[Federal Register Volume 63, Number 100 (Tuesday, May 26, 1998)]
[Notices]
[Pages 28532-28533]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-13817]
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SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-39996; File No. SR-AMEX-97-30)
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the American Stock Exchange, Inc. Relating to Professional
Hearing Officers, Executive Committee Review of Appeals From
Disciplinary Panel Decisions and Indemnification of Persons Serving on
Disciplinary Panels and Exchange Officials
May 18, 1998.
I. Introduction
On August 11, 1997, the American Stock Exchange, Inc. (``Amex'' 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 which amends the Exchange's
Constitution and Rules of Procedure applicable to its disciplinary
proceedings. A notice of the proposed rule change appeared in the
Federal Register on March 24, 1998.\3\ The Commission received no
comment letters concerning this rule change. This order approves the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4 (1995).
\3\ Securities Exchange Act Release No. 39767 (March 17, 1998),
63 FR 1414 (March 24, 1998).
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The Exchange's Constitution and Rules of Procedure applicable to
disciplinary proceedings currently require, among other things, the
Exchange to draw members of disciplinary panels exclusively from the
ranks of practicing securities industry professionals. These rules also
generally require the Chairmen of Disciplinary Panels to be Exchange
Officials. The Exchange believes the current system for selecting
Disciplinary Panels has worked well for many years, and Panel members
have performed an invaluable service to the Exchange on a voluntary
basis. Recently, the Exchange has noticed that the complexity of the
legal issues confronting its disciplinary panels has increased, thus
requiring Article V, Section 1(b) of the Exchange's Constitution and
its Rules of Procedure to be modified.
II. Description of the Proposal
i. Professional Hearing Officers
Frequently, Disciplinary Panels face complicated legal questions
that must be resolved promptly to ensure the timely resolution of
enforcement matters. While the Exchange provides the Panels with an
assistant, this staff person has a non-substantive role in enforcement
proceedings and, therefore, is unable to fully participate in
evaluating important legal, evidentiary and procedural questions.
Accordingly, the Exchange has amended its Constitution and Rules to
provide for professional hearing officers to serve as chairmen and
voting members of Exchange Disciplinary Panels.\4\ The remaining
members of Disciplinary Panels would continue to be drawn from the
ranks of practicing securities industry professionals as currently
provided for in the Exchange's Constitution and Rules.\5\
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\4\ The Amex expects that the ``professional hearing officer
will be an individual who is a lawyer who has had litigation
experience in the securities area. It is possible that such
individual, or his firm, may provide advice or services to the
Exchange on matters that do not relate to the investigation or
preparation of disciplinary matters.'' See letter from Janice M.
Stroughter, Director of Hearings and Special Counsel, Legal &
Regulatory Policy, American Stock Exchange, Inc., to Katherine
England, Esq., Assistant Director, Market Supervision, SEC, dated
February 25, 1998 (``Amendment No. 2'').
\5\ CR. CBOE Rule 2.1 (establishing committees, procedures and
duties and powers thereof); NYSE rule 476(b) (outlining the
composition of a Hearing Board, the selection pool from which
panelists are chosen and length of service); and PCX Rule 11
(procedures for establishing committees in general, membership
selection, and delegation of jurisdiction to specific committees).
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ii. Indemnification of Persons Serving on Disciplinary Panels and
Exchange Officials
The indemnification provision of the Exchange's Constitution had
not specifically mentioned persons serving on Disciplinary Panels nor
Exchange Officials. Although the Exchange believes there are sound
arguments for concluding that persons serving on Disciplinary Panels
and Exchange Officials already are covered by the Exchange's indemnity
provision, the Exchange has, nevertheless, amended the Constitution to
make this coverage explicit to help ensure that the Exchange can
continue to attract and retain qualified persons to serve in these
capacities.\6\
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\6\ Cf. CBOE Const. art. IX, NYSE Const. art. XII, and PCX
Const. art. XVI. According to these provisions, indemnification is
granted to members of any committees authorized by their respective
Constitutions or Boards.
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iii. Board Review of Disciplinary Panel Decisions
Prior to this proposal, in all instances, disciplinary appeals were
heard by the Executive Committee of the Board pursuant to delegated
authority from the Board of Governors as authorized by Article V,
Section 1(b) of the Constitution except where a member or member
organization is expelled or suspended for a period of one year or more.
In such instance, a review by the full Board would have been required.
However, the Exchange has amended its Constitution to vest in the
Executive Committee the delegated authority to hear all appeals
(including matters the Board calls for review) regardless of the nature
of the respondent or the penalty.\7\ This should make the appeal
process less cumbersome, while at the same time eliminating a special
review privilege (i.e., full Board review) that existed for members and
member organizations, but not for their employees. The full Board would
retain authority to review disciplinary decisions when such review is
deemed appropriate.
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\7\ Cf. CBOE Rule 17.10 (review shall be conducted by the Board
or a committee of the Board); NYSE Rule 476(f) (review of Hearing
Panel's decision conducted by the Board); and PCX Rule 10.8(a)
(review may either be conducted by the Board or by a committee
appointed by Board).
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III. Discussion
The Commission believes that the proposed rule change is consistent
with the Act \8\ and the rules and regulations promulgated thereunder.
Specifically, the Commission believes that approval of the proposed
rule change is
[[Page 28533]]
consistent with Section 6(b)(7) \9\ of the Act. The proposed rule
change provides fair procedures for disciplining its members and
associated persons by changing the composition of Disciplinary Panels
to allow professional hearing officers to serve as chairmen and voting
members on these panels. Providing more responsibility and authority to
these professional hearing officers lends credibility to the
disciplinary process because all parties involved in the dispute will
benefit from their expertise and knowledge of the law as it applies to
the securities industry. This expertise and knowledge should result in
speedier Panel decisions without sacrificing due process.
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\8\ Pursuant to Section 3(f) of the Act, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. In updating its rules to improve its
disciplinary process, the Exchange has enhanced efficiency by
streamlining a process that should enable the Exchange to
expeditiously resolve disciplinary actions. Competition should also
improve as members and customers become confident that wrongdoing
will be quickly and effectively addressed. If competition increases
then capital formation should improve as an increase in business
should result in increased profits. 15 U.S.C. 78c(f).
\9\ Section 6(b)(7) requires the Commission to determine that a
registered national securities exchange's rules are designed to
provide a fair procedure for the disciplining of members and persons
associated with members.
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The Commission notes, however, that the Exchange's rules do not
specifically address the possibility of conflicts of interest between
the panelist and parties in the dispute.\10\ In response, the Exchange
states that its Hearings Department screens panel members for conflicts
of interest.\11\ Initially, prospective panel members are chosen who do
not present apparent conflicts. These prospective panelists are then
given the names of the parties, names of lawyers or agents representing
the parties, names of any potential witnesses disclosed by the parties,
and the nature of the case. Prospective panelists are then asked
whether they have any past or present relationships with any of the
persons mentioned and whether they are aware of any other conflict
presented by any of the persons mentioned or by the nature of the case.
The Exchange also forwards the names of prospective panelists to the
parties so that the parties can conduct their own conflicts check. In
the Commission's view, this procedure should go on a long way in
removing any interested persons from the list of prospective panelists
before the panel is selected, thereby minimizing the possibility of
conflicts.
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\10\ Cf. CBOE Rule 2.1(c) (no member shall participate in
adjudication of a matter in which he is personally interested) and
PCX Rule 10.8(b) (review board member required to disclose any
circumstances that might preclude him from rendering an objective
and impartial determination) and Rule 11.3 (no committee member
shall participate in an adjudication of a matter in which he is
personally interested).
\11\ See supra note 4, Amendment No. 2 at p.2.
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The Commission agrees that extending the right of indemnification
to persons serving on Disciplinary Panels and to Exchange Officials
should allow the Exchange to attract and retain qualified persons to
serve in these capacities. By eliminating the possibility of litigation
and potential judgment as factors in deciding whether to participate on
a Panel, the pool of qualified candidates should increase and their
decisions will be based on impartial analysis of the evidence and
circumstances, not fear of reprisal. Finally, the Commission supports
the Exchange vesting in the Executive Committee the authority to hear
all appeals. Streamlining the appeals process should result in
expedited enforcement action where necessary, which will, in turn,
benefit the public.
IV. Conclusion
For the above reasons, the Commission believes that the proposed
rule change is consistent with the provisions of the Act, and in
particular with Section 6(b)(7).
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the proposed rule change (SR-AMEX-97-30) be, and hereby
is approved.
\12\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 98-13817 Filed 5-22-98; 8:45 am]
BILLING CODE 8010-01-M