Self-Regulatory Organizations; American Stock Exchange, Inc.; Order Granting Approval to Proposed Rule Change Relating to Disciplinary Jurisdiction and Settlement of Disciplinary Actions

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34358; File No. SR-Amex-93-42]

Self-Regulatory Organizations; American Stock Exchange, Inc.;

Order Granting Approval to Proposed Rule Change Relating to

Disciplinary Jurisdiction and Settlement of Disciplinary Actions

July 12, 1994.

I. Introduction

On December 23, 1993, the American Stock Exchange, Inc. (``Amex''

or ``Exchange'') submitted to the Securities and Exchange Commission

(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4

thereunder,\2\ a proposed rule change to amend its disciplinary rules

relating to the retention of disciplinary jurisdiction and the

settlement of disciplinary actions. On May 11, 1994, the Exchange

notified the Commission that the Constitutional changes had been

approved by the Exchange membership, and that no further Exchange

action was required for the Commission to proceed with the proposed

rule change.\3\

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\1\15 U.S.C. Sec. 78s(b)(1) (1988).

\2\17 CFR 240.19b-4 (1993).

\3\The original 19b-4 filing was filed with the Commission in

December 1993 and noted that the membership had not yet voted on the

proposed rule change to the Amex's Constitution. The Constitutional

change was approved by the Exchange membership at a special meeting

of the regular members held on April 12, 1994. See letter from

Geraldine Brindisi, Corporate Secretary, Amex, to Diana Luka-Hopson,

Branch Chief, SEC, dated May 10, 1994.

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The proposed rule change was published for comment in Securities

Exchange Act Release No. 33501 (January 21, 1994), 59 FR 4126 (January

28, 1994). No comments were received on the proposal.

II. Description

Under current Exchange Rule 341.09 member firms must file a

termination notice with the Exchange whenever a registered employee

leaves their employ.\4\ Member firms also are required to file amended

termination notices, subsequent to the registered employee's departure,

if they become aware of customer complaints or other possible

wrongdoing by the employee.\5\ Currently, Article V, Section 6 of the

Exchange's Constitution and Rule 341.08 permit the Exchange to retain

disciplinary jurisdiction even after the termination of a person's or

an entity's status as a member, member organization, or registered

employee, provided that the Exchange gives them written notice that it

is retaining jurisdiction within one year immediately following its

receipt of the written notice of termination by member firms.

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\4\Amex Rule 341.09 requires that immediate notification to the

Exchange of any termination of employment of a registered employee

or officer be submitted on Form U-5.

\5\Instruction 5 to Form U-5 states that reporting firms have a

continuing obligation to amend and update Form U-5 as it pertains to

disciplinary action against the person or entity and complaints of

possible wrongdoing. This obligation includes reportable matters

which occur or become known after initial submission of Form U-5.

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In an appeal to the Commission last year, a respondent in an Amex

disciplinary proceeding asserted that the Exchange lacked jurisdiction

over him because it failed to notify him within one year from the time

his former firm filed the termination notice reporting his voluntary

resignation.\6\ The Commission's decision agreed with the respondent,

stating that the Amex Rule required it to retain jurisdiction within

one year of its receipt of the original termination notice. However,

the Commission indicated that it was sensitive to the Exchange's

position that the one year time period should begin to run only after

the Exchange is notified by the member firm of possible violative

conduct in the amended termination notice, and suggested that the Amex

amend its rules to strengthen its jurisdictional position.

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\6\In re Leavitt, Securities Exchange Act Release No. 32441,

1993 SEC LEXIS 1427 (June 10, 1993) (Admin. Proc. File No. 3-7836).

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The proposed rule change provides that the Exchange must assert

disciplinary jurisdiction over a person or entity within one year of

the filing of a termination notice or within one year of any amendment

to such notice. By amending the applicable Constitutional and Rule

provisions, the Exchange will be able to retain jurisdiction for one

year after it is notified by the member firm of possible violative

conduct by the registered employee in an amended termination notice.\7\

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\7\As the Commission noted in the Leavitt opinion, the NASD

Rules provide for retention of disciplinary jurisdiction after an

amended notice. Specifically, Article IV, Section 4 of the NASD By-

Laws provides that the NASD may retain disciplinary jurisdiction

within two years after the effective date of termination, provided,

however, that any amendment to a notice of termination that is filed

within two years of the original notice which discloses that such

person may have engaged in conduct actionable under any applicable

statute, rule or regulation, shall operate to recommence the running

of the two-year period.

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The Exchange also is amending its Rules regarding settlement of

disciplinary matters. Article V, Section 1(b)(4) of the Amex's

Constitution and Amex Rule 345 currently require that the Exchange

issue formal charges against persons or entities it believes have

committed serious infractions of the Exchange's Rules or the federal

securities laws. The issuance of formal charges begins a lengthy

process which includes the filing of an answer to the charges, the

exchange of documents, and the scheduling of a disciplinary hearing.

The Amex's present disciplinary procedures do not provide for the

settlement of charges before formal charges are issued. In some

circumstances, however, persons who are the subject of Exchange

investigations may wish to avoid the time and expense of a hearing and

settle the matter by stipulating to certain facts and consenting to a

penalty. The rule change would allow such parties to settle claims

without undergoing the process for formal charges by allowing the party

to proceed directly to the procedures that are currently contained in

Article V, Section 2 of the Amex's Constitution and in Amex Rule 345

for ``Stipulation of Facts and Consent to Penalty.''

The procedures contained in the above provisions provide for a

hearing before a Disciplinary Panel to determine whether the party is

guilty of having committed an offense on the basis of a written

stipulation of facts and consent to a specified penalty entered into

between the party and an officer of the Exchange. The Disciplinary

Panel may fix and impose the penalty agreed to in the stipulation and

consent, or any lesser penalty. If the Disciplinary Panel rejects the

stipulation and consent to a specified penalty, the matter will proceed

as if the stipulation and consent had not been entered into, and the

stipulation and consent will be disregarded in any subsequent

proceeding.

III. Discussion

The Commission finds that the proposed rule change is consistent

with the requirements of the Act and the rules and regulations

thereunder applicable to a national securities exchange and, in

particular, with the requirements of Sections 6(b) (5) and (6) of the

Act.\8\ Specifically, Section 6(b)(5) of the Act requires that the

rules of an exchange be designed to promote just and equitable

principles of trade, to prevent fraudulent and manipulative acts and,

in general, to protect investors and the public. Section 6(b)(6) of the

Act requires that the rules of an exchange provide that its members,

and persons associated with its members, be appropriately disciplined

for violation of the rules of the exchange.

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\8\15 U.S.C. Sec. 78f(b) (5) and (6) (1988).

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The Commission believes that the rule change to provide the

Exchange with disciplinary jurisdiction over persons or entities

suspected of wrongdoing for one year after any amendment to the

termination of employment notice is made will ensure that the Exchange

will retain jurisdiction over persons for a year after it is notified

of possible offenses, and accordingly is consistent with the Exchange's

regulatory responsibilities under Section 6(b)(6) of the Act. The rule

change will enable the Exchange to investigate and conduct disciplinary

hearings pursuant to its established rules and procedures to determine

if a person or entity has committed violations of Exchange rules or the

federal securities laws, and to impose appropriate sanctions thereon.

The rule change also is consistent with Section 6(b)(5) of the Act in

that it serves to protect investors and the public interest by enabling

the Exchange to discipline persons who violate Exchange Rules or the

federal securities laws within a reasonable time after learning of

possible wrongdoing.

The Commission further believes that the rule change to allow

parties to settle claims against them without undergoing a lengthy

formal charging process is consistent with Section 6(b) (5) and (6) of

the Act. The Commission believes that the rule change will save

substantial time and expense for the Exchange and its members, and give

the Exchange more flexibility in negotiating the resolution of

enforcement actions. The rule also will continue to ensure that all

settlements will be reviewed by the Amex's Disciplinary Panel and

continues to give to the panel the ability to reject any settlement as

is appropriate. Accordingly, we believe the change should make the

Amex's enforcement proceedings more efficient without reducing the

effectiveness of its procedures. Furthermore, the Commission finds that

the proposed procedures for settling disciplinary actions are similar

to those of other national securities exchanges.\9\

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\9\See, e.g., New York Stock Exchange Rule 476(g); Chicago Board

Options Exchange Rule 17.8.

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IV. Conclusion

It Is Therefore Ordered, pursuant to Section 19(b)(2) of the

Act,\10\ that the proposed rule change (SR-Amex-93-42) is approved.

\10\15 U.S.C. 78s(b)(2) (1988).

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For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\11\

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\11\17 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-17429 Filed 7-18-94; 8:45 am]

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