[Federal Register Volume 59, Number 121 (Friday, June 24, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-15362]
[[Page Unknown]]
[Federal Register: June 24, 1994]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34230; File No. SR-NYSE-94-05]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Order Approving Proposed Rule Change and Amendment No. 1 to Proposed
Rule Change and Notice of Filing and Order Granting Accelerated
Approval to Amendment No. 2 to Proposed Rule Change Relating to
Additions to ``List of Exchange Rule Violations and Fines Applicable
Thereto Pursuant to Rule 476A'' and Minor Rule Violation Enforcement
and Reporting Plan
June 17, 1994.
I. Introduction
On March 2, 1994, the New York Stock Exchange, Inc. (``NYSE'' 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 to the ``List of Exchange
Rule Violations and Fines Applicable Thereto Pursuant to Rule 476A''
(``Rule 476A List'') its policy that new Exchange members must have
their trades supervised by an experienced member. The NYSE also
requested approval, under Rule 19d-1(c)(2), to amend its Minor Rule
Violation Enforcement and Reporting Plan (``Plan'') to include the
policy regarding supervision of trades by new members.\3\ On March 21,
1994, the NYSE submitted to the Commission Amendment No. 1 to the
proposed rule change in order to clarify certain aspects of the
original filing and to request approval of the policy itself.\4\ On
June 17, 1994, the NYSE submitted Amendment No. 2 to proposed rule
change to revise certain language in the text of the Rule 476A List and
to describe the form of notice provided to members.\5\
---------------------------------------------------------------------------
\1\15 U.S.C. Sec. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1991).
\3\See letter from James E. Buck, Senior Vice President and
Secretary, NYSE, to Sandra Sciole, Special Counsel, Division of
Market Regulation, SEC, dated March 1, 1994.
\4\See letter from Donald Siemer, Director, Market Surveillance
Division, NYSE, to Beth Stekler, Attorney, Division of Market
Regulation, SEC, dated March 16, 1994 (``Amendment No. 1)''.
\5\See letter from Donald Siemer, Director, Market Surveillance
Division, NYSE, to Beth Stekler, Attorney, Division of Market
Regulation, SEC, dated June 15, 1994 (``Amendment No. 2'').
---------------------------------------------------------------------------
The proposed rule change was published for comment in Securities
Exchange Act Release No. 33834 (March 30, 1994), 59 FR 16251 (April 6,
1994). No comments were received on the proposal. This order approves
the proposed rule change including both amendments.
II. Background
In 1984, the Commission amended Rule 19d-1(c) under the Act to
allow the self-regulatory organizations (``SROs'') to submit, for
Commission approval, plans for the abbreviated reporting of minor rule
violations.\6\ The Commission approved the NYSE's Plan, as embodied in
NYSE Rule 476A, in 1985.\7\ Accordingly, the Exchange is relieved of
current reporting requirements under section 19(d)(1) with respect to
those disciplinary actions taken pursuant to its Plan.
---------------------------------------------------------------------------
\6\See Securities Exchange Act Release No. 21013 (June 1, 1994),
49 FR 23838 (June 8, 1994). Pursuant to Rule 19d-1(c)(1), an SRO is
required to file promptly with the Commission notice of any
``final'' disciplinary action taken by that SRO. Pursuant to Rule
19d-1(c)(2), however, any disciplinary action taken by an SRO for a
violation of an SRO rule, which has been designated as a minor rule
violation pursuant to a Commission approved plan, shall not be
considered ``final'' if the sanction imposed consists of a fine not
exceeding $2,500 and the sanctioned person does not seek an
adjudication, including a hearing, or otherwise exhaust his or her
administrative remedies. By deeming that unadjudicated minor rule
violations are not final, the Commission permits the SRO to report
such violations on a periodic basis.
\7\See Securities Exchange Act Release No. 21688 (January 25,
1985), 50 FR 5025 (February 5, 1985). Subsequent additions of rules
to the Rule 476A List were made in Securities Exchange Act Release
Nos. 22037 (May 14, 1985), 50 FR 21008 (May 21, 1985); 23104 (April
11, 1986), 51 FR 13307 (April 18, 1986); 24985 (October 5 1987), 52
FR 41643 (October 29, 1987); 25763 (May 27, 1988), 54 FR 20925 (June
7, 1988); 27878 (April 4 1990), 55 FR 13345 (April 10, 1990); 28003
(May 8, 1990), 55 FR 20004 (May 14, 1990); 28505 (October 2, 1990),
55 FR 41288 (October 10, 1990); 28995 (March 21, 1991), 56 FR 12967
(March 28, 1991); 30280 (January 22, 1992), 57 FR 3452 (January 29,
1992); 30536 (March 31, 1992), 57 FR 12357 (April 9, 1992); 32421
(June 7, 1993), 58 FR 32973 (June 14, 1993); 33403 (December 28,
1993), 59 FR 641 (January 1, 1994); and 33816 (March 25, 1994), 59
FR 15471 (April 1, 1994).
---------------------------------------------------------------------------
The NYSE Plan provides that the Exchange shall designate those
rules as to which a violation may be deemed a minor rule violation.\8\
Under the procedures set forth in NYSE Rule 476A, if a member, member
organization, allied member, approved person, or registered or non-
registered employee of a member or member organization violates a
designated rule, the Exchange may impose a fine, not to exceed
$5,000,\9\ by issuing a citation with a specific penalty. The
disciplined person can either accept the penalty or opt for a hearing
on the matter.\10\ In addition, the Exchange retains the discretion to
bring violations of those rules included in the NYSE Rule 476A List to
full disciplinary proceedings, if the Exchange determines that the
violation is not minor in nature.
---------------------------------------------------------------------------
\8\See Rule 476A(e). As noted above, see supra note 7, the
Exchange has amended the Rule 476A List, from time to time, as it
has gained experience with its Plan.
\9\Fines imposed pursuant to Rule 476A in excess of $2,500 are
deemed final, and therefore are subject to the reporting
requirements of Section 19(d)(1) of the Act.
\10\The procedures governing full disciplinary proceedings are
set forth in NYSE Rule 476.
---------------------------------------------------------------------------
In adopting Rule 19d-1, the Commission noted that the rule was an
attempt to balance the informational needs of the Commission against
the reporting burdens of the SROs.\11\ Rule 19d-1(c) represented the
Commission's attempt further to reduce such burdens, by permitting
quarterly reporting of minor rule violations in those circumstances
where immediate reporting was unnecessary. Accordingly, the abbreviated
reporting was intended to be limited to SRO rules which could be
adjudicated quickly and objectively.
---------------------------------------------------------------------------
\11\See Securities Exchange Act Release No. 13762 (July 8,
1977), 42 FR 35411 (July 14, 1977).
---------------------------------------------------------------------------
III Description of the Proposal
The NYSE is proposing to adopt as a rule its policy regarding
supervision of trades by new members and to add this policy to its
Plan.\12\ To become an NYSE Floor member, a candidate must participate
in an orientation program\13\ and successfully complete the required
membership examination (Series 15), after which he or she must wear a
temporary badge for a minimum of two weeks. During that probationary
period, a new member may execute orders, but only under the direct
supervision of a fully qualified NYSE member who is a disinterested
third party to the transaction. The experienced member observes the
trade, and reviews it for compliance with the relevant Exchange
rules.\14\
---------------------------------------------------------------------------
\12\See supra, note 3.
\13\According to the NYSE, the New Member Orientation Program
consists of six one-hour sessions which are designed to familiarize
candidates with Exchange regulations, systems and trading practices.
As part of this program, new members receive, and are expected to be
familiar with, information regarding the requirement that an
experienced member must supervise their trades during their
probationary period. See, e.g., NYSE Information Memorandum 92-10
(April 9, 1992); NYSE Memorandum to Members on Trading Floor
(October 29, 1993).
\14\This review is evidenced by placing the experienced member's
badge number on the back of the order ticket. See Amendment No. 1,
supra, note 4.
---------------------------------------------------------------------------
If a new Exchange member fails to adhere to the supervision
requirement, the NYSE may extend his or her probationary period for an
additional week. The proposed rule change will allow the NYSE to impose
a fine pursuant to Rule 476A for subsequent violations of the new
member order execution policy.\15\ Upon Commission approval, the
Exchange intends to distribute an Information Memorandum notifying
members that they may be subject to a fine, and to include that
Information Memorandum in the materials provided to new members during
their orientation program.\16\
---------------------------------------------------------------------------
\15\Because the initial violation of this policy will result in
an extension of the probationary period, the second violation will
be subject to the first time fine provided by Rule 476A. See
Amedment No. 1, supra, note 4.
\16\See Amendment No. 2, supra, note 5. For further discussion
of the New Member Orientation Program, see supra note 13 and
accompanying text.
---------------------------------------------------------------------------
The NYSE states that the proposed rule change will advance the
objectives of Section 6(b)(6) of the Act in that it will provide a
procedure whereby members and member organizations can be
``appropriately disciplined'' in those instances where a rule violation
is minor in nature, but a sanction more serious than a warning or
cautionary letter is appropriate. According to the Exchange, the
proposed rule change provides a fair procedure for imposing such
sanctions, in accordance with the requirements of Sections 6(b)(7) and
6(d)(1).
IV. 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 sections 6(b) (1), (6) and (7),
6(c)(3), 6(d)(1), and 19(d).\17\ The Commission believes that the
NYSE's policy regarding supervision of trades by new members, together
with its orientation program, should be sufficient to ensure that new
members receive adequate guidance and experience before they may
execute orders on their own. In the Commission's opinion, this
supervisory requirement should provide inexperienced Exchange members
with training to help them acquire the practical skills necessary to
comply with NYSE rules, the Act and the regulations thereunder.
---------------------------------------------------------------------------
\17\15 U.S.C. 78f (b)(1), (6) and (7), 78f(c)(3), 78f(d)(1) and
78s(d) (1988).
---------------------------------------------------------------------------
The Commission finds that the proposed amendments to the Plan are
consistent with the Section 6(b)(6) requirement that the rules of an
exchange provide that its members and persons associated with its
members shall be appropriately disciplined for violations of rules of
the exchange. In this regard, the proposal provides an efficient
procedure for appropriate disciplining of members for a rule violation
that is technical and objective in nature. Moreover, because the Plan
provides procedural rights to the person fined and permits a
disciplined person to request a full hearing on the matter, the
proposal provides a fair procedure for the disciplining of members and
persons associated with members, consistent with Sections 6(b)(7) and
6(d)(1) of the Act.
The Commission also believes that the proposal provides an
alternative means by which to deter violations of the NYSE's policy
regarding the supervision of trades by new members, thus furthering the
purposes of Section 6(b)(1) of the Act. An exchange's ability
effectively to enforce compliance by its members and member
organizations with Commission and Exchange rules is central to its
self-regulatory functions. Inclusion of a rule in an exchange's minor
rule violation plan should not be interpreted to mean that it is an
unimportant rule. On the contrary, the Commission recognizes that
inclusion of rules under a minor rule violation plan may not only
reduce reporting burdens on an SRO but also may make its disciplinary
system more efficient in prosecuting violations of these rules.
In addition, because the NYSE retains the discretion to bring a
full disciplinary proceeding for any violation included on the Rule
476A List, the Commission believes that adding the new member order
execution policy to the Rule 476A List will enhance, rather than
reduce, the NYSE's enforcement capabilities regarding this Exchange
policy. Indeed, the Commission expects the NYSE to bring full
disciplinary proceedings for violations of this supervisory requirement
where the violation is egregious or where there is a history or pattern
of repeat violations.
Finally, the Commission believes that the inclusion of the policy
regarding supervision of trades by new members on the Rule 476A
Violations List will prove to be an effective alternative response to a
violation when the initiation of a full disciplinary proceeding is
unsuitable because such a proceeding may be more costly and time-
consuming in view of the minor nature of the particular violation.
The Commission finds good cause for approving Amendment No. 2 prior
to the thirtieth day after the date of publication of notice of filing
thereof. Amendment No. 2 merely clarifies certain language in the text
of the Rule 476A List, and provides additional details about the
proposed notice to members. Finally, the Commission did not receive any
comments on the original proposal, which was noticed for the full
statutory period.
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 2 to the proposed rule change.
Persons making written submissions should file six copies thereof with
the Secretary, Securities and Exchange Commission, 450 Fifth Street,
NW., Washington, D.C. 20549. Copies of the submission, all subsequent
amendments, all written statements with respect to the proposed rules
change that are filed with the Commission and all written
communications relating to Amendment No. 2 between the Commission and
any persons, other than those that may be withheld from the public in
accordance with the provisions of 5 U.S.C. Sec. 552, will be available
for inspection and copying in the Commission's Public Reference
Section, 450 Fifth Street, NW., Washington, D.C. 20549. Copies of such
filing will also be available at the principal office of the NYSE. All
submissions should refer to File No. SR-NYSE-94-05 and should be
submitted by July 15, 1994.
V. Conclusion
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\18\ and Rule 19d-1(c)(2) under the Act,\19\ that the proposed rule
change (SR-NYSE-94-05), including Amendment No. 2 on an accelerated
basis, is approved.
---------------------------------------------------------------------------
\18\15 U.S.C. 78s(b)(2) (1988).
\19\17 CFR 240.19d-1(c)(2) (1991).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\20\
---------------------------------------------------------------------------
\20\17 CFR 200.30-3(a)(12) (1991).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-15362 Filed 6-23-94; 8:45 am]
BILLING CODE 8010-01-M
