[Federal Register Volume 63, Number 111 (Wednesday, June 10, 1998)]
[Notices]
[Pages 31817-31818]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-15421]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40066; File No. SR-CHX-97-25]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Chicago Stock Exchange, Incorporated, Amending the Minor 
Rule Violation Plan

June 4, 1998.

I. Introduction

    On October 1, 1997, the Chicago Stock Exchange, Incorporated 
(``CHX'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ a proposed rule change 
amending the Minor Rule Violation Plan. The proposed rule change was 
published for comment in Securities Exchange Act Release No. 39723 
(March 5, 1998), 63 FR 12123 (March 12, 1998). No comments were 
received on the proposal. For the reasons discussed below, the 
Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
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II. Description of the Proposal

    On May 30, 1996 the Commission approved a proposed rule change that 
established a CHX Minor Rule Violation Plan (``Plan'').\2\ The Exchange 
is now proposing to add the failure to display a limit order in the 
quotation \3\ to the section of the Plan relating to Floor Decorum and 
Minor Trading Rule Violations. The Exchange believes that it is 
appropriate to add the CHX Limit Order Rule to the Plan because 
violations of the rule are either objective and technical in nature or 
easily verifiable. Moreover, the Exchange believes that because the CHX 
Limit Order Rule is built upon a comparable Commission Rule,\4\ 
violations of such rule require sanctions that are more severe than a 
warning or cautionary letter. Accordingly, the Exchange is proposing 
the recommended fine for failure to display a limit order in the 
quotation (Article XX, Rule 7, interpretation and policy .05) to be 
$1,000 for the first violation and all subsequent violations.\5\
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    \2\ Rule 19d-1(c)(2) under the Act authorizes national 
securities exchanges to adopt minor rule violation plans for the 
summary discipline and abbreviated reporting of minor rule 
violations by exchange members and member organizations. See 
Securities Exchange Act Release No. 21013 (June 1, 1984), 49 FR 
23828 (approving amendments to paragraph (c)(2) of Rule 19d-1 under 
the Act). The CHX's Plan was approved by the Commission in 1996. See 
Securities Exchange Act Release No. 37255 (May 30, 1996), 61 FR 
28918 (approving File No. SR-CHX-95-25).
    \3\ CHX Article XX, Rule 7 (``CHX Limit Order Rule'').
    \4\ See 17 CFR 200.11Acl-4 (``Limit Order Display Rule'').
    \5\ The Exchange notes that the minor rule plan violation 
schedule is merely a recommended fine schedule and that fines of 
more or less than the recommended fines can be imposed (up to a 
$2500 maximum) in appropriate circumstances. Moreover, the Exchange 
may proceed with formal disciplinary action, rather than procedures 
under the Plan, whenever it finds that a violation of the limit 
order rule was more than inadvertent.
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III. Discussion

    The Commission believes that the proposed rule change is consistent 
with the Act and the rules and regulations thereunder applicable to a 
national securities exchange, and, in particular, with Section 6(b)(5) 
which requires that the rules of an exchange be designed to promote 
just and equitable principles of trade, to remove impediments and to 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public 
interest.\6\
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    \6\ 15 U.S.C. 78f(b)(5).
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    The Exchange's proposal is also consistent with the requirements in 
Sections 6(b)(1) \7\ and 6(b)(6) \8\ that the rules of an exchange 
enforce compliance and provide appropriate discipline for violations of 
Commission and Exchange rules. Moreover, because CHX Article XII, Rule 
9 provides procedural rights to the person fined and permits a 
disciplined person to request a full hearing on the matter, the 
proposal provides a fair procedure for the disciplining of members and 
persons associated with members, consistent with Sections 6(b)(7) \9\ 
and 6(d)(1) \10\ of the Act.
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    \7\ 15 U.S.C. 78f(b)(1).
    \8\ 15 U.S.C. 78f(b)(6).
    \9\ 15 U.S.C. 78f(b)(7).
    \10\ 15 U.S.C. 78f(d)(1).
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    The Exchange's proposal reinforces the obligations of an exchange 
specialist to immediately display certain customer limit orders in 
accordance with the Commission's Limit Order Display Rule \11\ and the 
CHX Limit Order Rule.\12\ The Commission believes that displaying 
customer limit orders benefits investors by providing enhanced 
execution opportunities and improved transparency.\13\
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    \11\ 17 CFR 250.11Ac1-4.
    \12\ The Commission believes the increased fine of $1000 for the 
first violation is appropriate considering the very serious nature 
of these violations.
    \13\ See Securities Exchange Act Release 37619A (September 6, 
1996), 61 FR 48290 (September 12, 1996) (``Adopting Release'').
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    The Commission expects that the Exchange has the appropriate

[[Page 31818]]

surveillance procedures to easily identify a specialist who fails to 
display a customer limit order immediately or is relying on an 
automated system that does not display limit orders immediately.\14\ 
The Commission, therefore, believes that because certain violations of 
the Limit Order Rule are amenable to efficient and equitable 
enforcement they are appropriate for inclusion in CHX's Minor Rule 
Plan. The Commission expects, however, because a violation of the Limit 
Order Rule amounts to a violation of a federal securities law, that the 
Exchange will err on the side of caution in disposing of such 
violations under the Plan.\15\ The Commission expects the Exchange to 
continue to resolve more serious violations of rules through the use of 
formal disciplinary procedures, as in the case of an egregious 
violation or habitual offender.
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    \14\ A specialist is not displaying customer limit orders 
immediately if the specialist regularly executes customer limit 
orders at, for example, the 27th second after receipt. As stated in 
the Adopting Release, the requirement that a limit order be 
displayed ``immediately'' means that the limit order must be 
displayed as soon as practicable, but no later than 30 seconds after 
receipt under normal market conditions. This 30 seconds is an outer 
limit under normal market conditions and is not to be interpreted as 
a 30-second safe harbor.
    \15\ For example, the Commission expects that the Exchange would 
not issue several cautionary letters before instituting the fines 
under the Plan or aggregate multiple violations of the rules before 
instituting abbreviated disciplinary procedures under the Plan or, 
if necessary, full disciplinary procedures.
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IV. Conclusion

    For the foregoing reasons, the Commission believes that the 
proposed rule change is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and, in particular, with Sections 6(b)(1), 6(b)(5), 6(b)(6), 6(b)(7), 
6(d)(1) and 19(d) of the Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\16\ and Rule 19d-1(c)(2) thereunder,\17\ that the proposed rule change 
(SR-CHX-97-25) be, and hereby is, approved.

    \16\ 15 U.S.C. 78s(b)(2).
    \17\ 17 CFR 250.19d-1(c)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-15421 Filed 6-9-98; 8:45 am]
BILLING CODE 8010-01-M