[Federal Register Volume 60, Number 25 (Tuesday, February 7, 1995)]
[Notices]
[Pages 7239-7241]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-2907]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35300; File No. SR-CBOE-94-46]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 1 to the Proposed Rule Change by the Chicago Board 
Options Exchange, Inc., Relating to Amendments to the Minor Rule 
Violation Fine Plan

January 31, 1995.
    On November 21, 1994, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with 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 amend certain provisions of 
CBOE Rule 17.50, ``Imposition of Fines for Minor Rule Violations.''

    \1\15 U.S.C. 78s(b)(1) (1998).
    \2\17 CFR 240.19b-4 (1994).
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    Notice of the proposed rule change appeared in the Federal Register 
on December 5, 1993.\3\ No comments were received on the proposal.\4\

    \3\See Securities Exchange Act Release No. 35014 (November 28, 
1994), 59 FR 62429 (December 5, 1994).
    \4\On January 10, 1995, the CBOE amended its proposal to provide 
that fines imposed pursuant to CBOE Rule 17.50(b)(7) are subject to 
review by the Exchange's Appeals Committee. See Letter from Arthur 
B. Reinstein, Attorney, CBOE, to Sharon Lawson, Assistant Director, 
Division of Market Regulation, Commission, dated January 9, 1995 
(``Amendment No. 1''). CBOE Rule 17.50(g)(7) establishes a fine 
schedule for failures to submit trade data on the trade date. See 
order approving File No. SR-CBOE-94-50.
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    The CBOE proposes to amend CBOE Rule 17.50 to (1) extend the 
``lookback period'' for determining certain sanctions; (2) limit the 
number of transactions for which a member may request verification; (3) 
clarify appeal procedures; (4) provide for the waiver of certain fees 
for appeals; (5) conform procedures for requests for review under CBOE 
Rule 17.50 with other CBOE rules; and (6) clarify certain provisions of 
the rule.
    Specifically, the Exchange proposes to (1) amend CBOE Rule 
17.50(g)(4) to 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) amend CBOE Rule 17.50(g)(5) to 
create an 18-month ``lookback period'' for failure to submit trade 
information to the price reporter pursuant to CBOE Rule 6.51. The 
Exchange 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.
    The CBOE proposes to amend Exchange Rule 17.50, Interpretation and 
Policy .03 to 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. Under Interpretation and Policy .03, as amended, 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.
    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 CBOE proposes to amend Exchange Rule 17.50(c)(1) to 
state explicitly the rights of members fined under the rule. The CBOE 
also proposes to add paragraph (d)(1) to clarify the procedures 
applicable to appeals from fines imposed for trading conduct and 
decorum violations to note 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 
Rule 19.2, ``Submission of Application to Exchange,'' and 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, the CBOE proposes to amend CBOE Rule 17.50(c) to 
provide the Exchange's Business Conduct Committee (``BCC'')\5\ and the 
Appeals Committee with the discretion to waive the forum fee provided 
for if the applicable committee finds that the person charged is guilty 
of one or more of the rule violations alleged and the sole disciplinary 
sanction imposed 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 committees believe that a waiver of the 
forum fee is warranted; such situations arise, for example, when a fine 
is reduced on appeal.

    \5\The BCC has decision-making authority concerning possible 
violations within the disciplinary jurisdiction of the Exchange. The 
BCC reviews CBOE staff investigatory reports and issues statements 
of charges, accepts or rejects offers of settlement and letters of 
consent, holds hearings and conducts summary proceedings, serves 
written decisions on the parties to proceedings, and, when 
appropriate, imposes sanctions, including expulsions, suspensions, 
fines, censures, and other fitting sanctions.
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    The CBOE also proposes to amend CBOE Rule 17.50(c)(3) and to add 
(d)(3) to make the procedures applicable to requests by the Board of 
Directors (``Board'') for review by the Board of determinations of the 
Appeals Committee under CBOE Rule 17.50 consistent with the procedures 
applicable to similar requests regarding other decisions of these 
committee 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 [[Page 7240]] 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.\6\ 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.

    \6\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.
    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)(5), 6(b)(6), and 
6(b)(7).\7\ Section 6(b)(6) of the Act requires that the rules of the 
Exchange provides that its members be appropriately disciplined for 
violations of the Act, the rules and regulations thereunder, and the 
Exchange's rules. As noted above, the CBOE proposes to amend CBOE Rule 
17.50 to (1) extend to 18 months the ``lookback period'' for failure to 
submit accurate trade information pursuant to CBOE Rule 6.51;\8\ (2) 
create an 18-month ``lookback period'' for failure to submit trade 
information to the price reporter pursuant to CBOE Rule 6.51;\9\ and 
(3) provide that the maximum fine authorized under the Exchange's 
trading and decorum policies may be imposed for a first or second 
offense if the Floor Officials Committee believes that such action is 
warranted. The Commission believes that these amendments to CBOE Rule 
17.50 will provide for prompt, effective and appropriate discipline of 
CBOE Rule 6.51 and of the Exchange's trading and decorum policies.

    \7\15 U.S.C. 78f(b)(5), (6), and (7) (1988).
    \8\See CBOE Rule 17.50(g)(4).
    \9\See CBOE Rule 17.50(g)(5).
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    In addition, the Commission notes that the current fine schedules 
provided in CBOE 17.50 for violations of CBOE rule 6.51 are graduated 
to account for repeat offenders and that allowing the Exchange to 
create 18-month ``lookback periods'' is consistent with the existing 
framework of graduated fines and may increase the CBOE's ability to 
deter repeat offenders. By encouraging market makers and floor brokers 
to submit accurate trade information and to submit information to the 
price reporter, the proposal should enhance the accuracy of the CBOE's 
audit trails and, in turn, protect investors and the public interest by 
helping the CBOE to enforce compliance by its members with the federal 
securities laws and the CBOE's rules.
    The Commission also believes that it is reasonable for the CBOE to 
amend CBOE Rule 17.50, Interpretation and Policy .03 to limit the 
number of transactions during a 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. Specifically, under the 
proposal, if a member receives three or more such fines during an 18-
month period he will be permitted to request verification of the 
greater of 50 transactions or 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 will apply separately to fines imposed under CBOE Rules 
17.50(g)(4) and 17.50(g)(5).
    The Commission believes that the proposal to amend CBOE Rule 17.50, 
Interpretation and Policy .03 to limit the number of transactions 
during a particular month for which a member may request verification 
strikes a reasonable balance between providing CBOE members with a 
reasonable opportunity to request verification of fines imposed for 
failure to submit accurate trade information or failure to submit trade 
information to the price reporter and limiting the administrative 
burden associated with verification of the transactions. In this 
regard, the CBOE states that the majority of verification requests 
involve the review of between 30 and 150 transactions and that the 
Exchange has had to devote an increasing amount of CBOE staff time and 
resources to processing the verification requests. According to the 
CBOE, the proposed cap will affect a small percentage of the members 
requesting verification and will materially reduce the total number of 
transactions that will be reviewed by the Exchange's surveillance 
staff.
    At the same time, the Commission believes that the proposed 
amendment to CBOE Rule 17.50, Interpretation and Policy .03 does not 
compromise members' rights to fair procedures in CBOE disciplinary 
proceedings. Specifically, the Commission notes that the limit on 
verification requests does not apply to members who receive less than 
three fines for violations of either CBOE Rule 17.50(g)(4) or 
17.50(g)(5) during an 18-month period and that the proposal limits, but 
does not eliminate, a member's ability to request verification of 
transactions during a particular month. In addition, the Commission 
notes that a member fined under CBOE Rule 17.50 may contest the fine 
imposed pursuant to CBOE Rule 17.50 through the submission of a written 
answer as provided in CBOE Rule 17.5, ``Answer,'' when the matter will 
become subject to review by the Exchange's BCC.\10\

    \10\See CBOE Rule 17.50(c).
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    The Commission believes that it is reasonable for the CBOE to amend 
CBOE Rule 17.509c)(1) to state explicitly the right of members fined 
under CBOE Rule 17.50, including members who receive fines exceeding 
$2,500 for trading conduct and decorum policy violations, to contest 
the Exchange's determination by filing an answer under CBOE Rule 17.5. 
In addition, the Commission believes that it is reasonable for the 
Exchange to add paragraph (d) to CBOE Rule 17.50, which specifies the 
procedures applicable to appeals of trading conduct and decorum policy 
violation fines not exceeding $2,500 imposed pursuant to CBOE Rule 
17.50(g)(6) and fines imposed pursuant to CBOE Rule 27.50(g)(7).\11\

    \11\See Amendment No. 1, supra note 4.
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    The Commission believes that the amendments to CBOE Rule 17.50(c) 
and addition of paragraph (d) clarify the appeal procedures available 
to members fined under CBOE Rule 17.50, thereby helping to ensure that 
the Exchange provides fair procedures for the disciplining of members, 
consistent with Section 6(b)(7) of the Act. The Commission believes 
that right to appeal sanctions imposed under CBOE Rule 17.50 will help 
to safeguard the procedural rights of sanctioned persons while 
preserving the Exchange's ability to adjudicate minor rule violations 
in a timely and efficient manner through the process established in 
CBOE Rule 17.50.
    In addition, the Commission believes that it is reasonable for the 
Exchange to amend its rules to provide BCC and the 
[[Page 7241]] Appeals Committee with the discretion to waive the forum 
fee established in CBOE Rule 17.50 if the BCC or the Appeals Committee 
determines that the person charged is guilty of one or more of the rule 
violations alleged and the sole disciplinary sanction imposed by the 
BCC or the Appeals Committee is a fine which is less than the total 
fine initially imposed for the violation. By allowing the BCC and the 
Appeals Committee to waive the forum fees, the Commission believes that 
the proposal should enhance the fairness of the CBOE 's disciplinary 
system and help to ensure that appropriate and equitable discipline is 
imposed under CBOE Rule 17.50.
    The Commission believes that it is reasonable for the Exchange to 
amend CBOE Rule 17.50 to provide that the Exchange department which 
commenced an action under CBOE Rule 17.50, the person charged, the 
President of the Exchange, and the Board may require a review by the 
Board of any determination of the Appeals Committee under CBOE Rule 
17.50 by proceeding in the manner provided in CBOE Rule 19.5, 
``Review.'' The Commission notes that the provision is similar to the 
current CBOE rule governing requests for review of BCC determinations.
    Finally, the Commission believes that the CBOE's proposal to make 
nonsubstantive changes to CBOE Rule 17.50(g)(1) is consistent with the 
Act because it is designed to clarify the rule.
    The Commission finds good cause for approving Amendment No. 1 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register in 
order to establish procedures applicable to appeals of fines imposed 
pursuant to CBOE Rule 17.50(g)(7). By providing members with a means to 
appeal such fines, the Commission believes that the procedures set 
forth in Amendment No. 1 should help to ensure that fines are imposed 
fairly under CBOE Rule 17.50(g)(7). Accordingly, the Commission 
believes it is consistent with sections 6(b)(5) and 19(b)(2) of the Act 
to approve Amendment No. 1 on an accelerated basis.
    It is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\12\ that the proposed rule change (File No. SR-CBOE-94-46) is 
approved.

    \12\15 U.S.C. 78s(b)(2) (1982).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\

    \13\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-2907 Filed 2-6-95; 8:45 am]
BILLING CODE 8010-01-M