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]

Download as PDF 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 (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 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] sroberts on PROD1PC70 with NOTICES BILLING CODE 8010–01–M 19 17 CFR 200.30–3(a)(12). VerDate Aug<31>2005 17:33 Jun 26, 2006 Jkt 208001 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 PO 00000 Frm 00056 Fmt 4703 Sfmt 4703 36571 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 http://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’’). E:\FR\FM\27JNN1.SGM 27JNN1 36572 Federal Register / Vol. 71, No. 123 / Tuesday, June 27, 2006 / Notices 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. sroberts on PROD1PC70 with NOTICES 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. VerDate Aug<31>2005 17:33 Jun 26, 2006 Jkt 208001 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. PO 00000 Frm 00057 Fmt 4703 Sfmt 4703 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. E:\FR\FM\27JNN1.SGM 27JNN1 Federal Register / Vol. 71, No. 123 / Tuesday, June 27, 2006 / Notices 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. sroberts on PROD1PC70 with NOTICES 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. VerDate Aug<31>2005 17:33 Jun 26, 2006 Jkt 208001 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 PO 00000 Frm 00058 Fmt 4703 Sfmt 4703 36573 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. E:\FR\FM\27JNN1.SGM 27JNN1 36574 Federal Register / Vol. 71, No. 123 / Tuesday, June 27, 2006 / Notices 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). sroberts on PROD1PC70 with NOTICES 30 See VerDate Aug<31>2005 17:33 Jun 26, 2006 Jkt 208001 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). PO 00000 Frm 00059 Fmt 4703 Sfmt 4703 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 (http://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 (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 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 (http://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]


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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.
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    \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.
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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 http://
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.
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    \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.
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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 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.
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    \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.
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    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.
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    \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\
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    \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).
---------------------------------------------------------------------------

    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

[[Page 36574]]

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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'').
---------------------------------------------------------------------------

    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 (http://
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 (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

[[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