67 FR 56 pgs. 13395-13397 - Self-Regulatory Organizations; Order Granting Accelerated Approval of Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 1 Thereto by the Philadelphia Stock Exchange, Inc. Relating to Aggregation of Individual Violations of Exchange Order Handling Rules and Option Floor Procedure Advices
Type: NOTICEVolume: 67Number: 56Pages: 13395 - 13397
Docket number: [Release No. 34-45570; File No. SR-Phlx-2001-114]
FR document: [FR Doc. 02-6897 Filed 3-21-02; 8:45 am]
Agency: Securities and Exchange Commission
Official PDF Version: PDF Version
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-45570; File No. SR-Phlx-2001-114]
Self-Regulatory Organizations; Order Granting Accelerated Approval of Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 1 Thereto by the Philadelphia Stock Exchange, Inc. Relating to Aggregation of Individual Violations of Exchange Order Handling Rules and Option Floor Procedure Advices
March 15, 2002.
I. Introduction
On December 18, 2001, the Philadelphia Stock Exchange, Inc. ("Phlx" or "Exchange") filed with the Securities and Exchange Commission ("SEC" or "Commission"), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 ("Act"),1and Rule 19b-4 thereunder,2 a proposed rule change to amend Exchange Rule 960.2(f) and Exchange Rule 970 to permit the Exchange to aggregate, or "batch," individual violations of Exchange order handling rules and Option Floor Procedure Advices ("OFPAs") and consider such "batched" violations as a single offense.3 The proposed rule change was published for comment in the Federal Register on February 14, 2002.4 On March 8, 2002, the Exchange filed Amendment No. 1 to the proposed rule change.5 No comments were received on the proposed rule change. This order approves the proposed rule change on an accelerated basis and issues notice of filing and grants accelerated approval to Amendment No. 1.
Footnotes:
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b-4.
3 The Exchange filed this proposed rule change in accordance with the provisions of Section IV.B.i of the Commission's September 11, 2000 Order Instituting Public Administrative Proceedings Pursuant to Section 19(h)(1) of the Act, which required the Exchange to adopt rules establishing, or modifying existing, sanctioning guidelines such that they are reasonably designed to effectively enforce compliance with options order handling rules. See Securities Exchange Act Release No. 43268 (September 11, 2000), Administrative Proceeding File No. 3-10282 ("Order").
4 See Securities Exchange Act Release No. 45421 (February 7, 2002), 67 FR 6961.
5 See letter from Richard S. Rudolph, Director and Counsel, Phlx, to Nancy J. Sanow, Assistant Director, Division of Market Regulation ("Division"), Commission, dated March 7, 2002 ("Amendment No. 1"). In Amendment No. 1, the Exchange clarified that "batching" of violations can occur only where the Exchange uses automated surveillance to detect violations.
II. Description of the Proposal
The proposed rule change would clarify that the Exchange may consider multiple numbers of violations of order handling rules and OFPAs6as one single offense, where automated surveillance is available,7for purposes of initiating disciplinary action under Exchange rules, or imposing fines pursuant to fine schedules set forth in the relevant OFPAs under the Exchange's Minor Rule Plan. Such aggregation of order handling violations would enable the Exchange's Market Surveillance Department to identify, through exception reporting,8members and member organizations that fail to meet acceptable compliance thresholds for such rules and OFPAs, and to determine whether to impose fines pursuant to the Exchange's Minor Rule Plan or refer the matter to the Business Conduct Committee ("BCC") for consideration of formal disciplinary action.9In addition, as an alternative to aggregation, the Exchange may refer violations to the BCC for possible disciplinary action when the Exchange determines that there exists a pattern or practice of violative conduct without exceptional circumstances or when any single instance of violative conduct without exceptional circumstances is deemed to be egregious.10
Footnotes:
6 Specifically, the Exchange proposes, pursuant to its Numerical Criteria for Bringing Cases for Violations of Phlx Order Handling Rules, to "batch" violations of Exchange Rule 1051 (concerning the requirement that a member or member organization initiating an options transaction must report or ensure that the transaction is reported within 90 seconds of execution); Exchange Rule 1082 (concerning the requirement that quotes be firm for both price and size, and the requirement that marketable orders received in a size greater than the disseminated size be executed in their entirety or up to the disseminated size within 30 seconds); OFPA A-1 (concerning the requirement that a specialist use due diligence to ensure that the best available bid and offer is displayed for those option series in which he is assigned); OFPA F-2 (the aforementioned 90-second trade reporting requirement under the Exchange's Minor Rule Plan); and other OFPAs.
7 See supra note 4.
8 Id.
9 The Exchange submitted to the Commission a letter, for which it requested confidential treatment, proposing how its regulatory staff would aggregate violations of the order handling rules, where the violations are identified through the Exchange's automated surveillance system. See letter from Anne Exline Starr, First Vice President Regulatory Group, Phlx, to John McCarthy, Associate Director, Office of Compliance, Inspections and Examinations ("OCIE"), Commission, and Deborah Lassman Flynn, Assistant Director, Division, Commission, dated January 30, 2002. The Exchange has informed OCIE that it will begin automated surveillance for trade reporting violations no later than April 15, 2002. In the interim period, OCIE will continue to evaluate the Exchange's surveillance, investigatory, and enforcement process to ensure that the Phlx is adequately surveilling and enforcing member compliance with its trade reporting requirements.
10 In the event that the Exchange discovers through investigation that a single violation or a pattern or practice of violations of Exchange order handling rules is the result of intentional conduct on the part of a member organization, nothing would preclude the Exchange from referring such a matter directly to the Business Conduct Committee for possible disciplinary action.
III. Discussion
After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.11In particular, the Commission believes that the proposed rule change is consistent with Section 6(b)(5) of the Act,12which requires, among other things, that the rules of an exchange be designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market, and to protect investors and the public interest. The Commission also finds that the proposed rule change is consistent with Section 6(b)(6) of the Act,13which requires that the rules of an exchange provide that its members be appropriately disciplined for violations of exchange rules, the Act, and rules and regulations thereunder, by expulsion, suspension, limitation of activities, functions, and operations, fine, censure, being suspended or barred from being associated with a member, or any other fitting sanction.
Footnotes:
11 In approving this proposed rule change, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
12 15 U.S.C. 78f(b)(5).
13 15 U.S.C. 78f(b)(6).
Moreover, the Commission notes that the Exchange submitted a letter, for which it requested confidential treatment, proposing how its regulatory staff would aggregate violations of the order handling rules, where such violations are identified through the Exchange's automated surveillance systems.14The Commission believes that the compliance thresholds proposed in this letter provide a reasonable first step and should assist the Exchange in disciplining its members for violations of the Exchange's order handling rules. The Commission expects, however, that as compliance rates improve, the Exchange will adjust the compliance thresholds accordingly. Consequently, the Commission's approval of the proposed rule change is contingent on the Exchange providing notice to the Commission's Office of Compliance Inspections and Examinations of any future changes to this letter, and to any other sanctioning guidelines not codified in the Exchange's rules.
Footnotes:
14 See supra note 9.
At this time, the Commission believes the proposed sanctioning guidelines are reasonably designed to effectively enforce compliance with the options order handling rules. Nevertheless, the Commission expects the Exchange to continue to evaluate the adequacy of the proposed sanctioning guidelines to determine whether they do, in fact, effectively enforce compliance with the options order handling rules.15
Footnotes:
15 The Commission's examination staff will also monitor the application of these guidelines to determine whether they do, in fact, improve member compliance with the options order handling rules.
Furthermore, the Commission finds good cause for accelerating approval of the proposed rule change and Amendment No. 1 thereto prior to the thirtieth day after publication in the Federal Register . The Commission notes that the proposed rule change was noticed for the full comment period and the Commission is accelerating approval of the filing on the twenty-ninth day after publication of the proposed rule change in the Federal Register . The Commission believes that accelerated approval will permit the Exchange to implement, and investors to benefit from, the proposed rule change without undue delay. Amendment No. 1 clarifies that "batching" of violations can occur only where the Exchange uses automated surveillance to detect violations. In addition, the Commission notes that it received no comments on the proposed rule change. For these reasons, the Commission finds good cause exists, consistent with Sections 6(b)(5)16and 19(b)(2) of the Act,17to approve the proposed rule change and Amendment No. 1 thereto on an accelerated basis.
Footnotes:
16 15 U.S.C. 78f(b)(5).
17 15 U.S.C. 78s(b)(2).
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and arguments concerning Amendment No. 1, including whether Amendment No. 1 is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Room. Copies of such filing will also be available for inspection and copying at the principal office of the Phlx. All submissions should refer to file number SR-Phlx-2001-114 and should be submitted by April 12, 2002.
V. Conclusion
For the foregoing reasons, the Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and rules and regulations thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,18that the proposed rule change (SR-Phlx-2001-114) and Amendment No. 1 thereto are approved on an accelerated basis.
Footnotes:
18 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.19
Footnotes:
19 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-6897 Filed 3-21-02; 8:45 am]
BILLING CODE 8010-01-P