[Federal Register Volume 66, Number 103 (Tuesday, May 29, 2001)]
[Notices]
[Pages 29188-29192]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-13328]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-44327; File No. SR-ISE-2001-04]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the International Securities Exchange LLC Relating to Its
Disciplinary Procedures
May 18, 2001.
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 February 6, 2001, the International Securities Exchange LLC (the
``Exchange'' or the ``ISE'') 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.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange is proposing various changes to its disciplinary rules
and procedures. A complete copy of the text of the proposed rule change
is available at the Office of the Secretary, the ISE and the
Commission.
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 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 Exchange has entered into a regulatory services agreement with
NASD Regulation (``NASDR'') pursuant to which, among other things,
NASDR provides services related to conducting regulatory investigations
and disciplinary actions. The ISE is proposing to make changes to its
disciplinary rules and procedures to reflect and facilitate this
``hybrid'' regulatory system. In particular, the Exchange seeks to
conform its disciplinary rules and procedures to those of NASDR where
appropriate. In addition, the Exchange has carefully reviewed the
disciplinary rules currently in place at the other self-regulatory
organizations (``SROs'') and seeks to incorporate rules and standards
found in the rule of the other SROs in a manner tailored to fit the
needs of the Exchange, while assuring a disciplinary process that is
fair to the Exchange's members as required by the Securities Exchange
Act of 1934, as amended (``Exchange Act''). The specific changes are
discussed below.
The Exchange proposes to include in separate Rules the provisions
currently contained in Rule 1601 that (1) require members and persons
associated with Members to provide information upon the request of the
Exchange, and (2) specify the Exchange's authority and obligation to
investigate possible violations within the disciplinary jurisdiction of
the Exchange. These provisions will be contained in Rules 1601 and
1602, respectively. While Rule 1615 already provides the Exchange
authority to contract with another SRO to perform some or all of the
Exchange's
[[Page 29189]]
disciplinary functions, a parenthetical has been added in both Rules to
specify that another SRO acting on behalf of the ISE can require
members to provide information and conduct investigations. No
substantive changes have been made to these rules, although the
language specifying the Exchange regulatory staff's authority and
obligation to investigate possible violations has been amended to
reflect language more recently approved by the Commission for the
Pacific Exchange (``PCX'').\3\
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\3\ See PCX Rule 10.2; Securities Exchange Act Release No. 42756
(May 11, 2000).
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Rule 1602 is re-numbered to Rule 1603 and re-titled ``Letters of
Consent.'' This rule currently permits a disciplinary matter to be
concluded through a letter of consent prior to the initiation of formal
disciplinary proceedings upon approval of the letter of consent by the
Business Conduct Committee (``BCC''). The Exchange proposes to change
the existing procedures to require that the Chief Regulatory Officer
accept a letter of consent before it may be presented to the BCC for
consideration. The rule specifies that if agreement on the terms of a
letter of consent cannot be reached between a member or associated
person and regulatory staff, or if a letter of consent is rejected by
the Chief Regulatory Officer, the Exchange may then institute a formal
disciplinary action. The rule continues to require that the BCC approve
all letters of consent before they may become final.
Rule 1603 (Charges) is re-numbered to Rule 1604. This rule
currently provides that the Exchange will prepare a statement of
charges whenever it appears that there is probable cause for finding a
violation within the disciplinary jurisdiction of the Exchange. The
current language also provides that the statement of charges will be
served upon the member or person being charged (the ``Respondent''),
and that the Respondent will be given access to documents related to
the case. The proposed rule change specifies that a statement of
charges will be prepared by regulatory staff and must be approved by
the Chief Regulatory Officer.
Rule 1604 (Answer) is re-numbered to Rule 1605. This rule currently
provides a Respondent with 15 days after service of the charges to file
a written answer. The Exchange proposes to extend this answer period to
25 calendar days to conform with the period allowed under NASDR
procedures.\4\ In addition, the Exchange proposes to add a provision
specifying that, upon review of a Respondent's answer, the Chief
Regulatory Officer may modify the statement of charges and re-serve
them on the Respondent. The Respondent will then be given additional
time to answer the amended charges.
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\4\ See NASD Code of Procedure, Rules 9138(a) and 9215(a).
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Rule 1605 (Hearing) is re-numbered to Rule 1606. This rule
specifies the procedure for conducting disciplinary hearings.
Currently, the rule specifies that hearings will be held before ``one
or more'' members of the BCC. The Exchange proposes to amend the rule
to specify that disciplinary hearings will be held before a panel
comprised of a professional hearing officer and two members of the BCC.
The professional hearing officer will be provided by NASDR under our
regulatory services agreement, and under the proposal, this person will
be the Panel Chairman that handles all procedural matters. The two ISE
member representatives on a panel will be appointed by the Chairman of
the BCC from among the members of the BCC. We propose to adopt
guidelines governing this appointment, as well as a provision
specifying that a panel member must withdraw from a panel if at any
time he or she has a conflict of interest or bias or circumstances
otherwise exist where his or her fairness might reasonably be
questioned.\5\
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\5\ These provisions are similar to the recusal guidelines
provided for in the NASD and AMEX rules. See NASD Code of
Procedures, Rules 9233(a) (specifying that the term ``days'' in the
disciplinary rules is ``calendar'' days) and 9234(a); AMEX Rules,
Exchange Disciplinary Proceedings, Rules 1 and 2(b).
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The Exchange proposes to extend from 15 days to 28 calendar days
the notice period provided parties regarding the time and place of the
hearing. The Exchange also proposes to change the time in advance of a
scheduled hearing by which each party is required to furnish the panel
and the opposing party copies of all documentary evidence to be
presented at the hearing from five days to 10 calendar days. These
changes are made to conform with NASDR procedures.\6\
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\6\ NASD Code of Procedure, Rules 9221(d) (25 days notice of
hearing) and 9261(a) (requiring submission of documentary evidence
at least 10 days prior to hearing date).
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The Exchange further proposes to specify in Rule 1606 that
interlocutory Board review of decisions made by a panel during a
hearing will generally be prohibited. The proposed provision states
that interlocutory review will be permitted only if the panel agrees to
such review after determining that the issue is a controlling issue of
rule or policy and that immediate Board review would materially advance
the ultimate resolution of the case. Currently, there is nothing in the
Exchange rules with respect to interlocutory review, and the proposal
is consistent with NASDR procedures.\7\
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\7\ See NASDR Code of Procedure, Rule 9148; see also Chicago
Board Options Exchange (``CBOE'') Rule 17.6(b).
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Finally, the Exchange proposes to amend Rule 1606 regarding ex
parte communications to specify that the prohibition on ex parte
communications extends to members of a hearing panel and to board
members, in addition to BCC members. It would be inappropriate for a
member or an associated person to discuss a pending disciplinary matter
with any party that may be called upon to render a decision in the
matter. In light of the proposed changes discussed above that specifies
that a hearing panel will make disciplinary determinations, and the
right for review of a panel decision by the Board discussed below, the
prohibition should be extended to members of panels and the Board.
Rule 1608 (Decision) is renumbered to Rule 1607. The Exchange
proposes to delete paragraph (b) from the rule. This provision
specifies that if a hearing panel is comprised of less than half of the
members of the BCC, there would be an automatic review by a majority of
the BCC. As discussed above, the Exchange is proposing that hearings be
conducted by a hearing panel instead of the BCC. Therefore, paragraph
(b) is not applicable under the proposed change to Rule 1607
(Hearings).
Rule 1606 (Summary Proceedings) is re-numbered Rule 1608. This rule
currently specifies that a panel may make a determination without a
hearing and may impose a penalty as to violations that a Respondent has
admitted or has failed to answer on that otherwise do not appear in
dispute. The Exchange proposed to specify that the ten-day notice
currently required under the rule is ``calendar'' days and that it be
given to the panel chairman, but proposes no substantive changes to
this rule.
Rule 1607 (Offers of Settlement) is re-numbered Rule 1609. This
rule provides that a Respondent may submit a written offer of
settlement following service of a statement of charges. The Exchange
proposes to re-organize this rule, as well as specify that an offer of
settlement may be submitted to the Chief Regulatory Officer if a panel
has not yet been formed. The Respondent may submit a written statement
in support of the offer, but the Exchange proposes to eliminate the
right to request an oral argument in support of the offer. The proposal
also specifies that where a
[[Page 29190]]
panel or Chief Regulatory Officer accepts an offer of settlement, it or
he will issue a decision, including findings and conclusions and
imposing a sanction, consistent with the terms of the offer. Where a
panel or Chief Regulatory Officer rejects an offer of settlement, it or
he will notify the Respondent and the matter will proceed as if such
offer had not been made. A decision to accept or reject an offer of
settlement is final, and the Respondent may not seek review thereof.
Rule 1609 (Review) is re-numbered to Rule 1610. This rules provides
that the Respondent has 15 days following a decision to submit a
petition for review of a disciplinary decision. The Exchange proposes
to extend this period to 25 ``calendar'' days and specify that the
review is conducted by the Board to be consistent with the time allowed
under NASD rules.\8\ The Exchange does not propose any other
substantive changes to this rule.
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\8\ See NASD Code of Procedure, Rule 9311(a).
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Rule 1610 (Judgment and Sanction) is re-numbered to Rule 1611. This
rule provides generally that members and associated persons may be
disciplined by, among other things, fine, censure, expulsion,
suspension, and limitation of activities, functions and operations. The
Exchange proposes to adopt a provision under this rule specifying that
all fines and other monetary sanctions be paid to the Chief Financial
Offer of the Exchange. The proposal would permit the Exchange to
summarily suspend a Member that fails to promptly pay a fine, or
terminate the association of a person who fails to promptly pay a fine,
when such fine becomes finally due and payable.\9\ In addition, the
Exchange proposes to require that a member or associated person bear
such costs of the proceeding as the adjudicator deems fair and
appropriate under the circumstances.\10\
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\9\ See NASD Code of Procedure, Rule 8320(b).
\10\ See NASD Code of Procedure, Rule 8330.
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Rule 1611 (Service of Notice) and 1612 (Extension of Time Limits)
have been combined in Rule 1612 (Procedural Matters). The Exchange does
not propose any substantive changes to these rules.
The Exchange also proposes several changes to the minor rule
violation plan contained in Rule 1614.\11\ Under this rule, the
Exchange staff has the authority to issue ``traffic tickets'' for
violations that are minor in nature. While violations are generally
black and white, recipients of penalties under the minor rule violation
plan have a right to appeal the imposition of a fine to the BCC and
ultimately to the Board. The Exchange proposes to specify that the
formal rules of evidence do not apply to review hearings conducted by
the BCC under Rule 1614. The BCC will determine the time and place of
the hearing and make all determinations with regard to procedural or
evidentiary matters, as well as prescribe the time within which all
documents or written materials must be submitted. Evidence may be
presented and witnesses may testify and be subject to questioning by
the BCC and the opposing party. A person fined under Rule 1614 is
entitled to be presented by counsel who may participate fully in the
hearing.\12\
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\11\ This constitutes the requisite notification required for
minor rule violation plans under Rule 19d-1 of the Exchange Act.
\12\ This language parallels that contained in the Exchange's
existing hearing procedures contained in Rule 1605(d), which is
proposed to be amended to Rule 1606(e).
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The Exchange also proposes to clarify the application of the Rule
to particular violations. Paragraph (d) of the rule currently specifies
sanctions for violations of Rule 412 (Position Limits), Rule 1403
(Focus Reports), Rule 1404 (Requests for Data), Rule 717 (Order Entry),
Rule 803 (Quotation Parameters) and Rule 805 (Execution of Orders in
Appointed Options). The Exchange is not proposing to include any
additional rules or to change any of the sanctions with the exception
of a time parameter associated with Rule 803 and the sanctions related
to violations of Rule 805, both of which are discussed below.
Many of the sanction schedules for violations of the Rules listed
above currently contain an indication that upon a certain number of
violations, a referral will be made to the BCC. This reference to the
BCC is made because the rules currently provide for the BCC to issue
formal charges that initiate formal disciplinary actions. In light of
the proposed changes discussed above that provide for the issuance of
charges by the Chief Regulatory Officer, the Exchange proposes to
remove the reference to the BCC in the minor rule schedules and instead
indicate that the level of violation subjects the member to ``Formal
Disciplinary Action,'' which is outside of the scope of Rule 1614. This
has the same effect as the prior reference to the BCC and does not
substantively change the sanction schedules.
Rule 803 contains maximum quotation spread parameters that
currently are uniform across the five options exchanges. Unlike other
options exchanges, market makers on the ISE quote independently from
remote locations, and each quote entered by a market maker must have a
size associated with the price. Once the size associated with a price
is exhausted, the price is automatically moved down for a bid and up
for an offer by the Exchange according to parameters pre-set by the
market maker. As a result, a market maker might enter a quote with an
allowable bid-ask spread, but have its bid and/or offer automatically
moved by the Exchange so that the spread becomes too wide. Accordingly,
market makers must be given some amount of time to update a quote to
bring the spread within the allowable parameters. Currently, Rule
1614(d)(6) specifies that a market maker must take immediate action to
adjust its quote to comply with the maximum allowable spread, and that
except in unusual market conditions, immediate means within five
seconds. This five second guideline was adopted before the Exchange
initiated trading. Experience now indicates that five seconds is
insufficient for a market maker to enter an adjusted price and
communicate the new price to the Exchange. Accordingly, the Exchange
proposes to increase the guideline to ten seconds. While ten seconds
remains a very short period of time for a market maker to enter an
adjusted price, the Exchange believes it is prudent to keep the
guideline as low as practically possible. If experience with the ten
second guideline indicates that additional time is needed to create a
fair opportunity for members to comply with the spread parameters, the
Exchange will consider amending the rule to increase the guideline.
With respect to violation Rule 805, the Exchange is proposing to
increase the fine amounts and clarify the application of the sanction
schedule. Rule 805 requires market makers to execute a minimum
percentage of their total volume in appointed options measured on a
quarterly basis. The sanction schedule currently provides that a member
will receive a letter of caution for the first violation of this
requirement within a rolling twelve-month period, and will be subject
to a fine of $400, $800 and $1200 for the second, third and fourth
violations, respectively. The Exchange believes that it is appropriate
to increase the fine amounts to $500, $1000 and $2500, respectively. In
addition, the sanction schedule currently indicates that a member will
receive a letter of caution for the first offense ``within 85% of the
requirement'' and a fine for the second offense ``not within 85% of
requirement.'' The Exchange proposes that both of these references be
deleted, as they are inconsistent with each other and the intent of the
Rule 1614. In
[[Page 29191]]
particular, paragraph (a) of Rule 1614 states that the Exchange is not
required to impose a fine pursuant to the Rule with respect to the
violation of any Rule included therein, and that the Exchange may,
whenever it determines that any violation is not minor in nature, bring
a formal disciplinary action, rather than impose the sanction contained
in the minor violation schedule. The Exchange will consider the
severity of the violation of Rule 805 in every case, whether it is the
first, second, third or fourth violation within a rolling twelve-month
period and determine whether it is appropriate to apply the minor rule
sanction contained in the schedule or whether formal disciplinary
action should be taken.
The final proposed rule change is to Rule 1615, which states that
the Exchange may contract with another SRO to perform some or all of
the Exchange's disciplinary functions.\13\ This rule also states that
the Exchange shall specify to what extent the ISE's disciplinary rules
govern ISE disciplinary actions and to what extent the rules of another
SRO with which the Exchange has contracted shall govern such actions.
Notwithstanding any arrangement with another SRO, the ISE retains
ultimate legal responsibility for and control of all disciplinary
functions, and this is also expressly stated in Rule 1615.
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\13\ See Program for Allocation of Regulatory Responsibilities
Pursuant to Rule 17d-2; Order Granting Approval of Plan Allocating
Regulatory Responsibility; International Securities Exchange LLC and
National Association of Securities Dealers, Inc., Securities
Exchange Act Release No. 42815 (May 23, 2000), 65 FR 34762 (May 31,
2000).
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The Exchange proposes to adopt Supplemental Material .01 to Rule
1615 to specify that it has entered into a contract with NASDR to
provide professional hearing officers and to act as an agent of the
Exchange with respect to the ISE's disciplinary procedures. The
proposed provision states that all of the ISE's disciplinary rules
shall govern Exchange disciplinary actions. In addition, the provision
recognizes that under Rule 1606(a) (as proposed in this filing) the
professional hearing officer is designated as the chairman of a hearing
panel, and that under Rule 1606(e) (as proposed in this filing), the
chairman of the panel has the sole responsibility to determine
procedural matters. In the course of discharging his responsibilities,
the professional hearing officer shall apply the standards contained in
the NASD Code of Procedure, and policies, practices and interpretations
thereof, so long as the ISE's Rules are not in conflict.
The Exchange believes this provision strikes the appropriate
balance between adopting and applying ISE procedures and gaining the
benefit of its relationship with NASDR. Specifically, as described
above, the ISE has proposed a disciplinary procedure that is similar to
those of other exchanges and which it believes provides members with
due process. The ISE also seeks to utilize the experience that has been
developed by NASDR over decades of hearing cases and rendering
opinions. By directing the professional hearing officer to apply the
standards, policies, practices and interpretations under the NASD Code
of Procedure where ISE Rules are not in conflict, the ISE represents
that the Exchange and its members are able to benefit from this
experience. As the ISE gains experience with respect to procedural
issues arising during disciplinary hearings, it will propose its own
rules where appropriate or when, in the opinion of the Exchange, it
believes an interpretation, policy or practice different from what is
applied under the NASD Code of Procedure should be applied to ISE
disciplinary hearings. In this respect, the ISE will closely monitor
determinations made by professional hearing officers and continually
evaluate whether procedural issues should be made according to the NASD
Code of Procedure.
2. Statutory Basis
The ISE believes that the proposed rule change, as amended, is
consistent with the provisions of Section 6(b)(1) of the Act,\14\ which
requires that an exchange be organized and have the capacity to be able
to carry out the purposes of this title and to comply, and to enforce
compliance by its members and persons associated with its members, with
the provisions of the Exchange Act, the rules and regulations
thereunder, and the rules of the exchange. The proposal is designed to
further the purposes of Section 6(b)(6) \15\ requiring the rules of an
exchange to provide that its members and persons associated with its
members be appropriately disciplined for violation of the provisions of
the Exchange Act, the rules or regulation thereunder, or the rules of
the exchange, as well as Section 6(b)(7) \16\ requiring the rules of an
exchange to provide a fair procedure for the disciplining of members
and persons associated with members.
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\14\ 15 U.S.C. 78f(b)(1).
\15\ 15 U.S.C. 78f(b)(6).
\16\ 15 U.S.C. 78f(b)(7).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The ISE does not believe that the proposed rule change, as amended,
will result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
Written comments on the proposed rule change, as amended, were
neither solicited nor 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 ISE consents, the Commission will:
(A) By order approve the proposed rule change, as amended, or
(B) Institute proceedings to determine whether the proposed rule
change, as amended, should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written date, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as amended is consistent with the Act. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549-0609. Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change, as amended, 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 at the Commission's Public Reference Room.
Copies of such filing will also be available for inspection and copying
at the principal office of the ISE. All submissions should refer to
File No. SR-ISE-2001-04 and should be submitted by June 19, 2001.
[[Page 29192]]
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-13328 Filed 5-25-01; 8:45 am]
BILLING CODE 8010-01-M