[Federal Register Volume 61, Number 49 (Tuesday, March 12, 1996)]
[Notices]
[Pages 10053-10054]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-5784]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36927; File No. SR-NYSE-95-45]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change Relating to Additions 
to ``List of Exchange Rule Violations and Fines Applicable Thereto 
Pursuant to Rule 476A''

March 5, 1996.
    On December 28, 1995, the New York Stock Exchange, Inc. (``NYSE'' 
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 revise the List of Exchange 
Rule Violations and Fines Applicable Thereto Pursuant to Rule 476A 
(``476A List'') to include NYSE Rule 476(a)(10) and certain provisions 
of NYSE Rule 95 and NYSE Rule 127. The NYSE also requested approval, 
under Rule 19d-1(c)(2), to amend its Rule 19d-1 Minor Rule Violation 
Enforcement and Reporting Plan (``MRVP'') to include the items proposed 
for addition to the 476A List.\3\

    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Daniel Parker Odell, Assistant Secretary, 
NYSE, to Glen Barrentine, Team Leader, Division of Market 
Regulation, SEC, dated December 27, 1995.
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 36756 (Jan. 22, 1996), 61 FR 2856 (Jan. 29, 
1996). No comments were received on the proposal.
    In 1984, the Commission adopted amendments to Rule 19d-1(c) to 
allow SROs to submit, for Commission approval, plans for the 
abbreviated reporting of minor rule violations.\4\ The Commission, in 
adopting Rule 19d-1, attempted to balance the informational needs of 
the Commission against the reporting burdens of the SROs,\5\ and with 
paragraph (c) of Rule 19d-1 the Commission further attempted to reduce 
those reporting burdens by permitting, where immediate reporting was 
unnecessary, quarterly reporting of minor rule violations. Rule 19d-
1(c), however, was intended to be limited to rules that can be 
adjudicated quickly and objectively.

    \4\ See Securities Exchange Act Release No. 21013 (June 1, 
1984), 49 FR 23828 (June 8, 1984). Pursuant to paragraph (c)(1) of 
Rule 19d-1, an SRO is required to file promptly with the Commission 
notice of any final disciplinary action taken by the SRO. Pursuant 
to paragraph (c)(2) of Rule 19d-1, any disciplinary action taken by 
an SRO for a violation of an SRO rule that has been designated a 
minor rule violation pursuant to the Plan 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. 
By deeming unadjudicated minor violations as not final, the 
Commission permits the SRO to report violations on a periodic, 
rather than on an immediate, basis.
    \5\ See Securities Exchange Act Release No. 13762 (July 8, 
1977), 42 FR 35411 (July 14, 1977).
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    In 1985, the Commission approved a NYSE plan for the abbreviated 
reporting of minor rule violations pursuant to Rule 19d-1(c). The NYSE 
MRVP, as embodied in NYSE Rule 476A, provides that the Exchange may 
designate violations of certain rules as minor rule violations. The 
Exchange may impose a fine, not to exceed $5,000, on any member, member 
organization, allied member, approved person, or registered or non-
registered employee of a member or member organization for a violation 
of the delineated rules by issuing a citation with a specific 
penalty.\6\ Such person can either accept the penalty or request a full 
disciplinary hearing on the matter.\7\ The Exchange also retains the 
option of bringing violations of rules subject to NYSE Rule 476A to 
full disciplinary proceedings, and the Commission expects the Exchange 
to do so for egregious or repeated violations.

    \6\ The List is contained in Supplementary Material to NYSE Rule 
476A. As discussed supra, note 4, only those fines imposed that are 
not in excess of $2,500 are subject to periodic reporting. Fines 
imposed pursuant to Rule 476A in excess of $2,500 are deemed final 
and therefore must be reported immediately to the Commission 
consistent with the reporting requirements of Section 19(d)(1) of 
the Act.
    \7\ As discussed supra, note 4, any sanction for which a full 
disciplinary hearing was requested or administrative remedies 
otherwise have been exhausted is considered final and must be 
reported immediately to the Commission consistent with the reporting 
requirements of Section 19(d)(1) of the Act.
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    The NYSE currently is adding to the 476A List and MRVP: (1) 
misstatements or omissions of fact on any submission filed with the 
Exchange as provided in NYSE Rule 476(a)(10); (2) failure to comply 
with the requirements of NYSE Rule 95 with respect to its order 
identification requirements or prohibition of transactions by members 
on the Floor involving discretion; and

[[Page 10054]]
(3) failure to comply with certain procedures under NYSE Rule 127 for 
execution of block cross transactions at a price that is outside the 
NYSE best bid or offer.
    Specifically, the Exchange is seeking to add to the 476A List 
misstatements or omissions of fact on applications for membership 
approval, financial statements, reports or other submissions filed with 
the Exchange in violation of NYSE Rule 476(a)(10). The Commission 
believes that violations of NYSE Rule 476(a)(10) are relatively 
objective and thus adding this rule to the MRVP is consistent with the 
Act. The Commission, however, is concerned about situations where false 
or misleading statements and omissions of material facts are willfully 
made that could cause an individual or entity to be subject to a 
statutory disqualification as defined in Section 3(a)(39)(F) of the 
Act. In such situations, procedures under Rule 476A would not be 
appropriate to address the conduct, and the Exchange should bring a 
full disciplinary proceeding for any such violation and notify the 
Commission immediately of any final action on the matter. In this 
regard, the Exchange has represented that it would be careful to 
distinguish misstatements or omissions of facts from willfully made 
false or misleading statements and omissions of material fact. 
Moreover, the Exchange has stated that in appropriate circumstances 
(i.e., findings of a pattern of misstatements or omissions), the 
Exchange would not use the procedures under Rule 476A to address the 
conduct.
    The Exchange also proposes to amend the Rule 476A List by adding 
NYSE Rule 95, which generally prohibits transactions that involve 
discretion as to (1) choice of security, (2) total amount of security 
to be bought or sold, or (3) whether a transaction is to be a purchase 
or sale. The Exchange is also seeking to add to the 476A List the 
failure to identify appropriately a liquidating order pursuant to NYSE 
Rule 95(c) (all liquidating orders effected pursuant to Rule 95(c) must 
be marked on the Floor as ``BC'' in the case of an order covering a 
short position or ``SLQ'' in the case of the sell order liquidating a 
long position). The Commission believes that violations of NYSE Rule 95 
in these circumstances are relatively objective and thus adding these 
violations to the MRVP is consistent with the Act.
    Finally, the Exchange is presently seeking approval to add to the 
476A List the failure by members or member organizations to adhere to 
certain procedures under NYSE Rule 127 for execution of block cross 
transactions at a price that is outside of the NYSE best bid or offer. 
Specifically, the failure to fulfill the requirement to satisfy public 
limit order at the clean up price when a position is established or 
increased for a member's or member organization's proprietary account 
would be considered a violation for which a fine pursuant to Rule 476A 
might be imposed.\8\ Moreover, the failure to utilize the procedures of 
NYSE Rule 127 to satisfy all better-priced limit orders when effecting 
block crosses outside the currently quoted market would also be 
considered a violation for which a fine pursuant to Rule 476A might be 
imposed. These specific violations of NYSE Rule 127 can be objectively 
determined and therefore the Commission believes that it is consistent 
with the Act to add these violations of NYSE Rule 127 to the 476A List 
and MRVP.

    \8\ The Exchange has represented that it would not seek to 
review a member's initial determination as to whether the member 
would incur excessive stock loss by satisfying all orders at the 
clean-up price.
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    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)(1), 6(b)(6), 
6(b)(7), 6(d)(1) and 19(d) of the Act.\9\ The proposal is consistent 
with the Section 6(b)(6) requirement that the rules of an exchange 
provide that its members and persons associated with its members shall 
be disciplined appropriately for violations of rules of the exchange. 
The proposal provides an efficient procedure for appropriate 
disciplining of members for rule violations that are objective and 
technical in nature. Moreover, because NYSE Rule 476A provides 
procedural rights to the person fined and permits a disciplined person 
to request a full hearing on the matter, the proposal provides a fair 
procedure for the disciplining of members and persons associated with 
members, consistent with Section 6(b)(7) and 6(d)(1) of the Act.

    \9\ See 15 U.S.C. Secs. 78f(b) (1), (6), (7), and (d)(1) and 
Sec. 78s(d).
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    The Commission also believes that the proposal provides an 
alternate means by which to deter violations of the NYSE rules included 
in the MRVP, thus furthering the purposes of Section 6(b)(1) of the 
Act. An exchange's ability to enforce effectively compliance by its 
members and member organizations with Commission and Exchange rules is 
central to its self-regulatory functions. Inclusion of a rule in an 
exchange's minor rule violation plan should not be interpreted to mean 
it is an unimportant rule. On the contrary, the Commission recognizes 
that inclusion of rules under a minor rule violation plan may not only 
reduce reporting burdens on an SRO but also may make its disciplinary 
system more efficient in prosecuting violations of these rules.
    Moreover, because the NYSE retains the discretion to bring a full 
disciplinary proceeding for any violation included on the 476A List, 
the Commission believes that adding the NYSE rules outlined above will 
enhance, rather than reduce, the NYSE's enforcement capabilities of 
these Exchange requirements. In this regard, the Commission expects the 
Exchange to bring full disciplinary proceedings if it determines that a 
violation otherwise covered by the MRVP is not minor in nature, in the 
event of repeated violations of a particular rule, or in any other 
appropriate circumstance. Finally, the Commission believes that 
subjecting violations of the above specified NYSE rules to Rule 476A 
procedures will prove to be an effective response when the initiation 
of a full disciplinary proceeding is unsuitable because such a 
proceeding may be more costly and time-consuming in view of the minor 
nature of the particular violation. By including these rules in the 
476A List, the Exchange can quickly respond to violations, thereby 
immediately deterring similar infractions.
    IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-NYSE-95-45) is approved.

    \10\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\

    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-5784 Filed 3-11-96; 8:45 am]
BILLING CODE 8010-01-7