Document ID: SEC-2006-0686-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Philadelphia Stock Exchange, Inc.
Posted Date: 2006-05-26T04:00Z

[Federal Register: May 26, 2006 (Volume 71, Number 102)]
[Notices]               
[Page 30462-30464]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26my06-138]                         

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53846; File No. SR-Phlx-2005-65]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto 
Relating to the Exchange's Business Conduct Committee and Disciplinary 
Rules

May 19, 2006.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 2, 2005, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the Phlx. 
On May 16, 2006, the Phlx filed Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Amendment No. 1.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to amend Exchange By-Law Article X, Section 10-
11, Business Conduct Committee and Exchange Rules 960 and 970 to: (1) 
Establish a Hearing Officer position; (2) amend certain provisions 
relating to the retention and compensation of Hearing Panelists; (3) 
amend the hearing process as it relates to decisions issued by the 
Hearing Panel; and (4) make other minor, non-substantive changes to 
Exchange By-Law Article X, Section 10-11, Business Conduct Committee 
and Rules 960 and 970. Specifically, the proposal discussed below would 
create the new staff position of a ``Hearing Officer,'' who, along with 
two other Hearing Panelists, would hear contested disciplinary matters 
that previously were heard by the Business Conduct Committee (``BCC'' 
or ``Committee''). The text of the proposed rule change is available on 
the Phlx's Web site (http://www.phlx.com), at the Phlx's Office of the 

Secretary, and at the Commission's Public Reference Room.

[[Page 30463]]

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Phlx included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Phlx has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Background: Currently, pursuant to Exchange Rule 960.5(a), a 
hearing on a Statement of Charges is held before a Hearing Panel 
composed of three persons appointed by the Chairman of the BCC or the 
Chairman's designee. The presiding person of each Hearing Panel is a 
member of the Committee. The other two persons on the Hearing Panel are 
members of the Exchange, or general partners or officers of member 
organizations, or such other persons whom the Chairman of the BCC or 
the Chairman's designee considers to be qualified.
    Currently, pursuant to Exchange Rule 960.5(d), after the conclusion 
of the hearing, the Hearing Panel reviews the entire record of the 
proceeding and submits a written hearing report to the Committee 
containing proposed findings of fact, conclusions of violations and a 
recommendation as to appropriate sanctions, to be considered by the 
Committee at the next Committee meeting after the report is completed.
    After reviewing the entire record of the disciplinary proceeding, 
the BCC, by a majority of the members voting, determines whether the 
Respondent has committed violations and the appropriate sanctions, if 
any.\4\ The BCC then issues a written decision, including in its 
decision a statement of findings and conclusions, with the reasons 
therefor, upon all material issues presented in the record, and whether 
each violation within the disciplinary jurisdiction of the Exchange 
alleged in the statement of charges has occurred.
---------------------------------------------------------------------------

    \4\ See Exchange Rule 960.8.
---------------------------------------------------------------------------

Hearing Officer

    The Exchange proposes to establish a new permanent professional 
position of Hearing Officer. The responsibilities of the Hearing 
Officer would include, but are not limited to: presiding over hearings 
in contested disciplinary cases authorized by the Exchange's BCC, 
conducting pre-hearing conferences, ruling on procedural or discovery 
matters, scheduling hearing sessions, making all necessary evidentiary 
or other rulings (in consultation with the Hearing Panelists), 
regulating the conduct of the hearing, imposing appropriate sanctions 
for improper conduct by a party or a party's representative, drafting 
and issuing decisions on behalf of the Hearing Panel and rendering 
decisions in connection with Summary Disposition Proceedings.\5\ The 
Hearing Officer would not be permitted to be involved in any manner in 
the investigation of possible misconduct, to participate in the 
consideration by the BCC of whether to institute a disciplinary action, 
to render a decision following a hearing without the concurrence of a 
majority of the Hearing Panel, to rule upon requests to disqualify the 
Hearing Officer or any member of the Hearing Panel, or to issue 
citations for violations of Exchange rules or floor procedure 
advices.\6\
---------------------------------------------------------------------------

    \5\ See proposed Exchange Rule 960.6.
    \6\ In addition, in accordance with By-Law Article X, Section 
10-11, the jurisdiction of the Hearing Officer and Hearing Panel 
shall not extend to the enforcement of rules and regulations of the 
Floor Procedure Committee or the Options Committee relating to 
order, decorum, health, safety and welfare on the trading floors, or 
to hearings held by and sanctions imposed by such committees 
relating to such matters, except as permitted by the rules of the 
Exchange or any interpretation thereof, and any regulations 
promulgated thereunder.
---------------------------------------------------------------------------

    The Hearing Officer would report to the Audit Committee for all 
performance and compensation purposes to help ensure that the Hearing 
Officer is completely neutral and accountable to the Audit Committee 
alone. The Hearing Officer would merely report to the General Counsel 
or his or her designee to comply with policies and procedures 
applicable to all employees of the Exchange, such as reporting vacation 
time or sick leave.

Hearing Panelists

    Consistent with current practice, the Hearing Panelists would be 
selected based on their background, experience and training, which 
should qualify them to consider and make determinations regarding the 
subject matter to be presented to the Hearing Panel. Other factors to 
consider include the availability of the individual Hearing Panelists, 
the extent of their prior service on Hearing Panels and any 
relationship between such persons and the Respondent, which might make 
it inappropriate for such persons to serve on the Hearing Panel. The 
BCC Chair, or the Chair's designee, would select the Hearing Panelists 
for each matter from a pool of qualified panelists.\7\
---------------------------------------------------------------------------

    \7\ The Exchange intends to form a ``pool'' of pre-qualified 
Hearing Panelists for contested disciplinary cases. In order to form 
this pool, the staff intends to develop a questionnaire, using as a 
model the questionnaire currently used by the NASD for potential 
members of arbitration panels. Members of the BCC would not be 
eligible to serve as Hearing Panelists. However, as discussed in 
proposed Rule 960.5(a)(7), if the Hearing Officer is unable to 
preside over the hearing for any reason, the Chair of the BCC shall 
appoint a qualified replacement Hearing Officer for that hearing, 
which could possibly include a member of the BCC.
---------------------------------------------------------------------------

    After being designated as a qualified panelist, the Exchange 
intends to have each prospective panelist complete a mandatory training 
session to be conducted by the Hearing Officer. Qualified panelists 
would serve for three-year terms. After that time, if a panelist wished 
to continue serving, the panelist would be required to submit an 
updated application, which would be reviewed by the BCC.
    Currently, pursuant to Exchange Rule 960.5(a)(4), Hearing Panelists 
may be compensated in extraordinary cases, as determined by the Chair 
of the BCC, in consultation with the Chairman of the Board of 
Governors.\8\ The Exchange proposes that Hearing Panelists be 
compensated for all hearing sessions and for one deliberation session 
per disciplinary proceeding. A hearing session would be defined as any 
meeting between the parties and Hearing Panelists, including pre-
hearing conferences. Hearing Panelists would be compensated at a fixed 
rate for each session that lasts four hours or less.\9\ For example, if 
a hearing on a given day lasted a total of six hours, Hearing Panelists 
would be compensated for two hearing sessions. This fixed and non-
negotiable rate would be the same for each hearing session, and for one 
deliberation session for which a Hearing Panel renders a decision, but 
no compensation would be paid for ``study time'' (i.e., reviewing 
materials in preparation for a pre-hearing conference or hearing). If a 
case settled prior to a hearing, panelists would not receive any 
compensation, unless a pre-hearing conference (which is included in the 
definition of a hearing session and for which compensation would be 
given) was held. If a hearing were cancelled, the panelists would not 
be entitled to

[[Page 30464]]

compensation, but would be reimbursed for any travel-related expenses 
incurred, if applicable. If a Hearing Panelist is also a member of the 
Board, any Board or Standing Committee meetings that are held on the 
same day as the hearing would be considered a single meeting for the 
purposes of compensation.
---------------------------------------------------------------------------

    \8\ Factors to be considered when determining whether a case is 
extraordinary include, but are not limited to, the anticipated 
length of time of the hearing; the complexity and serious nature of 
the matter; and the magnitude of the potential penalty.
    \9\ Compensation for Hearing Panelists would be subject to a cap 
amount per day, regardless of the number of hearing sessions (or 
Board or Committee meetings attended).
---------------------------------------------------------------------------

Issuance of Decisions

    If an Offer of Settlement (``Offer'') is submitted to the BCC 
before a hearing commences, even if the Hearing Panelists are selected, 
the Committee would still consider the Offer and, if accepted, issue a 
decision. If an Offer is submitted after a hearing commences, however, 
the Exchange staff would promptly submit its position with respect to 
such Offer. The Hearing Panelists would then determine whether to 
consider the Offer and, if considered, whether to accept or reject the 
Offer.\10\
---------------------------------------------------------------------------

    \10\ The BCC will continue to hear any current matters through 
their completion if a hearing has already commenced. Thus, if the 
proposed rule change is approved by the Commission and implemented 
in the middle of an ongoing hearing, the BCC will hear that matter 
through its completion and will issue the decision accordingly.
---------------------------------------------------------------------------

    A decision issued by the Hearing Panel would be considered final. 
Any appeal of the decision would be taken directly to the Exchange's 
Board of Governors.
    The purpose of the proposal is to replace the current BCC hearing 
process described above to make it more efficient. By having a 
permanent and independent Hearing Officer and pre-screened, qualified 
Hearing Panelists, the formal hearing process should be expedited and 
the sanctioning process reconciled so that sanctions for similar 
misconduct are imposed more uniformly given that the same Hearing 
Officer would preside over all hearings.
    Pre-screening Hearing Panelists and compensating them should also 
help to ensure that qualified panelists are selected to serve on 
Exchange Hearing Panels. In addition, the Exchange believes that having 
the Hearing Panel issue a final decision directly, without having to go 
to the BCC for review and approval, should help expedite the issuance 
of decisions.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) of the Act \11\ in general, and furthers the objectives of 
sections 6(b)(5), 6(b)(6) and 6(b)(7) of the Act \12\ in particular, in 
that this proposal should help to: (i) Protect investors and the public 
interest; (ii) appropriately discipline members, member organizations 
and persons associated with members or member organizations; and (iii) 
provide a fair procedure for the disciplining of members, member 
organizations and persons associated with members or member 
organizations.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5), (6) and (7).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Phlx consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The Commission is considering granting accelerated approval of the 
proposed rule change at the end of a 15-day comment period.\13\
---------------------------------------------------------------------------

    \13\ The Phlx has requested accelerated approval of this 
proposed rule change prior to the 30th day after the date of 
publication of the notice of the filing thereof.
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-Phlx-2005-65 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2005-65. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all 

written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change 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 in the Commission's Public Reference Room. Copies of the filing 
also will be available for inspection and copying at the principal 
office of the Phlx. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly. All submissions should refer to File Number 
SR-Phlx-2005-65 and should be submitted on or before June 12, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Nancy M. Morris,
Secretary.
 [FR Doc. E6-8133 Filed 5-25-06; 8:45 am]

BILLING CODE 8010-01-P