[Federal Register Volume 71, Number 182 (Wednesday, September 20, 2006)]
[Notices]
[Pages 55037-55042]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-15588]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54437; File No. SR-CHX-2005-06]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Order Approving a Proposed Rule Change and Amendment No. 1 and Notice 
of Filing and Order Granting Accelerated Approval to Amendment No. 2 to 
a Proposed Rule Change Relating to Disciplinary and Delisting 
Procedures

September 13, 2006.

I. Introduction

    On March 7, 2005, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposal to revise the Exchange's disciplinary and delisting 
procedures. The Exchange filed Amendment No. 1 to the proposed rule 
change on June 2, 2006. The proposed rule change, as amended by 
Amendment No. 1, was published for comment in the Federal Register on 
June 27, 2006.\3\ The Commission received no comments regarding the 
proposal, as amended by Amendment No. 1. On August 10, 2006, the 
Exchange filed Amendment No. 2 to the proposed rule change.\4\ This 
order approves the proposal, as amended. In addition, the Commission is 
publishing notice to solicit comments on, and is simultaneously 
approving, on an accelerated basis, Amendment No. 2.
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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. 54021 (June 20, 
2006), 71 FR 36571 (``Notice'').
    \4\ Amendment No. 2 revises the proposal to: (1) Clarify that 
the Exchange will use its emergency suspension authority under CHX 
Art. VII, Rule 2(a)(1)(i) only with respect to CHX Participants, and 
not with respect to associated persons of CHX Participants; (2) 
confirm that the Exchange will not use its emergency suspension 
authority under CHX Art. VII, Rule 2(a)(1)(i) unless the Exchange 
believes that the rule violation suggests that a Participant is in 
such financial or operational difficulty that the Participant cannot 
be permitted to continue to do business as a Participant with safety 
to investors, creditors, other Participants, or the Exchange; and 
(3) clarify that only a Participant, but not an associated person of 
a Participant, may hold a trading permit.
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II. Description of the Proposal

    The proposal revises a number of rules governing the CHX's 
disciplinary and delisting procedures. According to the CHX, the 
Exchange reviewed its rules, in part, to respond to the requirements of 
the Commission's 2003 order instituting public administrative

[[Page 55038]]

proceedings against the Exchange,\5\ and in light of the Commission's 
guidance that a self-regulatory organization (``SRO'') should ensure 
that its ``regulatory function is strong, vigorous, and sufficiently 
independent and insulated from improper influence from management or 
any regulated entity.'' \6\
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    \5\ See Securities Exchange Act Release No. 48566 (September 30, 
2003), Administrative Proceeding File No. 3-11282 (``Order''). The 
Exchange noted that certain aspects of the proposed rule change are 
based on the recommendations of the Independent Counsel appointed by 
the terms of the Order.
    \6\ See Securities Exchange Act Release No. 48946 (December 17, 
2003), 68 FR 74678 (December 24, 2003) (order approving File No. SR-
NYSE-2003-34).
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A. Authorization of Formal Disciplinary Actions and Other Proceedings

    Several CHX rules currently require the CHX's Chief Executive 
Officer (``CEO'') to authorize the institution of disciplinary and 
related proceedings.\7\ The proposal revises these rules to authorize 
the CHX's Chief Regulatory Officer (``CRO''), rather than its CEO, to 
institute these proceedings. The Exchange believes that requiring the 
CRO, rather than the CEO, to authorize proceedings under these rules 
will eliminate any appearance of a conflict of interest and bolster the 
apparent and actual independence of the Exchange's regulatory 
processes.\8\
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    \7\ See, e.g., CHX Art. VII, Rule 2, ``Emergency Suspensions'' 
(authorizing the CEO to suspend a Participant or associated person 
under certain circumstances); CHX Art. XII, Rule 2(a), ``Minor 
Infraction,'' (authorizing the CEO to censure a respondent or impose 
a fine for a minor infraction); and CHX Article XII, Rule 2(d) 
(renumbered by the proposal as 2(b), ``Collateral Proceedings'') 
(authorizing the CEO to suspend or expel a Participant or associated 
person sanctioned by another SRO). See also CHX Art. XII, Rule 1(b) 
(requiring the CEO to direct the CHX's staff to prefer written 
charges if it appears to the CEO that there has been a violation of 
the CHX's rules).
    \8\ Although the CRO reports to the CEO, and therefore could 
potentially be influenced by the CEO's views on a proposed 
disciplinary matter, the Exchange noted that the CRO is required to 
appear before, and report on the Exchange's regulatory programs to, 
the Exchange's Regulatory Oversight Committee not less than 
quarterly. The Regulatory Oversight Committee, a committee of the 
CHX's Board of Directors (``Board'') composed predominately of 
independent directors, is charged with oversight of the Exchange's 
regulatory function. The Exchange believes that this review by the 
Regulatory Oversight Committee serves as a reasonable mechanism to 
prevent any conflict of interest from interfering with the 
Exchange's regulatory role.
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    The proposal will allow either the CRO or the CEO to institute 
proceedings under CHX Art. XI, Rule 8, ``Operational Capability,'' 
based upon a Participant's failure to maintain operational capability, 
and to impose restrictions on Participant Firm operations under CHX 
Art. XI, Rule 3(d), ``Restrictions on Operations,'' relating to net 
capital and aggregate indebtedness requirements. The Exchange believes 
that allowing either the CEO or the CRO to authorize proceedings under 
these rules is appropriate because they may involve a mixture of 
business and regulatory concerns.

B. Initial Decision by Hearing Officers

    To eliminate any appearance of a conflict of interest, the proposal 
eliminates the provisions in current CHX Art. XII, Rule 5(b), 
``Decision,'' that authorize the CEO to review a Hearing Officer's 
proposed decision and modify its conclusions, remand the matter for 
additional findings or supplemental proceedings, or conduct further 
proceedings himself.\9\ The revised rule provides that the Hearing 
Officer's decision will be final, although it may be appealed to a 
Judiciary Committee or to the Board, as applicable, in accordance with 
CHX Art. XII, Rule 6.
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    \9\ The proposal renumbers this provision as CHX Art. XII, Rule 
5(f).
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C. Criteria for the Selection of Hearing Officers in Disciplinary and 
Delisting Proceedings

    The proposal revises CHX Article XII, Rule 5, ``Hearing 
Procedure,'' to delineate the criteria that the CEO must consider in 
selecting a Hearing Officer for a disciplinary proceeding \10\ and to 
create a process through which a respondent may object to a particular 
Hearing Officer on the grounds of bias or conflict of interest.\11\ The 
proposal adopts identical criteria and objection procedures with 
respect to Hearing Officers for delisting hearings.\12\
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    \10\ See CHX Art. XII, Rule 5(e), ``Appointment of Hearing 
Officer.'' Specifically, the rule states that the CEO should give 
reasonable consideration to a prospective Hearing Officer's 
professional competence and reputation, experience in the securities 
industry, familiarity with the subject matter involved, the absence 
of bias and any conflict of interest, and any other relevant 
factors.
    \11\ See CHX Art. XII, Rule 5(h), ``Impartiality of Hearing 
Officer.'' The rule permits a respondent to file a motion seeking 
the disqualification of a Hearing Officer for bias or conflict of 
interest within 15 days of the Hearing Officer's appointment.
    \12\ See CHX Art. XXVIII, Rule 4(d).
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D. Elimination of Redundant Procedures

    The proposal eliminates the summary hearing process in current CHX 
Art. XII, Rule 2(b), ``Summary Hearing and Penalty,'' which the 
Exchange believes is redundant of other CHX disciplinary processes and, 
therefore, unnecessary. Similarly, the proposal deletes the suspension 
and termination rules applicable to specialists, odd-lot dealers, and 
market makers in CHX Articles XXX, XXXI, and XXXIV, respectively, 
because the Exchange believes that these provisions are obsolete and 
redundant of the Emergency Suspension provisions provided under CHX 
Art. VII, Rule 2.

E. Appeal of Disciplinary Proceedings

    The proposal revises CHX Art. XII, Rule 6 to allow the Exchange, as 
well as a respondent, to appeal decisions to a Judiciary Committee.\13\ 
Similarly, the proposal revises CHX Art. XXVIII, Rule 4(e) to allow the 
Exchange, as well as an issuer, to appeal the decision of a Hearing 
Officer in a delisting proceeding.
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    \13\ Specifically, the revised rule allows the Exchange to 
appeal an order issued under CHX Art. XII, Rules 2(b), 4(b), and 5.
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    In addition, the proposal streamlines the current appellate review 
process for disciplinary actions. Currently, appeals are heard first by 
a Judiciary Committee, then by the Executive Committee and finally, on 
a discretionary basis, by the Board.\14\ The proposal eliminates 
appellate review by the Executive Committee and provides that appeals 
will be heard by a Judiciary Committee and, on a discretionary basis, 
by the full Board.\15\ The Exchange believes that the revised 
procedures should reduce the time required to reach a final judgment, 
thus contributing to the fair and effective enforcement of the 
Exchange's rules.
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    \14\ See CHX Art. XII, Rule 6.
    \15\ See CHX Art. XII, Rule 6.
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F. Failure to Promptly Pay Fines

    Under CHX Art. XIV, Rule 10, ``Failure to Pay Debts,'' a 
Participant who fails to pay a fine owed to the Exchange within 60 days 
may be suspended, after due notice, until payment is made. The proposal 
revises this rule to authorize the Exchange to initiate a disciplinary 
proceeding under Art. XII against a Participant or associated person 
for the failure to pay a debt owed to the Exchange. The Exchange 
believes that the revised rule will provide the Exchange with the 
flexibility to assess additional fines or other sanctions, either in 
lieu of or in addition to a suspension, as an added inducement to avoid 
late payment of a fine owed to the Exchange.

G. Procedural Changes

    The proposal revises several CHX rules to provide greater clarity 
to the Exchange's disciplinary and delisting procedures. In this 
regard, the proposal sets forth clear timeframes for responding to 
charges, scheduling hearings, filing motions, and issuing orders.\16\ 
The proposal also: (i) Specifies

[[Page 55039]]

the information that must be included in certain notices; \17\ (ii) 
creates limited rights to prehearing discovery for all parties to a 
proceeding; \18\ (iii) sets timeframes for motions and appeals; \19\ 
(iv) confirms that the Board or the Executive Committee could direct 
the CRO to initiate a disciplinary proceeding; \20\ (v) confirms that a 
Hearing Officer must make specific findings as to each proffered charge 
and impose an appropriate sanction for violations that are found to 
have occurred; \21\ (vi) clarifies that fines assessed under the 
summary procedure of CHX Art. XII, Rule 2 are not publicly reported, 
except as may be required by Rule 19d-1 under the Act; \22\ and (vii) 
confirms that the three-person Board panel that hears an appeal from an 
emergency suspension decision will consist of at least two public 
directors on the Board.\23\ The proposal also adopts provisions that 
set forth the required content of settlement agreements in disciplinary 
proceedings.\24\
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    \16\ For example, the proposal revises CHX Art. XII, Rule 5, to 
require that: (i) A respondent file a written answer to charges 
within 30 days from the date of service of the charges; (ii) the 
Hearing Officer schedule a hearing within 30 days after the filing 
of an answer; and (iii) the Hearing Officer ordinarily issue an 
order within 90 days after the conclusion of a hearing. Similarly, 
the proposal revises CHX Art. XXVIII, Rule 4(d), ``Hearing,'' to 
require that a Hearing Officer in a delisting hearing to schedule a 
hearing within 30 days after receipt of an issuer's demand for a 
hearing, and that the Hearing Officer issue an order within 90 days 
after the conclusion of a hearing.
    \17\ Specifically, the proposal revises Article XII, Rule 1(b), 
``Written Charges,'' to state that a respondent must be served with 
written charges identifying with specificity each Exchange rule or 
provision of the federal securities laws alleged to have been 
violated. The proposal revises CHX Art. XII, Rule 2(a), ``Minor 
Infraction,'' to state explicitly that the person against whom a 
fine is imposed shall be served with a written statement (the 
``Notice of Fines''), signed by the CRO or his designee, setting 
forth: (i) The rule(s) or policy(ies) alleged to have been violated; 
(ii) the act or omission constituting each such violation; (iii) the 
fine imposed for each such violation; (iv) the date on which such 
action is taken; and (v) the date on which such determination 
becomes final and such fine becomes due and payable to the Exchange, 
or on which such action must be contested. The Exchange represents 
that it currently provides this notice to persons against whom a 
fine is imposed, and that the language added to the rule confirms 
that this practice should continue.
    \18\ The parties must exchange a list of witnesses that they 
plan to call to testify at least 30 days before the hearing. See CHX 
Art. XII, Rule 5(c)(1). In addition, any party may request 
production of some or all of the documents that an opposing party 
intends to introduce as evidence. This request must be made at least 
45 days prior to the hearing, and the documents must be produced at 
least 30 days before the hearing. See CHX Art. XII, Rule 5(c)(2). A 
party that does not identify witnesses or produce requested 
documents will be barred from presenting those witnesses or 
documents at the hearing, unless the party seeking to introduce the 
evidence can show good cause for the failure to earlier identify the 
witnesses or documents and can establish that the failure to allow 
the presentation of the evidence would result in undue hardship to 
that party. See CHX Art. XII, Rules 5(c)(1) and 5(c)(2).
    \19\ See, e.g., CHX Art. XII, Rule 5(h) (regarding motions to 
disqualify the hearing examiner) and CHX Art. XII, Rule 6(a) 
(regarding appeals to the Judiciary Committee).
    \20\ See CHX Art. XII, Rule 1(b)(2).
    \21\ See CHX Art. XII, Rule 5(f).
    \22\ See CHX Art. XII, Rule 2(a).
    \23\ See CHX Art. VII, Rule 2(b).
    \24\ See CHX Art. XII, Rule 1(d). The proposal deletes the 
current provisions in CHX Art. XII, Rule 2(c) governing settlement 
agreements and adopts new Rule 1(d) of CHX Art. XII. This provision 
confirms that a respondent could settle a proceeding at any time by 
entering into a settlement agreement with the Exchange without 
admitting or denying the charges, except as to jurisdiction, which 
must be admitted. The settlement agreement must contain a waiver by 
the respondent of all rights to appeal and a proposed penalty to be 
imposed, which must be reasonable under the circumstances and 
consistent with the seriousness of the alleged violations. The CRO 
will have the sole right to approve a proposed settlement agreement.
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H. Removal of Securities

    The proposal revises CHX Art. XXVIII, Rule 4, ``Removal of 
Securities,'' to provide that the Listing Unit of the CHX's Market 
Regulation Department, rather than the Board, will make the initial 
determination to delist a security. The proposal also eliminates the 
CEO's review of a Hearing Officer's findings with respect to a 
delisting. In addition, the proposal confirms that a Hearing Officer's 
decision is final unless a review is specifically demanded,\25\ and 
sets forth the process and standards that the Executive Committee must 
follow with respect to any appeal of a Hearing Officer's decision.\26\
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    \25\ Appeals from a Hearing Officer's decision would be heard by 
the Executive Committee. See CHX Art. XXVIII, Rule 4(e).
    \26\ See CHX Art. XXVIII, Rules 4(d) and (e). As noted above, 
the proposal also adopts provisions setting forth the criteria that 
a CEO must consider in selecting a Hearing Officer for a delisting 
proceeding and provides a process for objecting to a Hearing Officer 
on the grounds of bias or conflict of interest. See notes 10-12, 
supra, and accompanying text.
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I. Role of Exchange Counsel

    The proposal clarifies the role of Exchange counsel in disciplinary 
and delisting proceedings by providing that, in both types of 
proceedings, the Exchange counsel acting as counsel to the Hearing 
Officer may not be an employee of the CHX's Market Regulation 
Department and may not have directly participated in any examination, 
investigation, or decision associated with the initiation or conduct of 
the proceeding.\27\
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    \27\ See CHX Art. XII, Rule 5(g) and CHX Art. XXVIII, Rule 4(d).
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J. Additional Changes

    The proposal also revises several terms used throughout CHX Art. 
XII. For example, the proposal revises CHX Art. XII to substitute the 
term ``respondent'' for ``accused'' and ``hearing'' for ``trial.''

K. Effective Date of the Rule Changes

    The Exchange states that the rule changes contained in the proposal 
will apply to any formal disciplinary proceeding, suspension decision, 
or delisting proceeding that the Exchange initiates on or after a date 
that immediately follows the date of the Commission's approval. The 
Exchange will issue a notice to Participants announcing this date.

L. Amendment No. 2

    CHX Art. VII, Rule 2(a)(1)(i), as amended, provides the Exchange 
with emergency suspension authority over a Participant that has failed 
to perform its contracts, is insolvent, or is in such financial or 
operational condition or otherwise conducting its business in such a 
manner that the Participant cannot be permitted to continue in business 
with safety to its customers, creditors, or the Exchange, including a 
reasonable belief that the Participant is violating and will continue 
to violate any provision of the CHX's rules, the federal securities 
laws or rules or regulations thereunder, or any condition or 
restriction imposed pursuant to the provisions of CHX Art. XI, Rule 
3(d), or CHX Art. XI, Rule 8(a). Amendment No. 2 revises the proposal 
to: (1) Clarify that the Exchange will use its emergency suspension 
authority under CHX Art. VII, Rule 2(a)(1)(i) only with respect to CHX 
Participants, and not with respect to associated persons of CHX 
Participants; (2) confirm that the Exchange will not use its emergency 
suspension authority under CHX Art. VII, Rule 2(a)(1)(i) unless the 
Exchange believes that the rule violation suggests that a Participant 
is in such financial or operational difficulty that the Participant 
cannot be permitted to continue to do business as a Participant with 
safety to investors, creditors, other Participants, or the Exchange; 
and (3) clarify that only a Participant, but not an associated person 
of a Participant, may hold a trading permit. The proposal also revises 
CHX Art. VII, Rule 2(a)(1) to allow the Exchange to use its emergency 
suspension authority with respect to an associated person who has been 
barred or suspended from being associated with a member of any SRO.

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

[[Page 55040]]

a national securities exchange.\28\ In particular, the Commission finds 
that the proposed rule change, as amended, is consistent with Section 
6(b)(1) of the Act,\29\ which requires, among other things, that a 
national securities exchange have the capacity to enforce compliance by 
its members and persons associated with its members with the provisions 
of the Act and the rules and regulations thereunder, and with the rules 
of the exchange; with Section 6(b)(5) of the Act,\30\ 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; and with Section 6(b)(7) of the Act,\31\ which requires that 
the rules of a national securities exchange provide a fair procedure 
for the disciplining of members and persons associated with members. In 
addition, the Commission finds that the proposal, as amended, is 
consistent with Section 6(d)(1) of the Act,\32\ which requires, among 
other things, that a national securities exchange, in determining 
whether a member or associated person should be disciplined, bring 
specific charges, notify the member or associated person of, and give 
him an opportunity to defend against the charges, and keep a record. 
The Commission also finds that the proposal, as amended, is consistent 
with Section 6(d)(3) of the Act,\33\ which, among other things, allows 
a national securities exchange to summarily suspend a member or person 
associated with a member who has been and is expelled or suspended from 
any SRO or barred or suspended from being associated with a member of 
any SRO, and to summarily suspend a member who is in such financial or 
operating difficulty that the exchange determines and so notifies the 
Commission that the member cannot be permitted to continue to do 
business as a member with safety to investors, creditors, other 
members, or the exchange.
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    \28\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \29\ 15 U.S.C. 78f(b)(1).
    \30\ 15 U.S.C. 78f(b)(5).
    \31\ 15 U.S.C. 78f(b)(7).
    \32\ 15 U.S.C. 78f(d)(1).
    \33\ 15 U.S.C. 78f(d)(3).
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    The Commission finds that the rule changes \34\ requiring the CRO, 
rather than the CEO, to authorize the institution of disciplinary and 
related proceedings could help to reduce the appearance of, or 
potential for, a conflict of interest in the institution of such 
proceedings, thereby helping the Exchange to provide a fair procedure 
for disciplining members, as required by Section 6(b)(7) of the 
Act,\35\ and helping to separate the CHX's business and regulatory 
functions. Similarly, the Commission finds that the proposal to 
eliminate the provisions in current CHX Art. XII, Rule 5(b) that allow 
the CEO to review and modify a Hearing Officer's proposed decision 
should help to eliminate the appearance of a conflict of interest in 
the Exchange's disciplinary process. The Commission believes that the 
proposal to amend CHX Art. XI, Rules 3(d) and 8(a), to allow the CRO, 
as well as the CEO, to authorize proceedings under those rules is 
reasonable because those rules govern matters that raise both business 
and regulatory concerns.
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    \34\See note 7, supra, and accompanying text.
    \35\ Although the CRO reports to the CEO, the CRO must report 
not less than quarterly to the Board's Regulatory Oversight 
Committee, which is composed predominately of independent directors 
and assists the Board in monitoring the design, implementation, and 
effectiveness of the CHX's regulatory programs. See CHX Article IV, 
Rule 4, ``Regulatory Oversight Committee.''
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    The Commission finds that the adoption of criteria that the CEO 
should consider in selecting a Hearing Officer for disciplinary 
proceedings, and the procedures for objecting to a Hearing Officer in a 
disciplinary proceeding,\36\ are consistent with Section 6(b)(7) of the 
Act because they should help the Exchange to provide a fair procedure 
for disciplining members. The Commission finds that the comparable 
provisions relating to the criteria for selection of Hearing Officers 
for delisting proceedings \37\ are consistent with Section 6(b)(5) of 
the Act because they should help the Exchange to provide a fair 
procedure for delisting proceedings.
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    \36\ See notes 10-12, supra, and accompanying text.
    \37\ See CHX Art, XXVIII, Rule 4(d).
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    Similarly, the Commission believes that the rule changes 
prohibiting the person acting as Exchange counsel to the Hearing 
Officer in a disciplinary or delisting proceeding from being an 
employee of the CHX's Market Regulation Department or from having 
directly participated in any examination, investigation, or decision 
associated with the initiation or conduct of the proceeding \38\ should 
help the Exchange to provide fair disciplinary and delisting 
proceedings by ensuring that such counsel did not participate in the 
initiation or conduct of the matter before the Hearing Officer.
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    \38\ See CHX Art, XII, Rule 5(g) and CHX Art. XXVIII, Rule 4(d).
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    The Exchange believes that the procedures in current CHX Art. XII, 
Rule 2(b), and in CHX Articles XXX, XXXI, and XXXIV are obsolete and 
redundant of the emergency suspension provisions of CHX Art. VII, Rule 
2.\39\ Accordingly, the Commission believes that the deletion of these 
provisions should simplify the CHX's rules.
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    \39\ See Section II.D., supra.
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    The Commission finds that the rule changes \40\ allowing the 
Exchange to appeal the decision of the Hearing Officer in disciplinary 
and delisting proceedings are consistent with Section 6(b)(1) of the 
Act because these provisions could enhance the Exchange's ability to 
enforce its rules and the federal securities laws and the rules and 
regulations thereunder. In addition, the Commission believes that the 
changes to CHX Art. XII, Rule 6 that eliminate Executive Committee 
review of Judiciary Committee decisions could allow disciplinary 
matters to be resolved more efficiently. The Commission notes that 
respondents will continue to have the ability to appeal a Hearing 
Officer's decision to the Judiciary Committee, and that the Board will 
continue to have the ability to review decisions of the Judiciary 
Committee on a discretionary basis.\41\ Accordingly, although the 
proposal eliminates Executive Committee review of decisions by the 
Judiciary Committee, the Commission believes that the CHX's rules will 
continue to provide a fair procedure for disciplining members, 
consistent with Section 6(b)(7) of the Act.
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    \40\ See Section II.E., supra.
    \41\ See CHX Art. XII, Rule 6.
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    The Commission believes that the amendments to CHX Art. XIV, Rule 
10 authorizing the Exchange to initiate a disciplinary proceeding under 
CHX Art. XII for failure to pay a debt owed to the Exchange could 
facilitate the Exchange's collection of fines by providing the Exchange 
with an additional mechanism for sanctioning Participants, associated 
persons, and other persons or entities subject to the CHX's 
jurisdiction that fail to pay fines within the time prescribed in the 
CHX's rules.
    As described more fully in Section II.G., supra, the proposal also 
revises the CHX's rules to, among other things, set timeframes for 
filing motions and appeals, scheduling hearings, and issuing orders; 
provide for pre-hearing discovery, with timeframes for exchanging 
witness lists and producing documents; and specify the required content 
of settlement agreements in

[[Page 55041]]

disciplinary proceedings. The Commission finds that these changes 
should help the Exchange to provide a fair procedure for disciplining 
members, as required by Section 6(b)(7) of the Act, by adding clarity 
and specificity to the CHX's disciplinary rules and by establishing 
timeframes for respondents and Hearing Officers that could facilitate 
the timely resolution of disciplinary matters.
    The Commission finds that proposal to revise CHX Art. XII, Rule 
1(b) and CHX Art. XII, Rule 2(a) \42\ to clarify in its rules that the 
Exchange must provide a respondent with written charges identifying the 
laws or rules allegedly violated is consistent with Section 6(d)(1) of 
the Act, which, among other things, requires that a national securities 
exchange, in a proceeding to determine whether to discipline a member 
or associated person, bring specific charges, notify the member or 
person of, and give him an opportunity to defend against, the charges, 
and keep a record.\43\ Similarly, the Commission finds that the 
proposed changes to CHX Art. XII, Rule 5(f) requiring, among other 
things, that a Hearing Officer's order make specific findings as to 
each charge brought by the Exchange and, where a violation is found, 
impose an appropriate sanction,\44\ is consistent with the requirements 
in Section 6(d)(1)(B) and (C) of the Act that a national securities 
exchange's determination to impose a disciplinary sanction be supported 
by a statement setting forth the specific law, rule, or regulation 
violated and the sanction imposed and the reasons therefor.
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    \42\ See note 17, supra.
    \43\ The Exchange has represented that it currently provides 
respondents with written notice of the charges and that the proposed 
rule change is intended to confirm that this practice should 
continue.
    \44\ See Section II.G., supra.
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    As described more fully above,\45\ the proposal revises CHX Art. 
VII, Rule 2(a)(1) to clarify the manner in which the Exchange would use 
its emergency suspension authority and to allow the Exchange to use its 
emergency authority with respect to a Participant that it believes is 
violating any condition or restriction imposed pursuant to the 
provisions of CHX Art. XI, Rule 3(d), or CHX Art. XI, Rule 8(a).\46\ 
The Commission finds that these changes are consistent with Section 
6(d)(3)(B) of the Act, which allows a national securities exchange to 
summarily suspend a member who is in such financial or operating 
difficulty that the exchange determines and so notifies the Commission 
that the member cannot be permitted to continue to do business as a 
member with safety to investors, creditors, other members, or the 
exchange. Similarly, the Commission finds that the revisions to CHX 
Art. VII, Rule 2(a)(1)(ii) that allow the Exchange to use its emergency 
authority with respect to an associated person barred or suspended from 
being associated with a member of any SRO is consistent with Section 
6(d)(3)(A) of the Act, which allows a national securities exchange to 
summarily suspend a member or associated person who has been and is 
expelled or suspended from any SRO or barred or suspended from being 
associated with a member of any SRO.
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    \45\ See Section II.L., supra.
    \46\ CHX Art. XI, Rule 3(d) allows the CEO or the CRO to impose 
restrictions or conditions on a Participant that fails to maintain 
necessary operational personnel or facilities or engages in an 
activity that casts doubt on the Participant's continued compliance 
with the CHX's net capital requirements. CHX Art. XI, Rule 8(a) 
allows the CEO or the CRO to impose conditions or restrictions on a 
Participant that fails to maintain adequate operational capability, 
including making and keeping current books and records in accordance 
with Rules 17a-3 and 17a-4 under the Act, 17 CFR 240.17a-3 and 17a-
4.
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    In addition, the proposal confirms that the three-person Board 
panel that hears an appeal from an emergency suspension will include 
two public members of the Board.\47\ The Commission believes that this 
change could help to ensure the impartiality of the panels that hear 
appeals from emergency suspensions, thereby helping the Exchange to 
provide a fair procedure for disciplining members and associated 
persons, as required by Section 6(b)(7) of the Act.
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    \47\ See CHX Art. VII, Rule 2(b).
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    The Commission finds that the changes to CHX Art. XXVIII, Rule 4, 
relating to delisting procedures, are intended to clarify the CHX's 
delisting procedures and to ensure the fairness of the CHX's delisting 
proceedings and thus are consistent with the Act. In this regard, the 
proposal eliminates the CEO's review of a Hearing Officer's findings 
with respect to a delisting, thereby avoiding the appearance of, or 
potential for, a conflict of interest. Similarly, the proposal revises 
the CHX's rules to provide that the Listing Unit of the CHX's Market 
Regulation Department, rather than the Board, will make the initial 
determination to delist a security, thereby ensuring that the entity 
that initiates a delisting will not participate in an appellate review 
of the initial delisting determination. An issuer may request a hearing 
of a delisting before a Hearing Officer, and the Hearing Officer's 
decision will be final unless either the issuer or the Exchange 
requests review of the decision by the Executive Committee of the CHX 
Board.\48\ The Executive Committee must uphold the Hearing Officer's 
decision if it finds that the Hearing Officer's factual conclusions are 
supported by substantial evidence and his or her decision is not 
arbitrary, capricious, or an abuse of discretion.\49\ The Commission 
believes that adopting these processes and standards for review should 
help promote fairness with respect to the CHX's appellate process.
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    \48\ See CHX Art. XXVIII, Rule 4(e).
    \49\ See id.
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    The Commission finds that the technical changes to revise certain 
terms used throughout the CHX's disciplinary rules are consistent with 
the Act.
    The Commission finds good cause for approving Amendment No. 2 prior 
to the thirtieth day after the date of publication of notice of filing 
thereof in the Federal Register. As described more fully above, 
Amendment No. 2 clarifies the proposal by confirming that the Exchange 
will use its emergency suspension authority under CHX Art. VII, Rule 
2(a)(1)(i) only with respect to Participants and only when the Exchange 
believes that a rule violation suggests that a Participant is in such 
financial or operational difficulty that the Participant cannot be 
permitted to continue to do business as a Participant with safety to 
investors, creditors, other Participants, or the Exchange. Accordingly, 
the Commission finds that it is consistent with Sections 6(b)(5) and 
19(b) of the Act to approve Amendment No. 2 on an accelerated basis.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 2, including whether Amendment No. 2 
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-CHX-2005-06 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE, 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-CHX-2005-06. This file

[[Page 55042]]

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 Exchange. 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-CHX-2005-06 and should be submitted on or before October 11, 2006.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\50\ that the proposed rule change (SR-CBOE-2005-06), as amended, 
is approved.
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    \50\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\51\
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    \51\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-15588 Filed 9-19-06; 8:45 am]
BILLING CODE 8010-01-P