[Federal Register Volume 67, Number 56 (Friday, March 22, 2002)]
[Notices]
[Pages 13395-13397]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-6897]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45570; File No. SR-Phlx-2001-114]


Self-Regulatory Organizations; Order Granting Accelerated 
Approval of Proposed Rule Change and Notice of Filing and Order 
Granting Accelerated Approval of Amendment No. 1 Thereto by the 
Philadelphia Stock Exchange, Inc. Relating to Aggregation of Individual 
Violations of Exchange Order Handling Rules and Option Floor Procedure 
Advices

March 15, 2002.

I. Introduction

    On December 18, 2001, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to

[[Page 13396]]

Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to amend Exchange 
Rule 960.2(f) and Exchange Rule 970 to permit the Exchange to 
aggregate, or ``batch,'' individual violations of Exchange order 
handling rules and Option Floor Procedure Advices (``OFPAs'') and 
consider such ``batched'' violations as a single offense.\3\ The 
proposed rule change was published for comment in the Federal Register 
on February 14, 2002.\4\ On March 8, 2002, the Exchange filed Amendment 
No. 1 to the proposed rule change.\5\ No comments were received on the 
proposed rule change. This order approves the proposed rule change on 
an accelerated basis and issues notice of filing and grants accelerated 
approval to Amendment 
No. 1.
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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 in accordance 
with the provisions 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. 45421 (February 7, 
2002), 67 FR 6961.
    \5\ See letter from Richard S. Rudolph, Director and Counsel, 
Phlx, to Nancy J. Sanow, Assistant Director, Division of Market 
Regulation (``Division''), Commission, dated March 7, 2002 
(``Amendment No. 1''). In Amendment No. 1, the Exchange clarified 
that ``batching'' of violations can occur only where the Exchange 
uses automated surveillance to detect violations.
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II. Description of the Proposal

    The proposed rule change would clarify that the Exchange may 
consider multiple numbers of violations of order handling rules and 
OFPAs \6\ as one single offense, where automated surveillance is 
available,\7\ 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. Such 
aggregation of order handling violations would enable the Exchange's 
Market Surveillance Department to identify, through exception 
reporting,\8\ 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 Business Conduct Committee (``BCC'') 
for consideration of formal disciplinary action.\9\ In addition, as an 
alternative to aggregation, the Exchange may refer violations to the 
BCC for possible disciplinary action when 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.\10\
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    \6\ Specifically, the Exchange proposes, pursuant to its 
Numerical Criteria for Bringing Cases for Violations of Phlx Order 
Handling Rules, to ``batch'' violations of Exchange Rule 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); 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 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.
    \7\ See supra note 4.
    \8\ Id.
    \9\ 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 
(``OCIE''), Commission, and Deborah Lassman Flynn, Assistant 
Director, Division, Commission, dated January 30, 2002. The Exchange 
has informed OCIE that it will begin automated surveillance for 
trade reporting violations no later than April 15, 2002. In the 
interim period, OCIE will continue to evaluate the Exchange's 
surveillance, investigatory, and enforcement process to ensure that 
the Phlx is adequately surveilling and enforcing member compliance 
with its trade reporting requirements.
    \10\ In the event that the Exchange 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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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.\11\ In particular, the Commission believes that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\12\ 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,\13\ 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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    \11\ 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).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ 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.\14\ 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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    \14\ See supra note 9.
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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.\15\
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    \15\ 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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    Furthermore, the Commission finds good cause for accelerating 
approval of the proposed rule change and Amendment No. 1 thereto prior 
to the thirtieth day after publication in the Federal Register. The 
Commission notes that the proposed rule change was noticed for the full 
comment period and

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the Commission is accelerating approval of the filing on the twenty-
ninth day after publication of the proposed rule change in the Federal 
Register. The Commission believes that accelerated approval will permit 
the Exchange to implement, and investors to benefit from, the proposed 
rule change without undue delay. Amendment No. 1 clarifies that 
``batching'' of violations can occur only where the Exchange uses 
automated surveillance to detect violations. In addition, the 
Commission notes that it received no comments on the proposed rule 
change. For these reasons, the Commission finds good cause exists, 
consistent with Sections 6(b)(5) \16\ and 19(b)(2) of the Act,\17\ to 
approve the proposed rule change and Amendment No. 1 thereto on an 
accelerated basis.
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    \16\ 15 U.S.C. 78f(b)(5).
    \17\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1, including whether Amendment No. 1 
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 Phlx. All 
submissions should refer to file number SR-Phlx-2001-114 and should be 
submitted by April 12, 2002.

V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, 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,\18\ that the proposed rule change (SR-Phlx-2001-114) and Amendment 
No. 1 thereto are approved on an accelerated basis.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-6897 Filed 3-21-02; 8:45 am]
BILLING CODE 8010-01-P