[Federal Register Volume 61, Number 238 (Tuesday, December 10, 1996)]
[Notices]
[Pages 65098-65099]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-31333]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38012; File No. SR-CBOE-96-63]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Incorporated Relating to 
the Collection of Commission Income by an Non-Executing Floor Broker 
and Pooling of Floor Brokerage

December 3, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), \1\ and Rule 19b-4 thereunder, \2\ notice is hereby given 
that on October 21, 1996, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Item 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Chicago Board Options Exchange, Incorporated proposed to delete 
Rule 6.25, Pooling of Floor Brokerage, and Rule 14.6, Collection of 
Floor Brokerage. The text of the proposed rule change 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

1. Purpose
    The purpose of the proposed rule change is to delete two rules, 
Rule 6.25 and Rule 14.6, which place limitations on the conduct of a 
floor brokerage business on the floor of the Exchange. The Exchange 
believes that these rules are now no longer necessary to achieve their 
original purpose, i.e., to ensure that customer orders are handled with 
due diligence, in light of the adoption of rules which specifically 
govern floor broker behavior and in light of changes in the industry 
over the last twenty years since these rules were adopted.

 Rule 6.25

    Rule 6.25, Pooling of Floor Brokerage, prohibits a member 
organization that has one or more floor brokers who are nominees of or 
whose memberships are registered for the member organization to enter 
into any agreement, arrangement, or understanding with another such 
organization whereby such organizations are to handle floor brokerage 
for each other. The rule 6.25 prohibition does not apply to the 
handling of floor brokerage by one such firm for another on an 
occasional basis or to an arrangement permitted by the Equity Floor 
Procedure Committee in writing. Buy its terms, the Rule also does not 
prohibit an independent floor broker from handing floor brokerage for a 
member organization.
    Both Rule 6.25 and Rule 14.6 were adopted at the infancy of the 
Exchange in a very different environment than exists now. The adoption 
of these rules was a simple method to ensure that floor brokers 
provided good service to their customers. Rule 6.25 was intended to 
prevent the larger member firm organizations from dominating the floor 
brokerage business, thus limiting competition. A rule that prohibits a 
floor broker from employing the services of a member organization 
employing more than one floor broker, however, could severely limit 
that brokers ability to handle his order flow in an efficient and 
timely manner, particularly at those posts without an independent floor 
broker. The Exchange believes, therefore, that this rule might actually 
hinder the efficient representation of customer orders on the floor and 
that floor broker organizations should be given the opportunity to 
develop such relationships as they feel can best enable them to service 
their customers. According to the CBOE, deletion of Rules 6.25 and 14.6 
would remove the Exchange from the business of making business 
determinations for the floor brokers about what type of relations can 
best meet their needs and allow them to best service their customers.

Rule 14.6

    Rule 14.6, Collection of Floor Brokerage, requires a member who 
acts as a floor broker for another member to collect and retain the 
entire brokerage

[[Page 65099]]

and prohibits the collecting broker from dividing the brokerage with 
any other person. Rule 14.6, however, does permit the brokerage earned 
by a nominee of, or a broker whose membership is registered for, a 
member organization to be paid to the member organization. In this 
event, the member's compensation from the member organization must be 
commensurate with the brokerage so contributed and other services 
rendered.
    The deletion of Rule 14.6 would permit a floor broker who is absent 
from the trading crowd when the related trade occurs (``absent floor 
broker'') to collect and retain the brokerage commission for an order 
executed by another floor broker (``executing floor broker'') on behalf 
of the absent floor broker. Currently, the limitations of Rule 14.6 
create a practical problem when a floor broker must leave a trading 
crowd to attend to other business or personal matters. In these 
situations, the floor broker often will give his orders to another 
floor broker to execute on his behalf in order to ensure the customer 
does not miss out on a market opportunity in his absence. However, the 
customer of the absent floor broker ordinarily will not have a 
relationship with the executing broker and will not expect to receive a 
bill from the executing broker. Under the proposed rule change, the 
absent floor broker would be entitled to bill the customer for the 
trade executed by the executing floor broker with the bill for all the 
other trades executed by the absent floor broker on behalf of that 
customer. The proposal, therefore, would reduce the chance of customer 
confusion and would also reduce administrative burdens for the floor 
brokers.
    The Exchange believes it is proper for the floor brokers to make 
any business arrangements among themselves which they believe to be 
appropriate and which would lead to the efficient conduct of business. 
In light of the potential customer confusion and the administrative 
burdens, the Exchange does not believe the restriction against 
collecting brokerage for a trade executed on one's behalf serves a 
useful regulatory purpose in situations where a floor broker must leave 
a trading crowd for personal reasons or to attend to other business.
    Regardless of who is being paid the brokerage commission for the 
trade, however, the floor broker who actually executes the trade would 
have to have his or her acronym placed on the trade ticket and would be 
responsible for using due diligence in the handling of the order and in 
fulfilling all the other responsibilities of a floor broker in the 
representation of the order pursuant to Exchange rules. The Exchange 
believes that because the executing floor broker will be held 
responsible under Exchange rules for handling the order, the order will 
be treated with proper care by the executing floor broker regardless of 
who is paid for the trade. In addition, the Exchange believes that 
floor brokers will have a financial incentive to execute the orders 
either because of a reciprocal relationship of passing along orders or 
through a sharing of the brokerage commission.
    By eliminating outdated restrictions on the conduct of floor 
brokerage on the floor, the proposed rule change should help to provide 
floor brokers with the flexibility to develop relationships which 
should provide for the most efficient conduct of customer business on 
the floor and at the same time should avoid customer confusion by 
eliminating additional bills for brokerage services. The proposed rule 
change, therefore, is consistent with and furthers the objectives of 
Section 6(b)(5) of the Act, in that it is designed to perfect the 
mechanisms of a free and open market and to protect investors and the 
public interest.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b)(5) of the Act in that it is designed to prevent 
fraudulent and manipulative acts and practices and to perfect the 
mechanism of a free and open market.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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 either solicited or received.

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

    Within 35 days of 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 reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve the 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. 20549.
    Copies of such filing will also be available for inspection and 
copying at the principal office of the Exchange. All submissions should 
refer to File No. SR-CBOE-96-63 and should be submitted by December 31, 
1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-31333 Filed 12-9-96; 8:45 am]
BILLING CODE 8010-01-M