[Federal Register Volume 59, Number 232 (Monday, December 5, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29788]


[[Page Unknown]]

[Federal Register: December 5, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35014; File No. SR-CBOE-94-46]

 

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc., Relating to 
Amendments to the Minor Rule Violation Fine Plan

November 28, 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 November 
21, 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

    CBOE Rule 17.50, ``Imposition of Fines for Minor Rule Violations,'' 
authorizes the Exchange to impose a fine of up to $5,000 for minor 
violations of certain CBOE rules in lieu of commencing a disciplinary 
proceeding. The CBOE proposes to amend CBOE Rule 17.50 to extend the 
``lookback period'' for determining certain sanctions, clarify appeal 
procedures, and limit the number of times a member may request 
verification of certain fines. Specifically, the Exchange proposes to 
amend CBOE Rule 17.50 to: (1) extend from nine to 18 months the 
``lookback period'' for failure to submit accurate trade information 
pursuant to CBOE Rule 6.51, ``Reporting Duties;'' and (2) create an 18-
month ``lookback period'' for failure to submit trade information to 
the price reporter pursuant to CBOE Rule 6.51.
    The CBOE also proposes to amend CBOE Rule 17.50(g)(6) to provide 
that the maximum fine authorized under the Exchange's trading and 
decorum policies may be imposed for a first or second offense if 
warranted under the circumstances in the view of the Floor Officials 
Committee. In addition, the CBOE proposes to amend Interpretation and 
Policy .03 to Exchange Rule 17.50 to impose a cap on the number of 
transactions during a particular month for which a member fined more 
than twice in a 18-month period for failure to submit accurate trade 
information or failure to submit trade information to the price 
reporter may request verification of the fine. Under the amended 
interpretation, a member fined more than twice in an 18-month period 
may request verification of the greater of 50 transactions during a 
month or 10% of the number of transactions deemed not to be in 
compliance with CBOE Rule 6.51.
    Moreover, the CBOE proposes to amend CBOE Rule 17.50 to (1) clarify 
the appeal procedures for fines imposed for trading conduct and decorum 
violations; (2) allow waiver of the forum fee for appeals of fines 
imposed pursuant to CBOE Rule 17.50 if a fine is reduced on appeal; and 
(3) make the procedures applicable to requests by the Exchange's Board 
of Directors (``Board'') for review by the Board of determinations 
rendered under CBOE Rule 17.50 consistent with the procedures 
applicable to similar Board requests for review under CBOE Rule 19.5, 
``Review.'' Finally, the proposal makes certain nonsubstantive 
editorial changes to clarify CBOE Rule 17.50.
    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 statements 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

    CBOE Rule 17.50 authorizes the Exchange to impose a fine, not to 
exceed $5,000, for minor violations of certain CBOE rules in lieu of 
commencing a disciplinary proceeding. The purpose of the proposal is to 
revise CBOE Rule 17.50 to (1) extend from nine to 18 months the 
``lookback period'' for failure to submit accurate trade information; 
(2) establish an 18-month ``lookback period'' for failure to submit 
trade information to the price reporter; (3) impose a cap on the number 
of transactions during a particular month for which a member fined more 
than twice in an 18-month period for failure to submit accurate trade 
information or failure to submit trade information to the price 
reporter may request verification; (4) clarify the appeal procedures 
for fines imposed for trading conduct and decorum violations; (5) allow 
waiver of the forum fee for appeals of fines imposed pursuant to CBOE 
Rule 17.50 if a fine is reduced on appeal; and (6) make the procedures 
applicable to requests by the Exchange's Board for review by the Board 
of determinations rendered under CBOE Rule 17.50 consistent with the 
procedures applicable to similar Board requests for review under CBOE 
Rule 19.5. In addition, the proposal makes certain editorial changes to 
clarify CBOE Rule 17.50 without affecting its substance.
    Currently, CBOE Rule 17.50(g)(4) provides for a nine month 
``lookback period'' for failure to submit accurate trade information. 
Specifically, the sanction schedule applicable with respect to such 
violations is graduated so that the sanctions imposed start to increase 
with the third violation committed during a nine month period and 
continue to increase with each subsequent violation committed during 
such nine month period. Under the proposal, the sanction schedule for 
failure to submit accurate trade information will retain its current 
structure except that the current nine month ``lookback period'' will 
be replaced with an eighteen month ``lookback period.''
    Similarly, the Exchange proposes to amend CBOE Rule 17.50(g)(5), 
which currently contains no ``lookback period'' for failure to submit 
trade information to the price reporter, to also provide for an 
eighteen month ``lookback period.'' As amended, the structure of the 
``lookback period'' for failure to submit trade information to the 
price reporter will be the same as the amended ``lookback period'' for 
failure to submit accurate trade information.
    The Exchange believes that the proposed increased ``lookback 
periods'' will help to sanction recidivists more effectively by 
increasing the sanctions for repeat violators. In addition, the 
Division of Market Regulation (``Division'') of the Commission 
recommended to the Exchange in connection with the Division's 1993 
inspection of the Exchange's surveillance, investigative, and 
enforcement programs that the ``lookback periods'' under CBOE Rule 
17.50 be increased,\1\ and the proposed ``lookback period'' increases 
are in accordance with the Exchange's response to the Division 
concerning the implementation of this recommendation.\2\
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    \1\See Letter from Brandon Becker, Director, Division, 
Commission, to Charles Henry, President, CBOE, dated October 20, 
1993.
    \2\See Letter from Charles Henry, President, CBOE, to Brandon 
Becker, Director, Division, Commission, dated January 14, 1994.
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    The CBOE also proposed to amend Interpretation and Policy .03 to 
CBOE Rule 17.50 to limit the number of transactions during a particular 
month for which a member fined more than twice during an 18-month 
period under CBOE Rule 17.50(g)(4) or (g)(5) may request verification 
of the fine. Currently, there is no limitation on the number of 
transactions for which a member may request verification under 
Interpretation and Policy .03. Under the proposal, if during an 18-
month period a member receives three or more fines pursuant to CBOE 
Rules 17.50(g)(4) or 17.50(g)(5), a limitation would be imposed on the 
member's ability to request verification of the fines. Specifically, in 
requesting verification of such fines, the maximum number of 
transactions during a particular month with respect to which a member 
could request verification would be limited to the greater of (1) 50 
transactions or (2) 10% of the number of transactions deemed not to be 
in compliance with CBOE Rule 17.50(g)(4) or 17.50(g)(5). The proposed 
cap would apply separately to fines imposed under CBOE Rules 
17.50(g)(4) and 17.50(g)(5).
    The CBOE states that in most instances a request for verification 
involves the review by the Exchange of the hard copies of a member's 
trading tickets in order to determine whether keypunch errors have 
occurred in the inputting of the data contained on the tickets. The 
majority of the requests involve the review of between 30 and 150 
transactions, and the number of transactions with respect to which 
review has been requested by a member has ranged in scope from as 
little as three transactions to as many as 700 transactions. Since the 
end of the third quarter of 1993, contemporaneous with an increase in 
trading volume on the Exchange, the number of fines imposed pursuant to 
CBOE Rules 17.50(g)(4) and (g)(5) has risen, resulting in a higher 
number of requests for verification. Consequently, the Exchange has had 
to devote an increasing amount of staff time and resources to handling 
these requests.
    The Exchange believes that the proposed cap is necessary to reduce 
the amount of staff time and resources which are currently devoted to 
processing verification requests and to alleviate the current 
administrative burden associated with responding to these requests. In 
addition, the Exchange believes that the proposed cap strikes an 
appropriate balance between not overburdening the Exchange's 
surveillance staff with the processing of verification requests and 
leaving in place a meaningful and reasonable opportunity for CBOE 
members to request verification. Specifically, the Exchange believes 
that the proposed cap is reasonable based on its analysis that the cap 
will affect a small percentage of the members requesting verification 
while at the same time materially reducing the total number of 
transactions that will need to be reviewed by the Exchange's 
surveillance staff.
    The CBOE also proposes several amendments to revise the procedures 
applicable to the appeal and review of fines imposed under CBOE Rule 
17.50. First, the Exchange notes that all fines imposed under CBOE Rule 
17.50 are appealable to the CBOE's BCC, except for fines imposed for 
trading conduct and decorum violations not exceeding $2,500, which are 
appealable to the Exchange's Appeals Committee and are governed by CBOE 
Chapter 19, ``Hearings and Review.'' The CBOE proposes to amend 
Exchange Rule 17.50 to clarify the procedures applicable to appeals 
from fines imposed for trading conduct and decorum violations by adding 
paragraph (d)(1), which notes that, among other things, a person fined 
for such violations may contest the Exchange's determination by filing 
a written application with the Secretary of the Exchange pursuant to 
CBOE 19.2, ``Submission of Application to Exchange,'' and stating that 
a hearing, if requested, will be conducted in accordance with the 
provisions of CBOE Rules 19.3, ``Procedure Following Applications for 
Hearing,'' and 19.4, ``Hearing.'' Under paragraph (d)(2), the Appeals 
Committee may waive the forum fee if the Appeals Committee finds that 
the person charged is guilty of one or more of the rule violations 
alleged and the sole disciplinary sanction imposed by the Appeals 
Committee is a fine which is less than the total fine initially imposed 
by the Exchange.
    In addition, after a hearing or review in which the BCC determines 
that a person is guilty of a rule violation, CBOE Rule 17.50(c) 
currently requires the BCC to impose a forum fee of $100 against the 
person if the determination was reached without a hearing, or $300 if a 
hearing was conducted. The CBOE proposes to amend the rule to provide 
the BCC with the discretion to waive the forum fee if the BCC finds 
that the person charged is guilty of one or more of the rule violations 
alleged and the sole disciplinary sanction imposed by the BCC is a fine 
which is less than the total fine initially imposed by the Exchange. 
The CBOE believes that this amendment will lead to a more equitable 
resolution of certain appeals under CBOE Rule 17.50 in situations where 
the BCC believes that a waiver of the forum fee is warranted, for 
example, when a fine is reduced on appeal.
    The CBOE also proposes to amend CBOE Rule 17.50 to make the 
procedures applicable to requests by the Board for review by the Board 
of determinations of the BCC and Appeals Committee under CBOE Rule 
17.50 consistent with the procedures applicable to requests by the 
Board for Board review of other decisions of those committees as 
provided in CBOE Rules 17.10(c) and 19.5(a).
    Finally, the CBOE proposes a nonsubstantive change to clarify CBOE 
Rule 17.50(g)(1), ``Violation of position limit rules,'' by deleting a 
potentially confusing reference to CBOE Rule 24.4, ``Position Limits 
for Broad-Based Index Options.'' Currently, CBOE Rule 17.50(g)(1), 
which applies to violations of all of the Exchange's position limit 
rules, only specifically references CBOE Rules 4.11, ``Position 
Limits,'' and 24.4(a), and does not specifically reference the other 
CBOE rules which determine compliance with CBOE Rule 4.11, the 
Exchange's general rule governing position limits.\3\ Although the CBOE 
states that this is not technically incorrect--because all position 
limit violations, no matter what type of option they relate to, are 
violations of CBOE Rule 4.11--the current references are potentially 
confusing. Therefore, to eliminate potential confusion, the CBOE 
proposes to delete the reference to CBOE Rule 24.4(a), so that CBOE 
Rule 17.50(g)(1), as amended, will refer only to CBOE Rule 4.11.
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    \3\Other CBOE position limit rules which establish ways to 
determine compliance with CBOE Rule 4.11 with respect to particular 
types of options include CBOE Rule 24.A, ``Position Limits for 
Industry Options,'' CBOE Rule A.7, ``Position Limits';' (Flexible 
Exchange Options), CBOE Rule 21.3, ``Position Limits'' (Treasury 
Bonds and Notes), and CBOE Rule 23.3, ``Position Limits'' (interest 
rate options).
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    The CBOE believes that the proposed rule change is consistent with 
Section 6(b) of the Act, in general, and furthers the objectives of 
Sections 6(b)(1) and 6(b)(7), in particular, in that it enhances the 
effectiveness and fairness of the Exchange's disciplinary procedures.

(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, N.W., Washington, D.C. 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, N.W., 
Washington, D.C. 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 27, 
1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-29788 Filed 12-2-94; 8:45 am]
BILLING CODE 8010-01-M