[Federal Register Volume 63, Number 168 (Monday, August 31, 1998)]
[Notices]
[Pages 46259-46261]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23315]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40356; File No. SR-CSE-98-02]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto, by The Cincinnati Stock Exchange, 
Inc., Relating to Regulatory Jurisdiction and Proceedings

August 24, 1998.
    Pursuant to Section 19(b)(1) of the securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 7, 1998, The 
Cincinnati Stock Exchange, Inc. (``CSE'' 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 CSE. On July 31, 1998, the Exchange filed 
with the Commission Amendment No. 1 to the proposed rule change.\2\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ In Amendment No. 1, the Exchange added Section 6(b)(6) of 
the Act as a statutory basis for the proposed rule change. The 
Exchange also set forth the procedure, under proposed CSE Rule 8.3, 
to be utilized upon the rejection of a letter of consent by the 
Business Conduct Committee. Finally, the Exchange corrected 
grammatical errors in proposed CSE Rule 8.1(a). Letter from Adam 
Gurwitz, Vice President Legal, CSE, to Kelly McCormick, Attorney, 
Division of Market Regulation Commission, dated July 30, 1998 
(``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to update and clarify its rules concerning 
disciplinary jurisdiction and practice. The text of the proposed rule 
change is available at the Office of the Secretary, CSE and the 
Commission.

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 CSE 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 CSE has prepared summaries, set forth in section A, 
B, and C below, of the most significant aspects of such statements.

[[Page 46260]]

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

1. Purpose
    The Exchange proposes to clarify and codify its disciplinary 
jurisdiction and practices by amending and renumbering those rules 
found in Chapter VIII of the Exchange Rules. The proposed rule change 
codifies existing Exchange practice, and is not intended to expand the 
CSE's existing grant of regulatory jurisdiction.
    The proposed rule change modifying CSE Rule 8.1 states the general 
nature of the Exchange's regulatory jurisdiction and authority and 
states that such jurisdiction extends to any violation of the Act, as 
amended, the rules and regulations promulgated thereunder, any 
provision of the Exchange's Articles of Incorporation, By-Laws or 
rules, any interpretation thereof, or any resolution or order of the 
Board of Trustees or appropriate Exchange committee. The provision 
indicates that any such violation may, after notice and an opportunity 
for a hearing, be addressed by expulsion, suspension, limitation of 
activities, functions and operations, fine, censure, suspension or bar 
from association with a member or any other fitting sanction.
    This rule also clarifies that the Exchange's jurisdiction extends 
to individual Exchange members as well as member organizations, 
responsible parties and persons associated with members. The CSE may 
discipline individuals for violations committed by employees under 
their supervision or by member organizations. Conversely, a member 
organization may be disciplined for violations committed by individuals 
associated with such member organizations. These failures to supervise 
charges are essential to a self-regulatory organization's ability to 
ensure that its member organizations properly supervise individuals and 
are common in the industry. The Exchange has always had the ability to 
bring such charges under its general regulatory authority, and is now 
more clearly expressing that authority.
    The Exchange has always had the ability to police abuses in its 
marketplace. This includes abuses by persons associated with members 
who subsequently leave the employ of those members. Thus, the proposed 
CSE Rule 8.1(b) codifies longstanding industry practice in stating that 
members and associated persons remain subject to the Exchange's 
disciplinary jurisdiction after termination of membership or 
association for violations that occurred prior to termination. Thus, 
members and associated persons may not avoid regulatory action simply 
by terminating their membership or association with a member. Proposed 
CSE Rule 8.1(c) notes that a summary suspension or other action taken 
under Chapter VII of the CSE's rules (suspension of member for 
insolvency or failure to perform on its contracts) shall not be deemed 
to be a disciplinary action under Chapter VII and the provisions of 
Chapter VIII shall not apply to such action. The proposed CSE Rule 
8.2(c) clarifies that entities within the regulatory jurisdiction of 
the Exchange are required to furnish information that the Exchange may 
request in connection with any investigation, hearing or appeal. 
Failure to provide such information shall be considered a rule 
violation. Proposed CSE Rule 8.2(c) also states that a member or 
associated person is entitled to be represented by counsel, at his/her 
own expense, during any Exchange investigation, hearing or appeal.
    The CSE has always permitted any member or associated person who is 
the subject of an Exchange investigation to submit a statement to the 
Exchange's Business Conduct Committee (``BCC'') explaining why no 
disciplinary action should be taken--a so-called ``Wells submission.'' 
Proposed CSE Rule 8.2(d) and CSE Rule 8.2(f) codify this procedural 
right and specifically permit a Wells submission to be made on 
videotape to facilitate such statements. In addition, proposed CSE Rule 
8.3 codifies the Exchange's expedited proceedings procedure, through 
which a member or associated person may attempt to resolve a matter by 
negotiating a letter of consent with the Exchange staff. In the CSE's 
experience, such procedures can, in certain cases, facilitate a fair 
and equitable resolution to potential disciplinary matters. Moreover, 
proposed CSE Rule 8.8 clarifies additional procedures concerning an 
offer of settlement tendered by a respondent in connection with a 
statement of charges. Specifically, a respondent may submit a written 
statement in support of an offer of settlement and may make an 
additional oral presentation to the BCC if the Exchange staff will not 
recommend acceptance of such offer or if the BCC initially rejects the 
offer. A respondent would be limited to a maximum of 2 offers to 
balance a desire to facilitate settlement with a need to bring 
disciplinary proceedings to closure within a reasonable timeframe. 
Together, these additional procedures should help ensure fair 
disciplinary proceedings.
    Proposed CSE Rule 8.10(d) would permit the Exchange President or 
Chairman to request review by the Exchange's Board of Trustees of any 
decision by the BCC not to initiate charges against a member or 
associated person. The Board could, at its discretion, order such a 
review. In this way, the CSE proposes to institute a system of checks 
and balances in the disciplinary process. Finally, the proposed 
Interpretation .01 of CSE Rule 8.11 sets forth the Exchange's policy 
concerning staff compliance with relevant laws and regulations, as well 
as the publication of disciplinary actions. The Exchange does not 
routinely release this type of information to the press. If 
circumstances warrant, however, the Exchange's Executive Committee may 
direct the Exchange staff to issue a press release or other statement 
to the press
2. Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
\3\ in general, and furthers the objectives of Section 6(b)(5) \4\ in 
particular in that it is designed to promote just and equitable 
principles of trade and to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. In addition, 
the proposed rule change furthers the objectives of Section 6(b)(6) \5\ 
because it provides that members and persons associated with members 
shall be appropriately disciplined for violations of the Act, or the 
rules or regulations thereunder, or the rules of the Exchange.\6\ 
Specifically, the proposed rule change will clarify the Exchange's 
regulatory jurisdiction and the conduct of disciplinary proceedings, 
and will thereby help ensure proper enforcement of its rules.
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    \3\ 15 U.S.C. 78f.
    \4\ 15 U.S.C. 78f(b)(5).
    \5\ 15 U.S.C. 78f(b)(6).
    \6\ Amendment No. 1.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The CSE does not believe that the proposed rule change will impose 
any inappropriate burden on competition.

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

    No comments were solicited or received in connection with the 
proposed rule change.

[[Page 46261]]

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 (1) 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 (2) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such 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, including whether the proposed rule 
change is consistent with the Act. 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 in the 
Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, 
D.C. 20549. Copies of such filings will also be available for 
inspection and copying at the principal office of the CSE. All 
submissions should refer to File No. SR-CSE-98-02 and should be 
submitted by September 21, 1998.

    For the Commission, by Division of Market Regulation, pursuant 
to the delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-23315 Filed 8-28-98; 8:45 am]
BILLING CODE 8010-01-M