[Federal Register Volume 62, Number 62 (Tuesday, April 1, 1997)]
[Notices]
[Pages 15555-15559]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8231]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38439; File No. SR-CHX-96-31]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Stock Exchange, Inc., To Amend Articles IV, VII,
and XII of the Exchange's Rules To Modify the Exchange's Disciplinary
Procedures
March 25, 1997.
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
9, 1996,\1\
[[Page 15556]]
the Chicago Stock Exchange, Inc. (``CHX'' 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 self-regulatory organization. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
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\1\ The Exchange filed Amendment No. 1 with the Commission on
February 18, 1997, the substance of which is incorporated into this
notice. See letter from David Rusoff, Attorney, Foley & Lardner, to
Katherine England, Assistant Director, Market Regulation,
Commission, dated February 17, 1997.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange proposes to amend Articles IV, VII, and XII of the
Exchange's Rules to modify the Exchange's disciplinary procedures.
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 self-regulatory organization
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 self-regulatory organization
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
The purpose of the proposed rule change, which makes substantive
changes to some portions of the disciplinary procedures, is to provide
a balanced process for managing disciplinary matters by bringing peer
review into the disciplinary process while at the same time including
independent review and participation by public members of the Board of
Governors or other individuals not connected to the Exchange during
each stage of the disciplinary process. The proposed rule change is
also meant to harmonize Exchange practice with that of other exchanges
by separating key management personnel who have overall responsibility
for the ``business'' areas of the Exchange from the disciplinary
process. To accomplish this goal, the proposed rule change eliminates
the active role the President has played in the disciplinary process.
The Exchange feels that it is more appropriate for the President, who
runs the daily business of the Exchange, to be separated from the
disciplinary process. The Exchange notes that no other exchange has its
chief executive officer involved in the disciplinary process.
Additionally, as described more fully below, the proposed rule
change eliminates one level of internal appeal after a hearing. Rather
than permitting respondents to appeal to the Judiciary Committee and
then the Executive Committee, the decision of a reconstituted Judiciary
Committee will be final. The Exchange believes that the prior system of
double review was an inefficient use of CHX resources.
The Exchange believes that the proposal is timely. The Governance
Committee of the CHX has, for some time, been examining several
governance issues affecting the Exchange. For example, the Governance
Committee was instrumental in developing the recent proposal to create
a class of ``approved lessors'' on the Exchange.\2\ Another area that
the Governance Committee focused on is disciplinary procedures and the
proposal contained herein is, in large part, the completion of the
Governance Committee's efforts.
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\2\ See SR-CHX-96-30.
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The proposal extensively amends Article XII, dealing with
discipline and hearing procedures, and the rules thereunder. Proposed
Rule 1(a) provides that Exchange staff will investigate potential
disciplinary matters brought to their attention and make a report to an
Initial Determination Panel, rather than to the President, if the staff
decides to recommend changes. Proposed Rule 1(b) provides for a new
Hearing Pool, a standing body of individuals appointed jointly by the
Chairman and the Vice Chairman, with the approval of the Executive
Committee or the Board of Governors. The Hearing Pool will consist of
not less than twelve and not more than twenty-five members. The
Exchange feels that this range is appropriate, based on its analysis of
the historical number of disciplinary procedures brought before the
Exchange, together with the complexity of those proceedings. At least
four Hearing Pool members must be public governors of the Exchange or
other individuals not affiliated with the Exchange or with any broker
or dealer. These Hearing Pool members are referred to as ``Unaffiliated
Panelists.'' These unaffiliated panelist members of the Hearing Pool
may be individuals other than public governors, in part, because of the
limited number of public governors on the CHX. Moreover, the use of
such ``outside'' Hearing Pool members will permit the Exchange to take
advantage of outside expertise that is often useful in conducting
disciplinary proceedings. Continued use of such expertise would assist
in assuring efficient and fair disciplinary procedures. The remaining
members of the Hearing Pool shall be chosen from among members of the
Exchange and partners, officers, and directors of member firms.
The Exchange intends to require each member of the Hearing Pool to
complete a questionnaire upon such member's appointment to either an
Initial Determination Panel or a Hearing Panel. The purpose of such
questionnaire will be to assist in identifying any potential conflicts
of interest. In addition, under the proposed rule change, each Hearing
Pool member has an affirmative obligation to bring actual and potential
conflicts of interest to the attention of the Chairman and the Vice
Chairman.
Under proposed Rule 1(c), reports of staff investigations of
possible disciplinary violations will be made to an Initial
Determination Panel selected for that disciplinary matter, consisting
of three disinterested individuals, chosen from the Hearing Pool,
appointed jointly by the Chairman and the Vice Chairman with the
approval of the Executive Committee or the Board. For purposes of
proposed Rule 1(c) and related proposed Rule 1(g), ``disinterested''
means that the individual cannot have any direct or indirect interest
in the disciplinary matter, or any other conflict of interest, which
might preclude the individual from rendering an objective and impartial
determination. the Exchange will determine if an individual is
disinterested using the questionnaire described above and the
provisions in proposed Rule 1(c) and proposed Rule 1(g) that put an
affirmative obligation on the individual to report any actual or
potential conflicts of interest to the Chairman or Vice Chairman. Each
Initial Determination Panel will include at least one Hearing Pool
member who is an Unaffiliated Panelist.
All decisions of the Initial Determination Panel will be made by
majority vote. Each Initial Determination Panel will have the authority
to determine the manner in which it will proceed, consistent with the
other disciplinary rules. An Initial Determination Panel will be
automatically dissolved once it completes all of its duties, either
immediately if no charges are brought by the Initial Determination
Panel (or by
[[Page 15557]]
the Executive Committee on appeal of the Initial Determination) or, if
the disciplinary matter proceeds, after the Hearing Panel has issued a
decision or has otherwise completed its work. If a member of the
Initial Determination Panel is unable to continue serving on the Panel
without causing undue delay, or is not qualified to continue serving on
the panel, a new member of the Hearing Pool will be selected to replace
him or her and will be given adequate opportunity to review the
proceedings of the Initial Determination Panel and familiarize him or
herself with the evidence and documents. The Exchange has determined
that a period of two weeks or less will not constitute ``undue delay.''
Under proposed Rule 1(d), the Initial Determination Panel, rather
than the President, as is the case under the current rules, determines
whether or not to bring charges. The Exchange staff may appeal the
decision of the Initial Determination Panel not to bring charges to the
Executive Committee or the Board, not including Executive Committee
members, if any, who have been involved in that particular disciplinary
proceeding up to that time. Review by the Executive Committee or Board
will be de novo review and that decision will be final. Proposed Rule
1(e) provides that if either the Initial Determination Panel (or the
Executive Committee or Board on appeal) decides that it appears that
the accused has committed a default or other offense in violation of
the Exchange's Constitution or rules, the Initial Determination Panel
(or Executive Committee or Board on appeal) shall direct the Exchange
staff to bring charges, a copy of which shall be served in writing on
the accused. The proposed rule change modifies the title of proposed
Rule 1(f) from ``Serving Instruments on the Accused'' to ``Serving
Charges.''
Proposed Rule 1(g) provides for the appointment of a Hearing Panel
by the Chairman and Vice-Chairman, with the approval of the Board. The
Hearing Panel will consist of three persons chosen from the Hearing
Pool and one member of the Hearing Panel must be an Unaffiliated
Panelist. The Hearing Panel may not include any Hearing Pool members
who were members of the Initial Determination Panel for that particular
matter. Hearing Panel members must be disinterested \3\ and will be
required to report any actual or potential conflicts of interest to the
Chairman or Vice Chairman.
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\3\ See supra discussion relating to the definition of
``disinterested.''
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Under proposed Rule 1(g), the Hearing Panel will consider the
charges, will conduct a hearing if requested, and will decide whether
the accused has committed the violations alleged and, if so, what
sanction should be imposed. As with the Initial Determination Panel,
all decisions of the Hearing Panel will be made by majority vote; the
Hearing Panel will automatically dissolve after completing its duties
and notifying the Secretary in writing of its decision. Each Hearing
Panel will have the authority to determine the manner in which it
proceeds consistent with these Rules. If a member of the Hearing Panel
is unable to continue serving on the Panel without causing an undue
delay, or is not qualified to continue serving on the Panel because of
the existence of a relationship between him or her and the person or
persons involved in the matter, a new member of the Hearing Pool will
be selected to replace him or her and will be given adequate
opportunity to review the proceedings of the panel and familiarize
himself or herself with the evidence and documents so far presented to
the Hearing Panel.
As mentioned above, all Initial Determination Panels and Hearing
Panels will have the authority under the proposed rule change to
determine their own procedures. The Exchange believes that this is
appropriate, given the limited number of disciplinary cases brought by
the CHX. The Exchange believes that this is appropriate, given the
limited number of disciplinary cases brought by the CHX. The Exchange
believes that flexibility in procedures is necessary because each case
differs in the complexity of issues and the need for particular
procedures. For example, a very complex case may require a lengthy
briefing schedule to adequately address all issues raised. On the other
hand, a simple case with few contested issues may be conducted much
more efficiently on an expedited basis. Therefore, the Exchange does
not believe that it would be appropriate to establish one set of
procedures that would necessarily apply to all disciplinary procedures.
The Exchange proposed to modify current Rules 2(a) (Minor
Infractions) and 2(b) (Summary Hearing and Sanction) to make those
parts of these summary proceedings that were formerly the
responsibility of the President the responsibility of an Initial
Determination Panel. Summary proceedings for minor infractions under
Rule 2(a) and for summary hearings and sanctions under Rule 2(b) will
be used only if the investigation and report provided for in Rule 1(a)
expressly recommend that the Initial Determination Panel proceed
according to Rule 2(a) or Rule 2(b). Appeals of summary proceedings
under Rule 2(a) will now be made to a Judiciary Committee, rather than
the Executive Committee, in order to harmonize the minor infraction
proceedings appeals process with the regular disciplinary proceedings
appeals process. The Exchange believes that because the maximum fine
that can be imposed pursuant to Rule 2(a) has not been changed in many
years, and inflation has eroded the desired impact of the fine, the
maximum fine amount should be increased. As a result, the proposed rule
change will increase the fine amount that the Initial Determination
Panel may impose pursuant to Rule 2(a) will be increased from $500 to
$5,000.
The Exchange also proposes to amend Rule 2(b) to remove all
references to Midwest Clearing Corporation and Midwest Securities Trust
Company, and replace the term ``penalty'' with ``sanction'' whenever it
occurs. The proposed changes to Rule 2(b) also make clear that Rule
2(b) may only be used upon the agreement by the accused to have his
proceeding heard by an Initial Determination Panel, rather than the
President, as the rule currently states.
The proposed rule change renumbers current Rule 2(c), relating to
settlement procedure, as Rule 3. Under proposed Rule 3, the Initial
Determination Panel will assume the role the President previously held
under this section. Proposed Rule 3 will explicitly permit the accused
to propose an offer of settlement to the Initial Determination Panel at
any time before a judgment is rendered by a Hearing Panel. In addition,
the Initial Determination Panel may accept an offer of settlement up
until a judgment is rendered by the Hearing Panel hearing the case as
long as the offer is not otherwise withdrawn. The accused cannot
withdraw an offer of settlement once the Initial Determination Panel
has accepted it. An offer of settlement must contain a proposed
sanction and a waiver of appeal rights. If the offer of settlement is
submitted within fifteen days from the date of service of the charges,
the accused will receive an additional ten-day period from the time of
the receipt of the Initial Determination Panel's non-acceptance of the
offer of settlement to file any response required by proposed Rule
7(a).\4\
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\4\ Proposed Rule 7(a), current Rule 5, deals with the conduct
of the disciplinary hearing.
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The proposed rule change renumbers current Rule 2(d), relating to
actions by other self regulatory organizations, as
[[Page 15558]]
Rule 4. The proposed rule change modifies proposed Rule 4 to harmonize
the language in proposed Rule 4 with the definition of statutory
disqualification contained in the Act by adding ``person associated
with a member'' to the list of those entities affected by proposed Rule
4 and by replacing the phrase ``exchange or association'' with the
phrase ``self-regulatory organization.'' The proposed rule change to
proposed Rule 4 also adjusts internal cross-references to the Rule.
The proposed rule change renumbers current Rule 2(d)(1) as Rule
4(a) and amends proposed Rule 4(a) to provide that if an entity is the
subject of an action by another self-regulatory organization and as a
result falls within proposed Rule 4(a), the staff may so advise an
Initial Determination Panel, instead of the President. The Initial
Determination Panel may then proceed under proposed Rule 4(b) (current
Rule 2(d)(2)). If the staff recommends to the Initial Determination
Panel that it proceed under Rule 4(b) but the Initial Determination
Panel elects not to proceed, the staff will have the right to appeal
the Initial Determination Panel's decision to the Board; provided,
however, that the Chairman, the Vice Chairman, the President, and any
other member of the Initial Determination Panel that denied the staff's
request who is also on the Board shall not hear any such appeal. The
Board will review de novo the decision of the Initial Determination
Panel; the decision of the Board as to whether to proceed under
proposed Rule 4(b) will be final.
The existing language in current Rule 2(d)(1) regarding
commencement of sanctions being concurrent with and no greater than the
sanctions of other sanctioning bodies upon whose action the Exchange's
action is based has been moved to new Rule 4(b). The proposed rule
change also modifies proposed Rule 4(a) to clarify that nothing in Rule
4(a) precludes the taking of any action against any person against whom
action may be taken under any other Section of this Article or Rule of
the Exchange. The current rule language states that nothing in the Rule
(prior to Rule 2(d)(1), proposed Rule 4(a)) precludes the Exchange from
proceeding against any person, as opposed to the taking of any action
against any person. Proposed Rule 4(b) will state that the Initial
Determination Panel will occupy the role previously occupied by the
President. Additionally, the proposed rule change renumbers current
rule 2(d)(3) as proposed Rule 4(c) and amends it to replace the word
``penalty'' with the word ``sanction'' and the word ``President'' with
the phrase ``Initial Determination Panel.''
The proposed rule change renumbers current Rule 3 as Rule 5 and
adjusts internal cross-reference to the Rule accordingly. The proposed
rule change renumbers current Rule 4 as Rule 6 and replaces the phrase
``the President'' with the phrase ``the Initial Determination Panel''
and the word ``penalty'' with the word ``sanction.''
The proposed rule change renumbers current Rule 5, relating to the
conduct of hearing, as Rule 7 and replaces the term ``trial'' with the
word ``hearing'' whenever it occurs. Proposed Rule 7(a) states that
hearings will be conducted by a Hearing Panel appointed in accordance
with Rule 1 instead of by a Hearing Examiner appointed by the
President. Under proposed Rule 7(a), the Initial Determination Panel,
rather than the President, will have the authority to grant extensions
of time for answering charges. In addition, the proposed rule change
replaces the word ``should'' with the word ``shall'' when describing
what is required in an answer to the charges.
Proposed Rule 7(b) eliminates the role of the Hearing Examiner and
the President in determining guilt and sanctions. Under proposed Rule
7(b), the Hearing Panel will render its judgment, and may find that the
accused has committed all or some of the violations as charged, or that
the accused has committed none of the violations charged. Under
proposed Rule 7(b), the Hearing Panel will have the authority to impose
appropriate sanctions. The decision of the Hearing Panel will be in
writing, three copies of which will be signed by the Chairman of the
Hearing Panel.
Proposed Rule 7(c) provides that prosecution of charges will be the
responsibility of senior Exchange staff members who will no longer
necessarily be appointed by the President. Proposed Rule 7(c) also
states that Exchange counsel shall be present as counsel to the Hearing
Panel. Proposed Rule 7(d) provides all members of a Hearing Panel must
be impartial and independent of the staff members who prepared and
prosecuted the charges. Proposed rule 7(d) also provides that Exchange
counsel may assist the Hearing Panel in preparing its judgment.\5\
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\5\ The Commission notes that the Exchange has stated that the
Exchange staff prosecuting the charges are different from Exchange
counsel that is counsel to the Hearing Panel. Phone conversation
between David Rusoff, Foley & Lardner, Craig Long, Foley & Lardner,
Katherine England, Assistant Director, Market Regulation,
Commission, and Heather Seidel, Attorney, Market Regulation,
Commission, on January 22, 1997.
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The proposed rule change renumbers current Rule 6, the review
section, as Rule 8. Under proposed Rule 8 the accused and the Exchange
staff will have fifteen days from the date of service of any judgment
imposed under Rules 4(b), 6(b), or Rule 7, rather than from the date of
notice of a penalty imposed, to demand review of the judgment. Appeals
under these sections will be made to a reconstituted Judiciary
Committee.\6\ The standard of review on appeal will be similar to what
it currently is; the Judiciary Committee may not reverse or modify the
judgment under review unless the majority of the Judiciary Committee
finds that the applicable panel's decision (either the Initial
Determination Panel or the Hearing Panel) is not supported by
substantial evidence or that the decision is arbitrary, capricious or
an abuse of discretion.\7\ Proposed Rule 8 provides that the Judiciary
Committee's decision will be final and deletes current Rules 6(b) and
6(c), which provide for appeal to the Executive Committee and the Board
of Governors. The Exchange notes that this change will eliminate the
system of double review. Proposed Rule 8 also make clear that all final
determinations by the Judiciary Committee are appealable to the
commission in accordance with applicable Commission Rules.
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\6\ See infra amendments to Article IV, Rule 5, relating to the
manner or appointment of the Judiciary Committee.
\7\ The language of current Rule 6 states that ``[t]he Judiciary
Committee may not reverse, or modify, in whole or in part, the
decision of the Hearing Examiner and Final Judgment of the President
under paragraph (b) of Rule 4 or under Rule 5 if the factual
conclusions in the decision are supported by substantial evidence
and such decision is not arbitrary, capricious or an abuse of
discretion.''
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The proposed rule change renumbers current Rule 7 as Rule 9 and
deletes references to appeals to the Executive Committee or the Board
of Governors. The proposed rule change also renumbers current Rule 8 as
Rule 10, current Rule 9 as Rule 11, and current Rule 10 as Rule 12.
Proposed Rule 11, Minor Rule Violations, corrects internal cross-
references to the rules amended by this rule filing and provides that
reports of a Minor Rule Violation Panel recommending that disciplinary
charges be brought will now be made to an Initial Determination Panel,
rather than the President.
The proposed rule change amends Article IV, Rule 5 to modify the
manner of appointment of a Judiciary Committee. The Chairman, rather
than the President, will appoint five members of the Board of
Governors, excluding the Chairman, Vice
[[Page 15559]]
Chairman, President, and all governors who have already served on the
Initial Determination Panel or Hearing Panel convened in connection
with a disciplinary matter to be reviewed. Two of the five members of
the Judiciary Committee will be non-member (public) governors. The
proposed rule change also amends Article VII, Rule 5(a) in order to
clarify that the President's power of emergency suspension extends to
persons associated with members, in addition to members and member
organizations. The Exchange believes that this change codifies the
Exchange's authority, as set forth in Section 6(b)(6) of the Act, in
CHX rules.
The Exchange proposes that the proposed rule change become
effective sixty days after approval by the Commission. This time period
will give the Exchange adequate time to implement the new procedures
and appoint a Hearing Pool. The Exchange proposes that, in general, if
a disciplinary action has commenced and is pending as of the date of
effectiveness of the proposed rule change, all of the new rules and
procedures should apply. However, if a Hearing Officer has already been
appointed pursuant to the old rules then the old hearing rules should
apply. In any event, so long as no appeal has been filed by the date of
effectiveness of the proposal, the new appellate rules and procedures
shall apply except that, if a Hearing Officer presided at the hearing,
references in the appeal rules to decisions of the Initial
Determination panel or Hearing Panel, as the case may be, should be
changed to ``hearing officer and final judgment of the President.''
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b)(5) of the Act \8\ in that it is designed to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating securities
transactions, to remove impediments to and perfect the mechanism of a
free and open market and a national market system and, in general, to
protect investors and the public interest. The proposed rule change is
also consistent with Section 6(b)(7) of the Act \9\ in that it provides
a fair procedure for the disciplining of members and persons associated
with members.
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\8\ 15 U.S.C. 78f(b)(5).
\9\ 15 U.S.C. 78f(b)(7).
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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 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 either solicited or received.
III. Date of Effectiveness of Proposed Rule Change and Timing for
Commission Action
Within 35 days of the 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 the 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, N.W., Washington, D.C. 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 at the
Commission's Public Reference Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
Exchange. All submissions should refer to File No. SR-CHX-96-31 and
should be submitted by April 22, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-8231 Filed 3-31-97; 8:45 am]
BILLING CODE 8010-01-M
