[Federal Register Volume 67, Number 56 (Friday, March 22, 2002)]
[Notices]
[Pages 13392-13393]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-6894]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45567; File No. SR-PCX-2001-23]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change by the Pacific Exchange, Inc. To Adopt New Sanctioning 
Guidelines for Enforcing Compliance With the Exchange's Options Order 
Handling Rules

March 15, 2002.

I. Introduction

    On December 26, 2001, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with 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 adopt new sanctioning 
guidelines to assist the Exchange in enforcing compliance with its 
options order handling rules.\3\ The proposed rule change was published 
for comment in the Federal Register on

[[Page 13393]]

February 13, 2002.\4\ No comments were received on the proposed rule 
change. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Exchange filed this proposed rule change pursuant to the 
requirements of Section IV.B.i of the Commission's September 11, 
2000 Order Instituting Public 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 (``Order'').
    \4\ See Securities Exchange Act Release No. 45416 (February 7, 
2002), 67 FR 6777.
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II. Description of the Proposal

    Currently, violations of the Exchange's firm quote, limit order 
display, and priority rules are treated as formal disciplinary actions 
and outside the scope of the Exchange's Minor Rule Plan (``MRP'').\5\ 
Violations of trade reporting and best execution obligations, however, 
are generally handled pursuant to the Exchange's MRP. While the MRP 
provides general guidance with respect to fine levels to be imposed for 
each distinct violation, nothing in the MRP prohibits the Exchange from 
removing a single violation of these obligations from the MRP and 
enforcing it as a formal disciplinary matter. The Exchange may also 
initiate a formal disciplinary action if it deems that a member or 
member organization's conduct amounts to a pattern or practice with 
respect to violations of the rules covered by its MRP or if its conduct 
in even a single instance is particularly egregious.
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    \5\ See PCX Rule 10.13.
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    The Exchange proposes to establish specific fine levels for 
disciplinary actions initiated as a result of violations of the 
Exchange's rules relating to firm quote (Rule 6.86), limit order 
display (Rule 6.55), obligations of market makers, priority (Rule 
6.75), best execution (Rule 6.46), and trade reporting (Rule 6.69). The 
proposed sanctioning guidelines would be used by various Exchange 
bodies that adjudicate disciplinary actions, including the Ethics and 
Business Conduct Committee, the PCX Board of Governors, the PCX 
Surveillance and Enforcement Departments, for in-house adjudications 
(collectively, ``Adjudicatory Bodies''), in determining appropriate 
remedial sanctions. The proposal lists general principles that would be 
considered by the Adjudicatory Bodies in connection with the imposition 
of sanctions in all cases.\6\ The proposed guidelines provide both a 
range of fines as well as non-monetary sanctions that could be assessed 
against offending members. Fine amounts would differ depending on the 
number of disciplinary actions that have been brought by the Exchange 
against the particular member or member organization.\7\ The proposed 
guidelines would also allow for non-monetary sanctions such as 
suspension, expulsion, or other sanctions in egregious cases.
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    \6\ 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 Hassan A. Abedi, Manager, 
Enforcement, PCX, to Nancy J. Sanow, Assistant Director, Division of 
Market Regulation (``Division''), Commission, dated December 21, 
2001.
    \7\ When determining whether an action is the first disciplinary 
action, the Adjudicatory Body would consider disciplinary actions 
with respect to violative conduct that occurred within the two years 
prior to the misconduct at issue. Recent acts of similar misconduct 
may be considered to be aggravating factors. For purposes of the 
proposed rule change, this two-year look-back provision would apply 
on a rolling basis. Telephone conversation between Hassan A. Abedi, 
Manager, Enforcement, PCX, and Sonia Patton, Special Counsel, 
Division, Commission, on February 6, 2002.
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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.\8\ 
In particular, the Commission believes that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\9\ which requires, among 
other things, that the rules of an exchange be designed to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market, and to protect investors and 
the public interest. The Commission also finds that the proposed rule 
change is consistent with Section 6(b)(6) of the Act,\10\ which 
requires that the rules of an exchange provide that its members be 
appropriately disciplined for violations of exchange rules, the Act, 
and rules and regulations thereunder, by expulsion, suspension, 
limitation of activities, functions, and operations, fine, censure, 
being suspended or barred from being associated with a member, or any 
other fitting sanction.
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    \8\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 15 U.S.C. 78f(b)(6).
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    Moreover, the Commission notes that the Exchange submitted a 
letter, for which it requested confidential treatment, proposing how 
its regulatory staff would aggregate violations of the order handling 
rules, where such violations are identified through the Exchange's 
automated surveillance systems\11\. The Commission believes that the 
compliance thresholds proposed in this letter provide a reasonable 
first step and should assist the Exchange in disciplining its members 
for violations of the Exchange's order handling rules. The Commission 
expects, however, that as compliance rates improve, the Exchange will 
adjust the compliance thresholds accordingly. Consequently, the 
Commission's approval of the proposed rule change is contingent on the 
Exchange providing notice to the Commission's Office of Compliance 
Inspections and Examinations of any future changes to this letter, and 
to any other sanctioning guidelines not codified in the Exchange's 
rules.
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    \11\ See supra note 6.
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    At this time, the Commission believes the proposed sanctioning 
guidelines are reasonably designed to effectively enforce compliance 
with the options order handling rules. Nevertheless, the Commission 
expects the Exchange to continue to evaluate the adequacy of the 
proposed sanctioning guidelines to determine whether they do, in fact, 
effectively enforce compliance with the options order handling 
rules.\12\
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    \12\ The Commission's examination staff will also monitor the 
application of these guidelines to determine whether they do, in 
fact, improve member compliance with the options order handling 
rules.
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IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and rules 
and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-PCX-2001-23) is approved.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-6894 Filed 3-21-02; 8:45 am]
BILLING CODE 8010-01-P