[Federal Register Volume 70, Number 210 (Tuesday, November 1, 2005)]
[Notices]
[Pages 65948-65950]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-21716]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52675; File No. SR-PCX-2005-75]


Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of 
Filing and Order Granting Accelerated Approval to a Proposed Rule 
Change and Amendment No. 1 Thereto Relating to Offers of Settlement

October 25, 2005.
    Pursuant to section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act'') and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on June 13, 2005, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. On September 
21, 2005, PCX submitted Amendment No. 1 to the proposed rule change.\3\ 
The Commission is publishing this notice and order to solicit comments 
on the proposed rule change, as amended, from interested persons and 
simultaneously is approving the proposal, as amended, on an accelerated 
basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Amendment No. 1.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    PCX is proposing to amend PCX Rule 10.6 pertaining to offers of 
settlement. The text of the proposed rule change, as amended, is 
available on PCX's Web site (http://www.pacificex.com), at the PCX'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, 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 III 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange states that the purpose of the proposed rule change is 
to revise the procedures for offers of settlement submitted in Exchange 
enforcement actions against Options Trading Permit (``OTP'') Holders 
and OTP Firms in order to make the disciplinary process more efficient 
and effective while maintaining appropriate OTP Holder and OTP Firm 
involvement in the oversight of the settlement process.
    Currently, all offers of settlement, whether contested or 
uncontested by the Exchange's Department of Enforcement, are considered 
by the Ethics and Business Conduct Committee (``EBCC'') for acceptance 
or rejection. If an offer of settlement is accepted by the EBCC, the 
EBCC issues a decision, and the Respondent \4\ cannot seek review of 
the decision. EBCC decisions are then submitted to the PCX Board of 
Directors (the ``Board'') in order to provide the Board with an 
opportunity to accept or reject the offer of settlement. This process 
is subject to the delays occurring between the time when the EBCC 
accepts an offer of settlement and the time when the Board subsequently 
reviews the accepted offer of settlement. Consequently, the imposition 
of disciplinary measures intended to prevent misconduct and maintain 
the integrity of the marketplace are also delayed.
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    \4\ See PCX Rule 10.4 (defining ``Respondent'').
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    Under the proposed rule change, an offer of settlement would be 
``uncontested'' when a Respondent makes an offer and the Department of 
Enforcement does not oppose it.\5\ In cases of uncontested offers of 
settlement made before a complaint has been issued, the General Counsel 
of the Exchange would have the authority to accept or reject the offers 
and decisions.\6\ Similarly, in cases of uncontested offers of 
settlement made after a complaint has been issued but before the 
hearing on the merits, the General Counsel of the Exchange would have 
the authority to accept or reject the offers and decisions.\7\ Finally, 
in cases of uncontested offers of settlement made after a hearing on 
the merits has begun, the Conduct Panel for the hearing would have the 
authority to accept or reject offers and decisions.\8\
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    \5\ See proposed PCX Rule 10(e)(1). The Commission notes that 
the Exchange's Department of Enforcement would transmit the 
Respondent's uncontested offer of settlement, along with a proposed 
decision, to either the Exchange's General Counsel or the Conduct 
Panel, as appropriate.
    \6\ See proposed PCX Rule 10(e)(2). When a Respondent submits an 
offer of settlement, the Department of Enforcement drafts a decision 
accepting the offer and submits both documents to the appropriate 
body. See Letter from Alden Adkins, Chief Regulatory Officer, PCX, 
to Katherine A. England, Assistant Director, Division of Market 
Regulation, Commission, dated October 6, 2005.
    \7\ See proposed PCX Rule 10(e)(3).
    \8\ See proposed PCX Rule 10(e)(4).
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    Any offer of settlement opposed by the Department of Enforcement 
would be ``contested.'' \9\ Under the proposal, Respondents would not 
be permitted to submit contested offers of settlement for consideration 
by the EBCC or the Conduct Panel before a complaint has been 
issued.\10\ In cases of contested offers of settlement made after a 
complaint has been issued but before a hearing on the merits has begun, 
the EBCC would have the authority to accept or reject the offers and 
decisions,\11\ which is consistent with current PCX practices. In cases 
of contested offers of settlement made after a hearing on the merits 
has begun, the Conduct Panel would have the authority to accept or 
reject the offers and decisions.\12\ Any offer of settlement submitted 
by a Respondent to the Conduct Panel after a hearing on the merits has 
begun would not stay the proceedings, unless the Conduct Panel decides 
to stay the proceedings.\13\
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    \9\ See proposed PCX Rule 10(f)(1). The Commission notes that 
the Exchange's Department of Enforcement would transmit the 
Respondent's contested offer of settlement, along with a proposed 
decision, to either the EBCC or the Conduct Panel, as appropriate.
    \10\ See proposed PCX Rule 10(f)(2).
    \11\ See proposed PCX Rule 10(f)(3).
    \12\ See proposed PCX Rule 10(f)(4).
    \13\ See proposed PCX Rule 10(a)(2).
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    All offers of settlement would become final upon acceptance by the 
General Counsel of the Exchange, the EBCC, or the Conduct Panel, as 
appropriate, and thus Board approval of offers of settlement would no 
longer be required. Under the proposal, the Board and the EBCC would 
review on a quarterly basis all offers of settlement after-the-fact to 
provide guidance and feedback to the Department of Enforcement and the 
General Counsel of the Exchange concerning appropriate settlement 
practices and amounts.\14\
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    \14\ See proposed PCX Rule 10(k). Neither the Board's nor the 
EBCC's action will affect any issued decisions.
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    In addition, the proposed rule change sets forth certain 
requirements with which offers of settlement must comply.\15\ These 
requirements include that the offer be in writing and signed by the 
person making the offer, and that the offer set forth certain details 
stating

[[Page 65949]]

the statutory provisions or rules alleged to have been violated, the 
acts or practices that the OTP Holder or OTP Firm is alleged to have 
engaged in or omitted, findings of fact, proposed sanctions, and the 
effective date of such proposed sanctions.
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    \15\ See proposed PCX Rule 10(c).
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    Finally, the proposed rule change sets forth certain rights that a 
Respondent waives upon submission of an offer of settlement to the PCX. 
In particular, a Respondent waives his right to: (1) Claim bias or 
prejudgment by certain individuals; (2) appeal before PCX committees, 
the Commission, and federal, state, and local courts; and (3) claim 
violations of the ex parte prohibitions of PCX Rule 10.3.\16\ The 
Exchange believes that waiver of such rights is appropriate in light of 
the proposed rule's intent, which is to create a more efficient and 
effective disciplinary process.\17\
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    \16\ See proposed PCX Rule 10(d).
    \17\ Paragraph (j) of the proposed rule change provides that a 
Respondent shall not be prejudiced by an offer of settlement that is 
rejected.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act \18\ in general, and furthers the 
objectives of section 6(b)(5) of the Act \19\ in particular, because it 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, and to remove impediments to and perfect 
the mechanism of a free and open market and a national market system.
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    \18\ 15 U.S.C. 78f(b)(5).
    \19\ 15 U.S.C. 78f(b).
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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 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

    Written comments on the proposed rule change were neither solicited 
nor received.

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-PCX-2005-75 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-PCX-2005-75. 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 the 
filing also will be available for inspection and copying at the 
principal office of the PCX. 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-PCX-2005-75 and should be submitted on or before 
November 22, 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.\20\ Specifically, the Commission believes that the proposal 
is consistent with section 6(b)(7) of the Act,\21\ which requires that 
the rules of an exchange provide a fair procedure for the discipline of 
its members and persons associated with its members. The Commission 
also believes that the proposal is reasonably designed to provide a 
more efficient disciplinary process to address violations of the 
Exchange's rules and the federal securities laws by the Exchange's 
members.
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    \20\ In approving this proposed rule change, as amended, the 
Commission has considered its impact on efficiency, competition, and 
capital formation. See 15 U.S.C. 78c(f).
    \21\ 15 U.S.C. 78f(b)(7).
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    Under the Exchange's proposal, a Respondent may propose an 
uncontested offer of settlement to the Exchange's Department of 
Enforcement in response to the initiation of a disciplinary inquiry by 
the Department of Enforcement.\22\ If the Respondent submits an 
uncontested offer of settlement before a hearing on the merits has 
begun, then the Department of Enforcement would transmit the 
uncontested offer, along with a proposed decision, to the Exchange's 
General Counsel for consideration. Specifically, if a Respondent 
submits an uncontested offer of settlement before the issuance of a 
complaint, and the General Counsel accepts it, then the Department of 
Enforcement would issue the decision and notify the parties. If a 
Respondent submits an uncontested offer of settlement after the 
Department of Enforcement has issued a complaint, and the General 
Counsel accepts it, then the General Counsel would issue the decision 
and notify the parties. Finally, if the Respondent submits an 
uncontested offer of settlement after a hearing on the merits has 
begun, then the Department of Enforcement would transmit the 
uncontested offer, along with a proposed decision, to the Conduct Panel 
for consideration. If the Conduct Panel accepts the decision, then the 
General Counsel would issue the decision and notify the parties.
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    \22\ The Exchange represents that it contacts a Respondent 
before any complaint is issued, such that the Respondent would be in 
a position to ascertain whether the terms of any contemplated offer 
of settlement would be ``uncontested'' or ``contested'' by the 
Exchange's Department of Enforcement.
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    The Commission believes that the involvement of the Exchange's 
General Counsel in considering uncontested offers of settlement 
submitted before a hearing on the merits has begun should be an 
appropriate safeguard and provides for an appropriate separation of 
functions at the Exchange. Further, the Commission believes that the 
proposal is reasonably designed to advance the interests of the 
Exchange's Department of Enforcement in efficiently and expeditiously 
resolving

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disciplinary cases when an uncontested offer of settlement is made 
before the commencement of a hearing on the merits without the 
involvement of the EBCC, while providing for review and consideration 
of possible violations. In particular, the Commission believes that the 
involvement of the Department of Enforcement and General Counsel in 
considering and rendering decisions on uncontested offers of settlement 
before the commencement of a hearing on the merits is appropriate, 
given the Respondent's choice to propose settlement terms that the 
Exchange's Department of Enforcement considers acceptable.
    Additionally, the proposal allows a Respondent, after a complaint 
has been issued, to submit an offer of settlement for consideration 
that is otherwise opposed on its terms, i.e., contested, by the 
Exchange's Department of Enforcement. If submitted before a hearing on 
the merits, a contested offer of settlement would be considered by the 
EBCC. If a Respondent submits a contested offer of settlement after a 
hearing on the merits has begun, the offer would be considered by the 
Conduct Panel. The Commission believes that this process is reasonably 
designed to allow Respondents to have their contested offers of 
settlement considered by the EBCC or the Conduct Panel when the offer 
would otherwise be opposed by the Exchange's Department of Enforcement. 
In addition, the Commission believes that this process balances the 
Exchange's interests in achieving efficient resolutions of disciplinary 
matters with its members' interests in having a process through which 
they can submit contested offers of settlement for consideration by the 
EBCC or the Conduct Panel. The Commission notes that under current PCX 
Rule 10, all offers of settlement are considered by the EBCC.
    In particular, the Commission notes that contested offers of 
settlement submitted after the issuance of a complaint but before the 
commencement of a hearing on the merits would be considered by the 
EBCC, and contested offers of settlement submitted after the issuance 
of a complaint and after the commencement of a hearing on the merits 
would be considered by the Conduct Panel. The Commission believes that 
this procedure provides a fair process by which the Exchange's members 
may take their contested offers of settlement before the EBCC or 
Conduct Panel, both of which are comprised primarily of the OTP Holders 
or allied persons of OTP Firms.
    Moreover, the proposed rule change sets forth in detail provisions 
relating to the content and signature requirements for offers of 
settlement, as well as waivers of certain rights upon submission of an 
offer of settlement. Additionally, the proposal provides for quarterly 
review by the EBCC and the Board Appeals Committee of final 
disciplinary actions in order to provide the Department of Enforcement 
and General Counsel with guidance on future settlement practices and 
settlement amounts. The Commission believes that this provision is 
reasonably designed to provide for EBCC and Board input, albeit on a 
prospective basis only, on the Exchange's disciplinary program, thereby 
providing a mechanism for the Board to comply with the self-regulatory 
organization's responsibility to maintain an adequate and effective 
disciplinary system.
    The Commission finds good cause for approving this proposal before 
the thirtieth day after the publication of notice thereof in the 
Federal Register. Accelerating approval of the proposal will allow the 
Exchange to implement, without undue delay, a more efficient process 
for reviewing and deciding upon offers of settlement, while maintaining 
OTP Holder and OTP Firm involvement in the settlement process. In 
addition, the Commission notes that the NASD has a substantially 
similar rule with respect to offers of settlement.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\23\ that the proposed rule change, as amended (SR-PCX-2005-75), is 
hereby approved on an accelerated basis.
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    \23\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 05-21716 Filed 10-31-05; 8:45 am]
BILLING CODE 8010-01-P