Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), and Rule 19b-4 thereunder, notice is hereby given that on December 18, 2001, the Philadelphia Stock Exchange, Inc. (“Phlx” 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 Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange proposes to amend Exchange Rule 960.2(f), Determination to Initiate Charges, and Exchange Rule 970 concerning the Exchange's minor rule violation enforcement and reporting plan (“Minor Rule Plan”), by clarifying that the Exchange may aggregate, or “batch,” individual violations of Exchange order handling rules and Option Floor Procedure Start Printed Page 6962Advices (“OFPAs”)  and consider such “batched” violations as a single offense.
The proposed rules would also expressly provide that, as an alternative to “batching” of order handling violations, in certain circumstances in which the Exchange determines that there exists a pattern or practice of violative conduct without exceptional circumstances, or when any single instance of violative conduct without exceptional circumstances is deemed to be egregious, the Exchange may refer the matter to the Business Conduct Committee (“BCC”) for possible disciplinary action.
The text of the proposed rule change is available at the Phlx's Office of the Secretary and at 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 Exchange 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 Exchange 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
The purpose of the proposed rule change is to clarify that the Exchange may consider an aggregate number of violations of order handling rules and OFPAs as one single offense for purposes of initiating disciplinary action under Exchange rules, or imposing fines pursuant to fine schedules set forth in the relevant OFPAs under the Exchange's Minor Rule Plan. The Exchange believes that such aggregation of order handling violations would enable the Exchange's Market Surveillance Department to identify, through exception reporting and through on-floor surveillance, members and member organizations that fail to meet acceptable compliance thresholds for such rules and OFPAs, and to determine whether to impose fines pursuant to the Exchange's Minor Rule Plan or refer the matter to the BCC for consideration of formal disciplinary action.
The proposed rule change contemplates that aggregation of order handling violations in every instance may not be appropriate. The proposed rule change provides two alternatives to aggregation. First, the Exchange may refer the matter to the BCC for possible disciplinary action when the Exchange determines that there exists a pattern or practice of violative conduct without exceptional circumstances. The Exchange believes that the provision relating to a pattern or practice of order handling violations would enable it to identify and discipline repeat offenders, and should ultimately deter such conduct and encourage member organizations to remain compliant with the requirement.
As a second alternative to aggregation, the proposed rules would provide that, when any single instance of violative conduct without exceptional circumstances is deemed to be egregious, the Exchange may refer the matter to the BCC for possible disciplinary action. The Exchange could determine that a single instance of violative conduct is so flagrant that such an instance would not be appropriate for aggregation under the proposed rule change. The Exchange believes that this provision would allow it to discipline egregious offenders appropriately and expeditiously when the offense rises above the aggregation threshold.
The Exchange believes that the aggregation proposal, in conjunction with the alternatives to aggregation relating to a pattern or practice of order handling violations or an egregious order handling violation, provide it with the means to enforce Exchange order handling rules in a manner that should ultimately deter such conduct and result in fewer violations.
(2) Statutory Basis
The Exchange believes that the proposed rule change is consistent with section 6(b) of the Act, in general, and furthers the objectives of section 6(b)(5) of the Act, in particular, in that it is designed to perfect the mechanisms of a free and open market and the national market system, protect investors and the public interest and promote just and equitable principles of trade by codifying the way in which order handling violations will be enforced.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any inappropriate 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 Start Printed Page 6963publishes 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 is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Room. Copies of such filing will also be available for inspection and copying at the principal office of the Exchange. All submissions should refer to File No. SR-Phlx-2001-114 and should be submitted by March 7, 2002.Start Signature
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.
Margaret H. McFarland,
3. Exchange Rule 970 sets forth the criteria for the imposition of a fine (not to exceed $2,500) on any member, member organization, or any partner, officer, director or person employed by or associated with any member or member organization, for any violation of a Floor Procedure Advice, which violation the Exchange shall have determined is minor in nature. Such a fine is imposed in lieu of commencing a “disciplinary proceeding” as that term is used in Exchange Rules 960.1-960.12. Minor Rule Plan fines are subject to Rule 19d-1 under the Act.Back to Citation
4. The Exchange has agreed to amend the proposed rule change to clarify that “batching” of violations can only occur where the Exchange uses automated surveillance to detect violations. See telephone conversation between Edith Hallahan, First Vice President and Deputy General Counsel, Phlx, and Deborah Lassman Flynn, Assistant Director, Division of Market Regulation (“Division”), Commission, on February 7, 2002.Back to Citation
5. Specifically, the Exchange proposes to “batch” violations of Exchange Rules 1051 (concerning the requirement that a member or member organization initiating an options transaction must report or ensure that the transaction is reported within 90 seconds of execution to the tape) and Exchange Rule 1082 (concerning the requirement that quotes be firm for both price and size, and the requirement that marketable orders received in a size greater than the disseminated size be executed in their entirety or up to the disseminated size within 30 seconds); OFPA A-1 (concerning the requirement that a specialist shall use due diligence to ensure that the best available bid and offer is displayed for those option series in which he is assigned); OFPA F-2 (the aforementioned 90-second trade reporting requirement under the Exchange's Minor Rule Plan); and other OFPAs, pursuant to its Numerical Criteria for Bringing Cases for Violation of Phlx Order Handling Rules.Back to Citation
6. The Exchange filed this proposed rule change in accordance with the provisions of Section IV.B.i of the Commission's September 11, 2000 Order Instituting Administrative Proceedings Pursuant to Section 19(h)(1) of the Act, which required the Exchange to adopt rules establishing, or modifying existing, sanctioning guidelines such that they are reasonably designed to effectively enforce compliance with options order handling rules. See Securities Exchange Act Release No. 43268 (September 11, 2000), Administrative Proceeding File No. 3-10282 (the “Order”).Back to Citation
7. See supra note 4.Back to Citation
8. The Exchange submitted to the Commission a letter, for which it requested confidential treatment, proposing how its regulatory staff would aggregate violations of the order handling rules, where the violations are identified through the Exchange's automated surveillance system. See letter from Anne Exline Starr, First Vice President Regulatory Group, Phlx, to John McCarthy, Associate Director, Office of Compliance, Inspections and Examinations, Commission, and Deborah Lassman Flynn, Assistant Director, Division, Commission, dated January 30, 2002.Back to Citation
9. For example, the Exchange states that in the event that it discovers through investigation that a single violation or a pattern or practice of violations of Exchange order handling rules is the result of intentional conduct on the part of a member organization, nothing would preclude the Exchange from referring such a matter directly to the Business Conduct Committee for possible disciplinary action.Back to Citation
[FR Doc. 02-3630 Filed 2-13-02; 8:45 am]
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