Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Notices 6675

8 17 CFR 200.3–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3See letter from Michael D. Pierson, Director,

Regulatory Policy, PCX, to Michael A. Walinskas,

Associate Director, Division of Market Regulation,

Commission, dated June 24, 1999 (‘‘Amendment

No. 1’’). In Amendment No. 1, the Exchange

withdrew proposed PCX Rule 10.8, Hearing Panels,

and renumbered two of the proposed rules.

4See letter from Michael D. Pierson, Director,

Regulatory Policy, PCX, to Jennifer Colihan,

Attorney, Division of Market Regulation,

Commission, dated January 7, 2000 (‘‘Amendment

No. 2’’). In Amendment No. 2, the Exchange

proposed to delete PCX Rule 10.4(f) among other

things.

5See letter from Michael D. Pierson, Director,

Regulatory Policy, PCX, to Kelly Riley, Attorney,

Division of Market Regulation, Commission, dated

January 14, 2000 (‘‘Amendment No. 3’’). In

Amendment No. 3, the Exchange proposed to make

minor word change and change the heading for

proposed Rule 10.4(c) from ‘‘Summary

Proceedings’’ to ‘‘Summary Determinations’’ among

other things.

6The Commission notes that the Exchange has

proposed a similar disciplinary structure and

procedures for the Pacific Equities, Inc. See

Exchange Act Release No. 42178 (Nov. 24, 1999) 64

FR 68136 (Dec. 6, 1999) (File No. SR–PCX–99–39).

the Commission’s Public Reference

Room. Copies of the filing will also be

available for inspection and copying at

the principal offices of the Exchange.

All submissions should refer to File No.

SR–NYSE–99–25 and should be

submitted by March 2, 2000.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.8

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–3035 Filed 2–9–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42384; File No. SR–PCX–

99–10]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Pacific Exchange, Inc. Amending

Its Disciplinary Procedures

February 3, 2000.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘ACT’’) 1 and Rule 19b–4 thereunder,2

notice is hereby given that on April 2,

1999, the Pacific Exchange, Inc. (‘‘PCX’’

or ‘‘Exchange’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’) the proposed rule

change as described in Items I, II, and

III below, which Items have been

prepared by the PCX. On June 25, 1999,

the PCX filed with the Commission

Amendment No. 1 to the proposed rule

change.3 On January 18, 2000, the PCX

filed with the Commission Amendment

No. 2 to the proposed rule change.4 On

January 19, 2000, the PCX filed with the

Commission Amendment No. 3 to the

proposed rule change.5 The Commission

is publishing this notice to solicit

comments on the proposed rule change,

as amended, from interested persons.

1. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The PCX is proposing to amend its

rules on disciplinary proceedings at the

Exchange,6 and in particular, to add

new rules to codify the independent

function of PCX Regulatory Staff; to

clarify what communications are

improper in the context of pending

investigations or disciplinary

proceedings; to provide PCX Regulatory

Staff with the ability to issue formal

complaints for the alleged violation of

Exchange rules; to permit qualified

persons who are not members to serve

on hearing panels; and otherwise to

codify procedures relating to hearing

panelists’ conflicts of interest. Below is

the text of the proposed rule change.

Proposed new language is in italics;

proposed deletions are in [brackets].

* * * * *

Rule 10

Disciplinary Jurisdiction and Appeals

¶6061 Disciplinary Jurisidiction

Rule 10.1—No change.

¶6067 Investigations and Regulatory

Cooperation

Rule 10.2(a). The Exchange

Regulatory Staff will function

independently of the commercial

interests of the Exchange members and

will have the sole discretion to

investigate, and will [shall] investigate,

possible violations within the

disciplinary jurisdiction of the

Exchange. [upon order of the Board of

Governors, the Executive Committee,

the Ethics and Business Conduct

Committee, or the Floor Trading

Committees or upon receipt of a

complaint alleging such violations filed

by a member or by any other person.]

No member of the Board of Governors

or the Executive Committee or nonRegulatory Staff may interfere with or

attempt to influence the process or

resolution of any pending investigation

or disciplinary proceeding. [All such

complaints should specify in reasonable

detail the facts constituting the

violation, including the specific

statutes, Exchange Constitutional

provisions, Rules, commentaries,

resolutions, policies or procedures

allegedly violated. A member or person

associated with a member is entitled to

be represented by counsel during any

Exchange investigation.

(b) No member or person associated

with a member shall impede or delay an

Exchange investigation with respect to

possible violations within the

disciplinary jurisdiction of the

Exchange nor refuse to furnish

testimony, documentary materials or

other information requested by the

Exchange during the course of its

investigation. Failure to furnish such

testimony, documentary materials or

other information requested by the

Exchange pursuant to this Rule on the

date or within the time period required

by the Exchange shall be considered

obstructive of an Exchange inquiry or

investigation and subject to formal

disciplinary action.]

(b) Any person, any Exchange

committee, the Board of Governors or

the Executive Committee may submit for

investigation a complaint alleging

possible violations. Each complaint

must specify in reasonable detail the

facts constituting the violation and any

specific federal statute, rule, regulation

or Exchange constitutional provision,

rule, commentary, resolution, policy or

procedure allegedly violated.

[(c) A member or member

organization shall submit such trade

data elements specified in Commentary

.01 below in such automated format as

may be prescribed by the Exchange from

time to time, in regard to such

transaction or transactions as may be the

subject of a particular request for

information made by the Exchange.

Failure to submit such data in the

required format shall be considered

obstructive of an Exchange inquiry or

investigation and subject to formal

disciplinary action.]

(c) A member, member organization

or associated person is entitled to be

represented by counsel during any

Exchange investigation.

[(b)] (d) No member, member

organization, [or person associated with

a member] associated person or other

person or entity over whom the

Exchange has jurisdiction pursuant to

Rule 10.1(b) may [shall] impede or delay

an Exchange investigation with respect

to possible violations within the

disciplinary jurisdiction of the

Exchange nor refuse to furnish

testimony, documentary materials or

other information requested by the

Exchange during the course of its

investigation. Failure to furnish such

testimony, documentary materials or

other information requested by the

Exchange pursuant to this Rule on the

date or within the time period required

by the Exchange [shall] will be

6676 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Notices

considered obstructive of an Exchange

inquiry or investigation and subject to

formal disciplinary action.

[(c)] (e) A member or member

organization [shall] must submit such

trade data elements specified in

Commentary .01 below in such

automated format as may be prescribed

by the Exchange from time to time, in

regard to such transaction or

transactions as may be the subject of a

particular request for information made

by the Exchange. Failure to submit such

data in the required format [shall] will

be considered obstructive of an

Exchange inquiry or investigation and

subject to formal disciplinary action.

Commentary:

.01—No change.

[Regulatory Cooperation]

[(d)] (f) No member, member

organization, associated person [person

associated with a member or member

organization], or other person or entity

over whom the Exchange has

jurisdiction pursuant to Rule 10.1(b),

[shall] may refuse to appear and testify

before another exchange or selfregulatory organization in connection

with a regulatory investigation,

examination, or disciplinary proceeding

or refuse to furnish documentary

materials or other information or

otherwise impede or delay such

investigation, examination or

disciplinary proceeding if the Exchange

requests such information or testimony

in connection with any inquiry resulting

from an agreement entered into by the

Exchange pursuant to Rule 14.1 The

requirements of this Rule [10.2(d)]

10.2(f) [shall] will apply regardless of

whether the Exchange has initiated an

investigation pursuant to Rule 10.2(a) or

a disciplinary proceeding pursuant to

Rule [10.3] 10.5.

Commentary:

.01 The terms ‘‘exchange’’ and ‘‘selfregulatory organization,’’ as used in

Rule [10.2(d)] 10.2(f), [shall] will

include, but are not limited to, any

member or affiliate member of the

Intermarket Surveillance Group.

.02 Any person or entity required to

furnish information or testimony

pursuant to Rule [10.2(d)] 10.2(f) [shall]

will be afforded the same rights and

procedural protections as that person or

entity would have if the Exchange had

initiated the request for information or

testimony.

Ex Parte Communications

10.3(a) Prohibited Communications.

Unless on adequate notice and

reasonable opportunity for all parties to

participate:

(1) No person who is a subject of a

pending Exchange investigation

(‘‘Subject’’) or a Respondent in a

pending disciplinary proceeding, or

counsel for or a representative of the

Subject or the Respondent, with

knowledge of a pending Exchange

invesgitation or disciplinary proceeding,

may make or knowlingly cause to be

made an ex parte communication, as

defined below, relevant to the facts or

allegations of the investigation or the

disciplinary proceeding to: (a) a member

of the Board of Governors; (b) a member

of the Executive Committee; (c) a person

who advises the Board of Governors or

the Executive Committee; (d) any

member or Exchange Regulatory Staff

that is not participating in the

resolution of the investigation or the

disciplinary proceeding; or (e) a member

of a Hearing Panel or the disciplinary

committee with jurisdiction over the

investigation or disciplinary proceeding.

(2) No person who is a member of a

Hearing Panel or the disciplinary

committee with jurisdiction over an

investigation or disciplinary proceeding,

with knowledge of a pending

investigation or disciplinary proceeding,

may make or knowingly cause to be

made an ex parte communication, as

defined below, relevant to the facts or

allegations of the investigation or the

disciplinary proceeding to: (a) a member

of the Board of Governors; (b) a member

of the Executive Committee; (c) a person

who advises the Board of Governors or

the Executive Committee; (d) any

member of Exchange Regulatory Staff;

or (e) the Subject of a pending Exchange

investigation or a Respondent in a

pending disciplinary proceeding, or

counsel for or a representative of the

Subject or the Respondent.

(3) No person who is a member of the

Board of Governors or the Executive

Committee, or any person who advises

the Board of Governors or the Executive

Committee, with knowledge of a

pending investigation or disciplinary

proceeding, may knowingly make or

cause to be made an ex parte

communication, as defined below,

relevant to the facts or allegations of the

investigation or the disciplinary

proceeding to: (a) any member of

Exchange Regulatory Staff; (b) the

Subject of a pending Exchange

investigation or a Respondent in a

pending disciplinary proceeding, or

counsel for or a representative of the

Subject or the Respondent; or (c) a

member of a Hearing Panel or the

disciplinary committee with jurisdiction

over the investigation or disciplinary

proceeding.

(b) Disclosure of Prohibited

Communications. Any person who

receives, makes or knowingly causes to

be made a communication prohibited by

this Rule must promptly submit to

Exchange Regulatory Staff for inclusion

in the record of the investigation or

disciplinary proceeding:

(1) All such written communications;

(2) Memoranda stating the substance

of all such oral communications; and

(3) All written responses and

memoranda stating the substance of any

oral responses to such communications.

(c) Remedies. Any member, member

organization or associated person who

made or knowingly caused to be made

a communication prohibited by

subsection (a) will be subject to

disciplinary action. Furthermore, an

Exchange disciplinary committee, to the

extent consistent with the interests of

justice, may issue to the member,

member organization or associated

person responsible for the

communication or who benefited from

the communication an order to show

cause why the claim, defense or interest

of the member, member organization or

associated person should not be

adversely affected by reason of such ex

parte communication, including but not

limited to the entry of an adverse

summary decision. All parties to a

disciplinary proceeding and Exchange

Regulatory Staff will be provided with

adequate notice and a reasonable

opportunity to respond to any

allegations or contentions contained in

the prohibited communication and any

responses will be included in the record

of the investigation or disciplinary

proceeding.

(d) Permitted Communications.

Nothing in this Rule prohibits the

members of a disciplinary committee or

Exchange Regulatory Staff from

discussing a pending investigation or

disciplinary proceeding at a meeting of

the committee in connection with: (1)

The adjudication of the investigation

pursuant to the Minor Rule Plan; (2) the

determination of whether to impose

informal discipline; (3) the

determination of whether to authorize a

complaint or take no further action; or

(4) the determination of whether to

accept an offer of settlement.

Commentary:

.01 ‘‘Ex parte communication’’

means an oral or written

communication made without notice to

all parties, i.e., Exchange Regulatory

Staff and the Subjects of investigations

or Respondents in disciplinary

proceedings. A written communication

is ex parte unless a copy has been

previously or simultaneously delivered

to all interested parties. An oral

Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Notices 6677

communication is ex parte unless it is

made in the presence of all interested

parties except those who, on adequate

prior notice, declined to be present.

.02 A disciplinary proceeding will be

considered to be pending from the date

that a Complaint has been issued

pursuant to Rule 10.5 until the

proceeding, including any appeals,

becomes final.

¶6073 Complaints [and Answers]

[Rule 10.4] (Note—Rule 10.4 has been

renumbered as Rule 10.5)

Rule [10.3]10.4(a) [Whenever it shall

appear to the Board of Governors, the

Executive Committee, or any standing

committee designated by the Board of

Governors to review disciplinary

proceedings that] Any standing

committee designated by the Board of

Governors to review disciplinary

proceedings, and Exchange Regulatory

Staff designated by the Exchange, has

the authority to determine whether there

is probable cause for finding that a

violation within the disciplinary

jurisdiction of the Exchange has

occurred and that further proceedings

are warranted[, the]. If the Exchange

(‘‘the Complainant’’) determines that

further proceedings are warranted, then

the Exchange [shall] will initiate a

formal disciplinary action by preparing

a statement of charges (‘‘the

Complaint’’) against [the] any [person

or] member, member organization or

associated person alleged to have

committed a violation (‘‘the

Respondent’’) specifying the acts in

which the Respondent is [charged]

alleged to have engaged in, or which the

Respondent is alleged to have omitted,

and [setting forth] alleging the specific

provisions of the Securities Exchange

Act of 1934, as amended, rules and

regulations promulgated thereunder,

Exchange constitutional provisions,

rules, commentaries, resolutions,

policies or procedures, of which such

acts or omissions are alleged to be in

violation.

(b) At any time prior to service of the

written answer to the Complaint, the

Complaint may be amended to allege

new matters of fact or law. After service

of the written answer, the hearing panel

may allow amendment of the Complaint

upon submission of a written motion by

the Exchange and a showing of good

cause.

The Respondent shall have fifteen

business days after service of the

charges to file a written answer thereto.

The answer shall specifically admit or

deny each allegation contained in the

charges, and the Respondent shall be

deemed to have admitted any allegation

not specifically denied. The answer may

also contain any defense which the

Respondent wishes to submit and may

be accompanied by documents in

support of his answer or defense. In the

event the Respondent fails to file an

answer, the charges shall be considered

to be admitted.

The time period to file any answer

may be extended for such further

periods as may be granted by the

Exchange, if such request for extension

of the filing period is received by the

Exchange within five business days

prior to the date on which the answer

is due.

Summary Determinations

(c) [Rule 10.5] Notwithstanding the

provisions of Rule 10.5, the disciplinary

committee with jurisdiction over the

proceeding may make a determination

without a hearing and may impose a

penalty as to such charges which the

Respondent has admitted or has failed

to answer or which otherwise do not

appear to be in dispute. Notice of such

summary determination, specifying the

violations and penalty, shall be served

upon the Respondent.

Commentary:

.01 The term ‘‘probable cause’’

means that facts and circumstances

establish a reasonable likelihood that

the person committed the violation in

issue.

Hearing

[Rule 10.5] (Note: Rule 10.5 has been

renumbered as Rule 10.4(c))

[Rule 10.4] Rule 10.5(a) Upon

Respondent’s filing an answer, the

Respondent may request a hearing. An

appropriate Committee of the Exchange

(‘‘the Hearing Committee’’) shall

appoint one or more members to hear

the matter (‘‘the Panel’’). Parties shall be

given at least 15 calendar days notice of

the time and place of the hearing and a

statement of the matters to be

considered therein.

(b) Prior to the hearing, the Parties

shall be notified of the composition of

the Panel. Any objection to the

composition of the Panel must be

submitted to the Hearing Administrator

within five business days of receipt of

the notification regarding the

composition of the Panel.

(c) At least five business days prior to

the hearing the parties shall submit to

the Hearing Administrator a list of

witnesses and any documentary

evidence or other materials to be

presented at the hearing. The Hearing

Administrator shall immediately furnish

such list of witnesses, documentary

evidence or other materials to the other

parties.

(d) At the hearing, both the

Complainant and the Respondent shall

be entitled to be heard in person and to

present any relevant matter. Any

witnesses, testimony or evidence offered

by the Complainant or the Respondent

shall be subject to cross-examination by

the other party. The Panel shall

determine all questions concerning the

admissibility of evidence and shall

otherwise regulate the conduct of the

hearing. Formal rules of evidence shall

not apply. The charges shall be

presented by one or more

representatives of the Exchange, who

along with Respondent and any other

party, may present evidence and

produce witnesses who shall testify

under oath and are subject to being

questioned by the Panel and other

parties. The Panel, upon its own motion

or the motion of the Complainant or

Respondent, may request the production

of documentary materials and

witnesses. No member or person

associated with a member shall refuse to

furnish relevant testimony,

documentary materials or other

information requested by the Panel

during the course of the hearing. The

Respondent and intervening parties are

entitled to be represented by counsel

who may participate fully in the

hearing. A transcript for the hearing

shall be made and shall become part of

the record.

(e) Any person not otherwise a party

may intervene as a party to the hearing

upon demonstrating to the satisfaction

of the Panel that he has an interest in

the subject of the hearing and that the

disposition of the matter may, as a

practical matter, impair or impede his

ability to protect that interest. Also, the

Panel may in its discretion permit a

person to intervene as a party to the

hearing when the person’s claim or

defense and the main action have

questions of law or fact in common. Any

person wishing to intervene as a party

to a hearing shall file with the Panel a

notice requesting the right to intervene,

stating the grounds therefor, and setting

forth the claim or defense for which

intervention is sought. The Panel, in

exercising its discretion concerning

intervention, shall take into

consideration whether the intervention

will unduly delay or prejudice the

adjudication of the rights of the original

parties.

[(f) Except in writing, with copies to

the other parties, neither the

Complainant, the Respondent, nor any

interested party may discuss with the

Panel any matter concerning the facts or

allegations in the complaint unless the

other parties to the action are given

6678 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Notices

7The current provisions on regulatory

cooperation are set forth in PCX Rule 10.2(d).

8These provisions were, in large part, adapted

from the NASD Manual—Code of Procedure

(‘‘NASD Code of Proc.’’) Rule 9143, Ex Parte

Communications.

9Cf. NASD Code of Proc. Rule 9143(a)(1).

10Cf. NASD Code of Proc. Rule 9143(a)(2).

11Cf. NASD Code of Proc. Rule 9143(a)(1)–1(2)

12Cf. NASD Code of Proc. Rule 9143(b).

sufficient notice and an opportunity to

be heard.]

Rules 10.6–10.14—No change.

* * * * *

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

PCX included statements concerning the

purpose of and basis for the proposed

rule change and discussed any

comments it received on the proposed

rule change. The text of these statements

may be examined at the places specified

in Item IV below. The PCX has prepared

summaries, set forth in Sections A, B,

and C below, of the most significant

aspects of such statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

Independence of Regulatory Staff. The

Exchange is proposing to modify PCX

Rule 10.2 so that it will include new

provisions on the independence of PCX

Regulatory Staff and its separation from

the Exchange’s commercial interests.

Specifically, the rule is being modified

to state that the Exchange’s Regulatory

Staff will function independently of the

commercial interests of the Exchange

members and will have the sole

discretion to investigate, and will

investigate, possible violations within

the disciplinary jurisdiction of the

Exchange. The proposed rule further

states specifically that no member of the

Board of Governors or the Executive

Committee or non-Regulatory Staff may

interfere within or attempt to influence

the process or resolution of any pending

investigation or disciplinary proceeding.

Investigations. The Exchange is

proposing to reorganize the provisions

on Exchange investigations and to make

various technical and housekeeping

changes to the text of PCX Rule 10.2,

which will now cover both Exchange

investigations and regulatory

cooperation.7

Ex Parte Communications. The

Exchange is proposing to adopt new

PCX Rule 10.3 to codify specific

provisions on ex parte

communications.8 This rule change

codifies what communications

regarding pending investigations and

disciplinary proceedings are improper.

The Exchange believes that this rule

change will serve to assure that the

integrity and independence of the

Exchange’s regulatory function will be

protected.

More specifically, proposed Exchange

Rule 10.3(a)(1) provides that unless on

adequate notice and reasonable

opportunity for all parties to participate,

no person who is a subject of a pending

Exchange investigation (‘‘Subject’’) or a

Respondent in a pending disciplinary

proceeding, or counsel for or a

representative of the Subject or the

Respondent, with knowledge of a

pending Exchange investigation or

disciplinary proceeding, may make or

knowingly cause to be made an ex parte

communication, as defined below,

relevant to the facts or allegations of the

investigation or the disciplinary

proceeding to: (a) a member of the Board

of Governors; (b) a member of the

Executive Committee; (c) a person who

advises the Board of Governors or the

Executive Committee; (d) any member

of Exchange Regulatory Staff that is not

participating in the resolution of the

investigation or the disciplinary

proceeding; or (e) a member of a Hearing

Panel or the disciplinary committee

with jurisdiction over the investigation

or disciplinary proceeding.9

Proposed PCX Rule 10.3(a)(2)

provides that unless on adequate notice

and reasonable opportunity for all

parties to participate, no person who is

a member of a Hearing Panel or the

disciplinary committee with jurisdiction

over an investigation or disciplinary

proceeding, with knowledge of a

pending investigation or disciplinary

proceeding, may make or knowingly

cause to be made an ex parte

communication, as defined below,

relevant to the facts or allegations of the

investigation or the disciplinary

proceeding to: (a) A member of the

Board of Governors; (b) a member of the

Executive Committee; (c) a person who

advises the Board of Governors or the

Executive Committee; (d) any member

of Exchange Regulatory Staff; or (e) the

Subject of a pending Exchange

investigation or a Respondent in a

pending disciplinary proceeding, or

counsel for or a representative of the

Subject or the Respondent.10

Proposed Rule 10.3(a)(3) provides that

unless on adequate notice and

reasonable opportunity for all parties to

participate, no person who is a member

of the Board of Governors or the

Executive Committee, or any person

who advises the Board of Governors or

the Executive Committee, with

knowledge of a pending investigation or

disciplinary proceeding, may knowingly

make or cause to be made an ex parte

communication, as defined below,

relevant to the facts or allegations of the

investigation or the disciplinary

proceeding to: (a) Any member of

Exchange Regulatory Staff; (b) the

Subject of a pending Exchange

investigation or a Respondent in a

pending disciplinary proceeding, or

counsel for or a representative of the

Subject or the Respondent; or (c) a

member of a Hearing Panel or the

disciplinary committee with jurisdiction

over the investigation or disciplinary

proceeding.11

With respect to the disclosure of

prohibited communications, proposed

PCX Rule 10.3(b) provides that any

person who receives, makes or

knowingly causes to be made a

communication prohibited by this Rule

must promptly submit to Exchange

Regulatory Staff for inclusion in the

record of the investigation or

disciplinary proceeding: (1) All such

written communications; (2)

memoranda stating the substance of all

such oral communications; and (3) all

written responses and memoranda

stating the substance of any oral

responses to such communications.12

Proposed Exchange Rule 10.3(c) sets

forth remedies applicable to situations

in which prohibited communications

have been made. Specifically, the rule

provides that any member, member

organization or associated person who

made or knowingly caused to be made

a communication prohibited by

subsection (a) will be subject to

disciplinary action. The rule further

provides that an Exchange disciplinary

committee, to the extent consistent with

the interests of justice, may issue to the

member organization or associated

person responsible for the

communication or who benefited from

the communication an order to show

cause why the claim, defense or interest

of the member, member organization or

associated person should not be

adversely affected by reason of such ex

parte communication, including but not

limited to the entry of an adverse

summary decision. The rule further

provides that all parties to a disciplinary

proceeding and Exchange Regulatory

Staff will be provided with adequate

notice and a reasonable opportunity to

respond to any allegations or

contentions contained in the prohibited

communication and any responses will

be included in the record of the

Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Notices 6679

13Cf. NASD Code of Proc. Rule 9143(c).

14Cf. Chicago Board Options Exchange (‘‘CBOE’’)

Rule 17.4, Interpretation and Policy .01.

15See, e.g., proposed PCX Rule 10.3(a)(1) (‘‘No

person who is * * * a Respondent in a pending

disciplinary proceeding, may make * * * and ex

parte communication. * * *’’ (emphasis added)).

Cf. CBOE Rule 17.14, Interpretation and Policy

.01(i).

16 15 U.S.C. 78f(b).

17 15 U.S.C. 78f(b)(5).

18 15 U.S.C. 78f(b)(6).

investigation or disciplinary

proceeding.13

Proposed PCX Rule 10.3(d) clarifies

that nothing in the rule on ex parte

communications prohibits the members

of a disciplinary committee or Exchange

Regulatory Staff from discussing a

pending investigation or disciplinary

proceeding at a meeting of the

committee in connection with: (1) The

adjudication of the investigation

pursuant to the Minor Rule Plan; (2) the

determination of whether to impose

informal discipline; (3) the

determination of whether to authorize a

complaint or take no further action; or

(4) the determination of whether to

accept an offer of settlement.

Proposed Commentary .01 to

Exchange Rule 10.3 defines an ‘‘ex parte

communication’’ as an oral or written

communication made without notice to

all parties, i.e., Exchange Regulatory

Staff and the Subjects of investigations

or Respondents in disciplinary

proceedings. The Commentary further

states that a written communication is

ex parte unless a copy has been

previously or simultaneously delivered

to all interested parties. It further

provides that an oral communication is

ex parte unless it is made in the

presence of all interested parties except

those who, on adequate prior notice,

declined to be present.14

Finally, proposed Commentary .02 to

PCX Rule 10.3 states that a disciplinary

proceeding will be considered to be

pending from the date that a Complaint

has been issued pursuant to Rule 10.5

until the proceeding, including any

appeals, becomes final. This provision

will serve to clarify the scope of

statements prohibited by PCX Rule

10.3.15

Complaints. PCX Rule 10.3, which the

PCX proposes to renumber as Rule 10.4,

currently provides that formal

complaints for alleged violations of

Exchange rules (and other provisions)

may be authorized by the PCX Board of

Governors, by the Executive Committee

of the Exchange, or by any standing

committee designated by the Board of

Governors to review disciplinary

proceedings. The Exchange is proposing

to modify that provision so that only

Exchange Regulatory Staff designated by

the Exchange and any standing

committee designated by the Board of

Governors to review disciplinary

proceedings has the authority to

determine whether there is probable

cause to issue a formal complaint, i.e.,

probable cause for finding that a

violation within the disciplinary

jurisdiction of the Exchange has

occurred and that further proceedings

are warranted. The PCX also proposes to

make certain technical changes to the

text of current Exchange Rule 10.3 for

clarification purposes, e.g., changing the

term ‘‘charged’’ to ‘‘alleged.’’

With regard to amending outstanding

Complaints, proposed PCX Rule 10.4(b)

provides that at any time prior to service

of the written answer to the Complaint,

the Complaint may be amended to

allege new matters of fact or law. It

further provides that after service of the

written answer, the hearing panel may

allow amendment of the Complaint

upon submission of a written motion by

the Exchange and a showing of good

cause.

Finally, the Exchange is proposing to

adopt new Commentary .01 to new PCX

Rule 10.4 to provide that the term

‘‘probable cause’’ means that facts and

circumstances establish a reasonable

likelihood that the person committed

the violation in issue.

Summary Determinations. The

Exchange proposes to renumber PCX

Rule 10.5 to Rule 10.4(c).

2. Statutory Basis

The PCX believes the proposed rule

change is consistent with Section 6(b) 16

of the Act, in general, and furthers the

objectives of Section 6(b)(5),17 in

particular, in that it is designed to

promote just and equitable principles of

trade and to protect investors and the

public interest. The PCX also believes

that the proposal is consistent with

Section 6(b)(6) 18 of the Act in that it is

designed to assure that Exchange

members and persons associated with

Exchange members are appropriately

disciplined for violations of the Act, the

rules and regulations thereunder, and

the rules of the Exchange.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange does not believe that

the proposed rule change will impose

any burden on competition that is not

necessary or appropriate in furtherance

of the purposes of the Act.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

Written comments on the proposed

rule change were neither solicited nor

received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the publication of

this notice in the Federal Register or

within such longer period (i) as the

Commission may designate up to 90

days of such date if it finds such longer

period (i) as the Commission may

designate up to 90 days of such date if

it finds such longer period to be

appropriate and publishes its reasons

for so finding or (ii) as to which the selfregulatory organization consents, the

Commission will:

(A) By order approve the proposed

rule change, or

(B) Institute proceedings to determine

whether the proposed rule change

should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing,

including whether the proposed rule

change is consistent with the Act.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549–0609. 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 at

the Commission’s Public Reference

Room. Copies of such filing also will be

available for inspection and copying at

the principal office of the PCX.

All submissions should refer to File

No. SR–PCX–99–10 and should be

submitted by March 2, 2000.

6680 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Notices

19 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3Position limits impose a ceiling on the number

of option contracts in each class on the same side

of the market (i.e., aggregating long calls and short

puts or long puts and short calls) that can be held

or written by an investor or group of investors

acting in concert.

4See Exchange Act Release No. 41216 (March 26,

1999), 64 FR 16019.

5See Letter from John Dayton, Phlx, to Nancy

Sanow, Commission, dated November 9, 1999

(‘‘Amendment No. 1’’).

6Position limits impose a ceiling on the number

of option contracts in each class on the same side

of the market (i.e., aggregating long calls and short

puts or long puts and short calls) that can be held

or written by an investor or group of investors

acting in concert.

7Exercise limits prohibit an investor or group of

investors acting in concert from exercising more

than a specified number of puts or calls in a

particular class within five consecutive business

days.

8See 15 U.S.C. 78f(b). In approving this rule

change, 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. at 78c(f).

9Exchange Act Release Nos. 39489 (December 24,

1997), 63 FR 276 (January 5, 1998) (SR–CBOE–97–

11) (order approving an increase in OEX position

and exercise limits); 31330 (October 16, 1992), 57

FR 48408 (October 23, 1992) (SR–Amex–92–13)

(order approving an increase in Institutional Index

Options position and exercise limits).

10Position and exercise limits for the XOC were

raised from 17,000 to 25,000 contracts in 1996.

Position and exercise limits for the VLE were raised

from approximately 13,000 contracts, based on a

position limit based on monetary value, to 25,000

contracts in 1988. The US Top 100 Index was

created with limits of 25,000 contracts in 1995. See

Exchange Act Release No. 36745 (January 19, 1996),

61 FR 2561 (January 26, 1996) (SR–Phlx–95–38)

(establishing XOC position and exercise limits);

Exchange Act Release No. 35591 (April 11, 1995),

60 FR 19423 (April 18, 1995) (SR–Phlx–95–07)

(establishing TPX position and exercise limits);

Exchange Act Release No. 25644 (May 3, 1988), 53

FR 16829 (May 11, 1988) (SR–Phlx–88–06)

(establishing VLE position and exercise limits). See

also Exchange Act Release Nos. 37676 (September

13, 1996), 61 FR 49508 (September 20, 1996) (order

approving SR–CBOE–96–01, increasing position

limits for the SPX from 45,000 to 100,000

contracts); 39789 (December 24, 1997), 63 FR 276

(January 5, 1998) (order approving SR–CBOE–97–

11, increasing position limits for the OEX from

75,000 to 150,000 contracts). See also infra note 19.

11See H.R. Rep. No. IFC–3, 96th Cong., 1st Sess.

At 189–91 (Comm. Print 1978).

12The Phlx has been trading market index

options sionce 1985. See Exchange Act Release No.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.19

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–3087 Filed 2–9–00; 9:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42386; File No. SR–Phlx–

98–55]

Self-Regulatory Organizations;

Philadelphia Stock Exchange, Inc.:

Order Approving Proposed Rule

Change and Notice of Filing and Order

Granting Accelerated Approval to

Amendment No. 1 Relating to an

Increase in Position and Exercise

Limits for Certain Broad-Based Index

Options

February 4, 2000.

I. Introduction

On December 21, 1998 the

Philadelphia Stock Exchange, Inc.

(‘‘Phlx’’ 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 (‘‘Exchange Act’’

or ‘‘Act’’) 1 and Rule 19b–4 thereunder,2

a proposed rule change to increase

broad-based (‘‘market’’) index option

position and exercise limits on the

Value Line Composite Index (‘‘VLE’’),

the US Top 100 Index (‘‘TPX’’), and the

National Over-the-Counter Index

(‘‘XOC’’).3

The proposed rule change was

published for comment in the Federal

Register on April 2, 1999.4 No

comments were received on the

proposal. On November 10, 1999, the

Phlx filed an amendment to the

proposed rule change.5 This order

approves the proposal, as amended.

II. Description

The Phlx proposed to amend Phlx

Rule 1001A(a)(i)–(ii) by increasing

market index option position limits on

the VLE, the TPX, and the XOC.6

Specifically, the Phlx proposed to triple

the current levels of 25,000 contracts

total and 15,000 contracts in the nearest

expiration month for the VLE and the

TPX to 75,000 contracts total and 45,000

contracts in the nearest expiration

month. The Phlx also proposed to triple

position and exercise limits for the XOC

from 25,000 contracts total to 75,000

contracts total.

Exchange exercise limits,7 which are

expressed in Phlx Rule 1002A, are

established by reference to position

limits, such that any increase in

position limits would also increase

exercise limits. Accordingly, the Phlx

proposed to increase exercise limits to

correspond to the proposed increases in

position limits.

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 Sections 6 of the Act.8

Specifically, the Commission believes

that the proposed rule change is

designed to prevent fraudulent and

manipulative acts and practices, to

promote just and equitable principles of

trade, to foster cooperation and

coordination with persons engaged in

facilitating transactions in securities,

and to remove impediments to and

perfect the mechanism of a free and

open market and a national market

system.

Position limits serve as a regulatory

tool designed to address potential

manipulative schemes and adverse

market impact surrounding the use of

options. In the past, the Commission has

stated that:

Since the inception of standardized

options trading, the options exchanges have

had rules imposing limits on the aggregate

number of options contracts that a member

or customer could hold or exercise. These

rules are intended to prevent the

establishment of options positions that can

be used or might create incentives to

manipulate or disrupt the underlying market

so as to benefit the options position. In

particular, position and exercise limits are

designed to minimize the potential for minimanipulations and for corners or squeezes of

the underlying market. In addition such

limits serve to reduce the possibility for

disruption of the options market itself,

especially in illiquid options classes.9

In general, the Commission has taken

a gradual, evolutionary approach toward

expansion of position and exercise

limits.10 The Commission has been

careful to balance two competing

concerns when considering the

appropriate level at which to set option

position and exercise limits. The

Commission has recognized that the

limits must be sufficient to prevent

investors from disrupting the market in

the component securities comprising

the indexes. At the same time, the

Commission has determined that limits

must not be established at levels that are

so low as to discourage participation in

the options market by institutions and

other investors with substantial hedging

needs or to prevent specialists and

market-makers from adequately meeting

their obligations to maintain a fair and

orderly market.11

The Commission has carefully

considered the Phlx’s proposal. At the

outset, the Commission notes that it still

believes that the fundamental purposes

of position and exercise limits are being

served by their existence. Nevertheless,

the Commission believes that the Phlx’s

current experience with the trading of

market index options 12 make it