Document ID: SEC-2011-0868-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Stock Exchange, Inc.
Posted Date: 2011-06-22T04:00Z

[Federal Register Volume 76, Number 120 (Wednesday, June 22, 2011)]
[Notices]
[Pages 36596-36598]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-15553]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64686; File No. SR-CHX-2011-07]

Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Order Approving a Proposed Rule Change To Amend Minor Rule Plan

 June 16, 2011.

I. Introduction

    On April 20, 2011, the Chicago Stock Exchange, Inc. (``CHX'' or the 
``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 amending CHX Article 12, Rule 8 (Minor Rule Plan) 
(``MRP'') to incorporate additional violations into the MRP, increase 
the sanctions for certain violations, add censure authority to the MRP, 
eliminate the Minor Rule Violation Panel, clarify pleading requirements 
of a Respondent seeking to challenge a sanction by instituting a formal 
disciplinary proceeding, and make other minor changes. The proposed 
rule change was published for comment in the Federal Register on May 5, 
2011.\3\ The Commission received no comment letters on the proposed 
rule change. This order approves the proposed rule change.
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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. 64370 (April 29, 
2011); 76 FR 25727 (``Notice'').
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II. Description

    The Exchange proposed to make additional rules subject to 
punishment under its MRP. These rules relate to: (1) Failure to notify 
the Exchange of a request to withdraw capital contribution (Article 3, 
Rule 6(b)); (2) failure to request Exchange approval of the transfer of 
equity securities of a participant firm (Article 3, Rule 11); (3) 
reporting of loans (Article 3, Rule 12); (4) failure to provide the 
Exchange with information (Article 6, Rule 7); (5) impeding or delaying 
an Exchange examination, inquiry, or investigation (Article 6, Rule 9); 
(6) designation of e-mail addresses (Article 3, Rule 13); (7) 
registration and approval of personnel (Article 6, Rule 2(a)); (8) 
written supervisory procedures (Article 6, Rule 5(b)); (9) failure to 
report short positions (Article 7, Rule 9); (10) furnishing of records 
(Article 11, Rule 1); (11) maintenance of books and records (Article 
11, Rule 2); (12) participant

[[Page 36597]]

communications (Article 11, Rule 4); (13) market maker registration and 
appointment (Article 16, Rule 1); (14) market maker reporting of 
position information (Article 16, Rule 10); (15) institutional broker 
registration and appointment (Article 17, Rule 1); (16) reporting of 
transactions (Article 9, Rule 13); (17) institutional broker 
obligations for entry of orders into an automated system (Article 17, 
Rule 3(a)); and (18) institutional broker responsibilities for handling 
orders within an integrated system (Article 17, Rule 3(b)). The 
Exchange believes that it will be able to carry out its regulatory 
responsibility more quickly and efficiently by incorporating these 
violations into its MRP.
    The Exchange also proposed to increase the fine levels for certain 
violations. The Exchange proposed to increase the maximum fine pursuant 
to the MRP from $2,500 to $5,000 and to increase the fines in the Fine 
Schedule in order to better deter violative activity and more closely 
adhere to the fine schedules of other self-regulatory organizations. 
For most reporting and recordkeeping rule violations and certain 
trading rule violations, the recommended fines were increased from 
$100/$500/$1000 for first, second, and third tier fines, respectively, 
to $250/$750/$1500. The Exchange also proposed recommended fines of 
$500/$1000/$2500 for other, more serious trading rule violations (i.e., 
ones which involve the potential for customer harm), as well as 
violations of the obligation to establish, maintain, and enforce 
written supervisory procedures, and to provide information to the 
Exchange in connection with regulatory inquiries or other matters. The 
Exchange recommended fines of $1000/$2500/$5000 for the most serious 
violations contained within the Plan (Trading Ahead). Finally, the 
Exchange proposed to expand the rolling time period in which violations 
would result in escalation to the next highest tier from 12 to 24 
months, which is consistent with the minor rule plans of other 
exchanges.
    In conjunction with altering the fine levels, the Exchange proposed 
to add a censure authority to the MRP to provide additional flexibility 
in imposing sanctions in particular cases. A censure could be used in 
the initial findings of a violation where the Exchange wants to put the 
Respondent on notice that certain conduct violates CHX rules or in 
other circumstances in which a monetary fine is not appropriate or 
necessary.
    The Exchange proposed to eliminate the role of the Minor Rule 
Violation Panel in issuing sanctions pursuant to the MRP, and to 
authorize certain members of the Exchange's Market Regulation staff to 
issue MRP sanctions. Specifically, MRP sanctions would be imposed 
either by the Exchange's Chief Enforcement Counsel or Chief Regulatory 
Officer. The Exchange noted that allowing members of its staff to issue 
MRP fines was consistent with the practice at other exchanges regarding 
MRPs and was also similar to the method by which formal disciplinary 
actions are instituted by the CHX under Article 12, Rule 1.\4\ The 
Exchange stated that the proposed change would help to expedite the 
process of issuing MRP sanctions and would eliminate an inherent source 
of potential conflicts (or appearance thereof) whenever Participants 
determine disciplinary sanctions.
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    \4\ See, e.g., Chicago Board Options Exchange (``CBOE'') Rule 
17.50(a), Imposition of Fines for Minor Rule Violations (provides 
for fines to be issued by ``the Exchange''); BATS Exchange Rule 
8.15(a), Imposition of Fines for Minor Violation(s) of Rules, 
(provides for fines to be issued by ``the Exchange''); International 
Stock Exchange Rule 1614(a), Imposition of Fines for Minor Rule 
Violations (provides for fines to be issued by ``the Exchange''). 
Formal disciplinary actions under CHX Article 12, Rule 1 are 
authorized by the Exchange's Chief Regulatory Officer.
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    The Exchange also proposed to clarify the pleading requirements of 
a Respondent who seeks to challenge a sanction by instituting a formal 
disciplinary proceeding. The proposed changes would require a 
Respondent challenging an MRP sanction to file an answer that meets the 
standards for an answer under Article 12, Rule 5(b). The proposal would 
authorize the Secretary of the Exchange (the person to whom such 
responses are directed) to deny the answer for a failure to meet these 
standards. Under the proposal, the denial of the answer by the 
Secretary without leave to amend and refile would be considered the 
final action of the Exchange, and the MRP fine would become due and 
payable and/or a censure would be imposed. The Exchange also added 
language incorporating the requirement of Exchange Act Rule 19d-1 
relating to the reporting of Exchange disciplinary actions to the 
Commission.\5\
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    \5\ The Exchange's proposed language is based upon language in 
the Minor Rule Violation Plan of the CBOE. See CBOE Rule 17.50(a).
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    Finally, the Exchange proposed to make certain non-substantive, 
clarifying changes to some of the current rules referenced in the MRP. 
For example, the filing proposed to clarify that the short sale rule 
(Article 9, Rule 23) applied to all sell orders and not just those of a 
proprietary nature.\6\ In addition, the filing proposed to make changes 
to address proper rule cites and/or description of rules. For example, 
the filing proposed to clarify that an institutional broker's best 
execution obligations under Article 17, Rule 3 specifically fall under 
paragraph (d) of such rule. In addition, rather than describing the 
rule as ``Failure to meet best execution obligations'', the rule will 
be titled ``Institutional Broker obligations in handling orders (best 
execution).''
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    \6\ Currently, the Plan only addresses a Participant's duty to 
comply with the short sale rule when selling short for its own 
account (e.g., proprietarily). See Article 12, Rule 8(h)(ii)(5).
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III. Discussion and Commission's Findings

    The Commission finds that the proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\7\ In particular, the 
Commission believes that the proposal is consistent with Section 
6(b)(5) of the Act,\8\ which requires that the rules of an exchange be 
designed to, among other things, protect investors and the public 
interest. The Commission also believes that the proposal is consistent 
with Sections 6(b)(1) and 6(b)(6) of the Act,\9\ which require that the 
rules of an exchange enforce compliance with, and provide appropriate 
discipline for, violations of Commission and Exchange rules. The 
Commission notes that because CHX Article 12 provides procedural rights 
to a person fined under the MRP to contest the fine and permits a 
hearing on the matter, the Commission believes that the MRP provides a 
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.\10\ Furthermore, the Commission believes that the proposed changes 
to the MRP should strengthen the Exchange's ability to carry out its 
oversight and enforcement responsibilities as a self-regulatory 
organization in cases where full disciplinary proceedings are 
unsuitable in view of the minor nature of the particular violation. 
Therefore, the Commission finds that the proposal is consistent with 
the public interest, the protection of investors, or otherwise in 
furtherance of the purposes of the Act,

[[Page 36598]]

as required by Rule 19d-1(c)(2) under the Act,\11\ which governs minor 
rule violation plans.
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    \7\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5).
    \9\ 15 U.S.C. 78f(b)(1) and 78f(b)(6).
    \10\ 15 U.S.C. 78f(b)(7) and 78f(d)(1).
    \11\ 17 CFR 240.19d-1(c)(2).
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    In approving this proposed rule change, the Commission in no way 
minimizes the importance of compliance with CHX rules and all other 
rules subject to the imposition of fines under the MRP. The Commission 
believes that the violation of any self-regulatory organization's 
rules, as well as Commission rules, is a serious matter. However, the 
MRP provides a reasonable means of addressing rule violations that do 
not rise to the level of requiring formal disciplinary proceedings, 
while providing greater flexibility in handling certain violations. The 
Commission expects that CHX will continue to conduct surveillance with 
due diligence and make a determination based on its findings, on a 
case-by-case basis, whether a fine of more or less than the recommended 
amount is appropriate for a violation under the MRP or whether a 
violation requires formal disciplinary action under CHX Article 12.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\12\ and Rule 19d-1(c)(2) under the Act,\13\ that the proposed rule 
change (SR-CHX-2011-07) be, and hereby is, approved and declared 
effective.
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    \12\ 15 U.S.C. 78s(b)(2).
    \13\ 17 CFR 240.19d-1(c)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(44).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-15553 Filed 6-21-11; 8:45 am]
BILLING CODE 8011-01-P