[Federal Register Volume 62, Number 86 (Monday, May 5, 1997)]
[Notices]
[Pages 24520-24522]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-11606]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38547; File No. SR-CBOE-96-73]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Chicago Board Options Exchange, Inc., Relating to 
Membership Committee Jurisdiction Over Continuing Membership

April 25, 1997.

I. Introduction

    On November 26, 1996, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') a proposed rule change pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') 
\1\ and Rule 19b-4 thereunder.\2\ On February 12, 1997, the Exchange 
filed an amendment to the rule proposal.\3\ The rule change amends CBOE 
Rule 3.4, ``Denial of and Conditions to Membership,'' to grant CBOE's 
Membership Committee (``MC''), instead of the CBOE's Business Conduct 
Committee (``BCC''), the power to deny continued membership or 
association with a member, or to condition continuance in membership or 
association, if the member or associated person: (1) Fails to meet any 
of the qualification requirements for membership or association after 
the membership or association has been approved; (2) fails to meet any 
condition placed by the MC on such membership or association; (3) 
violates an agreement with the Exchange; or (4) becomes subject to a 
statutory disqualification under the Act. The rule change also amends 
CBOE Rule 3.4 to require a member or person associated with a member 
who is subject to a statutory disqualification to submit an application 
to the MC in order to continue as a member or as a person associated 
with a member.
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Arthur Reinstein, Senior Attorney, CBOE, to 
Janice Mitnick, Attorney, Division of Market Regulation, Commission, 
dated February 12, 1997 (``Amendment No. 1''). Amendment No. 1 
provides that failure to file an application notifying the Exchange 
of a statutory disqualification would be a factor to be considered 
by the CBOE's Membership Committee in making determinations with 
respect to the person's membership or association pursuant to CBOE 
Rule 3.4(e), instead of constituting a waiver of the individual's 
right of appeal. Further, Amendment No. 1 describes the procedures 
to be followed by the Exchange's Membership Committee in reviewing 
an application submitted pursuant to proposed CBOE Rule 3.4(f). 
Finally, Amendment No. 1 describes the composition of the CBOE's 
Business Conduct Committee and CBOE's Membership Committee.
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    Notice of the proposed rule change and Amendment No. 1, together 
with the substance of the proposal, was provided by issuance of a 
release (Securities Exchange Act Release No. 38290 (February 14, 1997)) 
and by publication in the Federal Register (62 FR 8472 (February 25, 
1997)). No comments were received. This order approves the proposed 
rule change, as amended.

II. Description of the Proposal

    Currently, the CBOE's MC may deny or condition membership for new 
applicants for the reasons specified in CBOE Rule 3.4 (a), (b), and 
(c). CBOE Rule 3.4(e) currently authorizes the Exchange's BCC, rather 
than the MC, to take action against existing members or

[[Page 24521]]

associated persons when any of the reasons delineated in CBOE Rule 3.4 
(a), (b), or (c) for denying or conditioning membership or association 
arise.
    The CBOE proposes to amend CBOE Rule 3.4(e) to allow the MC, rather 
than the BCC, to deny continued membership or association, or to 
condition the continuance of membership or association, if the member 
or associated person: (1) Fails to meet any of the qualification 
requirements for membership or association after the membership or 
association has been approved; (2) fails to meet any condition placed 
by the MC on such membership or association; (3) violates any agreement 
with the Exchange; or (4) becomes subject to a statutory 
disqualification under the Act.
    The Exchange believes that it is more appropriate for the MC to 
deal with membership related issues (whether these issues concern an 
applicant for membership or an existing CBOE member), and for the BCC 
to limit its activities to disciplinary matters involving allegations 
of specific rule violations. According to the CBOE, the MC is more 
familiar with the considerations that properly bear on decisions to 
deny or condition membership, and is best able to evaluate cases 
involving whether to continue or condition the membership of an 
existing member by referring to the standards it applies when 
evaluating applicants for membership. Furthermore, the BCC may not be 
familiar with the factors considered by the MC when acting on 
membership applications, or the types of conditions that may be imposed 
on applicants. Therefore, the CBOE believes that the rule change will 
remove the possibility of disparate or inconsistent treatment of 
membership issues because the MC will make all membership-related 
decisions, both for individuals applying for membership and for CBOE 
members.
    New CBOE Rule 3.4(g) preserves the right of persons denied 
membership under CBOE Rule 3.4 (a), (b) or (c) to appeal the MC's 
decision pursuant to Chapter XIX, ``Hearings and Review,'' of the 
CBOE's rules and grants the same right of review to existing members 
and associated persons who are not permitted to continue in membership 
or association, or whose membership or association is conditioned 
pursuant to CBOE Rule 3.4(e).\4\ Further, pursuant to CBOE Rule 3.4(g), 
no determination by the MC to discontinue or condition membership or 
association shall take effect until the review procedures under Chapter 
XIX have been exhausted, or the time for such review has passed.
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    \4\ Under Chapter XIX, a person denied membership may be apply 
for a hearing before a panel of the Appeals Committee to obtain 
review of a MC denial. See CBOE Rule 19.2, ``Submission of 
Applications to the Exchange.'' The panel's decision may then be 
appealed to or reviewed by the CBOE's Board of Directors 
(``Board''). See CBOE Rule 19.5, ``Review.''
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    Although the BCC will no longer have authority over decisions 
regarding conditioned or continued membership under CBOE Rule 3.4(e), 
the CBOE notes that the BCC will retain its power to take action 
against existing members or associated persons pursuant to Section 2.2, 
``Eligibility for Membership; Good Standing,'' of the Exchange's 
Constitution if a member or associated person violates any provision of 
the Constitution or the rules.\5\ The Exchange believes that, as a 
practical matter, the rule change will have little effect on the BCC's 
ability to act because the BCC rarely relies on CBOE Rule 3.4(e), but 
instead takes disciplinary action for specific rule violations under 
the other provisions of the CBOE's rules. Accordingly, the Exchange 
states that, following the CBOE's current practice, the BCC will 
continue to take disciplinary action under CBOE Rule 4.2, ``Adherence 
to Law,'' and the Chairman of the Board or the Chairman of the 
Executive Committee will continue to take action under CBOE Rule 16.1, 
``Imposition of Suspension.''
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    \5\ Section 2.2 provides that ``the good standing of a member 
may be suspended, terminated or otherwise withdrawn, as provided in 
the Rules, if any of said conditions for approval cease to be 
maintained or the member violates any of its agreements with the 
Exchange or any of the provisions of the Constitution or the 
Rules.''
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    The rule change also clarifies that CBOE Rule 3.4(e) applies to 
associated persons as well as members. The Exchange states that the 
CBOE has always interpreted CBOE Rule 3.4(e) to apply to associated 
persons as well as members, and that the rule change clarifies CBOE 
Rule 3.4(e) to reflect this interpretation.
    Finally, the rule change will add paragraph (f) to CBOE Rule 3.4, 
which will require members or persons associated with members who 
become subject to a statutory disqualification \6\ to file an 
application with the MC within 30 days of becoming subject to the 
statutory disqualification if the member or associated person wishes to 
continue in membership or association. The MC will consider continued 
membership or association with a member under the same procedures as it 
will consider a new application of an individual who is subject to a 
statutory disqualification.\7\ Absent extenuating circumstances, if a 
member or associated person fails to submit the required application, 
the Exchange may consider such failure as a factor to be considered by 
the MC when making a determination with respect to the member or 
associated person's continued membership or association.\8\
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    \6\ See 15 U.S.C. Sec. 78c(a)(39).
    \7\ See Amendment No. 1, supra note 3, and CBOE Regulatory 
Circular RG95-93.
    \8\ See Amendment No. 1, supra note 3.
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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, the requirements of Section 6(b)(6),\9\ which requires that 
the rules of an exchange provide that its members and persons 
associated with its members be appropriately disciplined for violations 
of the Act, the rules and regulations thereunder, and the rules of the 
exchange. In addition, the Commission finds that the Exchange's 
proposal is consistent with Section 6(b)(7) of the Act,\10\ which 
requires, among other things, that the rules of an exchange provide a 
fair procedure for the disciplining of members and associated persons, 
the denial of membership, and the barring of any person from 
association with a member.
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    \9\ 15 U.S.C. Sec. 78f(b)(6).
    \10\ 15 U.S.C. Sec. 78f(b)(7).
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    The Commission believes that it is reasonable for the Exchange to 
amend its rules to provide the MC, rather than the BCC, with 
jurisdiction over membership issues relating to existing CBOE members 
and associated persons.\11\ In this regard, the Commission notes that 
the CBOE has stated that the MC is more familiar with the 
considerations that bear on decisions to deny or condition membership 
and is best able to evaluate cases involving membership issues. In 
addition, the CBOE believes that the consolidation of membership issues 
with the MC will help to ensure consistent treatment of membership 
related issues, whether the issues concern an applicant for membership 
or association or an existing CBOE member or associated person.
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    \11\ As noted above, the CBOE's MC currently may deny or 
condition membership or association with regard to applicants for 
membership or association under CBOE Rule 3.4 (a), (b), and (c).
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    The proposal also preserves the right of CBOE members and 
associated persons, as well as applicants for membership or 
association, to appeal decisions of the MC under CBOE Rule

[[Page 24522]]

3.4. Specifically, CBOE Rule 3.4(g) provides that an applicant or 
associated person who has been denied membership or association 
pursuant to CBOE Rule 3.4(a), (b), or (c), or whose continuance in 
membership or association has been conditioned pursuant to CBOE Rule 
3.4 (e), may appeal the MC's decision under Chapter XIX of the CBOE's 
rules. As noted above, Chapter XIX of the CBOE's rules provides for a 
hearing before a panel of the CBOE's Appeals Committee and for review 
of the panel's decision by the CBOE's Board or a committee of the 
Board. In addition, CBOE Rule 3.4(g) states that no decision of the MC 
under CBOE Rule 3.4(e) will take effect until the review procedures 
under Chapter XIX have been exhausted or the time for review has 
expired. Accordingly, the Commission believes that the CBOE's proposal 
preserves the rights of members and applicants to appeal decisions of 
the MC, thereby helping to ensure that the CBOE's rules provide fair 
procedures for disciplining members and associated persons, and for 
denials of membership, consistent with Section 6(b)(7) under the Act.
    In addition, the Commission believes that it is reasonable for the 
CBOE to clarify that CBOE Rule 3.4(e) applies to associated persons as 
well as members in order to reflect accurately the CBOE's 
interpretation and application of CBOE Rule 3.4(e). Finally, the 
Commission believes it is reasonable to add CBOE Rule 3.4(f), requiring 
a member or associated person who becomes subject to a statutory 
disqualification to submit an application to the MC to continue in 
membership in order to facilitate the CBOE's compliance with Commission 
Rule 19h-1.

IV. Conclusion

    It is therefore ordered, pursuant to Sec. 19(b)(2) of the Act,\12\ 
that the proposed rule change (SR-CBOE-96-73) be, and hereby is, 
approved.

    \12\ 15 U.S.C. Sec. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-11606 Filed 5-2-97; 8:45 am]
BILLING CODE 8010-01-M