[Federal Register Volume 63, Number 207 (Tuesday, October 27, 1998)]
[Notices]
[Pages 57340-57342]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28644]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40568; File No. SR-CSE-98-02]


Self-Regulatory Organizations; Cincinnati Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Amendment No. 1 Relating to 
Regulatory Jurisdiction and Proceedings

October 19, 1998.

I. Introduction

    On July 7, 1998, the Cincinnati Stock Exchange, Inc. (``CSE'' 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 update and clarify the 
Exchange's rules concerning disciplinary jurisdiction and practice. 
Amendment No. 1 was submitted to the Commission on July 30, 1998.\3\ 
The proposed rule change was published for comment in the Federal 
Register on August 31, 1998.\4\ The Commission received no comments on 
the proposal. This order approves the proposal, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 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 clarified language 
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'').
    \4\ Exchange Act Release No. 40356 (August 24, 1998) 63 FR 46259 
(August 31, 1998).
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II. Description of the Proposal

    The CSE proposes to clarify and codify the Exchange's disciplinary 
jurisdiction by amending and renumbering the rules found in Chapter 
VIII of the Exchange Rules. According to the CSE, the proposed rule 
change is not intended to expand the Exchange's existing grant of 
regulatory jurisdiction, but rather to codify existing Exchange 
practices.\5\
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    \5\ The proposal renumbers a number of existing rules to 
accommodate for the addition of new rules. The rule numbers 
referenced in this order correlate to the rules as proposed.
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CSE Rule  8.1

    Subsection (a) of proposed CSE Rule 8.1 provides for the Exchange's 
general regulatory jurisdiction and authority and states that the 
Exchange's 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, of any resolution or order of the 
Board of Trustees or appropriate Exchange committee (hereinafter 
collectively referred to as the ``Rules''). In addition, proposed CSE 
Rule 8.1(a) states that any violation of the Rules, 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.
    Proposed CSE Rule 8.1(a) also clarifies that individual Exchange 
members as well as responsible parties or persons associated with a 
member organization may be charged with violations of the Rules 
committed by employees or member organizations. Similarly, member 
organizations may be charged with violations committed by individuals. 
This provision is designed to ensure adequate supervision by members of 
their employees. The Exchange also explained that discipline for the 
failure to supervise is common in the industry and the proposed rule 
change merely clarifies the Exchange's existing authority.
    Proposed CSE Rule 8.1(b) provides that members and associated 
persons remain subject to the Exchange's disciplinary jurisdiction upon 
termination of membership or association for violations that occurred 
prior to such termination. The Exchange notes that this proposed 
subsection expresses long-standing industry practice and prevents 
members and associated persons from avoiding disciplinary actions 
simply by terminating their membership or association with a member.
    Finally, CSE Rule 8.1(c) clarifies that summary suspensions or 
other actions taken pursuant to Chapter VII of the Exchange Rules are 
not considered disciplinary actions. Accordingly, the provisions of 
Chapter VIII are not applicable to such Chapter VII actions.

CSE Rule  8.2

    Proposed CSE Rule 8.2, addressing complaints and investigations, 
adds new subsections (c) through (f). Subsection (c) sets forth that a 
member or person associated with a member has

[[Page 57341]]

an obligation to furnish information that the Exchange may request in 
connection with any investigation, hearing, or appeal. In addition, 
proposed CSE Rule 8.2(c) provides that a member or person associated 
with a member is entitled to be represented by counsel during such an 
investigation, proceeding, or inquiry. Proposed CSE Rule 8.2(e) 
provides that any failure to provide requested information is 
considered a violation of proposed CSE Rule 8.2.
    Upon notice by the Exchange of an alleged violation of any of the 
Rules, the person who is suspected of the violation is entitled to 
submit a statement stating why no disciplinary action should be taken--
a so-called ``Wells submission.'' Subsections (d) and (f) of proposed 
CSE Rule 8.2 provide for such a statement to be made either in writing 
or by videotape and submitted to the Business Conduct Committee 
(``BCC'').

Additional Changes

    Proposed CSE Rule 8.3 provides for expedited proceedings. Pursuant 
to this rule, a member or person associated with a member may attempt 
to resolve a matter by negotiating a letter of consent. The Exchange 
explains that for certain cases such a procedure facilitates a fair and 
equitable resolution to potential disciplinary matters.
    Settlement offers in response to a statement of charges are 
addressed in proposed CSE Rule 8.8. In subsection (b), the Exchange 
provides that a respondent may submit a written statement in support of 
a settlement offer. If the Exchange staff does not recommend acceptance 
of a settlement offer, the respondent may make an oral statement to the 
BCC addressing why the settlement offer should be accepted. Subsection 
(c) limits the number of written settlement offers that may be 
submitted to the BCC to a maximum of two. The Exchange believes the 
limitation balances the desire to facilitate settlements with a need to 
bring closure to disciplinary proceedings.
    The Exchange also proposes CSE Rule 8.10(d), which addresses the 
review of decisions not to initiate charges. Pursuant to this new 
subsection, the Board of Trustees may review a decision not to initiate 
upon application by the President or the Chairman.
    Finally, the proposed rule change adds new Interpretation .01 to 
proposed CSE Rule 8.11. This Interpretation states the Exchange's 
policy concerning staff compliance with the procedural requirements of 
the Rules. In addition, the Interpretation provides the policy 
concerning publication of disciplinary matters. The proposal explains 
that the CSE does not routinely release such information, but if 
circumstances warrant such a release, the Exchange's Executive 
Committee may direct release to the public by the staff.

III. Discussion

    After careful review, 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.\6\ 
In particular, the Commission finds that the proposed rule change is 
consistent with the requirements of Sections 6(b)(1), 6(b)(5), 6(b)(6), 
and 6(b)(7) of the Act.\7\
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    \6\ In reviewing this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f(b)(1); 15 U.S.C. 78f(b)(5); 15 U.S.C. 
78f(b)(6); and 15 U.S.C. 78f(b)(7).
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    Section 6(b)(1) of the Act \8\ requires exchanges to possess the 
capacity to enforce compliance by their members and persons associated 
with members with the provisions of the Act, the rules and regulations 
thereunder and the rules of the Exchange. Proposed CSE Rule 8.1 helps 
provide such capacity by expressly stating the Exchange's disciplinary 
jurisdiction. Moreover, the rule notes the Exchange's authority to 
pursue, discipline, and sanction members and persons associated with 
members for violations of the Rules. Proposed CSE Rule 8.1 should 
further strengthen the Exchange's enforcement authority by holding 
employers responsible for violations committed by employees and by 
stating that the Exchange has continuing jurisdiction over terminated 
members or persons associated with members.
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    \8\ 15 U.S.C. 78f(b)(1).
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    Proposed CSE Rule 8.2 (c) and (e) also enhance the CSE's 
enforcement capacity. By requiring the submission of information 
pertinent to disciplinary actions, this rule should help ensure that 
Exchange officials making disciplinary decisions have the facts 
necessary to enforce the Rules. In addition, the mechanism for Board of 
Trustees review of BCC decisions not to initiate charges contained in 
proposed CSE Rule 8.10(d) should ensure further oversight of the 
enforcement of the Rules.
    The Commission also finds that the proposed rule change is 
consistent with the requirements of Section 6(b)(5) of the Act \9\ 
which provides, among other things, that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices and 
to protect investors and the public. The proposed rule change clarifies 
and codifies the disciplinary jurisdiction of the Exchange, providing 
notice to members and persons associated with members that violations 
of the Rules can lead to disciplinary proceedings. Such notice should 
discourage fraudulent and manipulative acts and practices and result in 
the protection of investors and the public.
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    \9\ 15 U.S.C. 78f(b)(5).
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    In addition, the Commission finds that the proposed rule change is 
consistent with the requirements of Section 6(b)(6) of the Act,\10\ 
because it provides that members and persons associated with members 
shall be appropriately disciplined for violations of the Rules. For 
example, CSE Rule 8.1(a) expressly provides that the Exchange may 
appropriately discipline members or persons associated with members by 
expulsion, suspension, limitation of activities, functions and 
operations, fine, censure, suspension or bar from association with a 
member or any other fitting sanction.
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    \10\ 15 U.S.C. 78f(b)(6).
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    The proposed rule change also is consistent with the fair 
disciplinary procedure requirements of Section 6(b)(7) of the Act.\11\ 
The Commission finds that the proposed rule change is designed to 
improve the transparency, speed, and efficiency of the disciplinary 
process, thereby promoting a fair procedure for disciplining members 
and persons associated with members. Chapter VIII of the Exchange Rules 
increases transparency by setting forth the disciplinary process to be 
employed for disciplining members and persons associated with members. 
Moreover, proposed CSE Rule 8.3 and 8.8 specifically provide for the 
prompt resolution of charges. CSE Rule 8.3 offers a member or person 
associated with a member the opportunity to resolve a matter by 
negotiating a letter of consent. In addition, CSE Rule 8.8 furnishes 
the procedures to be employed for settlement offers. A member or person 
associated with a member may submit an offer of settlement in lieu of 
the disciplinary procedures. When a settlement offer is not accepted, 
limiting a member or person associated with a member to one additional 
settlement offer should give appropriate and fair closure to the 
disciplinary process.
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    \11\ 15 U.S.C. 78f(b)(7).
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    Proposed CSE Rule 8.2 further ensures fair disciplinary procedures 
by notifying subjects of allegations made against them and by allowing 
members to submit either a written or video ``Wells submission'' in 
response to a notice of charges. This provision

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provides an efficient method for responding to a violation charge and 
for identifying where a disciplinary action may be inappropriate. CSE 
Rule 8.2 also expresses that a member or person associated with a 
member has the right to be represented by counsel during an 
investigation, proceeding or inquiry, thereby helping to ensure the 
fairness of the proceedings.
    Finally, the proposed rule change promotes the fairness of 
disciplinary procedures in proposed Interpretation .01 to CSE Rule 
8.11. Interpretation .01 to CSE Rule 8.11 emphasizes the Exchange's 
commitment to a fair disciplinary process. It states that the staff 
shall comply with all procedural requirements of the Rules. The 
interpretation also addresses public disclosure of disciplinary 
proceedings setting forth Exchange policy, providing for a fair 
procedure for determining if disclosure is appropriate.
    Accordingly, the Commission believes the proposed rule change 
should protect those subject to the CSE's disciplinary process while 
ensuring the Exchange's enforcement of the Rules meant to protect 
investors.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-CSE-98-02) 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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-28644 Filed 10-26-98; 8:45 am]
BILLING CODE 8010-01-M