[Federal Register Volume 59, Number 158 (Wednesday, August 17, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-20122]


[[Page Unknown]]

[Federal Register: August 17, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34516; File No. SR-CHX-94-12]

 

Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Order Approving Proposed Rule Change Relating To Disclosure of Pending 
Formal Exchange Disciplinary Proceedings to the Central Registration 
Depository

August 10, 1994.

I. Introduction

    On May 6, 1994, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission'' or ``SEC''), 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 authorize the Exchange to 
provide information to the Central Registration Depository (``CDR'') 
concerning pending formal, Exchange disciplinary proceedings for 
disclosure to the public.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1994).
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    The proposed rule change was noticed in Securities Exchange Act 
Release No. 34268 (June 28, 1994), 59 FR 34459 (July 5, 1994). No 
comments were received on the proposal. This order approves the 
proposed rule change.

II. Description of the Proposal

    The CHX is adopting Rule 9 to Article XII of the Exchange's Rules 
to authorize the CHX to provide information to the CRD\3\ concerning 
pending formal Exchange disciplinary proceedings for disclosure to the 
public. According to the Exchange, a formal disciplinary proceeding is 
considered to be pending from the time charges are issued\4\ until the 
proceeding is completed.\5\ Currently, the Exchange discloses 
information only on final Exchange disciplinary actions to the CRD.\6\
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    \3\The CRD is an automated industry database containing 
employment and disciplinary history of members and associated 
persons registered with self-regulatory organizations (``SROs'') and 
state securities agencies. The CRD is operated by the National 
Association of Securities Dealers, Inc. (``NASD'') with input on 
policy and other matters from federal and state agencies and other 
SROs, including the Exchange.
    \4\CHX Article XII, Rule 1(b) provides, in part, that if in the 
judgment of the President it shall appear that an accused has 
committed a default or other offense in violation of the 
Constitution or Rules of the Exchange the President shall, except as 
hereinafter provided, direct the staff to prefer written charges 
against the accused. A copy of such charges shall be served upon the 
accused. The accused shall also be served with written notice of 
when and where the charges will be heard.
    \5\See CHX Article XII, Rule 7.
    \6\Information concerning final disciplinary actions taken by 
the Exchange, the NASD and other self-regulatory and regulatory 
organizations, as well as information concerning certain criminal 
convictions contained in the CRD, has been disclosed to the public 
pursuant to the NASD's 800 number service since October 1991. The 
Commission subsequently approved the NASD's procedures for operating 
its 800 number service in Securities Exchange Act Release No. 30629 
(April 23, 1992), 57 FR 18535 (April 30, 1992) (File No. SR-NASD-91-
39) (``800 Number Service Plan Approved Order''). On July 1, 1993, 
the SEC approved an NASD rule change to make more information 
available to the general public regarding pending disciplinary 
proceedings or actions taken by federal or state securities agencies 
and SROs that relate to securities or commodities transactions, and 
regarding criminal indictments and information. See Securities 
Exchange Act Release No. 32568 (July 1, 1993), 58 FR 36723 (July 8, 
1993) (File No. SR-NASD-93-26) (``Pending Event Disclosure Approval 
Order'').
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    Information on pending formal SRO disciplinary proceedings, among 
other events, is currently in the CRD, but only to the extent that 
reports are made by members, member organizations and associated 
persons pursuant to their reporting obligations on the Uniform 
Application for Securities Industry Registration or Transfer (Form U-4) 
and Form BD, the uniform application form for broker-dealer 
registration. The proposal would expand the information available on 
pending disciplinary actions by requiring the Exchange to report such 
cases to the CRD.\7\
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    \7\On March 31, 1994, the Commission approved a similar proposal 
by the New York Stock Exchange, Inc. (``NYSE'') which authorized the 
NYSE to provide information to the CRD concerning pending formal 
NYSE disciplinary proceedings, for disclosure to the public. See 
Securities Exchange Act Release No. 33844 (March 31, 1994), 59 FR 
16669 (April 7, 1994) (order approving File No. SR-NYSE-94-11).
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    The Exchange believes that the proposed rule change is consistent 
with Section 6(b)(5) of the Act in that it is designed to promote just 
and equitable principles of trade, to remove impediments and to perfect 
the mechanisms of a free and open market and a national market system, 
and in general, to protect investors and the public interest.

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 Section 6(b).\8\ In particular, 
the Commission believes the proposal is consistent with the Section 
6(b)(5)\9\ requirements 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 interest.
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    \8\15 U.S.C. 78f (1988).
    \9\25 U.S.C. 78f(b)(5) (1988).
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    In the Securities Enforcement Remedies and Penny Stock Reform Act 
of 1990 (``Penny Stock Reform Act''), Congress mandated that the NASD 
establish a toll-free telephone number (`800 number service'') for the 
purpose of receiving and responding to inquiries from the public 
regarding the background of NASD members and their associated persons. 
The NASD began operating its 800 number service on October 1, 1991. 
Upon the request of a caller, the NASD may disclose, in the form of a 
written report, the following information contained in the CRD: \10\ 
past and present employment history of NASD members and their 
associated persons; all final disciplinary actions,\11\ taken by 
federal and state regulatory agencies and SROs, that relate to 
securities or commodities transactions; and all criminal convictions 
reported on Form BD or Form U-4.
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    \10\Under NASD procedures, the 800 number service operator does 
not provide any information over the telephone. Instead, a written 
copy of the information requested is sent to the caller and to the 
NASD member and/or associated person who is the subject of the 
inquiry. The identity of the caller remains confidential. See 800 
Number Service Plan Approval Order, supra, note 6.
    \11\The NASD's 800 number service plan does not define the term 
``disciplinary action.'' According to the NASD, however, the term 
includes, but is not limited to, information provided in response to 
question 7 on Form BD and question 22 on Form U-4. See Pending Event 
Disclosure Approval Order, supra, note 6.
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    In 1993, the Commission approved a rule change by the NASD to 
expand the scope of information that is reportable through its 800 
number service.\12\ Thus, in addition to the information set forth 
above, the NASD may disclose to the public such events as pending 
formal disciplinary actions initiated by federal and state regulatory 
agencies and SROs; criminal indictments or informations; civil 
judgments; and certain arbitration awards in securities and commodities 
disputes involving public customers. Currently, the NASD relies on 
members and associated persons to report these events to the CRD on 
Form BD or Form U-4, respectively. Because this represents the only 
means by which the NASD can obtain data about pending disciplinary 
actions (other than its own), the quality of the CRD database, and thus 
of the 800 number service, depends on complete and timely reporting by 
members and associated persons.
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    \12\See Pending Event Disclosure Approval Order, supra, note 6. 
The Commission notes that, in 1992, Congress requested that the 
General Accounting Office (``GAO'') conduct a review of various 
aspects of the Penny Stock Reform Act, including the NASD's 800 
number service. Among other things, the GAO recommended that 
information about final arbitration awards be reported. Accordingly, 
the NASD submitted, and the Commission approved, a rule change 
authorizing the NASD to disclose certain arbitration awards, as well 
as pending formal disciplinary actions, through its 800 number 
service. In this context, the Commission notes that it has requested 
all SROs to coordinate with the NASD the transfer of information 
about awards rendered in each exchange's arbitration program.
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    In the Commission's opinion, Rule 9 to Article XII should help fill 
a potential gap in the NASD's 800 number service, by authorizing the 
Exchange to report the initiation of a formal CHX disciplinary 
proceeding\13\ involving an Exchange member, member organization or 
associated person, and significant changes in the status thereof,\14\ 
directly to the CRD. As a result, that information will be available to 
the public whether or not it is voluntarily reported by the member or 
associated person. The Commission therefore finds that the proposed 
rule change should enhance the fairness and accuracy of the CRD 
database and, accordingly, of information released to the public 
through the 800 number service.
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    \13\For purposes of reporting to the CRD, the CHX considers a 
formal disciplinary proceeding to be pending from the time charges 
are issued until completion of the proceeding. See supra, notes 4 
and 5.
    \14\CHX Rule 9 provides the following examples of significant 
changes in the status of a pending formal disciplinary proceeding 
which would require disclosure: the issuance of a decision by the 
President; and the filing of an appeal to and/or the issuance of a 
decision by, a Judiciary Committee, the Exchange's Executive 
Committee or Board of Governors.
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    The Commission has long believed that investors need access to 
reliable information in order to protect themselves against potential 
fraud and abuse. In this respect, Rule 9 to Article XII should help 
customers make an informed decision about whether they should conduct 
or continue to conduct business with particular securities 
professionals. In sum, the Commission has concluded that the rule 
change should increase the flow of information to the public and thus 
should ultimately strengthen investor protection.
    It is therefore ordered, pursuant to Section 19(b)(2)\15\ that the 
proposed rule change (SR-CHX-94-12) is hereby approved.

    \15\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.\16\
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    \16\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-20122 Filed 8-16-94; 8:45 am]
BILLING CODE 8010-01-M