[Federal Register Volume 71, Number 121 (Friday, June 23, 2006)]
[Notices]
[Pages 36157-36159]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-9934]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54011; File No. SR-Phlx-2005-65]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Granting Accelerated Approval of Proposed Rule Change as Amended 
by Amendment No. 1 Relating to the Exchange's Business Conduct 
Committee and Disciplinary Rules

June 16, 2006.

I. Introduction

    On November 2, 2005, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') a proposed rule change pursuant to section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'')\1\ and Rule 
19b-4 thereunder,\2\ to amend the Exchange By-Law Article X, Section 
10-11 (``Business Conduct Committee'') and Exchange Rules 960 and 970, 
the disciplinary rules. The Phlx filed Amendment No. 1 to the proposed 
rule change on May 16, 2006. The proposed rule change, as amended, was 
published for comment in the Federal Register on May 26, 2006 for a 15-
day comment period, which ended on June 12, 2006.\3\ The Commission 
received no comments on the proposal. This order approves the proposed 
rule change, 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 Securities Exchange Act Release No. 53846 (May 19, 
2006), 71 FR 30462.
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II. Description of the Proposed Rule Change

    The Phlx proposes to create the new staff position of a ``Hearing 
Officer,'' who, along with two other Hearing Panelists, would hear 
contested disciplinary matters that are currently heard by a Panel 
appointed by the Chairman of the Business Conduct Committee (``BCC'' or 
``Committee''). In connection with creating the Hearing Officer 
position, the Phlx proposes to amend Exchange By-law Article X, Section 
10-11, which governs the BCC, and Exchange Rules 960 and 970, the 
disciplinary rules.

Background

    Pursuant to Exchange Rule 960.5(a), a hearing on a Statement of 
Charges is currently held before a Hearing Panel composed of three 
persons appointed by the Chairman of the BCC or the Chairman's 
designee. The presiding person of each Hearing Panel is a member of the 
Committee. The other two persons on the Hearing Panel are members of 
the Exchange, or general partners or officers of member organizations, 
or such other persons whom the Chairman of the BCC or the Chairman's 
designee considers to be qualified.
    Pursuant to Exchange Rule 960.5(a)(4), Hearing Panelists currently 
may be compensated in extraordinary cases, as determined by the 
Chairman of the BCC, in consultation with the Chairman of the Board of 
Governors. Exchange Rule 960.5(a)(4) provides factors to be considered 
when determining whether a case is extraordinary, which include but are 
not limited to the anticipated length of time of the hearing, the 
complexity and seriousness of the matter, and the magnitude of the 
potential penalty.
    Currently, pursuant to Exchange Rule 960.5(d), after the conclusion 
of the hearing, the Hearing Panel reviews the entire record of the 
proceeding and submits a written hearing report to the Committee 
containing proposed findings of fact concerning the allegations in the 
Statement of Charges, conclusions as to whether a violation within the 
disciplinary jurisdiction of the Exchange has occurred and an 
enumeration of such violations, and recommendations as to appropriate 
sanctions, to be considered by the Committee at the next Committee 
meeting after the report is completed.
    Pursuant to Exchange Rule 960.8, currently, after reviewing the 
entire record of the disciplinary proceeding,

[[Page 36158]]

the BCC, by a majority of the members voting, determines whether the 
Respondent has committed violations and the appropriate sanctions, if 
any. The BCC then issues a written decision, including in its decision 
a statement of findings and conclusions, with the reasons therefor, 
upon all material issues presented in the record, and whether each 
violation within the disciplinary jurisdiction of the Exchange alleged 
in the Statement of Charges has occurred.

Hearing Officer

    The Exchange proposes to establish a new permanent professional 
position of Hearing Officer. The responsibilities of the Hearing 
Officer would include, but not be limited to: presiding over hearings 
in contested disciplinary cases authorized by the Exchange's BCC, 
conducting pre-hearing conferences, ruling on procedural or discovery 
matters, scheduling hearing sessions, making all necessary evidentiary 
or other rulings (in consultation with the Hearing Panelists), 
regulating the conduct of the hearing, imposing appropriate sanctions 
for improper conduct by a party or a party's representative, drafting 
and issuing decisions on behalf of the Hearing Panel and rendering 
decisions in connection with Summary Disposition Proceedings. The 
Hearing Officer would not be permitted to be involved in any manner in 
the investigation of possible misconduct, to participate in the 
consideration by the BCC of whether to institute a disciplinary action, 
to render a decision following a hearing without the concurrence of a 
majority of the Hearing Panel, to rule upon requests to disqualify the 
Hearing Officer or any member of the Hearing Panel, or to issue 
citations for violations of Exchange rules or floor procedure 
advices.\4\
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    \4\ In addition, in accordance with By-Law Article X, Section 
10-11, the jurisdiction of the Hearing Officer and Hearing Panel 
shall not extend to the enforcement of rules and regulations of the 
Floor Procedure Committee or the Options Committee relating to 
order, decorum, health, safety and welfare on the trading floors, or 
to hearings held by and sanctions imposed by such committees 
relating to such matters, except as permitted by the rules of the 
Exchange or any interpretation thereof, and any regulations 
promulgated thereunder.
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    The Hearing Officer would report to the Audit Committee for all 
performance and compensation purposes to help ensure that the Hearing 
Officer is completely neutral and accountable to the Audit Committee 
alone. The Hearing Officer would merely report to the General Counsel 
or his or her designee to comply with policies and procedures 
applicable to all employees of the Exchange, such as reporting vacation 
time or sick leave.

Hearing Panelists

    The BCC Chair, or the Chair's designee, would select two Hearing 
Panelists for each matter from a pool of qualified individuals.\5\ 
Consistent with current practice, the Hearing Panelists would be 
selected based on their background, experience and training, which 
should qualify them to consider and make determinations regarding the 
subject matter to be presented to the Hearing Panel. The Chair would 
also consider other factors, including the availability of the 
individual Hearing Panelists, the extent of their prior service on 
Hearing Panels and any relationship between such persons and the 
Respondent, which might make it inappropriate for such persons to serve 
on the Hearing Panel.
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    \5\ The Exchange intends to form a ``pool'' of pre-qualified 
Hearing Panelists for contested disciplinary cases. In order to form 
this pool, the staff intends to develop a questionnaire, using as a 
model the questionnaire currently used by the NASD for potential 
members of arbitration panels. Members of the BCC would not be 
eligible to serve as Hearing Panelists. However, as discussed in 
proposed Exchange Rule 960.5(a)(7), if the Hearing Officer is unable 
to preside over the hearing for any reason, the Chair of the BCC 
shall appoint a qualified replacement Hearing Officer for that 
hearing from a pre-screened pool of qualified candidates, which 
could possibly include a member of the BCC.
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    After being designated as a qualified Hearing Panelist, the 
Exchange intends to have each prospective Hearing Panelist complete a 
mandatory training session to be conducted by the Hearing Officer. 
Qualified Hearing Panelists would serve for three-year terms. After 
that time, if a Hearing Panelist wished to continue serving, the 
Hearing Panelist would be required to submit an updated application for 
review and approval by the BCC.
    The Exchange proposes that Hearing Panelists be compensated for all 
hearing sessions and for one deliberation session per disciplinary 
proceeding for which a Hearing Panel renders a decision. A hearing 
session would be defined as any meeting between the parties and Hearing 
Panel, including pre-hearing conferences, but no compensation would be 
paid for ``study time'' (i.e., reviewing materials in preparation for a 
pre-hearing conference or hearing). Hearing Panelists would be 
compensated at a fixed and non-negotiable rate for each hearing session 
that lasts four hours or less and for one deliberation session.\6\ For 
example, if a hearing on a given day lasted a total of six hours, 
Hearing Panelists would be compensated for two hearing sessions. If a 
case settled prior to a hearing, Hearing Panelists would not receive 
any compensation, unless a pre-hearing conference (which is included in 
the definition of a hearing session and for which compensation would be 
given) was held. If a hearing were cancelled, the Hearing Panelists 
would not be entitled to compensation, but would be reimbursed for any 
travel-related expenses incurred, if applicable. If a Hearing Panelist 
is also a member of the Board, any Board or Standing Committee meetings 
that are held on the same day as the hearing would be considered a 
single meeting for the purposes of compensation.
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    \6\ Compensation for Hearing Panelists would be subject to a cap 
amount per day, regardless of the number of hearing sessions (or 
Board or Committee meetings attended).
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Offers of Settlement and Issuance of Decisions

    If an Offer of Settlement (``Offer'') is submitted to the BCC 
before a hearing commences, even if the Hearing Panelists are selected, 
the Committee would still consider the Offer and, if accepted, issue a 
decision. The Exchange proposes that, if an Offer is submitted after a 
hearing commences, however, the Exchange staff would promptly submit 
its position with respect to such Offer. The Hearing Panel would then 
determine whether to consider the Offer and, if considered, whether to 
accept or reject the Offer.
    The Hearing Panel would review the entire record of the 
disciplinary proceeding (or the written submissions, if applicable) \7\ 
and, by a majority vote, determine whether the Respondent has committed 
violations and the appropriate sanctions, if any. The Hearing Panel 
would then issue a written decision, including in its decision a 
statement of findings and conclusions, with the reasons therefor, upon 
all material issues presented in the record, and whether each violation 
within the disciplinary jurisdiction of the Exchange alleged in the 
Statement of Charges has occurred. The Hearing Panel would be required 
to prepare its decision, absent extraordinary circumstances, within 60 
days after Exchange staff has served the Hearing Officer and/or members 
of the Hearing Panel with a copy of the transcript of the hearing. A 
decision issued by the Hearing Panel would be considered final. Any 
appeal of the decision would

[[Page 36159]]

be taken directly to the Exchange's Board of Governors.
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    \7\ In lieu of requesting a hearing, a Respondent may request 
that the matter be decided upon written submissions. The Hearing 
Officer shall decide whether to grant the request and determine a 
schedule for each party to make its respective submissions. See 
proposed Exchange Rule 960.4.
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III. Discussion

    After careful review, 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 finds that the 
proposed rule change, as amended, is consistent with section 6(b)(5) of 
the Act,\9\ which requires, among other things, that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system and, in general, 
to protect investors and the public interest. In addition, the 
Commission finds that the proposed rule change, as amended, is 
consistent with section 6(b)(6) of the Act,\10\ which requires that the 
rules of the exchange provide that its members and persons associated 
with its members shall be appropriately disciplined for violation of 
the provisions of the Act, the rules and regulations thereunder, or the 
rules of the exchange, and with section 6(b)(7) of Act,\11\ which 
requires that the rules of the exchange provide a fair procedure for 
the disciplining of members and persons associated with members.
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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).
    \11\ 15 U.S.C. 78f(b)(7).
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    The Commission believes that the proposed rule change should 
streamline and expedite the hearing process by having a permanent 
Hearing Officer and pre-screened, qualified Hearing Panelists, and by 
having the Hearing Panel issue a final decision itself, without having 
to go to the BCC for review and approval. In addition, the Commission 
notes that the Exchange proposes to place restrictions on the 
activities of the Hearing Officer, and to require a Hearing Officer or 
Hearing Panelist to remove himself from consideration of a matter if he 
cannot render a fair and impartial decision. The Commission believes 
that these measures should help to ensure to that the Hearing Officer 
and Hearing Panelists are completely neutral and that their decisions 
are fair and impartial. Furthermore, the Commission believes that 
having a single Hearing Officer preside over all hearings will increase 
the likelihood that more uniform sanctions will be imposed for similar 
misconduct by members, making the Exchange's disciplinary process more 
fair.
    The Commission finds good cause for accelerating approval of the 
proposed rule change, as amended by Amendment No. 1, prior to the 30th 
day after the date of publication of notice of the filing in the 
Federal Register. The Commission published the proposed rule change for 
public comment on May 26, 2006 for a 15-day comment period and received 
no comments on the proposal. The Commission believes that accelerated 
approval should expedite the appointment of a hearing officer and allow 
the Exchange to implement a more efficient disciplinary process.\12\
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    \12\ The Commission notes that the Exchange has represented that 
the BCC will hear any current matters through their completion if a 
hearing commenced prior to the date of this approval order. Thus, 
any ongoing hearing will be heard by the BCC through its completion 
and the BCC will issue a decision accordingly.
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IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-Phlx-2005-65), as amended, 
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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Nancy M. Morris,
Secretary.
[FR Doc. E6-9934 Filed 6-22-06; 8:45 am]
BILLING CODE 8010-01-P