[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