[Federal Register Volume 59, Number 227 (Monday, November 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29211]


[Federal Register: November 28, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34984; File No. SR-CBOE-94-33]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to the 
Reporting by the Exchange to the Central Registration Depository 
(``CRD'') of Information Concerning Pending Formal Exchange 
Disciplinary Proceedings

November 18, 1994.
    On September 15, 1994, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder,\2\ filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') a proposed rule change requiring the CBOE 
to report information concerning pending formal Exchange disciplinary 
proceedings to the Central Registration Depository (``CRD'').\3\ Notice 
of the proposal appeared in the Federal Register on October 13, 
1994.\4\ No comment letters were received on the proposed rule change. 
This order approves the CBOE proposal.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1992).
    \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\See Securities Exchange Act Release No. 34792 (October 5, 
1994), 59 FR 52014 (October 13, 1994).
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    Currently, the Exchange discloses to the CRD information with 
respect to formal Exchange disciplinary proceedings only upon the 
conclusion of such proceedings.\5\ Under the proposed rule change, the 
amount of information concerning formal Exchange disciplinary 
proceedings\6\ reported by the Exchange to the CRD would be expanded to 
include the issuance of a statement of charges in such proceedings and 
all significant changes\7\ in the status of such proceedings while such 
proceedings are pending. For purposes of Rule 17.14, a formal Exchange 
disciplinary proceeding would be considered to be pending from the time 
that a statement of charges is issued in the proceeding\8\ until the 
outcome of the proceeding becomes final.
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    \5\Information concerning final disciplinary actions taken by 
the Exchange, the NASD, and other SROs, 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 (``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) (``800 Number Service Plan 
Approval Order''). On July 1, 1993, the Commission approved an NASD 
rule change to make more information available to the public 
regarding pending disciplinary proceedings or actions taken by 
federal or state agencies and SROs that relate to securities and 
commodities transactions, and regarding criminal indictments and 
information. See Securities Exchange Act Release No. 32568 (July 1, 
1993), 58 FR 36723 (July 8, 1993) (``Pending Event Disclosure 
Approval Order''). In addition, the Commission recently approved 
rule changes by both the New York Stock Exchange, Inc. and the 
Chicago Stock Exchange, Inc. that are substantively the same as the 
CBOE's proposal. See Securities Exchange Act Release Nos. 33844 
(March 31, 1994), 59 FR 16669 (April 7, 1994) and 34516 (August 10, 
1994), 59 FR 42317 (August 17, 1994) (``NYSE and CHX Approval 
Orders'').
    \6\For purposes of CBOE Rule 17.14, and Exchange disciplinary 
proceeding would be considered to be a formal disciplinary 
proceeding if it is initiated by the Exchange pursuant to Exchange 
Rule 17.2 et. seq.
    \7\Significant changes in the status of a formal Exchange 
disciplinary proceeding would be deemed to include, but not be 
limited to, the scheduling of a disciplinary hearing, the issuance 
of a decision by the CBOE's Business Conduct Committee, the filing 
of an appeal to the Exchange's Board of Directors, and the issuance 
of a decision by the Exchange's Board of Directors.
    \8\See CBOE Rule 17.4(b).
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    In addition to the foregoing, the proposed rule change would 
renumber the provisions which are currently contained in Rule 17.12 
(Miscellaneous Provisions) without affecting the substance of these 
provisions. Specifically, under the proposed rule change, the current 
provisions of Rule 17.12 would be separated into two rules, Rule 17.12 
and Rule 17.13.
    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, the requirements of Section 6(b)(5).\9\ Specifically, the 
Commission believes the proposal is 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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    \9\15 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 its 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.\10\ As initially 
implemented, a caller using the 800 number service could request a 
written report from the NASD with the following information contained 
in the CRD:\11\ past and present employment history of NASD members and 
their associated persons; all final disciplinary actions,\12\ 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\See supra note 5.
    \11\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 5.
    \12\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 5.
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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.\13\ 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.\14\ 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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    \13\Id. 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.
    \14\See supra note 13.
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    As stated in the NYSE and CHX Approval Orders,\15\ the proposed 
rule change should help fill a potential gap in the NASD's 800 number 
service by authorizing the Exchange to report directly to the CRD the 
initiation of a formal CBOE disciplinary proceeding and significant 
changes in the status thereof. 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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    \15\See supra note 5.
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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, the CBOE proposal 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 proposed 
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) of the Act, 
\16\ that the proposed rule change (File No. SR-CBOE-94-33) is 
approved.
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    \16\15 U.S.C. 78s(b)(2) (1988).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\17 CFR 200.30-3(a)(12) (1993).
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Jonathan G. Katz,
Secretary.
[FR Doc. 94-29211 Filed 11-25-94; 8:45 am]
BILLING CODE 8010-01-M