[Federal Register Volume 59, Number 134 (Thursday, July 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17033]
[[Page Unknown]]
[Federal Register: July 14, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34322; File No. SR-PSE-93-31]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change and Amendment No. 1 to Proposed Rule Change by the Pacific Stock
Exchange, Inc., Relating to Amendments to its Minor Rule Plan
July 6, 1994.
I. Introduction
On November 30, 1993, the Pacific Stock Exchange, Inc. (``PSE'' or
``Exchange''), pursuant to Section 19(b)(1) of the Securities Exchange
Act of 1934 (``Act'')\1\ and Rule 19b-4 thereunder,\2\ filed with the
Securities and Exchange Commission (``Commission'') a proposed rule
change which amends its Minor Rule Plan (``MRP'')\3\ by adding certain
violations to the list of those subject to the expedited disciplinary
procedures set forth in PSE Rule 10.13, and by amending the recommended
fine schedule (``Recommended Fine Schedule'') for MRP violations. On
March 30, 1994, the Exchange filed Amendment No. 1 to the proposed rule
change.\4\
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\1\15 U.S.C. 78s(b)(1) (1982).
\2\17 CFR 240.19b-4 (1993).
\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 Exchange's MRP initially was approved by the
Commission in 1985. See Securities Exchange Act Release No. 22654
(November 21, 1985), 50 FR 48853 (November 27, 1985). On June 24,
1993, the Commission approved a number of amendments to the
Exchange's MRP, including the addition of certain rules to the list
of MRP violations, the addition of detailed procedures to the MRP,
and revisions to the Exchange's Recommended Fine Schedule. See
Securities Exchange Act Release No. 32510 (June 24, 1993), 58 FR
35491 (July 1, 1993) (``Release 34-32510'').
\4\In Amendment No. 1, the Exchange (1) eliminated from its
proposal the inclusion, in the Exchange's MRP and the Recommended
Fine Schedule, of violations of certain proposed rules which either
were pending before the Commission and not yet approved at the time
this proposal was filed with the Commission, or are still pending
before the Commission (See File Nos. SR-PSE-93-26 and SR-PSE-93-10,
respectively); and (2) deleted a cross-reference to another rule
which also is pending before the Commission and has not yet been
approved (See File No. SR-PSE-93-19). See Letter from Michael D.
Pierson, Senior Attorney, Market Regulation, PSE, to Thomas N.
McManus, Division of Market Regulation, Commission, dated Mach 28,
1994.
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Notice of the Exchange's proposed rule change and Amendment No. 1
appeared in the Federal Register on May 2, 1994.\5\ No comment letters
were received on the proposal. This order approves the proposal and
Amendment No. 1 thereto.
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\5\See Securities Exchange Act Release No. 33956 (April 22,
1994), 59 FR 22700 (May 2, 1994).
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II. Description of the Proposal
1. The Exchange's MRP
PSE Rule 10.13(a) authorizes the PSE's Executive Committee, Ethics
and Business Conduct Committee, Options Floor Trading Committee, and
Equity Floor Trading Committee to impose a fine not to exceed $5,000 on
any member, member organization, or person associated with a member or
member organization for any violation of an Exchange rule that has been
deemed to be minor in nature and approved by the Commission for
inclusion in the MRP. The purpose of Rule 10.13 is to provide for a
response to a rule violation when a meaningful sanction is appropriate
but when initiation of a disciplinary proceeding under PSE Rule 10.3\6\
is not suitable because such a proceeding would be more costly and
time-consuming than would be warranted given the minor 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.\7\
Rule 10.13 includes a list of rule violations that are eligible for the
expedited disciplinary procedure under the MRP and that may be the
subject of fines in accordance with the Recommended Fine Schedule. In
order for a particular Exchange rule violation to qualify for inclusion
in the MRP, the rule violation must be either objective or technical in
nature, and be easily verifiable, thereby lending itself to the use of
expedited proceedings.
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\6\PSE Rule 10.3 governs the initiation of disciplinary
proceedings by the Exchange for violations within the disciplinary
jurisdiction of the Exchange.
\7\See Release 34-32510, supra note 3, for a more comprehensive
explanation of the MRP procedures.
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2. Proposed Additions to List of MRP Violations
The Exchange is proposing to amend its MRP by adding the following
violations of Exchange rules and policies to the MRP: (1) Members who
act as Floor Brokers and Market Makers trading in excess of 100
contracts per month as a Market Maker without a Primary Appointment
(PSE Rule 6.38(c)); (2) Failure to request a market to be removed from
the screen when leaving the trading crowd (PSE Rule 6.37, Com. .03; PSE
Rule 6.46, Com. .04); (3) Failure to meet 75% Primary Appointment
requirement (PSE Rule 6.35, Com. .03); (4) Failure to meet 60% in-
person trading requirement (PSE Rule 6.37, Com. .07); (5) Unauthorized
use of telephones located in the options trading post areas; (6) Short
Sale rules (PSE Rule 5.18(a)-(f)); (7) Inadequate staffing at
specialist post (prior to the opening) (PSE Rule 5.28(c)-(d)); (8)
Failure to furnish in a timely manner books, records, or other
requested information or testimony in connection with an examination of
financial responsibility and/or operational conditions (PSE Rule
2.12(c)); and (9) Failure to notify the Exchange of a change of address
where notices may be served (PSE Rule 1.13).
3. Proposed Amendments to Recommend Fine Schedule
The Recommended Fine Schedule is graudated so that the sanctions
imposed for particular Exchange rule violations increase with each
subsequent violation. The Exchange proposes to establish recommended
fines for first, second, and third-time violations of the rules
proposed to be added to the MRP.\8\ The Exchange also is proposing that
Options and Equity Floor Decorum and Minor Trading Rule Violations be
calculated on a running two-year basis, so that a subsequent violation
of the same provision within two years will be subject to the next
highest fine (e.g., the second violation that occurs within a two-year
period will be treated as a second occurrence). However, the Exchange
proposes that violations of particular Equity Floor Decorum and Minor
Trading Rules be considered on a running one-year basis consistent with
existing provisions to that effect in the Equity Floor Procedure
Advices (``EFPA'').\9\
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\8\The largest fine for a violation of one of these rules is
$2,500 (for a third-time violation of the short sale rule).
\9\Such rule violations include (1) Smoking or Expectorating
(EFPA 1-B); (2) Alcoholic Beverages (EFPA 1-B); and (3) Conduct of
Guests (EFPA 1-B).
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The Exchange represents that the amended Recommended Fine Schedule
will be disseminated to the Exchange membership via a regulatory
bulletin, and recirculated periodically (i.e., approximately once per
year).
III. Commission Findings and Conclusions
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)(5) and 6(b)(6).\10\
Specifically, the Commission believes that an exchange's ability to
effectively enforce compliance by its members and member organizations
with Commission and Exchange rules is central to its self-regulatory
functions. The inclusion of a rule in an exchange's minor rule
violation plan, therefore, should not be interpreted to mean 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 and/or repeated violations of
these rules, thereby furthering its mandates to protect investors and
the public interest.
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\10\15 U.S.C. 78f(b) (5) and (6) (1988). Section 6(b)(5) of the
Act requires that the rules of an exchange protect investors and the
public interest. Section 6(b)(6) of the Act requires that the rules
of an exchange provide that its members be appropriately disciplined
for violations of the Act, the rules and regulations thereunder, and
the Exchange's rules.
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The Commission has previously found that the Exchange's MRP
provides fair procedures for appropriately disciplining members and
member organizations for minor rule violations that warrant a sanction
more severe than a warning or cautionary letter, but for which a full
disciplinary proceeding would be unsuitable because such a proceeding
would be costly and time-consuming in view of the minor nature of the
violation.\11\
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\11\See Release 34-32510, supra note 3.
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The Commission finds that violations of the Exchange rules proposed
to be added to the MRP are either objective or technical in nature and
are easily verifiable, thereby lending themselves to the use of
expedited proceedings. For example, noncompliance with the 75% Primary
Appointment requirement, or with the 60% in-person trading requirement,
are matters which may be determined objectively and adjudicated quickly
without the complicated factual and interpretive inquiries associated
with more sophisticated Exchange disciplinary proceedings. If 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 PSE Rule 10.3. The
Commission expects the PSE to bring full disciplinary proceedings in
appropriate cases (e.g., in cases where the violation is egregious or
where there is a history or pattern of repeat violations).
In addition, the recommended fines proposed to be added by the
Exchange to the Recommended Fine Schedule are graduated to account for
repeat offenders. The Commission expects the Exchange to commence a
formal disciplinary proceeding under PSE Rule 10.3, and impose more
serious sanctions, if it determines that a violation otherwise covered
by the MRP is not minor in nature, in the event of repeat violations of
a certain rule by a particular member or member organization, or in any
other appropriate circumstance. The fine schedules should result in
appropriate discipline of members, in a manner that is proportionate to
the minor nature of such violations. Further, the Commission believes
that calculating fines on a running two-year basis (or on a running
one-year basis for certain rule violations), while preserving the
Exchange's ability to increase the sanction for subsequent violations,
is an equitable approach that accounts for the possibility that a
substantial period of time may elapse between violations.
Finally, the PSE has represented that the Recommended Fine Schedule
will be circulated periodically to members of the Exchange. The
Commission believes that the publicizing of the Recommended Fine
Schedule further enhances the fairness of the MRP.
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the proposed rule change (File No. SR-PSE-93-31), as
amended, is hereby approved.
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\12\15 U.S.C. 78s(b)(2) (1988).
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) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17033 Filed 7-13-94; 8:45 am]
BILLING CODE 8010-01-M
