[Federal Register Volume 64, Number 23 (Thursday, February 4, 1999)]
[Notices]
[Pages 5696-5697]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2606]
[[Page 5696]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40990; File No. SR-CHX-98-24]
Self-Regulatory Organizations; Chicago Stock Exchange,
Incorporated; Order Approving a Proposed Rule Change Relation to the
Exchange's Decorum Rules, Short Sales and Minor Rule Violation Plan
January 28, 1999.
On September 29, 1998,\1\ the Chicago Stock Exchange, Incorporated
(``CHX'' or ``Exchange'') submitted to the Securities and Exchange
Commission (``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \2\ and Rule 19b-4
thereunder,\3\ a proposed rule change to amend: (1) Interpretation and
Policy .01 of Rule 3 of Article XII relating to the Exchange's Decorum
Rules regarding repetitive administrative/executive 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. Notice of the proposed rule
change appeared in the Federal Register on December 22, 1998.\4\ The
Commission received no comment letters concerning the proposed rule
change. This order approves the proposed rule change.
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\1\ The Exchange initially filed this proposal on September 29,
1998. However, on December 2, 1998, the Exchange filed Amendment No.
1 to provide an example of an ``inadvertent'' violation and to
increase the recommended fines for short sale violations. 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.
\2\ 15 U.S.C. 78s(b)(1).
\3\ 17 CFR 240.19b-4.
\4\ See Securities Exchange Act Release No. 40793 (December 15,
1998), 63 FR 70820 (December 22, 1998).
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First, the Exchange proposed 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 inappropriate or
unnecessary. Additionally, the Exchange proposed to include these
violations as Class B violations for purposes of the Minor Rule
Violation Plan and proposed to retain the existing recommended fines.
Second, the Exchange proposed to codify the requirement for members
to comply with the Short Sale Rule. Codifying the Short Sale Rule
within the Exchange rules will allow the Exchange to assess fines for
violation of this rule under its Minor Rule Violation Plan in
appropriate circumstances. If the violation is inadvertent or isolated,
the Exchange may assess fines pursuant to the Minor Rule Violation Plan
and not pursuant to the Exchange's formal disciplinary procedures.
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\5\ According to the CHX, 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 New York Stock Exchange (``NYSE'') via an NYSE
Designated Order Turnaround (``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 than ``long'' the security. If the
specialist then 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.
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Finally, the Exchange proposed to add certain rules and policies to
its Minor Rule Violation Plan under Article XII, Rule 9. Specifically,
the Exchange proposed to add violations of its rules relating to: (1)
proprietry 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 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 MAX automatically executes
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 proposed 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, where the recommended fines would be $500, $1,000, and
$2,500 for the first, second, and third, and subsequent violations,
respectively.\6\
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\6\ The Commission staff recommended that the Exhcange's fines
for Short Sale Rule violations be commensurate with the fine
schedules of other exchanges. Hence, the fines for violation of this
rule were increased. See Amendment No. 1 supra note 1.
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The Commission believes the proposed rule change is consistent with
the Act and the rules and regulations promulgated thereunder.\7\
Specifically, the Commission believes that approval of the proposed
rule change is consistent with Sections 6(b)(6) \8\ and 6(b)(7) \9\ of
the Act. The proposal is consistent with the requirement of Sections
6(b)(6) and (b)(7) in that it provides fair procedures and guidelines
that enable the Exchange to appropriately discipline its members and
persons associated with members for violations of the rules of the
exchange.
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\7\ The Commission has considered the proposed rule's impact on
efficiency, competition and capital formation. By classifying
certain messages as a violation of the Exchange's Decorum Rules, the
proposal should enhance efficiency by eliminating unnecessary
communications which could burden computer capacity. Codifying the
Short Sale Rule in the Exchange's rules should enhance competition
by preventing market manipulation in securities. 15 U.S.C. 78c(f).
\8\ Section 6(b)(6) requires the Commission to determine that
the rules of the exchange provide that its members and persons
associated with members shall be appropriately disciplined for
violating the federal securities laws or the rules of the exchange
by fine or other fitting sanction. 15 U.S.C. 78f(b)(6).
\9\ Section 6(b)(7) requires the Commission to determine that
the rules of the exchange provide a fair procedure for disciplining
its members and persons associated with members. 15 U.S.C. 78(b)(7).
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The Commission believes that amending the list of Class B
violations set forth in the Exchange's Decorum Rules to include
inappropriate messages will provide a fair procedure whereby member
organizations can be properly sanctioned for these violations that are
minor in nature. Moreover, the Commission believes that including the
Short Sale Rule within the rules of the Exchange and imposing fines for
violations of the Short Sale Rule under its Minor Rule Violation Plan
provide a fair procedure for the disciplining of members and persons
associated with members, which is consistent with the Act. The
Commission suggests that only those violations of the Short Sale Rule
which are inadvertent or isolated be handled pursuant to the Exchange's
Minor Rule Violation Plan. In the event that a violation occurs
involving circumstances where more severe sanctions would be warranted,
the Commission believes the Exhange should address them by taking a
formal disciplinary proceeding.\10\
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\10\ The Commission expects that the CHX would err on the side
of caution in disposing of violations under the Minor Rule Violation
Plan. For example, the Commission expects that the CHX would not
issue several cautionary letters before instituting the fines under
the Minor Rule Violation Plan or aggregate multiple violations of
the rules before instituting abbreviated disciplinary procedures,
or, if necessary, a formal disciplinary proceeding.
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[[Page 5697]]
The Commission also finds that the additional rules and policies
added to the Minor Rule Violation Plan are objective in nature and
easily verifiable. Thus, these rules and policies qualify for the less
labor intensive and costly disciplinary procedure. The Commission notes
that inclusion of these additional rules and policies under the Minor
Rule Violation Plan should make the Exchange's disciplinary system more
efficient in prosecuting violations of these rules.
For the above reasons, the Commission believes that the proposed
rule change is consistent with the provisions of the Act, and in
particular with Sections 6(b)(6) and 6(b)(7).
It is therefore ordered, pursuant to Section 19(b)(2) \11\ of the
Act, that the proposed rule change (SR-CHX-98-24), is hereby approved.
\11\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-2606 Filed 2-3-99; 8:45 am]
BILLING CODE 8010-01-M