[Federal Register Volume 59, Number 137 (Tuesday, July 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17429]


[[Page Unknown]]

[Federal Register: July 19, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34358; File No. SR-Amex-93-42]

 

Self-Regulatory Organizations; American Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change Relating to 
Disciplinary Jurisdiction and Settlement of Disciplinary Actions

July 12, 1994.

I. Introduction

    On December 23, 1993, the American Stock Exchange, Inc. (``Amex'' 
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 amend its disciplinary rules 
relating to the retention of disciplinary jurisdiction and the 
settlement of disciplinary actions. On May 11, 1994, the Exchange 
notified the Commission that the Constitutional changes had been 
approved by the Exchange membership, and that no further Exchange 
action was required for the Commission to proceed with the proposed 
rule change.\3\
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    \1\15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1993).
    \3\The original 19b-4 filing was filed with the Commission in 
December 1993 and noted that the membership had not yet voted on the 
proposed rule change to the Amex's Constitution. The Constitutional 
change was approved by the Exchange membership at a special meeting 
of the regular members held on April 12, 1994. See letter from 
Geraldine Brindisi, Corporate Secretary, Amex, to Diana Luka-Hopson, 
Branch Chief, SEC, dated May 10, 1994.
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 33501 (January 21, 1994), 59 FR 4126 (January 
28, 1994). No comments were received on the proposal.

II. Description

    Under current Exchange Rule 341.09 member firms must file a 
termination notice with the Exchange whenever a registered employee 
leaves their employ.\4\ Member firms also are required to file amended 
termination notices, subsequent to the registered employee's departure, 
if they become aware of customer complaints or other possible 
wrongdoing by the employee.\5\ Currently, Article V, Section 6 of the 
Exchange's Constitution and Rule 341.08 permit the Exchange to retain 
disciplinary jurisdiction even after the termination of a person's or 
an entity's status as a member, member organization, or registered 
employee, provided that the Exchange gives them written notice that it 
is retaining jurisdiction within one year immediately following its 
receipt of the written notice of termination by member firms.
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    \4\Amex Rule 341.09 requires that immediate notification to the 
Exchange of any termination of employment of a registered employee 
or officer be submitted on Form U-5.
    \5\Instruction 5 to Form U-5 states that reporting firms have a 
continuing obligation to amend and update Form U-5 as it pertains to 
disciplinary action against the person or entity and complaints of 
possible wrongdoing. This obligation includes reportable matters 
which occur or become known after initial submission of Form U-5.
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    In an appeal to the Commission last year, a respondent in an Amex 
disciplinary proceeding asserted that the Exchange lacked jurisdiction 
over him because it failed to notify him within one year from the time 
his former firm filed the termination notice reporting his voluntary 
resignation.\6\ The Commission's decision agreed with the respondent, 
stating that the Amex Rule required it to retain jurisdiction within 
one year of its receipt of the original termination notice. However, 
the Commission indicated that it was sensitive to the Exchange's 
position that the one year time period should begin to run only after 
the Exchange is notified by the member firm of possible violative 
conduct in the amended termination notice, and suggested that the Amex 
amend its rules to strengthen its jurisdictional position.
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    \6\In re Leavitt, Securities Exchange Act Release No. 32441, 
1993 SEC LEXIS 1427 (June 10, 1993) (Admin. Proc. File No. 3-7836).
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    The proposed rule change provides that the Exchange must assert 
disciplinary jurisdiction over a person or entity within one year of 
the filing of a termination notice or within one year of any amendment 
to such notice. By amending the applicable Constitutional and Rule 
provisions, the Exchange will be able to retain jurisdiction for one 
year after it is notified by the member firm of possible violative 
conduct by the registered employee in an amended termination notice.\7\
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    \7\As the Commission noted in the Leavitt opinion, the NASD 
Rules provide for retention of disciplinary jurisdiction after an 
amended notice. Specifically, Article IV, Section 4 of the NASD By-
Laws provides that the NASD may retain disciplinary jurisdiction 
within two years after the effective date of termination, provided, 
however, that any amendment to a notice of termination that is filed 
within two years of the original notice which discloses that such 
person may have engaged in conduct actionable under any applicable 
statute, rule or regulation, shall operate to recommence the running 
of the two-year period.
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    The Exchange also is amending its Rules regarding settlement of 
disciplinary matters. Article V, Section 1(b)(4) of the Amex's 
Constitution and Amex Rule 345 currently require that the Exchange 
issue formal charges against persons or entities it believes have 
committed serious infractions of the Exchange's Rules or the federal 
securities laws. The issuance of formal charges begins a lengthy 
process which includes the filing of an answer to the charges, the 
exchange of documents, and the scheduling of a disciplinary hearing.
    The Amex's present disciplinary procedures do not provide for the 
settlement of charges before formal charges are issued. In some 
circumstances, however, persons who are the subject of Exchange 
investigations may wish to avoid the time and expense of a hearing and 
settle the matter by stipulating to certain facts and consenting to a 
penalty. The rule change would allow such parties to settle claims 
without undergoing the process for formal charges by allowing the party 
to proceed directly to the procedures that are currently contained in 
Article V, Section 2 of the Amex's Constitution and in Amex Rule 345 
for ``Stipulation of Facts and Consent to Penalty.''
    The procedures contained in the above provisions provide for a 
hearing before a Disciplinary Panel to determine whether the party is 
guilty of having committed an offense on the basis of a written 
stipulation of facts and consent to a specified penalty entered into 
between the party and an officer of the Exchange. The Disciplinary 
Panel may fix and impose the penalty agreed to in the stipulation and 
consent, or any lesser penalty. If the Disciplinary Panel rejects the 
stipulation and consent to a specified penalty, the matter will proceed 
as if the stipulation and consent had not been entered into, and the 
stipulation and consent will be disregarded in any subsequent 
proceeding.

III. 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) (5) and (6) of the 
Act.\8\ Specifically, Section 6(b)(5) of the Act requires that the 
rules of an exchange be designed to promote just and equitable 
principles of trade, to prevent fraudulent and manipulative acts and, 
in general, to protect investors and the public. Section 6(b)(6) of the 
Act requires that the rules of an exchange provide that its members, 
and persons associated with its members, be appropriately disciplined 
for violation of the rules of the exchange.
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    \8\15 U.S.C. Sec. 78f(b) (5) and (6) (1988).
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    The Commission believes that the rule change to provide the 
Exchange with disciplinary jurisdiction over persons or entities 
suspected of wrongdoing for one year after any amendment to the 
termination of employment notice is made will ensure that the Exchange 
will retain jurisdiction over persons for a year after it is notified 
of possible offenses, and accordingly is consistent with the Exchange's 
regulatory responsibilities under Section 6(b)(6) of the Act. The rule 
change will enable the Exchange to investigate and conduct disciplinary 
hearings pursuant to its established rules and procedures to determine 
if a person or entity has committed violations of Exchange rules or the 
federal securities laws, and to impose appropriate sanctions thereon. 
The rule change also is consistent with Section 6(b)(5) of the Act in 
that it serves to protect investors and the public interest by enabling 
the Exchange to discipline persons who violate Exchange Rules or the 
federal securities laws within a reasonable time after learning of 
possible wrongdoing.
    The Commission further believes that the rule change to allow 
parties to settle claims against them without undergoing a lengthy 
formal charging process is consistent with Section 6(b) (5) and (6) of 
the Act. The Commission believes that the rule change will save 
substantial time and expense for the Exchange and its members, and give 
the Exchange more flexibility in negotiating the resolution of 
enforcement actions. The rule also will continue to ensure that all 
settlements will be reviewed by the Amex's Disciplinary Panel and 
continues to give to the panel the ability to reject any settlement as 
is appropriate. Accordingly, we believe the change should make the 
Amex's enforcement proceedings more efficient without reducing the 
effectiveness of its procedures. Furthermore, the Commission finds that 
the proposed procedures for settling disciplinary actions are similar 
to those of other national securities exchanges.\9\
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    \9\See, e.g., New York Stock Exchange Rule 476(g); Chicago Board 
Options Exchange Rule 17.8.
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IV. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-Amex-93-42) is approved.

    \10\15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17429 Filed 7-18-94; 8:45 am]
BILLING CODE 8010-01-M