[Federal Register Volume 59, Number 158 (Wednesday, August 17, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-20122]
[[Page Unknown]]
[Federal Register: August 17, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34516; File No. SR-CHX-94-12]
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Order Approving Proposed Rule Change Relating To Disclosure of Pending
Formal Exchange Disciplinary Proceedings to the Central Registration
Depository
August 10, 1994.
I. Introduction
On May 6, 1994, the Chicago Stock Exchange, Inc. (``CHX'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``Commission'' or ``SEC''), 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 authorize the Exchange to
provide information to the Central Registration Depository (``CDR'')
concerning pending formal, Exchange disciplinary proceedings for
disclosure to the public.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1994).
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The proposed rule change was noticed in Securities Exchange Act
Release No. 34268 (June 28, 1994), 59 FR 34459 (July 5, 1994). No
comments were received on the proposal. This order approves the
proposed rule change.
II. Description of the Proposal
The CHX is adopting Rule 9 to Article XII of the Exchange's Rules
to authorize the CHX to provide information to the CRD\3\ concerning
pending formal Exchange disciplinary proceedings for disclosure to the
public. According to the Exchange, a formal disciplinary proceeding is
considered to be pending from the time charges are issued\4\ until the
proceeding is completed.\5\ Currently, the Exchange discloses
information only on final Exchange disciplinary actions to the CRD.\6\
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\3\The CRD is an automated industry database containing
employment and disciplinary history of members and associated
persons registered with self-regulatory organizations (``SROs'') and
state securities agencies. The CRD is operated by the National
Association of Securities Dealers, Inc. (``NASD'') with input on
policy and other matters from federal and state agencies and other
SROs, including the Exchange.
\4\CHX Article XII, Rule 1(b) provides, in part, that if in the
judgment of the President it shall appear that an accused has
committed a default or other offense in violation of the
Constitution or Rules of the Exchange the President shall, except as
hereinafter provided, direct the staff to prefer written charges
against the accused. A copy of such charges shall be served upon the
accused. The accused shall also be served with written notice of
when and where the charges will be heard.
\5\See CHX Article XII, Rule 7.
\6\Information concerning final disciplinary actions taken by
the Exchange, the NASD and other self-regulatory and regulatory
organizations, as well as information concerning certain criminal
convictions contained in the CRD, has been disclosed to the public
pursuant to the NASD's 800 number service since October 1991. The
Commission subsequently approved the NASD's procedures for operating
its 800 number service in Securities Exchange Act Release No. 30629
(April 23, 1992), 57 FR 18535 (April 30, 1992) (File No. SR-NASD-91-
39) (``800 Number Service Plan Approved Order''). On July 1, 1993,
the SEC approved an NASD rule change to make more information
available to the general public regarding pending disciplinary
proceedings or actions taken by federal or state securities agencies
and SROs that relate to securities or commodities transactions, and
regarding criminal indictments and information. See Securities
Exchange Act Release No. 32568 (July 1, 1993), 58 FR 36723 (July 8,
1993) (File No. SR-NASD-93-26) (``Pending Event Disclosure Approval
Order'').
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Information on pending formal SRO disciplinary proceedings, among
other events, is currently in the CRD, but only to the extent that
reports are made by members, member organizations and associated
persons pursuant to their reporting obligations on the Uniform
Application for Securities Industry Registration or Transfer (Form U-4)
and Form BD, the uniform application form for broker-dealer
registration. The proposal would expand the information available on
pending disciplinary actions by requiring the Exchange to report such
cases to the CRD.\7\
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\7\On March 31, 1994, the Commission approved a similar proposal
by the New York Stock Exchange, Inc. (``NYSE'') which authorized the
NYSE to provide information to the CRD concerning pending formal
NYSE disciplinary proceedings, for disclosure to the public. See
Securities Exchange Act Release No. 33844 (March 31, 1994), 59 FR
16669 (April 7, 1994) (order approving File No. SR-NYSE-94-11).
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The Exchange believes that the proposed rule change is consistent
with Section 6(b)(5) of the Act in that it is designed to promote just
and equitable principles of trade, to remove impediments and to perfect
the mechanisms of a free and open market and a national market system,
and in general, to protect investors and the public interest.
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).\8\ In particular,
the Commission believes the proposal is consistent with the Section
6(b)(5)\9\ 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 interest.
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\8\15 U.S.C. 78f (1988).
\9\25 U.S.C. 78f(b)(5) (1988).
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In the Securities Enforcement Remedies and Penny Stock Reform Act
of 1990 (``Penny Stock Reform Act''), Congress mandated that the NASD
establish a toll-free telephone number (`800 number service'') for the
purpose of receiving and responding to inquiries from the public
regarding the background of NASD members and their associated persons.
The NASD began operating its 800 number service on October 1, 1991.
Upon the request of a caller, the NASD may disclose, in the form of a
written report, the following information contained in the CRD: \10\
past and present employment history of NASD members and their
associated persons; all final disciplinary actions,\11\ taken by
federal and state regulatory agencies and SROs, that relate to
securities or commodities transactions; and all criminal convictions
reported on Form BD or Form U-4.
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\10\Under NASD procedures, the 800 number service operator does
not provide any information over the telephone. Instead, a written
copy of the information requested is sent to the caller and to the
NASD member and/or associated person who is the subject of the
inquiry. The identity of the caller remains confidential. See 800
Number Service Plan Approval Order, supra, note 6.
\11\The NASD's 800 number service plan does not define the term
``disciplinary action.'' According to the NASD, however, the term
includes, but is not limited to, information provided in response to
question 7 on Form BD and question 22 on Form U-4. See Pending Event
Disclosure Approval Order, supra, note 6.
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In 1993, the Commission approved a rule change by the NASD to
expand the scope of information that is reportable through its 800
number service.\12\ Thus, in addition to the information set forth
above, the NASD may disclose to the public such events as pending
formal disciplinary actions initiated by federal and state regulatory
agencies and SROs; criminal indictments or informations; civil
judgments; and certain arbitration awards in securities and commodities
disputes involving public customers. Currently, the NASD relies on
members and associated persons to report these events to the CRD on
Form BD or Form U-4, respectively. Because this represents the only
means by which the NASD can obtain data about pending disciplinary
actions (other than its own), the quality of the CRD database, and thus
of the 800 number service, depends on complete and timely reporting by
members and associated persons.
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\12\See Pending Event Disclosure Approval Order, supra, note 6.
The Commission notes that, in 1992, Congress requested that the
General Accounting Office (``GAO'') conduct a review of various
aspects of the Penny Stock Reform Act, including the NASD's 800
number service. Among other things, the GAO recommended that
information about final arbitration awards be reported. Accordingly,
the NASD submitted, and the Commission approved, a rule change
authorizing the NASD to disclose certain arbitration awards, as well
as pending formal disciplinary actions, through its 800 number
service. In this context, the Commission notes that it has requested
all SROs to coordinate with the NASD the transfer of information
about awards rendered in each exchange's arbitration program.
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In the Commission's opinion, Rule 9 to Article XII should help fill
a potential gap in the NASD's 800 number service, by authorizing the
Exchange to report the initiation of a formal CHX disciplinary
proceeding\13\ involving an Exchange member, member organization or
associated person, and significant changes in the status thereof,\14\
directly to the CRD. As a result, that information will be available to
the public whether or not it is voluntarily reported by the member or
associated person. The Commission therefore finds that the proposed
rule change should enhance the fairness and accuracy of the CRD
database and, accordingly, of information released to the public
through the 800 number service.
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\13\For purposes of reporting to the CRD, the CHX considers a
formal disciplinary proceeding to be pending from the time charges
are issued until completion of the proceeding. See supra, notes 4
and 5.
\14\CHX Rule 9 provides the following examples of significant
changes in the status of a pending formal disciplinary proceeding
which would require disclosure: the issuance of a decision by the
President; and the filing of an appeal to and/or the issuance of a
decision by, a Judiciary Committee, the Exchange's Executive
Committee or Board of Governors.
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The Commission has long believed that investors need access to
reliable information in order to protect themselves against potential
fraud and abuse. In this respect, Rule 9 to Article XII should help
customers make an informed decision about whether they should conduct
or continue to conduct business with particular securities
professionals. In sum, the Commission has concluded that the rule
change should increase the flow of information to the public and thus
should ultimately strengthen investor protection.
It is therefore ordered, pursuant to Section 19(b)(2)\15\ that the
proposed rule change (SR-CHX-94-12) is hereby approved.
\15\15 U.S.C. 78s(b)(2) (1988).
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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) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-20122 Filed 8-16-94; 8:45 am]
BILLING CODE 8010-01-M
