[Federal Register Volume 59, Number 121 (Friday, June 24, 1994)]
[Unknown Section]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-15362]


[[Page Unknown]]

[Federal Register: June 24, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34230; File No. SR-NYSE-94-05]

 

Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Amendment No. 1 to Proposed 
Rule Change and Notice of Filing and Order Granting Accelerated 
Approval to Amendment No. 2 to Proposed Rule Change Relating to 
Additions to ``List of Exchange Rule Violations and Fines Applicable 
Thereto Pursuant to Rule 476A'' and Minor Rule Violation Enforcement 
and Reporting Plan

June 17, 1994.

I. Introduction

    On March 2, 1994, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``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 add to the ``List of Exchange 
Rule Violations and Fines Applicable Thereto Pursuant to Rule 476A'' 
(``Rule 476A List'') its policy that new Exchange members must have 
their trades supervised by an experienced member. The NYSE also 
requested approval, under Rule 19d-1(c)(2), to amend its Minor Rule 
Violation Enforcement and Reporting Plan (``Plan'') to include the 
policy regarding supervision of trades by new members.\3\ On March 21, 
1994, the NYSE submitted to the Commission Amendment No. 1 to the 
proposed rule change in order to clarify certain aspects of the 
original filing and to request approval of the policy itself.\4\ On 
June 17, 1994, the NYSE submitted Amendment No. 2 to proposed rule 
change to revise certain language in the text of the Rule 476A List and 
to describe the form of notice provided to members.\5\
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    \1\15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1991).
    \3\See letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Sandra Sciole, Special Counsel, Division of 
Market Regulation, SEC, dated March 1, 1994.
    \4\See letter from Donald Siemer, Director, Market Surveillance 
Division, NYSE, to Beth Stekler, Attorney, Division of Market 
Regulation, SEC, dated March 16, 1994 (``Amendment No. 1)''.
    \5\See letter from Donald Siemer, Director, Market Surveillance 
Division, NYSE, to Beth Stekler, Attorney, Division of Market 
Regulation, SEC, dated June 15, 1994 (``Amendment No. 2'').
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 33834 (March 30, 1994), 59 FR 16251 (April 6, 
1994). No comments were received on the proposal. This order approves 
the proposed rule change including both amendments.

II. Background

    In 1984, the Commission amended Rule 19d-1(c) under the Act to 
allow the self-regulatory organizations (``SROs'') to submit, for 
Commission approval, plans for the abbreviated reporting of minor rule 
violations.\6\ The Commission approved the NYSE's Plan, as embodied in 
NYSE Rule 476A, in 1985.\7\ Accordingly, the Exchange is relieved of 
current reporting requirements under section 19(d)(1) with respect to 
those disciplinary actions taken pursuant to its Plan.
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    \6\See Securities Exchange Act Release No. 21013 (June 1, 1994), 
49 FR 23838 (June 8, 1994). Pursuant to Rule 19d-1(c)(1), an SRO is 
required to file promptly with the Commission notice of any 
``final'' disciplinary action taken by that SRO. Pursuant to Rule 
19d-1(c)(2), however, any disciplinary action taken by an SRO for a 
violation of an SRO rule, which has been designated as a minor rule 
violation pursuant to a Commission approved plan, shall not be 
considered ``final'' if the sanction imposed consists of a fine not 
exceeding $2,500 and the sanctioned person does not seek an 
adjudication, including a hearing, or otherwise exhaust his or her 
administrative remedies. By deeming that unadjudicated minor rule 
violations are not final, the Commission permits the SRO to report 
such violations on a periodic basis.
    \7\See Securities Exchange Act Release No. 21688 (January 25, 
1985), 50 FR 5025 (February 5, 1985). Subsequent additions of rules 
to the Rule 476A List were made in Securities Exchange Act Release 
Nos. 22037 (May 14, 1985), 50 FR 21008 (May 21, 1985); 23104 (April 
11, 1986), 51 FR 13307 (April 18, 1986); 24985 (October 5 1987), 52 
FR 41643 (October 29, 1987); 25763 (May 27, 1988), 54 FR 20925 (June 
7, 1988); 27878 (April 4 1990), 55 FR 13345 (April 10, 1990); 28003 
(May 8, 1990), 55 FR 20004 (May 14, 1990); 28505 (October 2, 1990), 
55 FR 41288 (October 10, 1990); 28995 (March 21, 1991), 56 FR 12967 
(March 28, 1991); 30280 (January 22, 1992), 57 FR 3452 (January 29, 
1992); 30536 (March 31, 1992), 57 FR 12357 (April 9, 1992); 32421 
(June 7, 1993), 58 FR 32973 (June 14, 1993); 33403 (December 28, 
1993), 59 FR 641 (January 1, 1994); and 33816 (March 25, 1994), 59 
FR 15471 (April 1, 1994).
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    The NYSE Plan provides that the Exchange shall designate those 
rules as to which a violation may be deemed a minor rule violation.\8\ 
Under the procedures set forth in NYSE Rule 476A, if a member, member 
organization, allied member, approved person, or registered or non-
registered employee of a member or member organization violates a 
designated rule, the Exchange may impose a fine, not to exceed 
$5,000,\9\ by issuing a citation with a specific penalty. The 
disciplined person can either accept the penalty or opt for a hearing 
on the matter.\10\ In addition, the Exchange retains the discretion to 
bring violations of those rules included in the NYSE Rule 476A List to 
full disciplinary proceedings, if the Exchange determines that the 
violation is not minor in nature.
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    \8\See Rule 476A(e). As noted above, see supra note 7, the 
Exchange has amended the Rule 476A List, from time to time, as it 
has gained experience with its Plan.
    \9\Fines imposed pursuant to Rule 476A in excess of $2,500 are 
deemed final, and therefore are subject to the reporting 
requirements of Section 19(d)(1) of the Act.
    \10\The procedures governing full disciplinary proceedings are 
set forth in NYSE Rule 476.
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    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.\11\ Rule 19d-1(c) represented the 
Commission's attempt further to reduce such burdens, by permitting 
quarterly reporting of minor rule violations in those circumstances 
where immediate reporting was unnecessary. Accordingly, the abbreviated 
reporting was intended to be limited to SRO rules which could be 
adjudicated quickly and objectively.
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    \11\See Securities Exchange Act Release No. 13762 (July 8, 
1977), 42 FR 35411 (July 14, 1977).
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III Description of the Proposal

    The NYSE is proposing to adopt as a rule its policy regarding 
supervision of trades by new members and to add this policy to its 
Plan.\12\ To become an NYSE Floor member, a candidate must participate 
in an orientation program\13\ and successfully complete the required 
membership examination (Series 15), after which he or she must wear a 
temporary badge for a minimum of two weeks. During that probationary 
period, a new member may execute orders, but only under the direct 
supervision of a fully qualified NYSE member who is a disinterested 
third party to the transaction. The experienced member observes the 
trade, and reviews it for compliance with the relevant Exchange 
rules.\14\
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    \12\See supra, note 3.
    \13\According to the NYSE, the New Member Orientation Program 
consists of six one-hour sessions which are designed to familiarize 
candidates with Exchange regulations, systems and trading practices. 
As part of this program, new members receive, and are expected to be 
familiar with, information regarding the requirement that an 
experienced member must supervise their trades during their 
probationary period. See, e.g., NYSE Information Memorandum 92-10 
(April 9, 1992); NYSE Memorandum to Members on Trading Floor 
(October 29, 1993).
    \14\This review is evidenced by placing the experienced member's 
badge number on the back of the order ticket. See Amendment No. 1, 
supra, note 4.
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    If a new Exchange member fails to adhere to the supervision 
requirement, the NYSE may extend his or her probationary period for an 
additional week. The proposed rule change will allow the NYSE to impose 
a fine pursuant to Rule 476A for subsequent violations of the new 
member order execution policy.\15\ Upon Commission approval, the 
Exchange intends to distribute an Information Memorandum notifying 
members that they may be subject to a fine, and to include that 
Information Memorandum in the materials provided to new members during 
their orientation program.\16\
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    \15\Because the initial violation of this policy will result in 
an extension of the probationary period, the second violation will 
be subject to the first time fine provided by Rule 476A. See 
Amedment No. 1, supra, note 4.
    \16\See Amendment No. 2, supra, note 5. For further discussion 
of the New Member Orientation Program, see supra note 13 and 
accompanying text.
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    The NYSE states that the proposed rule change will advance the 
objectives of Section 6(b)(6) of the Act in that it will provide a 
procedure whereby members and member organizations can be 
``appropriately disciplined'' in those instances where a rule violation 
is minor in nature, but a sanction more serious than a warning or 
cautionary letter is appropriate. According to the Exchange, the 
proposed rule change provides a fair procedure for imposing such 
sanctions, in accordance with the requirements of Sections 6(b)(7) and 
6(d)(1).

IV. Discussion

    The Commission finds that the proposed rule change is 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(c)(3), 6(d)(1), and 19(d).\17\ The Commission believes that the 
NYSE's policy regarding supervision of trades by new members, together 
with its orientation program, should be sufficient to ensure that new 
members receive adequate guidance and experience before they may 
execute orders on their own. In the Commission's opinion, this 
supervisory requirement should provide inexperienced Exchange members 
with training to help them acquire the practical skills necessary to 
comply with NYSE rules, the Act and the regulations thereunder.
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    \17\15 U.S.C. 78f (b)(1), (6) and (7), 78f(c)(3), 78f(d)(1) and 
78s(d) (1988).
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    The Commission finds that the proposed amendments to the Plan are 
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 violations of rules of 
the exchange. In this regard, the proposal provides an efficient 
procedure for appropriate disciplining of members for a rule violation 
that is technical and objective in nature. Moreover, because the Plan 
provides procedural rights to the person fined and permits a 
disciplined person to request a full hearing on the matter, the 
proposal provides a fair procedure for the disciplining of members and 
persons associated with members, consistent with Sections 6(b)(7) and 
6(d)(1) of the Act.
    The Commission also believes that the proposal provides an 
alternative means by which to deter violations of the NYSE's policy 
regarding the supervision of trades by new members, thus furthering the 
purposes of Section 6(b)(1) of the Act. An exchange's ability 
effectively to enforce 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 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 plan may not only 
reduce reporting burdens on an SRO but also may make its disciplinary 
system more efficient in prosecuting violations of these rules.
    In addition, because the NYSE retains the discretion to bring a 
full disciplinary proceeding for any violation included on the Rule 
476A List, the Commission believes that adding the new member order 
execution policy to the Rule 476A List will enhance, rather than 
reduce, the NYSE's enforcement capabilities regarding this Exchange 
policy. Indeed, the Commission expects the NYSE to bring full 
disciplinary proceedings for violations of this supervisory requirement 
where the violation is egregious or where there is a history or pattern 
of repeat violations.
    Finally, the Commission believes that the inclusion of the policy 
regarding supervision of trades by new members on the Rule 476A 
Violations List will prove to be an effective alternative response to a 
violation when the initiation of a full disciplinary proceeding is 
unsuitable because such a proceeding may be more costly and time-
consuming in view of the minor nature of the particular violation.
    The Commission finds good cause for approving Amendment No. 2 prior 
to the thirtieth day after the date of publication of notice of filing 
thereof. Amendment No. 2 merely clarifies certain language in the text 
of the Rule 476A List, and provides additional details about the 
proposed notice to members. Finally, the Commission did not receive any 
comments on the original proposal, which was noticed for the full 
statutory period.
    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 2 to the proposed rule change. 
Persons making written submissions should file six copies thereof with 
the Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW., Washington, D.C. 20549. Copies of the submission, all subsequent 
amendments, all written statements with respect to the proposed rules 
change that are filed with the Commission and all written 
communications relating to Amendment No. 2 between the Commission and 
any persons, other than those that may be withheld from the public in 
accordance with the provisions of 5 U.S.C. Sec. 552, will be available 
for inspection and copying in the Commission's Public Reference 
Section, 450 Fifth Street, NW., Washington, D.C. 20549. Copies of such 
filing will also be available at the principal office of the NYSE. All 
submissions should refer to File No. SR-NYSE-94-05 and should be 
submitted by July 15, 1994.

V. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ and Rule 19d-1(c)(2) under the Act,\19\ that the proposed rule 
change (SR-NYSE-94-05), including Amendment No. 2 on an accelerated 
basis, is approved.
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    \18\15 U.S.C. 78s(b)(2) (1988).
    \19\17 CFR 240.19d-1(c)(2) (1991).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-15362 Filed 6-23-94; 8:45 am]
BILLING CODE 8010-01-M