplinary
proceedings setting forth Exchange policy, providing for a fair
procedure for determining if disclosure is appropriate.
Accordingly, the Commission believes the proposed rule change
should protect those subject to the CSE's disciplinary process while
ensuring the Exchange's enforcement of the Rules meant to protect
investors.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the proposed rule change (SR-CSE-98-02) is approved.
\12\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-28644 Filed 10-26-98; 8:45 am]
BILLING CODE 8010-01-M
