[Federal Register Volume 59, Number 134 (Thursday, July 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17031]


[[Page Unknown]]

[Federal Register: July 14, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34327; File No. SR-NYSE-93-38]

 

Self-Regulatory Organizations; New York stock Exchange, Inc.; 
Order Granting Approval of Proposed Rule Change Relating to Additions 
of Certain Exchange Rules to the ``List of Exchange Rule Violations and 
Fines Applicable Thereto Pursuant to Rule 476A'' and Amendment Minor 
Rule Violation Enforcement and Reporting Plan

July 7, 1994.
    On October 21, 1993 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 revise the Rule 476A 
Violations List (``List'') for imposition of fines for minor violations 
of rules and/or policies by adding to the List Exchange Rules 
304(h)(2), 345.12, 346 (b) and (e), 346(f), 352 (b) and (c), 440C and 
472(c). The NYSE also requested approval, under Rule 19d-1(c)(2), to 
amend its Rule 19d-1 Minor Rule Violation Enforcement and Reporting 
Plan (``MRVP'') to include the Rules enumerated above.\3\
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1993).
    \3\See letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Diana Luka-Hopson, Branch Chief, Commission, 
dated October 20, 1993.
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 33779 (March 17, 1994), 59 FR 14231 (March 25, 
1994). No comments were received on the proposal.

Description and Background

    In 1984, the Commission adopted amendments to paragraph (c) of 
Securities Exchange Act Rule 19d-1 to allow SROs to submit, for 
Commission approval, plans for the abbreviated reporting of minor rule 
violations.\4\ Subsequently, in 1985, the Commission approved an NYSE 
plan for the abbreviated reporting of minor rule violations pursuant to 
Rule 19d-1(c) under the Act. The MRVP relieves the NYSE of the current 
reporting requirements imposed under Section 19(d)(1) of the Act for 
violations listed in NYSE Rule 476A. The NYSE MRVP, as embodied in NYSE 
Rule 476A, provides that the Exchange may designate violations of 
certain rules as minor rule violations. The Exchange may impose a fine, 
not to exceed $5,000, on any member, member organization, allied 
member, approved person, or registered or non-registered employee of a 
member or member organization for a violation of the delineated rules 
by issuing a citation with a specific penalty.\5\ Such person can 
either accept the penalty, or opt for a full disciplinary hearing on 
the matter. Fines assessed pursuant to NYSE Rule 476A in excess of 
$2,500 are not considered pursuant to the MRVP and must be reported in 
a manner consistent with the current reporting requirement of Section 
19(d)(1) of the Act. The Exchange also retains the option of bringing 
violations of rules included under NYSE Rule 476A to full disciplinary 
proceedings, and the Commission expects the Exchange to do so for 
egregious or repeat violations.
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    \4\See Securities Exchange Act Release No. 21013 (June 1, 1984), 
49 FR 23828 (June 8, 1984). Pursuant to paragraph (c)(1) of Rule 
19d-1, an SRO is required to file promptly with the Commission 
notice of any ``final'' disciplinary action taken by the SRO. 
Pursuant to paragraph (c)(2) of Rule 19d-1, any disciplinary action 
taken by an SRO for a violation of an SRO rule that has been 
designated a minor rule violation pursuant to the Plan 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. 
By deeming unadjudicated minor violations as not final, the 
Commission permits the SRO to report violations on a periodic, as 
opposed to immediate, basis.
    \5\The List is contained under Supplementary Material to 
Exchange Rule 476A. As discussed in note 4 supra, only those fines 
imposed that are not in excess of $2,500 are subject to periodic 
reporting. Fines imposed pursuant to Rule 476A in excess of $2,500 
are deemed final and therefore are subject to immediate reporting to 
the Commission.
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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.\6\ In promulgating paragraph (c) of 
the Rule, the Commission was attempting further to reduce those 
reporting burdens by permitting, where immediate reporting was 
unnecessary, quarterly reporting of minor rule violations. The Rule is 
intended to be limited to rules which can be adjudicated quickly and 
objectively.
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    \6\See Securities Exchange Act Release No. 13762 (July 8, 1977), 
42 FR 35411 (July 14, 1977).
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    The NYSE currently is adding Exchange Rules 304(h)(2), 345.12, 346 
(b) and (e), 346(f), 352 (b) and (c), 440C and 472(c), which generally 
include reporting, required approvals, record retention and conduct of 
accounts, for which determinations of violations can be made 
objectively.

Discussion

    Specifically, Rule 304(h)(2) requires that any applicant, applying 
to the Exchange for consideration as an approved person, supply the 
Exchange with information regarding any statutory disqualification to 
which said applicant (or anyone associated therewith) may be subject. 
The Commission believes that since this is strictly a notification 
provision, determining compliance therewith is objective.
    Rule 345.12 requires applications (Form U-4) for all natural 
persons required to be registered with the Exchange to be filed upon 
the candidate's employment and to be kept current. The Commission 
believes that as an administrative and record-keeping provision, 
determining compliance is objective.
    Rules 346 (b) and (e) generally place limitations upon members, 
allied members, and their employees with respect to outside employment 
and association.\7\ The Commission believes that the large category of 
possible minor infractions of these rules and the relative objectivity 
in assessing possible infractions justify their inclusion in the List 
and MRVP.
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    \7\Rule 346(b) requires members, allied members and employees of 
member organizations to receive prior written consent of their 
employer to engage in any other business activity or to be employed 
or compensated by any other person. Rule 346(e) provides that 
persons delegated supervisory responsibilities must devote their 
full time to the business of the member organization during business 
hours, unless otherwise permitted by the Exchange (Rule 346.10).
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    Rule 346(f) prohibits any member, member organization, allied 
member, approved person or employee of any person in a control 
relationship with a member or member organization from associating with 
any person subject to a statutory disqualification as defined in the 
Act. For the purposes of this Rule, the term associated with a member 
or member organization has the same meaning as the term ``associated 
with a member'' as defined in section 3(a)(21) of the Act.\8\ The 
Commission believes that violations of this Rule are relatively 
objective and that adding this Rule to the List and MRVP will provide 
additional deterrence for this type of association, and thus is 
consistent with the Act.
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    \8\15 U.S.C. 78c(a)(21). Under the Act, the term means any 
partner, officer, director, or branch manager of such member (or any 
person occupying a similar status or performing similar functions), 
any person directly or indirectly controlling, controlled by, or 
under common control with such member, or any employee of such 
member.
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    Rules 352 (b) and (c) generally prohibit any member, member 
organization, allied member, registered representative or officer from 
guaranteeing any customer against loss in any account and from sharing 
in profits or losses in a customer's account. The Commission believes 
that although there can be serious infractions of these Rules, there 
are a sufficient number of unexceptional situations that have arisen 
that warrant adding the Rules to the List and MRVP. The Commission 
reemphasizes that the NYSE is only to treat minor violations of the 
rules included in the List and MRVP under Rule 476A and all serious 
violations should continue to be disciplined in accordance with NYSE 
Rule 476 (``Disciplinary Proceedings Involving Charges Against Members, 
Member Organizations, Allied Members, Approved Persons, Employees, or 
Others'').
    Rule 440C prohibits a member or member organization from failing to 
deliver against a short-sale until diligent effort is made to borrow 
securities necessary to make delivery. The Commission notes that 
activity constituting ``diligent effort'' in the context of this Rule 
is explicitly outlined in an NYSE Information Memo circulated to its 
members in October of 1991.\9\ Because the NYSE has placed its members 
on notice as to what conduct is violative of Rule 440C, we expect that 
determination of compliance will be straightforward and objective. We 
therefore believe that it is consistent with the Act to add Rule 440C 
to the List and MRVP.
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    \9\See NYSE Information Memo Number 91-41 to all members and 
member organizations, dated October 18, 1991.
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    Finally, Rule 472(c) requires that members and member organizations 
retain communications with customers or the public for at least three 
years.\10\ The Commission believes that because this is a record 
retention rule, discerning compliance is objective and it is 
appropriate to discipline under the MRVP for minor violations of this 
Rule.
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    \10\The communications must also contain the name of the person 
who prepared the material, the name of the person approving its 
issuance, and be readily available to the Exchange upon request.
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Conclusion

    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(d)(1) and 19(d) of the Act.\11\ 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 violations of rules of the exchange. In 
this regard, the proposal provides an efficient procedure for 
appropriate disciplining of members for rule violations that generally 
encompass reporting, required approvals, record retention and conduct 
of accounts requirements and are objective in nature. Moreover, because 
NYSE Rule 476A 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.
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    \11\15 U.S.C. 78f(b) (1), (6) and (7), 78f(d)(1) and 78s(d) 
(1988).
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    The Commission also believes that the proposal provides an 
alternate means by which to deter violations of the NYSE rules included 
in the MRVP, thus furthering the purposes of Section 6(b)(1) of the 
Act. An exchange's ability to effectively 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 
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 List, 
the Commission believes that adding the NYSE Rules outlined above will 
enhance, rather than reduce, the NYSE's enforcement capabilities of 
these Exchange requirements. In this regard, the Commission expects the 
Exchange to bring full disciplinary proceedings if it determines that a 
violation otherwise covered by the MRVP is not minor in nature, in the 
event of repeat violations of a particular rule, or in any other 
appropriate circumstance. Finally, the Commission believes that the 
inclusion of the subject Rules will prove to be an effective alternate 
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. By including the Rules in the Rule 476A Minor Rule Violation 
List, the NYSE can quickly respond to violations, thereby immediately 
deterring similar infractions.
    It Is Therefore Ordered, pursuant to Section 19(b)(2) and Rule 19d-
1(c)(2) under the Act,\12\ that the proposed rule change (SR-NYSE-93-
38) is approved.
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    \12\15 U.S.C. 78s(b)(2) (1988) and 17 CFR 240.19d-1(c)(2) 
(1991).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17031 Filed 7-13-94; 8:45 am]
BILLING CODE 8010-01-M