[Federal Register Volume 63, Number 245 (Tuesday, December 22, 1998)]
[Notices]
[Pages 70820-70821]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-33816]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40793; File No. SR-CHX-98-24]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Stock Exchange, Inc. Relating to the Exchange's 
Decorum Rules, Short Sales and Minor Rule Violation Plan

December 15, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 29, 1998,\3\ the Chicago Stock Exchange, Incorporated 
(``CHX'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') the proposed rule change, as 
described in Items I, II, and III below, which Items have been prepared 
by the Exchange. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Exchange filed Amendment No. 1 with the Commission on 
December 2, 1998. The amendment provides an example of an 
``inadvertent'' violation, modifies the recommended fine schedule to 
increase the proposed recommended fines for short sale violations, 
and makes non-substantive changes. See Letter from Patricia L. Levy, 
Senior Vice President and General Counsel, the Chicago Stock 
Exchange, Inc., to Mignon McLemore, Division of Market Regulation, 
SEC, dated December 1, 1998.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend (1) Interpretation and Policy .01 of 
Rule 3 of Article XII relating to the Exchange's Decorum Rules 
regarding repetitive administrative/execution messages; (2) Rule 17 of 
Article IX, to codify the existing requirement for members to comply 
with Rule 10a-1 under the Act (``Short Sale Rule''); and (3) Rule 9(h) 
of Article XII, to add certain rules and policies to the Exchange's 
Minor Rule Violation Plan.

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 Exchange 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 self-regulatory organization has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

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

1. Purpose
    The Exchange first proposes to amend the list of Class B violations 
set forth under Rule 3, Article XII of the Exchange's Decorum Rules to 
include repetitive administrative/execution messages sent over the 
Intermarket Trading System (``ITS'') or the Midwest Automated Execution 
System (``MAX'') that are indecorous, inappropriate or unnecessary. In 
addition, because the Exchange believes that violations of this rule 
are objective in nature and easily verifiable, the Exchange proposes to 
include these violations as Class B violations for purposes of the 
Minor Rule Violation Plan and proposes to retain the existing 
recommended fines for Class B violations of the Decorum Rates.
    Second, the Exchange proposes to codify in its rules the existing 
requirement for members to compy with the Short Sale Rule. Codifying 
the Short Sale Rule within the Exchange rules will allow the Exchange 
to assess fines for violation of the Short Sale Rule under its Minor 
Rule Violation Plan in appropriate circumstances, as discussed more 
fully below.
    Finally, the Exchange proposes to add certain rules and policies to 
the Exchange's Minor Rule Violation Plan under Article XII, Rule 9. 
Specifically, the Exchange is adding violations of its rules relating 
to: (1) Proprietary short sales by floor members (Article IX, Rule 17) 
(e.g., failing to properly mark a short sale a short and executing a 
short sale at an inappropriate tick); (2) the issuance of pre-opening 
responses under the ITS Rules (Article XX, Rule 39) (e.g., using 
Designated Order Turnaround (``DOT''), Post Execution Reporting 
(``PER''), or any method other than ITS to send a pre-opening 
response); and (3) the failure of a specialist to adjust limit orders 
to the block price when the MAX automatically executes such limit 
orders at the limit price upon a price penetration in the primary 
market (Article XX, Rule 7.06 and related Rule 37(b)(6) of Article XX). 
The Exchange believes that violations of these rules are objective in 
nature and are easily verifiable. Thus, the Exchange believes that 
violations of these rules in inadvertent or isolated circumstances 
should be handled under the Exchange's Minor Rule Violation Plan and 
not pursuant to the Exchange's formal disciplinary procedures.\4\ The 
Exchange proposes that the recommended fines for the above violations 
be $100, $500, and $1,000 for the first, second, third and subsequent 
violations, respectively, except for violations of the Short Sale Rule, 
the recommended fines would be $500, $1,000 and $2,500 for the first, 
second, and third subsequent violations, respectively.\5\
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    \4\ An inadvertent violation of the Short Sale Rule might occur, 
for example, if a specialist that is long 1,000 shares of a security 
sends an order to sell 1,000 shares in that security to the NYSE via 
a NYSE DOT machine. Because a specialist's inventory is not 
automatically updated to reflect executions over a DOT machine 
(unlike executions on the CHX or via ITS which are automatically 
reflected in a specialist's inventory on a real-time basis), it is 
possible that a specialist may either forget about the DOT order, or 
may be late in manually updating his inventory position to reflect 
the sale via DOT. In either event, the specialist's inventory at 
that time would not reflect that the specialist is now ``flat'' 
rather ``long'' the security. If the specialist than marks his next 
sale as ``long'' rather than properly marking the order as 
``short,'' it might be because the specialist merely looked at his 
inventory position and did not take the DOT order into account in 
determining whether he was long or short. While this would still be 
a violation of the short sale rule, depending on the totality of the 
facts (e.g., whether this is isolated or part of a larger fraud, or 
if other unusual circumstances existed, etc.) in certain 
circumstances, this violation might be considered an ``inadvertent'' 
violation that is appropriate for the minor rule violation plan. See 
Amendment No. 1, supra note 3.
    \5\ See Amendment No. 1, supra note 3.
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2. Statutory Basis
    The Exchange believes 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\ 6(b)(6),\7\ 6(b)(7),\8\ 
6(d)(1) \9\ and 19(d) \10\ of the Act. The Exchange believes 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

[[Page 70821]]

shall be disciplined appropriately for violations of the rules of the 
exchange. The Exchange also believes that the proposal provides an 
efficient procedure for appropriate disciplining of members for rule 
violations that are objective in nature. Morever, because CHX Article 
XII, Rule 3, provides procedural rights to the person fined and permits 
a disciplined person to appeal or request review of the matter, the 
Exchange believes the proposal provides a fair procedure for the 
disciplining of members and persons associated with members, consistent 
with Sections 6(b)(7) and 6(d)(1) of the Act.
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    \6\ 15 U.S.C. 78f(b)(1).
    \7\ 15 U.S.C. 78f(b)(6).
    \8\ 15 U.S.C. 78f(b)(7).
    \9\ 15 U.S.C. 78f(d)(1).
    \10\ 15 U.S.C. 78s(d).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impost any burden on competition.

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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 (i) as the Commission may 
designate up to 90 days of such date if its finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) 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 proposal 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 at the Commission's 
Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549. 
Copies of such filing will also be available for inspection and copying 
at the principal office of the Exchange. All submissions should refer 
to File No. SR-CHX-98-24 and should be submitted by January 12, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc 98-33816 Filed 12-21-98; 8:45 am]
BILLING CODE 8010-01-M