Federal Register / Vol. 61, No. 110 / Thursday, June 6, 1996 / Notices 28917

5The Commission notes that such regulatory

circular should, at a minimum, specify the exact

time period during which the weighted average

settlement value for expiring IPC options will be

calculated.

6See Securities Exchange Act Release Nos. 32120

(April 9, 1993), 58 FR 19864 (April 16, 1993)

(approval order for the Financial Times-Stock

Exchange 100 Index); 37089 (April 9, 1996), 61 FR

16660 (April 16, 1996) (approval order for the

Nasdaq-100 Index).

7The Commission notes that if the Bolsa

determines to sue a weighted average settlement

methodology, the weighted average will be

commuted from transaction prices over a period of

time at the end of the trading day. The Commission

expects, however, that once the exact time period

for calculating the settlement value for IPC options

is established, the CBOE will make conforming

changes to its rules in accordance with Section

19(b) of the Act.

8 15 U.S.C. 78s(b)(2) (1988).

9 17 CFR 200.30–3(a)(12).

Mexican markets are closed on the

Friday before expiration and the CBOE

is open for trading, the last trading day

for expiring IPC Index options on the

CBOE will be Thursday.

The Exchange notes that if the Bolsa

decides to use a weighted average

method to determine the settlement

value of IPC options, the CBOE will

issue a press release stating that such a

determination has been made and

listing which series will be affected by

the new settlement methodology. The

Exchange will also issue a regulatory

circular to its members and member

firms informing them of the specifics of

the settlement methodology, as well as

which series will be affected by the new

settlement methodology.5 In addition to

distributing the regulatory bulletin on

the floor of the Exchange, the Exchange

will publish the regulatory circular in

its regulatory bulletin.

According to the Exchange, the

weighted average methodology is less

likely to be manipulated because the

settlement value is not determined by

reference to only one transaction in each

of the component securities, but rather

is determined by the weighted average

of a series of transactions in each of the

component stocks over a period of time

at the end of the trading day. Presently,

the Bolsa has not made a final

determination regarding which

settlement methodology it will employ.

2. Statutory Basis

The CBOE believes that the proposal

is consistent with Section 6(b) of the

Act, in general, and furthers the

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

particular, in that it will allow the

Exchange to trade IPC options without

interruption if the Bolsa changes its

settlement methodology. In this

regard,the CBOE believes that the rule

change furthers the objectives of Section

6(b)(5) of the Act in that it is designed

to promote just and equitable principles

of trade, to remove impediments to and

perfect the mechanism of a free and

open market and a national market

system, and to protect investors and the

public interest.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The CBOE does not believe that the

proposed rule change will impose any

inappropriate burden on competition.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

Comments were nether solicited nor

received with respect to the proposed

rule change.

III. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington, DC 20549. Copies of the

submission, all subsequent

amendments, all written statements

with respect to the proposed rule

changes that are filed with the

Commission, and all written

communications relating to the

proposed rule changes 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

Section, 450 Fifth Street, NW.,

Washington, DC 20549. Copies of such

filings also will be available for

inspection and copying at the principal

office of the CBOE. All submissions

should refer to File No. SR–CBOE–96–

32 and should be submitted by [insert

date 21 days from date of publication].

IV. Commission’s Findings and Order

Granting Accelerated Approval of

Proposed Rule Change

The Commission finds 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,

the requirement of Section 6(b)(5)

thereunder. Specifically, the

Commission finds that the CBOE’s

proposal to change the method for

determining the settlement value of IPC

options does not present any new or

novel regulatory issues as the

Commission has previously approved

settlement methodologies utilizing

average weighted prices.6 In addition,

by issuing both a press release and a

regulatory circular concerning the

change in settlement methodology for

IPC options, which will include

information pertaining to which series

will be affected by the new settlement

methodology, investor confusion should

be avoided. Lastly, the Commission

believes that the weighted average

settlement methodology may reduce the

susceptibility of the Index to

manipulation by diminishing the impact

of a single trade on the settlement

price.7

The Commission finds good cause to

approve the proposal prior to the

thirtieth day after the date of

publication of notice of filing thereof in

the Federal Register. By accelerating the

effectiveness of the CBOE’s rule

proposal, the Commission is ensuring

that the Exchange will be able to list

index options on the IPC without any

interruption if the Bolsa decides to

change the settlement methodology

while continuing to ensure that

investors are adequately informed of the

changes in settlement methodology.

Accordingly, the Commission believes

that it is consistent with Sections 6(b)(5)

and 19(b)(2) of the Act to approve the

proposed rule change on an accelerated

basis.

V. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) 8 of the Act, that the

proposed rule change (File No. SR–

CBOE–96–32) is hereby approved on an

accelerated basis.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.9

Jonathan G. Katz,

Secretary.

[FR Doc 96–14180 Filed 6–5–96; 8:45 am]

BILLING CODE 8010–01–M
28918 Federal Register / Vol. 61, No. 110 / Thursday, June 6, 1996 / Notices

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

2 17 CFR 240.19b–4 and 240.19d–1(c)(2).

3The Exchange has submitted to the SEC

concurrently with the proposed rule change a minor

rule violation reporting plan in accordance with

Rule 19d–1(c)(2) under the Act. See Letter from

David Rusoff, Attorney, Foley & Lardner; to Glen

Barrentine, SEC, dated October 6, 1995.

4See Letter from David T. Rusoff, Attorney, Foley

& Lardner, to Glen Barrentine, SEC, dated December

8, 1995 (‘‘Amendment No. 1’’).

5See Letter from David T. Rusoff, Attorney, Foley

& Lardner, to Jon Kroeper, Attorney, SEC, dated

January 12, 1996 (‘‘Amendment No. 2’’); Letter from

David T. Rusoff, Attorney, Foley & Lardner, to Glen

Barrentine, SEC, dated March 3, 1996

(‘‘Amendment No. 3’’); and Letter from David T.

Rusoff, Attorney, Foley & Lardner, to John Kroeper,

Attorney, SEC, dated April 17, 1996 (‘‘Amendment

No. 4’’). Amendment No. 2 added a number of

clarifications to the proposal, amended the

Recommended Fine Schedule, and revised the

proposed minor rule violation reporting plan to

provide a method for modifying the list of rule

violations that constitute minor rule violations

under the reporting plan. Amendment No. 3 revised

the proposal by removing the President of the CHX

from any role in the imposition or setting aside of

fines under the proposal and further amended the

Recommended Fine Schedule. Amendment No. 3

also revised the proposed rule change and reporting

plan by removing seven rule violations from the list

of rule violations that would be designated minor

rule violations under the proposal and reporting

plan and clarified the operation of four other rules

on such list. Amendment No. 4 revised the proposal

to provide for the imposition of a fine under the

proposal in the event the Staff disagrees with the

Minor Rule Violation Panel’s recommendation that

the Exchange commence a formal disciplinary

proceeding, and amended language from

Amendment No. 2 in light of changes to the

proposal contained in Amendment No. 3.

6See Letter from C. Philip Curely, Attorney,

Robinson Curely & Clayton, P.C., to Margaret H.

McFarland, Deputy Secretary, SEC, dated January 5,

1996 (‘‘Comment Letter No. 1’’); Letter from C.

Philip Curely, Attorney, Robinson Curley &

Clayton, P.C., to Jonathan G. Katz, Secretary, SEC,

dated March 7, 1996 (‘‘Comment Letter No. 2’’). See

infra Section III, for a discussion of Comment Letter

Nos. 1 and 2.

7 In Securities Exchange Act Release No. 21013

(June 1, 1984), 49 FR 23828 (June 8, 1984), the SEC

adopted amendments to paragraph (c) of Rule 19d–

1 to allow self-regulatory organizations (‘‘SROs’’) to

submit for SEC approval plans for the abbreviated

reporting of minor disciplinary infractions. Under

the amendments, any disciplinary action taken by

a self-regulatory organization against any person for

violation of a rule of the self-regulatory organization

that has been designated as a minor rule violation

pursuant to a plan filed with the SEC shall not be

considered ‘‘final’’ for purposes of Section 19(d)(1)

of the Act if the sanction imposed consists of a fine

not exceeding $2,500 and the sanctioned person has

not sought an adjudication, including a hearing, or

otherwise exhausted his or her administrative

remedies with respect to the matter.

The SEC has approved minor disciplinary rule

plans by virtually every stock exchange and the

National Association of Securities Dealers, Inc. See,

e.q., Securities Exchange Act Release No. 21918

(April 3, 1985), 50 FR 14068 (April 9, 1985) (File

No. 4–260) (Amex); Securities Exchange Act

Release No. 22415 (September 17, 1985), 50 FR

38600 (September 23, 1985) (File No. 4–284)

(NYSE); Securities Exchange Act Release No. 22654

(November 21, 1985), 50 FR 48853 (November 27,

1985) (File No. 4–285) (PSE); Securities Exchange

Act Release No. 32383 (May 28, 1993), 58 FR 31768

(June 4, 1993) (SR–NASD–93–06).

8The proposed rule change also renumbers

existing CHX Article XII, Rule 9 to Article XII, Rule

10. See Amendment No. 1, supra note 4.

[Release No. 34–37255; File No. SR–CHX–

95–25]

Self-Regulatory Organizations;

Chicago Stock Exchange,

Incorporated; Order Granting Approval

to Proposed Rule Change, Including

Amendment Nos. 1, 2, 3, and 4,

Relating to the Establishment of a

Minor Rule Violation Procedure and

Reporting Plan

May 30, 1996.

I. Introduction

On October 11, 1995, the Chicago

Stock Exchange, Incorporated (‘‘CHX‘’

or ‘‘Exchange’’) submitted to the

Securities and Exchange Commission

(‘‘SEC’’ or ‘‘Commission’’), pursuant to

Sections 19(b)(1) and 19(d)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’) 1 and Rules 19b–4 and 19d–

1(c)(2) thereunder,2 a proposed rule

change to establish a minor rule

violation procedure.3 On December 8,

1995, the Exchange submitted to the

Commission Amendment No. 1 to the

proposed rule change.4 The original

filing, as amended by Amendment No.

1, was published for comment in

Securities Exchange Act Release No.

36576 (December 12, 1995), 60 FR

65362 (December 19, 1995). On January

17, 1996 the Exchange submitted to the

Commission Amendment No. 2 to the

proposed rule change, on March 5, 1996

the Exchange submitted Amendment

No. 3 to the proposed rule change, and

on April 17, 1996 the Exchange

submitted Amendment No. 4 to the

proposed rule change.5 Amendment

Nos. 2, 3, and 4 were published for

comment in Securities Exchange Act

Release No. 37140 (April 23, 1996), 61

FR 19107 (April 30, 1996). The

Commission received two comment

letters on the proposal.6 This order

approves the proposed rule change,

including amendment Nos. 1, 2, 3, and

4, and the Exchange’s proposed minor

rule violation reporting plan.7

II. Description

The Exchange proposes to adopt, as

Article XII, Rule 9 of the CHX rules,8 a

minor rule violation procedure

(‘‘Procedure’’) that authorizes the

Exchange, in lieu of commencing

disciplinary proceeding, to impose a

fine, not to exceed $2,500, on any

member, member organization,

associated person or registered or nonregistered employee of a member or

member organization for any violation

of an Exchange rule which the Exchange

determines to be minor in nature. The

Committee on Floor Procedure will have

the same authority for violations

relating to decorum on the Exchange

trading floor. The Procedure specifically

states that the Committee on Floor

Procedure and the Panel shall not,

collectively, impose more than one fine

pursuant to the Procedure relating to the

same underlying violation and incident.

If the fine is to be imposed by the

Exchange (as opposed to the Committee

on Floor Procedure) the fine shall be

imposed in accordance with the method

set forth in paragraph (b) of the

Procedure. Specifically, prior to

imposing the fine, the staff of the

Exchange shall present the facts

supporting such violative conduct to a

Minor Rule Violation Panel (‘‘Panel’’),

which shall consist of three floor

members (one member of the Committee

on Floor Procedure, one member of the

Committee’s Rules Subcommittee, and

one member not on the Committee or

any of its subcommittees) appointed by

the President of the Exchange. The

Panel then is authorized either to

impose the fine, reject the staff’s

recommendation, or recommend that

the Exchange commence a formal

disciplinary proceeding under Article

XII of the CHX rules. In the event that

the Panel recommends that the

Exchange commence a formal

disciplinary proceeding, the staff shall

either issue a report to the President, in

accordance with Article XII, Rule 1(a),

recommending that formal changes be

brought, or advise the Panel that the

staff will not recommend that the

Exchange commence a formal

disciplinary proceeding. If the staff

decides not to recommend the

commencement of a formal disciplinary

proceeding, the Panel is required to

impose a fine in accordance with the

provisions of the Procedure.

If a fine is to be imposed under the

Procedure, the Exchange will serve a

written statement on the person against

whom a fine is imposed setting forth the

rule violated, the act or omission

constituting the violation, the fine

imposed and the date of imposition, the

date the fine must be paid and the date

by which such determination must be

contested, such date to be not less than

15 days after the date of service of the

written statement.

If the person against whom a fine is

imposed pursuant to the Procedure

chooses not to contest the matter and

pays the fine, he or she waives his or her

right to a disciplinary proceeding under

Article XII of the Exchange’s rules and

any right to review or appeal (to the

extent such right would otherwise exist

under current Exchange rules).

Alternatively, any person may chose to
Federal Register / Vol. 61, No. 110 / Thursday, June 6, 1996 / Notices 28919

9Any fine imposed under the Procedure that is

contested may be publicly reported by the Exchange

to the same extent that CHX disciplinary

proceedings may be publicly reported. See CHX

Rules, Article XII, Rule 9 (Pending Proceedings).

10The Exchange will file with the SEC, for its

approval pursuant to Section 19(b) of the Act and

Rule 19b–4 thereunder, any proposed additions to,

deletions from, or other modifications to either the

list of rule violations set forth in Article XII, Rule

9 that are deemed to be minor rule violations or the

related Recommended Fine Schedule.

As part of the proposed rule filing, the Exchange

has submitted a Recommended Fine Schedule

which contains recommended dollar amounts for

the first, second, third and subsequent violations,

as calculated on a twelve-month rolling basis, of a

rule designated as a minor rule violation in the

Procedure and Plan. With one exception, the

recommended dollar amounts are as follows: First

Violation—$100; Second Violation—$500; Third

and Subsequent Violation—$1,000. For violations

of Article XI, Rule 4 (Financial and Operational

Reports) the recommended fines will be those

currently set forth in Interpretation and Policy .02

to such rule (i.e., 1–30 days late—$100; 31–60 days

late—$200; 61–90 days late—$400).

11The Plan provides that the Exchange may make

additions to, deletions from, or other modifications

to the list of rule violations that constitute minor

rule violations under the Plan. Rule 19d–1(c)(2)

under the Act requires that the SEC approve by

order, after appropriate notice of the terms of

substance of the filing or a description of the

subjects and issues involved and opportunity for

interested persons to submit written comment, any

amendment to an exchange’s minor rule violation

reporting plan submitted under such rule. In this

regard, the Plan provides that every filing of a

proposed rule change by the Exchange pursuant to

Section 19(b) of the Act and Rule 19b–4 thereunder

that adds to, deletes from or otherwise modifies the

list of rule violations contained in Article XII, Rule

9(h) of the CHX rules for which the Article XII, Rule

9 Procedure may be used will be deemed a request

by the Exchange for SEC approval to modify the list

of CHX rules that are designated minor rule

violations for purposes of the Exchange’s reporting

plan pursuant to Rule 19d–1(c)(2) under the Act.

12The Exchange’s quarterly report to the SEC will

include: the CHX’s internal file number for the case,

the name of the individual and/or organization, the

nature of the violation, the specific rule provision

violated, the fine imposed, the number of times the

rule violation has occurred, and the date of

disposition.

13 In Amendment No. 3, the Exchange removed

seven violations from the list of violations it

proposed to add to its Procedure and Plan.

14The only violation of this rule that may be

considered a minor rule violation is a failure of a

specialist to properly time-stamp an order ticket

entrusted to him or it.

15The provision of this rule that may be

considered a minor rule violation is the provision

that states that although oral bids and offers in

securities in the cabinet are permitted, they cannot

conflict with bids and offers resident in the cabinet.

A violation of this provision would occur if a floor

broker fails to ‘‘clear the cabinet’’ (i.e., fails to

satisfy bids or offers in the cabinet) before effecting

an agency cross in a cabinet security at the same

price or a price worse than the price of the bid or

offer resident in the cabinet.

16The only portion of this rule that is considered

a minor rule violation is the prohibition on a

specialist trading for his or its own account ahead

of customer orders on the specialist’s book.

17The only violation of this rule that may be

considered a minor rule violation is a specialist’s

failure to fill an incoming ITS commitment to the

fullest extent possible based on orders in the

specialist’s book.

18See Comment Letter Nos. 1 and 2, supra note

6.

19See Amendment No. 3, supra note 5; Letter

from George T. Simon, Attorney, Foley & Lardner,

to Jonathan G. Katz, Secretary, SEC, dated March 4,

1996.

contest a fine by submitting a written

answer, at which point the matter

becomes a ‘‘disciplinary proceeding’’

subject to the applicable provisions of

Article XII, including all disciplinary

sanctions available thereunder (except

for contests of a fine by the Committee

on Floor Procedure, which will be

subject to the provisions of Article XII,

Rule 3).9

Under the Procedure, the Exchange

will periodically prepare and announce

to its members and member

organizations a list of Exchange rules

and policies as to which the Exchange

may impose fines pursuant to the

Procedure as well as the fines that may

be imposed for their violation.10 The

Procedure, however, expressly states

that the Exchange is not required to

impose a fine under the Procedure with

respect to any violation of any rule

included on such list. In addition,

whenever the Exchange determines that

a rule violation is not minor in nature,

it has the discretion to commence

disciplinary proceedings under Article

XII of the CHX rules.

The Exchange also proposes to adopt,

pursuant to Section 19(d)(1) of the Act

and Rule 19d–1(c)(2) thereunder, a

minor rule violation reporting plan

(‘‘Plan’’). Under its Plan, the Exchange

designates certain specified rule

violations as minor rule violations 11

and requests that it be relieved of the

current reporting requirement of Rule

19d–1(c)(1) under the Act regarding

such violations, provided it gives notice

of such violations to the Commission on

a quarterly basis.12 The Plan, however,

would not cover any fine imposed

pursuant to the Procedure that is

contested. Such violations and fines

would continue to be reported as they

occur.

The Exchange has proposed a list of

rule and policy violations that would be

designated minor rule violations in both

its Procedure and Plan: 13 (1)

Acquisition of Membership by General

or Limited Partner (Article II, Rule 1);

(2) General Partners Bound by Rules of

Exchange (Article II, Rule 4); (3) Notice

of Death or Retirement of Partner

(Article II, Rule 9); (4) Filing and

Approval of Articles of Incorporation

(Article III, Rule 4); (5) Authorization of

Officers to Act (Article III, Rule 5); (6)

Officers, Directors and Principal

Stockholders (Article III, Rule 6); (7)

Death or Retirement of Registrant

Member (Article III, Rule 11); (8)

Records of Orders Transmitted (Article

IX, Rule 78); (9) Dealing in Stocks on

Put, Call, Straddle or Option (Article IX,

Rule 15); (10) Record of Margin Calls

and Receipt of Margin (Article X, Rule

2); (11) Record of Orders (Article XX,

Rule 24); (12) Written Reports of

Transactions (Article XXX, Rule 5); (13)

Record of Orders (Article XXX, Rule

11); 14 (14) Financial Operational

Reports (Article XI, Rule 4); (15)

Notification of Change in Bond

Coverage (Article XI, Rule 6); (16) Filing

Requirements on Change of Examining

Authority (Article XI, Rule 7); (17)

Submission of Evaluation of CoSpecialists Survey (Article VIII, Rule

11); (18) Failure to Issue Intermarket

Trading System (‘‘ITS’’) Pre-Opening

Notification (Article XX, Rule 39); (19)

Failure to Comply with ITS TradeThrough, Locked Markets and Block

Trade Rules (Article XX, Rule 40); (20)

Failure to Comply with 50%

Requirement (Article XXXIV, Rule 3);

(21) Failure to Comply with Public

Outcry Rule (Article XXXIV, Rule 10);

(22) Violation of Class A Decorum Rules

(Article XII, Rule 3, Interpretation and

Policy .01); (23) Violation of Class B

Decorum Rules (Article XII, Rule 3,

Interpretation and Policy .01); (24)

Failure to Clear the Post (Article XX,

Rule 10); (25) Failure to Comply with

Cabinet Securities Provision (Article

XX, Rule 11); 15 (26) Failure to Comply

with Minimum Fractional Changes

(Article XX, Rule 22); (27) Failure to

Comply with ‘‘Stopped’’ Order Rule

(Article XX, Rule 28); (28) Improper Use

of ‘‘SOLD’’ Designator (Article VIII, Rule

7); (29) Trading Ahead of Customer

Orders (Article XXX, Rule 2); 16 and (30)

Violation of Preference Solely on

Competitive Basis Rule (Article XXX,

Rule 3).17

III. Comments

The Commission received two

comment letters on the proposal from

Robinson Curely & Clayton, P.C.18 In

response, the Exchange filed

Amendment No. 3 to the proposal and

a reply letter.19 The following is a

summary of the arguments raised in the

comment letters, and the Exchange’s

response thereto.

First, in Comment Letter Nos. 1 and

2 the commenter argues that the

proposal gives too much discretion to

the Exchange’s staff with regard to the

disposition of alleged violations of CHX

rules and does not provide any

guidelines as to whether a formal

disciplinary proceeding or the

Procedure should be utilized in any

particular situation. In this regard, the
28920 Federal Register / Vol. 61, No. 110 / Thursday, June 6, 1996 / Notices

20See, e.g., NYSE Rule 476A, Amex Rule 590, and

BSE Chapter XVIII, Section 4.

21Under the Procedure, as originally proposed, if

the Panel recommended that the Exchange

commence a formal disciplinary proceeding in a

matter brought before it, the staff would issue a

report to the President pursuant to Article XII, Rule

1(a), either recommending that formal charges be

brought or that the President impose a sanction in

accordance with the Procedure. The President then

would have had the discretion to: (i) direct the staff

to prefer written charges, (ii) reject the

recommendation to prefer written charges, or (iii)

impose a fine under the Procedure. See Securities

Exchange Act Release No. 36576 (December 12,

1995), 60 FR 65362 (December 19, 1995).

22Subject to review by the Judiciary Committee,

Executive Committee and the Board of Governors.

See CHX Rules, Article XII, Rule 6.

23 In Comment Letter No. 2, the commenter

suggested that a means to avoid such a ‘‘chilling

effect’’ would be to allow the Exchange not to

impose a more severe sanction in a disciplinary

proceeding arising out of a contested minor rule

violation than the fine originally imposed under the

Procedure.

24Under CHX Rules, Article XII, Rule 2(a), if in

the President’s judgment it appears from the staff’s

report filed pursuant to Rule 1(a) that an alleged

violator has committed a minor infraction of the

CHX Constitution or rules, the President may

summarily censure and/or impose a fine of up to

$500 against such violator. The President’s decision

may be appealed to the Executive Committee of the

Exchange, whose decision shall be final.

25 15 U.S.C. 78f (b)(1), (b)(6), and (b)(7); 78f(d)(1);

and 78s(d).

26Relatedly, the SEC also believes that the CHX

proposal to create a new Minor Rule Violation

Panel to review specified minor rule violations

should help to make its disciplinary system more

efficient in prosecuting violations of these rules.

27Compare list of proposed minor rule violations

in CHX Procedure and Plan (see supra text

commenter argues that the staff could

elect to initiate a formal disciplinary

proceeding (with the potential for the

imposition of a severe penalty and

attendant publicity) if it was to its

‘‘advantage’’ to do so, or utilize the

Procedure in order to spare a

presumably favored offender such

treatment. The Exchange contends that

the discretion given to its staff under the

Procedure is the same prosecutorial

discretion currently given to the staff in

deciding whether to bring disciplinary

charges and approved by the

Commission for use by other SROs in

their minor rule violation procedures.

Moreover, the CHX argues that because

all fines imposed under the Procedure

must be approved by the Panel, the

Procedure gives less discretion to the

CHX staff than that granted under the

procedures utilized by other exchanges,

which allow their staffs to unilaterally

assess such fines.20

Second, in Comment Letter No. 1 the

commenter argued that the Procedure,

as originally proposed, also placed too

much discretion in the hands of the

CHX’s President.21 Furthermore, the

commenter contended that the

interaction of the President’s role under

the Exchange’s existing formal

disciplinary procedures and the

Procedure, as originally proposed,

would create an ‘‘unsound result’’ in a

situation where the President

disregarded the Panel’s

recommendation that the Exchange

initiate a formal disciplinary action and

imposed a fine under the Procedure. If

the alleged violator contested the

imposition of such a fine, the matter

would become a formal disciplinary

proceeding. Under Article XII, Rule 5(b)

of the CHX rules, the President imposes

the final judgment in each formal

disciplinary proceeding.22 The

commenter claimed that in such

situations the President would, in effect,

sit as ‘‘trial judge and appeals court.’’ In

response, the CHX stated that this

concern was resolved by Amendment

No. 3, which removed the President

from any role in the Procedure;

however, the Exchange also disputed

the commenter’s characterization of the

President’s role in the Procedure, as

originally filed.

Third, in Comment Letter Nos. 1 and

2 the commenter contends that because

any contest of a fine imposed under the

Procedure converts the matter into a

formal disciplinary proceeding with the

potential for the imposition of more

severe sanctions, the Procedure imposes

a ‘‘chilling effect’’ on a member’s ability

to contest such a fine.23 The CHX asserts

in response that in approving the minor

rule violation procedures of other

exchanges, the Commission has

determined that such procedures are

consistent with the Act.

Finally, the commenter questioned

the need for the adoption of a minor

rule violation procedure by the

Exchange, given the existence of the

summary procedure for minor

infractions of CHX rules found in

Article XII, Rule 2.24 The Exchange

responded by submitting that the Article

XII, Rule 2 summary procedure has not

been designated for use in conjunction

with a minor rule violation reporting

plan. As a result, any summary action

taken under Rule 2(a) is a ‘‘final

disciplinary action,’’ which is subject to

the immediate reporting requirements of

Rule 19d–1 under the Act.

IV. Discussion

After careful consideration of the

Comment Letters and the Exchange’s

response thereto, the Commission has

decided to approve the Exchange’s

Procedure and Plan. For the reasons

discussed below, the Commission finds

that the proposed rule change and

minor rule violation reporting plan are

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(b)

(1), (6), and (7), 6(d)(1) and 19(d) of the

Act.25

A. Proposed Minor Rule Violation

Procedure

The proposal is consistent with the

Section 6(b)(6) requirement that the

rules of an exchange provide that its

members and persons associated with

its members shall be appropriately

disciplined for violation of the rules of

the exchange. In this regard, the

Commission believes that the proposal

will provide a procedure whereby

member organizations can be

appropriately disciplined in those

instances when a rule violation is

technical and objective or minor in

nature, but a sanction more serious than

a warning or cautionary letter is

appropriate. Furthermore, because the

Procedure provides procedural rights to

the person fined and permits a

disciplined person to request a full

disciplinary hearing on the matter, the

proposal provides fair procedure for the

disciplining of members and persons

associated with members consistent

with Sections 6(b)(7) and 6(d)(1) of the

Act.

The Commission also believes that the

proposal provides an alternate means by

which to deter violations of the CHX

rules included in the Procedure, thus

furthering the Section 6(b)(1)

requirement that an exchange have the

ability to enforce compliance by its

members and persons associated with

its members with the Act and the rules

of the exchange. An exchange’s ability

to enforce effectively compliance by its

members and member organizations

with Commission and exchange rules is

central to its self-regulatory functions.

Inclusion of a rule in an exchange’s

minor rule violation procedure and

reporting plan should not be interpreted

to mean that it is an unimportant rule.

On the contrary, the Commission

recognizes that inclusion of rules under

a minor rule violation procedure and

reporting plan not only can reduce

reporting burdens of an SRO but also

can make its disciplinary system more

efficient in prosecuting violations of

such rules.26

The Commission finds that of the 37

rules that the CHX has proposed to

designate as minor rule violations in its

Procedure and Plan, 28 already have

been approved by the Commission for

inclusion in the minor rule violation

procedures and reporting plans of other

exchanges.27 As violations of these 28
Federal Register / Vol. 61, No. 110 / Thursday, June 6, 1996 / Notices 28921

following footnote 13 for such list), with lists of

minor rule violations contained in NYSE Rule 476,

Amex Rule 590, and PSE Rule 10.13.

28The Commission notes that it already has

approved for use in the Philadelphia Stock

Exchange, Inc.’s minor rule violation and reporting

plan an analogous rule that pertains to registered

options traders (‘‘ROTs’’). See Securities Exchange

Act Release No. 23491 (August 1, 1986), 51 FR

28469 (August 7, 1986) (File No. 4–289).

Specifically, Phlx Option Floor procedure Advice

B–3 requires, among other things, that at least 50%

of each ROT’s trading activity in each quarter must

be in assigned options.

29E.g., for every security priced above $1.00, no

less than a 1⁄8 per $1.00 variation is permissible.

30Telephone conversation between David Rusoff,

Attorney, Foley & Lardner; Daniel Liberti, Manager,

Market Regulation, and Rick Ose, Market

Regulation, CHX; and Glen Barrentine and Jon

Kroeper, SEC, on February 28, 1996.

31See supra note 15.

32See supra note 17.

33See Amendment No. 3, supra note 5.

34The Exchange’s floor staff can determine

whether the cabinet securities provision has been

violated through a comparison of executions in

such securities with orders resident in the book.

Violations of precedence to orders in the book can

be determined through a comparison of ITS

commitments, executions thereof on the Exchange,

and subsequent specialist executions. Telephone

conversation between David T. Rusoff, Attorney,

Foley & Lardner, and Jon Kroeper, Attorney, SEC,

dated May 24, 1996. Violations of the two

provisions concerning clearing the post can be

determined by discerning whether the floor broker

or market maker’s order ticket was stamped with

the distinctive identifier of the time stamp machine

at the specialist’s post, or through a conversation

with the specialist in question. For a more complete

discussion of the determination of clearing the post

violations, see Amendment No. 3, supra note 5.

35E.g., Trading Ahead of Customer Orders

(Article XXX, Rule 2) and Failure to Comply with

‘‘Stopped’’ Order Rule (Article XX, Rule 28).

rules are amenable to quick, objective

determinations of compliance and are

readily adjudicated, the Commission

finds that they are appropriate for

inclusion in the CHX’s Procedure. The

Commission also finds that, for the

following reasons, the other nine rules

proposed to be designated as minor rule

violations are appropriate for inclusion

in the CHX’s Procedure.

Notification of Change in Bond

Coverage (Article XI, Rule 6) requires

members to file with the Exchange any

changes in their fidelity bond coverage.

Filing Requirements on Change of

Examining Authority (Article XI, Rule 7)

requires members to file with the

Exchange upon their withdrawal from

membership in another national

securities exchange or registered

securities association that is the

member’s designated examining

authority. These rules are essentially

administrative reporting requirements

whose violation is both objectively

determinable and readily adjudicated,

making them suitable for inclusion in

the Exchange’s Procedure.

Failure to Comply with 50%

Requirement (Article XXXIV, Rule 3)

requires that 50% of a CHX market

maker’s quarterly share volume must be

in issues to which he or she is

assigned.28 Failure to Comply with

Minimum Fractional Changes (Article

XX, Rule 22) requires that bids and

offers in a security may not be made at

a less variation than that set in the

rule.29 A minor rule violation of Written

Reports of Transactions (Article XXX,

Rule 5) would occur, for example, if a

specialist failed to supply a report of a

transaction that was not effected

through the Exchange’s MAX System.30

As with the rules discussed in the

previous paragraph, violations of these

rules lend themselves to quick, objective

determination and adjudication.

Accordingly, these rules are appropriate

for inclusion in the Exchange’s

Procedure.

The remaining four violations are

concerned directly with the handling

and execution of orders entered with

Exchange members. A minor rule

violation of Failure to Comply with

Cabinet Securities Provision (Article

XX, Rule 11) would occur if a member

fails to satisfy bids or offers already

resident in the cabinet before effecting

an agency cross in a cabinet security at

the same or worse price than that of a

bid or offer in the cabinet.31 The portion

of Violation of Preference Solely on

Competitive Basis Rule (Article XXX,

Rule 3) subject to the Exchange’s

Procedure is a specialist’s failure to fill

an incoming ITS commitment to the

fullest extent possible based on orders

in the specialist’s book.32 Failure to

Comply with Public Outcry Rule

(Article XXXIV, Rule 10) and Failure to

Clear the Post (Article XX, Rule 10)

provide that market makers and floor

brokers must audibly bid or offer their

orders at the post before sending the

order to another market or effecting an

agency cross, as the cause may be.33

Although these four rules involve

more substantive matters than the rules

concerning reporting requirements,

violations of these rules should not

involve the complicated factual and

interpretive issues that are present in

matters that require the initiation of

formal disciplinary proceedings.

Moreover, the Exchange has represented

to the Commission that member noncompliance with these four rules is

readily determinable through the use of

its surveillance mechanisms.34 The

Commission believes that aggressive

enforcement of these rules under the

Procedure should benefit investors by

improving order interaction on the

Exchange, while furthering member

compliance with the Exchange’s trading

rules. Specifically, floor brokers and

market makers more likely will be

encouraged to clear the post or the

cabinet before effecting agency crosses

or off-the-Floor transactions, thus

providing a greater opportunity for the

execution of orders against those

already resident either with the

specialist or in the cabinet. Also,

specialists will be provided with an

additional incentive to fill incoming ITS

commitments to their stated amount,

leading to the more prompt execution of

orders on the specialist’s book.

Although a violation of these four

rules and a number of the other rules

contained in the Exchange’s Procedure

are designed to provide important

investor safeguards,35 a particular

violation of such rules may or may not

rise to the level which would justify a

formal disciplinary proceeding.

Therefore, the Commission believes that

including such rules in the Procedure,

in light of the Exchange’s discretion to

bring a formal disciplinary hearing for

any violation of such rules, should

enhance, rather than reduce, the

Exchange’s enforcement capabilities

regarding these rules in cases where

initiation of a formal disciplinary

proceeding may be more costly and time

consuming in view of the minor nature

of the particular violation, if not the

category of violation.

In conclusion, the Commission

believes that the Procedure will provide

a more effective means of deterrence for

the rules the Exchange proposes to

include in its Procedure than would the

alternative of written letters of caution

for lesser violations of such rules.

Accordingly, the Commission notes that

the CHX retains the discretion to bring

a formal disciplinary proceeding for

violations of any of the rules listed in

the Procedure. The Commission expects

the CHX to do so when appropriate for

the particular violation(s) involved, as

in the cases of an egregious violation or

habitual offender.

B. Comments on the Minor Rule

Violation Procedure

For the reasons discussed below, the

Commission believes that the

Procedure, as amended, adequately

addresses the concerns raised by the

commenter. First, the Commission does

not believe that the Procedure grants

undue discretion to the staff of the

Exchange in the disposition of alleged

violations of CHX rules, nor that it

provides inadequate guidelines as to the

staff’s exercise of such discretion. As the

Exchange stated in its response to the

Comment Letters, the addition of the
28922 Federal Register / Vol. 61, No. 110 / Thursday, June 6, 1996 / Notices

36Specifically, in the context of a formal

disciplinary proceeding the Exchange has the

ability to discipline its members and any persons

associated with a member ‘‘by expulsion,

suspension, limitation of activities, functions, and

operations, fine, censure, being suspended or barred

from being associated with a member or any other

fitting sanction.’’ See CHX Rules, Article XII, Rule

8(a). As the Panel may only impose monetary fines

under the Procedure, the commenter’s proposal

could restrict the Exchange to imposing such fines

in formal disciplinary proceedings arising out of

appeals of minor rule violations, thus depriving the

Exchange of the opportunity to impose what may

be a more appropriate sanction in light of its

findings in a formal hearing.

37See Securities Exchange Act Release No. 13726

(July 8, 1977), 42 FR 36411 (July 14, 1977).

38See Securities Exchange Act Release No. 21013

(June 1, 1984), 49 FR 23828 (June 8, 1984).

39See supra Section IV.A.

40Although the CHX Board of Governors makes

the initial determination of whether an Exchange

rule violation is ‘‘minor’’ for purposes of inclusion

in new Article XII, Rule 9 and the Plan, this

determination is subject to SEC review pursuant to

Sections 19 (b)(1) and (d)(1) of the Act and Rules

19b–4 and 19d–1(c)(2) thereunder. The SEC notes

that Article XII, Rule 9 fines in excess of $2500 are

not considered assessed pursuant to the Plan and,

accordingly, must be reported on an immediate

basis to the SEC under Section 19(d)(1) of the Act

and Rule 19d–1 thereunder.

41 15 U.S.C. 78s(b)(2)

42 17 CFR 200.30–3(a)(12) and (a)(44).

Procedure gives its staff the same

prosecutorial discretion as that

approved by the Commission for use by

other SROs in their minor rule violation

procedures. In addition, the Procedure

limits the staff’s discretion by requiring

that the Panel impose all fines against

alleged violators. Moreover, as has been

noted above, the Procedure is to be

utilized in situations where a rule

violation is technical and objective or

minor in nature; the Commission

expects that the Exchange will resolve

more serious violations of such rules

through the use of formal disciplinary

proceeding. The Comment Letters make

the related argument that the

availability of the Procedure opens the

possibility that the Exchange could

abuse its discretion and utilize either

the Procedure or full disciplinary

proceedings depending upon the

identity of the alleged violator. The

Commission believes that this concern

is alleviated by the Commission’s ability

to review the disciplinary actions taken

by the Exchange through both the CHX’s

formal reporting under Rule 19d–1 and

proposed quarterly reporting under the

Plan, and as part of the Commission’s

regular oversight inspections of the

Exchange.

Second, the Commission notes that

the commenter’s concern that the roles

of the CHX’s President, under the

Exchange’s existing disciplinary

procedures and the Procedure, as

originally filed, would create an

unsound result has been rendered moot

by the removal in Amendment No. 3 of

any role on the part of the President in

the imposition of fines under the

Procedure.

Third, the commenter argues that

because any contest of a fine imposed

under the Procedure converts the matter

into a formal disciplinary proceeding

with the potential for the imposition of

more severe sanctions, the Procedure

imposes a chilling effect on a member’s

ability to contest such a fine. The

Commission believes that the

commenter’s argument is misplaced.

The availability of a minor rule

violation procedure benefits not only an

exchange, for the reasons noted above,

but alleged violators of rules deemed

minor rule violations as well. In having

the ability to pay a fine assessed under

a minor rule violation procedure instead

of being subject to the initiation of

formal disciplinary procedures as a

matter of course, an alleged violator has

the opportunity to avoid the

expenditure of time and resources, as

well as the attendant publicity, that a

formal disciplinary proceeding may

entail. An alleged violator receives these

benefits while retaining his or her due

process rights to contest the charges in

a formal disciplinary proceeding.

As for the commenter’s suggestion

that the Exchange could prevent such a

‘‘chilling effect’’ by amending the

proposed rule change to provide that no

more severe sanction could be imposed

in any formal disciplinary proceeding

arising out of a contest of a minor rule

violation fine than that originally

imposed under the Procedure, the

Commission believes that such a

provision would limit unduly the

Exchange’s discretion to impose what it

believed were appropriate sanctions as

a result of the findings it made with

regard to a matter in a formal

disciplinary proceeding.36

Finally, the commenter questions the

necessity for the Procedure given the

existence of summary disciplinary

procedures in Article XII, Rule 2(a) of

the Exchange’s rules. The Commission

does not believe that an Exchange’s

ability to adopt a minor rule violation

procedure and reporting plan should be

limited by the existence of other

summary procedures in an exchange’s

rules. Additionally, the Commission

notes that the Article XII, Rule 2(a)

procedure is incompatible with a minor

rule violation reporting plan, as any

proceeding under Rule 2(a) is

considered a formal disciplinary

proceeding under CHX rules, making

any action taken under these procedures

a ‘‘final disciplinary action’’ under Rule

19d–1, and therefore immediately

reportable to the Commission.

C. Minor Rule Violation Reporting Plan

In adopting Rule 19d–1, the

Commission noted that the Rule was an

attempt to balance the informational

needs of the Commission against the

reporting burdens of the SROs.37 In

promulgating paragraph (c)(2) of Rule

19d–1, the Commission attempted to

reduce the reporting burdens of the

SROs by permitting, where immediate

reporting was unnecessary, periodic

reporting of minor rule violations.38

Any minor rule violation reporting plan

adopted pursuant to Rule 19d–1(c)(2) is

intended to be limited to rules which

relate to areas that can be adjudicated

quickly and objectively.

The Commission believes that the

rules proposed to be deemed minor rule

violations under the Exchange’s Plan

meet this criteria for the same reasons

as noted above with regard to the rules

proposed for inclusion in its

Procedure.39 Violations of these rules

are amenable to quick and objective

determinations of compliance. Efficient

and equitable enforcement of violations

of these CHX rules should not entail the

complicated factual and interpretive

inquiries associated with more

sophisticated Exchange disciplinary

actions. Therefore, it is reasonable for

these rules to be included in such an

abbreviated periodic reporting plan.40 In

addition, the Commission finds that the

format proposed by the Exchange to

make its quarterly report of violations to

the Commission under the Plan is

identical, in all material respects, to the

minor rule violation reporting plans

approved by the Commission for use by

other exchanges, and thus in

compliance with the requirements of

Rule 19d–1(c)(2) under the Act.

V. Conclusion

It Is Therefore Ordered, pursuant to

Section 19(b)(2) of the Act 41 and Rule

19d–1(c)(2) thereunder, that the

proposed rule change (SR–CHX–95–25)

and minor rule violation reporting plan

of the Exchange is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.42

Jonathan G. Katz,

Secretary.

[FR Doc. 96–14177 Filed 6–5 –96; 8:45 am]

BILLING CODE 8010–01–M