SEC Approves Rules Expanding Stock-By-Stock Circuit Breakers and Clarifying Process for Breaking Erroneous Trades
The Securities and Exchange Commission today approved new rules submitted by the national securities exchanges and FINRA to expand a recently-adopted circuit breaker program to include all stocks in the Russell 1000 Index and certain exchange-traded funds. The SEC also approved new exchange and FINRA rules that clarify the process for breaking erroneous trades.
The circuit breaker pilot program was approved in June in response to the market disruption of May 6 and currently applies to stocks listed in the S&P 500 Index. Trading in a security included in the program is paused for a five-minute period if the security experiences a 10 percent price change over the preceding five minutes. The pause gives the markets an opportunity to attract new trading interest in an affected stock, establish a reasonable market price, and resume trading in a fair and orderly fashion. The circuit breaker program is in effect on a pilot basis through Dec. 10, 2010.
A list of the securities included in the Russell 1000 Index, which was rebalanced on June 25, is available on the Russell website. The list of exchange-traded products included in the pilot is available on the SEC's website. The SEC anticipates that the exchanges and FINRA will begin implementing the expanded circuit breaker program early next week.
"These circuit breakers and this more objective guidance on breaking erroneous trades will help our markets retain the confidence of investors and companies," said SEC Chairman Mary L. Schapiro. "We have worked quickly with the exchanges to take these steps, and we will continue to be very focused on addressing weaknesses exposed on May 6."
The markets will continue to use the pilot period to make appropriate adjustments to the parameters or operation of the circuit breakers as warranted based on their experience.
The erroneous trade rules were developed in response to the market disruption of May 6. The rules will make it clearer when - and at what prices - trades will be broken by the exchanges and FINRA. As with the circuit breaker program, these rules will be in effect on a pilot basis through Dec. 10, 2010.
For stocks that are subject to the circuit breaker program, trades will be broken at specified levels depending on the stock price:
Where circuit breakers are not applicable, the exchanges and FINRA will break trades at specified levels for events involving multiple stocks depending on how many stocks are involved:
On May 6, the markets only broke trades that were more than 60 percent away from the reference price in a process that was not transparent to market participants. By establishing clear and transparent standards for breaking erroneous trades, the new rules should help provide certainty in advance as to which trades will be broken, and allow market participants to better manage their risks.
At Chairman Schapiro's request, the SEC staff is also:
The SEC staff also intends to work with the markets and CFTC staff to consider recalibrating market-wide circuit breakers currently on the books - none of which was triggered on May 6. These circuit breakers apply across all equity trading venues and the futures markets. (Press Rel. 2010-167)
In the Matter of Steven W. Salutric
On September 10, an Administrative Law Judge issued an Order Making Findings and Imposing Sanction by Default (Default Order) in, Administrative Proceeding No. 3-13996. The Default Order bars Steven W. Salutric (Salutric) from association with any investment adviser. On July 14, 2010, the United States District Court for the Northern District of Illinois issued an agreed Partial Final Judgment against Salutric that permanently enjoined him from violations of Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rule 10b-5 and temporarily enjoined him from violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. SEC v. Salutric, No. 1:10-cv-00115 (N.D. Ill.). The Complaint in the civil action alleged that from at least 2007 through the present, Salutric acting as an investment adviser, misappropriated at least $1.8 million from at least 17 of his clients to support businesses and entities linked to him and, as part of a Ponzi scheme, to make payments to other clients. (Rel. IA-3082; File No. 3-13996)
Aaron Tsai Sanctioned
Aaron Tsai (Tsai), formerly of Florida, has been barred from association with any broker or dealer. The sanction was ordered in an administrative proceeding before an administrative law judge, following court-ordered injunctions against him. In March 2009 a court found he had violated the registration and reporting provisions of the federal securities laws and enjoined him from further violations. Previously, in April 2005, Tsai was enjoined from violating the registration provisions. A U.S. resident at the time of his wrongdoing, he now resides in Taiwan. (Initial Decision No. 403; File No. 3-13835)
SEC Charges Affiliated Computer Services, Inc. With Stock Options Backdating and False Disclosures
The Securities and Exchange Commission today charged Affiliated Computer Services, Inc. (ACS), a former Fortune 500 company in the business of providing business process and information technology services, alleging that during the period 1995 to 2006, ACS backdated stock option grants to its officers and employees and falsely denied that officers at the company had engaged in intentional backdating. ACS was later acquired by Xerox Corporation on Feb. 5, 2010.
The SEC's complaint, filed in federal district court in Washington, D.C., alleges that from 1995 to 2006, ACS engaged in a fraudulent and deceptive scheme to provide executives and other employees with undisclosed compensation. ACS, through its former CEO and its former CFO, backdated the grant dates of ACS stock options to coincide with the dates of low closing prices for the company's stock and then filed periodic reports with the SEC that omitted necessary expenses for backdated options.
The SEC's complaint alleges that as a result of the undisclosed backdating, ACS materially understated the company's compensation expenses in financial statements contained in public reports filed with the Commission. Additionally, ACS did not have adequate internal controls relating to the granting of stock options and did not maintain accurate books and records concerning its stock option grants.
The SEC's complaint also alleges that while the company was conducting an internal investigation of the backdating ACS, through its former CEO and former CFO, made false denials that intentional backdating by officers had occurred at ACS. As alleged in the complaint, the former CEO read a statement during an April 27, 2006 earnings call for investors denying "the intentional granting of look-back stock options to executive officers and directors in order to achieve lower option exercise prices." ACS made similar false disclosures in its May 10, 2006 Form 12b-25 and in Note 3 to its May 15, 2006 Form 10-Q stating that, "ACS does not believe that any director or officer of the Company has engaged in the intentional backdating of stock option grants in order to achieve a more advantageous exercise price." Both the former CEO and the former CFO reviewed drafts of the filings and the former CFO signed the filings. On Aug. 7, 2006, ACS filed a Form 8-K with the Commission attaching a press release, which stated that information set forth in Note 3 to its May 15, 2006 Form 10-Q concerning its stock option investigation "can no longer be relied upon."
In January 2007, ACS restated its historical financial statements. ACS's restatement recorded $51 million in compensation expenses for 72 of the 73 option grants it awarded between 1994 and 2005.
Without admitting or denying the SEC's allegations, ACS consented to a permanent injunction against violations of Section 17(a) of the Securities Act of 1933, Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder. The Commission took into account the cooperation that ACS provided the Commission staff during its investigation. [SEC v. Affiliated Computer Services, Inc., Civil Action No. 1:10-cv-1515 (D.D.C.)] (LR-21643; AAE Rel. 3182)
SEC Charges Georgia Cardiologist With Insider Trading
On Sept. 9, 2010, the Securities and Exchange Commission filed a civil action in the U.S. District Court for the Northern District of Georgia charging Dr. Bobby V. Khan, a Georgia cardiologist, with insider trading in the stock of a Georgia-based pharmaceutical company, just days before the announcement of a tender offer for the purchase of all the shares of that company.
The Commission's complaint alleges that Defendant Khan acquired material nonpublic information regarding the acquisition of Sciele Pharma, Inc. by Japanese pharmaceutical company Shionogi & Co., Ltd. from a long time business associate and friend, who was then an officer of Sciele. Following his receipt of this information, Khan opened an online brokerage account, his first since 2003. Khan then transferred approximately one-third of his then-liquid net worth into that account and purchased a combined total of 4,000 shares of Sciele stock, days before Shionogi's public announcement of its tender offer for Sciele shares on Labor Day, Sept. 1, 2008. Following the tender offer announcement, Khan sold all of his Sciele shares in October 2008, realizing substantial profits and returns in less than two months.
The Commission seeks the issuance of a permanent injunction, disgorgement and prejudgment interest, and civil monetary penalties. The Commission appreciates the assistance of the Financial Industry Regulatory Authority (FINRA) in this matter. [SEC v. Dr. Bobby V. Khan, Civil Case No. 1:10-cv-2865 (N.D. Ga.)] (LR-21644)
Immediate Effectiveness of Proposed Rule Changes
A proposed rule change filed by NASDAQ OMX PHLX (SR-Phlx-2010-122) to clarify what information must be entered into the Exchange's Options Floor Broker Management System has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal RegisterFederal Register during the week of September 13. (Rel. 34-62867)
A proposed rule change filed by NASDAQ OMX BX (SR-BX-2010-062) relating to Market Maker obligations has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of September 13. (Rel. 34-62869)
A proposed rule change filed by the Chicago Board Options Exchange (SR-CBOE-2010-078) to permit certain FLEX Options to trade under the FLEX Trading Procedures for a limited time on a closing only basis has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of September 13. (Rel. 34-62870)
Accelerated Approval of Proposed Rule Change
New York Stock Exchange filed, and the Commission has approved on an accelerated basis, a proposed rule change (SR-NYSE-2010-59) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 to amend NYSE Rule 452 and Listed Company Manual Section 402.08 to eliminate broker discretionary voting on executive compensation matters. Publication is expected in the Federal Register during the week of September 13. (Rel. 34-62874)
Approval of Proposed Rule Change
The Commission granted approval of a proposed rule change submitted by NYSE Arca (SR-NYSEArca-2010-71) pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 to list and trade shares of the ETFS White Metals Basket Trust. Publication is expected in the Federal Register during the week of September 13. (Rel. 34-62875)
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