[Federal Register Volume 59, Number 227 (Monday, November 28, 1994)]
[Unknown Section]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29214]


[Federal Register: November 28, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34987; File No. SR-CBOE-94-35]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc., Relating to 
Expedited Proceedings and Offers of Settlement

November 18, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on October 
12, 1994, the Chicago Board Options Exchange, Inc. (``CBOE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the self-
regulatory organization. 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 CBOE proposes to amend CBOE Rules 17.3, ``Expedited 
Proceeding,'' and 17.8 ``Offers of Settlement,'' to (1) specify that 
the subject of an Exchange investigation must notify the CBOE staff in 
writing within 15 days of the date of notification under paragraph (d), 
``Notice, Statement and Access,'' of CBOE Rule 17.2, ``Complaint and 
Investigation'' that he elects to proceed in an expedited manner 
pursuant to CBOE Rule 17.3; (2) reduce the time period during which 
settlement offers may be submitted by a subject in an Exchange 
disciplinary matter who seeks to resolve the matter through expedited 
proceedings pursuant to CBOE Rule 17.3; and (3) allow either the 
subject or the Exchange staff to end the negotiations for a letter of 
consent at any point during the negotiations.\1\ If either the CBOE 
staff or the subject ends the negotiations, the subject will have 15 
days to submit a written statement to the BCC pursuant to CBOE Rule 
17.2(d) indicating why no disciplinary action should be taken; the CBOE 
staff may then bring the matter to the BCC for appropriate action. If 
the subject and the CBOE staff are able to agree upon a letter of 
consent, the CBOE staff will submit the letter to the BCC.
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    \1\CBOE Rule 17.2(c), ``Report,'' requires the CBOE staff to 
submit a written report of its investigation to the Exchange's 
Business Conduct Committee (``BCC'') in every case where an 
investigation results in a finding that there are reasonable grounds 
to believe that a violation of the Act or the CBOE's rules has been 
committed. CBOE Rule 17.2(d), `'Notice, Statement and Access,'' 
requires the CBOE staff to notify the subject of the report of the 
general nature of the allegations and of the specific provisions of 
the Act or of the CBOE's rules that appear to have been violated. 
Under CBOE Rule 17.3, the subject of a report written pursuant to 
CBOE Rule 17.2 may to seek to dispose of the matter through a letter 
of consent.
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    In addition, the CBOE proposes to amend CBOE Rule 17.8, 
Interpretation and Policy .01, to provide that if the respondent and 
the CBOE staff are unable to reach agreement on a letter of consent 
under CBOE Rule 17.3 then the number of days over 30 between the time 
when the CBOE staff receives notice of the respondent's election to 
proceed in an expedited manner under CBOE Rule 17.3 and the date when 
either party ends the consent negotiations shall be deducted from the 
120-day period specific in CBOE Rule 17.8 (a), ``Submission of Offer,'' 
which provides a 120-day period within which a respondent may submit a 
settlement offer to the BCC. Regardless of the amount of time spent in 
unsuccessful consent negotiations, the respondent will have no less 
than 14 days to submit a settlement offer to the BCC pursuant to CBOE 
Rule 17.8(a).
    The text of the proposal is available at the Office of the 
Secretary, CBOE, 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 self-regulatory organization 
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 statement may be examined at 
the places specified in Item IV below. The self-regulatory organization 
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

Background
    Pursuant to CBOE Rule 17.2(d), prior to the time that the CBOE 
staff submits an investigative report to the Exchange's BCC concerning 
possible disciplinary violations, the staff if required to provide a 
notice to the subject of the report which sets forth the general nature 
of the allegations made in the report and the specific rules that 
appear to have been violated (a ``Notification Letter''). CBOE Rule 
17.2(d) provides further than, except when the BCC determines that 
expeditious action is required, the subject of an investigative report 
shall have 15 days from the date of the Notification Letter in which to 
submit a written statement to the BCC concerning why no disciplinary 
action should be taken against a subject (a ``Notification Response''). 
In accordance with CBOE Rule 17.4, ``Charges,'' the CBOE staff then 
submits the investigative report and the Notification Response to the 
BCC, and if the BCC determines that probable cause exists for finding a 
disciplinary violations, a statement of charges is issued against the 
subject.
    Upon the issuance of a statement of charges against a subject, the 
subject is referred to as a respondent under the Exchange's rules.\2\ 
Pursuant to CBOE Rule 17.8(a), a respondent has 120 calendar days from 
the date of service of a statement of charges in which to submit 
settlement offers to the BCC. However, the 120-day settlement period 
does not include the number of days in excess of seven calendar days 
that it takes the Exchange's staff to comply with a respondent's 
request for access to documents which is made properly pursuant to CBOE 
Rule 17.4(c), ``Access to Documents.''\3\ In addition, with one 
exception, a respondent is only entitled to submit a maximum of two 
settlement offers to the BCC during the 120-day settlement period.\4\ 
Upon the expiration of the 120-day settlement period, or earlier if the 
BCC rejects a respondent's second settlement offer prior to the 
expiration of such period, a hearing is scheduled with respect to the 
charges.\5\
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    \2\See CBOE Rule 17.4(b), ``Initiation of Charges.''
    \3\See CBOE Rule 17.8, Interpretation and Policy .01(c). CBOE 
Rule 17.4(c) provides that within 60 calendar days after a statement 
of charges has been served upon a respondent, the respondent may 
make a written request for access to all documents concerning the 
case that are in the Exchange's investigative file except for CBOE 
staff investigation and examination reports and materials prepared 
by the CBOE staff in connection with such reports or in anticipation 
of a disciplinary hearing. However, in providing such documents the 
CBOE staff may protect the identity of a complainant.
    \4\See CBOE Rule 17.8, Interpretation and Policy .01(a) and (b). 
The BCC, at its discretion, may permit a respondent to submit a 
third settlement offer during the 120-day settlement period if the 
pertinent details of the offer are consistent with parameters and 
criteria deemed acceptable by the BCC.
    \5\See CBOE Rule 17.8, Interpretation and Policy .02.
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    Notwithstanding the foregoing, CBOE Rule 17.3 sets forth an 
expedited proceeding process pursuant to which a subject may seek to 
resolve a disciplinary matter through a letter of consent with the 
Exchange prior to the issuance of a statement of charges against the 
subject. CBOE Rule 17.3 requires that a letter of consent contain a 
description of the facts, violation, and sanction and must be agreed 
upon by the Exchange staff and by the respondent. In addition, CBOE 
Rule 17.3 requires that all such letters of consent be accepted by the 
BCC. If the Exchange staff and the subject are unable to agree upon a 
letter of consent or if they agree upon a letter of consent and the 
letter is rejected by the BCC, CBOE Rule 17.3 provides that the matter 
shall proceed as if no letter of consent had been submitted to the BCC 
(i.e, the BCC may decide to authorize the issuance of a statement of 
charges against the subject; the subject is then entitled to submit 
settlement offers to the BCC pursuant to CBOE Rule 17.8 during the 120-
day settlement period).
    Therefore, under the Exchange's current rules, a subject who 
unsuccessfully attempts to resolve a disciplinary matter through 
expedited proceedings is permitted to take advantage of the entire 120-
day settlement period, no matter how long the subject may have spent in 
the expedited proceeding process. As a result, as noted by the Exchange 
and by the Division of Market Regulation (``Division'') of the 
Commission in connection with the Division's inspection of the 
Exchange's surveillance, investigative, and enforcement programs which 
took place last year, it is possible for a respondent to utilize the 
expedited proceeding process as a means of circumventing the 120-day 
settlement period limit and accordingly as a means of simply delaying 
the resolution of the case.\6\
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    \6\See Letter from Brandon Becker, Director, Division, 
Commission, to Charles Henry, President, CBOE, dated October 20, 
1993, and Letter from Charles Henry, President, CBOE, to Brandon 
Becker, Director, Division, Commission, dated January 14, 1994.
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Proposal
    In response to this concern, the CBOE proposes to amend CBOE Rule 
17.8 to reduce the time period during which settlement offers may be 
submitted by a subject who seeks to resolve a disciplinary matter 
through expedited proceedings, is unable to reach an agreement with 
Exchange staff, and consumes over 30 days in the expedited proceeding 
process. Specifically, under the proposal, the number of days in excess 
of 30 days that a subject spends in the expedited proceeding will be 
deducted from the 120-day settlement period applicable to the subject; 
provided, however, that in no event will a subject's settlement period 
under CBOE Rule 17.8 ever be less than 14 days.\7\
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    \7\The proposed amendment will also amend all of the references 
to the 120-day settlement period which are contained currently in 
CBOE Rule 17.8 to acknowledge that this settlement period will be 
shorter in situations where the mechanism described for limiting the 
120-day settlement period becomes applicable.
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    The mechanism for limiting settlement periods will apply only to a 
subject who attempts to resolve a disciplinary matter through expedited 
proceedings and is unable to reach an agreement with CBOE staff upon a 
letter of consent. It will not apply to a subject who attempts to 
resolve a disciplinary matter through expedited proceedings and who 
reaches an agreement with CBOE staff upon a letter of consent, but 
finds that the agreed-upon letter of consent is not accepted by the 
BCC. In addition, under this mechanism, in no event will the number of 
days between the time that the expedited proceedings process is deemed 
to end (as described below) and the time that a subject is served with 
a statement of charges be deducted from the 120-day settlement period 
applicable to the subject.
    The proposed amendment will also refine the procedures that are 
applicable to expedited proceedings under CBOE Rule 17.3 in two ways. 
First, the proposed amendment will impose a new requirement that any 
subject desiring to attempt to resolve a disciplinary matter through 
expedited proceedings submit a written notice of this fact to the 
Exchange staff within 15 days from the date of service upon the subject 
of a Notification Letter. Second, the proposed amendment will permit 
either the Exchange staff or the subject to declare an end to the 
negotiations regarding a letter of consent and thus an end to the 
expedited proceeding process at any point in the consent negotiations 
by delivering a written declaration to this effect to the other party. 
After the declaration is delivered, the subject will have 15 days to 
submit a Notification Response and the Exchange staff will then be 
permitted to bring the matter to the BCC. Currently, there is no 
provision in the CBOE's rules setting forth when a subject is deemed to 
enter the expedited proceeding process or when the expedited proceeding 
process is deemed to end, and these new procedures will establish a 
start and end date for when a subject is deemed to be in the expedited 
proceeding process so that the number of days that the subject spends 
in the expedited proceeding process can be calculated for the purposes 
of CBOE Rule 17.8.
    Finally, the proposal makes certain editorial changes to clarify 
CBOE Rules 17.8 and 17.3 without affecting their substance.
    The CBOE believes that the proposal will enhance the efficiency and 
effectiveness of the Exchange's disciplinary process. Specifically, the 
Exchange believes that by limiting the settlement period applicable to 
those subjects who consume over 30 days in the expedited proceeding 
process but cannot reach an agreement with the Exchange staff upon a 
letter of consent, the proposed changes will minimize opportunities for 
delay and thereby help to preserve evidence and the memories of 
witnesses.
Basis
    The CBOE believes that the proposal is consistent with section 6(b) 
of the Act, in general, and further the objectives of section 6(b)(1) 
and 6(b)(6), in particular, in that it promotes appropriate 
disciplinary processes and enables the Exchange to efficiently enforce 
compliance with its rules and federal securities laws.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE 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 solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days after the 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 publishes its reason for so finding or (ii) as to 
which the self-regulatory organization 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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
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 at the 
Commission's Public Reference Section, 450 Fifth Street, NW., 
Washington, DC. Copies of such filing will also be available for 
inspection and copying at the principal office of the above-mentioned 
self-regulatory organization. All submissions should refer to the file 
number in the caption above and should be submitted by December 19, 
1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\17 CFR 200.30-3(a)(12) (1993).
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Jonathan G. Katz,
Secretary.
[FR Doc. 94-29214 Filed 11-25-94; 8:45 am]
BILLING CODE 8010-01-M