[Federal Register Volume 60, Number 243 (Tuesday, December 19, 1995)]
[Notices]
[Pages 65362-65364]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30761]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36576; File No. SR-CHX-95-25]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Stock Exchange, Inc. Relating to the 
Establishment of a Minor Rule Violation Procedure and Reporting Plan

December 12, 1995.
    Pursuant to Sections 19(b)(1) and (d)(1) of the Securities Exchange 
Act of 1934 (``Act''), 15 U.S.C. 78s(b)(1) and (d)(1), and Rules 19b-4 
and 19d-1(c)(2) thereunder,\1\ notice is hereby given that on October 
11, 1995, the Chicago Stock Exchange, Inc. (``CHX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the self-regulatory organization.\2\ On 
December 8, 1995, the Exchange submitted Amendment No. 1 to the 
proposed rule change.\3\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.

    \1\ 17 C.F.R. 240.19b-4 and 19d-(c)(2).
    \2\ The Exchange is submitting to the SEC concurrently with the 
proposed rule change a minor rule violation reporting plan in 
accordance with Rule 19d-1(c)(2) under the Act. See Letter from 
David Rusoff, Attorney, Foley & Lardner, to Glen Barrentine, Senior 
Counsel, SEC, dated October 6, 1995.
    \3\ See Letter from David Rusoff, Attorney, Foley & Lardner, to 
Glen Barrentine, Senior Counsel, SEC, dated December 8, 1995. 
Amendment No. 1 renumbers existing Article XII, Rule 9 to Article 
XII, Rule 10.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to add a minor rule violation procedure 
as Article XII, Rule 9 of the Exchange's rules, adopt a minor rule 
violation reporting plan,\4\ and renumber existing Article XII, Rule 9.

    \4\ In Securities Exchange Act Release No. 21013 (June 1, 1984), 
49 FR 23828 (June 8, 1984), the SEC adopted amendments to paragraph 
(c) of Rule 19d-1 to allow self-regulatory organizations to submit 
for SEC approval plans for the abbreviated reporting of minor 
disciplinary infractions. Under the amendments, any disciplinary 
action taken by a self-regulatory organization against any person 
for violation of a rule of the self-regulatory organization that has 
been designated as a minor rule violation pursuant to a plan filed 
with the SEC 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 with respect to the matter.
    The SEC has approved minor disciplinary rule plans by virtually 
every stock exchange and the National Association of Securities 
Dealers, Inc. See, e.g., Securities Exchange Act Release No. 21919 
(April 3, 1985), 50 FR 14068 (April 9, 1985) (File No. 4-260) 
(Amex); Securities Exchange Act Release No. 22415 (September 17, 
1985), 50 FR 38600 (September 23, 1985) (File No. 4-284) (NYSE); 
Securities Exchange Act Release No. 22654 (November 21, 1985), 50 FR 
48853 (November 27, 1985) (File No. 4-285) (PSE).
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The proposed minor rule violation procedure (``Procedure'') 
authorizes the Exchange, in lieu of commencing a disciplinary 
proceeding, to impose a fine, not to exceed $2,500, on any member, 
member organization, associated person or registered or non-registered 
employee of a member or member organization for any violation of an 
Exchange rule which the Exchange determines to be minor in nature. The 
Committee on Floor Procedure will have the same authority for 
violations relating to decorum on the Exchange trading floor.
    If the fine is to be imposed by the Exchange (as opposed to the 
Committee on Floor Procedure) the fine shall be imposed in accordance 
with the method set forth in paragraph (b) of the Procedure. 
Specifically, prior to imposing the fine, the staff of the Exchange 
shall present the facts supporting such violative conduct to a Minor 
Rule Violation Panel (``Panel''), which shall consist of three floor 
members (one member of the Committee on Floor Procedure, one member of 
the Committee's Rules Subcommittee, and one member not on the Committee 
or any of its subcommittees) appointed by the President of the 
Exchange. The Panel is then authorized to impose the fine. In the event 
the Panel does not impose the fine, the staff shall, under 
circumstances set forth in the Procedure, issue a report to the 
President. The President, in turn, may either impose the fine, direct 
the staff to prefer formal charges or reject the staff's recommendation 
entirely.
    If a fine is to be imposed under the Procedure, the Exchange will 
serve a written statement on the person against whom a fine is imposed 
setting forth the rule violated, the act or omission constituting the 
violation, the fine imposed and the date of imposition, the date the 
fine must be paid and the date by which such determination must be 
contested.
    If the person against whom a fine is imposed pursuant to the 
Procedure chooses not to contest the matter and pays the fine, he or 
she waives his or her right to a disciplinary proceeding under Article 
XII of the Exchange's rules and any right to review or appeal (to the 
extent such right would otherwise exist under current Exchange rules). 
Alternatively, any person may choose to contest a fine by submitting a 
written answer, at which point the matter becomes a ``disciplinary 
proceeding'' subject to the applicable provisions of Article XII, 
including all disciplinary sanctions available thereunder (except for 
contests of a fine by the Committee on Floor Procedure, which will be 
subject to the provisions of Article XII, Rule 3).
    Under the Procedure, the Exchange will periodically prepare and 
announce to its members and member organizations a list of Exchange 
rules and policies as to which the Exchange may impose fines pursuant 
to the Procedure as well as the fines that may be imposed for their 
violation. The Procedure, however, expressly states that the Exchange 
is not required to impose a fine under the Procedure with respect to 
any violation of any rule included on such list. In addition, whenever 
the Exchange determines that a rule violation is not minor in nature, 
it has the discretion to commence disciplinary proceedings under 
Article XII of the CHX rules.
    The Exchange also proposes to adopt a minor rule violation 
reporting plan (``Plan''). Under its Plan, the Exchange designates 
certain specified rule 

[[Page 65363]]
violations as minor rule violations and requests that it be relieved of 
the current reporting requirement of Rule 19d-1(c)(1) under the Act 
regarding such violations, provided it gives notice of such violations 
to the Commission on a quarterly basis.\5\ The Plan, however, would not 
cover any fine imposed pursuant to the Procedure that is contested. 
Such violations and fines would continue to be reported as they occur.

    \5\ The Exchange's quarterly report to the SEC will include: the 
CHX's internal file number for the case, the name of the individual 
and/or organization, the nature of the violation, the specific rule 
provision violated, the fine imposed, the number of times the rule 
violation has occurred, and the date of disposition.
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    Initially, the Exchange is proposing to include the following rule 
and policy violations in both its Procedure and Plan: (1) Acquisition 
of membership by general or limited partner (Article II, Rule 1); (2) 
general partners bound by rules of Exchange (Article II, Rule 4); (3) 
notice of death or retirement of partner (Article II, Rule 9); (4) 
filing and approval of Articles of Incorporation (Article III, Rule 4); 
(5) authorization of officers to act (Article III, Rule 5); (6) 
officers, directors and principal stockholders (Article III, Rule 6); 
(7) death or retirement of registrant member (Article III, Rule 11); 
(8) transactions off the floor (Article VIII, Rule 9); (9) records of 
orders transmitted (Article IX, Rule 7); (10) dealing in stocks on put, 
call, straddle or option (Article IX, Rule 15); (11) record of margin 
calls and receipt of margin (Article X, Rule 2); (12) record of orders 
(Article XX, Rule 24); (13) specialist's book (Article XXX, Rule 4); 
(14) written reports of transactions (Article XXX, Rule 5); (15) record 
of orders (Article XXX, Rule 11); (16) financial operational reports 
(Article XI, Rule 4); (17) notification of change in bond coverage 
(Article XI, Rule 6); (18) filing requirements on change of examining 
authority (Article XI, Rule 7); (19) submission of books to board 
(Article VIII, Rule 11); (20) submission of evaluation of co-
specialists survey (Article VIII, Rule 11); (21) failure to issue ITS 
pre-opening notification (Article XX, Rule 39); (22) failure to comply 
with ITS trade-through, locked markets and block trade rules (Article 
XX, Rule 40); (23) failure to comply with stop order rule (Article XXX, 
Rule 22); (24) failure to comply with 50 percent requirement (Article 
XXXIV, Rule 3); (25) failure to comply with trading from off the floor 
rule (Article XXXIV, Rule 4); (26) failure to comply with public outcry 
rule (Article XXXIV, Rule 10); (27) violation of Class A decorum rules 
(Article II, Rule 3, Interpretation and Policy .01); (28) violation of 
Class B decorum rules (Article XII, Rule 3, Interpretation and Policy 
.01); (29) failure to comply with recognized quotations (Article XX, 
Rule 7); (30) failure to clear the post (Article XX, Rule 10); (31) 
failure to comply with cabinet securities provision (Article XX, Rule 
11); (32) failure to comply with minimum fractional changes Article XX, 
Rule 22); (33) failure to comply with agency cross rule (Article XX, 
Rule 23); (34) failure to comply with ``stopped''order rule (Article 
XX, Rule 28); (35) improper use of ``SOLD'' designator (Article VIII, 
Rule 7); (36) trading ahead of customer orders (Article XXX, Rule 2); 
(37) violation of preference solely on competitive basis rule (Article 
XXX, Rule 3).
    The purpose of the Procedure is to provide a more appropriate 
response to certain rule violations. At the present time, when the 
staff of the CHX discovers a technical, inadvertent, or otherwise minor 
rule violation, often, the Exchange's only practical response is to 
issue a written letter of caution to the person(s) involved focusing 
attention on the necessity of fully complying with all Exchange rules 
and policies and warning against future violations. Such written 
admonitions, however, may not always successfully deter future 
violations. The other alternative, the initiation of a formal 
disciplinary proceeding may, in many cases, be too time consuming, too 
costly, and carry too severe a penalty for such minor violations. The 
ability to impose a fine on a discretionary basis may constitute a more 
effective deterrent than a cautionary letter while avoiding the severe 
penalty or attendant publicity of a disciplinary hearing. The Procedure 
provides for an appropriate response to minor rule violations of 
certain Exchange rules while preserving the due process rights of the 
party accused through specified, required procedures.
    The purpose of the Plan is to provide the CHX with the flexibility 
to fashion reporting requirements that would result in the Commission 
receiving the necessary information regarding minor rule violations in 
the least burdensome way possible.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b)(5) of the 
Act \6\ and will advance the objectives of Section 6(b)(6) of the Act 
\7\ in that it will provide a procedure whereby members can be 
``appropriately disciplined'' in those instances when a rule violation 
is minor in nature, but a sanction more serious than a warning or 
cautionary letter is appropriate. In accordance with Sections 6(b)(7) 
and 6(d)(1) of the Act,\8\ the proposed rule change provides a fair 
procedure for imposing such sanctions. Finally, the proposed plan is 
consistent with Section 6(d)(1) of the Act and Rule 19d-1(c)(2) 
thereunder, which authorizes self-regulatory organizations to adopt 
minor rule violation reporting plans.

    \6\ 15 U.S.C. 78f(b)(5).
    \7\ 15 U.S.C. 78f(b)(6).
    \8\ 15 U.S.C. 78f(b)(7) and (d)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose a burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 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 

[[Page 65364]]
Section 450 Fifth Street, NW., Washington, DC 20549. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the Exchange. All submissions should refer to File 
No. SR-CHX-95-25 and should be submitted by January 8, 1996.
    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-30761 Filed 12-18-95; 8:45 am]
BILLING CODE 8010-01-M