[Federal Register Volume 62, Number 7 (Friday, January 10, 1997)]
[Notices]
[Pages 1480-1481]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-619]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38117; File No. SR-CSE-96-08]


Self-Regulatory Organizations; Cincinnati Stock Exchange; Order 
Granting Approval to Proposed Rule Change Relating to Continuous or 
Regular Quotation Obligations

January 3, 1997.

I. Introduction

    On October 3, 1996, the Cincinnati Stock Exchange (``CSE'' 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 issue a reiteration and 
clarification of its rules concerning dealer obligations to provide 
continuous or regular two-sided quotations.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 37811 (October 11, 1996), 61 FR 54472 (October 
18, 1996). No comments were received on the proposal.

II. Description

    The purpose of the proposed rule change is to clarify the 
obligations of CSE Designated Dealers, Qualified Dealers, and 
Contributing Dealers (collectively, ``CSE Dealers'') to provide 
continuous or regular two-sided quotations, as the case may be, during 
the trading day.\3\ Currently, CSE Rules 11.8 and 11.9 set forth the 
requirements for CSE Dealers' quotations obligations. To clarify these 
requirements, the CSE is proposing to adopt a Regulatory Circular 
(``Circular''), which sets forth the obligations of a CSE Dealer to 
comply with CSE Rule 11.8 and 11.9 in providing quotes. Upon Commission 
approval of the Circular, the CSE will be disseminating the Circular to 
CSE Dealers and the requirements in the Circular will be fully 
enforceable as a rule of the Exchange. The Circular will provide 
guidance concerning quotation obligations at the opening and intra-day, 
during computer systems problems, and in unusual market conditions. In 
addition, the Circular will delineate enforcement standards for non-
compliance with CSE rules pertaining to quotation obligations.
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    \3\ The term ``Designated Dealer'' is defined by the Exchange as 
a member who maintains a minimum net capital amount and who has been 
approved by the CSE's Securities Committee to perform market making 
functions by entering bids and offers into the Exchange's trading 
systems. See CSE Rule 11.9(a)(3). During Exchange trading hours, a 
Designated Dealer is required to provide continuous bids and offers 
for round lots of issues for which the member is registered as a 
Designated Dealer. See CSE Rule 11.9(c)(iii).
    A ``Contributing Dealer'' is defined as a member who maintains a 
minimum net capital amount and during Exchange trading hours 
provides regular bids and offers for round lots of issues for which 
the member is registered. See CSE Rule 11.9(a)(4). Currently, no CSE 
member is registered with the Exchange as a Contributing Dealer. 
Telephone Conversation between Adam Gurwitz, Director of Legal 
Affairs, CSE, and Jon Kroeper, Attorney, SEC, dated January 2, 1997.
    A ``Qualified Dealer'' is defined as a member who has been 
approved by the CSE's Securities Committee to provide to all members 
during Exchange trading hours a continuous two-sided market in odd-
lots of issues for which the member is designated a Qualified 
Dealer. See CSE Rule 11.8.
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    Specifically, the Circular will reiterate the obligations of a 
Designated Dealer or Qualified Dealer to display a two-sided quotation 
for a security immediately following the opening of the security on the 
primary market, and immediately to reestablish a quotation if that 
quotation is taken out during the day as a result of a transaction. The 
Exchange will thus reemphasize the need for Designated Dealers and 
Qualified Dealers to maintain continuous, two-sided quotations 
throughout the trading day.
    Moreover, the Circular will specify the notification procedures to 
be followed in the event of a computer system problem that prevents a 
CSE Dealer from providing continuous or regular two-sided quotations. 
Frequent systems problems may result in the CSE Dealer's deregistration 
in certain issues by the Exchange's Market Performance Committee 
(``MPC''), or may be considered by the MPC as a factor in a request to 
become a dealer in additional securities. In addition, the Circular 
states that the existence of unusual market conditions will not exempt 
a CSE Dealer from its continuous or regular quotation obligations.
    Finally, the Circular will place CSE members on notice that they 
will be informed of their compliance status at least quarterly, and 
will set forth possible sanctions resulting from non-compliance. In 
this regard, the Circular states that initial non-compliance may lead 
to a warning letter or a fine, while further non-compliance may lead to 
the imposition of sanctions, which may include a fine and 
deregistration in one or more issues. The Circular also states, 
however, that the MPC may impose sterner or swifter action, including 
sanctions, as it may find appropriate.

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).\4\ In particular, 
the Commission believes the proposal is consistent with the Section 
6(b)(5) 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.
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    \4\ 15 U.S.C. 78f(b).
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    The Commission finds that the Circular sets forth an adequate 
reiteration of CSE Dealers' existing obligations under Exchange rules 
to provide continuous or regular two-sided quotations, as the case may 
be,\5\ during Exchange trading hours. As was noted above, the Circular 
states that a Designated Dealer or Qualified Dealer shall immediately 
display a two-sided quotation as soon as the security opens on the 
primary market and that the dealer must immediately reestablish a bid 
or offer if its quote has been taken out as the result of a 
transaction.
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    \5\ See supra note 3.
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    In addition, the Commission believes that the Circular will provide 
CSE Dealers with appropriate clarification as to their continuous or 
regular quotation obligations under Exchange rules during the 
occurrence of unusual market conditions and in the event of systems 
problems at the Exchange or a member firm. The Circular clearly states 
that a CSE Dealer is not exempted from its obligation to provide 
continuous or regular two-sided quotations during the occurrence of 
unusual market conditions. Moreover, the Circular references the 
procedures, adopted in a

[[Page 1481]]

previous Regulatory Circular,\6\ that are to be followed in the event 
that systems problems at a member firm or the Exchange temporarily 
prevent a CSE Dealer from providing continuous or regular quotations.
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    \6\ See CSE Regulatory Circular 96-07.
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    Furthermore, the Commission believes that the Circular is 
consistent with Section 6(b)(1) of the Act \7\ in that it provides a 
means of notifying CSE Dealers of their compliance with the Exchange's 
rules regarding quotation obligations and delineates enforcement 
standards that will be applied by the Exchange as a result of member 
non-compliance with such obligations. The Circular states that members 
will be notified of their compliance status at least quarterly. In the 
event of non-compliance, the Circular provides that initial non-
compliance may lead to a warning letter or a fine, while further non-
compliance may lead to the imposition of sanctions, which may include a 
fine and deregistration in one or more issues. The Circular also 
states, however, that the MPC may impose sterner or swifter action, 
including sanctions, as it may find appropriate. The Commission would 
particularly expect the CSE to impose sterner sanctions for egregious 
or continued violations. Accordingly, given the flexibility inherent in 
the Circular's enforcement standards, the Commission believes that such 
standards should provide the Exchange with an appropriate framework to 
address instances of CSE Dealer non-compliance with the Exchange's 
rules regarding quotation obligations.
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    \7\ 15 U.S.C. 78f(b)(1).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-CSE-96-08) is approved.

    \8\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-619 Filed 1-9-97; 8:45 am]
BILLING CODE 8010-01-M