Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change and Amendment No. 1 Relating to the Exchange's Disciplinary Process, 36571-36575 [06-5682]
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Federal Register / Vol. 71, No. 123 / Tuesday, June 27, 2006 / Notices
Number SR–CBOE–2006–55 on the
subject line.
SECURITIES AND EXCHANGE
COMMISSION
Paper Comments
[Release No. 34–54021; File No. SR–CHX–
2005–06]
• 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–CBOE–2006–55. This file
number should be included on the
subject lien if e-mail is used.To help the
Comission 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 (https://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
Section, 100 F Street, NE., Washington,
DC 20549–1090. Copies of such filing
also will be available for inspection and
copying at the principal office of the
CBOE. 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–CBOE–2006–55 and should
be submitted on or before July 18, 2006.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.19
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 06–5680 Filed 6–26–05; 8:45 am]
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BILLING CODE 8010–01–M
19 17
CFR 200.30–3(a)(12).
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Self-Regulatory Organizations;
Chicago Stock Exchange, Inc.; Notice
of Filing of Proposed Rule Change and
Amendment No. 1 Relating to the
Exchange’s Disciplinary Process
June 20, 2006.
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 March 7,
2005, the Chicago Stock Exchange, inc.
(‘‘CHX’’ or ‘‘Exchange’’) 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 the CHX. On June 2, 2006,
the Exchange filed Amendment No. 1 to
the proposed rule change.3 The
Commission is publishing this notice to
solicit comments on the proposed rule
change, as amended, from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The CHX proposes to adopt, amend,
and delete a number of rules relating to
the Exchange’s enforcement and
disciplinary processes. This proposal, as
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Amendment No. 1 revises the proposal to: (i)
Clarify the role of Exchange counsel in both
disciplinary and delisting proceedings by providing
that Exchange counsel—who are not part of the
CHX’s Market Regulation Department—can serve as
counsel for the Hearing Officer, so long as these
attorneys have not directly participated in any
examination, investigation or decision associated
with the initiation or conduct of the particular
proceeding; (ii) delete proposed changes to the
Exchange’s Minor Rule Violation Plan contained in
the original filing, which have been filed separately
with the Commission in File No. SR–CHX–2005–39;
(iii) eliminate the proposed addition of new types
of violations to the existing summary procedure for
handling minor infractions; (iv) clarity that any
person against whom a fine is imposed for minor
infractions pursuant to CHX Art. XII, Rule 2(a) will
be provided with notice of the violation and fines
imposed; (v) provide dual authority to the Chief
Executive Officer and Chief Regulatory Officer to
impose restrictions on Participant Firm operations
for failure to meet the requirements of CHX Art. XI,
rule 3, ‘‘Net Capital and Aggregate Indebtedness;’’
(vi) modify the Exchange’s delisting rule, CHX Art.
XXVIII, Rule 4, to make the hearing and appeal
process for delisting decisions similar to the
hearings that might be held in other matters and to
provide that the initial delisting decision-makers
are not the same persons who would hear an appeal
from that decision; and (vii) incorporate additional
details that had not been included in the original
version of the proposal, but which have been added
to respond to comments from Commission staff.
Amendment No. 1 replaces and supersedes the
original filing in its entirety.
2 17
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amended, would: (1) Modify the
procedures by which formal
disciplinary actions and certain other
matters that require a hearing are
instituted by removing the Chief
Executive Officer (‘‘CEO’’) from the
authorization process and substituting
the Exchange’s Chief Regulatory Officer
(‘‘CRO’’); (2) adopt a rule establishing
the criteria by which Hearing Officers
are selected and providing a procedure
by which a respondent may move to
replace a Hearing Officer based upon a
showing of bias or conflict of interest;
(3) delete the requirement that the CEO
approve, modify, or reject the findings
of a Hearing Officer in a formal
disciplinary action and certain other
matters that require a hearing; (4)
modify the existing rules relating to
appeals of Hearing Officer decisions to
permit the Exchange to appeal an
adverse decision; (5) amend the
Exchange’s rules relating to the nonpayment of fines to provide for
additional sanctions; and (6) make
various language and organizational
changes. The text of this proposed rule
change is available on the Exchange’s
Web site https://www.chx.com/rules/
proposed_rules.htm 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
CHX 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. The CHX 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
In light of the Commission’s recent
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 regulatory
entity,’’ 4 the CHX has reviewed its
existing rules relating to its disciplinary
4 Securities Exchange Act Release No. 48946
(December 17, 2003), 68 FR 74678 (December 24,
2003) (order approving File No. SR–NYSE–2003–
34) (the ‘‘ NYSE Governance Order’’).
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process.5 The Exchange is proposing a
number of modifications, addition and
deletions to the rules governing
Exchange disciplinary proceedings. In
general, these changes serve to eliminate
any appearance of a conflict of interest
by removing the CEO from the
authorization and determination of
disciplinary charges. The Exchange also
proposes to enhance the ability of its
regulatory staff to effectively prosecute
disciplinary actions by endowing the
Exchange with the right to appeal
adverse decisions and providing for
addition sanctions for the failure of an
Exchange Participant to promptly pay a
disciplinary fine. The Exchange is also
proposing various language and
organizational changes to the
disciplinary rules.
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a. Authorization of Formal Disciplinary
Actions
The Exchange’s current rules require
that the CEO authorize the institution of
all major disciplinary actions.6 The
Exchange believes that this requirement
is outdated and somewhat inconsistent
with recent Commission direction that
SROs must possess ‘‘sufficient
independence in the regulatory process
to prevail against undue interference or
influence from the persons or entities
being regulated.’’ 7 The CHX is of the
belief, confirmed by the Independent
Consultant appointed by the terms of
the Order,8 that there is no evidence of
any actual conflict of interest having
influenced the decision of the
5 The CHX’s review also is being conducted
pursuant to the requirements of the Commission’s
September 30, 2003 Order Instituting Proceedings
against the Exchange. Securities Exchange Act
Release No. 48566 (September 30, 2003),
Administrative Proceeding File No. 3–11282 (the
‘‘Order’’). Certain aspects of this filing are also
based upon the recommendations of the
Independent Consultant appointed by the terms of
the Order.
6 These proceedings include: CHX Art. VII, Rule
2, ‘‘Emergency Suspensions;’’ CHX Art. XI, Rule
3(d), ‘‘Restrictions on Operations;’’ CHX Art. XI,
Rule 8, ‘‘Operational Capability;’’ CHX Art. XII,
Rule 1(b), ‘‘Disciplinary Actions;’’ CHX Art. XII,
Rule 2, ‘‘Summary Procedure;’’ CHX Art. XXVIII,
Rule 4, Interpretation .01, ‘‘Removal of Securities;’’
CHX Art. XXX, Rule 8, ‘‘Termination of Specialist
Registration;’’ CHX Art. XXXI, Rule 14,
‘‘Termination of Specialist Registration;’’ CHX Art.
XXXIV, Rule 15, ‘‘Suspension of Registered Market
Makers.’’ Authorization by the CEO is not required
to institute an action pursuant to the Exchanges’s
Minor Rule Violation Plan. Such actions are
authorized by a Minor Rule Violation panel, which
is appointed by the CEO. See CHX Art. XII, Rule
9, ‘‘ Minor Rule Violations.’’ The Exchange
proposes to delete the procedures of CHX Articles
XXX, XXXI and XXXIV regarding ex parte
suspension of Participants since the process is both
outdated and duplicative of the Emergency
Suspension process detailed in CHX Art. VII, Rule
2, which is being updated in this filing.
7 NYSE Governance Order, supra note 4.
8 See Order, supra note 5.
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Exchange’s CEO regarding any
disciplinary matters. Nevertheless, the
Exchange proposes to remove the CEO
from such decision-making processes to
address any negative public perception
of a possible conflict of interest. In place
of the current structure, the Exchange
proposes that disciplinary and related
proceedings against Exchange
Participants be authorized by the
Exchange’s CRO. In the case of
proceedings based upon a Participant’s
failure to maintain operational
capability under CHX Art. XI, Rule 8,
the Exchange has determined to permit
the institution of such proceedings at
the direction of either the CEO or the
CRO.9 The Exchange believes that dual
authority is appropriate in such
proceedings since, unlike traditional
disciplinary matters, they can involve a
mixture of business and regulatory
concerns.
Vesting the authority to initiate
disciplinary actions in the Exchange’s
CRO serves to bolster the apparent and
actual independence of the Exchange’s
regulatory processes. The CRO’s
primary mission is to ensure that the
Exchange has an effective regulatory
program reasonably designed to ensure
compliance by is Participants with the
Exchange’s rules and the federal
securities laws. The Exchange
acknowledges that the CRO reports to
the CEO and therefore could
conceivably be influenced by the latter’s
views on a proposed disciplinary
matter. However, the CRO is required to
appear before, and report on the
Exchange’s regulatory programs not less
than quarterly to, the Exchange’s
Regulatory Oversight Committee, a
committee of the CHX’s Board of
Directors (‘‘Board’’) predominately
composed of independent directors,
which is charged with oversight of the
Exchange’s regulatory function.10 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. Moreover, the Exchange
notes that the Commission has
acknowledged that there is no‘‘one size
fits all’’ model for discharging an SRO’s
oversight function.11 The Exchange
believes that this proposed structure is
9 The Exchange proposes to extend this same dual
authority to the decision to impose restrictions on
Participant Firm operations under CHX Art. XI Rule
3(d), relating to net capital and aggregate
indebtedness requirements.
10 The composition requirements and
responsibilities of the Exchange’s Regulatory
Oversight Committee were set forth in the Order.
See Order, supra note 5.
11 See NYSE Governance Order, supa note 4, at
n. 96 and accompanying text.
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appropriate given the scope and nature
of its regulatory unit and mission.
In addition, the Exchange proposes to
delete paragraph (b) of CHX Art. XII,
Rule 2 to eliminate the ‘‘summary
hearing’’ process noted therein and to
delete paragraph (c) regarding the
‘‘settlement procedure.’’ To the extent
that action under CHX Art. XII, Rule
2(a), ‘‘ Minor Infraction,’’ is not
warranted under the circumstances
involved, the CRO may refer the matter
for a formal disciplinary action under
CHX Art. XII, Rule 1, ‘‘Investigation and
Written Report of Investigation
Findings.’’ Thus, the current hearing
procedure noted in CHX Art. XII, Rule
2(b) is redundant and unnecessary. The
CHX also proposes to delete the
suspension and termination rules
applicable to specialists, odd-lot
dealers, and market makers in CHX
Articles XXX, XXXI, and XXXIV,
respectively, as obsolete and redundant
of the Emergency Suspension provisions
under CHX Art. VII, Rule 2. Finally, the
Exchange also proposes to amend the
process under current CHX Art. XII,
Rule 2(d), ‘‘Collateral Proceedings,’’ to
provide for the appointment of a
Hearing Officer to oversee proceedings
to suspend or bar a Participant or
associated person based upon the
imposition of a comparable sanction by
another SRO.12 The current version of
the rule provides for the CEO to conduct
that hearing personally.
b. Criteria for the Section of Hearing
Officers
The Exchange seeks to amend its
disciplinary rules to provide for criteria
to be followed in the selection and
appointment of Hearing Officers in
disciplinary proceedings. Currently, the
rules of the Exchange provide only that
the CEO shall select a Hearing Officer.13
While the Exchange continues to believe
that it is appropriate for the CEO to
select the Hearing Officer, the Exchange
would like to create requirements of
professional competence and experience
and the absence of bias or any conflict
of interest that the CEO would be
required to consider in selecting a
Hearing Officer.14 In fairness to the
12 Current CHX Art. XII, Rule 2(d) would become
proposed CHX Art. XII, Rule 2(b) because of the
proposed deletion of other rule provisions.
13 See CHX Art. XII, Rule 5(a), ‘‘Conduct of
Hearing.’’
14 See proposed CHX Art. XII, Rule 5(e),
‘‘Appointment of Hearing Officer.’’ These
provisions would require that the CEO give
reasonable consideration to the 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 actual or perceived conflict of interest
and any other relevant factors.
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respondent, the Exchange also proposes
to create a process by which the
respondent could object to a particular
Hearing Officer on the grounds of bias
or conflict of interest.15
c. Initial Decision by Hearing Officers
CHX rules currently require that the
proposed decision of a Hearing Officer
be reviewed by the CEO of the
Exchange.16 The CEO may take a
number of different actions with respect
to the proposed judgment. The CEO may
approve or modify the proposed
decision, remand the matter for further
consideration, or even conduct
additional proceedings himself. The
Exchange’s review of comparable
provisions of the rules of other SROs
has not revealed a similar requirement
relating to disciplinary proceedings. In
order to eliminate any appearance of a
conflict of interest, the Exchange
proposes to eliminate the requirement
that the CEO review the proposed
decision of the Hearing Officer and
instead provide that the Hearing Officer
issue a final, albeit appealable, decision.
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d. Appeal of Disciplinary Proceedings
Under the current CHX rules,
disciplinary orders may only be
appealed by the respondent to the
Judiciary Committee of the Exchange.17
According to the CHX, the rules of most
other exchanges and SROs permit
appeals to be brought by either party.
The Exchange believes that there may be
instances when the Exchange’s Market
Regulation staff that prosecuted a
particular matter may wish to appeal an
adverse decision. For example, where
the staff believes that a Hearing Officer
applied an incorrect standard of law in
making his or her decision, an appeal
may be appropriate and desirable.
Providing the staff of the Exchange with
the authority to initiate an appellate
review would put the staff in the same
position as the respondent, and
therefore appears to increase the
fundamental fairness of the disciplinary
process.
In addition, the Exchange proposes to
streamline the appellate review process
for disciplinary actions. Currently,
appeals are heard first by a Judiciary
Committee, then by the Executive
Committee and finally, on a
15 See proposed CHX Art. XII, Rule 5(h),
‘‘Impartiality of Hearing Officer.’’ Any motion
seeking the disqualification of the Hearing Officer
would need to be filed within 15 days of the
Hearing Officer’s appointment.
16 See CHX Art. XII, Rule 5(b), ‘‘Decision.’’ This
provision currently is identified as Rule 5(b), but
would be changed to Rule 5(f) because of the
proposed addition of other rule provisions.
17 See CHX Art. XII, Rule 6(a), Judiciary
Committee.
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discretionary basis, by the Board.18 In
place of this three-tiered structure, the
Exchange proposes to eliminate
appellate review by the Executive
Committee. Appeals would be heard by
a Judiciary Committee and, on a
discretionary basis, by the full Board.19
The removal of an unnecessary layer of
review should reduce the time required
to reach a final judgment, thus
contributing to the fair and effective
enforcement of the Exchange’s rules.
e. Failure to Promptly Pay Fines
The Exchange has noticed a recent
trend that some Minor Rule Violation
Plan (MRVP) fines are not being paid in
a timely manner. Under existing
Exchange rules, Participants who fail to
pay fines owing to the Exchange within
60 days of the date such amount became
payable may be suspended, after due
notice, until such payment is made.20
While a suspension rule may be an
effective deterrent in most
circumstances, the Exchange would like
the flexibility to assess additional fines
or other sanctions, either in lieu of or in
addition to a suspension, as added
inducement to avoiding late payment.
Moreover, the Exchange would like to
explicitly include associated persons of
Participants in the text of the rule.21
f. Procedural Changes
Although the Exchange’s current rule
set forth the general process to be
followed in the course of a disciplinary
proceeding, the rules contain few details
about the time frames within which
various tasks must be accomplished; do
not provide for pre-hearing discovery;
and do not set forth certain other details
about the disciplinary process.
The Exchange’s proposal would
attempt to provide more clarity to these
proceedings. As an initial matter, the
proposed rules would set forth clear
time frames in which various events
must occur, e.g., responding to charges,
filing of motions, and issuing of
orders.22 The proposed rules also would
18 See
CHX Art. XII, Rule 6.
proposed CHX Art. XII, Rule 6(a) and (b).
20 See CHX Art. XIV, Rule 10, ‘‘Failure to Pay
Debts.’’ Suspension of a Participant for Nonpayment operates as a termination of the
Participant’s registration with the Exchange.
21 The Exchange believes that it already has the
authority to suspend such persons for nonpayment
of fines pursuant to CGX ART. XII, Rule 8,
‘‘Disciplinary Jurisdiction,’’ but proposes to amend
the language of CHX Art. XIV, Rule 10, to provide
additional clarity to its Participants and their
associated persons.
22 For example, in CHX Art. XII, the proposed
changes would require: (i) That a respondent file a
written answer to charges within 30 days from the
date of service of the charges (CHX Rule 5(b)); (ii)
that the Hearing Officer schedule a hearing within
30 days after the filing of an answer (CHX Rule
19 See
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confirm the information that should be
included in certain notices; 23 create
limited rights to prehearing discovery
for all parties to a proceeding; 24 and set
briefing schedules in various
situations.25
Somewhat more substantively, the
proposed rules would: (i) Confirm that
the Board or the Executive Committee
could direct the CRO to initiate a
disciplinary proceeding; 26 (ii) confirm
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; 27 (iii) confirm that the
Exchange will serve a party fined under
the summary procedure in CHX Art. XII,
Rule 2 with a notice that provides
specific information about the violation
and the associated fine; 28 (iv) clarify
that fines assessed under the summary
procedure of CHX Art. XII, Rule 2 are
not publicly reported, except as may be
5(d)); and (iii) that the Hearing Officer ordinarily
issue an order within 90 days after the conclusion
of a hearing (CHX Rule 5(f)). In CHX Art. XXVIII,
the proposed rule changes similarly would require
that the Hearing Officer 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
(CHX Rule 4(d)).
23 The proposed rules would confirm that, in any
action taken by the Exchange pursuant to the
summary procedure set forth in CHX Art. XII, rule
2(a), the person against whom a fine is imposed
shall be served (as also provided in CHX Art. XII,
Rule 1(c)) 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
determinination becomes final and such fine
becomes due and payable to the Exchange, or on
which such action must be contested. The Exchange
currently provides this notice to persons against
whom a fine is imposed. This new provision would
confirm that that practice should continue.
24 Under the proposed rules, the parties must
exchange a list of witnesses that they plan to call
to testify at least 30 days before the hearing. See
proposed CHX Art. XII, Rule 5(c)(1), ‘‘Prehearing
Procedure.’’ 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 proposed CHX Art, XII, Rule
5(c)(2). Under the proposed rules, a party that does
not identify witnesses or produce requested
documents would be barred from presenting those
witnesses or documents at the hearing, unless the
party seeking to introduce the evidence could show
good cause for the failure to earlier identify the
witnesses or documents and could establish that the
failure to allow the presentation of the evidence
would result in undue hardship to that party. See
proposed Art, XII, Rules 5(c)(1) and 5(c)(2).
25 See proposed 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).
26 See proposed CHX Art. XII, Rule 1(b)(2).
27 See proposed CHX Art. XII, Rule 5(f).
28 See supra note 23.
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required by Rule 19d–1 under the Act;29
(v) extend the emergency suspension
rules to associated persons of
Participants;30 and (vi) confirm that the
three-person board panel that hears an
appeal from an emergency suspension
decision would consist of at least two
public directors on the Board.31 The
Exchange also proposes to add
provisions that set forth the required
content of settlement agreements in
disciplinary proceedings.32 The
Exchange believes that these proposed
changes provide important clarifications
that are consistent with the Exchange’s
obligation to provide a fair and vigorous
procedure for the enforcement of its
rules.
g. Removal of Securities
Other proposed changes can be found
in CHX Art. XXVIII, which contains the
Exchange’s rules relating to the listing of
securities. In this article, the Exchange
proposes to add text that sets forth new
requirements of professional
competence and experience, and the
absence of bias or any conflict of
interest, that the CEO would be required
to consider in selecting a Hearing
Officer for a proposed delisting
hearing.33 The proposal would also
incorporate a process by which an
issuer could object to a particular
Hearing Officer on the grounds of bias
or conflict of interest.34 In addition, the
proposed changes in this article would
confirm that a Hearing Officer’s decision
is final unless a review is specifically
demanded and would set forth the
process and standards that should be
followed by the Executive Committee on
any appeal of the Hearing Officer’s
decision.35 Finally, the proposed
changes would make clear that the final
decision to delist a security, on appeal,
would be made by the Executive
Committee (not by the Exchange’s
Board) and would confirm that the
initial delisting decision-makers are not
29 See
proposed CHX Art. XII, Rule 2(a).
proposed CHX Art. VII, Rule 2.
31 See proposed CHX Art. VII, Rule 2(b).
32 See proposed CHX Art. XII, Rule 1(d). This
proposed provision would confirm 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).
Under the proposed rules, a 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 would have the
sole right to approve a proposed settlement
agreement.
33 See proposed CHX Art. XXVIII, Rule 4(d).
34 Id.
35 See proposed CHX Art. XXVIII, Rule 4(d)–(e).
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30 See
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the same persons who would hear an
appeal from that decision.36
h. Other Changes
The Exchange has made a number of
other miscellaneous changes to its
disciplinary rules in an effort to
modernize the terms used in referring to
the parties to proceedings. Some of the
terminology changes include
substituting ‘‘respondent’’ for ‘‘accused’’
and substituting ‘‘hearing’’ for ‘‘trial.’’ 37
The Exchange anticipates that these
proposed rule changes, if and when
approved by the Commission, would be
implemented for any newly-commenced
proceeding as soon as possible after
such Commission approval occurs.
Upon approval of the proposed rule
changes, the Exchange will issue a
notice to its Participants that describes
the changes and that confirms that the
changes will apply to any proceeding
that is initiated by the Exchange on or
after a date that immediately follows the
date of the Commission’s approval.38
2. Statutory Basis
The CHX believes the proposal is
consistent with the requirements of the
Act and the rules and regulations
thereunder that are applicable to a
national securities exchange, and, in
particular, with the requirements of
Section 6(b).39 The CHX believes the
proposal is consistent with Section
6(b)(5) of the Act 40 in that it is designed
to promote just and equitable principles
of trade, to remove impediments to, 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.
36 The current rule provides that securities may
be delisted by the Exchange’s Board and that an
appeal from that decision is made to a hearing
examiner and, ultimately, to the Exchange’s
Executive Committee. See CHX Art. XXVIII, Rule 4
and Interpretation and Policy .01. The Exchange
believes that it is appropriate to remove any
suggestion that the same persons who make a
delisting decision might hear the appeal from that
decision. Under the proposed change, the
Exchange’s staff would make an initial delisting
determination, which could be heard by a hearing
examiner and then appealed to the Exchange’s
Executive Committee.
37 See, e.g., proposed CHX Art. XII, Rule 1(b)
(introducing the term ‘‘respondent’’) and CHX Art.
XII, Rule 5 (introducing the term ‘‘hearing’’ instead
of ‘‘trial’’).
38 These changes would apply to the appeal of
any MRVP fine that is imposed on or after the
approval date, as well as to any formal disciplinary
proceeding, suspension decision or delisting action
that the Exchange initiates on or after the approval
date.
39 15 U.S.C. 78f(b).
40 15 U.S.C. 78f(b)(5).
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Fmt 4703
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B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule changes will impose
any burden on competition.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the Exchange consents,
the Commission will:
(A) By order approve such proposed
rule change, or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. 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 (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. 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
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 (https://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
E:\FR\FM\27JNN1.SGM
27JNN1
Federal Register / Vol. 71, No. 123 / Tuesday, June 27, 2006 / Notices
Commission, and all written
communications relating 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 July 18, 2006.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.41
J. Lynn Taylor,
Assistant Secretary
[FR Doc. 06–5682 Filed 6–26–06; 8:45 am]
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54016; File No. SR–ISE–
2006–32]
Self-Regulatory Organizations;
International Securities Exchange, Inc.;
Notice of Filing and Immediate
Effectiveness of Proposed Rule
Change and Amendment No. 1 Thereto
Relating to Fee Changes
June 19, 2006.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
Act),1 and Rule 19b–4 thereunder,2
notice is hereby given that on June 1,
2006, the International Securities
Exchange, Inc. (ISE or Exchange) 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 the ISE. On June 15, 2006,
ISE filed Amendment No. 1 to the
proposed rule change.3 The ISE has
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Amendment No. 1 deleted brackets included in
the initial Exhibit 5. The brackets reflected a
proposed rule change in SR–ISE–2006–30, which
was originally submitted under Section 19(b)(3)(A)
of the Act, rejected by the Commission, and
subsequently re-filed by the Exchange under
Section 19(b)(2) of the Act. The Exchange also made
sroberts on PROD1PC70 with NOTICES
1 15
VerDate Aug<31>2005
17:33 Jun 26, 2006
Jkt 208001
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The ISE is proposing to increase the
threshold average daily volume (ADV)
levels for the reduction and waiver of
execution fees and the waiver of
comparison fees with respect to trading
options on the Nasdaq 100 Index
Tracking Stock (QQQQ) and
transactions executed in the Exchange’s
Facilitation Mechanism.
The text of the proposed rule change,
as amended, is available on the ISE’s
Web site (https://www.iseoptions.com/
legal/proposedlrulelchanges.asp), at
the principal office of the ISE, 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
BILLING CODE 8010–01–M
41 17
designated this proposal as one
establishing or changing a due, fee, or
other charge imposed by the ISE under
Section 19(b)(3)(A)(ii) of the Act,4 and
Rule 19b–4(f)(2) thereunder,5 which
renders the proposal effective upon
filing with the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change, as amended, from interested
persons.
In its filing with the Commission, the
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. The 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 purpose of this proposed rule
change is to increase the threshold ADV
levels for the reduction and waiver of
execution fees and the waiver of
comparison fees in the Exchange’s
Schedule of Fees for (i) trading options
in the QQQQ and (ii) transactions
executed through the Exchange’s
Facilitation Mechanism. In November
2003, on a pilot basis, the Exchange
clarifying changes to the purpose section of the
filing. The correction to Exhibit 5 and the
clarifications to the purpose section of the original
filing do not affect the fees covered by this filing.
4 15 U.S.C. 78s(b)(3)(A)(ii).
5 17 CFR 240.19b–4(f)(2).
PO 00000
Frm 00060
Fmt 4703
Sfmt 4703
36575
adopted a reduction and a waiver of
execution fees and a waiver of
comparison fees for QQQQ options.6 In
September 2004, again on a pilot basis,
the Exchange adopted a similar
reduction and a waiver of execution fees
and a waiver of comparison fees on
transactions executed through the
Exchange’s Facilitation Mechanism.7
Discount on QQQQ Execution and
Comparison Fees
Under the current QQQQ pilot
program, when a member’s monthly
ADV in QQQQ options reaches 8,000
contracts, the member’s execution fee
for the next 2,000 contracts is reduced
by $0.10 per contract.8 Further, when a
member’s monthly ADV in QQQQ
options reaches 10,000 contracts, the
Exchange waives the entire execution
fee and the comparison fee for each
QQQQ option contract traded thereafter.
The Exchange states that its volume in
QQQQ options traded has increased as
a result of this pilot program. As a
result, ISE now proposes to increase the
threshold ADV levels at which the fee
reduction and waiver for QQQQ options
traded apply, such that the $0.10 per
contract fee reduction shall apply for
the next 2,000 contracts when a
member’s monthly ADV in QQQQ
options reaches 10,000 contracts.
Further, when a member’s monthly
ADV reaches 12,000 contracts, the
Exchange will waive the entire
execution fee and the comparison fee for
each QQQQ option contract traded
thereafter.
Discount on Facilitation Mechanism
Fees
With respect to the Exchange’s
Facilitation Mechanism, the structure of
6 See Securities Exchange Act Release No. 49147
(January 29, 2004), 69 FR 5629 (February 5, 2004).
See also Securities Exchange Act Release Nos.
49853 (June 14, 2004), 69 FR 35087 (June 23, 2004)
(extending the pilot program until November 30,
2004); 50900 (December 21, 2004), 69 FR 78075
(December 29, 2004) (extending the pilot program
until November 30, 2005); and 52934 (December 9,
2005), 70 FR 74859 (December 16, 2005) (extending
the pilot program until November 30, 2006).
7 See Securities Exchange Act Release Nos. 50658
(November 12, 2004), 69 FR 67768 (November 19,
2004); and 52934, supra note 6 (extending the pilot
program until November 30, 2006). The Facilitation
Mechanism is a process by which Electronic Access
Members facilitate block-size orders. Options traded
in the Facilitation Mechanism are treated as Firm
Proprietary orders and, as such, are subject to an
execution and comparison fee of $0.15 and $0.03
per contract per side, respectively.
8 This execution fee and any reduction or waiver
thereof is applicable to Firm Proprietary orders and
ISE Market Maker orders. For ISE Market Maker
orders, the execution fee is currently between $0.21
and $0.12 per contract side, depending on the
Exchange Average Daily Volume, and the
comparison fee is currently $0.03 per contract per
side.
E:\FR\FM\27JNN1.SGM
27JNN1
]]>Agencies
[Federal Register Volume 71, Number 123 (Tuesday, June 27, 2006)]
[Notices]
[Pages 36571-36575]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-5682]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54021; File No. SR-CHX-2005-06]
Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Notice of Filing of Proposed Rule Change and Amendment No. 1 Relating
to the Exchange's Disciplinary Process
June 20, 2006.
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 March 7, 2005, the Chicago Stock Exchange, inc. (``CHX'' or
``Exchange'') 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 the CHX. On June 2,
2006, the Exchange filed Amendment No. 1 to the proposed rule
change.\3\ The Commission is publishing this notice to solicit comments
on the proposed rule change, as amended, from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 revises the proposal to: (i) Clarify the
role of Exchange counsel in both disciplinary and delisting
proceedings by providing that Exchange counsel--who are not part of
the CHX's Market Regulation Department--can serve as counsel for the
Hearing Officer, so long as these attorneys have not directly
participated in any examination, investigation or decision
associated with the initiation or conduct of the particular
proceeding; (ii) delete proposed changes to the Exchange's Minor
Rule Violation Plan contained in the original filing, which have
been filed separately with the Commission in File No. SR-CHX-2005-
39; (iii) eliminate the proposed addition of new types of violations
to the existing summary procedure for handling minor infractions;
(iv) clarity that any person against whom a fine is imposed for
minor infractions pursuant to CHX Art. XII, Rule 2(a) will be
provided with notice of the violation and fines imposed; (v) provide
dual authority to the Chief Executive Officer and Chief Regulatory
Officer to impose restrictions on Participant Firm operations for
failure to meet the requirements of CHX Art. XI, rule 3, ``Net
Capital and Aggregate Indebtedness;'' (vi) modify the Exchange's
delisting rule, CHX Art. XXVIII, Rule 4, to make the hearing and
appeal process for delisting decisions similar to the hearings that
might be held in other matters and to provide that the initial
delisting decision-makers are not the same persons who would hear an
appeal from that decision; and (vii) incorporate additional details
that had not been included in the original version of the proposal,
but which have been added to respond to comments from Commission
staff. Amendment No. 1 replaces and supersedes the original filing
in its entirety.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The CHX proposes to adopt, amend, and delete a number of rules
relating to the Exchange's enforcement and disciplinary processes. This
proposal, as amended, would: (1) Modify the procedures by which formal
disciplinary actions and certain other matters that require a hearing
are instituted by removing the Chief Executive Officer (``CEO'') from
the authorization process and substituting the Exchange's Chief
Regulatory Officer (``CRO''); (2) adopt a rule establishing the
criteria by which Hearing Officers are selected and providing a
procedure by which a respondent may move to replace a Hearing Officer
based upon a showing of bias or conflict of interest; (3) delete the
requirement that the CEO approve, modify, or reject the findings of a
Hearing Officer in a formal disciplinary action and certain other
matters that require a hearing; (4) modify the existing rules relating
to appeals of Hearing Officer decisions to permit the Exchange to
appeal an adverse decision; (5) amend the Exchange's rules relating to
the non-payment of fines to provide for additional sanctions; and (6)
make various language and organizational changes. The text of this
proposed rule change is available on the Exchange's Web site https://
www.chx.com/rules/proposed_rules.htm 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 CHX 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. The CHX 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
In light of the Commission's recent 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 regulatory entity,'' \4\ the
CHX has reviewed its existing rules relating to its disciplinary
[[Page 36572]]
process.\5\ The Exchange is proposing a number of modifications,
addition and deletions to the rules governing Exchange disciplinary
proceedings. In general, these changes serve to eliminate any
appearance of a conflict of interest by removing the CEO from the
authorization and determination of disciplinary charges. The Exchange
also proposes to enhance the ability of its regulatory staff to
effectively prosecute disciplinary actions by endowing the Exchange
with the right to appeal adverse decisions and providing for addition
sanctions for the failure of an Exchange Participant to promptly pay a
disciplinary fine. The Exchange is also proposing various language and
organizational changes to the disciplinary rules.
---------------------------------------------------------------------------
\4\ Securities Exchange Act Release No. 48946 (December 17,
2003), 68 FR 74678 (December 24, 2003) (order approving File No. SR-
NYSE-2003-34) (the `` NYSE Governance Order'').
\5\ The CHX's review also is being conducted pursuant to the
requirements of the Commission's September 30, 2003 Order
Instituting Proceedings against the Exchange. Securities Exchange
Act Release No. 48566 (September 30, 2003), Administrative
Proceeding File No. 3-11282 (the ``Order''). Certain aspects of this
filing are also based upon the recommendations of the Independent
Consultant appointed by the terms of the Order.
---------------------------------------------------------------------------
a. Authorization of Formal Disciplinary Actions
The Exchange's current rules require that the CEO authorize the
institution of all major disciplinary actions.\6\ The Exchange believes
that this requirement is outdated and somewhat inconsistent with recent
Commission direction that SROs must possess ``sufficient independence
in the regulatory process to prevail against undue interference or
influence from the persons or entities being regulated.'' \7\ The CHX
is of the belief, confirmed by the Independent Consultant appointed by
the terms of the Order,\8\ that there is no evidence of any actual
conflict of interest having influenced the decision of the Exchange's
CEO regarding any disciplinary matters. Nevertheless, the Exchange
proposes to remove the CEO from such decision-making processes to
address any negative public perception of a possible conflict of
interest. In place of the current structure, the Exchange proposes that
disciplinary and related proceedings against Exchange Participants be
authorized by the Exchange's CRO. In the case of proceedings based upon
a Participant's failure to maintain operational capability under CHX
Art. XI, Rule 8, the Exchange has determined to permit the institution
of such proceedings at the direction of either the CEO or the CRO.\9\
The Exchange believes that dual authority is appropriate in such
proceedings since, unlike traditional disciplinary matters, they can
involve a mixture of business and regulatory concerns.
---------------------------------------------------------------------------
\6\ These proceedings include: CHX Art. VII, Rule 2, ``Emergency
Suspensions;'' CHX Art. XI, Rule 3(d), ``Restrictions on
Operations;'' CHX Art. XI, Rule 8, ``Operational Capability;'' CHX
Art. XII, Rule 1(b), ``Disciplinary Actions;'' CHX Art. XII, Rule 2,
``Summary Procedure;'' CHX Art. XXVIII, Rule 4, Interpretation .01,
``Removal of Securities;'' CHX Art. XXX, Rule 8, ``Termination of
Specialist Registration;'' CHX Art. XXXI, Rule 14, ``Termination of
Specialist Registration;'' CHX Art. XXXIV, Rule 15, ``Suspension of
Registered Market Makers.'' Authorization by the CEO is not required
to institute an action pursuant to the Exchanges's Minor Rule
Violation Plan. Such actions are authorized by a Minor Rule
Violation panel, which is appointed by the CEO. See CHX Art. XII,
Rule 9, `` Minor Rule Violations.'' The Exchange proposes to delete
the procedures of CHX Articles XXX, XXXI and XXXIV regarding ex
parte suspension of Participants since the process is both outdated
and duplicative of the Emergency Suspension process detailed in CHX
Art. VII, Rule 2, which is being updated in this filing.
\7\ NYSE Governance Order, supra note 4.
\8\ See Order, supra note 5.
\9\ The Exchange proposes to extend this same dual authority to
the decision to impose restrictions on Participant Firm operations
under CHX Art. XI Rule 3(d), relating to net capital and aggregate
indebtedness requirements.
---------------------------------------------------------------------------
Vesting the authority to initiate disciplinary actions in the
Exchange's CRO serves to bolster the apparent and actual independence
of the Exchange's regulatory processes. The CRO's primary mission is to
ensure that the Exchange has an effective regulatory program reasonably
designed to ensure compliance by is Participants with the Exchange's
rules and the federal securities laws. The Exchange acknowledges that
the CRO reports to the CEO and therefore could conceivably be
influenced by the latter's views on a proposed disciplinary matter.
However, the CRO is required to appear before, and report on the
Exchange's regulatory programs not less than quarterly to, the
Exchange's Regulatory Oversight Committee, a committee of the CHX's
Board of Directors (``Board'') predominately composed of independent
directors, which is charged with oversight of the Exchange's regulatory
function.\10\ 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. Moreover, the Exchange notes that the Commission has acknowledged
that there is no``one size fits all'' model for discharging an SRO's
oversight function.\11\ The Exchange believes that this proposed
structure is appropriate given the scope and nature of its regulatory
unit and mission.
---------------------------------------------------------------------------
\10\ The composition requirements and responsibilities of the
Exchange's Regulatory Oversight Committee were set forth in the
Order. See Order, supra note 5.
\11\ See NYSE Governance Order, supa note 4, at n. 96 and
accompanying text.
---------------------------------------------------------------------------
In addition, the Exchange proposes to delete paragraph (b) of CHX
Art. XII, Rule 2 to eliminate the ``summary hearing'' process noted
therein and to delete paragraph (c) regarding the ``settlement
procedure.'' To the extent that action under CHX Art. XII, Rule 2(a),
`` Minor Infraction,'' is not warranted under the circumstances
involved, the CRO may refer the matter for a formal disciplinary action
under CHX Art. XII, Rule 1, ``Investigation and Written Report of
Investigation Findings.'' Thus, the current hearing procedure noted in
CHX Art. XII, Rule 2(b) is redundant and unnecessary. The CHX also
proposes to delete the suspension and termination rules applicable to
specialists, odd-lot dealers, and market makers in CHX Articles XXX,
XXXI, and XXXIV, respectively, as obsolete and redundant of the
Emergency Suspension provisions under CHX Art. VII, Rule 2. Finally,
the Exchange also proposes to amend the process under current CHX Art.
XII, Rule 2(d), ``Collateral Proceedings,'' to provide for the
appointment of a Hearing Officer to oversee proceedings to suspend or
bar a Participant or associated person based upon the imposition of a
comparable sanction by another SRO.\12\ The current version of the rule
provides for the CEO to conduct that hearing personally.
---------------------------------------------------------------------------
\12\ Current CHX Art. XII, Rule 2(d) would become proposed CHX
Art. XII, Rule 2(b) because of the proposed deletion of other rule
provisions.
---------------------------------------------------------------------------
b. Criteria for the Section of Hearing Officers
The Exchange seeks to amend its disciplinary rules to provide for
criteria to be followed in the selection and appointment of Hearing
Officers in disciplinary proceedings. Currently, the rules of the
Exchange provide only that the CEO shall select a Hearing Officer.\13\
While the Exchange continues to believe that it is appropriate for the
CEO to select the Hearing Officer, the Exchange would like to create
requirements of professional competence and experience and the absence
of bias or any conflict of interest that the CEO would be required to
consider in selecting a Hearing Officer.\14\ In fairness to the
[[Page 36573]]
respondent, the Exchange also proposes to create a process by which the
respondent could object to a particular Hearing Officer on the grounds
of bias or conflict of interest.\15\
---------------------------------------------------------------------------
\13\ See CHX Art. XII, Rule 5(a), ``Conduct of Hearing.''
\14\ See proposed CHX Art. XII, Rule 5(e), ``Appointment of
Hearing Officer.'' These provisions would require that the CEO give
reasonable consideration to the 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 actual or perceived conflict of interest and any
other relevant factors.
\15\ See proposed CHX Art. XII, Rule 5(h), ``Impartiality of
Hearing Officer.'' Any motion seeking the disqualification of the
Hearing Officer would need to be filed within 15 days of the Hearing
Officer's appointment.
---------------------------------------------------------------------------
c. Initial Decision by Hearing Officers
CHX rules currently require that the proposed decision of a Hearing
Officer be reviewed by the CEO of the Exchange.\16\ The CEO may take a
number of different actions with respect to the proposed judgment. The
CEO may approve or modify the proposed decision, remand the matter for
further consideration, or even conduct additional proceedings himself.
The Exchange's review of comparable provisions of the rules of other
SROs has not revealed a similar requirement relating to disciplinary
proceedings. In order to eliminate any appearance of a conflict of
interest, the Exchange proposes to eliminate the requirement that the
CEO review the proposed decision of the Hearing Officer and instead
provide that the Hearing Officer issue a final, albeit appealable,
decision.
---------------------------------------------------------------------------
\16\ See CHX Art. XII, Rule 5(b), ``Decision.'' This provision
currently is identified as Rule 5(b), but would be changed to Rule
5(f) because of the proposed addition of other rule provisions.
---------------------------------------------------------------------------
d. Appeal of Disciplinary Proceedings
Under the current CHX rules, disciplinary orders may only be
appealed by the respondent to the Judiciary Committee of the
Exchange.\17\ According to the CHX, the rules of most other exchanges
and SROs permit appeals to be brought by either party. The Exchange
believes that there may be instances when the Exchange's Market
Regulation staff that prosecuted a particular matter may wish to appeal
an adverse decision. For example, where the staff believes that a
Hearing Officer applied an incorrect standard of law in making his or
her decision, an appeal may be appropriate and desirable. Providing the
staff of the Exchange with the authority to initiate an appellate
review would put the staff in the same position as the respondent, and
therefore appears to increase the fundamental fairness of the
disciplinary process.
---------------------------------------------------------------------------
\17\ See CHX Art. XII, Rule 6(a), Judiciary Committee.
---------------------------------------------------------------------------
In addition, the Exchange proposes to streamline the 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.\18\ In place of this
three-tiered structure, the Exchange proposes to eliminate appellate
review by the Executive Committee. Appeals would be heard by a
Judiciary Committee and, on a discretionary basis, by the full
Board.\19\ The removal of an unnecessary layer of review should reduce
the time required to reach a final judgment, thus contributing to the
fair and effective enforcement of the Exchange's rules.
---------------------------------------------------------------------------
\18\ See CHX Art. XII, Rule 6.
\19\ See proposed CHX Art. XII, Rule 6(a) and (b).
---------------------------------------------------------------------------
e. Failure to Promptly Pay Fines
The Exchange has noticed a recent trend that some Minor Rule
Violation Plan (MRVP) fines are not being paid in a timely manner.
Under existing Exchange rules, Participants who fail to pay fines owing
to the Exchange within 60 days of the date such amount became payable
may be suspended, after due notice, until such payment is made.\20\
While a suspension rule may be an effective deterrent in most
circumstances, the Exchange would like the flexibility to assess
additional fines or other sanctions, either in lieu of or in addition
to a suspension, as added inducement to avoiding late payment.
Moreover, the Exchange would like to explicitly include associated
persons of Participants in the text of the rule.\21\
---------------------------------------------------------------------------
\20\ See CHX Art. XIV, Rule 10, ``Failure to Pay Debts.''
Suspension of a Participant for Non-payment operates as a
termination of the Participant's registration with the Exchange.
\21\ The Exchange believes that it already has the authority to
suspend such persons for nonpayment of fines pursuant to CGX ART.
XII, Rule 8, ``Disciplinary Jurisdiction,'' but proposes to amend
the language of CHX Art. XIV, Rule 10, to provide additional clarity
to its Participants and their associated persons.
---------------------------------------------------------------------------
f. Procedural Changes
Although the Exchange's current rule set forth the general process
to be followed in the course of a disciplinary proceeding, the rules
contain few details about the time frames within which various tasks
must be accomplished; do not provide for pre-hearing discovery; and do
not set forth certain other details about the disciplinary process.
The Exchange's proposal would attempt to provide more clarity to
these proceedings. As an initial matter, the proposed rules would set
forth clear time frames in which various events must occur, e.g.,
responding to charges, filing of motions, and issuing of orders.\22\
The proposed rules also would confirm the information that should be
included in certain notices; \23\ create limited rights to prehearing
discovery for all parties to a proceeding; \24\ and set briefing
schedules in various situations.\25\
---------------------------------------------------------------------------
\22\ For example, in CHX Art. XII, the proposed changes would
require: (i) That a respondent file a written answer to charges
within 30 days from the date of service of the charges (CHX Rule
5(b)); (ii) that the Hearing Officer schedule a hearing within 30
days after the filing of an answer (CHX Rule 5(d)); and (iii) that
the Hearing Officer ordinarily issue an order within 90 days after
the conclusion of a hearing (CHX Rule 5(f)). In CHX Art. XXVIII, the
proposed rule changes similarly would require that the Hearing
Officer 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 (CHX Rule
4(d)).
\23\ The proposed rules would confirm that, in any action taken
by the Exchange pursuant to the summary procedure set forth in CHX
Art. XII, rule 2(a), the person against whom a fine is imposed shall
be served (as also provided in CHX Art. XII, Rule 1(c)) 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 determinination becomes final and such fine becomes due and
payable to the Exchange, or on which such action must be contested.
The Exchange currently provides this notice to persons against whom
a fine is imposed. This new provision would confirm that that
practice should continue.
\24\ Under the proposed rules, the parties must exchange a list
of witnesses that they plan to call to testify at least 30 days
before the hearing. See proposed CHX Art. XII, Rule 5(c)(1),
``Prehearing Procedure.'' 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 proposed CHX Art, XII, Rule 5(c)(2). Under the
proposed rules, a party that does not identify witnesses or produce
requested documents would be barred from presenting those witnesses
or documents at the hearing, unless the party seeking to introduce
the evidence could show good cause for the failure to earlier
identify the witnesses or documents and could establish that the
failure to allow the presentation of the evidence would result in
undue hardship to that party. See proposed Art, XII, Rules 5(c)(1)
and 5(c)(2).
\25\ See proposed 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).
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Somewhat more substantively, the proposed rules would: (i) Confirm
that the Board or the Executive Committee could direct the CRO to
initiate a disciplinary proceeding; \26\ (ii) confirm 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; \27\ (iii) confirm that the Exchange will serve a party fined
under the summary procedure in CHX Art. XII, Rule 2 with a notice that
provides specific information about the violation and the associated
fine; \28\ (iv) clarify that fines assessed under the summary procedure
of CHX Art. XII, Rule 2 are not publicly reported, except as may be
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required by Rule 19d-1 under the Act;\29\ (v) extend the emergency
suspension rules to associated persons of Participants;\30\ and (vi)
confirm that the three-person board panel that hears an appeal from an
emergency suspension decision would consist of at least two public
directors on the Board.\31\ The Exchange also proposes to add
provisions that set forth the required content of settlement agreements
in disciplinary proceedings.\32\ The Exchange believes that these
proposed changes provide important clarifications that are consistent
with the Exchange's obligation to provide a fair and vigorous procedure
for the enforcement of its rules.
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\26\ See proposed CHX Art. XII, Rule 1(b)(2).
\27\ See proposed CHX Art. XII, Rule 5(f).
\28\ See supra note 23.
\29\ See proposed CHX Art. XII, Rule 2(a).
\30\ See proposed CHX Art. VII, Rule 2.
\31\ See proposed CHX Art. VII, Rule 2(b).
\32\ See proposed CHX Art. XII, Rule 1(d). This proposed
provision would confirm 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). Under the proposed rules, a
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 would have the sole
right to approve a proposed settlement agreement.
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g. Removal of Securities
Other proposed changes can be found in CHX Art. XXVIII, which
contains the Exchange's rules relating to the listing of securities. In
this article, the Exchange proposes to add text that sets forth new
requirements of professional competence and experience, and the absence
of bias or any conflict of interest, that the CEO would be required to
consider in selecting a Hearing Officer for a proposed delisting
hearing.\33\ The proposal would also incorporate a process by which an
issuer could object to a particular Hearing Officer on the grounds of
bias or conflict of interest.\34\ In addition, the proposed changes in
this article would confirm that a Hearing Officer's decision is final
unless a review is specifically demanded and would set forth the
process and standards that should be followed by the Executive
Committee on any appeal of the Hearing Officer's decision.\35\ Finally,
the proposed changes would make clear that the final decision to delist
a security, on appeal, would be made by the Executive Committee (not by
the Exchange's Board) and would confirm that the initial delisting
decision-makers are not the same persons who would hear an appeal from
that decision.\36\
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\33\ See proposed CHX Art. XXVIII, Rule 4(d).
\34\ Id.
\35\ See proposed CHX Art. XXVIII, Rule 4(d)-(e).
\36\ The current rule provides that securities may be delisted
by the Exchange's Board and that an appeal from that decision is
made to a hearing examiner and, ultimately, to the Exchange's
Executive Committee. See CHX Art. XXVIII, Rule 4 and Interpretation
and Policy .01. The Exchange believes that it is appropriate to
remove any suggestion that the same persons who make a delisting
decision might hear the appeal from that decision. Under the
proposed change, the Exchange's staff would make an initial
delisting determination, which could be heard by a hearing examiner
and then appealed to the Exchange's Executive Committee.
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h. Other Changes
The Exchange has made a number of other miscellaneous changes to
its disciplinary rules in an effort to modernize the terms used in
referring to the parties to proceedings. Some of the terminology
changes include substituting ``respondent'' for ``accused'' and
substituting ``hearing'' for ``trial.'' \37\
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\37\ See, e.g., proposed CHX Art. XII, Rule 1(b) (introducing
the term ``respondent'') and CHX Art. XII, Rule 5 (introducing the
term ``hearing'' instead of ``trial'').
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The Exchange anticipates that these proposed rule changes, if and
when approved by the Commission, would be implemented for any newly-
commenced proceeding as soon as possible after such Commission approval
occurs. Upon approval of the proposed rule changes, the Exchange will
issue a notice to its Participants that describes the changes and that
confirms that the changes will apply to any proceeding that is
initiated by the Exchange on or after a date that immediately follows
the date of the Commission's approval.\38\
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\38\ These changes would apply to the appeal of any MRVP fine
that is imposed on or after the approval date, as well as to any
formal disciplinary proceeding, suspension decision or delisting
action that the Exchange initiates on or after the approval date.
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2. Statutory Basis
The CHX believes the proposal is consistent with the requirements
of the Act and the rules and regulations thereunder that are applicable
to a national securities exchange, and, in particular, with the
requirements of Section 6(b).\39\ The CHX believes the proposal is
consistent with Section 6(b)(5) of the Act \40\ in that it is designed
to promote just and equitable principles of trade, to remove
impediments to, 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.
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\39\ 15 U.S.C. 78f(b).
\40\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule changes will
impose any burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. 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 (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. 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
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 (https://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
[[Page 36575]]
Commission, and all written communications relating 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 July 18, 2006.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\41\
J. Lynn Taylor,
Assistant Secretary
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\41\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 06-5682 Filed 6-26-06; 8:45 am]
BILLING CODE 8010-01-M
