[Federal Register Volume 61, Number 139 (Thursday, July 18, 1996)]
[Notices]
[Pages 37513-37515]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-18172]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37421; File No. SR-CBOE-96-02]


Self-Regulatory Organizations; Order Granting Approval to 
Proposed Rule Change by the Chicago Board Options Exchange, Inc., 
Relating to the Liability of the Exchange and its Directors, Officers, 
Employees, and Agents, Precluding Certain Types of Legal Actions by 
Members Against Such Persons, and Requiring Members to Pay the 
Exchange's Costs of Litigation Under Specified Circumstances

July 11, 1996.

I. Introduction

    On January 18, 1996, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``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 various Exchange rules 
pertaining to the liability of the Exchange, to adopt new Rule 6.7A 
prohibiting a member from instituting certain types of legal 
proceedings against Exchange officials, and to adopt new Rule 2.24 
requiring a member to pay the Exchange's costs of litigation under 
specified circumstances.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    Notice of the proposed rule change appeared in the Federal Register 
on February 27, 1996.\3\ No comments were received on the proposed rule 
change.\4\ This order approves the CBOE's proposal.
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 36863 (February 20, 
1996), 61 FR 7285 (February 27, 1996).
    \4\ The CBOE submitted a letter regarding the enforceability of 
the proposed rules under state law. See letter from Michael L. 
Meyer, Schiff Hardin & Waite, to Matthew Morris, Division of Market 
Regulation, Commission, dated June 27, 1996.
---------------------------------------------------------------------------

II Background and Description

A. Exchange Liability

    The principal rule concerning Exchange liability is Rule 6.7(a), 
which currently provides that the Exchange shall not be liable to 
members, member organizations, or to associated persons for loss, 
damages, or claims arising out of the use or enjoyment of the 
facilities afforded by the Exchange, whether the loss, damages, or 
claims resulted from negligence or other unintentional errors or 
omissions, or from a cause not within the control of the Exchange. The 
proposed amendment to Rule 6.7(a) clarifies that, except as otherwise 
specifically provided in the rules of the Exchange, neither the 
Exchange nor its

[[Page 37514]]

directors, officers, committee members, employees, or agents shall be 
liable to members or their associated persons except where the 
Exchange's liability is attributable to willful misconduct, gross 
negligence, bad faith, fraud, or criminal acts.
    The proposed amendment to Rule 6.7 also incorporates, without 
material change, certain provisions which are currently set forth in 
Rules 23.14 and 24.12 to the effect that the Exchange is not liable for 
errors, omissions, or delays in collecting or disseminating various 
kinds of data, and the Exchange does not warrant such data. According 
to the Exchange, the purpose of moving these limitations of liability 
and disclaimers of warranty in Rule 6.7 is to place related subjects in 
a single rule.
    In addition, the CBOE proposes to make non-substantive amendments 
to Rules 7.11, 23.14, and 30.75, and to delete Rule 24.12 in order to 
eliminate provisions that duplicate what is set forth in Rule 6.7, as 
well as to clarify and conform the language of all of the rules 
pertaining to the liability of the Exchange.
    The CBOE also proposes certain changes to Interpretation and Policy 
.03 to Rule 6.7, which currently limits the Exchange's liability with 
respect to orders routed through the Exchange's Order Routing System 
(``ORS'') once the orders are printed at printers located on the 
Exchange floor. These changes clarify the description of the printers 
to which orders may be routed, and limits the liability of the Exchange 
once an order routed through ORS appears on a public automated routing 
(``PAR'') system terminal screen.

B. Legal Proceeding Against Exchange Directors, Officers, Employees, or 
Agents

    The proposed amendment adds new Rule 6.7A, which prohibits a member 
or associated person from instituting a lawsuit or any other legal 
proceeding against any director, officer, employee, agent, or other 
official of the Exchange or any subsidiary, for actions taken or 
omitted to be taken in connection with the official business of the 
Exchange or any subsidiary. Rule 6.7A, however, does not apply to 
violations of the federal securities laws where a private right of 
action exists, to appeals of disciplinary actions, or to other actions 
by the Exchange as provided for in the rules of the Exchange. According 
to the Exchange, the purpose of disallowing lawsuits or other legal 
proceedings against Exchange officials or agents when they are acting 
on Exchange business is to eliminate the potential exposure to personal 
liability of such persons, which impairs their ability to perform their 
duties.

C. Exchange's Cost of Defending Legal Proceedings

    The proposed amendment adds new Rule 2.24, which requires a member 
or associated person who fails to prevail in a lawsuit or other legal 
proceeding instituted by that person against the Exchange or other 
specified persons, and related to the business of the Exchange, to pay 
all reasonable expenses, including attorneys' fees, incurred by the 
CBOE in its defense during such proceeding. This provision is applied 
only in the event that the Exchange's expenses exceed $50,000. 
According to the Exchange, this rule is intended to discourage 
unfounded, vexatious litigation against the CBOE where the Exchange's 
costs of defense are significant, without having any undue chilling 
effect on legitimate claims or members. The proposed rule would apply 
to all types of legal proceedings that might be instituted by members 
against the Exchange or any of its directors, officers, committee 
members, employees, or agents, except that it expressly would not apply 
to disciplinary actions by the Exchange or to appeals therefrom, to 
other administrative appeals of Exchange actions, or to any specific 
instance where the Board has granted a waiver of this provision.

III. Discussion

    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 Section 6(b)(5).\5\ Specifically, 
the Commission believes that by limiting the liability of the Exchange 
and its directors, officers, employees, and agents, by precluding 
certain types of legal actions by members against such persons 
individually, and by discouraging frivolous lawsuits against the 
Exchange, the costs of the Exchange in responding to claims and 
lawsuits will be reduced, thereby permitting the resources of the 
Exchange to be better utilized for promoting just and equitable 
principles of trade and for protecting investors and the public 
interest.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. Sec. 78f(b)(5) (1988).
---------------------------------------------------------------------------

A. Exchange Liability

    The Commission believes the rule change limiting the liability of 
the Exchange and its directors, officers, committee members, employees, 
and agents, to situations attributable to willful misconduct, gross 
negligence, bad faith, fraud, criminal acts, or actions otherwise 
specifically prohibited in the rules of the Exchange, will adequately 
preserve members' right to pursue actions in circumstances where the 
Exchange and its officials should be held accountable, or where there 
has been a violation of the federal securities laws.
    In addition, the Commission believes that the CBOE's proposal to: 
(i) Incorporate Rules 23.14 and 24.12 into Rule 6.7; (ii) make non-
substantive amendments to Rules 7.11, 23.14, and 30.75; (iii) delete 
Rule 24.12; and (iv) update Interpretation and Policy .03 to Rule 6.7, 
will clarify the application of the principal rules governing Exchange 
liability.

B. Legal Proceedings Against Exchange Directors, Officers, Employees, 
or Agents

    The Commission believes that the rule change prohibiting members 
from instituting certain types of legal proceedings against Exchange 
officials should be approved. Specifically, the rule change prohibits 
members and associated persons from instituting lawsuits or any other 
legal proceeding against any director, officer, employee, agent, or 
other official of the Exchange or any subsidiary of the Exchange, for 
actions taken or omitted to be taken by these parties in connection 
with official business of the Exchange or any subsidiary. New Rule 
6.7A, however, does not impair a members' ability to initiate legal 
action based upon violations of the federal securities laws for which a 
private right of action exists, appeals of disciplinary actions, or 
other actions by the CBOE as provided for in the Exchange's rules. The 
Commission believes that new Rule 6.7A is consistent with the Act 
because it will help to ensure that the covered persons will be able to 
carry out their duties under the Act, and to enforce compliance with 
the Act and the rules thereunder, as well as the rules of the Exchange, 
without the threat of personal liability.

C. Exchange's Cost of Defending Legal Proceedings

    The Commission believes that the rule change requiring members or 
associated persons who fail to prevail in a lawsuit or other legal 
proceeding instituted by that person against the Exchange or other 
specified persons, and related to the business of the Exchange, to pay 
all reasonable expenses, including attorneys' fees, incurred by the 
CBOE in its defense during such proceedings if

[[Page 37515]]

such expenses exceed $50,000, is consistent with Section 6(b)(4) of the 
Act.\6\ Section 6(b)(4) requires that the rules of the exchange provide 
for the equitable allocation of reasonable dues, fees, and other 
charges among its members.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. Sec. 78f(b)(4) (1988).
---------------------------------------------------------------------------

    The Commission believes that because the funds to pay the legal 
expenses incurred by the Exchange in defending legal suits are 
generated, in part, by membership fees, the rule change reflects a 
reasonable business decision by the membership to shift the financial 
burden of litigation to the responsible member under certain 
circumstances. Moreover, as the Exchange's legal expenses must be 
reasonable and must accrue to at least $50,000 before a member would be 
obligated to compensate the Exchange, the Commission believes that the 
rule change should not provide an undue disincentive to litigation, in 
so far as it will permit the discovery needed to assess the merits of 
the members' cases.
    The Commission also notes that new Rule 2.24 specifically excludes 
disciplinary actions brought by the Exchange, other administrative 
appeals of Exchange actions, as well as any other specific instance 
where the Board grants a waiver of this rule. The Commission believes 
that this provision will ensure that members will be able to freely 
pursue their right to appeal any action brought by the Exchange for 
violations of its rules.\7\
---------------------------------------------------------------------------

    \7\ The Commission notes that if the minimum amount in the fee 
provision were substantially lower it might have a more difficult 
time concluding that the provision was consistent with Section 
6(b)(4). This is because such a lower threshold amount could be 
found to represent an inequitable allocation of fees to the 
disadvantage of certain members.
---------------------------------------------------------------------------

IV. Conclusion

    For the foregoing reasons, the Commission finds that the CBOE's 
proposal to limit the liability of the Exchange and its directors, 
officers, employees, and agents, to preclude certain types of legal 
actions by members against such persons individually, and to require 
members to pay the Exchange's costs of litigation under specified 
circumstances is consistent with the requirements of the Act and the 
rules and regulations thereunder.
    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-CBOE-96-02) is approved.

    \8\ 15 U.S.C. 78s(b)(2) (1988).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
---------------------------------------------------------------------------

    \9\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-18172 Filed 7-17-96; 8:45 am]
BILLING CODE 8010-01-M