[Federal Register Volume 60, Number 24 (Monday, February 6, 1995)]
[Notices]
[Pages 7091-7092]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-2750]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35297; File No. SR-CBOE-94-50]


Self-Regulatory Organizations; Order Granting Accelerated 
Approval to a Proposed Rule Change by the Chicago Board Options 
Exchange, Inc. Relating to As-of-Add Submissions

January 30, 1995.
    On December 1, 1994, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder,\2\ filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change relating to the fees assessed 
by the Exchange against members pursuant to Exchange Rule 2.26 for 
submitting trade information under Exchange Rule 6.51\3\ after the 
trade date (each an ``as-of-add''). Notice of the proposal and the 
Commission's order granting partial accelerated approval of the 
proposal appeared in the Federal Register on January 12, 1995.\4\ No 
comment letters were received on the proposed rule change. This order 
approves the remaining portion of the CBOE proposal.

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1992).
    \3\Among other things, Rule 6.51 requires that each transaction 
be immediately reported to the Exchange in a form and manner 
prescribed by the Exchange. See Rule 6.51(a).
    \4\See Securities Exchange Act Release No. 35190 (January 3, 
1995), 60 FR 3008 (January 12, 1995) (``Exchange Act Release No. 
35190'').
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    The purpose of the proposed rule change was to amend the as-of-add 
fee pilot program in three ways and to have the pilot program, as 
amended, made permanent. The Commission has already approved those 
portions of the proposal: (1) Permanently approving the as-of-add fee 
pilot program; (2) placing a ceiling on the monthly as-of-add fee that 
can be assessed against individual and clearing members pursuant to 
CBOE Rule 2.26; and (3) amending Rule 2.26 to authorize the Exchange to 
suspend rule 2.26 (and thereby waive the as-of-add fees that would 
otherwise be due) in exigent circumstances.\5\

    \5\Id.
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    The only portion of the proposal which has not yet been approved by 
the Commission is a proposed amendment to CBOE Rule 17.50(g) to include 
a fine schedule for substantial and repeated submissions by members of 
as-of-adds (``Minor Rule Plan Amendment''). Specifically, any member 
who exceeds the as-of-add rate considered nominal under Rule 2.26 by 
three times or more for two consecutive months\6\ would be subject to a 
fine of $250 for the first offense, $500 for the second offense, and 
$1,000 for each offense thereafter occurring during any 12-month 
period.\7\ The fines imposed pursuant to Rule 17.50(g) would be in 
addition to any fees due under Rule 2.26 and would serve to penalize 
those members who submit the greatest number of excessive as-of-add 
trades. Furthermore, in any circumstance in which a member's use of as-
of-adds suggests that it may be appropriate to impose more severe 
disciplinary sanctions than would be provided for under Rule 17.50(g), 
the member would be subject to investigation and discipline in 
accordance with Chapter XVIII of CBOE's rules.\8\

    \6\The nominal as-of-add rate is currently 2.4% of an individual 
member's monthly trades and 1.2% of a clearing member's monthly 
trades. Accordingly, fines under this proposal would currently be 
triggered for an individual member whenever that member's as-of-add 
submissions equal or exceed 7.2% of total trade submissions in each 
of two consecutive months, while fines to clearing firms would be 
triggered whenever a clearing member's as-of-add submissions equal 
or exceed 3.6% of total trade submissions for each of two 
consecutive months.
    \7\These fines would be assessed on a rolling basis. For 
example, an individual member who is cited for a first offense for a 
minor rule violation for exceeding the nominal allowable number of 
as-of-adds by three or more times during each of December and 
January would be fined for a second offense if that member again 
exceeds the allowable number of as-of-adds by three or more times 
during February. See Exchange Act Release No. 35190, supra note 4.
    \8\The CBOE has issued a Regulatory Circular to members 
describing the portions of the proposal previously approved and the 
Minor Rule Plan Amendment. The Commission notes, however, that this 
Regulatory Circular stated that the Minor Rule Plan Amendment would 
apply retroactively as of January 1, 1995. See CBOE Regulatory 
Circular RG94-85, dated December 28, 1994. Because the Commission 
generally does not approve the retroactive application of rule 
changes, particularly with regard to the assessment of fees and 
fines, immediately following approval of the Minor Rule Plan 
Amendment, the Exchange will issue another Regulatory Circular 
notifying members of the approval and the revised implementation 
date for Minor Rule Plan Amendment, which is tentatively scheduled 
for February 1, 1995. This Regulatory Circular will also emphasize 
that serious instances or extended periods of as-of-add submissions 
will be subject to investigation and possible disciplinary action 
notwithstanding Rule 17.50(g).
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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, the requirements of Section 6(b)(5).\9\ Specifically, the 
Commission finds that incorporating a fine schedule into Rule 17.50(g) 
for substantial and repeated submissions of as-of-adds fees addresses 
the suggestions previously noted by the [[Page 7092]] Commission 
concerning the assessment of as-of-add fees\10\ and may serve to 
further reduce the total number of as-of-adds by providing a clear 
sanction in those circumstances in which discipline is clearly 
appropriate. As a result, the Commission believes that the proposal 
should benefit all Exchange members, and ultimately investors, by 
increasing the efficiency with which Exchange transactions are 
processed as well as helping the Exchange to defray the additional 
costs it incurs with the processing of as-of-adds.

    \9\15 U.S.C. 78f(b)(5) (1988).
    \10\See Securities Exchange Act Release No. 34783 (October 3, 
1994), 59 FR 51459 (October 11, 1994).
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    The Commission believes that an exchange's ability to effectively 
enforce compliance by its members and member organizations with 
Commission and Exchange rules is central to its self-regulatory 
functions. The inclusion of a rule in an exchange's minor rule 
violation plan, therefore, 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/or repeated violations of 
these rules, thereby furthering its mandates to protect investors and 
the public interest.
    The Commission believes that adding the Minor Rule Plan Amendment 
is consistent with Sections 6(b)(5) and 6(b)(6) of the Act in that the 
purpose of Rule 17.50 is to provide for a response to a violation of 
Exchange rules or policy when a meaningful sanction is needed, but when 
initiation of a disciplinary proceeding pursuant to CBOE Rule 17.2 et 
seq. is not suitable because such a proceeding would be more costly and 
time-consuming than would be warranted given the nature of the 
violation. Rule 17.50 provides for an appropriate response to minor 
violations of certain Exchange rules, while preserving the due process 
rights of the party accused through specified, required procedures.
    Furthermore, the Commission finds that violations of the Minor Rule 
Plan Amendment are objective and easily verifiable, thereby lending 
itself to the use of expedited proceedings. Noncompliance with Rule 
17.50(g) may be determined objectively and adjudicated quickly without 
the complicated factual and interpretative inquiries associated with 
more sophisticated Exchange disciplinary proceedings. If the Exchange 
determines that a violation of Rule 17.50(g) is not minor in nature, 
the Exchange retains the discretion to initiate full disciplinary 
proceedings in accordance with Chapter XVII of CBOE's rules. The 
Commission expects the CBOE to bring full disciplinary proceedings in 
appropriate cases (e.g., in cases where the violation is egregious or 
where there is a history or pattern of repeat violations).
    The Commission finds good cause for approving the Minor Rule Plan 
amendment prior to the thirtieth day after the date of publication of 
notice of filing thereof in the Federal Register in order to provide 
the Exchange with adequate time to notify members of the approval of 
the Minor Rule Plan Amendment prior to the scheduled implementation 
date of February 1, 1955.\11\ Because any fines to be assessed pursuant 
to the Minor Rule Plan Amendment will be based on calendar month 
submissions of as-of-adds, accelerated approval will allow the Exchange 
to begin receiving the benefits of the rule without having to delay 
implementation for an additional month. Additionally, because the 
Exchange has already distributed a Regulatory Circular to members 
stating that the Minor Rule Plan Amendment, once approved, would be 
given retroactive effectiveness to January 1, 1995,\12\ members are 
already on notice of the proposal and will not, in the Commission's 
opinion, be harmed by shifting the implementation date to February 1, 
1995. Accordingly, the Commission believes it is consistent with 
Sections 6(b)(5) and 19(b)(2) of the Act to approve the remaining 
portion of the proposed rule change on an accelerated basis.

    \11\See supra note 8.
    \12\Id.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (File No. SR-CBOE-94-50) is 
approved.

    \13\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.\14\

    \14\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-2750 Filed 2-3-95; 8:45 am]
BILLING CODE 8010-01-M