Self-Regulatory Organizations; Pacific Stock Exchange, Inc.; Order Approving Proposed Rule Change Relating to Amendment of its Minor Rule Plan and Recommended Fine Schedule With Respect to Options Floor Decorum and Other Minor Trading Rule Violations

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35144; File No. SR-PSE-94-29]

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

Order Approving Proposed Rule Change Relating to Amendment of its Minor

Rule Plan and Recommended Fine Schedule With Respect to Options Floor

Decorum and Other Minor Trading Rule Violations

December 23, 1994.

I. Introduction

On October 14, 1994, the Pacific Stock Exchange, Inc. (``PSE'' or

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

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

Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 thereunder,\2\ a

proposal to amend PSE Rule 10.13(h) of its Minor Rule Plan (``MRP''):

Options Floor Decorum and Other Minor Trading Rule Violations, and to

revise its Recommended Fine Schedule relating to Options Floor Decorum

and Minor Trading Rule Violations.\3\

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

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

\3\Rule 19d-1(c)(2) under the Act, 17 CFR 240.19d-1(c)(2),

authorizes national securities exchanges to adopt minor rule

violation plans for the summary discipline and abbreviated reporting

of minor rule violations by exchange members and member

organizations. The Exchange's MRP initially was approved by the

Commission in 1985. See Securities Exchange Act Release No. 22654

(November 21, 1985), 50 FR 48853.

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The proposed rule change was published for comment in the Federal

Register on November 14, 1994.\4\ No comments were received on the

proposed rule change.

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\4\See Securities Exchange Act Release No. 34944 (November 4,

1994), 59 FR 56563.

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II. Description of the Proposal

The Exchange's proposal effects three changes to the MRP. First,

references in Rules 10.13(h)(10) and (11) to ``ten-up'' and ``Ten-Up

Rule'' are eliminated because such references no longer are applicable

in light of two recently approved rule changes.\5\ Second, the proposal

adds a reference to the MRP that addresses violations of Rule

6.82(c)(2), which requires Lead Market Makers to honor their guaranteed

markets. The Exchange believes that violations of Rule 6.82(c)(2)

already are provided for in the MRP by cross-reference, and this change

merely serves to eliminate any ambiguity. Third, the proposal amends

the MRP to add a reference to new Rule 6.66(c), which provides for the

identification of broker-dealer orders on the Options Floor.\6\ The

Exchange believes that such a disclosure requirement is similar to that

of Rule 6.86, also referred to in the MRP.

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\5\See Securities Exchange Act Release Nos. 34891 (October 25,

1994), 59 FR 54653 (approving 20-up rule); and 34946 (November 7,

1994), 59 FR 59265 (expanding Auto-Ex system capacity to 20

contracts).

\6\See Securities Exchange Act Release No. 34426 (July 21,

1994), 59 FR 38497 (approving Rule 6.66(c)).

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The Exchange's proposal also increases the recommended fines found

in the Recommended Fine Schedule for Option Floor Decorum and Minor

Trading Rule Violations.\7\ These infractions currently are listed in

the Exchange's MRP, codified as PSE Rule 10.13. Specifically, the

Exchange proposes to increase the recommended fines for the violations

specified in the following rules: 10.13(h)(2)--(4), (h)(7)--(9),

(h)(11), (h)(13)--(23), and (h)(26).\8\ The Commission has previously

approved these rules for inclusion in the MRP.\9\

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\7\PSE Rule 10.13(f) states that the Exchange shall maintain a

Recommended Fine Schedule setting forth the recommended fines for

each rule listed in the MRP, and that any changes to the Recommended

Fine Schedule shall be subject to the approval of the Commission.

\8\These rules denote the following Exchange Rule violations

with respect to options trading: failing to properly record the time

of receipt, change in limit, or increase in size of an order

[(h)(2)]; improper execution of a cross transaction [(h)(3)];

violation of procedures concerning a Market Maker's use of a Floor

Broker to effect transactions [(h)(4)]; failure to give up the name

of a clearing member by public outcry when requesting a quote and

size of the market or after effecting a trade [(h)(7)];

inadvertently placing a non-public order in the book [(h)(8)];

failing to remain for a specified amount of time after trade

processing [(h)(9)]; failure to honor a guaranteed market [(h)(10)];

failure to identify an order as for a broker-dealer [(h)[11)];

improper communication by use of hand signals or other means or

devices [(h)(12)]; improper vocalization of a trade [(h)(13)]'

violating a standard of conduct or dress [(h)(14)]; disruptive

action [(h)(15)]; disruptive action involving physical contact

[(h)(16)]; failing to act in a professional manner [(h)(17)]; use of

abusive language [(h)(18)]; time stamping [(h)(19)]; position and

exercise limit violations [(h)(20)-(21)]; acting as both Floor

Broker and Market Maker and trading in excess of 100 contracts per

month as a Market Maker [(h)(22)]; failing to request a market to be

removed from the screen when leaving a trading crowd [(h)(23)]; and

unauthorized use of telephones in trading post areas [(h)(26)].

\9\See Securities Exchange Act Release Nos. 22654 (November 21,

1985), 50 FR 48853; 32510 (June 24, 1993), 58 FR 35491; and 34322

(July 6, 1994), 59 FR 35958.

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The Exchange's proposal also increases the current fine levels for

such violations. Thus, the lowest fine on the schedule is raised from

$50 to $100, while the highest fine remains $2,500.\10\ For most of the

fine increases, the Exchange is increasing the fine levels from $100,

$250, and $500, for first-, second-, and third-time violations,\11\

respectively, to $250, $500, and $750, respectively, for such

violations. In addition, the Exchange is proposing to increase the

minimum fine for position and exercise limit violations as follows: for

between one and three violations (during a running two-year period),

the minimum fine would be increased from $100 to $250;\12\ for between

four and six violations during such a period, the minimum fine would be

increased from $100 to $500; and for seven or more violations during

such a period, the minimum fine would be increased from $100 to $750.

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\10\Pursuant to the MRP, the Exchange may impose a fine not to

exceed $5,000 on any member, member organization, or person

associated with a member or member organization. See PSE Rule

10.13(a). In appropriate circumstances (e.g., where aggravating or

mitigating circumstances are present), the Exchange may impose a

higher or lower fine than that set forth in the Recommended Fine

Schedule. In addition, the Exchange may, at its discretion, proceed

with formal disciplinary action if it determines that a given

violation is not minor in nature. See PSE Rule 10.13(f).

\11\Fines for multiple violations of Options Floor Decorum and

Minor Trading Rules are calculated on a running two-year basis.

\12\In addition, the provision for an informal letter of caution

for such violations is being eliminated.

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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, the requirements of Section 6(b)(5)\13\ 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. In addition, the Commission finds

that the Exchange's proposal is consistent with the requirements of

Section 6(b)(6) of the Act that the rules of an exchange provide that

its members are appropriately disciplined for violations of the Act,

its rules and the rules of the exchange.

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\13\15 U.S.C. 78f(b)(5) (1988).

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The Commission believes that the Exchange's ability to effectively

enforce compliance with Commission and Exchange rules by its members

and member organizations is central to its self-regulatory functions.

The inclusion of a rule in the Exchange's MRP should not be interpreted

to mean that it is not an important rule. On the contrary, the

Commission recognizes that the inclusion of minor violations of

particular rules under a minor rule violation plan may make the

Exchange's disciplinary system more efficient in prosecuting more

egregious and repeated violations of these rules, thereby furthering

its mandates to protect investors and the public interest.

The proposed additions to the MRP are either objective or technical

in nature and are easily verifiable, thereby lending themselves to the

use of expedited proceedings. The fine level increases will enhance the

Exchange's ability to enforce compliance with its rules through the

appropriate discipline of members and member organizations in a manner

that is proportionate to the minor nature of such violations. The

Exchange has represented that its membership will be informed of the

amended Recommended Fine Schedule via a regulatory bulletin. In

addition, the Recommended Fine Schedule will be recirculated

periodically (approximately yearly) pursuant to PSE Rule 10.13(f).\14\

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\14\Telephone conversation between Michael D. Pierson, Senior

Attorney, Market Regulation, PSE, and Francois Mazur, Attorney,

Division of Market Regulation, Commission, on November 15, 1994.

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IV. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the

Act,\15\ that the proposed rule change (SR-PSE-94-29) is approved.

\15\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.\16\

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\16\17 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-32154 Filed 12-29-94; 8:45 am]

BILLING CODE 8010-01-M