Self-Regulatory Organizations; New York Stock Exchange, Inc.; Order Granting Approval to Proposed Rule Change Relating to Additions to ``List of Exchange Rule Violations and Fines Applicable Thereto Pursuant to Rule 476A''

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36927; File No. SR-NYSE-95-45]

Self-Regulatory Organizations; New York Stock Exchange, Inc.;

Order Granting Approval to Proposed Rule Change Relating to Additions

to ``List of Exchange Rule Violations and Fines Applicable Thereto

Pursuant to Rule 476A''

March 5, 1996.

On December 28, 1995, the New York Stock Exchange, Inc. (``NYSE''

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 revise the List of Exchange

Rule Violations and Fines Applicable Thereto Pursuant to Rule 476A

(``476A List'') to include NYSE Rule 476(a)(10) and certain provisions

of NYSE Rule 95 and NYSE Rule 127. The NYSE also requested approval,

under Rule 19d-1(c)(2), to amend its Rule 19d-1 Minor Rule Violation

Enforcement and Reporting Plan (``MRVP'') to include the items proposed

for addition to the 476A List.\3\

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

\2\ 17 CFR 240.19b-4.

\3\ See letter from Daniel Parker Odell, Assistant Secretary,

NYSE, to Glen Barrentine, Team Leader, Division of Market

Regulation, SEC, dated December 27, 1995.

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The proposed rule change was published for comment in Securities

Exchange Act Release No. 36756 (Jan. 22, 1996), 61 FR 2856 (Jan. 29,

1996). No comments were received on the proposal.

In 1984, the Commission adopted amendments to Rule 19d-1(c) to

allow SROs to submit, for Commission approval, plans for the

abbreviated reporting of minor rule violations.\4\ The Commission, in

adopting Rule 19d-1, attempted to balance the informational needs of

the Commission against the reporting burdens of the SROs,\5\ and with

paragraph (c) of Rule 19d-1 the Commission further attempted to reduce

those reporting burdens by permitting, where immediate reporting was

unnecessary, quarterly reporting of minor rule violations. Rule 19d-

1(c), however, was intended to be limited to rules that can be

adjudicated quickly and objectively.

\4\ See Securities Exchange Act Release No. 21013 (June 1,

1984), 49 FR 23828 (June 8, 1984). Pursuant to paragraph (c)(1) of

Rule 19d-1, an SRO is required to file promptly with the Commission

notice of any final disciplinary action taken by the SRO. Pursuant

to paragraph (c)(2) of Rule 19d-1, any disciplinary action taken by

an SRO for a violation of an SRO rule that has been designated a

minor rule violation pursuant to the Plan shall not be considered

``final'' for purposes of Section 19(d)(1) of the Act if the

sanction imposed consists of a fine not exceeding $2,500 and the

sanctioned person has not sought an adjudication, including a

hearing, or otherwise exhausted his or her administrative remedies.

By deeming unadjudicated minor violations as not final, the

Commission permits the SRO to report violations on a periodic,

rather than on an immediate, basis.

\5\ See Securities Exchange Act Release No. 13762 (July 8,

1977), 42 FR 35411 (July 14, 1977).

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In 1985, the Commission approved a NYSE plan for the abbreviated

reporting of minor rule violations pursuant to Rule 19d-1(c). The NYSE

MRVP, as embodied in NYSE Rule 476A, provides that the Exchange may

designate violations of certain rules as minor rule violations. The

Exchange may impose a fine, not to exceed $5,000, on any member, member

organization, allied member, approved person, or registered or non-

registered employee of a member or member organization for a violation

of the delineated rules by issuing a citation with a specific

penalty.\6\ Such person can either accept the penalty or request a full

disciplinary hearing on the matter.\7\ The Exchange also retains the

option of bringing violations of rules subject to NYSE Rule 476A to

full disciplinary proceedings, and the Commission expects the Exchange

to do so for egregious or repeated violations.

\6\ The List is contained in Supplementary Material to NYSE Rule

476A. As discussed supra, note 4, only those fines imposed that are

not in excess of $2,500 are subject to periodic reporting. Fines

imposed pursuant to Rule 476A in excess of $2,500 are deemed final

and therefore must be reported immediately to the Commission

consistent with the reporting requirements of Section 19(d)(1) of

the Act.

\7\ As discussed supra, note 4, any sanction for which a full

disciplinary hearing was requested or administrative remedies

otherwise have been exhausted is considered final and must be

reported immediately to the Commission consistent with the reporting

requirements of Section 19(d)(1) of the Act.

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The NYSE currently is adding to the 476A List and MRVP: (1)

misstatements or omissions of fact on any submission filed with the

Exchange as provided in NYSE Rule 476(a)(10); (2) failure to comply

with the requirements of NYSE Rule 95 with respect to its order

identification requirements or prohibition of transactions by members

on the Floor involving discretion; and

[[Page 10054]]

(3) failure to comply with certain procedures under NYSE Rule 127 for

execution of block cross transactions at a price that is outside the

NYSE best bid or offer.

Specifically, the Exchange is seeking to add to the 476A List

misstatements or omissions of fact on applications for membership

approval, financial statements, reports or other submissions filed with

the Exchange in violation of NYSE Rule 476(a)(10). The Commission

believes that violations of NYSE Rule 476(a)(10) are relatively

objective and thus adding this rule to the MRVP is consistent with the

Act. The Commission, however, is concerned about situations where false

or misleading statements and omissions of material facts are willfully

made that could cause an individual or entity to be subject to a

statutory disqualification as defined in Section 3(a)(39)(F) of the

Act. In such situations, procedures under Rule 476A would not be

appropriate to address the conduct, and the Exchange should bring a

full disciplinary proceeding for any such violation and notify the

Commission immediately of any final action on the matter. In this

regard, the Exchange has represented that it would be careful to

distinguish misstatements or omissions of facts from willfully made

false or misleading statements and omissions of material fact.

Moreover, the Exchange has stated that in appropriate circumstances

(i.e., findings of a pattern of misstatements or omissions), the

Exchange would not use the procedures under Rule 476A to address the

conduct.

The Exchange also proposes to amend the Rule 476A List by adding

NYSE Rule 95, which generally prohibits transactions that involve

discretion as to (1) choice of security, (2) total amount of security

to be bought or sold, or (3) whether a transaction is to be a purchase

or sale. The Exchange is also seeking to add to the 476A List the

failure to identify appropriately a liquidating order pursuant to NYSE

Rule 95(c) (all liquidating orders effected pursuant to Rule 95(c) must

be marked on the Floor as ``BC'' in the case of an order covering a

short position or ``SLQ'' in the case of the sell order liquidating a

long position). The Commission believes that violations of NYSE Rule 95

in these circumstances are relatively objective and thus adding these

violations to the MRVP is consistent with the Act.

Finally, the Exchange is presently seeking approval to add to the

476A List the failure by members or member organizations to adhere to

certain procedures under NYSE Rule 127 for execution of block cross

transactions at a price that is outside of the NYSE best bid or offer.

Specifically, the failure to fulfill the requirement to satisfy public

limit order at the clean up price when a position is established or

increased for a member's or member organization's proprietary account

would be considered a violation for which a fine pursuant to Rule 476A

might be imposed.\8\ Moreover, the failure to utilize the procedures of

NYSE Rule 127 to satisfy all better-priced limit orders when effecting

block crosses outside the currently quoted market would also be

considered a violation for which a fine pursuant to Rule 476A might be

imposed. These specific violations of NYSE Rule 127 can be objectively

determined and therefore the Commission believes that it is consistent

with the Act to add these violations of NYSE Rule 127 to the 476A List

and MRVP.

\8\ The Exchange has represented that it would not seek to

review a member's initial determination as to whether the member

would incur excessive stock loss by satisfying all orders at the

clean-up price.

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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)(1), 6(b)(6),

6(b)(7), 6(d)(1) and 19(d) of the Act.\9\ The proposal is consistent

with the Section 6(b)(6) requirement that the rules of an exchange

provide that its members and persons associated with its members shall

be disciplined appropriately for violations of rules of the exchange.

The proposal provides an efficient procedure for appropriate

disciplining of members for rule violations that are objective and

technical in nature. Moreover, because NYSE Rule 476A provides

procedural rights to the person fined and permits a disciplined person

to request a full hearing on the matter, the proposal provides a fair

procedure for the disciplining of members and persons associated with

members, consistent with Section 6(b)(7) and 6(d)(1) of the Act.

\9\ See 15 U.S.C. Secs. 78f(b) (1), (6), (7), and (d)(1) and

Sec. 78s(d).

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The Commission also believes that the proposal provides an

alternate means by which to deter violations of the NYSE rules included

in the MRVP, thus furthering the purposes of Section 6(b)(1) of the

Act. An exchange's ability to enforce effectively compliance by its

members and member organizations with Commission and Exchange rules is

central to its self-regulatory functions. Inclusion of a rule in an

exchange's minor rule violation plan should not be interpreted to mean

it is an unimportant rule. On the contrary, the Commission recognizes

that inclusion of rules under a minor rule violation plan may not only

reduce reporting burdens on an SRO but also may make its disciplinary

system more efficient in prosecuting violations of these rules.

Moreover, because the NYSE retains the discretion to bring a full

disciplinary proceeding for any violation included on the 476A List,

the Commission believes that adding the NYSE rules outlined above will

enhance, rather than reduce, the NYSE's enforcement capabilities of

these Exchange requirements. In this regard, the Commission expects the

Exchange to bring full disciplinary proceedings if it determines that a

violation otherwise covered by the MRVP is not minor in nature, in the

event of repeated violations of a particular rule, or in any other

appropriate circumstance. Finally, the Commission believes that

subjecting violations of the above specified NYSE rules to Rule 476A

procedures will prove to be an effective response when the initiation

of a full disciplinary proceeding is unsuitable because such a

proceeding may be more costly and time-consuming in view of the minor

nature of the particular violation. By including these rules in the

476A List, the Exchange can quickly respond to violations, thereby

immediately deterring similar infractions.

IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the

Act,\10\ that the proposed rule change (SR-NYSE-95-45) is approved.

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

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For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\11\

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

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96-5784 Filed 3-11-96; 8:45 am]

BILLING CODE 8010-01-7