[Federal Register Volume 60, Number 90 (Wednesday, May 10, 1995)]
[Notices]
[Pages 24943-24945]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-11510]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35671; File No. SR-PHLX-94-61]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 1 to the Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc., Relating to Floor Procedure Advice F-8, Failure to 
Comply With an Exchange Inquiry

May 4, 1995.
    On November 21, 1994, the Philadelphia Stock Exchange, Inc. 
(``PHLX'' or ``Exchange'') filed with the Securities and Exchange 
Commission [[Page 24944]] (``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 Floor 
Procedure Advice (``Advice'') F-8, ``Failure to Comply with an Exchange 
Inquiry,'' to require PHLX members, member organizations, and 
associated persons to comply promptly with any request for information 
made by the Exchange in connection with any regulatory inquiry or 
examination relating to the Exchange's regulatory obligations. Advice 
F-8, as proposed, will apply to activities concerning equities,\3\ 
equity options, index options, and foreign currency options 
(``FCOs'').\4\

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19v-4 (1994).
    \3\On March 15, 1995, the PHLX amended its proposal to apply 
Advice F-8 to equities as well as options. See Letter from Edith 
Hallahan, Special Counsel, PHLX, to Michael Walinskas, Branch Chief, 
Office of Market Supervision, Division, Commission, dated March 14, 
1995. (``Amendment No. 1''). Under Amendment No. 1, Equity Advice 
EM-1 will be renumbered as F-8.
    \4\See Letter from Gerald D. O'Connell, First Vice President 
Market Regulation and Trading Operations, PHLX, to Michael 
Walinskas, Branch Chief, Office of Market Supervision (``OMS''), 
Division of Market Regulation (``Division''), Commission, dated 
January 30, 1995 (``January 30 Letter'').
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    The proposed rule change was published for comment in the Federal 
Register on February 7, 1995.\5\ No comments were received on the 
proposal.

    \5\See Securities Exchange Act Release No. 35305 (January 31, 
1995), 60 FR 7252 (February 7, 1995).
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    Currently, Advice F-8 requires Exchange members,\6\ member 
organizations, and associated persons, to comply promptly with any 
request for information made by the Exchange's Market Surveillance 
Department in connection with any investigation within the Exchange's 
disciplinary jurisdiction involving activities on the equity and option 
(including equity options, stock index options, and FCOs) trading 
floors. The PHLX proposes to amend Advice F-8 to: (1) Now also apply to 
activities on the equity trading floor, and (2) extend the requirements 
of Advice F-8 to include PHLX Examinations Department requests, as well 
as any requests made by the Exchange in connection with any other 
regulatory inquiry, investigation, or examination relating to the 
Exchange's regulatory obligations.

    \6\Advice F-8 also applies to FCO participants and participant 
organizations. See January 30 Letter, supra note 4. See also PHLX 
Rule 13, ``Foreign Currency Options Participant,'' which provides 
that FCO participants are subject to the provisions of the 
Exchange's rules that are applicable to a member of the Exchange and 
states that each reference to a member of the Exchange in the PHLX's 
rules is deemed to pertain also to FCO participants.
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    The PHLX notes that the Advice, which is administered under the 
Exchange's minor rule violation enforcement and reporting plan (``minor 
rule plan''),\7\ was adopted in order to expedite the Exchange's 
investigation process by enabling the Exchange to summarily reprimand 
failures to respond to such requests for information.\8\

    \7\The PHLX's minor plan, codified in PHLX Rule 970, contains 
floor procedure advices with accompanying fine schedules. Rule 19d-
1(c)(2) under the Act authorizes national securities exchanges to 
adopt minor rule violation plans for summary discipline and 
abbreviated reporting; Rule 19d-1(c)(1) requires prompt filing with 
the Commission of any final disciplinary action. However, minor rule 
violations not exceeding $2,500 are deemed not final, thereby 
permitting periodic, as opposed to immediate, reporting.
    \8\See Securities Exchange Act Release No. 26899 (June 7, 1989), 
54 FR 25526 (June 15, 1989) (order approving File No. SR-PHLX-89-
20).
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    Advice F-8 will continue to contain a prompt compliance requirement 
relating to Exchange requests for information pursuant to the advice. 
Under the proposal, information requested by the Exchange's 
Examinations Department must be received within two business days from 
the date of the original request in order to satisfy the prompt 
compliance requirement of Advice F-8.\9\ For other Exchange requests 
made pursuant to Advice F-8, information must be received within 10 
business days from the date of the original request in order to satisfy 
the prompt compliance requirement.

    \9\The two-business day requirement applies, for example, to 
requests for books and records. See Letter from Edith Hallahan, 
Special Counsel, PHLX, to Michael Walinskas, Branch Chief, OMS, 
Division, Commission, dated November 30, 1994.
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    Finally, the PHLX proposes to amend Advice F-8 to reduce the fine 
for a first violation of the Advice from $500 to $200, and to provide 
that each additional request for information not furnished within the 
allotted time period may be considered as a separate occurrence for 
purposes of the Advice's fine schedule.\10\

    \10\Under the Advice F-8's fine schedule, as amended, the 
Exchange will impose a fine of $200 for the first occurrence, $1,000 
for the second occurrence, $2,500 for the third occurrence, and a 
sanction discretionary with the Exchange's Business Conduct 
Committee (``BCC'') for the fourth and subsequent occurrences.
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    According to the PHLX, the modification of the fine schedule is 
designed to deter delays in compliance with Exchange requests for 
information by counting each repeat request as a separate occurrence. 
The proposal to reduce the fine for a first occurrence from $500 to 
$200 is designed to reflect the potential for increased application of 
the fines.
    The PHLX believes that extending the requirements of Advice F-8 to 
include Examinations Department and other regulatory requests should 
enhance the Exchange's ability to meet its regulatory obligations 
expeditiously. Accordingly, the Exchange believes that the proposed 
rule change is consistent with Section 6 of the Act, in general, and, 
in particular with Section 6(b)(5), in that it is designed to promote 
just and equitable principles of trade, to prevent fraudulent and 
manipulative acts and practices, and to protect investors and the 
public interest.
    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 requirement of Section 6(b)(5)\11\ that the rules of an 
exchange be designed to prevent fraudulent and manipulative acts and 
practices and to protect investors and the public interest. In 
addition, the Commission finds that the proposal is consistent with the 
requirement of Section 6(b)(1) of the Act that an exchange have the 
capacity to enforce compliance by its members with the provisions of 
the Act, the rules and regulations thereunder, and the rules of the 
exchange.

    \11\15 U.S.C. 78f(b)(5) (1988).
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    The Commission believes, as it has stated in the past,\12\ that in 
order to effect its supervisory and compliance role over members and 
members organizations, it is necessary for an exchange to have the 
ability to set timetables for the receipt of information, and the 
disciplinary authority to compel members to comply with such requests. 
By requiring Exchange members to comply promptly with Exchange requests 
for information in connection with any regulatory inquiry, 
investigation, or examination, the proposal protects investors and the 
public interest by facilitating the prompt resolution of Exchange 
investigations, examinations, and disciplinary proceedings. This, in 
turn, should enhance the quality, consistency, and fairness of the 
important Exchange oversight functions and enable the PHLX to better 
enforce compliance by its members with the Exchange's rules and the 
federal securities laws.

    \12\See Securities Exchange Act Release Nos. 27151 (August 18, 
1989), 54 FR 35972 (August 30, 1989) (order approving File No. SR-
PHLX-89-20); and 25763 (May 27, 1988), 53 FR 20925 (June 7, 1988) 
(order approving File No. SR-NYSE-87-10).
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    The Commission believes that it is reasonable for the Exchange to 
apply the [[Page 24945]] revised F-8 prompt compliance requirement to 
matters involving equities, equity options, index options, and FCOs, 
and to extend the prompt compliance requirement to information requests 
made by the Exchange in connection with any regulatory inquiry, 
investigation, or examination in order to expedite the Exchange's 
investigations and to provide consistent treatment for all Exchange 
requests for information. In addition, the Commission believes that 
including Advice F-8 in the Exchange's minor rule plan will enable the 
PHLX to impose immediate sanctions for failures to respond to Exchange 
requests for information, thereby encouraging timely compliance with 
the provisions of Advice F-8.\13\ Moreover, the Commission believes 
that it is appropriate to include Advice F-8 in the Exchange's minor 
rule plan because failures to respond to Exchange requests for 
information are objective in nature and are easily verifiable, and thus 
lend themselves to the use of expedited proceedings.

    \13\Under the PHLX's minor rule plan, the Exchange may impose a 
fine not to exceed $2,500 for violations of Advices in lieu of 
commencing a disciplinary proceeding. In any action taken under the 
minor rule plan, the PHLX must serve the person against whom a fine 
is imposed with a written statement setting forth (1) the Advice(s) 
alleged to have been violated; (2) the act or omission constituting 
each violation; (3) the fine imposed for each violation; and (4) the 
date by which the determination becomes final and the fine becomes 
due and payable to the Exchange, or when the determination must be 
contested. Any person against whom a fine is imposed pursuant to the 
minor rule plan may contest the Exchange's determination by filing 
an answer with the Exchange department taking the action, when the 
matter will be referred to the Exchange's BCC for their 
consideration.
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    The Commission believes it is reasonable for the PHLX to require 
members to provide information within two business days for 
Examinations Department requests, and within 10 business days for all 
other Exchange requests for information. In this regard, the Commission 
notes that Examinations Department requests will be made in connection 
with books and records which members must maintain on an ongoing basis 
and which should be readily available. In contrast, other information 
requests made by the Exchange may involve events which occurred in the 
past and for which information may not be readily available.\14\

    \14\For example, the Exchange's Market Surveillance Department 
may request information in connection with a particular trade or 
trades or a customer complaint about the handling of an order.
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    The Commission believes that it is reasonable for the PHLX to amend 
Advice F-8 to reduce the fine for a first violation of the Advice from 
$500 to $200, and to provide that each additional request for 
information not furnished within the allotted time period may be 
considered as a separate occurrence for purposes of the Advice's fine 
schedule. The Commission believes that this provision should help to 
deter delays in compliance with Exchange requests for information and 
result in appropriate discipline, which should further ensure the 
protection of investors and the public interest.
    The Commission finds good cause for approving Amendment No. 1 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register in 
order to make the treatment of equities under Advice F-8 consistent 
with the treatment of equity options, index options, and FCOs. The 
Commission notes that the portion of the proposal applicable to equity 
options, index options, and FCOs was subject to the full notice and 
comment period and that no comments were received on that portion of 
the proposal. Since Amendment No. 1 makes the treatment of equities 
under Advice F-8 consistent with the treatment of options, Amendment 
No. 1 raises no new regulatory issues. Accordingly, the Commission 
believes it is consistent with Sections 6(b)(5) and 19(b)(2) of the Act 
to approve Amendment No. 1 on an accelerated basis.
    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1 to the proposed rule change. 
Persons making written submissions should file six copies thereof with 
the Secretary, Securities and Exchange Commission, 450 Fifth Street, 
N.W., Washington, D.C. 20549. Copies of the submission, all subsequent 
amendments, all written statements with respect to the proposed rule 
change that are filed with the Commission, and all written 
communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for inspection and copying at the Commission's Public 
Reference Section, 450 Fifth Street, N.W., Washington, D.C. Copies of 
such filing will also be available for inspection and copying at the 
principal office of the above-mentioned self-regulatory organization. 
All submissions should refer to the file number in the caption above 
and should be submitted by May 31, 1995.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (File No. SR-PHLX-94-61) is 
approved.

    \15\15 U.S.C. 78s(b)(2) (1982).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\

    \16\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-11510 Filed 5-9-95; 8:45 am]
BILLING CODE 8010-01-M