[Federal Register Volume 67, Number 31 (Thursday, February 14, 2002)]
[Notices]
[Pages 6961-6963]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-3630]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45421; File No. SR-Phlx-2001-114]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. Relating to Aggregation 
of Individual Violations of Exchange Order Handling Rules and Option 
Floor Procedure Advices

February 7, 2002.
    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 December 18, 2001, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
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 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.
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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 Exchange Rule 960.2(f), 
Determination to Initiate Charges, and Exchange Rule 970 concerning the 
Exchange's minor rule violation enforcement and reporting plan (``Minor 
Rule Plan''),\3\ by clarifying that the Exchange may aggregate, or 
``batch,'' individual violations of Exchange order handling rules and 
Option Floor Procedure

[[Page 6962]]

Advices (``OFPAs'') \4\ and consider such ``batched'' violations as a 
single offense.
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    \3\ Exchange Rule 970 sets forth the criteria for the imposition 
of a fine (not to exceed $2,500) on any member, member organization, 
or any partner, officer, director or person employed by or 
associated with any member or member organization, for any violation 
of a Floor Procedure Advice, which violation the Exchange shall have 
determined is minor in nature. Such a fine is imposed in lieu of 
commencing a ``disciplinary proceeding'' as that term is used in 
Exchange Rules 960.1-960.12. Minor Rule Plan fines are subject to 
Rule 19d-1 under the Act.
    \4\ The Exchange has agreed to amend the proposed rule change to 
clarify that ``batching'' of violations can only occur where the 
Exchange uses automated surveillance to detect violations. See 
telephone conversation between Edith Hallahan, First Vice President 
and Deputy General Counsel, Phlx, and Deborah Lassman Flynn, 
Assistant Director, Division of Market Regulation (``Division''), 
Commission, on February 7, 2002.
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    The proposed rules would also expressly provide that, as an 
alternative to ``batching'' of order handling violations, in certain 
circumstances in which the Exchange determines that there exists a 
pattern or practice of violative conduct without exceptional 
circumstances, or when any single instance of violative conduct without 
exceptional circumstances is deemed to be egregious, the Exchange may 
refer the matter to the Business Conduct Committee (``BCC'') for 
possible disciplinary action.
    The text of the proposed rule change is available at the Phlx's 
Office of the Secretary and at 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 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 Exchange 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 purpose of the proposed rule change is to clarify that the 
Exchange may consider an aggregate number of violations of order 
handling rules and OFPAs\5\ as one single offense for purposes of 
initiating disciplinary action under Exchange rules, or imposing fines 
pursuant to fine schedules set forth in the relevant OFPAs under the 
Exchange's Minor Rule Plan.\6\ The Exchange believes that such 
aggregation of order handling violations would enable the Exchange's 
Market Surveillance Department to identify, through exception reporting 
and through on-floor surveillance,\7\ members and member organizations 
that fail to meet acceptable compliance thresholds for such rules and 
OFPAs, and to determine whether to impose fines pursuant to the 
Exchange's Minor Rule Plan or refer the matter to the BCC for 
consideration of formal disciplinary action.\8\
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    \5\ Specifically, the Exchange proposes to ``batch'' violations 
of Exchange Rules 1051 (concerning the requirement that a member or 
member organization initiating an options transaction must report or 
ensure that the transaction is reported within 90 seconds of 
execution to the tape) and Exchange Rule 1082 (concerning the 
requirement that quotes be firm for both price and size, and the 
requirement that marketable orders received in a size greater than 
the disseminated size be executed in their entirety or up to the 
disseminated size within 30 seconds); OFPA A-1 (concerning the 
requirement that a specialist shall use due diligence to ensure that 
the best available bid and offer is displayed for those option 
series in which he is assigned); OFPA F-2 (the aforementioned 90-
second trade reporting requirement under the Exchange's Minor Rule 
Plan); and other OFPAs, pursuant to its Numerical Criteria for 
Bringing Cases for Violation of Phlx Order Handling Rules.
    \6\ The Exchange filed this proposed rule change in accordance 
with the provisions of Section IV.B.i of the Commission's September 
11, 2000 Order Instituting Administrative Proceedings Pursuant to 
Section 19(h)(1) of the Act, which required the Exchange to adopt 
rules establishing, or modifying existing, sanctioning guidelines 
such that they are reasonably designed to effectively enforce 
compliance with options order handling rules. See Securities 
Exchange Act Release No. 43268 (September 11, 2000), Administrative 
Proceeding File No. 3-10282 (the ``Order'').
    \7\ See supra note 4.
    \8\ The Exchange submitted to the Commission a letter, for which 
it requested confidential treatment, proposing how its regulatory 
staff would aggregate violations of the order handling rules, where 
the violations are identified through the Exchange's automated 
surveillance system. See letter from Anne Exline Starr, First Vice 
President Regulatory Group, Phlx, to John McCarthy, Associate 
Director, Office of Compliance, Inspections and Examinations, 
Commission, and Deborah Lassman Flynn, Assistant Director, Division, 
Commission, dated January 30, 2002.
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    The proposed rule change contemplates that aggregation of order 
handling violations in every instance may not be appropriate. The 
proposed rule change provides two alternatives to aggregation. First, 
the Exchange may refer the matter to the BCC for possible disciplinary 
action when the Exchange determines that there exists a pattern or 
practice of violative conduct without exceptional circumstances. The 
Exchange believes that the provision relating to a pattern or practice 
of order handling violations would enable it to identify and discipline 
repeat offenders, and should ultimately deter such conduct and 
encourage member organizations to remain compliant with the 
requirement.
    As a second alternative to aggregation, the proposed rules would 
provide that, when any single instance of violative conduct without 
exceptional circumstances is deemed to be egregious, the Exchange may 
refer the matter to the BCC for possible disciplinary action. The 
Exchange could determine that a single instance of violative conduct is 
so flagrant that such an instance would not be appropriate for 
aggregation under the proposed rule change.\9\ The Exchange believes 
that this provision would allow it to discipline egregious offenders 
appropriately and expeditiously when the offense rises above the 
aggregation threshold.
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    \9\ For example, the Exchange states that in the event that it 
discovers through investigation that a single violation or a pattern 
or practice of violations of Exchange order handling rules is the 
result of intentional conduct on the part of a member organization, 
nothing would preclude the Exchange from referring such a matter 
directly to the Business Conduct Committee for possible disciplinary 
action.
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    The Exchange believes that the aggregation proposal, in conjunction 
with the alternatives to aggregation relating to a pattern or practice 
of order handling violations or an egregious order handling violation, 
provide it with the means to enforce Exchange order handling rules in a 
manner that should ultimately deter such conduct and result in fewer 
violations.
(2) Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act,\10\ in general, and furthers the 
objectives of section 6(b)(5) of the Act,\11\ in particular, in that it 
is designed to perfect the mechanisms of a free and open market and the 
national market system, protect investors and the public interest and 
promote just and equitable principles of trade by codifying the way in 
which order handling violations will be enforced.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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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 
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 written comments were either solicited or received.

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 it finds such longer period to 
be appropriate and

[[Page 6963]]

publishes its reasons for so finding, or (ii) as to which the Exchange 
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, NW, Washington, DC 20549-0609. 
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. 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-Phlx-2001-114 and 
should be submitted by March 7, 2002.

    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,
Secretary.
[FR Doc. 02-3630 Filed 2-13-02; 8:45 am]
BILLING CODE 8010-01-U