[Federal Register Volume 70, Number 134 (Thursday, July 14, 2005)]
[Notices]
[Pages 40762-40764]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3747]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52000; File No. SR-ISE-2005-21]


Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Notice of Filing and Order Granting Accelerated Approval of 
Proposed Rule Change and Amendments No. 1 and 2 Thereto To Amend Its 
Summary Fine Schedule for Position Limit Violations

July 8, 2005.
    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 June 15, 2005, the International Securities Exchange, Inc. 
(``Exchange'' or ``ISE'') 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 ISE. On 
June 23, 2005, the Exchange filed Amendment No. 1 to the proposed rule 
change.\3\ On July 7, 2005, the Exchange filed Amendment No. 2 to the 
proposed rule change.\4\ The Commission is publishing this notice and 
order to solicit comments on the proposed rule change, as amended, from 
interested persons and to approve the proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange amended the proposed rule 
change such that under proposed ISE Rule 1614(d)(1)(B): (1) fines 
for member accounts would be based on the number of violations in 
any 12-month rolling period and not within one calendar year; and 
(2) the $5,000 fine proposed by the Exchange would be for the fourth 
and each subsequent offense and not just for the fourth offense.
    \4\ In Amendment No. 2, the Exchange added a footnote to ISE 
Rules 1614(d)(1)(A) and (B) providing that (i) a one-trade date 
overage, (ii) a consecutive string of trade date overage violations 
where the position does not change or where a steady reduction in 
the overage occurs, or (iii) a consecutive string of trade 
violations resulting from other mitigating circumstances, may be 
deemed to constitute one offense, provided that the violations are 
inadvertent.

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[[Page 40763]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    ISE proposes to amend its summary fine schedule for position 
limits. The text of the rule change is available on ISE's Web site 
(http://www.iseoptions.com), at ISE's principal office, and at the 
Commission's Public Reference Room.

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

    In its filing with the Commission, ISE 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. ISE 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's disciplinary rules authorize the imposition of fines 
for minor rule violations, which are set forth in ISE Rule 1614. With 
respect to option position limit violations, current ISE Rule 
1614(d)(1) sets forth a graduated fine schedule that increases the 
dollar amount of the fine as the number of cumulative violations 
increase. The dollar amount of the fines ranges from $1.00 to $5.00 per 
contract for every contract exceeding the applicable position limit. 
Pursuant to ISE Rule 1614(a), a violation where the fine amount exceeds 
$5,000 is subject to disciplinary procedures under ISE Rules 1601 et 
seq.\5\
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    \5\ ISE Rule 1614(a) provides in relevant part: ``In lieu of 
commencing a disciplinary proceeding, the Exchange may, subject to 
the requirements set forth herein, impose a fine, not to exceed 
$5,000, on any Member, or person associated or employed by a Member, 
with respect to any Rule violation listed in section (d) of this 
Rule.''
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    Based on its experience with processing position limit violations, 
the Exchange has found that most position limit violations are 
technical in nature. Accordingly, the Exchange believes that position 
limit violations should be processed under a summary fine schedule. For 
example, the Exchange often encounters situations that involve 
inadvertent calculation errors or computer systems problems which 
result in sizable position limit overages and a consecutive string of 
single trade date violations. Because the ISE member is unaware of the 
problem that caused the violation, the violation can be sizeable and 
occur over a string of days. In these situations, once the Exchange has 
identified the overage and notified the ISE member, the ISE member 
takes appropriate action to bring the position into compliance and, if 
the overage was based on a computer systems problem, implements 
appropriate procedures to prevent a recurrence.
    Notwithstanding the unintentional nature of the violations, the 
Exchange's current rules provide for the imposition of fines for 
position limit violations in accordance with the fine schedule set 
forth in ISE Rule 1614(d)(1). For violations occurring in customer and 
member accounts, ISE Rule 1614(d)(1) deems one violation to equal a 
single date overage. Therefore, a single position limit overage that 
continues over a string of consecutive days would significantly 
increase the probability that the fine would exceed the $5,000 
threshold set forth in ISE Rule 1614 as a result of reaching the next 
level in the graduated fine schedule. In these situations, the Exchange 
rules require the Exchange to remove the violation from the summary 
fine process of ISE Rule 1614(d) and place it under the disciplinary 
process set forth in ISE Rules 1601 et seq.
    The Exchange believes that removal of these types of violations 
from the summary fine process is incongruous with what it believes is 
the unintentional nature of the majority of the position limit 
violations that the Exchange comes across. To realign ISE Rule 1614(d) 
with the current landscape, the Exchange proposes to establish a fixed 
dollar fine amount per each offense, with the fine amount equaling 
$2,500 for violations occurring in the accounts of non-member customers 
and $5,000 for violations occurring in all other accounts. ISE believes 
that the cap on the fine amount would permit the Exchange to process 
the majority of position limit violations under the summary fine 
process without having to subject the violation to the disciplinary 
procedures provided in ISE Rules 1601 et seq. In addition to 
restructuring the fine amounts, the proposal would add a footnote to 
ISE Rules 1614(d)(1)(A) and (B) that the following may be deemed to 
constitute one offense, provided that the violations are inadvertent: 
(i) A one-trade-date overage, (ii) a consecutive string of trade-date 
overage violations where the position does not change or where a steady 
reduction in the overage occurs, or (iii) a consecutive string of trade 
violations where there are other mitigating circumstances. 
Contemporaneous with the imposition of a fine, the Exchange's 
regulatory staff would work with the subject ISE member to correct the 
problem that caused the position limit violation.
    Pursuant to ISE Rule 1614, the Exchange has the authority to remove 
the position limit violation from the summary fine process of ISE Rule 
1614(d)(1). Under ISE Rule 1614, ``the Exchange is not required to 
impose a fine pursuant to this Rule with respect to the violation of 
any Rule included herein, and the Exchange may, whenever it determines 
that any violation is not minor in nature, proceed under Exchange Rules 
1603 or 1604, rather than under this Rule.'' Therefore, the Exchange 
may remove the violation from the summary fine process whenever it 
determines that the violation is not minor in nature.
2. Statutory Basis
    The Exchange believes the proposed rule change, as amended, would 
enable the Exchange to deal more efficiently with the majority of 
position limit violations and to provide the Exchange with a more 
equitable method of dealing with inadvertent position limit violations. 
Therefore, ISE believes the proposed rule change, as amended, is 
consistent with Section 6(b) of the Act,\6\ in general, and Section 
6(b)(5),\7\ in particular, in that it is designed to promote just and 
equitable principles of trade and to remove impediments to and perfect 
the mechanism for a free and open market and a national market system.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change, as amended, 
would not impose any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act.

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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from its members or other interested 
parties.

[[Page 40764]]

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-ISE-2005-21 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number SR-ISE-2005-21. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 ISE. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly. All submissions should refer to File Number 
SR-ISE-2005-21 and should be submitted on or before August 4, 2005.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds that the proposed rule change, as amended, 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 proposal is consistent 
with Section 6(b)(5) of the Act,\9\ which requires that the rules of an 
exchange be designed to promote just and equitable principles of trade, 
to remove impediments and to perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest. The Commission also believes that 
the proposal is consistent with Sections 6(b)(1) and 6(b)(6) of the Act 
\10\ which require that the rules of an exchange enforce compliance 
with, and provide appropriate discipline for, violations of Commission 
and Exchange rules. In addition, because the existing ISE Rule 1614(c) 
offers procedural rights to a person fined under the ISE Rule 1614, the 
Commission believes ISE Rule 1614, as amended by this 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.\11\
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    \8\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 15 U.S.C. 78f(b)(1) and 78f(b)(6).
    \11\ 15 U.S.C. 78f(b)(7) and 78f(d)(1).
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    Finally, the Commission finds that the proposal, as amended, is 
consistent with the public interest, the protection of investors, or 
otherwise in furtherance of the purposes of the Act, as required by 
Rule 19d-1(c)(2) under the Act \12\ which governs minor rule violation 
plans. The Commission believes that the change to ISE Rule 1614 would 
strengthen its ability to carry out its oversight and enforcement 
responsibilities as a self-regulatory organization in cases where full 
disciplinary proceedings are unsuitable in view of the minor nature of 
the particular violation. The Commission also notes that ISE's proposal 
is similar to a proposal by the Chicago Board Options Exchange 
(``CBOE'') that was previously approved by the Commission.\13\
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    \12\ 17 CFR 240.19d-1(c)(2).
    \13\ See Securities Exchange Act Release No. 47959 (May 30, 
2003), 68 FR 34441 (June 9, 2003) (SR-CBOE-2002-05).
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    In approving this proposed rule change, the Commission in no way 
minimizes the importance of compliance with Exchange rules and all 
other rules subject to the imposition of fines under ISE Rule 1614. The 
Commission believes that the violation of any self-regulatory 
organization's rules, as well as Commission rules, is a serious matter. 
However, ISE Rule 1614 provides a reasonable means of addressing rule 
violations that do not rise to the level of requiring formal 
disciplinary proceedings, while providing greater flexibility in 
handling certain violations. The Commission expects that ISE will 
continue to conduct surveillance with due diligence and make a 
determination based on its findings, on a case-by-case basis, whether a 
fine of more or less than the recommended amount is appropriate under 
ISE Rule 1614 or whether a violation requires formal disciplinary 
action.
    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\14\ for approving the proposed rule change, as amended, prior 
to the thirtieth day after the date of publication of the notice of the 
filing thereof in the Federal Register. Because the Commission recently 
approved a substantively similar proposal by CBOE after a full notice-
and-comment period and this proposal does not raise any new regulatory 
issues, the Commission believes that accelerated approval is 
appropriate.
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    \14\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\15\ and Rule 19d-1(c)(2) thereunder,\16\ that the proposed rule 
change, as amended, (SR-ISE-2005-21) be, and hereby is, approved and 
declared effective.
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    \15\ 15 U.S.C. 78s(b)(2).
    \16\ 17 CFR 240.19d-1(c)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E5-3747 Filed 7-13-05; 8:45 am]
BILLING CODE 8010-01-P