[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