[Federal Register Volume 65, Number 237 (Friday, December 8, 2000)]
[Notices]
[Pages 77055-77056]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-31297]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43653; File No. SR-CSE-00-08]


Self-Regulatory Organizations; The Cincinnati Stock Exchange, 
Incorporated; Order Granting Approval to Proposed Rule Change To 
Include CSE Rule 11.9(u) and Interpretation .01 Thereunder in the Minor 
Rule Violation Program

December 1, 2000.

I. Introduction

    On October 13, 2000, The Cincinnati Stock Exchange, Incorporated 
(``CSE'' or ``Exchange'') filed with 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 amend CSE Rule 8.15, 
Imposition of Fines for Minor Violation(s) of Rules, to include CSE 
Rule 11.9(u) and Interpretation .01 thereunder, requiring CSE members 
to display certain market orders (``Market Order Display Rule''). The 
proposed rule change was published for comment in the Federal Register 
on October 27, 2000.\3\ No comments were received on the proposal. This 
order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 43471 (October 20, 
2000), 65 FR 64463 (October 27, 2000).
---------------------------------------------------------------------------

II. Description of the Proposal

    The CSE proposes to amend CSE Rule 8.15, Imposition of Fines for 
Minor Violation(s) of Rules, which provides for an alternative 
disciplinary regimen involving violations of Exchange rules that the 
Exchange determines are minor in nature. In lieu of commencing a 
disciplinary proceeding pursuant to Rules 8.1 through 8.14, the Minor 
Rule Violation Program (``Program'') permits the Exchange to impose a 
fine, not to exceed $2,500, on any member, member organization, or 
registered or non-registered employee of a member or member 
organization (``Member'') that the Exchange determines has violated a 
rule included in the Program. Adding a particular rule violation to the 
Program in no way circumscribes the Exchange's ability to address 
violations of those rules through more formal disciplinary rules. The 
Program simply provides the Exchange with greater flexibility in 
addressing rule violations that warrant a stronger regulatory response 
after the issuance of cautionary letters and yet, given the nature of 
the violations, do not rise to the level of requiring formal 
disciplinary proceedings.
    The Exchange proposes to add the failure to properly expose on the 
Exchange or immediately price improve certain customer market orders, 
as provided in Interpretation .01 to Exchange Rule 11.9(u), to the list 
of Exchange rule violations and fines included in the Program.\4\ The 
Exchange believes that Market Order Display Rule violations often are 
inadvertent and, in most cases, are best addressed in a summary 
fashion. However, because Interpretation .01 is predicated on the 
Exchange's commitment to promote customer price improvement

[[Page 77056]]

opportunities, violations of this Interpretation require sanctions more 
rigorous than a series of cautionary letters prior to formal 
proceedings.
---------------------------------------------------------------------------

    \4\ For further discussion of the CSE's Market Order Display 
Rule, see CSE Regulatory Circular to Exchange Members 97-07 (June 
17, 1997).
---------------------------------------------------------------------------

    Under the proposal, Exchange regulatory staff will review a 
sampling of Exchange members' market orders, based on appropriate 
market conditions, to determine if a threshold of market order exposure 
violations has been exceeded. Violations that exceed 2% of all eligible 
market orders of any Member for any calendar quarter will result in a 
$1,000 fine for that quarter. The second quarterly violation within a 
rolling 12-month period will result in a $2,500 fine. A third quarterly 
violation within a rolling 12-month period will result in a CSE 
Business Conduct Committee hearing with a staff recommendation of a 
$10,000 fine.\5\
---------------------------------------------------------------------------

    \5\ While the Exchange will collect data on a daily basis, the 
Exchange's initial sampling will consist of a review of data 
collected for two days per week--the day with the most violations, 
and the day with the fewest. Based on the Exchange's analysis of 
this information, the Exchange will determine if the violations 
exceed 2% of all eligible market orders for each calendar quarter. 
The Exchange plans eventually to determine violations based on 
information collected daily, rather than on a partial sample, with 
March 2001 as the proposed target date. See telephone conversation 
among Jeffrey Brown, Vice President, Regulation and General Counsel, 
CSE, James Flynn, Staff Attorney, CSE and Katherine England, 
Assistant Director, Division of Market Regulation (``Division''), 
SEC and Joseph Morra, Special Counsel, Division, SEC, November 30, 
2000.
---------------------------------------------------------------------------

    The minor rule violation fine schedule is merely a recommended 
schedule; fines of more or less than the recommended amount can be 
imposed (up to a $2,500 maximum) in appropriate situations. Also, the 
Exchange reserves the right to proceed with formal disciplinary action 
when, in the Exchange's opinion, circumstances warrant a more severe 
level of sanction or remedial action.

III. Discussion

    The Commission has reviewed carefully the CSE's proposed rule 
change and finds, for the reasons set forth below, that the proposal is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange.\6\ 
In particular, the commission finds the proposal is consistent with 
sections 6(b)(5),\7\ 6(b)(6),\8\ 6(b)(7),\9\ and 6(d)(1),\10\ of the 
Act.
---------------------------------------------------------------------------

    \6\ In approving this rule, the Commission has considered its 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
    \7\ 15 U.S.C. 78f(b)(5).
    \8\ 15 U.S.C. 78f(b)(6).
    \9\ 15 U.S.C. 78f(b)(7).
    \10\ 15 U.S.C. 78f(d)(1).
---------------------------------------------------------------------------

    Section 6(b)(5) requires that the rules of an exchange be designed 
to promote just and equitable principles of trade and to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest. The Commission believes the proposal is consistent 
with section 6(b)(5) because it will augment the Exchange's ability to 
police its market, and will allow greater flexibility in responding to 
violations of the Market Order Display Rule.
    Section 6(b)(6) requires that the rules of an exchange provide that 
its members and persons associated with its members shall be 
appropriately disciplined for violations of Commission and Exchange 
rules. Including violations of the Market Order Display Rule in the 
Program should give the Exchange the ability to treat violations of the 
Rule in a summary fashion, but retain the flexibility to address more 
egregious violations of the Rule with more severe sanctions where 
appropriate.
    In addition, the Commission believes that the proposal provides a 
reasonable procedure for the discipline of Members consistent with 
sections 6(b)(7) and 6(d)(1) of the Act. Section 6(b)(7) requires the 
rules of an eschange to be in accordance with the provisions Section 
6(d), and, in general, to provide a fair procedure for the disciplining 
of members and persons associated with members. Section 6(d)(1) 
requires that, in any proceeding by an exchange to determine whether a 
member should be disciplined, the exchange must bring specific charges, 
notify the member of those charges, and give the member an opportunity 
to defend against the charges. Because CSE Rule 8.15 provides 
procedural safeguards to the Member being fined, and allows the Member 
who is disciplined to request full hearing on the matter, the 
Commission believes the proposal is both reasonable and consistent with 
sections 6(b)(7) and 6(d)(1).
    The Commission notes that by allowing the CSE to address violations 
of the Market Order Display Rule under the Program, the Commission in 
no way minimizes the importance of compliance with the Rule, and all 
other Rules subject to the imposition of fines under the Program. The 
Commission believes that the violation of any Exchange and/or 
Commission Rule is a serious matter. However, in an effort to provide 
the Exchange with greater flexibility in addressing certain violations, 
the Program provides a reasonable means to address rule violations that 
do not rise to the level of requiring formal disciplinay proceedings. 
The Commission expects that the CSE will continue to conduct 
surveillance with due diligence, and make a determination based on its 
findings whether fines of more or less the recommended amount are 
appropriate for violation of the Market Order Display Rule on a case by 
case basis, or if a violation requires formal disciplinary action.

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
\11\ that the proposed rule change (SR-CSE-00-08) is approved.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority. \12\
---------------------------------------------------------------------------

    \12\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-31297 Filed 12-7-00; 8:45 am]
BILLING CODE 8010-01-M