[Federal Register Volume 74, Number 46 (Wednesday, March 11, 2009)]
[Notices]
[Pages 10638-10640]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-5202]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59522; File No. SR-NYSEArca-2008-134]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving 
Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To Amend 
Rule 10.16, Sanctioning Guidelines

March 5, 2009.

I. Introduction

    On December 11, 2008, NYSE Arca, Inc. (``NYSE Arca'' 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\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend NYSE Arca Rule 10.16 (``Rule 10.16'' or 
``Sanctioning Guidelines''). The proposed rule change was published for 
comment in the Federal Register on December 30, 2008.\3\ The Commission 
received no comments on the proposed rule change. On February 13, 2009, 
NYSE Arca filed Amendment No. 1 to the proposed rule change.\4\ This 
order approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 59117 (December 18, 
2008), 73 FR 79964.
    \4\ Amendment No. 1 makes minor, non-substantive changes to the 
description of the proposed rule change and to the proposed rule 
text. Because Amendment No. 1 is non-substantive in nature, the 
Commission is not publishing it for comment.
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II. Description

    Rule 10.16 sets forth (1) general principles that apply to all 
determinations of sanctions in options market-related disciplinary 
proceedings, (2) a list of principal considerations to use to determine 
sanctions, and (3) a set of suggested fines and non-monetary penalties 
for violations of specific options rules of the Exchange (``Specific 
Sanctioning Guidelines). The Sanctioning Guidelines are used by various 
Exchange bodies (hereafter ``adjudicators'') to help determine 
appropriate remedial sanctions in disciplinary proceedings. The 
Exchange proposes to make the following

[[Page 10639]]

amendments to the Sanctioning Guidelines:

A. General Principles

    The proposed rule change clarifies that the Sanctioning Guidelines 
are intended to apply to all persons using the facilities of the 
Exchange.\5\ Therefore, the proposed rule change amends the Sanctioning 
Guidelines to replace the terms ``employee'' and ``approved person'' 
with the broader term ``Associated sPerson,'' which includes Allied 
Persons, Affiliated Persons, Approved Persons and other employees of an 
OTP Firm.\6\ The Exchange also proposes changes to clarify that an 
Associated Person may be employed by an OTP Holder or OTP Firm.\7\
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    \5\ The Commission notes that Rule 10.16 is applicable to the 
options market-related activity of NYSE Arca, and therefore by its 
terms is limited to options market-related disciplinary proceedings 
of NYSE Arca.
    \6\ See proposed NYSE Arca Rules 10.16(a) and (d)(2)-(3), (8) 
and (12).
    \7\ See proposed NYSE Arca Rules 10.16(d)(2)-(3), (8) and (12).
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    The Exchange proposes to amend the Sanctioning Guidelines to make 
clear that irrelevant incidents of misconduct should not be considered 
by adjudicators in determining sanctions,\8\ and to allow adjudicators 
to use a ``reasonable calculation of loss'' for the purposes of 
determining restitution when actual loss cannot be calculated.\9\ 
Because it is not always possible for adjudicators to determine actual 
loss, the Exchange believes that the Sanctioning Guidelines should 
provide adjudicators an alternative method for calculating restitution.

    \8\ See proposed NYSE Arca Rule 10.16(b)(2).
    \9\ See proposed NYSE Arca Rule 10.16(b)(5).
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B. Specific Sanctioning Guidelines

    Rule 10.16 currently contains ``Specific Sanctioning Guidelines'' 
for certain enumerated options order handling rules \10\ and rules 
relating to recordkeeping and financial requirements.\11\ These 
Specific Sanctioning Guidelines list principal considerations that 
adjudicators should weigh when determining sanctions for these 
categories of rules; provide a three-tier monetary fine system based on 
the number of disciplinary actions against the named party; and provide 
for non-monetary penalties (e.g., suspensions and expulsions) for named 
parties in disciplinary proceedings. The proposed rule change amends 
the Specific Sanctioning Guidelines in Rules 10.16(e)-(f) to require 
that adjudicators consider the general principal considerations 
applicable to all violations, and to consider whether the disciplinary 
action is the first or subsequent disciplinary action taken against the 
OTP Holder, OTP Firm or Associated Person.\12\ The Exchange notes that 
recent acts of similar misconduct may be considered aggravating 
factors.
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    \10\ See NYSE Arca Rule 10.16(e) (Specific Sanctioning 
Guidelines for Options Order Handling Rules).
    \11\ See NYSE Arca Rule 10.16(f) (Specific Sanctioning 
Guidelines for Recordkeeping and Financial Requirements Rules.)
    \12\ See proposed NYSE Arca Rule 10.16(e)-(f).
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    The proposed rule change also replaces the three tiers of suggested 
fines set out in the Specific Sanctioning Guidelines with a single 
range of suggested fines. The Exchange believes that a single range of 
suggested fines will provide adjudicators greater latitude than they 
presently have in applying sanctions in a fair and consistent manner. 
The proposed rule change further amends the fine levels to increase the 
minimum and maximum fines that adjudicators may impose in disciplinary 
proceedings.\13\ The Exchange notes that under its Minor Rule Violation 
Plan (``MRVP''), the Exchange is authorized to impose fines of up to 
$5,000 for minor rule violations in lieu of initiating formal 
disciplinary proceedings.\14\ The Exchange represented that, in light 
of the fines permissible under the Exchange's MRVP, the current minimum 
monetary penalty levels in Rule 10.16 (which range between $1,000 and 
$5,000) are too low, given the serious nature of the violations.
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    \13\ See proposed NYSE Arca Rule 10.16(e)-(f).
    \14\ See NYSE Arca Rule 10.12.
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    Likewise, given the serious nature of the violations covered by the 
Sanctioning Guidelines, the Exchange believes the current maximum 
monetary penalty levels are also too restrictive. Therefore, in order 
to act as an effective deterrent against future violations, while 
serving as a just penalty for those who commit these violations, the 
Exchange proposes to increase the minimum monetary penalty to $10,000 
and the maximum monetary penalty to $100,000.
    The proposed rule change also amends the non-monetary penalty 
provision (providing for suspension, expulsion or other sanction for a 
named party in a disciplinary proceeding) to increase the suggested 
maximum term of suspensions from two years to five years. Under the 
current Sanctioning Guidelines, an adjudicator may suspend a named 
party in a formal disciplinary proceeding for up to two years or expel 
or permanently bar a named party for egregious rule violations. The 
Exchange believes that there are certain violations that could justify 
a suspension of more than two years, but do not justify an expulsion or 
a permanent bar. Therefore, the Exchange believes that increasing the 
maximum term of suspensions from two to five years will afford 
adjudicators greater flexibility in determining appropriate non-
monetary sanctions.
    The proposed rule change also amends Rule 10.16 to include Specific 
Sanctioning Guidelines for two additional rules. Proposed Rule 10.16(g) 
will set forth Specific Sanctioning Guidelines for violations of NYSE 
Arca Rule 9 (Conducting Business with the Public),\15\ and proposed 
Rule 10.16(h) will set forth guidelines for violations of NYSE Arca 
Rule 11 (Business Conduct).\16\ While the proposed principal 
considerations and non-monetary sanctions for these new Specific 
Sanctioning Guidelines are substantially similar to those contained in 
amended Rules 10.16(e)-(f), the Exchange proposes a different range of 
suggested fines for these two rules. The Exchange represents that 
violations of NYSE Arca Rules 9 and 11 are extremely serious matters. 
Therefore, the Exchange believes that the range of fines contained in 
Rules 10.16(g)-(h) should be higher than the range of fines contained 
in Rules 10.16(e)-(f). Accordingly, the proposed rule change provides 
that the suggested range of fines in Rules 10.16(g)-(h) will be from 
$15,000 to $150,000. The Exchange believes that these fines are 
appropriate given the serious nature of Rule 10.16(g)-(h) related 
offenses. The Exchange believes that these fines will act as an 
effective deterrent against future violations and serve as a just 
penalty for those that commit these violations.
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    \15\ See NYSE Arca Rule 9 (Conducting Business with the Public). 
This rule generally consists of several provisions intended to 
protect public customers and their accounts.
    \16\ See NYSE Arca Rule 11 (Business Conduct). This rule 
generally consists of several provisions intended to prevent actions 
that could be deemed detrimental to the welfare and protection of 
investors, or conduct or proceedings inconsistent with just and 
equitable principles of trade.
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C. Miscellaneous Changes

    The proposed rule change makes additional amendments to the 
Sanctioning Guidelines as follows:
    Rule 10.16(e)(2) sets forth Specific Sanctioning Guidelines for 
violations of the priority rules and obligations of market makers. The 
proposed rule

[[Page 10640]]

change adds NYSE Arca Rule 6.37A \17\ to Rule 10.16(e)(2) because Rule 
6.37A also deals with the obligations of market makers, and thus is 
appropriately included in this Specific Sanctioning Guideline.
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    \17\ See NYSE Arca Rule 6.37A (Obligations of Market Makers--
OX).
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    The proposed rule change eliminates references to floor official 
training for OTP Holders in Rule 10.16(b)(7) because the Exchange does 
not employ OTP Holders as floor officials.
    The proposal also corrects spelling and typographical errors and 
makes other minor, non-substantive changes throughout the Sanctions 
Guidelines such as the renumbering of certain provisions and the 
elimination of obsolete ``Commentary'' and examples of regulatory 
incidents that are not relevant to determinations of sanctions.

III. Discussion and Commission's Findings

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of Section 6(b) \18\ 
of the Act, and in particular, with Section 6(b)(5) \19\ of the Act, 
which requires, among other things, that the Exchange's rules be 
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, and, in general, to 
protect investors and the public interest.\20\
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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(5).
    \20\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    The Commission also finds that the proposal is consistent with 
Section 6(b)(6) \21\ of the Act, which requires that the rules of the 
exchange provide that its members and persons associated with its 
members shall be appropriately disciplined for violations of the Act 
and the rules and regulations thereunder.
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    \21\ 15 U.S.C. 78f(b)(6).
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    The Exchange's proposal amends the Sanctioning Guidelines to 
provide more flexibility for adjudicators in crafting fair and 
appropriate monetary and non-monetary sanctions for violations of 
certain enumerated Exchange rules, and adds categories of rules that 
will be subject to the Sanctioning Guidelines. The proposed rule change 
also clarifies that the guidelines apply to all persons using the 
option-related facilities of the Exchange, and makes other changes that 
should strengthen the Exchange's disciplinary program. Accordingly, the 
Commission finds that the proposed rule change is consistent with the 
Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-NYSEArca-2008-134) be, and 
it hereby is, approved.
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    \22\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-5202 Filed 3-10-09; 8:45 am]
BILLING CODE 8011-01-P