[Federal Register Volume 61, Number 187 (Wednesday, September 25, 1996)]
[Notices]
[Pages 50366-50367]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24491]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37695; File No. SR-PSE-96-19]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change and Notice of Filing and Order Granting Accelerated Approval of
Amendment No. 2 Thereto by the Pacific Stock Exchange, Inc., Relating
to Firm Quotes, Automatic Executions and Orders That May Be Placed in
the Options Public Limit Order Book
September 17, 1996.
On June 14, 1996, the Pacific Exchange, Inc. (``PSE'' 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 modify its rules on firm
quotes,\3\ automatic executions and orders that may be placed in the
Options Public Limit Order Book (``Book'') in order to clarify the
scope of these rules. The Exchange also proposed to modify its Minor
Rule Plan and Recommended Fine Scheduled relating to violations of
these rules. On June 26, 1996, the Exchange filed Amendment No. 1 to
the proposal.\4\ Notice of the proposed rule change and Amendment No. 1
was published for comment and appeared in the Federal Register on July
19, 1996.\5\ No comment letters were received on the proposal. On
August 28, 1996, the PSE filed Amendment No. 2 to the proposed rule
change.\6\ This order approves the PSE proposal as amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ As a result of Amendment No. 2, no changes are proposed to
PSE's firm quote rule (Rule 6.86). The Recommended Fine Schedule
pursuant to Rule 10.13, however, is proposed to be revised for
violations of Rule 6.86. See note 6, infra.
\4\ In Amendment No. 1, the Exchange corrects a technical error
in the number of items in the Minor Rule Plan (PSE Rule 10.13) and
Recommended Fine Schedule. See letter from Michael D. Pierson,
Senior Attorney, Regulatory Policy, PSE, to James T. McHale,
Attorney, Office of Market Supervision (``OMS''), Division of Market
Regulation (``Division''), Commission, dated June 26, 1996
(``Amendment No. 1'').
\5\ See Securities Exchange Act Release No. 37434 (July 12,
1996), 61 FR 37785 (July 19, 1996).
\6\ In Amendment No. 2 the Exchange withdraws that portion of
the filing which would have defined ``broker-dealer'' to include
``foreign broker-dealers'' for purposes of Rule 6.86 and 6.87. The
Exchange also included a technical amendment to Rule 10.13 (``Minor
Rule Plan'') and the Recommended Fine Schedule pursuant thereto. See
Letter from Michael D. Pierson, Senior Attorney, Regulatory Policy,
PSE, to James T. McHale, Attorney, OMS, Division, Commission, dated
August 27, 1996 (``Amendment No. 2'').
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I. Description of the Proposal
The Exchange is proposing to amend PSE Rule 6.87 to provide that
only non-broker-dealer customer orders are eligible for execution on
the Exchange's Automatic Execution System (``Auto-Ex''). This change
codifies a long-standing policy of the Exchange to that effect.
The Exchange is also proposing to amend PSE Rule 6.52(a). Rule
6.52(a) currently provides that no member shall place, or permit to be
placed, an order with an Order Book Official for an account in which
such member or his organization, any other member or member
organization, or any non-member broker-dealer has an interest. The
Exchange is proposing to replace that provision with one stating that
only non-broker-dealer customer orders may be placed with an Order Book
Official pursuant to Rule 6.52(a).
The Exchange is also proposing to amend its Minor Rule Plan so that
it includes the following rule violation: ``Entry of broker/dealer
order for execution on Auto-Ex system. (Rule 6.87(a)).'' The Exchange
believes that violations of Rule 6.87(a) are easily verifiable and,
therefore, are appropriate for inclusion in the Minor Rule Plan.
The Exchange is also proposing to modify its Recommended Fine
Schedule under the Minor Rule plan as follows: First, the current
recommended fine for a member who fails to honor a guaranteed market as
required by Rule 6.86(a) is $250 for a first violation, $500 for a
second violation and $750 for a third violation. The Exchange is
proposing to increase these fines to $500, $1,500 and $3,000 for a
first, second or third-time violation, respectively.\7\
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\7\ Fines for multiple violations of Options Floor Decorum and
Minor Trading Rules are calculated on a running two-year basis. For
a discussion of the Exchange's Recommended Fine Schedule, see
Securities Exchange Act Release No. 34322 (July 6, 1994), 50 FR
35958 (July 14, 1994).
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Second, the recommended fine for a member who fails to identify an
order as for a broker-dealer is currently $250 for a first violation,
$500 for a second violation and $750 for a third violation. The
Exchange is proposing to raise these fines to $500, $1,500 and $3,000
for first, second and third-time violations, respectively.
Third, the Exchange is proposing to establish fines of $500, $1,500
and $300
[[Page 50367]]
for first, second and third-time violations of the restriction against
entering broker-dealer orders for execution on the Auto-Ex system.
II. Discussion
The Commission finds that the proposed rule changes are consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, the requirements of Sections 6(b)(5) and 6(b)(6)\8\ in that
they are designed to facilitate transactions in securities, promote
just and equitable principles of trade, protect investors and the
public interest, and provide for the appropriate disciplining of the
PSE's members. Specifically, the Commission finds that limiting
execution of options orders through Auto-Ex to non-broker-dealer
customers is appropriate and consistent with the Act. Automatic
execution systems such as Auto-Ex were developed, in part, to aid
public customers by providing nearly instantaneous execution of small
orders at a guaranteed price.\9\ The rule change codifies PSE's
existing policy regarding those market participants that may utilize
Auto-Ex and is consistent with the policies of several of the other
optional markets, which currently limit the availability of their
respective automatic execution systems to non-broker-dealer customer
orders.\10\
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\8\15 U.S.C. 78f(b) (5) and (6).
\9\ See Securities Exchange Act Release No. 25995 (August 15,
1988), 53 FR 31781 (August 19, 1988) (order approving changes to the
Chicago Board Options Exchange's (``CBOE'') Retail Automatic
Execution System).
\10\ See e.g. CBOE Rule 6.8, and Securities Exchange Act Release
No. 37429 (July 12, 1986) (order approving proposed rule change by
the American Stock Exchange, Inc. relating to ``unbundling'' of
Auto-Ex orders).
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With regard to the change to Rule 6.52(a) the Commission finds that
this is also consistent with the Act. The Exchange has represented that
the change is merely to conform the language in Rule 6.52(a) with that
of Rule 6.86(a) and proposed Rule 6.87(a). The Commission finds that
the change in the language of the rule makes no substantive change with
regard to the determination of those orders that may be placed with an
Order Book Official, and should help to avoid confusion concerning the
applicability of the Rule.
Additionally, the Commission believes that including violations of
Rule 6.87(a) in the Exchange's Minor Rule Plan (``MRP'') is consistent
with the Act. 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\ The Commission believes that violations of Rule 6.87(a)
are objective and easily verifiable, thereby lending themselves to the
use of expedited proceedings.
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\11\ See Securities Exchange Act Release No. 32510 (June 24,
1993), 58 FR 35491 (July 1, 1993).
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Specifically, the entering of a broker-dealer order on Auto-Ex may
be determined objectively and adjudicated quickly without complicated
factual and interpretive inquiries.\12\
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\12\ If the Exchange determines that a violation of Rule 6.87(a)
is not minor in nature, the Exchange retains the discretion to
initiate full disciplinary proceedings in accordance with PSE Rule
10.3. Indeed, the Commission fully expects the PSE to bring full
disciplinary proceedings in appropriate cases.
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Finally, the Commission believes that the proposed changes to the
Recommended Fine Schedule are consistent with the Act. The fine level
increases will enhance the Exchange's ability to enforce compliance
with its rules through the appropriate discipline of members and member
organizations in a manner that is proportionate to the minor nature of
such violations. Further, the Exchange has represented that its
membership will be informed of the amended Recommended Fine Schedule
via a Rule Adoption Notice.\13\
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\13\ Telephone conversation between Michael D. Pierson, Senior
Attorney, Regulatory Policy, PSE, and James T. McHale, Attorney,
OMS, Division, Commission, on September 5, 1996.
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The Commission finds good cause for approving Amendment No. 2 to
the proposal prior to the thirtieth day after the date of publication
of the notices of filing thereof in the Federal Register. Specifically,
Amendment No. 2 withdraws that portion of the filing which would have
defined ``broker-dealer'' to include ``foreign broker-dealers'' for
purposes of Rules 6.86 and 6.87. The term ``foreign broker-dealers''
was not defined in the original proposal. Deletion of the term is
therefore appropriate, absent objective standards necessary to ensure
the fair enforcement of the affected rules. Therefore, by eliminating a
potential ambiguity in the Rules 6.86 and 6.87, Amendment No. 2
strengthens the proposal. The other change made by Amendment No. 2 is
technical and non-substantive in nature. Based on the above, the
Commission finds good cause for approving Amendment No. 2 to the
proposed rule change on an accelerated basis and believes that the
proposal, as amended, is consistent with Sections 6(b)(5), 6(b)(6), and
19(b)(2) \14\ of the Act.
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\14\ 15 U.S.C. 78s(b)(2).
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III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 2. 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 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 in the Commission's Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of such filing will also be
available for inspection and copying at the principal office of the
PSE. All submissions should refer to the File No. SR-PSE-96-19 and
should be submitted by October 16, 1996.
It therefore is ordered, pursuant to Section 19(b)(2) of the
Act,\15\ that the proposed rule change (SR-PSE-96-19) is approved.
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\15\ 15 U.S.C. 78s(b)(2).
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. 96-24491 Filed 9-24-96; 8:45 am]
BILLING CODE 8010-01-M
