[Federal Register Volume 62, Number 51 (Monday, March 17, 1997)]
[Notices]
[Pages 12667-12669]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-6561]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38377; File No. SR-CBOE-96-63]


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

March 7, 1997.
    On October 21, 1996, the Chicago Board Options Exchange, Inc. 
(``CBOE''

[[Page 12668]]

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 delete Rules 6.25 and 14.6, relating to 
collection of commission income by a non-executing floor broker and 
pooling of floor brokerage.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on December 10, 1996.\3\ No comments were received on the 
proposal. This order approves the proposal.
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    \3\ Securities Exchange Act Release No. 38012 (December 3, 
1996), 61 FR 65098 (December 10, 1996).
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    The Exchange proposes deleting Rule 6.25, Pooling of Floor 
Brokerage, which 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. By its 
terms, Rule 6.25 also does not prohibit an independent floor broker 
from handling floor brokerage for a member organization.
    The Exchange also proposes deleting Rule 14.6, Collection of Floor 
Brokerage, which requires a member who acts as a floor broker for 
another member to collect and retain the entire brokerage 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.
    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 Exchange 
states that the adoption of these rules was a simple method to ensure 
that floor brokers provided good service to their customers. 
Specifically, Rule 6.25 was intended to prevent the larger member firm 
organizations from dominating the floor brokerage business, thus 
limiting competition. The prohibition of a floor broker from employing 
the services of a member organization employing more than one floor 
broker, however, could severally 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 
relationship 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 being involved in the making of business 
determinations for floor brokers about what type of relationship can 
best meet their needs and allow them to best service their customers.
    The Exchange proposes deleting these rules to ease limitations on 
the conduct of 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 \4\ and in light of changes 
in the industry over the last twenty years since these rules were 
adopted.\5\
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    \4\ See CBOE rule 6.73, Responsibilities of Floor Brokers, which 
requires the use of due diligence to obtain the best price when 
executing an order.
    \5\ According to the CBOE, the use of computerized order systems 
on the Exchange has dramatically reduced the percentage of orders 
floor brokers handle. As a result, many member firms have only one 
floor broker at a post, creating a situation where orders must be 
passed from one floor broker to another on a regular basis to ensure 
that customer orders are always represented in a timely manner at 
the post. Telephone conversation between Tim Thompson, CBOE and 
David Sieradzki, SEC (January 14, 1997).
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    The CBOE states that the proposed rule change is consistent with 
Section 6(b) of the Act in general and furthers the objectives of 
Section 6(b)(5) in particular in that it is designed to promote just 
and equitable principles of trade and remove impediments to and enact 
mechanism of a free and open market.
    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).\6\ Specifically, the 
Commission believes the proposal is consistent with the Section 6(b)(5) 
\7\ requirements that the rules of an exchange be designed to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in transactions in securities, to 
prevent fraudulent and manipulative acts, and, in general, to protect 
investors and the public interest.\8\ The Commission also believes the 
proposal is consistent with the Section 6(b)(8) requirements that the 
rules of an exchange do not impose any burden on competition not 
necessary or appropriate.\9\
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
    \8\ In approving these rule changes, the Commission has 
considered the proposed rules' impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f(b)(8).
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    The Commission supports the CBOE's efforts to continue to review 
the form and substance of its regulations in response to changes in 
market structure and eliminate requirements that no longer serve a 
meaningful regulatory purpose. After careful review, the Commission 
agrees with the CBOE's determination that the restrictions contained in 
Rules 6.25 and 14.6 are not necessary to ensure adequate oversight of 
floor brokerage activity on the CBOE. Particularly, the Commission 
finds that the elimination of Rules 6.25 and 14.6 should aid the 
efficient and orderly operation of the trading floor of the Exchange.
    With respect to Rule 6.25, the CBOE has concluded that domination 
of the floor brokerage business by a small number of brokers is 
unlikely in light of the increased automation of traditional floor 
broker functions. The Commission notes that the CBOE has adequate rules 
in place relating to the way floor brokers handle customer orders that 
should ensure that customer orders are handled with due diligence.\10\ 
The Commission also notes that at least several other exchanges 
currently do not have rules forbidding the arrangements covered by Rule 
6.25, with no observed abuses in this area.\11\
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    \10\ See CBOE Rule 6.71(b) Registration of Floor Brokers and 
Rule 6.73 Responsibilities of Floor Brokers.
    \11\ Neither the American Stock Exchange nor the Pacific Stock 
Exchange have rules to prohibit collection of commission income by a 
non-executing floor broker or pooling of floor brokerage. Telephone 
conversation between Claire McGrath, Amex and David Sieradzki, SEC 
(Dec. 23, 1996); telephone conversation between Mike Pierson, PSE 
and David Sieradzki, SEC (Dec. 23, 1996).
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    With respect to the deletion of Rule 14.6, the Commission believes 
that the removal of the prohibition on the collection of floor 
brokerage by a non-executing floor broker provides an opportunity for 
more equitable allocation and division of earned floor

[[Page 12669]]

brokerage. The Commission does not believe the elimination of Rule 14.6 
will adversely effect the quality of execution by floor brokers of 
customer orders. Specifically, the Commission notes that the CBOE has 
other rules that require floor brokers to use due diligence in 
executing Order.\12\ In addition, the floor broker executing the trade 
is required to place his or her acronym on the trade ticket,\13\ 
ensuring that the executing floor broker can be identified and held 
accountable for the handling of the trade. The elimination of Rule 14.6 
should aid in the orderly flow of the market in that it enables floor 
brokers to assist each other in handling order flow on a more regular 
basis without penalty. The Commission also notes that at least several 
other exchanges currently do not have rules forbidding the arrangements 
covered by Rule 14.6, with no observed abuses in this area.\14\
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    \12\ See supra note 10.
    \13\ See DBOE Rule 6.51 Reporting Duties.
    \14\ See supra note 11.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-CBOE-96-63) is approved.

    \15\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-6561 Filed 3-14-97; 8:45 am]
BILLING CODE 8010-01-M