[Federal Register Volume 62, Number 98 (Wednesday, May 21, 1997)]
[Notices]
[Pages 27826-27828]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13280]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38631; File No. SR-PSE-96-42]
Self-Regulatory Organizations; Pacific Exchange, Inc.; Order
Granting Approval to Proposed Rule Change Relating to an Amendment to
the Minor Rule Plan and the Adoption of a Forum Fee for Minor Rule Plan
Appeals
May 14, 1997.
I. Introduction
On October 25, 1996, the Pacific Exchange, Inc. (``PCX'' 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 add unbundling of option
orders to the Exchange's list of Minor Rule Plan (``MRP'') violations
and to allow the imposition of a forum fee whenever a finding under the
MRP is appealed and affirmed.\3\ On October 25, 1996, the Exchange
submitted a letter providing additional justification for the
filing.\4\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Rule 19d-1(c)(2) under the Act, 17 CFR 240.19d-1(c)(2),
authorizes national securities exchanges to adopt minor rule
violation plans for the summary discipline and abbreviated reporting
of minor rule violations by exchange members and member
organizations. The PCX's Plan was approved by the Commission in
Securities Exchange Act Release No. 22654 (Nov. 21, 1985), 50 FR
48853.
\4\ Letter from Michael D. Pierson, Senior Attorney, Regulatory
Policy, PCX, to Ivette Lopez, Assistant Director, Division of Market
Regulation, SEC, dated October 24, 1996 (``PSE Letter'').
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The proposed rule change was published for comment in the Federal
Register on February 24, 1997,\5\ and no comments were received. This
order approves the proposal.
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\5\ Securities Exchange Act Release No. 38293 (Feb. 14, 1997),
62 FR 8286.
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II. Description
The Exchange is proposing to adopt a new subsection (5) to PCX Rule
10.11(d) to provide as follows: If, after a hearing or review on the
papers pursuant to subsection (d) of PCX Rule 10.16,\6\ a panel
appointed by the pertinent committee determines that a Member or Member
Organization has violated one or more Exchange rules, as alleged, that
panel: (i) May impose any one or more of the disciplinary sanctions
authorized
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by the Exchange's Constitution and Rules; and (ii) shall impose a forum
fee against the person charged in the amount of two hundred fifty
dollars ($250) if the determination was reached based on a review of
the papers, or in the amount of five hundred dollars ($500) if a
hearing was conducted. In the event that the Panel determines that a
Member or Member Organization has violated one or more Exchange rules,
as alleged, and the sole disciplinary sanction imposed by the pertinent
committee for such rule violation(s) is a fine that is less than the
total fine initially imposed by the Exchange for the subject
violation(s), the Committee has the discretion to waive the imposition
of a forum fee.\7\ The Exchange believes this fee is necessary to,
among other things, help offset the costs associated with certain
appeals involving MRP violations.
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\6\ PCX Rule 10.11, entitled ``Appeal of Floor Citations and
Minor Rule Plan Sanctions,'' sets forth the procedures that apply
when a member or member organization appeals a sanction imposed in
connection with a floor citation or the MRP. See PCX Rules 10.11 and
10.13.
\7\ The provisions of proposed Rule 10.11(d)(5) are similar to
those contained in Rule 17.50(d)(2) of the Chicago Board Options
Exchange (``CBOE'').
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The Exchange is also proposing to amend its MRP,\8\ PCX Rule 10.13,
to add the following violation to the section relating to Options Floor
Decorum and Minor Trading Rule Violations: ``Dividing up an order to
make its parts eligible for entry into Auto-Ex (Rule 6.87(c))'' (with
recommended fines of $2,500, $3,750 and $5,000 for first, second, and
third violations). The Exchange believes it is appropriate to include
Rule 6.87(c) in the MRP because violations of this rule are objective
in nature and easily verifiable.\9\
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\8\ Rule 19d-1(c)(2) under the Act authorizes national
securities exchanges to adopt minor rule violation plans for the
summary discipline and abbreviated reporting of minor rule
violations by exchange members and member organizations. See
Securities Exchange Act Release No. 21013 (June 1, 1984), 49 FR
23828 (approving amendments to paragraph (c)(2) of Rule 19d-1 under
the Act). The PCX's MRP was approved by the Commission in 1985. See
Securities Exchange Act Release No. 22654 (Nov. 21, 1985), 50 FR
48853 (approving File No. SR-PSE-85-24). In 1993, the Exchange
amended its MRP and adopted detailed procedures relating to the
adjudication of minor rule violations. See Securities Exchange Act
Release No. 32510 (June 24, 1993), 58 FR 35491. Thereafter, the
Exchange has modified its MRP several times. See Securities Exchange
Act Release Nos. 34322 (July 6, 1994), 59 FR 35958; 35144 (Dec. 23,
1994), 59 FR 67743; 36622 (Dec. 21, 1995), 60 FR 67384; 37886 (Oct.
29, 1996), 61 FR 37886 (approving File No. SR-PSE-96-26); 37799
(Oct. 9, 1996), 61 FR 54479 (approving additions to the MRP).
\9\ For example, an investigation will reveal that a customer's
original order, as represented on an ``upstairs'' trading ticket,
was for a number of option contracts that was greater than ten, but
handwritten notes will indicate that the original order has been
divided into separate orders. In addition, the Exchange's time and
sales report will establish that a number of sub-orders occurred
sequentially on the Auto-Ex system during a relatively short period
of time. See PSE Letter, supra note 4.
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III. Discussion
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, and, in
particular, with the requirements of Section 6(b).\10\ Specifically,
the Commission believes the proposal is consistent with the Section
6(b)(4) requirement that the rules of an exchange provide for the
equitable allocation of reasonable fees, the Section 6(b)(5)
requirements that the rules of an exchange be designed to promote just
and equitable principles of trade, to prevent fraudulent and
manipulative acts, and, in general, to protect investors and the
public, the Section 6(b)(6) requirement that the rules of an exchange
provide that its members be appropriately disciplined for violations of
an exchange's rules and the Act, and the Section 6(b)(7) requirement
that the rules of an exchange provide a fair procedure for the
disciplining of members.\11\
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\10\ 15 U.S.C. 78f(b).
\11\ Id, sections 78f(b)(4), 78f(b)(5), 78f(b)(6), 78f(b)(7). In
approving this rule, the Commission notes that it has considered the
proposal's impact on efficiency, competition, and capital formation,
consistent with Section 3 of the Act. Id. section 78c(f).
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A. Forum Fee
The Commission believes it is reasonable for the Exchange to
establish the proposed forum fee for members who appeal Floor citations
or MRP sanctions.\12\ It is appropriate to shift a portion of the costs
associated with appeal proceedings to those members seeking review of a
fine. The imposition of the forum fee is reasonable because the fee
serves as a vehicle to match Exchange costs in processing minor
disciplinary matters. Moreover, the Panel has the discretion to waive
the forum fee when the sole disciplinary sanction imposed is a fine
that is less than the total fine initially imposed for the violation.
This provision should help ensure that appropriate and equitable
discipline is imposed under the PCX's MRP. In addition, the amount of
the forum fee (either $250 or $500) appears reasonably designed to
recover a portion of the costs of the use of Exchange staff and other
Exchange resources that are utilized in processing appeals. Moreover,
the Commission does not believe the fees are likely to deter
respondents from appealing fines imposed pursuant to the MRP.
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\12\ The Exchange has stated that one purpose of the forum fee
is to deter frivolous appeals. The Commission does not believe such
rationale is acceptable for establishing a fee. Nonetheless, for the
reasons set forth below, the Commission believes the fee is not
inconsistent with the Act.
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B. Auto-Ex Unbundling
The Commission believes that an exchange's ability to effectively
enforce compliance by its members and member organizations with the
Commission's and Exchange's rules is central to its self-regulatory
function. The inclusion of a rule in an exchange's minor rule violation
plan, therefore, should not be interpreted to mean that it is not an
important rule. On the contrary, the Commission recognizes that the
inclusion of minor violations of particular rules under a minor rule
violation plan may make the exchange's disciplinary system more
efficient in prosecuting more egregious or repeated violations of these
rules, thereby furthering its mandate to protect investors and the
public interest.
The Commission believes that adding Rule 6.87(c) to the Exchange's
MRP is consistent with the Act. The purpose of the Exchange's MRP is to
provide a response to a violation of the Exchange's rules when a
meaningful sanction is needed but when initiation of the disciplinary
proceeding pursuant to Exchange Rule 10.3 \13\ is not suitable because
such a proceeding would be more costly and time-consuming than would be
warranted given the nature of the violation. Rule 10.13 provides for an
appropriate response to minor violations of certain Exchange rules
while preserving the due process rights of the party accused through
specified required procedures.\14\
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\13\ PCX Rule 10.3 governs the initiation of disciplinary
proceedings by the Exchange for violations within the disciplinary
jurisdiction of the Exchange.
\14\ The MRP permits any person to contest the Exchange's
imposition of the fine through submission of a written answer, at
which time the matter will become a formal disciplinary action.
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Violations of Rule 6.87(c) can be appropriately handled through
expedited proceedings because they are objective in nature and easily
verifiable. Noncompliance with the provisions may be determined
objectively and adjudicated quickly without the complicated factual and
interpretive inquiries associated with more sophisticated Exchange
disciplinary proceedings. If, however, the Exchange determines that a
violation of one of these rules is not minor in nature, the Exchange
retains the discretion to initiate full disciplinary proceedings in
accordance with Exchange Rule 10.3. The Commission expects the PCX to
bring full disciplinary proceedings in appropriate cases (e.g., in
cases where the violation is egregious or where there
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is a history or pattern of repeated violations).
Finally, the Commission finds that the imposition of the
recommended fines for violations of Rule 6.87(c) should result in
appropriate discipline of members in a manner that is proportionate to
the nature of such violations.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\15\ that the proposed rule change (SR-PSE-96-42) is approved.
\15\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-13280 Filed 5-20-97; 8:45 am]
BILLING CODE 8010-01-M
