[Federal Register Volume 61, Number 84 (Tuesday, April 30, 1996)]
[Notices]
[Pages 19107-19110]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10584]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37140; File No. SR-CHX-95-25]
Self-Regulatory Organizations; Notice of Filing of Amendment Nos.
2, 3, and 4 to Proposed Rule Change by the Chicago Stock Exchange,
Incorporated Relating to the Establishment of a Minor Rule Violation
Procedure and Reporting Plan
April 23, 1996.
Pursuant to Sections 19 (b)(1) and (d)(1) of the Securities
Exchange Act of 1934 (``Act''), 15 U.S.C. 78s (b)(1) and (d)(1), and
Rules 19b-4 and 19d-1(c)(2) thereunder,\1\ notice is hereby given that
on October 11, 1995, the Chicago Stock Exchange, Incorporated (``CHX''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change,\2\ and on December 8, 1995
filed Amendment No. 1 thereto.\3\ The original filing, as amended by
Amendment No. 1, was published for comment in Securities Exchange Act
Release No. 36576 (December 12, 1995), 60 FR 65362 (December 19, 1995).
On January 17, 1996 the Exchange submitted to the Commission Amendment
No. 2 to the proposed rule change,\4\ on March 5, 1996 the Exchange
submitted Amendment No. 3 to the proposed rule change,\5\ and on April
17, 1996 the Exchange submitted Amendment No. 4 to the proposed rule
change.\6\ The proposed rule change, as amended, is 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, as amended, from
interested persons.
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\1\ 17 CFR 240.19b-4 and 19d-1(c)(2).
\2\ The Exchange has submitted to the SEC concurrently with the
proposed rule change a minor rule violation reporting plan in
accordance with Rule 19d-1(c)(2) under the Act. See Letter from
David Rusoff, Attorney, Foley & Lardner, to Glen Barrentine, SEC,
dated October 6, 1995.
\3\ See Letter from David T. Rusoff, Attorney, Foley & Lardner,
to Glen Barrentine, SEC, dated December 8, 1995 (``Amendment No.
1'').
\4\ See Letter from David T. Rusoff, Attorney, Foley & Lardner,
to Jon Kroeper, Attorney, SEC, dated January 12, 1996 (``Amendment
No. 2'').
\5\ See Letter from David T. Rusoff, Attorney, Foley & Lardner,
to Glen Barrentine, SEC, dated March 3, 1996 (``Amendment No. 3'').
\6\ See Letter from David T. Rusoff, Attorney, Foley & Lardner,
to Jon Kroeper, Attorney, SEC, dated April 16, 1996 (``Amendment No.
4'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
In the original filing as amended by Amendment No. 1, the Exchange
proposed to add a minor rule violation procedure (``Procedure'') as
Article XII, Rule 9 of the Exchange's rules, adopt a minor violation
reporting plan (``Plan''),\7\ and renumber existing Article
[[Page 19108]]
XII, Rule 9 as Article XII, Rule 10.\8\ Amendment No. 2 adds a number
of clarifications to the Procedure, amends the Recommended Fine
Schedule, and revises the Plan to provide a method for modifying the
list of rule violations that constitute minor rule violations under the
Plan.\9\ Amendment No. 3 revises the Procedure by removing the
President of the CHX from any role in the imposition or setting aside
of fines under the Procedure and further amends the Recommended Fine
Schedule.\10\ Amendment No. 3 also revises the Procedure and Plan by
removing seven rule violations from the list of rule violations that
would be designated minor rule violations under the Procedure and Plan
and clarifies the operation of four other rules on such list.\11\
Amendment No. 4 revises the Procedure to provide for the imposition of
a fine under the Procedure in the event the Staff disagrees with the
Minor Rule Violation Panel's recommendation that the Exchange commence
a formal disciplinary proceeding, and amends language from Amendment
No. 2 in light of changes to the Procedure contained in Amendment No.
3.\12\
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\7\ In Securities Exchange Act Release No. 21013 (June 1, 1984),
49 FR 23828 (June 8, 1994), the SEC adopted amendments to paragraph
(c) of Rule 19d-1 to allow self-regulatory organizations to submit
for SEC approval plans for the abbreviated reporting of minor
disciplinary infractions. Under the amendments, any disciplinary
action taken by a self-regulatory organization against any person
for violation of a rule of the self-regulatory organization that has
been designated as a minor rule violation pursuant to a plan filed
with the SEC shall not be considered ``final'' for purposes of
Section 19(d)(1) of the Act if the sanction imposed consists of a
fine not exceeding $2,500 and the sanctioned person has not sought
an adjudication, including a hearing, or otherwise exhausted his or
her administrative remedies with respect to the matter.
The SEC has approved minor disciplinary rule plans by virtually
every stock exchange and the National Association of Securities
Dealers, Inc. See, e.g., Securities Exchange Act Release No. 21918
(April 3, 1985), 50 FR 14068 (April 9, 1985) (File No. 4-260)
(Amex); Securities Exchange Act Release No. 22415 (September 17,
1985), 50 FR 38600 (September 23, 1985) (File No. 4-284) (NYSE);
Securities Exchange Act Release No. 22654 (November 21, 1985), 50 FR
48853 (November 27, 1985) (File No. 4-285) (PSE).
\8\ See Securities Exchange Act Release No. 36576 (December 12,
1995), 60 FR 65362 (December 19, 1995); Amendment No. 1, supra note
3.
\9\ See Amendment No. 2, supra note 4.
\10\ See Amendment No. 3, supra note 5.
\11\ See Amendment No. 3, supra note 5.
\12\ See Amendment No. 4, supra note 6.
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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 \13\
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\13\ This discussion consolidates the ``Purpose'' discussion as
submitted in SR-CHX-95-25 and Amendment No. 1 thereto, see supra
note 8, and also discusses Amendment Nos. 2, 3, and 4 to the
proposal being filed herein.
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As amended, the Procedure authorizes the Exchange, in lieu of
commencing a disciplinary proceeding, to impose a fine, not to exceed
$2,500, on any member, member organization, associated person or
registered or non-registered employee of a member or member
organization for any violation of an Exchange rule which the Exchange
determines to be minor in nature. The Committee on Floor Procedure will
have the same authority for violations relating to decorum on the
Exchange trading floor. The Procedure specifically states that the
Committee on Floor Procedure and the Panel shall not, collectively,
impose more than one fine pursuant to the Procedure relating to the
same underlying violation and incident.
If the fine is to be imposed by the Exchange (as opposed to the
Committee on Floor Procedure) the fine shall be imposed in accordance
with the method set forth in paragraph (b) of the Procedure.
Specifically, prior to imposing the fine, the staff of the Exchange
shall present the facts supporting such violative conduct to a Minor
Rule Violation Panel (``Panel''), which shall consist of three floor
members (one member of the Committee on Floor Procedure, one member of
the Committee's Rules Subcommittee, and one member not on the Committee
or any of its subcommittees) appointed by the President of the
Exchange. The Panel is then authorized either to impose the fine,
reject the staff's recommendation, or recommend that the Exchange
commence a formal disciplinary proceeding under Article XII of the CHX
rules. In the event that the Panel recommends that the Exchange
commence a formal disciplinary proceeding, the staff shall either issue
a report to the President, in accordance with Article XII, Rule 1(a),
recommending that formal charges be brought, or advise the Panel that
the staff will not recommend that the Exchange commence a formal
disciplinary proceeding. If the staff decides not to recommend the
commencement of a formal disciplinary proceeding, the panel is required
to impose a fine in accordance with the provisions of the Procedure.
If a fine is to be imposed under the Procedure, the Exchange will
serve a written statement on the person against whom a fine is imposed
setting forth the rule violated, the act or omission constituting the
violation, the fine imposed and the date of imposition, the date the
fine must be paid and the date by which such determination must be
contested, such date to be not less than 15 days after the date of
service of the written statement.
If the person against whom a fine is imposed pursuant to the
Procedure chooses not to contest the matter and pays the fine, he or
she waives his or her right to a disciplinary proceeding under Article
XII of the Exchange's rules and any right to review or appeal (to the
extent such right would otherwise exist under current Exchange rules).
Alternatively, any person may choose to contest a fine by submitting a
written answer, at which point the matter becomes a ``disciplinary
proceeding'' subject to the applicable provisions of Article XII,
including all disciplinary sanctions available thereunder (except for
contests of a fine by the Committee on Floor Procedure, which will be
subject to the provisions of Article XII, Rule 3).\14\
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\14\ Any fine imposed under the Procedure that is contested may
be publicly reported by the Exchange to the same extent that CHX
disciplinary proceedings may be publicly reported. See CHX Rules,
Article XII, Rule 9 (Pending Proceedings).
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Under the Procedure, the Exchange will periodically prepare and
announce to its members and member organizations a list of Exchange
rules and policies as to which the Exchange may impose fines pursuant
to the Procedure as well as the fines that may be imposed for their
violation.\15\ The Procedure, however, expressly states that the
Exchange is not required to impose a fine under the Procedure with
respect to any violation of any rule included on such list. In
addition, whenever the Exchange determines that a rule violation is not
minor in nature, it has the discretion to commence disciplinary
proceedings under Article XII of the CHX rules.
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\15\ The Exchange will file with the SEC, for its approval
pursuant to Section 19(b) of the Act and Rule 19b-4 thereunder, any
proposed additions to, deletions from, or other modifications to
either the list of rule violations set forth in Article XII, Rule 9
that are deemed to be minor rule violations or the related
Recommended Fine Schedule.
As part of the proposed rule filing, the Exchange has submitted
a Recommended Fine Schedule which contains recommended dollar
amounts for the first, second, and third and subsequent violations,
as calculated on a twelve-month rolling basis, of a rule designated
as a minor rule violation in the Procedure and Plan. With one
exception, the recommended dollar amounts are as follows: First
Violation--$100; Second Violation--$500; Third and Subsequent
Violation--$1,000. For violations of Article XI, Rule 4 (Financial
and Operational Reports) the recommended fines will be those
currently set forth in Interpretation and Policy .02 to such rule
(i.e., 1-30 days late--$100; 31-60 days late--$200; 61-90 days
late--$400).
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The Exchange also proposes to adopt, pursuant to Section 19(d)(1)
of the Act and Rule 19d-1(c)(2) thereunder, a Plan for the reporting of
minor rule violations. Under its Plan, the Exchange designates certain
specified rule violations as minor rule violations \16\
[[Page 19109]]
and requests that it be relieved of the current reporting requirement
of Rule 19d-1(c)(1) under the Act regarding such violations, provided
it gives notice of such violations to the Commission on a quarterly
basis.\17\ The Plan, however, would not cover any fine imposed pursuant
to the Procedure that is contested. Such violations and fines would
continue to be reported as they occur.
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\16\ Under the Plan, the Exchange may make additions to,
deletions from, or other modifications to the list of rule
violations that constitute minor rule violations under the Plan. SEC
Rule 19d-1(c)(2) requires that the SEC approve by order, after
appropriate notice of the terms of substance of the filing or a
description of the subjects and issues involved and opportunity for
interested persons to submit written comment, any amendment to an
exchange's minor rule violation reporting plan submitted under such
rule. In this regard, the Plan provides that every filing of a
proposed rule change by the Exchange pursuant to Section 19(b) of
the Act and Rule 19b-4 thereunder that adds to, deletes from or
otherwise modifies the list of rule violations contained in Article
XII, Rule 9(h) of the CHX rules for which the Article XII, Rule 9
Procedure may be used will be deemed a request by the Exchange for
SEC approval to modify the list of CHX rules that are designated
minor rule violations for purposes of the Exchange's SEC Rule 19d-
1(c)(2) reporting plan.
\17\ The Exchange's quarterly report to the SEC will include:
the CHX's internal file number for the case, the name of the
individual and/or organization, the nature of the violation, the
specific rule provision violated, the fine imposed, the number of
times the rule violation has occurred, and the date of disposition.
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In the original rule filing, the Exchange proposed a list of rule
and policy violations that would be designated minor rule violations in
both its Procedure and Plan.\18\ As amended by the Exchange, seven
violations are removed from such list,\19\ and the operation of the
following four rule violations that are subject to the Procedure and
Plan is clarified: Article XXX, Rule 11 (Record of Orders); \20\
Article XX, Rule 11 (Cabinet Securities); \21\ Article XXX, Rule 2
(Precedence to Orders in Book); \22\ and Article XXX, Rule 3
(Precedence Solely on Competitive Basis).\23\
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\18\ See supra note 8.
\19\ Specifically, the seven proposed minor rule violations that
were removed from the Procedure and Plan are the following: Article
VII, Rule 9 (Transactions Off the Floor); Article XXX, Rule 4 (The
Specialist's Book); Article VIII, Rule 11, (Submission of Books to
Board); Article XXX, Rule 22 (Stop Orders); Article XXXIV, Rule 4
(Trading from Off the Floor); Article XX, Rule 7 (Recognized
Quotations); and Article XX, Rule 23 (Agency Cross Rule).
\20\ The only violation of this rule that may be considered a
minor rule violation is a failure of a specialist to properly time-
stamp an order ticket entrusted to him or it.
\21\ The provision of this rule that may be considered a minor
rule violation is the provision that states that although oral bids
and offers in securities in the cabinet are permitted, they cannot
conflict with bids and offers resident in the cabinet. A violation
of this provision would occur if a floor broker fails to ``clear the
cabinet'' (i.e., fails to satisfy bids or offers in the cabinet)
before effecting an agency cross in a cabinet security at the same
price or a price worse than the price of the bid or offer resident
in the cabinet.
\22\ The only portion of this rule that is considered a minor
rule violation is the prohibition on a specialist trading for his or
its own account ahead of customer orders on the specialist's book.
\23\ The only violation of this rule that may be considered a
minor rule violation is a specialist's failure to fill an incoming
ITS commitment to the fullest extent possible based on orders in the
specialist's book.
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The purpose of the Procedure is to provide a more appropriate
response to certain rule violations. At the present time, when the
staff of the CHX discovers a technical, inadvertent, or otherwise minor
rule violation, often, the Exchange's only practical response is to
issue a written letter of caution to the person(s) involved, focusing
attention on the necessity of fully complying with all Exchange rules
and policies and warning against future violations. Such written
admonitions, however, may not always successfully deter future
violations. The other alternative, the initiation of a formal
disciplinary proceeding may, in many cases, be too time consuming, too
costly, and carry too severe a penalty for such minor violations. The
ability to impose a fine on a discretionary basis may constitute a more
effective deterrent than a cautionary letter while avoiding the severe
penalty or attendant publicity of a disciplinary hearing. The Procedure
provides for an appropriate response to minor rule violations of
certain Exchange rules while preserving the due process rights of the
party accused through specified, required procedures.
The purpose of the Plan is to provide the CHX with the flexibility
to fashion reporting requirements that would result in the Commission
receiving the necessary information regarding minor rule violations in
the least burdensome way possible.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b)(5) of the
Act \24\ and will advance the objectives of Section 6(b)(6) of the Act
\25\ in that it will provide a procedure whereby members can be
``appropriately disciplined'' in those instances when a rule violation
is minor in nature, but a sanction more serious than a warning or
cautionary letter is appropriate. In accordance with Sections 6(b)(7)
and 6(d)(1) of the Act,\26\ the proposed rule change provides a fair
procedure for imposing such sanctions. Finally, the proposed plan is
consistent with Section 6(d)(1) of the Act and Rule 19d-1(c)(2)
thereunder, which authorizes self-regulatory organizations to adopt
minor rule violation reporting plans.
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\24\ 15 U.S.C. 78f(b)(5).
\25\ 15 U.S.C. 78f(b)(6).
\26\ 15 U.S.C. 78f(b)(7) and (d)(1).
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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 a burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members Participants, or Others
The Exchange understands that the Commission has received comments
on SR-CHX-95-25 and Amendment No 1. thereto.\27\ The Exchange believes
that issues raised by the commenter are addressed herein, and in a
letter from George T. Simon, Attorney, Foley & Lardner, to Jonathan G.
Katz, Secretary, Commission, dated March 4, 1996 (``March 4, 1996 CHX
Letter'').\28\
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\27\See Letter from C. Philip Curley, Attorney, Robinson Curley
& Clayton, P.C., to Margaret H. McFarland, Deputy Secretary, SEC,
dated January 5, 1996; Letter from C. Philip Curley, Attorney,
Robinson Curley & Clayton, P.C., to Jonathan G. Katz, Secretary,
SEC, dated March 7, 1996 (``March 7, 1996 Comment Letter'').
\28\ The SEC notes that the March 7, 1996 Comment Letter was
submitted in response to the March 4, 1996 CHX Letter. The two
comment letters received by the SEC regarding the CHX's proposal and
the March 4, 1996 CHX Letter was available in the SEC's public
reference room in File No. SR-CHX-95-25.
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III. Date of Effectiveness of the 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
[[Page 19110]]
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 Section, 450 Fifth Street,
NW., Washington, DC 20549. 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-95-25 and should be
submitted by May 21, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-10584 Filed 4-29-96; 8:45 am]
BILLING CODE 8010-01-M
