[Federal Register Volume 64, Number 47 (Thursday, March 11, 1999)]
[Notices]
[Pages 12197-12198]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-6005]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41127; File No. SR-CBOE-98-41]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval to 
Amendment Nos. 1 and 2 to the Proposed Rule Change by the Chicago Board 
Options Exchange, Inc. To Amend its Minor Rule Violation Plan With 
Respect to the Exercise of American-Style, Cash-Settled Index Options

March 2, 1999.

I. Introduction

    On September 21, 1998, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``SEC'' or ``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 its Minor Rule Violation 
Plan with respect to the exercise of American-style, cash-settled index 
options. On December 3, 1998, and February 17, 1999, respectively, the 
Exchange submitted to the Commission Amendment Nos. 1 \3\ and 2 \4\ to 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Patricia L. Cerny, Director, Department of 
Market Regulation, CBOE, to Robert Long, Attorney, Division of 
Market Regulation (``Division''), Commission dated December 2, 1998 
(``Amendment No. 1''). Amendment No. 1 added the summary fine 
schedule approved herein to CBOE Rule 17.50(c)(1).
    \4\ See letter from Timothy Thompson, Director, CBOE, to Robert 
Long, Attorney, Division, Commission, dated February 17, 1999 
(``Amendment No. 2''). Pursuant to Amendment No. 2, the time 
stamping of an advice or exercise instruction memorandum prior to 
purchasing contracts will not constitute a violation of the summary 
fine schedule because the practice of pre-time stamping is no longer 
relevant as a result of recent changes to CBOE's rules.
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    The proposed rule change was published for comment in the Federal 
Register on October 29, 1998.\5\ The Commission received no comments on 
the proposal. This order approves the proposal, as amended.
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    \5\See Exchange Act Release No. 40572 (October 19, 1998), 63 FR 
58081.
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II. Description of the Proposal

    CBOE proposes to amend its summary fine rule to add a schedule of 
fines for CBOE members who violate provisions of Exchange Rule 11.1 
governing the exercise of American-style, cash-settled index options. 
Currently, CBOE trades one American-style, cash-settled index option, 
Standard & Poor's 100 Index option (``OEX''). The following violations 
would be subject to a summary fine: failing to submit an exercise 
advice; submitting an advice without subsequently exercising an option; 
submitting an exercise advice after the designated cut-off time; and 
submitting an exercise advice for an amount different than the amount 
exercised. Violations occurring on a single trade date will generally 
be treated as one occurrence.\6\
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    \6\ For example, if on any given day an individual member 
submits an exercise advice late to the Exchange and on the same day 
subsequently exercises a larger number of contracts than noted on 
the advice, both of these rule infractions (late advice submission 
and contract discrepancy) would be treated under the summary fine 
program as one violation. On the other hand, if two different market 
maker nominees of the same member firm each separately submit late 
exercise advices, such independent actions would be treated as two 
separate rule violations, even though they occurred on the same day. 
Where a matter is referred to the Business Conduct Committee 
(``BCC'') for action, instead of being handled under the summary 
fine program, the BCC would not be precluded from handling similar 
fact patterns differently. Telephone conversation between Mary 
Bender, Senior Vice President, Regulation, CBOE, and Robert B. Long, 
Attorney, Division, Commission, on September 24, 1998.
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    There are three reasons why the Exchange determined to propose the 
schedule of summary fines discussed below for the above violations. 
First, the Exchange believes most violations are inadvertent. Second, 
processing routine violations under the summary fine program would 
significantly decrease the administrative burden of regulatory and 
enforcement staff as well as that of the BCC.\7\ Third, the membership 
of the Exchange would be more cognizant of the severity of penalties 
imposed and staff would be better able to process expeditiously routine 
violations under the summary fine program. The Exchange believes that 
the escalating schedule will deter members from considering fines for 
these violations as ``a cost of doing business.''
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    \7\ From January 1996 through May 1998, approximately 111 
investigative reports were reviewed at the pre-BCC level and 
resulted in the issuance of Letters of Caution. A total of 15 
Statement of Charges were authorized and/or settled by the BCC 
during the same time period. Five of these violations could have 
been resolved via the proposed summary fine program. The remaining 
violations either involved significant fines or the dissemination of 
news. Under the proposed program, investigative reports will not be 
prepared describing violative conduct and presented to the BCC and/
or pre-BCC. Rather, upon receipt and review of all necessary 
documentation, the Letter of Caution or Summary Fine Disciplinary 
Notice will be immediately issued to the member.
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    The summary fine schedule for Exchange Rule 11.1 violations, to be 
imposed as a rolling year look back period, would be as follows:
     Violations No. 1 and 2--Letter of Caution. However, if the 
violation involves 5 contracts or less and no unusual circumstances are 
noted, a Letter of Information will be issued. Letters of Information 
will not be counted for escalation purposes and a member cannot receive 
more than two Letters of Information during the rolling year look back 
period.
     Violation 3--Summary Fine of $1,000 plus $10 per contract*
     Violation 4--Summary Fine of $2,000 plus $10 per contract*
     Violation 5--Summary Fine of $4,000 plus $10 per contract*
     Violation 6 and Subsequent--Referral to the BCC.

    * Fines in excess of $5,000 will be deferred to the BCC.\8\

    \8\ Any fine imposed in excess of $2,500 will be subject to 
reporting on SEC Form BD in addition to the immediate, rather than 
periodic, reporting requirement of Section 19(d)(1) of the Act. 
Compare Exchange Act Release No. 30280 (January 22, 1992), 57 FR 
3452 (noting that fines in excess of $2,500, assessed under New York 
Stock Exchange, Inc. Rule 476A, are not considered pursuant to the 
NYSE's minor rule violation plan and are thus subject to the current 
reporting requirements of Section 19(d)(1) of the Act).
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    Some violations of CBOE Rule 11.1 with respect to American-style, 
cash-settled index options will not be resolved by summary fine. For 
example, violations that occur following the dissemination of 
significant news will not be resolved by way of summary fine. 
Additionally, violations where mitigating or aggravating circumstances 
are evident and it appears that a summary fine is inappropriate will be 
forwarded to the BCC.

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) and (d) of the Act.\9\ 
Specifically, the Commission believes the proposal is consistent with 
Sections 6(b)(1), (5), (6), and (7), 6(d)(1) and (3), and 19(d).\10\
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    \9\ 15 U.S.C. 78f(b) and (d).
    \10\ 15 U.S.C. 78f(b)(1), (5), (6) and (7), 78f(d)(1) and (3), 
and 78s(d).
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    Section 6(b)(5) requires, in part, that the rules of an exchange be 
designed to remove impediments to and perfect the mechanism of a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest; these rules must not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.\11\ The Commission finds that CBOE's proposed 
summary fines are equitable, non

[[Page 12198]]

discriminatory, and protect investors and the public interest by 
implementing an efficient means to punish the violations of Exchange 
rules discussed above (i.e., failing to submit an exercise advice; 
submitting an advice without subsequently exercising an option; 
submitting an exercise advice after the designated cut-off time; and 
submitting an exercise advice for an amount different than the amount 
exercised). By using the Exchange's summary fine program to punish 
these violations that the exchange represents are often inadvertent 
should allow the Exchange to allocate its resources to monitoring and 
punishing more serious and intentional offenses.
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    \11\ 15 U.S.C. 78f(b)(5).
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    The Commission also believes that the proposal is consistent with 
the Section 6(b)(6) requirement that the rules of an exchange provide 
that its members and persons associated with its members shall be 
appropriately disciplined for violations of rules of the exchange.\12\ 
In this regard, the proposal may provide an efficient procedure for the 
appropriate disciplining of members in those instances when a rule or 
policy violation is either minor or inadvertent.\13\
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    \12\ 15 U.S.C. 78f(b)(6).
    \13\ The Commission notes that under the proposal, a member 
could potentially receive two letters of information and two letters 
of caution in a given year before receiving a fine for a violation. 
The Commission believes that such a scenario could undermine the 
deterrent effect of the summary fine program with respect to the 
violations discussed in the proposal. As a result, the Commission 
has advised the Exchange to monitor this potential problem.
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    The Commission finds good cause for approving Amendments No. 1 and 
No. 2 to the proposed rule change prior to the thirtieth day after the 
date of publication of notice thereof in the Federal Register. CBOE's 
original proposal did not provide persons fined under the summary fine 
schedule with an opportunity to contest the exchange's determination. 
Amendment No. 1 ensures that alleged violators of the summary fine 
schedule are entitled to contest violations and request hearings, in 
accordance with CBOE Rule 1750(c)(1). In addition, the original 
proposal included time-stamping of an advice or exercise instruction 
memorandum prior to purchasing contracts in the list of minor rule 
violations. Amendment No. 2 removed this violation from the list of 
violations. The violation was removed because current CBOE rules 
require Exchange regulatory staff to time-stamp exercise advises upon 
depositing them into the exercise advice box. As a result, the practice 
of pre-time stamping is not relevant.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendments No. 1 and No. 2, including whether they 
are consistent with the Act. person 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 
that are filed with the Commission, and all written communication 
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 Room. 
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-98-41 and should be submitted by April 1, 1999.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-CBOE-98-41), as amended, is 
approved.

    \14\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-6005 Filed 3-10-99; 8:45 am]
BILLING CODE 8010-01-M