[Federal Register Volume 64, Number 222 (Thursday, November 18, 1999)]
[Notices]
[Pages 63065-63097]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-29777]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42111; File No. SR-CBOE-99-15]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1 and 2 to the Proposed Rule Change by the 
Chicago Board Options Exchange, Inc.; Updating the Exchange's 
Membership Rules

November 5, 1999.
    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 April 12, 1999, the Chicago Board Options Exchange, Inc. (``CBOE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. The CBOE filed Amendment No. 1 to the proposal on July 15, 
1999,\3\ and Amendment No. 2 to the proposal on November 3, 1999.\4\ 
The Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 makes numerous technical changes to the 
proposed rule language and corresponding changes in the Purpose 
section of the filing. See letter from Arthur B. Reinstein, 
Assistant General Counsel, CBOE, to Kenneth Rosen, Attorney, 
Division of Market Regulation (``Division''), SEC, dated July 14, 
1999.
    \4\ Amendment No. 2 makes minor technical corrections to the 
text of the proposed rule and deletes section 8(h) from the 
Exchange's Option Trading Lease Pool Procedures. See letter from 
Arthur B. Reinstein, Assistant General Counsel, CBOE, to Yvonne 
Fraticelli, Special Counsel, Division, SEC, dated November 3, 1999.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposes to update the Exchange's membership rules. The 
text of the proposed rule change is set forth below. Proposed additions 
are in italics and proposed deletions are in brackets.
Chicago Board Options Exchange, Incorporated Rules
    CHAPTER I--Definitions
RULE 1.1--Definitions
* * * * *
Lessor
    (ff) The term ``lessor'' means the owner of a transferable 
membership that has been leased to an individual or organization in 
accordance with the provisions of Rule 3.17 [3.16(b)], and includes any 
successor in interest of such owner. [A lessor shall continue as a 
member of the Exchange, subject to all of the provisions of the 
Constitution and Rules, except that for the duration of the lease 
arrangements with respect to that leased membership, a lessor may not 
conduct a public securities business as described by the provisions of 
Rules 3.1 and the Rules referenced therein.]
Lessee
    (gg) The term ``lessee'' means an individual or organization that 
has leased a transferable membership from the owner thereof in 
accordance with the provisions of Rule 3.17 [3.16(b)]. For the duration 
of the lease agreement, a lessee shall be deemed to be a member, 
subject to all of the provisions of the Constitution and Rules that are 
applicable to the owner of an Exchange membership, except that the 
provisions of the Constitution and Rules [Rule 3.12], which concern the 
ownership of membership, are not applicable to a lessee.

[[Page 63066]]

Government Securities Options Permit Holder
    (hh) Deleted ________, 199__ (99-____). [The term ``Government 
securities options permit holder'' means a qualified individual or 
organization with an approved nominee that has been issued a 
nonleasable, nontransferable temporary permit for effecting 
transactions in Government securities options designated by the Board. 
Each permit holder shall be subject to the provisions of the 
Constitution and Rules that are applicable to the owner of a regular 
Exchange membership, unless exempted from such provisions by the Board; 
provided, however, Rule 3.12, which concerns the ownership of 
membership, Rule 3.13, which concerns the purchase of membership, and 
Section 2.6 of the Constitution, which concerns voting and other rights 
and powers, shall not apply to a permit holder in his or its capacity 
as such.]
* * * * *
Nominee
    (pp) The term ``nominee'' means an individual who is authorized by 
a member organization, in accordance with Rule 3.8, to [conduct 
business on the floor of the Exchange and to] represent such member 
organization in all matters relating to the Exchange. [As long as a 
nominee remains effective, the nominee shall be deemed to be a member, 
subject to the provisions of the Constitution and Rules of the 
Exchange.]
* * * * *
CHAPTER III--Membership
Public Securities Business
    RULE 3.1. (a) Every individual member or member organization shall 
have as the principal purpose of its membership the conduct of a public 
securities business. No individual member or member organization shall 
own or have registered for it more memberships than are reasonably 
necessary to carry on [his or its] that member's Exchange activities.
    (b) A member shall be deemed to have such a purpose if and so long 
as
    (1) the member has qualified and acts in respect of its business on 
the Exchange in one or more of the following capacities: (i) a member 
organization approved to transact business with nonaffiliated public 
customers in accordance with Rule 9.1 [or]; (ii) a member organization 
approved to clear Exchange transactions of other members in accordance 
with the Rules of the Clearing Corporation; (iii) a Market-Maker as 
defined in Rule 8.1; ([iii]iv) a Floor Broker as defined in Rule 6.70; 
([iv]v) a Board Broker as defined in Rule 7.1; (vi) an order service 
firm as defined in Rule 6.77; [and]or
    (2) [all transactions are in compliance with Section 11(a) of the 
Securities Exchange Act of 1934 as amended and the rules and 
regulations adopted thereunder; or
    (3) the member is a lessor] the member is a lessor; or
    (3) the member is an individual with a membership that has been 
registered for a member organization; or
    (4) the member is a [general partner or executive officer or 
nominee of a member organization and his membership is registered for 
that] nominee of a member organization.
    (c) No member [or member organization] shall utilize any scheme, 
device, arrangement, agreement, or understanding designed to circumvent 
or avoid, by reciprocal means or in any other manner, the provisions of 
this Rule [3.1].
Qualifications and Membership Statuses of Individual Members
    RULE 3.2. (a) A person must satisfy the following requirements in 
order to be an individual member:
    (i) the person must be at least 21 years of age;
    (ii) the person must be registered as a broker or dealer pursuant 
to Section 15 of the Exchange Act or be associated with a member 
organization that is registered as a broker or dealer pursuant to 
Section 15 of the Exchange Act, except that an individual member who is 
approved to act solely as a lessor is not required to comply with this 
requirement; and
    (iii) the person must meet the other qualification requirements for 
membership under the Constitution and Rules.
    (b) The individual membership statuses that are approved by the 
Membership Committee (along with the primary Exchange Rule that 
provides for such approval if it is not Rule 3.9) include: (i) owner*; 
(ii) lessor*; (iii) lessee*; (iv) Chicago Board of Trade exerciser*; 
(v) sole proprietor*; (vi) individual with a membership that has been 
registered for a member organization*; (vii) nominee of a member 
organization*; (viii) Market-Maker (Rule 8.2); (ix) Floor Broker (Rule 
6.71); (x) member eligible to trade securities traded pursuant to 
Chapter XXX (Rule 30.2); and (xi) Trust Member (Rule 3.25). The 
individual permit statuses that are approved by the Membership 
Committee are IPC Permit Exerciser* (Rule 3.26) and Options Trading 
Permit holder* (Rule 3.27). Those individual membership statuses noted 
with an asterisk are also referred to in the Rules as membership 
capacity statuses.
    (c) Every individual member who is a lessee, a Chicago Board of 
Trade exerciser, or an owner (who is not a lessor) must have an 
authorized floor function. An individual member is deemed to have an 
authorized floor function if the member is approved by the Membership 
Committee to act as a Market-Maker and/or Floor Broker.
    [Individual memberships may be owned by a natural person who is at 
least 21 years of age and who, except for a lessor, is registered as a 
broker or dealer pursuant to Section 15 of the Securities Exchange Act 
of 1934, as amended, or is associated with a registered broker or 
dealer, and who meets the qualifications for membership in accordance 
with these Rules.]

. . . Interpretations and Policies:

    .01  Individual membership statuses that are approved by Exchange 
bodies other than the Membership Committee (along with the primary 
Exchange Rule that provides for such approval) include: (i) DPM 
Designee (Rule 8.81); (ii) FLEX Appointed Market-Maker for FLEX Index 
Options (Rule 24A.9); (iii) FLEX Qualified Market-Maker for FLEX Equity 
Options (Rule 24A.9); (iv) Lead Market-Maker in OEX or DJX options 
(Rule 8.15); and (v) Supplemental Market-Maker in OEX or DJX options 
(Rule 8.15).
Qualifications and Membership Statuses of Member Organizations
    RULE 3.3. (a) An organization must satisfy the following 
requirements in order to be a member organization:
    (i) the organization must be a corporation or partnership organized 
under the laws of one of the states of the United States;
    (ii) the organization must be registered as a broker or dealer 
pursuant to Section 15 of the Exchange Act, except that an organization 
that is approved to act solely as a lessor is not required to comply 
with this requirement; and
    (iii) the organization must meet the other qualification 
requirements for membership under the Constitution and Rules.
A corporation or partnership that is not organized under the laws of 
one of the states of the United States must satisfy the requirements 
set forth in Rule 3.4, in lieu of satisfying the requirements set forth 
in this paragraph (a), in order to be a member organization.
    (b) The member organization membership statuses that are approved

[[Page 63067]]

by the Membership Committee (along with the primary Exchange Rule that 
provides for such approval if it is not Rule 3.9) include: (i) owner*; 
(ii) lessor*; (iii) lessee*; (iv) member organization for which an 
individual member has registered his or her membership*; (v) member 
organization approved to transact business with the public* (Rule 9.1); 
(vi) Clearing Member; and (vii) order service firm* (Rule 6.77). The 
member organization permit statuses that are approved by the Membership 
Committee are IPC Permit Exerciser* (Rule 3.26) and Options Trading 
Permit holder* (Rule 3.27). Those individual membership statuses noted 
with an asterisk are also referred to in the Rules as membership 
capacity statuses.
    (c) A member organization that is a Clearing Member or an order 
service firm is required to possess at least one membership for which 
the organization is not a lessor.
    (d) A member organization that desires to become a different type 
of business entity permitted under the Rules must apply for membership 
in the name of the new entity.
    [(a) Memberships may be owned or leased by or registered for a 
corporation organized under the laws of one of the states of the United 
States or under other laws as the Board shall approve, or a 
partnership. The corporations or partnerships must be brokers or 
dealers registered pursuant to Section 15 of the Securities Exchange 
Act of 1934, as amended, except for corporations or partnerships that 
are lessors and that meet the qualifications for membership in 
accordance with these Rules.]
    [(b) With respect to each membership owned or leased by a 
corporation or partnership, the membership organization must designate 
an individual nominee in accordance with Rule 3.8, and Article II, 
Section 2.3 of the Constitution.
    (c) With respect to each membership registered for a corporation or 
partnership pursuant to Article II, Section 2.4 of the Constitution, 
the member organization shall be represented by the individual member 
who registered his/her membership for the organization.]
. . . Interpretations and Policies:
    .01  For purposes of eligibility for membership, an entity 
organized as a [Limited Liability Company] limited liability company 
under the laws of one of the states of the United States [or under 
other such laws as the Board shall approve,] shall be deemed a 
corporation, its members shall be deemed principal shareholders, and 
its members with management responsibility and its managers shall be 
deemed executive officers.
    .02  Member organization membership statuses that are approved by 
Exchange bodies other than the Membership Committee (along with the 
primary Exchange Rule that provides for such approval) include: 
Designated Primary Market-Maker (Rule 8.83).

Qualifications of Foreign Member Organizations

    RULE 3.4. (a) An organization that is not organized under the laws 
of one of the states of the United States must satisfy the following 
requirements in order to be a member organization:
    (i) the organization must be a corporation or partnership organized 
under the laws of a country other than the United States;
    (ii) the organization must disclose to the Exchange all persons 
associated with the organization and all parents of the organization, 
through all tiers of ownership, until the ultimate individual 
beneficial owners of the organization are disclosed;
    (iii) the organization must maintain in English and at a location 
in the United States the books and records of the organization that 
relate to its business on the Exchange;
    (iv) the organization must maintain its financial records in 
accordance with United States accounting standards or foreign 
accounting standards that are found by the Exchange to be comparable to 
United States accounting standards;
    (v) the organization must waive any secrecy laws in the domiciliary 
jurisdiction of the organization;
    (vi) the organization must provide to the Exchange an opinion of 
legal counsel of the domiciliary jurisdiction of the organization which 
certifies that (A) there are no secrecy laws in that jurisdiction and 
that the organization has effectively waived any future such laws or 
(B) that the organization has effectively waived any current or future 
secrecy laws in that jurisdiction;
    (vii) the organization must agree to submit to the jurisdiction of 
the federal courts of the United States and the courts of Illinois and 
to irrevocably waive, to the fullest extent permitted by law, any 
objection which the organization may have based on venue or forum non 
conveniens with respect to any action initiated in such courts;
    (viii) the organization must appoint a process agent in Illinois to 
receive, on the behalf of the organization, process which may be served 
in any legal action or proceeding;
    (ix) the organization must own its Exchange membership(s);
    (x) the organization must be registered as a broker or dealer 
pursuant to Section 15 of the Exchange Act;
    (xi) the organization must satisfy the foregoing requirements in a 
manner and form prescribed by the Exchange and must satisfy such 
additional requirements that the Exchange reasonably deems appropriate; 
and
    (xii) the organization must meet the other qualification 
requirements for membership under the Constitution and Rules.

. . . Interpretations and Policies:

    .01  For purposes of eligibility for membership, an entity 
organized as a limited liability company under the laws of a country 
other than the United States shall be deemed a corporation, its members 
shall be deemed principal shareholders, and its members with management 
responsibility and its managers shall be deemed executive officers.
Denial of and Conditions to Membership and Association
    RULE [3.4] 3.5 (a) The Membership Committee shall deny membership 
where an applicant has failed a required membership test.
    (b) The Membership Committee may deny (or may condition) membership 
or may prevent a person from becoming associated (or may condition an 
association) with a member for the same reasons that the Securities and 
Exchange Commission [(SEC)] may deny or revoke a broker-dealer 
registration and for those reasons required or allowed under the 
[Securities] Exchange Act [of 1934, each as amended from time to time].
    [(b) The Membership Committee shall deny membership where an 
applicant has failed the required test, and such an applicant must wait 
30 days before taking the examination a second time, 60 days if a 
second attempt is failed, and 120 days if a third or subsequent attempt 
is failed.]
    (c) The Membership Committee also may deny (or may condition) 
membership or may prevent a person from becoming associated (or may 
condition an association) with a member when the applicant: [, directly 
or indirectly,]
    [(1)](i) [has a negative net worth,] is a broker-dealer and (A) has 
a net worth (excluding personal assets) below $25,000 if the applicant 
is an individual, (B) has a net worth (excluding personal assets) below 
$50,000 if the applicant is an organization, (C) has financial 
difficulties involving an amount that is more than [five percent] 5% of 
the

[[Page 63068]]

applicant's net worth, or (D) has a pattern of failure to pay just 
debts; [(whether or not such debts have been the subject of a 
bankruptcy action);]
    [(2)](ii) is unable satisfactorily to demonstrate a capacity to 
adhere to all applicable Exchange, [SEC, Options Clearing Corporation] 
Securities and Exchange Commission, Clearing Corporation, and Federal 
Reserve Board policies, rules, and regulations, including those 
concerning record-keeping, reporting, finance, and trading procedures;
    [(3)](iii) would bring the Exchange into disrepute; or
    [(4)](iv) for such other cause as the Membership Committee 
reasonably may decide.
    [(d) When an applicant is a subject of an investigation conducted 
by any self-regulatory organization or government agency and involving 
his fitness for membership, the Membership Committee need not act on 
his application until the matter has been resolved.]
    ([e]d) The Membership Committee may determine not to permit a 
member or person associated with a member to continue in membership or 
association with a member or may condition such continuance in 
membership or association, if the member or associated person:
    (i) fails to meet any of the qualification requirements for 
membership or association after the membership or association has been 
approved[,];
    (ii) fails to meet any condition placed by the Membership Committee 
on such membership or association[,]; or
    (iii) violates any agreement with the Exchange[,]. [or
    (iv) becomes subject to a statutory disqualification under the 
Exchange Act.
    (f) If a member, or person associated with a member, who becomes 
subject to a statutory disqualification under the Exchange Act, wants 
to continue in Exchange membership or association with a member, the 
member or associated person must, within 30 days of becoming subject to 
a statutory disqualification, submit an application to the Membership 
Committee seeking to continue in Exchange membership or association 
with a member notwithstanding the statutory disqualification. Failure 
to timely file such an application is a factor that may be taken into 
consideration by the Membership Committee in making determinations 
pursuant to Rule 3.4(e).]
    (e) Any decision made by the Membership Committee pursuant to 
paragraph (a), (b), (c), or (d) of this Rule must be consistent with 
both the provisions of this Rule and the provisions of the Exchange 
Act.
    ([g]f) Any applicant who has been denied membership or association 
with a member or granted only conditional membership or association 
pursuant to [Rule 3.4(a), (b), or (c)] paragraph (a), (b), or (c) of 
this Rule, and any member or person associated with a member who is not 
permitted to continue in membership or association with a member or 
whose continuance in membership or association is conditioned pursuant 
to [Rule 3.4(e)] paragraph (d) of this Rule, may appeal the Membership 
Committee's decision under Chapter XIX. No determination of the 
Membership Committee to discontinue or condition a person's membership 
or association with a member pursuant to paragraph (d) of this Rule 
[3.4(e)] shall take effect until the review procedures under Chapter 
XIX have been exhausted or the time for review has expired.
Persons Associated with Member Organizations
    RULE [3.5] 3.6. (a) Persons associated with member organizations 
shall be bound by the Constitution and Rules of the Exchange and of the 
Clearing Corporation. The Exchange may bar a person from becoming or 
continuing to be associated with a member organization if such person 
does not agree in writing, [on a] in a manner and form prescribed by 
the Exchange, to furnish the Exchange with information with respect to 
such person's relationship and dealings with the member 
organization[s], and information reasonably related to such person's 
other securities business, as may be required by the Exchange, and to 
permit the examination of its books and records by the Exchange to 
verify the accuracy of any information so supplied.
    (b) Each associated person of a member organization that is 
required to be disclosed on Exchange Act Form BD as a direct owner or 
executive officer (or, if the member organization is not required to be 
a registered broker-dealer, each associated person of the organization 
that would be required to be disclosed on Form BD as a direct owner or 
executive officer in the event that the organization was a registered 
broker-dealer) is required to submit to the Membership Department, 
pursuant to Rule 3.9, an application for approval to become associated 
with the member organization in that capacity. No person may become 
associated with a member organization in the capacity of a direct owner 
or executive officer that is (or would be) required to be disclosed on 
Form BD unless and until the Membership Committee approves that 
association.
    [(b) Each member organization shall file with the Exchange and keep 
current a list and descriptive identification of those persons 
associated with the member organization who are its executive officers, 
directors, principal shareholders, general partners and limited 
partners. Such persons shall file with the Exchange a Uniform 
Application for Securities Industry Registration or Transfer (Form U-
4).]
    (c) A claim of any [person associated with a member organization 
described in the first sentence of paragraph (b) of this Rule against 
such organization] associated person required to be approved by the 
Membership Committee pursuant to paragraph (b) of this Rule against the 
member organization with which that person is associated shall be 
subordinate in right of payment [of] to customers and other members.
Certain Documents Required of [Applicants and] Members, Applicants, and 
Associated Persons
    RULE [3.6] 3.7 (a) Each member and member applicant shall promptly 
file the following documents with the Membership Department:
    (i) each member organization and member organization applicant that 
is a corporation shall promptly file with the Membership Department a 
copy of the articles or certificate of incorporation of the 
organization, the by-laws of the organization, and all amendments to 
those documents;
    (ii) each member organization and member organization applicant 
that is a partnership shall promptly file with the Membership 
Department a copy of any registration certificate of the organization, 
the partnership agreement of the organization, and all amendments to 
those documents;
    (iii) each member organization and member organization applicant 
shall promptly file with the Membership Department any other documents 
relating to the registration, governance, capital structure, or 
ownership of the organization that are requested by the Exchange; and
    (iv) each member and member applicant shall promptly file with the 
Membership Department any other documents requested by the Exchange 
that are reasonably related to that member's business on the Exchange 
or proposed business on the Exchange.
    (b) Each member and member applicant shall promptly file with the 
Membership Department its business and residence addresses, an address

[[Page 63069]]

where notices may be served, and any changes to this information.
    (c) Each member shall comply with the provisions of Exchange Act 
Section 17(f) and Exchange Act Rule 17f-2 respecting the fingerprinting 
of the member and its covered employees. Each member applicant and its 
covered employees shall also be fingerprinted in accordance with those 
provisions.
    [(a) Although the Exchange may request additional information, at a 
minimum offering circulars, private placement memoranda, the 
partnership agreement and all amendments thereto, in the case of a 
member partnership, the articles of incorporation, by-laws and all 
amendments thereto, in the case of a member corporation, and any lease 
agreement to which a membership is subject pursuant to Rule 3.16(b), 
shall be filed with the Membership Department and shall be subject to 
review by the Exchange; however, no action or failure to act by the 
Exchange shall be construed to mean that the Exchange has in any way 
passed on the investment merits of or given approval to any such 
document.
    (b) Every member shall file with the Membership Department and keep 
current an address where notices may be served.
    (c) In a manner and form prescribed by the Exchange, every member 
and every executive officer, director, principal shareholder, general 
partner and limited partner of a member organization shall pledge to 
abide by the Constitution and Rules of the Exchange, as from time to 
time amended, and by all circulars, notices, directives or decisions 
adopted pursuant to or made in accordance with the Constitution and 
Rules.]
    (d) Each member and member applicant that is a registered broker or 
dealer pursuant to Section 15 of the Exchange Act shall complete 
Exchange Act Form BD and keep its Form BD current by promptly 
completing any required amendments to its Form BD. Each member or 
applicant that is a registered broker-dealer shall also promptly file 
with the Membership Department, in a manner prescribed by the Exchange, 
its Form BD and all required amendments thereto. Each member and member 
applicant that is not required to be a registered broker-dealer shall, 
in a manner and form prescribed by the Exchange, promptly file with the 
Exchange a list and descriptive identification of those associated 
persons of the organization that have been, and that are applying to 
be, approved by the Membership Committee pursuant to Rule 3.6(b) and 
any changes to this information.
    (e) In a manner and form prescribed by the Exchange, each member, 
member applicant, and associated person required to be approved by the 
Membership Committee pursuant to Rule 3.6(b) shall pledge to abide by 
the Constitution and Rules of the Exchange, as from time to time 
amended, and by all circulars, notices, directives, or decisions 
adopted pursuant to or made in accordance with the Constitution and 
Rules.
    (f) All documents filed with the Membership Department by members, 
applicants, and associated persons shall be subject to review by the 
Exchange; however, no action or failure to act by the Exchange shall be 
construed to mean that the Exchange has in any way passed on the 
investment merits of the member, applicant, or associated person, or 
the adequacy of disclosure given to investors by the member, applicant, 
or associated person, or that the Exchange has in any other way given 
approval to any such document.
    ([d]g) [Members and member organizations] Each member shall keep 
and maintain a current copy of the Constitution and Rules in a readily 
accessible place. Member organizations that are approved to do business 
with the public pursuant to Rule 9.1 shall make the Constitution and 
Rules available for examination by customers.

. . . Interpretations and Policies

    .01  For purposes of paragraph (a)(i) of this Rule, an entity 
organized as a limited liability company shall promptly file with the 
Membership Department a copy of the registration certificate of the 
organization, the operating agreement of the organization, and all 
amendments to those documents.
[Parents of Member Organizations
    RULE 3.7. Deleted June 28, 1995 (95-21).]
Nominees and Members Who Register Their Memberships for Member 
Organizations
    RULE 3.8. (a) Each member organization that is the owner of a 
membership for which the member organization will not be acting as a 
lessor and each member organization that is a lessee of a membership 
shall be subject to the following provisions:
    (i) the member organization must designate an individual nominee to 
represent the organization with respect to that membership in all 
matters relating to the Exchange;
    (ii) if the member organization is the owner or lessee of more than 
one such membership, the organization must designate a different 
individual to be the nominee for each of the memberships;
    (iii) each nominee of a member organization designated pursuant to 
subparagraph (a)(i) of this Rule is required to have an authorized 
floor function, except that a nominee of a member organization that is 
approved solely to transact business with the public pursuant to Rule 
9.1 is not required to comply with this requirement;
    (iv) each nominee of a member organization designated pursuant to 
subparagraph (a)(i) of this Rule must be approved for membership in 
accordance with the Rules; and
    (v) each nominee of a member organization designated pursuant to 
subparagraph (a)(i) of this Rule who is approved for membership shall 
be deemed to be an individual member.
    (b) Each member organization that is the owner of a membership for 
which the member organization will be acting as a lessor shall be 
subject to the following provisions:
    (i) the member organization must designate an individual nominee to 
represent the organization with respect to that membership in all 
matters relating to the Exchange;
    (ii) if the member organization will be acting as a lessor for more 
than one membership, the organization must designate a single 
individual to act as the nominee with respect to all of those 
memberships;
    (iii) the nominee of the member organization for the membership(s) 
with respect to which the organization will be acting as a lessor may 
not have an authorized floor function with respect to such 
membership(s);
    (iv) the nominee of the member organization for the membership(s) 
with respect to which the organization will be acting as a lessor must 
satisfy all of the qualification requirements for membership, except 
for those requirements that are not applicable to lessors or that are 
applicable solely to members who will have an authorized floor 
function; and
    (v) the nominee of the member organization for the membership(s) 
with respect to which the organization will be acting as a lessor shall 
be deemed to be an associated person of the organization and shall not 
be deemed to be an individual member by virtue of being approved to act 
as the nominee for such membership(s).
    (c) Each individual member who owns a membership and each Chicago 
Board of Trade exerciser may apply to register his or her membership 
for a member organization. Upon approval of such an application, an 
individual who has

[[Page 63070]]

registered his or her membership for a member organization shall 
represent the organization in all matters relating to the Exchange in 
the same manner that a nominee represents a member organization. Each 
individual who registers his or her membership for a member 
organization must have an authorized floor function.
    (d) A member organization represented by a nominee or by an 
individual who has registered his or her membership for the 
organization shall, in a manner and form prescribed by the Exchange:
    (i) authorize that person to represent the organization with 
respect to all matters relating to the Exchange;
    (ii) agree to be responsible for all obligations arising out of 
that person's representation of the member organization in all matters 
relating to the Exchange; and
    (iii) agree to guarantee payment of all monetary disciplinary 
sanctions assessed against that person with respect to activity that 
takes place while the person is a nominee of the organization or has 
registered his or her membership for the organization.

The responsibility of the member organization pursuant to subparagraph 
(d)(ii) of this Rule shall include all obligations to the Exchange and 
all obligations to other members resulting from Exchange transactions 
or transactions in other securities made by the person on behalf of the 
member organization. A nominee shall not, solely by virtue of being a 
nominee of a member organization, have any personal liability to the 
Exchange or to any other member for Exchange transactions and other 
securities transactions made by the nominee on behalf of the member 
organization. Similarly, an individual shall not, solely by virtue of 
registering his or her membership for a member organization, have any 
personal liability to the Exchange or to any other member for Exchange 
transactions and other securities transactions made by the individual 
on behalf of the member organization.
    (e) The following requirements shall apply to every nominee of a 
member organization and to every individual who has registered his or 
her membership for a member organization:
    (i) the person must be materially involved in the daily operation 
of the Exchange business activities of the member organization for 
which the person is a nominee or has registered his or her membership;
    (ii) the person may have authorized floor functions only on behalf 
of one member organization; and
    (iii) the person may perform floor functions only on behalf of the 
member organization for which the person is approved by the Exchange to 
perform such functions and may not perform floor functions on the 
person's own behalf or on behalf of another member organization.
    (f) Notwithstanding the provisions of subparagraph (e)(iii) of this 
Rule, a nominee or person who has registered his or her membership for 
a member organization may act as an independent Market-Maker and/or an 
independent Floor Broker if the following 4 requirements are satisfied:
    (A) the person obtains the prior written approval to do so, in a 
manner and form prescribed by the Exchange, from the member 
organization for which the person is approved by the Exchange to 
perform floor functions;
    (B) the member organization for which the person is approved by the 
Exchange to perform floor functions agrees, in a manner and form 
prescribed by the Exchange, to guarantee all obligations arising out of 
that person's activities as an independent Market-Maker and/or an 
independent Floor Broker;
    (C) the person is registered as a broker or dealer pursuant to 
Section 15 of the Exchange Act; and
    (D) the person obtains the prior approval to act in this capacity 
from the Membership Committee.

A person who is approved to act as an independent Market-Maker and/or 
an independent Floor Broker pursuant to this paragraph (f) shall be 
personally responsible for all obligations arising out of those 
activities, and the member organization for which the person is 
approved by the Exchange to perform floor functions shall guarantee 
these obligations.
    (g) A member organization may designate one or more inactive 
nominees. An ``inactive nominee'' of a member organization is an 
individual who is eligible to become an effective nominee of that 
organization with respect to any membership for which the organization 
is either an owner (and not a lessor) or is a lessee. The following 
requirements shall apply to inactive nominees:
    (i) to become an inactive nominee of a member organization, an 
individual must be approved for membership and become an effective 
nominee of the member organization, with authorized floor functions, 
within 90 days of the approval for membership;
    (ii) an individual may be an inactive nominee of only one member 
organization;
    (iii) an inactive nominee shall have no rights or privileges of 
membership and shall have no right of access to the trading floor of 
the Exchange, unless and until the inactive nominee becomes an 
effective member pursuant to Rule 3.10; and
    (iv) if at any time an individual remains an inactive nominee for 6 
consecutive months, the individual's eligibility for membership will be 
terminated and the individual must reapply for membership in order to 
again become eligible for inactive nominee status.
    [(a)(1) Pursuant to Rule 3.3, every member organization that owns 
or leases a membership must authorize an individual nominee 
(``nominee''), as defined in Rule 1.1(pp), to represent the 
organization with respect to such membership in all matters relating to 
the Exchange.
    (2) The member organization represented by a nominee shall guaranty 
all obligations arising out of such nominee's representation of the 
member organization in all matters relating to the Exchange. The 
guaranty shall include all obligations to the Exchange and all 
obligations to other members or member organizations resulting from 
Exchange transactions or transactions in other securities, including 
such transactions of the nominee as an independent Market-Maker and/or 
independent Floor Broker for the nominee's own account as authorized in 
Paragraph (a)(4)(C) of this Rule.
    (3) The authorization and guaranty required in Paragraphs (a)(1) 
and (2) of this Rule shall be on a form or forms prescribed by the 
Exchange and filed with the Membership Department.
    (4) The following requirements shall apply to all nominees:
    (A) A nominee must be approved for membership in accordance with 
the Rules of the Exchange.
    (B) A nominee may perform floor functions only on behalf of the 
member organization for which he is authorized.
    (C) Notwithstanding the provisions of paragraph (B) above, a 
nominee, who is a registered broker/dealer, may trade as an independent 
Market-Maker and/or independent Floor Broker; provided that the nominee 
has the prior written approval of the member organization and the 
Exchange. Such approval shall be filed with the Membership Department.
    (b)(1) A member organization may designate an individual as an 
``inactive nominee''. The member organization shall pay a fee, as 
determined by the Board, for the privilege of maintaining the inactive 
nominee status.

[[Page 63071]]

    (2) The following requirements shall apply to inactive nominees:
    (A) To be eligible for inactive nominee status, an individual must 
be approved for membership in accordance with the Rules of the 
Exchange.
    (B) An inactive nominee shall have no rights or privileges of 
membership and shall have no right of access to the trading floor of 
the Exchange, unless and until said inactive nominee becomes an 
effective member pursuant to Rule 3.10, and all applicable Exchange 
fees are paid.
    (C) If an inactive nominee does not become an effective member 
within six (6) months of approval by the Membership Committee, or if at 
any time an individual remains an inactive nominee for six (6) 
consecutive months, the individual's eligibility for membership will be 
terminated. In order to again become eligible for membership or 
inactive nominee status, the individual must reapply for membership 
pursuant to Rule 3.9.]

. . . Interpretations and Policies:

    .01 Nothing in paragraph (d) of this Rule is intended to define or 
limit (i) any obligations between a nominee of a member organization, 
or an individual who has registered his or her membership for a member 
organization, and the member organization itself, (ii) any 
responsibility such a person may have for obligations of a member 
organization by virtue of a contractual obligation or ownership 
relationship to the organization beyond merely being a nominee or 
individual who has registered his or her membership for the 
organization, or (iii) the ability of the Exchange to sanction or take 
other remedial action against such a person pursuant to other Exchange 
rules for rule violations or other activity for which remedial measures 
may be imposed. 
Application Procedures and Approval or Disapproval
    RULE 3.9. (a) Any individual or organization desiring to become a 
member, any applicant or member desiring to act in one or more of the 
membership statuses set forth in Rule 3.2(b) or 3.3(b), any associated 
person required to be approved by the Membership Committee pursuant to 
Rule 3.6(b), and any member desiring to change the Clearing Member that 
guarantees the member's Exchange transactions shall submit an 
application to the Membership Department in a form and manner 
prescribed by the Exchange. 
    (b) The Membership Committee shall establish for each type of 
[membership] application a submission deadline of up to 90 days prior 
to the date that such an application will be considered for approval. 
These submission deadlines shall be published in a regulatory circular. 
[A membership] An application must be submitted to the Membership 
Department in accordance with the applicable submission deadline in 
order to be eligible for consideration. [All application fees must be 
filed with the application. Application fees are not refundable.]
    (c) Any required application fees must be filed with the 
application and are not refundable. 
    (d) Each applicant shall promptly update the application materials 
submitted to the Membership Department if any of the information 
provided in these materials becomes inaccurate or incomplete after the 
date of submission of the application to the Membership Department and 
prior to any approval of the application.
    ([b]e) Within a reasonable time following receipt of an application 
for membership, an application to change membership capacity statuses 
set forth in Rule 3.2(b) or 3.3(b), or an application to change 
Clearing Members, the name of the applicant and the application request 
shall be published in the Exchange Bulletin and posted on the Exchange 
Bulletin Board. The Membership Committee shall determine for each type 
of the foregoing applications the required time period that the above 
information must be posted on the Exchange Bulletin Board, provided 
that in no event shall any such required posting period be less than 10 
days. Notwithstanding the foregoing, the required posting period for a 
member's application to change Clearing Members shall be waived if the 
Clearing Member(s) that will no longer be guaranteeing the member's 
Exchange transactions consent to such waiver in a form and manner 
prescribed by the Exchange. The Membership Committee may also determine 
to implement a posting period requirement for other types of 
applications submitted pursuant to paragraph (a) of this Rule. The 
Membership Committee may shorten or waive a required posting period for 
an applicant if the Membership Committee determines that doing so is 
warranted due to extenuating circumstances.
    (f) The Membership Department shall investigate each applicant 
applying to be a member organization, each associated person required 
to be approved by the Membership Committee pursuant to Rule 3.6(b), and 
each applicant applying to be an individual member (with the exception 
of any individual member applicant who was an individual member within 
6 months prior to the date of receipt of that applicant's membership 
application by the Membership Department). The Membership Department 
may also investigate any other person or organization that submits an 
application pursuant to paragraph (a) of this Rule. 
    [(c) Before an application is approved by the Membership Committee:
    (1) Every individual applicant and, in the case of applicant 
organizations, all persons associated with the organization, shall be 
investigated by the Membership Department. The applicant shall file 
with the Membership Department any additional documents that may be 
required by the Exchange.
    (2) An applicant seeking trading privileges shall have completed 
the requirements of Rule 6.71, Registration of Floor Brokers, or Rule 
8.2, Registration of Market-Makers, including attending the New Member 
Orientation Program and taking the Floor Member Qualification Exam.
    (3) The name of the applicant shall have been posted on the 
Exchange Bulletin Board for at least 10 days.
    (d) An applicant must be approved by the Membership Committee to 
perform in at least one of the recognized capacities of a member as 
stated in Paragraph (b) of Rule 3.1.]
    (g) Any person applying pursuant to paragraph (a) of this Rule to 
have an authorized floor function is required to have attended the 
Exchange's New Member Orientation Program and to have passed the 
Exchange's Floor Member Qualification Exam. Additionally, any person 
who has attended the New Member Orientation Program and taken and 
passed the Floor Member Qualification Exam and who then does not 
possess an authorized floor function for more than 1 year is required 
to re-attend the New Member Orientation Program and to re-pass the 
Floor Member Qualification Exam in order to once again become eligible 
to have an authorized floor function. A person must score 75% or better 
on the Floor Member Qualification Exam in order to pass the Exam. Any 
person who fails the Floor Member Qualification Exam must wait 30 days 
to re-take the Exam after failing the Exam for the first time, must 
wait 60 days to re-take the Exam after failing the Exam for the second 
time, and must wait 120 days to re-take the Exam after failing the Exam 
for a third or subsequent time. The Exchange may not waive any of the 
requirements set forth in this paragraph (g).

[[Page 63072]]

    (h) The Membership Committee may approve an application submitted 
pursuant to paragraph (a) of this Rule only if any applicable posting 
period requirement pursuant to paragraph (e) of this Rule has been 
satisfied, any investigation pursuant to paragraph (f) of this Rule has 
been completed, and any applicable orientation and exam requirements 
pursuant to paragraph (g) of this Rule have been satisfied.
    (i) Each applicant that submits an application pursuant to 
paragraph (a) of this Rule and each person associated with the 
applicant shall submit to the Membership Department any additional 
information requested by the Exchange in connection with the Exchange's 
review of the application and may be required to appear before the 
Membership Committee and/or a File Review Subcommittee of the 
Membership Committee for an in-person interview or interviews. 
    ([e]j) Upon completion of the application process, the Membership 
Committee shall consider and vote on the approval or disapproval of the 
application, unless there is just cause for delay. One such just cause 
for delay is when an applicant is the subject of an inquiry, 
investigation, or proceeding conducted by a self-regulatory 
organization or governmental authority that involves the applicant's 
fitness for membership. In such an instance, the Membership Committee 
need not act on any application submitted by that applicant until the 
matter has been resolved. [Individual applicants and persons associated 
with applicant organizations may be required to appear in person before 
the Membership Committee or a subcommittee thereof. The Committee may 
also require any member or person associated with a member organization 
who may possess information relevant to the applicant's suitability for 
membership to provide information or testimony.]
    ([f]k) Approval of an application requires a vote of the majority 
of the members of the Membership Committee then in office. Any 
applicant that is approved to be a member by the Membership Committee 
must be approved by the Membership Committee to perform in at least one 
of the recognized capacities of a member as stated in Rule 3.1(b). 
Written notice of the action of the Membership Committee, specifying in 
the case of disapproval of an application the grounds therefor, shall 
be provided to the applicant.
    ([g]l) If the application process is not completed within [six (6)] 
6 months of the [filing] submission of the application[form] and the 
appropriate fee(s), the application shall be deemed to be automatically 
withdrawn.

. . . Interpretations and Policies:

    .01  Any member that submits an application pursuant to paragraph 
(a) of this Rule to change Clearing Members shall submit to the 
Membership Department along with the application a financial statement 
in a form prescribed by the Exchange which sets forth the member's 
assets and liabilities. The Membership Department shall provide a copy 
of this financial statement to the new Clearing Member designated in 
the application. 
    .02  The Membership Committee may disapprove the membership 
application of an organization if the Membership Committee determines 
that the name of the organization is confusingly similar to the name of 
an existing member organization. A member organization desiring to 
change the name of the organization shall submit an application to the 
Membership Department in a form and manner prescribed by the Exchange. 
As with member organization applicants, the Membership Committee may 
disapprove a name change requested by a member organization if the 
Membership Committee determines that the desired name is confusingly 
similar to the name of another member organization. For the purposes of 
this Interpretation and Policy .01, the name of an organization shall 
include both its official name and the name under which the 
organization conducts business.
Effectiveness of Membership [Applications] or Approved Associated 
Person Status
    RULE 3.10. (a) Each applicant for membership, for one of the 
membership statuses set forth in Rule 3.2(b) or 3.3(b), or for an 
approved associated person status pursuant to Rule 3.6(b) must become 
effective in that status within 90 days of the date of the applicant's 
approval for that status, except that an applicant to become a lessor 
may become effective in that status within 6 months of the date of the 
applicant's approval for that status.
    (b) An applicant for membership shall become an effective member 
upon (i) satisfying the applicable requirements to obtain a membership 
and (ii) release of a membership to that member by the Membership 
Department.
    [Applicants must become effective members within 90 days of the 
date of approval by the Membership Committee; provided that applicants 
for inactive nominee status must become effective members within 6 
months. Applicants shall become effective as follows:
    (a) An applicant for membership pursuant to paragraph (b) of 
Article Fifth of the Certificate of Incorporation upon release by the 
Membership Department.
    (b) An individual or organizational applicant for membership upon 
purchase of and payment for an Exchange membership and release by the 
Membership Department.
    (c) A lessee applicant upon the transfer of a membership to his use 
pursuant to Rule 3.16 and release by the Membership Department.
    (d) A nominee applicant shall become effective when the member 
organization notifies the Membership Department in writing that the 
nominee should become effective on a specific date on a specific 
membership.]
Notice of [Membership] Effectiveness of Membership or Approved 
Associated Person Status
    RULE 3.11. Promptly following the effectiveness of any membership, 
membership status pursuant to Rule 3.2(b) or 3.3(b), or associated 
person status pursuant to Rule 3.6(b), notice of such effectiveness 
shall be published in the Exchange Bulletin.
    [With respect to each membership that becomes effective in 
accordance with Rule 3.10, the Membership Department shall promptly 
mail a notice thereof to all members and shall post a copy of such 
notice on the bulletin board of the Exchange.]
[Ownership of] Membership Rights and Restrictions on Their Transfer
    RULE 3.12. (a) No rights shall be acquired by ownership of a 
regular membership except the right to an aliquot part of the net 
assets, if any, remaining after the payment of all debts and 
obligations of the Exchange in the event of its dissolution and winding 
up and, if the owner of the membership is in good standing, such rights 
as may be provided by the Constitution and Rules to members in good 
standing.
    (b) Except for the rights granted to the grantee of an 
Authorization to Sell a membership pursuant to Rule 3.14(d) and Rule 
3.15(b):
    (i) The Exchange shall not recognize any interest in the property 
or other rights represented by a membership except that of its owner as 
registered with the Exchange.
    (ii) No recognition or effect shall be given by the Exchange to any 
agreement or to any instrument entered into or executed by a member or 
his legal representatives which purports to transfer or assign the 
interest of the

[[Page 63073]]

member in the member's membership, or in the proceeds or any part 
thereof, or which purports to create any lien or other right with 
respect thereto, or which purports in any manner to provide for the 
disposition of such proceeds to a creditor of such member, nor shall 
payment of such proceeds be made by the Exchange on the order of such 
member.
    [No rights shall be acquired by ownership of a regular membership 
except the right to an aliquot part of the net assets, if any, 
remaining after the payment of all debts and obligations of the 
Exchange in the event of its dissolution and winding up and, if the 
owner of the membership is in good standing, such rights as may be 
provided by the Constitution and Rules to members in good standing. 
Special members shall have no interest in or any right to share in any 
distribution of the property and assets of the Exchange in the event of 
its dissolution and winding up.]
Purchase of Membership
    RULE 3.13. (a) Newly Issued Memberships. [Newly issued memberships 
may be purchased by approved applicants, through the Membership 
Department, when and as made available by the Exchange. Memberships 
purchased under this Paragraph (a) shall be acquired and paid for 
within 10 days of the applicant's receipt of the Notice of Approval 
issued pursuant to Rule 3.8.] When and as made available by the 
Exchange, newly issued memberships may be purchased, pursuant to 
procedures established by the Exchange, by those approved to be an 
owner or lessor.
    (b) Outstanding Memberships. Outstanding transferable memberships 
with respect to which notices of sale have been filed under Rule 
3.14(a) may be purchased [by approved applicants,] through the 
Membership Department and in accordance with the following procedures 
by those approved to be an owner or lessor. [All bids from approved 
applicants] Each membership bid must be submitted in writing to the 
Membership Department [of the Exchange]. Only those approved to be an 
owner or lessor may submit a bid and any such bid shall be canceled at 
such time that the bidder is no longer approved to be an owner or 
lessor. Provided that a bid is not canceled pursuant to the foregoing 
sentence, the bid shall remain in effect for 6 months unless written 
revocation of the bid is received by the Membership Department. The 
Membership Department will file [all bids by class of membership] each 
bid according to the highest price and the earliest submission date. 
The highest bid with the earliest filing date will be posted on the 
Exchange [bulletin board] Bulletin Board and published in the Exchange 
Bulletin. [All bids remain in effect for six months unless written 
revocation thereof is received by the Membership Department.] When a 
bid filed in accordance with the procedures of this [P]paragraph (b) is 
matched with an offer filed in accordance with the [provisions] 
procedures of Rule 3.14(a), neither can be changed or withdrawn. 
[Memberships purchased under this Paragraph (b) shall be acquired and 
paid for within 90 days of the applicant's receipt of the Notice of 
Approval issued pursuant to Rule 3.8.]
    (c) Payment. Not later than the second business day following the 
acceptance of a bid pursuant to paragraph (a) of this Rule or the 
matching of [the] a bid and offer pursuant to paragraph (b) of this 
Rule, the purchaser shall deliver to the Membership Department a 
certified or cashier's check made payable to the Exchange covering the 
purchase price of the membership.
Sale and Transfer of Membership
    RULE 3.14. (a) Sale by Owner. The owner of a transferable 
membership [who] that desires to sell [his] the membership shall submit 
a written offer of sale to the Membership Department. Each offer shall 
remain in effect for 6 months unless written revocation of the offer is 
received by the Membership Department. The Membership Department will 
file [all such offers by class of membership] each offer according to 
the lowest price and the earliest submission date. The lowest offer 
with the earliest filing date will be posted on the Exchange [bulletin 
board] Bulletin Board and published in the Exchange Bulletin. [All 
offers remain in effect for six months unless written revocation 
thereof is received by the Membership Department. After] When an offer 
filed in accordance with the procedures of this [P]paragraph (a) is 
matched with a bid filed in accordance with the [provisions] procedures 
of Rule 3.13(b), neither can be changed or withdrawn. The owner of a 
membership for which [A member who has filed an offer of sale shall, so 
long as he] an offer of sale has been matched with a bid shall, so long 
as the member remains in good standing and until the purchase price of 
the membership has been paid, continue to have all of the rights [and 
privileges, and shall remain subject to all of the duties and 
obligations,], privileges, duties, and obligations of membership.
    (b) Sale [or Cancellation] by Exchange. Whenever one or more of the 
following conditions exist with respect to a [transferable regular 
membership or a special] member that is the owner or lessee of a 
transferable membership, the Exchange may offer the membership for sale 
in accordance with Rule 3.14(a):
    ([1]i) An individual member has died or has been declared legally 
incompetent, and the owner or the legal representative of [such member] 
the owner has failed to consummate a transfer of the membership[(s)] 
within 6 months of the member's death or incompetence or within such 
extended time as may have been granted by the Exchange;
    ([2]ii) A member's good standing has been terminated, or has been 
suspended and has failed to be reinstated at the expiration of the 
period of suspension including any extension of such period [which] 
that may have been granted by the Exchange;
    ([3]iii) A member organization has been dissolved, formally or 
informally, and no transfer of its membership[(s)] has been 
accomplished within 6 months of the dissolution or within such extended 
time as may have been granted by the Exchange.
    [Whenever one or more of such conditions exist with respect to a 
special membership and the Exchange determines not to offer such 
special membership for sale, the Exchange may cancel such special 
membership by filing a cancellation of special membership form with the 
Membership Department. Notice of each such cancellation shall be mailed 
to all members and shall be posted on the bulletin board of the 
Exchange. Following such cancellation, the individual or organization 
having its special membership cancelled shall cease to have any of the 
rights, privileges or obligations of membership.]
    (c) Transfer by Owner. The owner of a transferable membership may 
transfer [such] the membership without adhering to the provisions 
contained in Rule 3.13(b) and [3.14(a)] paragraph (a) of this Rule so 
long as one of the following qualifying circumstances is applicable to 
and descriptive of the desired transfer and the transferee is approved 
[for membership in accordance with the Rules of the Exchange] to be an 
owner or lessor: 
    ([1]i) The owner of a transferable membership (whether or not 
[such] the membership is registered for a member organization) requests 
the transfer of [such] the membership to [his] the member's spouse, 
brother, sister, parent, child, grandparent, or grandchild;

[[Page 63074]]

    ([2]ii) The owner of a transferable membership requests the 
transfer of [such] the membership to an organization which has 
succeeded, through statutory merger, exchange of stock, or acquisition 
of assets to the business of the transferor;
    ([3]iii) The owner of a transferable membership requests the 
transfer of [such] the membership to an organization in which the 
transferor will maintain [a substantial interest, that is,] an interest 
at least equal in value to the [cost or] current market price of the 
membership [whichever is lower]; or
    ([4]iv) The owner of a transferable membership requests the 
transfer of such membership to an individual or organization which is a 
partner or shareholder of the transferor as part or all of a 
liquidation distribution of the transferor.

[Notwithstanding the foregoing, transfers pursuant to this Paragraph 
(c) shall not become effective until there has been deposited with the 
Membership Department an amount equal to the last sale of a membership 
of the same class as the membership being transferred or an acceptable 
Letter of Guarantee from a Clearing Member for such amount, which 
amount shall be applied as though it were proceeds of the sale of a 
membership for the purposes of Rule 3.15.]
    (d) Authorizations to Sell. The owner of a transferable membership 
may voluntarily grant to another Exchange member an Authorization to 
Sell the membership. Authorizations to Sell shall be subject to the 
following provisions:
    (i) An Authorization to Sell shall be effective only if it has been 
executed on a form prescribed by the Exchange and filed with the 
Membership Department.
    (ii) A membership owner may not grant an Authorization to Sell a 
particular membership to more than one member.
    (iii) The grantee of an Authorization to Sell shall have all of the 
authority granted under the Constitution and Rules relating to the sale 
of the membership that would otherwise be vested in the membership 
owner, including the sole authority to determine whether and when to 
submit an offer to sell the membership in accordance with the 
provisions of paragraph (a) of this Rule. Notwithstanding the 
foregoing, a grantee of an Authorization to Sell must (A) notify the 
membership owner in writing at least 3 business days prior to 
exercising the grantee's right to sell the membership of any decision 
by the grantee to exercise that right and (B) provide the Membership 
Department with written verification in a form and manner prescribed by 
the Exchange that the required notice has been provided to the 
membership owner.
    (iv) A membership owner that has granted an Authorization to Sell 
shall have no authority to direct the sale or transfer of the 
membership. An Authorization to Sell shall be irrevocable and may only 
be canceled if the grantee of the Authorization to Sell consents to its 
cancellation in a form and manner prescribed by the Exchange.
    (v) When a membership owner has granted an Authorization to Sell a 
membership, the Exchange shall take direction solely from the grantee 
of the Authorization to Sell with respect to matters relating to the 
sale of the membership. Notwithstanding the foregoing, a membership 
owner and a grantee may have a written contract between them which sets 
forth the circumstances under which the grantee may exercise the 
grantee's authority to sell the membership, and any breaches of this 
written contract may be redressed through arbitration under Chapter 
XVIII of the Rules or through other means permitted by that Chapter. 
The membership owner and the grantee shall promptly file with the 
Membership Department a copy of any such contract and any amendments 
thereto.
    (vi) In the event a grantee of an Authorization to Sell exercises 
the grantee's right to sell the membership by submitting an offer to 
sell the membership in accordance with the provisions of paragraph (a) 
of this Rule, the grantee may not be the purchaser of the membership 
and no bid submitted by the grantee pursuant to Rule 3.13(b) shall be 
matched with the offer to sell the membership unless the membership 
owner consents in a form and manner prescribed by the Exchange to 
having the grantee be the purchaser of the membership.
    (vii) Following the receipt by the Membership Department of an 
Authorization to Sell that has been granted by a member, a cancellation 
of the Authorization to Sell, or a contract concerning the exercise of 
authority under the Authorization to Sell, the Membership Department 
shall provide a copy of the applicable document to any Clearing Member 
that guarantees the member's Exchange transactions.
    (viii) The grant of an Authorization to Sell a membership shall 
include the grant of a security interest in any proceeds from the sale 
of the membership that the grantee of the Authorization to Sell is 
entitled to receive pursuant to Rule 3.15(b), and a properly executed 
Authorization to Sell form that has been filed with the Membership 
Department shall constitute a security agreement which grants the 
foregoing security interest to the grantee of the Authorization to 
Sell. The grantee of an Authorization to Sell may act to perfect the 
foregoing security interest under applicable law, which may include the 
filing of one or more UCC-1 Financing Statements. However, failure by a 
grantee of an Authorization to Sell to perfect the foregoing security 
interest under applicable law shall not affect the rights of the 
grantee under the Rules. In the event of a cancellation of an 
Authorization to Sell pursuant to paragraph (d)(iv) of this Rule, the 
grantee of the Authorization to Sell shall promptly file a Termination 
Statement with every filing authority where UCC-1 Financing Statements 
were filed with respect to the Authorization to Sell. The grantee of an 
Authorization to Sell shall promptly file with the Membership 
Department a file-stamped copy of any UCC filings made with respect to 
the Authorization to Sell.
Proceeds from Sale of Membership
    RULE 3.15. (a) In the event of a sale of a membership for which no 
Authorization to Sell has been granted, the Exchange shall remit the 
sale proceeds from the sale of the membership to the member whose 
membership was sold promptly following receipt of the sale proceeds by 
the Exchange pursuant to Rule 3.13(c).
    (b) In the event of a sale of a membership for which an 
Authorization to Sell has been granted:
    (i) The grantee of the Authorization to Sell shall have 2 business 
days from the date of the sale to notify the Membership Department in 
writing of any claims the grantee has against the member whose 
membership was sold. Such claims shall be limited to claims that are 
related to the Exchange business activities of the member whose 
membership was sold.
    (ii) For the purposes of this Rule, claims related to Exchange 
business activities shall include, but not be limited to, claims 
associated with Exchange transactions, securities or futures 
transactions other than on the Exchange that are related to Exchange 
transactions or positions resulting from Exchange transactions, loans 
or guarantees of loans for the purpose of purchasing an Exchange 
membership, and services provided in connection with any of the 
foregoing. Whether a claim is related to Exchange business activities 
shall be determined solely by the Exchange.

[[Page 63075]]

    (iii) The written claims notification provided by the grantee of 
the Authorization to Sell shall be in a form prescribed by the Exchange 
and shall specify the amount and nature of the claims. Promptly 
following its receipt by the Membership Department, the Membership 
Department shall provide a copy of the written claims notification to 
the member whose membership was sold.
    (iv) The member whose membership was sold shall have 5 business 
days from the date of the sale to either acknowledge or contest, in a 
form and manner prescribed by the Exchange, the claims set forth in the 
written claims notification. In the event the member whose membership 
was sold does not contest a claim in the written claims notification 
within the prescribed time period and in the manner prescribed by the 
Exchange for doing so, the claim shall be deemed to have been 
acknowledged by the member whose membership was sold.
    (v) Promptly following the expiration of the 5 business day period 
under subparagraph (b)(ii) of this Rule:
    (A) The Exchange shall remit to the grantee of the Authorization to 
Sell that portion of the sale proceeds applicable to claims in the 
written claims notification that were acknowledged by the member whose 
membership was sold.
    (B) The Exchange shall escrow that portion of the remaining sale 
proceeds applicable to claims in the written claims notification that 
were contested by the member whose membership was sold.
    (C) The Exchange shall remit to the member whose membership was 
sold any portion of the sale proceeds remaining after the provision for 
any payments and escrow under the above provisions.
    (vi) Any portion of the sale proceeds applicable to contested 
claims that has been escrowed pursuant to this Rule shall remain in 
escrow until the grantee of the Authorization to Sell and the member 
whose membership was sold resolve the claims through arbitration under 
Chapter XVIII of the Rules or through other means permitted by that 
Chapter. Notwithstanding the foregoing, the Exchange may determine to 
release the escrowed portion of the sale proceeds to the member whose 
membership was sold in the event the Exchange determines that the 
grantee of the Authorization to Sell is not proceeding in good faith to 
resolve the contested claims. Escrowed sale proceeds shall bear 
interest at the prevailing money market rate determined by the 
Exchange. The interest on the escrowed sale proceeds shall be available 
to contribute toward the satisfaction of the contested claims.
    (vii) Following the resolution of any contested claims for which 
sale proceeds have been escrowed pursuant to this Rule, the grantee of 
the Authorization to Sell and the member whose membership was sold 
shall notify the Membership Department in a form and manner prescribed 
by the Exchange of the resolution of the claims. Following receipt by 
the Membership Department of notification of the resolution of the 
contested claims, the Exchange shall promptly (A) remit to the grantee 
of the Authorization to Sell that portion of the escrowed sale proceeds 
and interest thereon to which the grantee is entitled pursuant to the 
resolution and (B) remit to the member whose membership was sold that 
portion of the escrowed sale proceeds and interest thereon to which the 
member whose membership was sold is entitled pursuant to the 
resolution.
    [Upon any sale of a membership pursuant to Rule 3.14, the Exchange 
shall hold the proceeds of the sale for a period of 20 days from the 
date of posting notice of the sale in the Exchange Bulletin and on the 
Exchange bulletin board(s), during which period claims against the 
proceeds may be filed by members for payment in accordance with this 
Rule. As soon as practicable following such 20 day period, the proceeds 
shall be applied by the Exchange to the following purposes and in the 
following order of priority:
    (a) The payment of such sums as the Board shall determine are or 
may become due to the Exchange from the member or from the member 
organization on whose behalf the membership was registered.
    (b) The payment of such sums as the Board shall determine are or 
may become due to the Clearing Corporation from the member whose 
membership is transferred or from the member organization on whose 
behalf the membership was registered.
    (c) The payment of such sums as the Board shall determine are due 
by such member or by the member organization on whose behalf the 
membership was registered to other members in payment of claims made by 
such other members arising directly as a result of (1) Exchange 
transactions, (2) transactions of such member in securities other than 
on the Exchange which are effected or carried in an account maintained 
by a clearing member or (3) loans or guarantees of loans to such member 
or member organization for the purpose of purchasing an Exchange 
membership or for any purpose other than the purchase of securities 
which loans were made or guaranteed by such other members. No claim 
asserted under this paragraph shall be considered by the Board nor 
shall any member asserting such a claim have any rights thereunder, 
unless a written statement of such claim shall have been filed with the 
Membership Department prior to the expiration of the 20-day period 
referred to in the first paragraph of this Rule. If the proceeds of the 
sale of a membership are insufficient to pay in full all claims allowed 
under this paragraph, payment shall be made pro rata upon all such 
allowed claims.
    (d) If a claim is contingent or the amount that ultimately will be 
due thereon cannot, for any reason, be immediately ascertained or 
determined, the Board in its sole discretion may, out of the proceeds 
of the sale of the membership, reserve and retain for later 
distribution in accordance with the Rules such amount as it may deem 
appropriate, pending the determination of the amount due on such claim.
    (e) After provision for the payment of the sums payable under 
paragraphs (a), (b) and (c) hereof and provision for the reserve, if 
any, under paragraph (d) hereof, there may, in the discretion of the 
Board, be deducted from the remaining proceeds and paid to the Exchange 
the amount of any unusual expenses incurred by the Exchange involving 
the disposition of such proceeds.
    (f) The surplus, if any, of proceeds of the transfer of a 
membership, after provision for the above payments and the setting 
aside of the reserve under paragraph (d) hereof, shall be paid to the 
member whose membership is transferred, or to his or its legal 
representatives.
    (g) No recognition or effect shall be given by the Exchange to any 
agreement or to any instrument entered into or executed by a member or 
his legal representatives which purports to transfer or assign the 
interest of such member in his or its membership, or in the proceeds or 
any part thereof, or which purports to create any lien or other right 
with respect thereto, or which purports in any manner to provide for 
the disposition of such proceeds to a creditor of such member, nor 
shall payment of such proceeds be made by the Exchange on the order of 
such member.]
. . . Interpretations and Policies:
    [.01  Notwithstanding the language of paragraph (g) of the Rule and 
subject to the provisions in paragraphs (a) through (f) respecting 
disposition of proceeds of sale, the Exchange may recognize and

[[Page 63076]]

give effect to a valid instrument by which a member, in consideration 
of a loan or guarantee of a loan by another member for the purpose of 
purchasing a membership, has authorized the lending or guaranteeing 
member to sell that membership.]
    .01[.02]  It is the policy of the Exchange not to impose a transfer 
fee on the sale of an Exchange membership and not to remit to the 
[selling] member whose membership was sold any interest earned while 
the proceeds of the sale are held by the Exchange [pursuant to Rule 
3.15], except as provided in subparagraphs (b)(iv) and (b)(v) of this 
Rule with respect to escrowed sale proceeds.
    [.03  Where sums are or may become due to more than one Clearing 
Corporation, the priority set forth in paragraph (b) shall inure to the 
benefit of each such Clearing Corporation pro rata.]
Special Provisions Regarding Chicago Board of Trade Exerciser 
Memberships
    RULE 3.16. (a) [Surrender of Memberships] Termination of 
Nontransferable Memberships. [Individuals or organizations owning 
nontransferable memberships acquired pursuant to paragraph] A 
nontransferable membership acquired by a person pursuant to Paragraph 
(b) of Article Fifth of the Certificate of Incorporation [or owning 
special memberships may surrender such memberships by giving notice 
thereof to the Membership Department, which shall terminate such 
membership] shall terminate (i) upon receipt by the Membership 
Department of written notice from the person that the person is 
surrendering the membership or (ii) at such time that the person is no 
longer entitled to membership on the Exchange in accordance with 
Paragraph (b) of Article Fifth of the Certificate of Incorporation. 
Notice of each such termination shall be [mailed to all members and 
shall be posted on the bulletin board of the Exchange] published in the 
Exchange Bulletin.
    [(b) Leased Memberships. (i) The owner of a transferable regular 
membership in good standing may lease such membership to an individual 
or organization, provided the lessee is approved for membership in 
accordance with the Rules of the Exchange. Lease agreements, which must 
be approved by the Exchange in accordance with Rule 3.6, shall include 
provisions covering (A) the duration of the lease arrangement; (B) the 
consideration to be paid by the lessee; (C) the assignability of the 
respective interests of the lessee and lessor in such lease agreement; 
and (D) as between the parties, which party shall exercise the voting 
rights of the membership and which party shall provide the funds 
necessary to satisfy all applicable Exchange dues, fees and other 
charges. Any division of rights and responsibilities between lessor and 
lessee shall not affect the obligation of the lessor to pay all amounts 
due the Exchange.
    (ii) The Lease of a regular membership or the reversion of a 
previously leased membership to the lessor upon termination of the 
lease agreement shall not become effective until there has been 
deposited with the Membership Department an amount equal to the last 
membership sale or an acceptable Letter of Guarantee from a Clearing 
Member for such amount, which amount shall be applied to claims of 
member creditors of the previous lessee which arose in the course of 
that previous lease arrangement or of the lessor as though it were 
proceeds of the sale of a membership for the purposes of Rule 3.15 
hereof.
    (iii) In the event the lessor of a membership effects a sale 
thereof pursuant to the provisions of Rule 3.14(a), claims may be made 
against the proceeds from the sale of such membership in accordance 
with Rule 3.15 by members having claims against either the lessee or 
the lessor, with priority given to claims made against the lessee.
    (iv) Special memberships shall not be leasable.]
    (b[c]) Board of Trade Exercisers. For the purpose of entitlement to 
membership on the Exchange in accordance with Paragraph (b) of Article 
Fifth of the Certificate of Incorporation of the Exchange (``Article 
Fifth(b)'') the term ``member of the Board of Trade of the City of 
Chicago'' (the ``CBOT''), as used in Article Fifth(b), is interpreted 
to mean an individual who is either an ``Eligible CBOT Full Member'' or 
an ``Eligible CBOT Full Member Delegate,'' as those terms are defined 
in the Agreement entered into on September 1, 1992 (the ``Agreement'') 
between the CBOT and the Exchange, and shall not mean any other person. 
In order to permit Eligible CBOT Full Members and Eligible CBOT Full 
Member Delegates to participate in an offer, distribution or redemption 
of the kind referred to in the last two sentences of Paragraph 3(a) of 
the Agreement, and solely for such purpose, the Exchange agrees to 
waive all membership dues, fees and other charges and all qualification 
requirements, other than those that may be imposed by law, that may be 
applicable to the application for membership on the Exchange of each 
Eligible CBOT Full Member and Eligible CBOT Full Member Delegate who 
wishes to exercise the Exercise Right during the period commencing on 
the date the Exchange gives notice to the CBOT pursuant to Paragraph 
3(b) of the Agreement and ending on the date such individual 
participates in such offer, distribution or redemption (as the case may 
be); provided, however, that (i) no Exerciser Member (as defined in the 
Agreement) for whom dues, fees and other charges and qualification 
requirements are waived in accordance with the foregoing shall have any 
rights as a member of the Exchange other than to participate in such 
offer, distribution or redemption, and (ii) the membership on the 
Exchange of each such Exerciser Member shall terminate immediately 
following the time such individual participates in such offer, 
distribution or redemption.

Leased Memberships

    RULE 3.17. (a) The owner of a transferable membership in good 
standing may lease the membership to an individual or organization, 
provided that the lessee is approved for membership in accordance with 
the Rules, the lease is made pursuant to a written lease agreement, and 
the lease is pre-approved by the Exchange. The Exchange shall bear no 
liability to a lessor or lessee in connection with the Exchange's 
review and approval of a lease agreement.
    (b) A lessor of a membership shall not have any liability for 
claims against a lessee of that membership solely by virtue of being a 
lessor of the membership. Nothing in this paragraph (b) is intended to 
limit or define any responsibility a lessor may have for claims against 
a lessee by virtue of a contractual obligation or ownership 
relationship between the lessor and lessee beyond the lease of a 
membership from the lessor to the lessee.
    (c) Each membership lease agreement must include such provisions as 
may be required by the Exchange and must also include provisions 
covering the following subjects: (i) the duration of the lease 
arrangement; (ii) the consideration to be paid by the lessee; (iii) the 
assignability of the respective interests of the lessee and lessor in 
the lease agreement; (iv) as between the parties, which party shall 
exercise the voting rights of the membership; and (v) as between the 
parties, which party shall provide the funds necessary to satisfy all 
applicable Exchange dues, fees, and other charges.
    (d) The lessee under a lease shall promptly file the lease 
agreement and any amendments thereto with the

[[Page 63077]]

Membership Department and shall promptly notify the Membership 
Department of any termination of the lease before the termination 
becomes effective.
    (e) In the event a lessor sells or transfers a membership while it 
is being leased to a lessee, the purchaser or transferee of the 
membership shall be required to lease the membership to the lessee 
pursuant to the terms of the lessee's existing lease agreement with the 
lessor for a period of 20 business days following the date the 
membership is transferred to the purchaser or transferee. The purchaser 
or transferee may satisfy this requirement by making arrangements with 
another membership owner to permit the lessee to lease a membership 
from that membership owner for the required time period pursuant to the 
terms of the lessee's existing lease agreement. The lessee may waive 
the requirements of this paragraph (e) in a form and manner prescribed 
by the Exchange. It shall be a violation of this Rule for a lessor to 
circumvent the requirements of this paragraph (e) by improperly 
terminating a membership lease prior to the sale or transfer of the 
membership for the purpose of avoiding the applicability of the 
requirements of this paragraph (e). If the Exchange determines that 
such a circumvention has taken place, the Exchange may impose the 
requirements of this paragraph (e) upon the purchaser or transferee of 
the membership and/or take disciplinary action against the lessor 
pursuant to Chapter XVII of the Rules.
    (f) In the event a lessor sells or transfers a membership while it 
is being leased to a lessee, the lessor shall remit to the purchaser or 
transferee of the membership no later than the date the membership is 
transferred to the purchaser or transferee any amounts paid to the 
lessor by the lessee under the lease agreement for any portion of the 
lease period, up to 20 business days from the transfer date, during 
which the lessor will no longer be leasing the membership to the 
lessee. The lessor shall also remit to the lessee by the transfer date 
any amounts paid to the lessor by the lessee under the lease agreement 
for any portion of the lease period beyond 20 business days from the 
transfer date. Notwithstanding the foregoing, in the event the lessee 
waives the requirements of paragraph (e) of this Rule, the lessor shall 
remit to the lessee by the transfer date all amounts paid to the lessor 
by the lessee under the lease agreement for any portion of the lease 
period during which the lessor will no longer be leasing the membership 
to the lessee.

Members and Associated Persons Who Are or Become Subject to a Statutory 
Disqualification

    RULE 3.18. (a) The Exchange may determine in accordance with the 
provisions of this Rule not to permit a member or associated person of 
a member to continue in membership or association with a member, or to 
condition such continuance in membership or association, if the member 
or associated person is or becomes subject to a statutory 
disqualification under the Exchange Act.
    (b) If a member or associated person of a member who is or becomes 
subject to a statutory disqualification under the Exchange Act wants to 
continue in Exchange membership or association with a member, the 
member or associated person must, within 10 days of becoming subject to 
a statutory disqualification, submit an application to the Membership 
Department, in a form and manner prescribed by the Exchange, seeking to 
continue in membership or association with a member notwithstanding the 
statutory disqualification. The application shall be accompanied by 
copies of all documents that are contained in the record of the 
underlying proceeding that triggered the statutory disqualification.
    (c) Following the receipt of an application submitted pursuant to 
paragraph (b) of this Rule, or in the event the Exchange becomes aware 
that a member or associated person of a member is subject to a 
statutory disqualification and has failed to submit an application 
pursuant to paragraph (b) of this Rule within the required time period, 
the Chairperson of the Membership Committee shall appoint a panel 
composed of the Membership Committee Chairperson and two other members 
of the Membership Committee to conduct a hearing concerning the matter 
pursuant to paragraph (f) of this Rule. In the case of recusal of the 
Membership Committee Chairperson, the Chairperson shall appoint another 
member of the Membership Committee to serve on the panel in place of 
the Membership Committee Chairperson.
    (d) Any person who is the subject of a proceeding under this Rule 
is entitled to be accompanied, represented, and advised by counsel at 
all stages of the proceeding.
    (e) Any person who is the subject of a proceeding under this Rule 
and any member or associated person of a member shall promptly submit 
any information requested by the Membership Department or hearing panel 
in connection with the proceeding.
    (f) The hearing panel shall hold a hearing to determine whether to 
permit the member or associated person of a member who is the subject 
of a proceeding under this Rule to continue in membership or 
association with a member, and if so, whether to condition such 
continuance in membership or association. The hearing shall be held 14 
or more days following the receipt of an application, or the initiation 
of a proceeding, pursuant to paragraph (c) of this Rule. The Exchange 
shall notify the subject of the proceeding in writing of the date, 
time, and location of the hearing. Both the subject of the proceeding 
and Exchange staff will be afforded an opportunity to present relevant 
information, arguments, and witnesses during the hearing. The hearing 
panel shall regulate the conduct of the hearing, and formal rules of 
evidence shall not apply. The subject of the proceeding shall be 
required to attend the hearing, and the Membership Department or 
hearing panel may require any member or associated person of a member 
to testify at the hearing. A verbatim record of the hearing shall be 
kept.
    (g) Following the hearing, the hearing panel shall present its 
recommended decision to the Membership Committee, which may ratify or 
amend the decision. Failure to timely file an application pursuant to 
paragraph (b) of this Rule is a factor that may be taken into 
consideration in rendering the decision. The decision shall be in 
writing and set forth the basis for the decision. The decision shall be 
promptly provided to the subject of the proceeding under this Rule and 
to the Executive Committee. The Executive Committee may determine 
within 7 days after the issuance of the Membership Committee's decision 
to order review of the decision. If the Executive Committee does not 
order review of the Membership Committee's decision, the Membership 
Committee's decision shall become the final decision of the Exchange.
    (h) If the Executive Committee orders review of the Membership 
Committee's decision, the review shall be conducted by the Executive 
Committee or a panel thereof composed of at least 3 members of the 
Executive Committee, whose decision must be ratified by the Executive 
Committee. Unless the Executive Committee shall decide to open the 
record for the introduction of additional information or argument, any 
determination to order review of the Membership Committee's decision 
and any review of the decision shall be

[[Page 63078]]

based solely on the record of the proceeding. The decision of the 
Executive Committee shall be in writing, shall be promptly provided to 
the subject of the proceeding, and shall be the final decision of the 
Exchange.
    (i) No determination of the Membership Committee to discontinue or 
condition a person's membership or association with a member pursuant 
to this Rule shall take effect until the review procedures under 
paragraph (h) of this Rule have been exhausted or the time for review 
has expired.

. . . Interpretations and Policies:

    .01  The Exchange may waive the provisions of this Rule when a 
proceeding is pending before another self-regulatory organization to 
determine whether to permit an associated person of a member to 
continue in membership or association with the member notwithstanding a 
statutory disqualification. In the event the Exchange determines to 
waive the provisions of this Rule with respect to an associated person, 
the Department of Financial and Sales Practice Compliance shall 
determine whether the Exchange will concur in any Exchange Act Rule 
19h-1 filing made by another self-regulatory organization with respect 
to the associated person.
    .02  If an associated person of a member is or becomes subject to a 
statutory disqualification under the Exchange Act, the member shall 
immediately provide written notice to the Membership Department of the 
name of the associated person, the person's capacity with the member, 
and the nature of the statutory disqualification.
[Death, Retirement, Withdrawal and Resignation] Termination from 
Membership
    RULE [3.17] 3.19. The membership status of a member shall 
automatically terminate at such time that the member does not possess a 
membership through ownership, lease, or registration of a membership to 
the member. The membership of a member organization shall also 
automatically terminate at such time that the member organization has 
no nominee or person who has registered his or her membership for the 
member organization. Notwithstanding the foregoing, if the Exchange 
determines that there are extenuating circumstances, the Exchange may 
permit a member to retain the member's membership status for such 
period of time as the Exchange deems reasonably necessary to enable the 
member to obtain a membership, a substitute nominee, or a substitute 
person to register his or her membership for the member, as applicable.
    [Upon the death, retirement, withdrawal or resignation from a 
member organization of an individual member whose membership is 
registered for the organization, of a nominee, or of the general 
partner--leaving the organization without a membership or without a 
nominee, or without a general partner--the Exchange may permit the 
organization to continue to act as a member in good standing for such 
period as the Exchange deems reasonably necessary to enable the 
organization to acquire a membership, to obtain approval of a 
substitute nominee, or to admit a new general partner, as applicable.]
Dissolution and Liquidation of Member Organizations
    RULE [3.18] 3.20. Every member organization shall promptly [notify] 
provide written notice to the Department of Financial and Sales 
Practice Compliance [in writing upon the] and to the Membership 
Department of any adoption of a plan of liquidation or dissolution of 
the member organization and of any actual liquidation or dissolution of 
the member organization. Upon receipt of such a notice, the member may 
be suspended in accordance with Chapter XVI of the Rules.
Obligations of Terminating Members
    RULE [3.19] 3.21.  Each terminating member shall promptly (i) 
return to the Exchange all Exchange badges, including trading and 
access badges, that were issued to the member by the Exchange with 
respect to that member's terminating membership status, (ii) make any 
outstanding filings required under Exchange rules, and (iii) pay any 
outstanding dues, fees, assessments, charges, fines, or other amounts 
due to the Exchange, the Securities and Exchange Commission, or the 
Securities Investor Protection Corporation.
    [Every member who sells or transfers his membership pursuant to the 
provisions of this Chapter must be current in all filings and payments 
of dues, fees and charges relating to that membership, including filing 
fees and charges required by the Securities and Exchange Commission and 
the Securities Investor Protection Corporation. If a member fails to 
make all such filings, or to pay all such dues, fees and charges, or to 
turn in his trading badge and membership certificate, the Exchange may, 
notwithstanding the other applicable provisions of this Chapter, 
withhold distribution of the proceeds of sale of said membership, or 
delay the effectiveness of the membership of the transferee, until such 
time as any such failures have been remedied.
Government Securities Options Permits
    RULE 3.20 Permits issued for effecting transactions pursuant to 
Exchange Rules and policies in Government securities options settled by 
physical delivery shall be effective for one year and shall be 
renewable annually for a maximum duration of four years from the date 
of issuance. Permits which are not renewed shall be retired and shall 
not be reissued by the Exchange. Permits not issued by December 31, 
1984 shall be withdrawn.
Privileges and Responsibilities of Permit Holders
    RULE 3.21. (a) Privileges. Government securities options permits 
issued by the Exchange shall entitle the holders to:
    (i) be admitted to the Floor of the Exchange during business days;
    (ii) enter into principal transactions as a Market-Maker in 
Government securities options during the prescribed business hours and 
days;
    (iii) purchase a regular membership during the last month of the 
three-year permit period in accordance with procedures established by 
the Exchange;
    (iv) such other privileges as may subsequently be granted by the 
Board.
Permit holders, however, shall have no right to petition or to vote at 
Exchange meetings or elections and shall have no interest in Exchange 
assets.
    (b) Nontransferability. The foregoing privileges may not be 
transferred or assigned; however, an organization with an approved 
permit-holder nominee may, upon approval of the Exchange, substitute 
another permit-holder nominee.
    (c) Dues and Fees. Fees for the first fifty (50) permits issued 
shall be ten-thousand dollars ($10,000) per year. Permit holders shall 
not be charged Exchange dues, but each permit holder and applicant for 
a permit shall be subject to all other fees and charges established by 
the Board.
. . . Interpretation and Policies:
.01  The Board has entitled permit holders to enter into agency 
transactions as Floor Brokers in Government securities options during 
the prescribed business hours and days.
Procedures for Government Securities Options Permit Issuance]
    RULE 3.22. Reserved. [Permits may be issued to qualified applicants 
who are either individuals or organizations with an approved nominee 
meeting the same

[[Page 63079]]

qualifications as an individual permit holder. The Membership Committee 
shall select the applicants who appear most qualified based on 
demonstrated knowledge of and experience in the securities and related 
industries, adequacy of financial resources and successful completion 
of a proficiency examination.
Additional Government Security Options Permits
    RULE 3.22A. The Exchange may issue up to 20 three-year permits for 
effecting transactions in Government security options settled by 
physical delivery, since no new permits may be issued under Rule 3.20. 
All of these permits shall expire three years after September 14, 1987. 
These additional permits shall have the same terms as the old permits 
with the following exceptions. There is no right to purchase a regular 
membership. No member or member organization may hold more than two 
permits. A member who is a sole proprietor may employ a nominee to use 
a permit, with the approval of the Membership Committee. The Membership 
Committee may withdraw, temporarily or permanently, some or all unused 
permits.]
Integrated Billing System
    RULE 3.23. Every member must designate a [clearing member for the 
payment of his] Clearing Member for the payment of the member's 
Exchange invoices by means of the Exchange's integrated billing system 
(``IBS''). The designated [clearing member] Clearing Member shall pay 
to the Exchange on a timely basis any amount that is not disputed 
pursuant to IBS procedures by the member who is directly involved. Such 
payments shall be drafted by the Exchange against the designated 
[clearing member's] Clearing Member's account at the Clearing 
Corporation;. The [the] Clearing Corporation shall have no liability in 
connection with its forwarding to the Exchange each month a check 
representing the total amount that the Exchange advises the Clearing 
Corporation is owed to the Exchange.
Member Death Benefit
    RULE 3.24. (a) Upon the death of an individual who is eligible for 
the Member Death Benefit, the Exchange shall pay the Member Death 
Benefit to the beneficiary designated by such individual in a filing 
made with the Membership Department in a form and manner prescribed by 
the Exchange.
    (b) The following individuals shall be eligible for the Member 
Death Benefit:
    (i) any individual who is an active member at the time of his or 
her death; and
    (ii) any individual who (i) was an active member within 90 days 
prior to the date of his or her death and (ii) was an active member 
during at least 274 out of the 365 days preceding the date of his or 
her last termination from active member status.
    (c) For the purposes of this Rule, the term ``active member'' shall 
mean any natural person who is a nominee of a member organization, a 
[CBT] Chicago Board of Trade exerciser, a lessee of an Exchange 
membership, or an owner of an Exchange membership that is not being 
leased to a lessee.
    (d) In no event shall more than one Member Death Benefit be paid by 
reason of the death of an individual who is eligible to receive the 
Member Death Benefit.
    (e) The Member Death Benefit shall be $50,000.
    (f) In the event that the Exchange pays a Member Death Benefit, the 
Exchange shall assess each active member at the time of the assessment 
an amount equal to $50,000 divided by the number of active members at 
the time of the assessment.
Transfer of Individual Membership in Trust
    RULE 3.25. An individual member in good standing who owns a 
membership may transfer [his] the membership in trust, subject to each 
of the following conditions:
    (a) Subject to paragraph (b) [below] of this Rule, the member 
transferring [his] a membership in trust (the ``Trust Member''), during 
[his] the member's lifetime, shall be the sole trustee and sole 
beneficiary of the trust. The Trust Member shall remain personally 
responsible for all obligations and liabilities associated with the 
membership and its use, and the membership shall remain subject to all 
of the Rules of the Exchange.
    (b) The trust must be a living trust. The terms of the trust shall 
provide that in the event the Trust Member dies, is declared legally 
incompetent, or is in any condition that substantially impairs [his] 
the Trust Member's ability to transact ordinary business (is 
``disabled''), as certified in a written opinion furnished to the 
Exchange by the Trust Member's physician who has personally examined or 
treated [him] the Trust Member, a legally qualified individual or 
institution may be appointed as successor trustee for the sole purpose 
of transferring the membership in accordance with the Rules [of the 
Exchange, including the requirements of Rule 3.15], subject to the 
right of the Exchange to offer the membership for sale in accordance 
with Rule 3.14(b)([1]i). Notwithstanding the foregoing, the terms of 
the trust may authorize the successor trustee to continue to hold the 
membership in trust for the benefit of the Trust Member during any 
period when the Trust Member is declared legally incompetent or is 
disabled so long as the membership is leased for that period in 
accordance with the requirements of Rule 3.17 [3.16(b)]. Furthermore, 
the trust shall provide that the Exchange shall bear no liability for 
any actions taken or omitted by the Trust Member or any successor 
trustee in respect of the administration of the trust or the management 
of trust assets.
    (c) A membership held in trust may be transferred during the 
lifetime of the Trust Member or at [his] the Trust Member's death in 
accordance with the provisions of Rule 3.14(c)([1]i), and may also be 
transferred during the lifetime of the Trust Member in accordance with 
the provisions of Rule 3.14(c)([3]iii), subject in either case to the 
requirements of the introductory clause and the last sentence of Rule 
3.14(c)]. Additionally, an Authorization to Sell may be granted with 
respect to a membership held in trust, in which case the provisions of 
Rule 3.14(d) and Rule 3.15(b) shall be applicable, and a membership 
held in trust may be sold in accordance with the provisions of Rule 
3.14 and Rule 3.15. 
    (d) A membership held in trust may also be transferred to the Trust 
Member to be held directly and not in trust.
    (e) A member desiring to transfer a membership into trust must 
submit to the Membership Department, in a form and manner prescribed by 
the Exchange, an application to transfer the membership into trust, a 
[A] copy of the trust agreement reflecting the foregoing requirements 
[shall be furnished to the Exchange, accompanied by], and the 
certification of the attorney who prepared the trust agreement that it 
conforms to the requirements of this Rule. The Exchange may disapprove 
the transfer if it finds the trust agreement fails to satisfy the 
requirements of this Rule by written notice of such disapproval sent to 
the member proposing the transfer.
    (f) After the transfer of a membership into trust has been approved 
by the Exchange, the Trust Member must promptly submit to the 
Membership Department any amendments to the trust agreement and must 
promptly notify the Membership Department in writing of any changes in 
the information set forth in the application

[[Page 63080]]

to transfer the membership into trust, any changes in successor 
trustee, any release of the membership out of trust, and any 
termination of the trust. In the event that the membership is released 
from the trust, the trust terminates, or the trust agreement is amended 
so that it no longer complies with the requirements of this Rule, the 
Exchange shall deem the membership to have reverted to the Trust Member 
to be held directly and not in trust. 
IPC Permits
    RULE 3.26. (a) IPC Permits. An IPC Permit shall be issued to each 
of the 33 persons who were members of the Bolsa Mexicana de Valores as 
of January 1, 1996. IPC Permits are non-transferable in any manner, 
whether by voluntary or involuntary sale, gift, lease or otherwise. A 
holder of an IPC Permit shall have either the right set forth in 
[sub]paragraph (b) or the right set forth in [subparagraph (c) of this 
Rule 3.26] paragraph (c) of this Rule.
    (b) IPC Permit Exercisers. A holder of an IPC Permit may apply on 
its own behalf or on behalf of one of its subsidiaries to become an IPC 
Permit Exerciser. Such applications shall be subject to the same 
approval procedures as are applicable under the Rules of the Exchange 
to applications for membership. If the person on whose behalf the 
application is filed is qualified for membership on the Exchange and if 
the application is approved and becomes effective, the applicant shall 
become an IPC Permit Exerciser and shall have the rights, obligations, 
and limitations set forth below.
    (1) Rights and Privileges. IPC Permit Exercisers shall enjoy the 
privileges of CBOE membership with respect to, and only with respect 
to, the trading of IPC Index Option Contracts. Among such privileges 
are (i) the right of a nominee of the IPC Permit Exerciser to access 
the trading floor for the purpose of executing orders upon satisfaction 
of all regulatory requirements and approvals that apply to membership 
generally; (ii) the right, through a nominee, to register and to be 
appointed as a Market-Maker in IPC Index Options; (iii) the right, 
through a nominee, to register and to act as a Floor Broker in IPC 
Index Options; (iv) the right to pay transaction fees to the Exchange 
at the member firm rate for transactions in IPC Index Options in its 
proprietary account; and (v) the right to use Exchange facilities in 
support of its trading in IPC Index Options on the same basis as other 
members of the Exchange. The rights of an IPC Permit Exerciser are not 
transferable in any manner.
    (2) Obligations. IPC Permit Exercisers and their associated persons 
shall be obligated to comply with all of the provisions of the Rules of 
the Exchange and the federal securities laws to the same extent as 
other members of the Exchange and their associated persons. For this 
purpose, all references in the Exchange Rules to members shall be 
deemed to include IPC Permit Exercisers. Without limiting the 
generality of the foregoing, such obligations shall include (i) the 
obligation to pay all fees, dues, and other charges imposed by the 
Exchange, (ii) the obligation to maintain and to file with the Exchange 
all records required of members and their associated persons, (iii) the 
obligation to take all required examinations, (iv) the obligation to 
comply with the Exchange's business conduct and floor dealing rules, 
(v) the obligation, if acting as a Market-Maker, to perform the 
obligations of a Market-Maker, (vi) the obligation, if approved to 
conduct business with the public, to comply with the provisions of 
Chapters IX and XII of the [Exchange's] Rules, (vii) the obligation to 
be subject to the Exchange's disciplinary and arbitration jurisdiction 
under Chapters XVII and XVIII, respectively, of the [Exchange's] Rules, 
and (viii) the obligation to be subject to the Exchange's limitation of 
liability rules.
    (3) Limitations. IPC Permit Exercisers shall have none of the 
rights of members under the laws of the State of Delaware, the 
Certificate of Incorporation of the Exchange, or the Constitution of 
the Exchange. Without limiting the generality of the foregoing, IPC 
Permit Exercisers shall have no interest in the property or assets of 
the Exchange, shall have no right to share in any distribution in the 
property and assets of the Exchange, shall have no right as an IPC 
Permit Exerciser to vote on issues submitted to the membership for 
vote, and shall have no right as an IPC Permit Exerciser to be elected 
to the Board of Directors. IPC Permit Exercisers will be deemed to be 
non-members in respect of transactions in Exchange products other than 
IPC Index Options, and registration of a nominee as a Market-Maker or 
Floor Broker in IPC Index Options shall not be deemed to give the 
nominee the right to effect transactions in such capacity in any other 
Exchange product. Accordingly, nominees of IPC Permit Exercisers may 
not while on the floor of the Exchange enter into transactions, nor 
flash orders to other trading posts, give verbal orders to brokers at 
other trading posts, or enter time-stamped orders to be executed by 
other members at other trading posts, in any Exchange product other 
than IPC Index Options, and if an IPC Permit Exerciser enters an order 
through an Exchange member from off the floor in Exchange products 
other than IPC Index Options, that order must be treated under the 
Exchange's Rules as the order of a customer.
    (c) Rights of Holders of IPC Permits. The Exchange transaction fees 
for the proprietary transactions in IPC Index Options of holders of IPC 
Permits that have not become IPC Permit Exercisers, either directly or 
through a subsidiary, shall be charged at member firm rates.
Options Trading Permits
    RULE 3.27. (a) Issuance, transfer and lease. Seventy-five Options 
Trading Permits (``Permits'') shall be distributed on or promptly 
following the date (herein called the ``Effective Date'') on which 
trading begins on the floor of the Exchange in NYSE Options (as 
hereinafter defined) pursuant to agreement between the Exchange and the 
New York Stock Exchange (``NYSE''), as follows:
    (1) Non-specialists. Each NYSE non-specialist options firm and sole 
proprietor, or any successor thereto approved by the Exchange, doing 
business on the NYSE options trading floor on the Effective Date will 
be entitled to be issued the same number of Permits as that firm had 
valid NYSE options floor badges on December 5, 1996; provided, however, 
that, in order for a person to be entitled to be issued a Permit in 
respect of a floor badge, the holder of that badge on December 5, 1996, 
must personally engage in one or more of the activities specified in 
subparagraph (b)(2) of this Rule on the Exchange.
    (2) Specialist firms. Each NYSE specialist options firm (including 
joint books) on the Effective Date, or any successor thereto approved 
by the Exchange, will be entitled to be issued the same number of 
Permits as that firm had valid NYSE options floor badges on December 5, 
1996. Each specialist firm to which a Permit is issued shall have the 
right to select the person who, from time to time, shall be its nominee 
in respect of such Permit, subject to qualifying under the Rules of the 
Exchange.
    (3) Creation of lease pool and distribution of proceeds. The 
Exchange will deposit into a ``lease pool'' any of the [seventy-five] 
75 Permits not issued to firms in accordance with the foregoing 
subparagraphs (1) and (2) hereof, as well as any Permits which may be 
surrendered pursuant to subparagraph (4) hereof, and will

[[Page 63081]]

attempt to lease such Permits through an auction or other competitive 
process determined by the Exchange. The proceeds received by the 
Exchange on or before the first day of each calendar quarter from the 
leases will be distributed on the fifteenth day of such calendar 
quarter pro rata to the persons whose names and mailing address are on 
a list furnished to the Exchange by NYSE on or after the Effective Date 
as a list of the 92 persons who were (a) NYSE members using or leasing 
out their NYSE options trading rights (``OTRs'') on September 5, 1996, 
or (b) holders of separated OTRs on that date, or (c) transferees on or 
prior to the Effective Date of such persons. The Exchange shall have no 
responsibility or liability for any inaccuracy or mistake in such list. 
[No lease of a Permit in the lease pool shall become effective until 
there has been deposited with the Membership Department of the Exchange 
an acceptable Letter of Guarantee from a Clearing Member in an amount 
determined in accordance with the next sentence, which amount shall be 
applied to the payment of claims pursuant to Rule 3.15 as though such 
amount were the proceeds from the sale of a membership. During the 
first year following the Effective Date and thereafter until there has 
been a sale of a Permit, the amount shall be $50,000, and thereafter 
the amount shall be equal to the last sale price of a Permit.] The 
Exchange shall have no obligation as the lessor of a Permit to any 
person.
    (4) Surrender of Permits. In the event a Permit is issued pursuant 
to subparagraph (1) hereof in respect of an NYSE options floor badge 
and the NYSE badgeholder, or a successor approved by the Exchange, does 
not engage in one or more of the activities specified in subparagraph 
(b)(2) of this Rule for one year following the Effective Date, then, 
unless the Exchange shall consent to the termination of such 
activities, the Permit shall be deemed to be surrendered forthwith and 
shall be added to the lease pool established pursuant to subparagraph 
(3) hereof.
    (5) Transfer and lease. Permits issued pursuant to subparagraphs 
(1) and (2) hereof shall not be transferable (whether by sale, gift, 
involuntary transfer, lease, or otherwise) for one year following the 
Effective Date; provided that the foregoing shall not restrict the 
right of specialist firms to change the nominee of a Permit issued 
pursuant to subparagraph (2) hereof. Notwithstanding the foregoing, the 
Exchange may consent to the transfer of a Permit in the event of the 
death of, hardship affecting, or certain successions in ownership of 
the holder of such Permit. Commencing one year after the Effective 
Date, all Permits shall be freely transferable in accordance with the 
provisions of the Rules applicable to the transfer of memberships.
    (b) Trading rights. Each holder of a Permit who satisfies the 
qualifications for membership in accordance with the Rules, or its 
nominee in the case of a holder who is not a natural person (each such 
holder or nominee is referred to herein as a ``Permit holder''), shall 
for the term of the Permit be deemed to be a limited member of the 
Exchange entitled to only the following trading rights and privileges:
    (1) to be admitted to the options trading facility established by 
the Exchange for the trading of NYSE Options during regular business 
days;
    (2) to engage in the activities of a Market-Maker, a DPM (as that 
term is defined in Rule 8.80), and/or a Floor Broker in respect of NYSE 
Options, in each case subject to the Rules of the Exchange applicable 
to such activities;
    (3) to trade by order as principal those classes of equity options 
that were dually traded on both the Exchange and the [New York Stock 
Exchange (``NYSE'')] NYSE on the last trading day preceding the 
Effective Date and that continue to be traded on the Exchange;
    (4) to trade by order as principal all classes of options traded on 
the Exchange in addition to those described in clauses (2) and (3) 
above, provided that a Permit holder's total contract volume in such 
classes of options during any calendar quarter may not exceed twenty 
percent (20%) of the sum of such Permit holder's total in person 
contract volume as principal pursuant to clause (2) above and such 
Permit holder's contract volume pursuant to clause (3) above during 
such calendar quarter; and
    (5) to be admitted to the other trading facilities of the Exchange 
for the purpose of responding to a call of a Board Broker or Order Book 
Official pursuant to Rule 7.5 in respect of any class of options in 
which a transaction has been effected for the Permit holder's account 
on the day of the call.
    As used in this Rule, the term ``trade by order'' means a trade 
effected on the Exchange by a member acting as Floor Broker for the 
account of a Permit holder, and the term ``NYSE Options'' means (i) 
those classes of options that were listed for trading on the NYSE 
options trading floor on last trading day preceding the Effective Date 
that were not then also listed for trading on the Exchange, and (ii) 
those additional classes of equity options designated by the Exchange 
as NYSE Options. During each of the seven years following the Effective 
Date, the Exchange shall designate as NYSE Options classes of equity 
options on at least 14 underlying stocks.
    (c) DPMs. The Modified Trading System established in Rule 8.80 will 
be employed in NYSE Options. Each specialist firm to which a Permit is 
issued pursuant to subparagraph (a)(2) of this Rule shall be appointed 
as the DPM in the same classes of NYSE Options as those for which it 
was designated as a specialist on NYSE. Subject to the provisions of 
the Rules, a Permit holder qualified to act as a DPM pursuant to the 
Rules shall be appointed to act as the DPM for each class of equity 
options designated by the Exchange pursuant to the last sentence of 
paragraph (b) of this Rule. Each specialist firm appointed as a DPM in 
a class of NYSE Options pursuant to the foregoing two sentences shall, 
subject to the provisions of the Rules, continue to act as such DPM 
during the term of the Permits and thereafter so long as it is a 
regular member or member organization of the Exchange.
    (d) Other rights and obligations.
    (1) Except as may be otherwise set forth in the Constitution, in 
this Rule 3.27 or in the other Rules, Permit holders shall have the 
same rights as other members of the Exchange; provided that a Permit 
shall not give an organization the right as a member to transact 
business with the public in options or other securities dealt in on the 
Exchange other than NYSE Options. Permit holders shall be subject to, 
and obligated to comply with, the Rules of the Exchange to the same 
extent as other members and their nominees, except as follows:
    (A) Membership application fees shall be waived in connection with 
(i) the submission of an application for approval as a Permit holder or 
as the nominee of a Permit holder arising out of the initial issuance 
of a Permit pursuant to subparagraph (a)(1) or (a)(2) of this Rule (but 
shall not be waived in respect of applications by transferees or 
lessees of a Permit or by subsequent nominees), (ii) the submission of 
an application for approval as a member of the Exchange or as the 
nominee of a member of the Exchange by a person who is the initial 
holder of a Permit issued pursuant to subparagraph (a)(1) or (a)(2) of 
this Rule, and (iii) the submission of an application for approval as 
the nominee of a member of the Exchange by a person who at the time of 
such application is the nominee of a NYSE specialist firm in respect of 
a Permit issued pursuant to subparagraph (a)(2) of this Rule.

[[Page 63082]]

    (B) In the event a person who is entitled to be issued a Permit 
files an application pursuant to Rule 3.9, the rights of such person 
shall be deemed to be effective for a temporary period terminating six 
months following the Effective Date or the date on which the Membership 
Committee gives written notice of its action on the application, 
whichever is the earlier, provided such person is not subject to a 
``statutory disqualification'' (as defined in the Securities Exchange 
Act of 1934), is in good standing on the NYSE on the Effective Date, 
and is not a subject of an investigation conducted by any self-
regulatory agency that may involve that person's fitness for membership 
on the Exchange.
    (C) All Permit holders shall be deemed to be appointed pursuant to 
Rule 8.3 to all classes of NYSE Options; provided, however, that the 
foregoing shall not affect the power of the appropriate Market 
Performance Committee to suspend or terminate the appointment of any 
Permit holder in accordance with the Rules.
    (2) Permit holders shall have the right to serve on any committee 
of the Exchange to which they are appointed.
    (3) Permit holders shall not have the rights of members, or be 
subject to the assessments on members, under Rule 3.24.

Extension of Time Limits

    RULE 3.28. Any time limit imposed on an applicant, member, or other 
person under this Chapter may be extended by the Membership Committee 
in the event that the Membership Committee determines that such an 
extension is warranted due to extenuating circumstances.

Delegation of Authority

    RULE 3.29. (a) All of the authority granted to the Exchange under 
this Chapter may be exercised by the Membership Committee and/or the 
Membership Department.
    (b) The Membership Committee may delegate to the Membership 
Department any of the authority that is granted to the Membership 
Committee under the Rules.
* * * * *
CHAPTER VI--Doing Business on the Exchange Floor
* * * * *
Limitation on Dealings
    RULE 6.5. No regular member shall bid, offer, purchase or write 
(sell) on the Exchange any security other than an option contract that 
is currently open for trading in accordance with the provisions of 
Chapter V. [No special member shall bid, offer, purchase, or write on 
the Exchange any security other than an option contract relating to one 
of the underlying securities listed in a guideline under this Rule 6.5 
(MSE Options, as that term is defined in section 2.1(d) of the 
Constitution) and currently open for trading in accordance with the 
provisions of Chapter V.
. . . Interpretations and Policies:
    .01  Special members may bid, offer, purchase, or write on the 
Exchange option contracts currently open for trading only with respect 
to the following underlying securities:

Ameritech
Diebold, Inc.
Anadarko Petroleum Corp.
Freeport-McMoRan, Inc.
Bristol-Myers Company
General Cinema Corp.
Champion International Corp.
IC Industries, Inc.
Chrysler Corporation
Litton Industries, Inc.
Coastal Corporation
Middle South Utilities, Inc.
Computer Associates International, Inc.
Ralston Purina Company
Corning Glass Works
Rockwell International Corporation]
* * * * *
    RULE 6.20--Admission to and Conduct on the Trading Floor; Member 
Education
* * * * *
. . . Interpretations and Policies:
* * * * *
.03 Deleted ________________, 199__ (99-______). [Rule 3.21 provides 
that a Government securities options permit holder is entitled to enter 
into principal transactions as a Market-Maker and agency transactions 
as a Floor Broker in Government securities options settled by physical 
delivery on the floor of the Exchange until his permit expires.]
* * * * *
Letters of Authorization
    RULE 6.72. (a) Required of each Floor Broker. No Floor Broker shall 
act as such on the Exchange unless there is in effect a Letter of 
Authorization that has been issued for such Floor Broker by a Clearing 
Member and filed with the Exchange. [A Floor Broker may have more than 
one such letter on file with the Exchange; provided, however, that a 
Letter of Authorization with an earlier effective date will afford the 
Clearing Member issuing such letter a priority over each subsequent 
issuer of a Letter of Authorization for claims made pursuant to Rule 
3.15 against the proceeds from the sale of a membership by the entity 
covered by such Letters of Authorization. The Exchange shall notify 
each issuer of a Letter of Authorization of other outstanding Letters 
of Authorization which have been issued to the same Floor Broker.]
    (b) Terms of Letter of Authorization. A Letter of Authorization 
shall be in a form prescribed by the Exchange and shall provide that 
the issuing Clearing Member accepts financial responsibility for all 
Exchange transactions made by the guaranteed Floor Broker.
    (c) Revocation of Letter of Authorization. A Letter of 
Authorization filed with the Exchange shall remain in effect until a 
written notice of revocation has been filed with the [Exchange and 
posted on the Exchange bulletin board. If such written notice has not 
been posted for] Membership Department. If such a written notice of 
revocation is not filed with the Membership Department at least one 
hour prior to the opening of trading on a particular business day, such 
revocation shall not become effective until the close of trading on 
such day. Upon the request of the Clearing Member that files such a 
written notice of revocation, the Exchange shall post notice of the 
revocation on the Exchange Bulletin Board. A revocation shall in no way 
relieve a Clearing Member of responsibility for transactions guaranteed 
prior to the effective date of such revocation.
. . . Interpretations and Policies:
    .01  Floor Brokers executing Government security options must have 
a separate Letter of Authorization issued by a Debt Securities Clearing 
Member.
    .02  Floor Brokers engaging in transactions in securities subject 
to the rules in Chapter XXX must have a separate Letter of 
Authorization issued by a Clearing Member that is a member of the 
Clearing Corporation for the security that is the subject of any such 
transaction.
* * * * *

Automated Billing Process for Market-Maker Brokerage Bills

    RULE 6.76A. (a) The Exchange shall administer the following 
automated billing process for brokerage services that are provided to 
Market-Makers by Floor Brokers and order service firms (``OSFs''):
    (i) Each Floor Broker and OSF shall submit a written bill by the 
6th day of the month to each Market-Maker customer of the Floor Broker 
or OSF for brokerage fees incurred by the Market-Maker during the prior 
month.

[[Page 63083]]

    (ii) For the purposes of this Rule, the submission of a written 
bill to a Market-Maker shall be deemed to include hand delivery of the 
bill to the Market-Maker, hand delivery of the bill to a representative 
of the Market-Maker such as the Market-Maker's clerk, or delivery of 
the bill to the Market-Maker's Clearing Member with a written notation 
that the bill is for the Market-Maker.
    (iii) A Market-Maker who receives a brokerage bill from a Floor 
Broker or OSF in accordance with this billing process shall have until 
the 10th day of the month to inform the Floor Broker or OSF if the 
Market-Maker disputes any portion of the bill. In the event the Market-
Maker disputes the bill, the Floor Broker or OSF may determine to 
adjust the bill.
    (iv) A Floor Broker or OSF that has submitted a written bill to a 
Market-Maker by the 6th day of the month for brokerage fees incurred by 
the Market-Maker during the prior month shall notify the Exchange's 
Accounting Department by the 12th day of the month in a form and manner 
prescribed by the Exchange of the amount to bill each Market-Maker 
customer of the Floor Broker or OSF for brokerage fees incurred by the 
Market-Maker during the prior month.
    (v) The Exchange shall take direction solely from the Floor Broker 
or OSF with respect to the amount to bill a Market-Maker pursuant to 
this billing process. If for any reason a Market-Maker disputes the 
amount a Floor Broker or OSF has instructed the Exchange to bill the 
Market-Maker pursuant to this billing process, the Market-Maker may 
pursue a claim against the Floor Broker or OSF in arbitration under 
Chapter XVIII of the Rules or through other means permitted by that 
Chapter.
    (vi) The Accounting Department shall prepare a monthly Market-Maker 
floor brokerage billing list for each Clearing Member that clears 
Market-Maker transactions and provide this list to each such Clearing 
Member by the 21st day of the month. The list shall set forth the 
amounts Floor Brokers and OSFs have instructed the Accounting 
Department to bill each Market-Maker that clears through that Clearing 
Member for brokerage fees incurred by the Market-Maker during the prior 
month.
    (vii) A Clearing Member may instruct the Accounting Department in a 
form and manner prescribed by the Exchange not to draft the Clearing 
Member pursuant to this billing process for that portion of the 
brokerage fees billed to a Market-Maker which would cause the Market-
Maker to have a negative balance in the Market-Maker's account at the 
Clearing Member. Any such instruction must be provided to the 
Accounting Department by the 22nd day of the month. In determining 
whether a negative balance would result in a Market-Maker's account, a 
Clearing Member may take into account deductions from the account that 
have been accrued but which have not yet posted to the account.
    (viii) On the 25th day of the month, the Exchange will draft from 
each Clearing Member's account at the Clearing Corporation the total 
amount billed pursuant to this Rule to Market-Makers that clear through 
that Clearing Member (with the exception of amounts the Clearing Member 
has instructed the Accounting Department not to draft pursuant to 
subparagraph (a)(vii) of this Rule). Following the draft of these 
funds, the Exchange shall promptly distribute the amounts drafted in a 
manner prescribed by the Exchange to the Floor Brokers and OSFs that 
provided billing instructions to the Accounting Department pursuant to 
this billing process.
    (ix) In the event a Clearing Member instructs the Accounting 
Department pursuant to subparagraph (a)(vii) of this Rule not to draft 
a portion of the brokerage fees billed to a Market-Maker:
    (A) The Exchange shall, pursuant to subparagraph (a)(viii) of this 
Rule, distribute on a pro rata basis to the Floor Brokers and OSFs that 
submitted instructions to bill the Market-Maker, the portion of the 
brokerage fees which were drafted from the Clearing Member for that 
Market-Maker. This pro rata distribution shall be allocated based on 
the amount that each Floor Broker and OSF instructed the Accounting 
Department to bill the Market-Maker.
    (B) If the Market-Maker later has a positive balance in the Market-
Maker's account at the Clearing Member, the Clearing Member shall 
deduct from the account the amount of the brokerage fees that the 
Clearing Member previously instructed the Accounting Department not to 
draft. The Clearing Member shall then promptly distribute to those 
Floor Brokers and OSFs who previously did not receive full payment the 
amounts which were previously billed but not drafted pursuant to this 
billing process. To the extent that any outstanding amounts that were 
not previously drafted have been paid to a Floor Broker or OSF, the 
Clearing Member shall not be required to deduct these amounts from the 
Market-Maker's account and distribute them to the Floor Broker or OSF.
    (x) If a Floor Broker or OSF fails to submit a written bill to a 
Market-Maker customer by the 6th day of the month for brokerage fees 
incurred by the Market-Maker during the prior month or if a Floor 
Broker or OSF fails to notify the Accounting Department by the 12th day 
of the month in the form and manner prescribed by the Exchange of the 
amount to bill each Market-Maker customer for brokerage fees incurred 
by the Market-Maker during the prior month, the Floor Broker or OSF may 
not bill the Market-Maker for these brokerage fees pursuant to the 
billing process set forth in this Rule. Notwithstanding the foregoing, 
the Floor Broker or OSF shall still be permitted to bill the Market-
Maker for these brokerage fees in the regular, non-automated fashion.
    (xi) In the event that any of the deadlines referenced in this Rule 
fall on a non-business day, the deadline shall advance to the next 
business day.
    (b) Each Clearing Member shall be authorized under this Rule (i) to 
deduct from a Market-Maker's account at that Clearing Member amounts 
drafted by the Exchange from the Clearing Member's account at the 
Clearing Corporation pursuant to this Rule for brokerage fees billed to 
that Market-Maker and (ii) to make deductions from the Market-Maker's 
account at the Clearing Member and distributions to Floor Brokers and 
OSFs of the deducted amounts in accordance with subparagraph (a)(ix)(B) 
of this Rule.
    (c) The Clearing Corporation shall have no liability to members or 
associated persons in connection with the billing process under this 
Rule.
    (d) To the extent that there is any inconsistency between the 
provisions of this Rule and the provisions of Rule 6.76, the provisions 
of this Rule shall govern with respect to the bills processed pursuant 
to the billing process under this Rule.
Order Service Firms
    RULE 6.77. (a) An order service firm is a regular member 
organization that is registered with the Exchange for the purpose of 
taking orders for the purchase or sale of stocks or commodity futures 
contracts (and options thereon) from market-makers on the floor of the 
Exchange and forwarding such orders for execution. An applicant for 
registration as an order service firm shall file [its] an application 
[in writing] with the Membership Department [of] in a form and manner 
prescribed by the Exchange. Applications shall be reviewed by the 
Membership Committee, which shall consider an applicant's financial 
condition, regulatory history, and such other factors as the Membership 
Committee deems appropriate. After reviewing the

[[Page 63084]]

application, the Membership Committee shall either approve or 
disapprove the applicant's registration as an order service firm. 
Before registration, the Membership Department, [upon direction of] if 
directed by the Membership Committee, shall post the names of the 
applicant and its nominee(s) on the floor of the Exchange for at least 
three business days.
    (b) An order service firm shall make available to market-maker 
customers upon request a statement of financial condition as disclosed 
by its most recent balance sheet, which shall be prepared no later than 
the tenth business day following each calendar month-end.
    (c) A [clearing member] Clearing Member need not register as an 
order service firm in order to take orders for the purchase or sale of 
stocks or commodity futures contracts (and options thereon) from 
market-makers for which it has a currently outstanding Letter of 
Guarantee.
    (d) An order service firm that takes orders for the purchase or 
sale of commodity futures contracts (and options thereon) must comply 
with the Commodity Exchange Act (``CEA'') and the rules and regulations 
promulgated thereunder. Such a firm shall keep the Department of 
Financial and Sales Practice Compliance apprised of its registration 
status under the CEA on an ongoing basis, including any financial 
reporting or capital requirements.
Letters of Guarantee Required of Order Service Firms
    RULE 6.78. (a) Prior to accepting any orders from market-makers on 
the floor of the Exchange, an order service firm must have on file with 
the [exchange] Exchange and in effect an Order Service Firm Letter of 
Guarantee issued for such service firm by a member of The Options 
Clearing Corporation.
    (b) The Order Service Firm Letter of Guarantee shall be in a form 
prescribed by [acceptable to] the Exchange and shall provide that the 
issuing [clearing member] Clearing Member accepts financial 
responsibility for all orders handled by the order service firm on the 
floor of the Exchange and for all financial obligations of the order 
service firm to the Exchange.
    (c) An Order Service Firm Letter of Guarantee filed with the 
Exchange shall remain in effect until a written notice of revocation 
has been filed with the [Exchange and posted on the Exchange bulletin 
board. If such written notice has not been posted for] Membership 
Department. If such a written notice of revocation is not filed with 
the Membership Department at least one hour prior to the opening of 
trading on a particular business day, such revocation shall not become 
effective until the close of trading on such [date] day. Upon the 
request of the Clearing Member that files such a written notice of 
revocation, the Exchange shall post notice of the revocation on the 
Exchange Bulletin Board. A revocation shall in no way relieve a 
[clearing member] Clearing Member of responsibility for transactions 
guaranteed prior to the effective date of such revocation.
    (d) No [clearing member] Clearing Member shall be permitted to 
guarantee more than three (3) order service firms without the prior 
written approval of the Department of Financial and Sales Practice 
Compliance (the ``Department''). In considering a request to guarantee 
more than three (3) such firms, the Department shall consider the 
[clearing member's] Clearing Member's level of excess net capital, 
additional financial resources, and such other factors as the 
Department deems appropriate.
* * * * *
CHAPTER VIII--Market-Makers, Trading Crowds and Modified Trading 
Systems
* * * * *
Letters of Guarantee
    RULE 8.5. (a) Required of Each Market-Maker. No Market-Maker shall 
make any transaction on the floor of the Exchange unless [a Letter of 
Guarantee has been issued for such member by a Clearing Member and 
filed with the Exchange, and unless such letter has not been revoked 
pursuant to paragraph (c) of this Rule] there is in effect a Letter of 
Guarantee that has been issued for such Market-Maker by a Clearing 
Member and filed with the Exchange. [A member may file more than one 
such Letter with the Exchange; provided, however, that a Letter of 
Guarantee with an earlier effective date will afford the Clearing 
Member issuing such letter a priority over each subsequent issuer of a 
Letter of Guarantee for claims made pursuant to Rule 3.15 against the 
proceeds from the sale of a membership by the person covered by such 
Letter of Guarante.] If a Market-Maker desires to clear his or her 
transactions through more than one Clearing Member, a Letter of 
Guarantee is required to be issued and filed with the Exchange by each 
such Clearing Member to cover Exchange transactions executed by the 
Market-Maker through that Clearing Member. A Market-Maker may not 
execute Exchange transactions through a Clearing Member unless there is 
in effect a Letter of Guarantee that has been issued for such Market-
Maker by the Clearing Member and filed with the Exchange. The Exchange 
shall notify each issuer of a Letter of Guarantee of other outstanding 
Letters of Guarantee [which] that have been issued to the same Market-
Maker [and shall notify each Clearing Corporation that has approved a 
Letter of Guarantee for a Market-Maker of the issuance and revocation, 
if applicable, of all other Letters of Guarantee issued to that Market-
Maker in respect of transactions subject to the rules of any other 
Clearing Corporation].
    (b) Terms of Letter of Guarantee. A Letter of Guarantee shall be in 
a form prescribed by the Exchange and shall provide that the issuing 
Clearing Member accepts financial responsibility for [all] Exchange 
transactions made by the guaranteed [member] Market-Maker when 
executing such transactions through the issuing Clearing Member.
    (c) Revocation of Letter of Guarantee. A Letter of Guarantee filed 
with the Exchange shall remain in effect until a written notice of 
revocation has been filed with the [Exchange and posted on the Exchange 
bulletin board. If such written notice has not been posted for] 
Membership Department. If such a written notice of revocation is not 
filed with the Membership Department at least one hour prior to the 
opening of trading on a particular business day, such revocation shall 
not become effective until the close of trading on such day. Upon the 
request of the Clearing Member that files such a written notice of 
revocation, the Exchange shall post notice of the revocation on the 
Exchange Bulletin Board. A revocation shall in no way relieve a 
Clearing Member of responsibility for transactions guaranteed prior to 
the effective date of such revocation.
. . . Interpretations and Policies:
    .01  Market-Makers entering into Government securities options 
transactions must have a separate Letter of Guarantee issued by a Debt 
Securities Clearing Member.
    .02  Each Market-Maker must file with the Exchange one or more 
Letters of Guarantee for transactions cleared by The Options Clearing 
Corporation.
    .03  A Market-Maker engaging in transactions subject to the rules 
in Chapter XXX may submit one or more Letters of Guarantee in respect 
of the securities to be traded by such Market-Maker; provided, that any 
such Letter of Guarantee shall specify the types of security (e.g., 
stocks or warrants, UIT interests) for which the Clearing Member 
accepts responsibility.

[[Page 63085]]

    .04  Only those Letters of Guarantee that are required to be 
deposited with a Clearing Corporation will be submitted to such 
Clearing Corporation for its approval. The Exchange shall notify each 
Clearing Corporation that has approved a Letter of Guarantee for a 
Market-Maker of the issuance and revocation, if applicable, of all 
other Letters of Guarantee issued to that Market-Maker in respect of 
transactions subject to the rules of any other Clearing Corporation.
* * * * *
    Rule 8.9--Securities Accounts and Orders of Market-Makers
* * * * *
. . . Interpretations and Policies:
* * * * *
    .08  Each participant in a joint account shall be jointly and 
severally liable for any losses which may be incurred by the joint 
account; however, in the case where a participant in a joint account is 
a nominee of a member organization, or is an individual who has 
registered his or her membership for a member organization, and the 
participant is not acting as an independent Market-Maker pursuant to 
Rule 3.8(f), the member organization and not the participant shall be 
so liable.
* * * * *
CHAPTER IX--Doing Business With the Public
* * * * *
Exchange Approval
    RULE 9.1. An individual regular member [or any special member] may 
not transact business with the public. A regular member organization 
may transact business with the public after an application, submitted 
on a form prescribed by the Exchange, has been approved by the 
Membership Committee. Approval to transact business with the public 
shall be based on a member organization's meeting the general 
requirements set forth in this Chapter and the net capital requirements 
set forth in Chapter XIII of the Rules, and such approval may be 
withdrawn if any of the requirements cease to be met.
* * * * *
Registration and Termination of Representatives
    RULE 9.3. (a) Registration. No member organization shall be 
approved to transact business with the public until those persons 
associated with it who are designated as Representatives have been 
approved by and registered with the Exchange. Persons who perform 
duties for the member organization which are customarily performed by 
sales representatives, solicitors, customers' men or branch office 
managers shall be designated as Representatives. In connection with 
their registration, Representatives shall file an application on a form 
prescribed by the Exchange, shall successfully complete a training 
course and an examination for the purpose of demonstrating an adequate 
knowledge of the securities business, and shall sign an agreement to 
abide by the Constitution and Rules of the Exchange and the Rules of 
the Clearing Corporation; provided, however, that Representatives of 
member organizations that are members of another national securities 
exchange or association which has standards of approval acceptable to 
the Exchange may be deemed to be approved by and registered with such 
other exchange or association. Member organizations whose 
Representatives are deemed registered pursuant to the last clause of 
the preceding sentence shall inform their Representatives of their 
obligation to adhere to the Constitution and Rules of the Exchange and 
the Rules of the Clearing Corporation.
    (b) Termination--Filing of U-5's. The discharge or termination of 
employment of any registered person, together with the reasons 
therefor, shall be reported by a member organization immediately 
following the date of termination, but in no event later than thirty 
(30) days following termination, to the Exchange's Department of 
Financial and Sale Practice Compliance on a Uniform Termination Notice 
for Securities Industry Registration (Form U-5). A copy of said 
termination notice shall be provided concurrently to the person whose 
association has been terminated.
    (c) Termination--Filing of amended U-5's. The member organization 
shall report to the Exchange, by means of an amendment to the Form U-5 
filed pursuant to paragraph (b) above, in the event that the member 
organization learns of facts or circumstances causing any information 
set forth in the notice to become inaccurate or incomplete. Such 
amendment shall be filed with the Exchange's Department of Financial 
and Sales Practice Compliance and provided concurrently to the person 
whose association has been terminated no later than thirty (30) days 
after the member organization learns of the facts or circumstances 
giving rise to the amendment.
. . . Interpretations and Policies:
    .01  The application prescribed by the Exchange pursuant to 
paragraph (a) of this Rule is the Uniform Application for Securities 
Industry Registration or Transfer (Form U-4). Any person required to 
complete Form U-4 shall promptly file any required amendments to Form 
U-4.
    .0[1]2 Any filing or submission requirement under this Rule shall 
be deemed to be satisfied if such filing or submission is made with the 
North American Securities Administrators Association/National 
Association of Securities Dealers, Inc. Central Registration Depository 
(CRD) within the applicable time period set forth in [paragraph (b) or 
(c) of] this Rule.
* * * * *
    CHAPTER X--Closing Transactions
* * * * *
Contracts of Suspended Parties
    RULE 10.11. When a member or member organization is suspended 
pursuant to Chapter XVI of these Rules, members and organizations 
having contracts with the suspended member or member organization for 
the purchase, sale or loan of securities shall, without unnecessary 
delay, proceed to close such contracts on the Exchange or in the best 
available market, except insofar as the rules of a Clearing Corporation 
are applicable and provide the method of closing; provided, however, 
that upon any such suspension, the Board of Directors may, in its 
discretion, suspend the mandatory closeout provisions of this Rule and 
may, in its discretion, reinstate such provisions at such time as it 
may determine. Should such a contract not be closed when required to be 
closed by this Rule, the price of settlement for the purpose of Rule 
3.15 shall be determined pursuant to the claims resolution procedures 
provided for by that Rule, with [fixed by the Board, having] due regard 
for the price current at the time
* * * * *
CHAPTER XV--Records, Reports and Audits
* * * * *
    RULE 15.1--Maintenance, Retention and Furnishing of Books, Records 
and Other Information
* * * * *
. . . Interpretations and Policies:
    .01 The following Rules contain specific requirements with regard 
to the maintenance and retention of books, records and other 
information: Rules 3.4 [3.5], 3.6 [3.7], 8.9, 9.6, 9.7, 9.8, 9.10,

[[Page 63086]]

9.21, 9.23, 11.2, 12.12 and Chapter XV. In addition, the following 
Rules contain specific requirements with regard to the furnishing of 
information to the Exchange: Rules [3.6], 3.7 [3.8], 3.9, [3.14, 3.15, 
3.16], 3.17, 3.18, 3.20, 3.21, 3.23, 3.25, 4.9, 4.13, 6.49, 6.51, 6.56, 
6.59, 6.71, 6.72, 7.2, 7.3, 7.6, 8.2, 8.3, 8.5, 8.10, 8.11, 9.1, 9.2, 
9.3, 12.11, 13.4, 14.2 and 19.2. The foregoing list is not intended to 
be exhaustive and members must comply with all applicable recordkeeping 
and reporting requirements whether or not listed above.
* * * * *
CHAPTER XVIII--Arbitration
* * * * *
    RULE 18.2--Procedures in Member Controversies
* * * * *

. . . Interpretations and Policies:

    .01  In any arbitration concerning the alleged failure to honor a 
trade, each party to the arbitration shall promptly provide copies of 
all documents filed or received in the arbitration by that party to the 
Clearing Member(s) that guaranteed that party's Exchange transactions 
when the alleged trade took place.
* * * * *
CHAPTER XXIVA--Flexible Exchange Options
* * * * *
    RULE 24A.15.--Letter of Guarantee or Authorization
* * * * *
    (a) No Market-Maker shall effect any transaction in FLEX Options 
unless one or more Letter(s) of Guarantee has been issued by a Clearing 
Member and filed with the Exchange pursuant to Rule 8.5(a) accepting 
financial responsibility for all FLEX transactions made by the Market-
Maker and such letter has not been revoked under Rule 8.5(c). Upon 
approval by The Options Clearing Corporation and filing with the 
Exchange, an existing Letter of Guarantee may be amended specifically 
to include FLEX Option transactions. [In determining priority for 
claims made pursuant to Rules 3.15 and 8.5, the filing of an amendment 
to an existing Letter of Guarantee to authorize a member to engage in 
FLEX transactions shall not change the effective date of the existing 
Letter.]
    (b) No Floor Broker shall act as such in respect of FLEX Option 
contracts unless [one or more Letters] a Letter of Authorization has 
been issued by a Clearing Member and filed with the Exchange under Rule 
6.72(a) specifically accepting responsibility for the clearance of FLEX 
Option transactions of the Floor Broker and such letter has not been 
revoked under Rule 6.72(c). Upon approval by the Clearing Corporation 
and filing with the Exchange, an existing Letter of Authorization may 
be amended to include FLEX Option transactions. [In determining 
priority or claims made pursuant to Rules 3.15 and 6.72, filing of an 
amendment to a Letter of Authorization shall not change the effective 
date of an existing Letter of Authorization.]
    [This rule supplements Exchange Rule 8.5.]
* * * * *
CHAPTER XXVI--Market Baskets
* * * * *
    RULE 26.11.--Market-Makers
* * * * *
    (c) Letter of Guarantee. No Market-Maker shall make any transaction 
on the floor of the Exchange in market basket contracts unless one or 
more Letters of Guarantee has been issued by a Clearing Member under 
Rule 8.5(a) in which the issuing Clearing Member specifically accepts 
financial responsibility for all market basket transactions made by the 
Market-Maker and such Letter has not been revoked pursuant to Rule 
8.5(c). Upon approval by the Clearing Corporation and filing with the 
Exchange, an existing Letter of Guarantee may be amended to include 
market basket transactions. [For purposes of determining the priority 
of Clearing Members for claims made pursuant to Rules 3.15 and 8.5, the 
effective date of an existing Letter of Guarantee shall not be deemed 
modified by the filing of an amendment authorizing a member to engage 
in market basket transactions.]
* * * * *
    RULE 26.13.--Floor Broker Financial Requirements
* * * * *
    (b) Letter of Authorization. No Floor Broker shall act as such in 
respect of market basket contracts unless [one or more Letters] a 
Letter of Authorization has been issued by a Clearing Member under Rule 
6.72(a) (and not revoked under Rule 6.72(c)) in which the issuing 
Clearing Member specifically accepts responsibility for the clearance 
of market basket transactions of the Floor Broker when the name of the 
Clearing Member is given up. Upon approval by the Clearing Corporation 
and filing with the Exchange, an existing Letter of Authorization may 
be amended to include market basket transactions. [For purposes of 
determining the priority of Clearing Members for claims made pursuant 
to Rues 3.15 and 6.72, the effective date of an existing Letter of 
Authorization shall not be deemed modified by the filing of an 
amendment authorizing a member to engage in market basket 
transactions.]
* * * * *
    CHAPTER XXX--Stock, Warrant and Other Rules
* * * * *
    RULE 30.74.--Clearing of System Transactions
* * * * *
    (e) Whenever a Clearing Corporation to which a System trade has 
been reported excludes such System trade from the clearance procedures 
conducted by such Clearing Corporation, either because such Clearing 
Corporation ceases to act (either with respect to transactions 
generally or as to a particular transaction) for a member or member 
organization, or because of the insolvency of such member or member 
organization, the Exchange may, but shall not be obligated to, assume 
and honor any one or more or all of such excluded System trades for the 
account of and on behalf of the member or member organization for which 
the Clearing Corporation ceased to act or which is insolvent and the 
Exchange may take such action in the market to close out or offset its 
position as it may deem appropriate. In any such case, the Exchange 
shall have a claim against such member or member organization in the 
amount of the loss incurred by the Exchange as a result of such 
assumption of such excluded System trades. The Exchange may assert such 
claim against such member or member organization in any appropriate 
forum [and, without limiting the generality of the foregoing, in 
connection with the transfer of any membership by such member, or by 
any member who is associated with such member organization, such claim 
shall be entitled to priority in payment as a sum due the Exchange 
under the provisions of Rule 3.15.]
* * * * *
    REGULATORY CIRCULAR RG 98-148 99-

Date: ________, 1999 [December 29, 1998]
To: Members and Applicants for Membership
From: Membership Department
Re: Membership Application and Other Membership Fees
    [Exchange Rules 2.22 and 3.9 authorize the Board of Directors to 
impose fees and the Membership Department to investigate all applicants

[[Page 63087]]

for membership, respectively. All applicants for CBOE membership, 
regardless of their Designated Examining Authority or standing at other 
self-regulatory organizations, are investigated and assessed the 
appropriate fees. This includes all persons associated within applicant 
member organizations, i.e., general and limited partners, executive 
officers, principal shareholders, and LLC members and managers. 
Moreover, investigations are conducted and the fees for such associated 
persons are assessed each time a new person of such status becomes 
associated with the firm, as well as at the time an initial application 
is filed.
    In connection with this process, member organizations are reminded 
of their obligation under CBOE Rule 3.5(b) to file with the Exchange 
and keep current a list and descriptive identification of those persons 
associated with the member organization who are its executive officers, 
directors, principal shareholders, general and limited partners, and 
LLC members and managers. Member organizations who have not fulfilled 
this obligation should do so by filing such a list with the Membership 
Department.
    For information purposes,] The following is a list of the 
Exchange's membership application fees and other membership fees, 
together with a brief explanation of each fee:

List of Fees
    Individual/Nominee/CBOT Exerciser/Lessee/Lessor..........     $2,000
    Non-member Customer Business.............................       $500
    Order Service Firm.......................................     $1,500
    General Partner..........................................       $250
    Executive Officer........................................       $250
    LLC Manager..............................................       $250
    Principal Shareholder....................................       $250
    Limited Partner..........................................       $250
    LLC Member...............................................       $250
    Corporation/Partnership/LLC..............................       $250
    Renewal/Change of Status.................................       $100
    Orientation..............................................       $200
    Lease Fee................................................       $500
Amendments to [Partnership] Bylaws/Partnership Agreement/
 Operating
    Agreement................................................       $100
Inactive Nominee Status Change
    Submission before 4:00 p.m. on date prior to effective           $40
     date....................................................
    Submission after 4:00 p.m. on date prior to effective            $75
     date or before 8:00 a.m. on effective date..............
    Submission after 8:00 a.m. on effective date.............       $150
Fingerprint Processing and Photograph Fee....................        $35
Transfer of Membership into Trust............................       $500
Inactive Nominee Status Quarterly Maintenance Fee............       $600
Applicant, Member, or Associated Person Subject to a              $2,500
 Statutory Disqualification..................................
Change in Status that, if Approved, Would Require Amended or      $1,500
 Additional Rule 19h-1(c) Filing.............................
 

ALL FEES ARE NON-REFUNDABLE AND MUST ACCOMPANY APPLICATIONS
    Individual/Nominee/CBOT Exerciser/Lessee/Lessor--This fee is 
payable by each new individual applicant for membership on the 
Exchange.
    Non-Member Customer Business--This fee is payable by applicant 
firms that plan to conduct a public customer business.
    Order Service Firm--This fee is payable by applicant firms that 
plan to conduct an order service business pursuant to CBOE Rule 6.77.
    General Partner--This fee is payable by each General Partner of a 
member firm applicant and each additional General partner who is added 
to such firm. General Partners must also be fingerprinted and incur the 
fingerprint processing fee.
    Executive Officer--This fee is payable by each Executive Officer of 
a member firm applicant and each additional Executive Office who is 
added to such firm. Executive Officers must also be fingerprinted and 
incur the fingerprint processing fee.
    LLC Manager--This fee is payable by each LLC Manager of an 
applicant LLC and each additional LLC Manager who is added to the LLC. 
LLC Managers must also be fingerprinted and incur the fingerprint 
processing fee.
    Principal Shareholder--This fee is payable by each Shareholder that 
directly owns 5% or more of a class of a voting security of an 
applicant corporation and each additional such Shareholder who is added 
to the corporation.
    Limited Partner--This fee is payable by each Limited Partner of an 
applicant partnership that has the right to receive upon dissolution, 
or has contributed, 5% or more of the partnership's capital and each 
additional such Limited Partner who is added to the partnership.
    LLC Member--This fee is payable by each LLC Member of an applicant 
LLC that has the right to receive upon dissolution, or has contributed, 
5% or more of the LLC's capital and each additional such LLC Member who 
is added to the LLC. LLC Members must also be fingerprinted and incur 
the fingerprint processing fee.
    Corporation/Partnership/LLC--This fee is payable by each new firm 
applicant for membership on the Exchange. If a member organization 
changes its legal structure (e.g., from partnership to corporation or 
the reverse, from partnership to LLC or the reverse, or from 
corporation to LLC or the reverse), the firm is considered a new entity 
and assessed all application fees.
    Renewal/Change of Status--This fee is payable by an existing 
individual member (including sole proprietors, nominees, CBOT 
exercisers, lessees, and lessors) desiring to change membership status 
or by a former individual member who [is reapplying] reapplies for 
membership within 6 months of his/her membership termination date.
    Orientation--This fee (for [an Orientation Seminar and Examination] 
the New Member Orientation Program and Floor Member Qualification Exam) 
is payable by each applicant seeking membership as a [market maker or 
floor broker] Market-Maker or Floor Broker.
    Lease Fee--The lease fee must accompany every new lease agreement 
filed with the Exchange.

[[Page 63088]]

    Bylaw, Partnership Agreement, and Operating Agreement Amendments--
This fee is payable each time a [partnership agreement is amended. 
Other applicable fees are also assessed (e.g. new General or Limited 
Partner fees)] member organization's bylaws, partnership agreement, or 
operating agreement is amended.
    Inactive Nominee Status Change Fee--This fee is payable whenever an 
inactive nominee moves to active status. The amount of this fee varies 
in accordance with when the Membership Department receives notice of 
the status change via the submission of a Notification of Change in 
Nominee Status Form. If the Notification Form is submitted before 4:00 
p.m. on the date prior to the effective date of the status change, the 
fee is $40. If the Notification From is submitted after 4:00 p.m. on 
the date prior to the effective date of the status change or before 
8:00 a.m. on the effective date of the status change, the fee is $75. 
If the Notification Form is submitted after 8:00 a.m. on the effective 
date of the status change, the fee is $150. No fee shall apply to moves 
from active to inactive status.
    Fingerprint Processing Fee--This fee is payable by all individual, 
nominee, CBOT exerciser, lessee, and lessor applicants and every 
General Partner, Executive Officer, LLC Member, and LLC Manager of 
member and applicant firms.
    Transfer of Membership into Trust--This fee is payable by every 
individual member applying to transfer his or her membership into trust 
pursuant to CBOE Rule 3.25.
    Inactive Nominee Status Quarterly Maintenance Fee--This fee is 
payable quarterly by a member firm for each inactive nominee status 
that the firm wishes to maintain. (E.g., a member firm desiring the 
ability to have 3 slots within which to designate inactive nominees 
would pay this fee at the beginning of each quarter for each of the 3 
slots.)
    Applicant, Member, or Associated Person Subject to a Statutory 
Disqualification--This fee is payable whenever a person or entity is 
subject to a statutory disqualification under the Securities Exchange 
Act of 1934 and: (i) is an applicant for Exchange membership, (ii) is 
seeking to be an associated person of an Exchange member (except where 
the Exchange is merely asked to concur in an SEC Rule 19h-1 filing by 
another self regulatory organization), or (iii) is an existing Exchange 
member or associated person who makes an application in accordance with 
Rule 3.18(b) or with respect to whom a proceeding is initiated pursuant 
to Rule 3.18 [3.4(f), or (iv) is an existing Exchange member or 
associated person who does not make an application in accordance with 
Rule 3.4(f) and contests a proceeding pursuant to Rule 3.4(e)]. This 
fee is in addition to any other membership fees that might be 
applicable.
    Change in Status that, if Approved, Would Require Amended or 
Additional SEC Rule 19h-1(c) Filing--This fee is payable whenever a 
person or entity on whose behalf the Exchange has filed a Rule 19h-1(c) 
filing that has been approved by the SEC applies for a change in status 
that will require the Exchange to file an amended or additional Rule 
19h-1(c) filing if the Exchange approves the requested change in 
status. This fee is in addition to any other membership fees that might 
be applicable.
    Any questions regarding this Regulatory Circular may be directed to 
Raedell Pancake, Director, Membership Department, at (312) 786-7460.
    (Regulatory Circulars RG90-10, RG91-48, RG92-37, RG95-47, RG95-58, 
[and] RG96-03, and RG98-148 Revised).
* * * * *
NYSE Options Program
Permit Lease Pool Procedures
* * * * *
    [8.h. No lease of a Permit in the lease pool will become effective 
until there has been deposited with the Membership Department of the 
Exchange a Letter of Guarantee from a Clearing Member in the amount 
equal to the last sale price of a Permit, except that during the first 
year of the Permits (during which no Permits may be bought or sold) the 
amount shall be $50,000.]

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 Exchange 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 Exchange 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

Introduction

    The purpose of this proposed rule change is to update the 
Exchange's rules relating to membership. The proposed rule amendments 
codify various procedures that have been implemented over time pursuant 
to the Exchange's current membership rules. Additionally, the proposed 
rule amendments clarify, restate, and reorganize certain of the 
Exchange's membership rules to make it easier for the Exchange's 
membership to reference and understand those provisions. Finally, the 
proposed rule amendments incorporate into the Exchange's membership 
rules various proposed improvements and enhancements, which are more 
fully described below.
    This proposed rule change is the product of a comprehensive review 
and evaluation of the Exchange's current membership rules. This 
thorough and detailed review and evaluation was conducted by Exchange 
staff, the Exchange's Membership Committee, Clearing Member 
representatives, and the Exchange's Floor Directors Committee and 
involved numerous meetings and discussions by and among these groups 
over several years.
    Set forth below is a summary of the substantive amendments proposed 
by this rule change.

Rule 1.1--Definitions

    The definition of lessor in CBOE Rule 1.1(ff) is proposed to be 
amended to clarify that a member organization that is a lessor of an 
Exchange membership may transact business with the public provided the 
organization is approved to do so pursuant to CBOE Rule 9.1. 
Specifically, the second sentence of CBOE Rule 1.1(ff) is proposed to 
be deleted because the sentence is ambiguous and could be read to imply 
that a lessor member organization is not permitted to transact business 
with the public. The definition of nominee in CBOE Rule 1.1(pp) is also 
proposed to be amended (i) to clarify that under the amended rules not 
all types of nominees are required to have an authorized floor function 
(i.e., as is more fully set forth in proposed CBOE Rules 3.8(a)(iii) 
and 3.8(b)(iii), nominees of member organizations approved solely to 
transact business with the public and of lessor member organizations 
are not required to have an authorized floor function) and (ii) to 
eliminate a

[[Page 63089]]

provision which provides that all nominees shall be deemed to be 
Exchange members since proposed Rule 3.8(b) provides that a nominee of 
a member organization approved to act solely as a lessor shall be 
deemed an associated person of the organization and not an individual 
member.

Rule 3.1--Public Securities Business

    CBOE Rule 3.1 is proposed to be amended to clarify when the Rule is 
referring to an individual member, a member organization, or a member. 
(As is set forth in Section 1.1(b) of the CBOE Constitution, the term 
``member'' means an individual member or a member organization.) CBOE 
Rule 3.1 is also proposed to be amended to delete the provision that 
requires compliance with Section 11(a) of the Act \5\ because 
compliance with the Act is required by CBOE Rule 4.2 and because CBOE 
Rule 3.1 is intended instead to set forth permissible membership 
capacities for the purpose of satisfying the requirement of Section 2.2 
of the CBOE Constitution and Rule 3.1(a) that every member shall have 
as the principal purpose of its membership the conduct of a public 
securities business. Additionally, CBOE Rule 3.1 is proposed to be 
amended to separately refer to the membership capacity of a nominee and 
the membership capacity of an individual who has registered his or her 
membership for a member organization.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78k(a).
---------------------------------------------------------------------------

Rule 3.2--Qualifications and Membership Statuses of Individual Members

    CBOE Rule 3.2 is proposed to be amended to clarify that the 
requirement in the Rule that an individual member is required to be 21 
years of age applies to every individual member and not solely to 
individual members who own memberships. CBOE Rule 3.2 is also proposed 
to be amended to set forth in the Rule (i) all of the individual 
membership statuses under the Exchange's rules (including those that 
are approved by the Membership Committee and those that are approved by 
Exchange bodies other than the Membership Committee) and (ii) those 
individual membership capacities for which one is required to have an 
authorized floor function. Additionally, proposed CBOE Rule 3.2(c) 
codifies in the Exchange's rules the definition of an authorized floor 
function (i.e., an individual member is deemed to have an authorized 
floor function if the member is approved by the Membership Committee to 
act as a Market-Maker and/or a Floor Broker).

Rule 3.3--Qualifications and Membership Statuses of Member 
Organizations

    Proposed CBOE Rule 3.3 is similar in structure to proposed CBOE 
Rule 3.2 and sets forth all of the membership organization membership 
statuses under the Exchange's rules (including those that are approved 
by the Membership Committee and those that are approved by Exchange 
bodies other than the Membership Committee). Consistent with long 
standing Exchange policy, CBOE Rule 3.3 also clarifies that a member 
organization that is a Clearing Member or an order service firm is 
required to possess at least one membership for which the organization 
is not a lessor. In addition, CBOE Rule 3.3 clarifies that a member 
organization that desires to become a different type of business entity 
must apply for membership in the name of the new entity.

Rule 3.4--Qualifications of Foreign Member Organizations

    Currently, CBOE Rule 3.3 provides that an organization not 
organized under United States law may not become a member organization, 
unless the organization is organized under other laws approved by the 
Exchange's Board of Directors. Due to the ever-increasingly global 
nature of the securities markets, the Exchange has determined to amend 
its rules to permit foreign entities to become members of the Exchange, 
provided that such entities satisfy a number of requirements that are 
designed to eliminate potential hindrances the Exchange might encounter 
in regulating a foreign entity were such requirements not in place. 
These requirements are set forth in proposed CBOE Rule 3.4 and include, 
among others, the requirements that the organization must (i) maintain 
in English and at a location in the United States the books and records 
of the organization that relate to its business on the Exchange, (ii) 
maintain its financial records in accordance with United States 
accounting standards or foreign accounting standards that are found by 
the Exchange to be comparable to United States accounting standards, 
(iii) waive any secrecy laws in the domiciliary jurisdiction of the 
organization, and (iv) submit to the jurisdiction of the United States 
federal courts and the Illinois courts.

Rule 3.5--Denial of and Conditions to Membership and Association

    Proposed CBOE Rule 3.5 (which is a revised version of current CBOE 
Rule 3.4) clarifies which criteria for denial or conditioning 
membership or association with a member are applicable only to broker-
dealer applicants and revises one of the current grounds for denial or 
conditioning approval of a broker-dealer applicant. Currently, the 
Membership Committee may deny or condition the approval of a broker-
dealer applicant if the applicant has a negative net worth. Under 
proposed CBOE Rule 3.5(c)(i), this ground is revised to provide that 
the Membership Committee may deny or condition the approval of a 
broker-dealer applicant if the applicant is an individual and has net 
worth (excluding personal assets) below $25,000 or if the applicant is 
an organization and has net worth (excluding personal assets) below 
$50,000. The Exchange believes that this somewhat higher standard is 
appropriate given the financial resources typically now required to 
operate as an Exchange member. In addition, any individual applicant 
who fails to satisfy this standard could still apply to become a non-
broker-dealer nominee of a member organization and not be subject to 
this standard.
    Proposed CBOE Rule 3.5 also clarifies that it is the Exchange's 
intention not to use as a ground for denial or conditioning approval of 
an applicant failure by the applicant to pay debts that have been 
discharged in bankruptcy. However, in the event an applicant has 
engaged in fraud in connection with a bankruptcy proceeding (such as 
fraudulent conveyances) or some other type of violation of just and 
equitable principles of trade, this clarification is not intended to 
limit the Exchange from considering this activity in determining 
whether to deny or condition approval of the applicant. A new provision 
is also proposed to be included in proposed CBOE Rule 3.5 which makes 
clear that any decision made by the Membership Committee to deny or 
condition approval of an applicant must be consistent with both the 
provisions of proposed CBOE Rule 3.5 and the provisions of the Act. 
Additionally, certain provisions of current CBOE Rule 3.4 are not 
included in proposed CBOE Rule 3.5 and instead are restated in other 
rules.

Rule 3.6--Persons Associated With Member Organizations

    Proposed CBOE Rule 3.6 clarifies that the associated persons of a 
member organization which are required to be disclosed to the Exchange 
and approved

[[Page 63090]]

by the Membership Committee include those associated persons that are 
required to be disclosed on the organization's Form BD as direct owners 
or executive officers (or, if the organization is a non-broker-dealer 
lessor member organization, those associated persons that would be 
required to be disclosed on Form BD in these capacities in the event 
the organization was a broker-dealer). In addition, a prior reference 
to the completion of Form U-4 has been deleted, and CBOE Rule 9.3 has 
been amended to clarify which associated persons are required to 
complete Form U-4 (i.e., persons who perform duties for member 
organizations approved to transact business with the public which are 
customarily performed by sales representatives, solicitors, customers' 
men, or branch office managers). Notwithstanding the foregoing, the 
Exchange may still require other applicants to complete Form U-4 during 
the application process solely as an information gathering tool.

Rule 3.7--Certain Documents Required of Members, Applicants, and 
Associated Persons

    Proposed CBOE Rule 3.7 sets forth those documents which members are 
required to submit to the Membership Department. Most of the provisions 
of proposed CBOE Rule 3.7 are restatements of current requirements set 
forth in current CBOE Rule 3.6. Additionally, because current CBOE Rule 
3.6 was last amended prior to when the Exchange amended its Rules to 
permit limited liability companies to become Exchange members, a 
provision is proposed to be included in proposed CBOE Rule 3.7.01 which 
specifies the documents that the Exchange currently requires applicants 
and members that are limited liability companies to file with the 
Membership Department. Proposed CBOE Rule 3.7 also includes provisions 
which refer to existing requirements under the Act (i.e., the 
requirements under Section 17(f) of the Act \6\ respecting 
fingerprinting and the requirement under Section 15 of the Act \7\ that 
broker-dealers complete and keep current Form BD).
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78q(f).
    \7\ 15 U.S.C. 78o.
---------------------------------------------------------------------------

Rule 3.8--Nominees and Members Who Register Their Memberships for 
Member Organizations

    CBOE Rule 3.8 is proposed to be amended to restate the current 
requirements that are applicable to nominees and members who register 
their memberships for member organizations. For example, CBOE Rule 
3.8(a) sets forth current requirements that are applicable to the 
designation of a nominee by a member organization that will not be 
acting as a lessor, and Rule 3.8(c) sets forth current requirements 
that are applicable to registering one's membership for a member 
organization. CBOE Rule 3.8 is also proposed to be amended to 
incorporate the following substantive changes.
    Proposed CBOE Rule 3.8(b) requires each lessor member organization 
to designate a single nominee to represent the organization in all 
matters relating to the Exchange with respect to all of the memberships 
for which the organization is a lessor. This individual will be 
required to satisfy all of the qualification requirements for 
membership (other than the requirements which are not applicable to 
lessors or which are applicable solely to members who will have an 
authorized floor function), except that the nominee will be considered 
an associated person of the lessor member organization and not an 
individual member by virtue of being approved to act as a nominee in 
this capacity. The Exchange currently requires lessor member 
organizations to designate a representative to represent the 
organization with respect to the memberships for which it is a lessor, 
and proposed CBOE Rule 3.8(b) formalizes the process for the 
designation and approval of these individuals and clarifies that they 
are subject to the Exchange rules that are applicable to nominees 
generally (except those rules that are not applicable to lessors or 
which are applicable solely to members who will have an authorized 
floor function).
    Proposed CBOE Rule 3.8(d) clarifies that a nominee shall not, 
solely by virtue of being a nominee of a member organization, have any 
personal liability to the Exchange or to any other member for Exchange 
transactions and other securities transactions made by the nominee on 
behalf of the member organization. Proposed CBOE Rule 3.8.01 also makes 
clear that nothing in CBOE Rule 3.8(d) is intended to define or limit 
(i) any obligations between a nominee of a member organization, or an 
individual who has registered his or her membership for a member 
organization, and the member organization itself; (ii) any 
responsibility such a person may have for obligations of the member 
organization by virtue of a contractual obligation or ownership 
relationship to the organization beyond merely being a nominee or 
individual who has registered his or her membership for the 
organization; or (iii) the ability of the Exchange to sanction or take 
other remedial action against such a person pursuant to other Exchange 
rules for rule violations or other activity for which remedial measures 
may be imposed.
    Proposed CBOE Rule 3.8(e)(i) provides that each nominee of a member 
organization and each individual who has registered his or her 
membership for a member organization is required to be materially 
involved in the daily operation of the Exchange business activities of 
the member organization. This provision is intended to eliminate the 
potential ability under the Exchange's current rules for an 
organization to qualify for membership by associating with an 
individual who is designated as that organization's nominee or who 
registers his or her membership for the organization but who has little 
or no involvement with the organization's Exchange business activities. 
The Exchange is proposing to prohibit the potential ability to have 
such an arrangement since such arrangements dilute the value of the 
membership rights of other Exchange members and result in a situation 
in which the person designated to represent the applicable member 
organization in all matters relating to the Exchange is not materially 
involved in the organization's Exchange business activities.

Rule 3.9--Application Procedures and Approval or Disapproval

    CBOE Rule 3.9 is proposed to be amended to restate the Exchange's 
current membership application procedures.
    For example, proposed CBOE Rule 3.9(g) restates the current 
provision that any individual membership applicant applying to have an 
authorized floor function is required to have attended the Exchange's 
New Member Orientation Program and to have passed the Exchange's Floor 
Member Qualification Exam. This provision is currently set forth in 
CBOE Rule 3.9(c)(2) and is proposed to be restated and moved to 
proposed CBOE Rule 3.9(g). Proposed CBOE Rule 3.9(g) also sets forth 
the procedural requirements that are related to this provision (such as 
the requirement that a person must score 75% or better on the Floor 
Member Qualification Exam in order to pass the Exam) which were 
previously approved by the Commission but which are not currently set 
forth in CBOE Rule

[[Page 63091]]

3.9.\8\ Additionally, the provisions currently set forth in Rule 3.5(b) 
which address when an applicant who fails the Floor Member 
Qualification Exam may re-take the Exam are proposed to be deleted from 
Rule 3.5(b) and to be included in proposed Rule 3.9(g).
---------------------------------------------------------------------------

    \8\ See Securities Exchange Act Release No. 32943 (September 22, 
1993), 58 FR 50984 (September 29, 1993) (File No.SR-CBOE-91-38) 
(reflecting Commission approval of the procedural provisions related 
to the Exchange's requirement that individual membership applicants 
applying to have an authorized floor function are required to pass 
the Exchange's Floor Membership Qualification Exam).
---------------------------------------------------------------------------

    The Exchange is also proposing to codify in CBOE Rule 3.9 the 
following current membership application procedures which are not 
currently set forth in CBOE Rule 3.9. First, proposed CBOE Rule 3.9(d) 
requires each applicant to promptly update the applicant's application 
materials if any of the information provided in these materials becomes 
inaccurate or incomplete after the date of submission of the 
application to the Membership Department and prior to any approval of 
the application. This requirement is currently set forth in the 
application materials themselves and is proposed to be added to Rule 
3.9. Second, proposed CBOE Rule 3.9(c) clarifies that the Membership 
Committee may utilize a posting period for any type of membership 
application and that the Membership Committee may shorten or waive a 
required posting period for an applicant if the Membership Committee 
determines that doing so is warranted due to extenuating circumstances. 
Third, proposed CBOE Rule 3.9(f) clarifies that the Exchange typically 
does not investigate an individual member applicant who was an 
individual member within the prior 6 months since the person was 
recently an Exchange member. Fourth, the provisions of CBOE Rule 
3.4(d), which provide that the Membership Committee need not act on a 
membership application when the applicant is the subject of an inquiry, 
investigation, or proceeding conducted by a self-regulatory 
organization or government agency involving the applicant's fitness for 
membership until the matter has been resolved, are proposed to be moved 
to proposed Rule 3.9(j). Fifth, proposed CBOE Rule 3.9.02 clarifies 
that a member organization which desires to change its name is required 
to submit an application to the Membership Department and that the 
Membership Committee may disapprove the name change application or 
membership application of an organization if the Membership Committee 
determines that the proposed name of the organization is confusingly 
similar to the name of an existing member organization.
    One substantive change that has been incorporated into CBOE Rule 
3.9 is that any member desiring to change the Clearing Member that 
guarantees the member's Exchange transactions will be required to 
submit an application for approval to do so to the Membership 
Department, including a financial statement which sets forth the 
member's assets and liabilities. Proposed CBOE Rule 3.9 also provides 
that the Membership Department will provide a copy of this financial 
statement to the new Clearing Member designated in the application and 
will post notice to the membership that the application has been 
received (unless the Clearing Member(s) that will no longer be 
guaranteeing the member's Exchange transactions waive this 
requirement). This amendment is intended to permit the Clearing 
Member(s) that will no longer be clearing the member's Exchange 
transactions as well as other members to notify the Membership 
Department if the member has outstanding liabilities that bear upon the 
member's qualification for membership and to provide the new Clearing 
Member designated by the member with information regarding the member's 
financial standing so that the Clearing Member will have this 
information available to it in connection with managing the risk 
associated with the member's trading activities.

Rule 3.10--Effectiveness of Membership or Approved Associated Person 
Status

    CBOE Rule 3.10 is proposed to be amended to restate the Exchange's 
current rule provisions regarding effectiveness of membership or 
approved associated person status. One substantive change that has been 
incorporated into CBOE Rule 3.10 is that an applicant that is approved 
to become a lessor will have 6 months to become effective in that 
status. Other types of applicants will continue to have 90 days to 
become effective in their approved statuses. Applicants that have been 
approved to become lessors will have a longer time period to become 
effective in that status because they generally must purchase a 
membership to become an effective lessor and it is often difficult for 
lessors to do so within 90 days.

Rule 3.11--Notice of Effectiveness of Membership or Approved Associated 
Person Status

    CBOE Rule 3.11 is proposed to be amended to reflect the Exchange's 
current procedures for notifying the membership of the effectiveness 
any membership, membership status, or associated person status. CBOE 
Rule 3.11 is also proposed to be amended to delete the requirement that 
such notices be posted on the Exchange Bulletin Board since these 
notices are included in the Exchange Bulletin (which is forwarded to 
all members) and since these notices relate to statuses that have 
already been approved (unlike notices of pending membership 
applications which are posted on the Exchange Bulletin Board so that 
members may submit comments to the Membership Department regarding an 
applicant's fitness for membership).

Rule 3.12--Membership Rights and Restrictions on Their Transfer

    CBOE Rule 3.12 is proposed to be amended to include in proposed 
CBOE Rule 3.12(b)(ii) a provision currently set forth in CBOE Rule 
3.15(g) regarding restrictions on the transfer of membership rights 
(which is proposed to be deleted from CBOE Rule 3.15) and to indicate 
that certain rights may be granted to the grantee of an Authorization 
to Sell a membership pursuant to proposed CBOE Rule 3.14(d) and 
proposed CBOE Rule 3.15(b) (which are more fully discussed below).

Rule 3.13--Purchase of Membership

    CBOE Rule 3.13 is proposed to be amended to generally provide that 
any newly issued memberships may be purchased pursuant to procedures 
established by the Exchange. CBOE Rule 3.13 is also proposed to be 
amended to clarify that only those approved to be an owner or lessor 
may purchase a membership and that any bid to purchase an outstanding 
transferable membership submitted by a person or organization approved 
to be an owner or lessor shall be canceled at such time that the person 
or organization is no longer approved to be an owner or lessor. In 
addition, proposed CBOE Rule 3.13(c) clarifies that a purchaser must 
pay for a purchased membership within 2 business days of the acceptance 
of a bid for a newly issued membership or the matching of a bid and 
offer for an outstanding transferable membership.

Rule 3.14--Sale and Transfer of Membership

    The Exchange's membership transfer provisions of CBOE Rule 3.14(c) 
are proposed to be amended to provide that if the owner of a 
transferable membership requests the transfer of the membership 
pursuant to CBOE Rule 3.14(c)(iii) to an organization in which the 
transferor will maintain an interest, the interest must be at least 
equal in

[[Page 63092]]

value to the current market price of the membership (instead of the 
lower of the current market price or cost of the membership). Because 
the market price of a membership has increased significantly over the 
years, maintaining an ownership interest in an organization equal to 
the original cost that a member may have paid for a membership may no 
longer reflect a material ownership interest in that organization.
    Current CBOE Rule 3.15.01 provides that the Exchange may recognize 
and give effect to a valid instrument by which a member, in 
consideration of a loan or guarantee of a loan by another member for 
the purpose of purchasing a membership, has authorized the lending or 
guaranteeing member to sell that membership. Proposed CBOE Rule 3.14(d) 
replaces this provision and also expands upon it by permitting the 
owner of a transferable membership to voluntarily grant an 
Authorization to Sell the membership to any other member (including, 
but not limited to, another member who has provided or guaranteed a 
loan to the membership owner for the purpose of purchasing a 
membership) and by specifying in more detail the provisions that are 
proposed to govern the grant of an Authorization to Sell and the 
exercise of authority thereunder.
    Among the provisions under proposed CBOE Rule 3.14(d) that will 
apply to an Authorization to Sell are the following: (i) An 
Authorization to Sell shall be effective only if it has been executed 
on a form prescribed by the Exchange and filed with the Membership 
Department; (ii) a membership owner may not grant an Authorization to 
Sell a particular membership to more than one member; (iii) the grantee 
of an Authorization to Sell will have all of the authority granted 
under the Exchange's Constitution and rules relating to the sale of the 
membership that would otherwise be vested in the membership owner; (iv) 
a grantee of an Authorization to Sell a membership must notify the 
membership owner in writing at least 3 business days prior to 
exercising the grantee's right to sell the membership; (v) an 
Authorization to Sell shall be irrevocable and may only be canceled if 
the grantee of the Authorization to Sell consents to its cancellation; 
(vi) the Exchange shall take direction solely from the grantee of an 
Authorization to Sell a membership with respect to matters relating to 
the sale of the membership; (vii) notwithstanding the foregoing, a 
membership owner and a grantee of an Authorization to Sell a membership 
may have a written contract between them which sets forth the 
circumstances under which the grantee may exercise the grantee's 
authority to sell the membership, and any breaches of this written 
contract may be redressed through arbitration under Chapter XVIII of 
the Exchange's rules or through other means permitted by that Chapter; 
(viii) the grantee of an Authorization to Sell a membership that 
exercises the grantee's right to sell the membership may not be the 
purchaser of the membership unless the membership owner consents; and 
(ix) following receipt by the Membership Department of an Authorization 
to Sell that has been granted by a member, a cancellation of the 
Authorization to Sell, or a contract concerning the exercise of 
authority under the Authorization to Sell, the Membership Department 
will provide a copy of the applicable document to the member's Clearing 
Member(s).

Rule 3.15--Proceeds From the Sale of Membership

    Current CBOE Rule 3.15 and current provisions of CBOE Rule 3.14 and 
Rule 3.16 provide for a claims process whenever a membership is sold, 
whenever a membership is transferred without a sale, at the beginning 
of a membership lease, and at the end of a membership lease. During 
this claims process, the Exchange, the Clearing Corporation, and 
members may submit claims against the owner of the membership that is 
being sold, transferred, or leased. If the membership was leased (such 
as is always the case at the end of a membership lease), the Exchange, 
the Clearing Corporation, and members may also submit claims against 
the lessee of the membership (except at the beginning of a membership 
lease when claims may only be submitted against the membership owner). 
In the case of a sale, these claims (if determined to be valid by the 
Board of Directors) are satisfied out of the proceeds of the sale. In 
the case of a transfer or the beginning or end of a lease, the owner of 
the membership that is the subject of the transfer or lease must post 
cash with the Exchange in an amount equal to the last membership sale 
or must obtain a letter of guarantee from a Clearing Member to satisfy 
the payment of any valid claims.
    For a number of reasons, the Exchange is proposing to modify this 
membership claims process so that the only permissible claimant under 
the process will now be the grantee of an Authorization to Sell, so 
that the process will only occur upon the sale of a membership, and so 
that lessors will no longer have liability under the claims process for 
the debts and liabilities of their lessees. The primary reason for 
these modifications is that the Exchange no longer believes it is 
equitable for a lessor to be liable under the membership claims process 
for the debts and liabilities of a lessee, particularly when it is 
almost always the case that a lessor has no involvement in incurring a 
lessee's debts and liabilities and has no means to monitor the 
activities of a lessee. The Exchange also believes that these 
modifications to the membership claims process, when coupled with 
providing for the ability to grant an Authorization to Sell a 
membership, will result in more individuals and entities desiring to 
own Exchange memberships (including a greater number of individuals and 
entities who are engaged in trading activities on the Exchange desiring 
to own Exchange memberships). Additionally, these modifications will 
eliminate the significant administrative burden on the Exchange, 
Clearing Members, and other members that is a byproduct of the current 
membership claims process while still preserving the right of members 
to pursue claims against other members through the arbitration process.
    Specifically, CBOE Rule 3.15 is proposed to be amended to provide 
for the following modified membership claims process upon the sale of a 
membership in place of the current membership claims process.
    In the event of a sale of a membership for which no Authorization 
to Sell has been granted, the Exchange shall remit the sale proceeds 
from the sale of the membership to the member whose membership was sold 
promptly following receipt of the sale proceeds by the Exchange.
    In the event of a sale of a membership for which an Authorization 
to Sell has been granted, the grantee shall have 2 business days from 
the date of the sale to notify the Membership Department of any claims 
the grantee has against the member whose membership was sold that are 
related to the member's Exchange business activities, and the member 
whose membership was sold shall have 5 business days from the date of 
the sale to either acknowledge or contest those claims. The Exchange 
shall then remit to the grantee that portion of the sale proceeds 
applicable to those claims that were acknowledged by the member whose 
membership was sold, escrow that portion of the remaining sale proceeds 
applicable to those claims that were contested by the member whose 
membership was sold, and remit to the member whose membership was sold 
any remaining

[[Page 63093]]

portion of the sale proceeds. Any portion of the sale proceeds 
applicable to contested claims that has been escrowed shall remain in 
escrow until the grantee and the member whose membership was sold 
resolve the claims through arbitration under Chapter XVIII of the Rules 
or through other means permitted by that Chapter. Notwithstanding the 
foregoing, the Exchange may determine to release to the member whose 
membership was sold sale proceeds that have been escrowed due to 
contested claims if the Exchange determines that the grantee of the 
Authorization to Sell is not proceeding in good faith to resolve the 
contested claims. Following the resolution of any contested claims for 
which sale proceeds have been escrowed, the Exchange shall remit the 
escrowed proceeds to the grantee and the member whose membership was 
sold in accordance with the resolution of these claims.
    CBOE Rule 3.15 also provides further explanation regarding the 
procedural aspects of this claims process, lists examples of types of 
claims related to Exchange business activities that may be submitted by 
the grantee of an Authorization to Sell under this claims process, and 
notes that whether a claim is related to Exchange business activities 
shall be determined solely by the Exchange.
    Additionally, proposed CBOE Rule 3.14(d)(viii) provides that, 
consistent with the priority provided for under CBOE Rule 3.15(b) to 
claims made by the grantee of an Authorization to Sell, the Exchange 
will recognize a security interest of the grantee in any proceeds from 
the sale of a membership that the grantee is entitled to receive 
pursuant to CBOE Rule 3.15(b), but will not recognize any other lien or 
security interest in a membership or in the proceeds from the sale of a 
membership.

Rule 3.16--Special Provisions Regarding Chicago Board of Trade 
Exerciser Memberships

    CBOE Rule 3.16 is proposed to be amended to clarify that a Chicago 
Board of Trade exerciser membership acquired by a person pursuant to 
Paragraph (b) of Article Fifth of the Exchange's Certificate of 
Incorporation terminates upon receipt by the Membership Department of 
written notice from the person that the person is surrendering the 
membership or at such time that the person is no longer entitled to 
membership on the Exchange in accordance with Paragraph (b) of Article 
Fifth. In addition, the provisions regarding leased memberships 
currently contained in CBOE Rule 3.16(b) have been deleted and restated 
in an amended form in proposed CBOE Rule 3.17.

Rule 3.17--Leased Memberships

    Proposed CBOE Rule 3.17 restates the provisions regarding leased 
memberships that are currently contained in CBOE Rule 3.16(b) and also 
incorporates the following substantive changes to those provisions.
    Proposed CBOE Rule 3.17(a) clarifies that the Exchange shall bear 
no liability to a lessor or lessee in connection with the Exchange's 
review and approval of a lease agreement.
    In connection with the modification of the current membership 
claims process to eliminate lessor liability under that process for 
claims against a lessee, the Exchange is proposing to include an 
explicit provision in proposed CBOE Rule 3.17(b) which provides that a 
lessor of a membership shall not have any liability for claims against 
a lessee of that membership solely by virtue of being a lessor of the 
membership. Proposed CBOE Rule 3.17(b) also clarifies that this 
provision is not intended to limit or define any responsibility a 
lessor may have for claims against a lessee by virtue of a contractual 
obligation or ownership relationship between the lessor and lessee 
beyond the lease of a membership from the lessor to the lessee. 
Similarly, the Exchange is proposing to eliminate the current provision 
of CBOE Rule 3.16(b) which provides that any division of rights and 
responsibilities between a lessor and lessee with respect to the 
satisfaction of applicable Exchange dues, fees, and other charges shall 
not affect a lessor's obligation to pay all amounts due the Exchange 
with respect to which a lessee has been delegated responsibility.
    Proposed CBOE Rule 3.17(c) clarifies that the Exchange may specify 
that particular provisions be included in membership lease agreements 
in addition to those specifically designated in the Rule.
    Proposed CBOE Rule 3.17(d) requires a lessee to promptly file the 
lease agreement and any amendments thereto with the Membership 
Department and to promptly notify the Membership Department of any 
termination of the lease before the termination becomes effective. This 
obligation is proposed to be placed on lessees because lessees are 
present at the Exchange to conduct their activities.
    Proposed CBOE Rule 3.17(e) is intended to prevent the potential 
occurrence of a situation in which a lessor sells or transfers a 
membership during the term of a lease of the membership and the lessee 
is left with no membership with which to conduct the lessee's Exchange 
business activities. Specifically, proposed CBOE Rule 3.17(e) provides 
that in the event a lessor sells or transfers a membership while it is 
being leased to a lessee, the purchaser or transferee of the membership 
is required to lease the membership to the lessee pursuant to the terms 
of the lessee's existing lease agreement with the lessor for a period 
of 20 business days following the date the membership is transferred to 
the purchaser or transferee. The purchaser or transferee may also 
satisfy this requirement by making arrangements with another membership 
owner to permit the lessee to lease a membership from that membership 
owner for the required time period pursuant to the terms of the 
lessee's existing lease agreement. Additionally, the lessee is 
permitted to waive this requirement if the lessee so chooses. The 
Exchange believes CBOE Rule 3.17(e) will prevent the disruption of 
business on the Exchange which can occur if a lessor sells or transfers 
a membership while it is being leased to a lessee by allowing the 
lessee a reasonable amount of time to procure the lease of another 
membership.
    Proposed CBOE Rule 3.17(e) further provides that it shall be a rule 
violation for a lessor to circumvent the requirements of proposed CBOE 
Rule 3.17(e) by improperly terminating a membership lease prior to the 
sale or transfer of the membership for the purpose of avoiding the 
applicability of these requirements. In the event the Exchange 
determines that such a circumvention has taken place, proposed CBOE 
Rule 3.17(e) provides that the Exchange may impose the requirements of 
proposed CBOE Rule 3.17(e) upon the purchaser or transferee of the 
membership and/or take disciplinary action against the lessor.
    Proposed CBOE Rule 3.17(f) clarifies that in the event a lessor 
sells or transfers a membership while it is being leased to a lessee, 
the lessor is required to remit to the purchaser or transferee of the 
membership any amounts paid to the lessor by the lessee under the lease 
agreement for any portion of the lease period, up to 20 business days, 
during which the lessor will no longer be leasing the membership to the 
lessee. The lessor is required to remit these amounts to the purchaser 
or transferee of the membership no later than the date the membership 
is transferred to the purchaser or transferee. The lessor is also 
required to remit to the lessee by the transfer date any remaining 
amounts paid to the lessor by the lessee under

[[Page 63094]]

the lease agreement for any portion of the lease period beyond the 
foregoing 20 business day period. Additionally, in the event the lessee 
waives the requirements of CBOE Rule 3.17(e) described above, the 
lessor is required to remit to the lessee by the transfer date all 
amounts paid to the lessor by the lessee under the lease agreement for 
any portion of the lease period during which the lessor will no longer 
be leasing the membership to the lessee.

Rule 3.18--Members and Associated Persons Who Are or Become Subject to 
a Statutory Disqualification

    The Exchange is proposing to modify its procedures for determining, 
with respect to a member or associated person who is or becomes subject 
to a statutory disqualification, whether to permit that member or 
associated person to continue in membership or association with a 
member, and if so, whether to condition such continuance in membership 
or association.
    Currently, the Membership Committee is authorized under current 
CBOE Rule 3.4, with respect to a member or associated person who is or 
becomes subject to a statutory disqualification, to determine not to 
permit that member or associated person to continue in membership or 
association with a member or to condition such continuance in 
membership or association. However, the Membership Committee must first 
gather the relevant information and interview the member or associated 
person before rendering its decision. In addition, the member or 
associated person has the right to appeal the Membership Committee's 
decision to the Exchange's Appeals Committee and to appeal the Appeals 
Committee's decision to the Board of Directors. Furthermore, these 
appeal rights must be exhausted before the Membership Committee's 
decision can take effect. Therefore, it is possible that a member or 
associated person could become subject to a statutory disqualification, 
such as a serious felony conviction, and still be able to continue to 
act in that capacity for an extended period of time while the foregoing 
proceedings are pending.
    Accordingly, the Exchange is proposing to modify its current 
procedures in this regard by replacing them with a more expedited 
procedure which will still provide due process to the member or 
associated person that is or has become subject to a statutory 
disqualification without a right of appeal to the Appeals Committee and 
then to the Board of Directors. The proposed modified procedure is set 
forth in proposed CBOE Rule 3.18 and has the following substantive 
components:
    (i) If a member or associated person who is or becomes subject to a 
statutory disqualification wants to continue in Exchange membership or 
association with a member, the member or associated person is required 
to submit an application to the Membership Department within 10 days of 
becoming subject to the statutory disqualification.
    (ii) Following receipt of the application, or in the event the 
Exchange becomes aware that a member or associated person is subject to 
a statutory disqualification and has failed within the required time 
period to submit an application to continue in membership or 
association, the Chairperson of the Membership Committee will appoint a 
panel composed of the Membership Committee Chairperson and two other 
members of the Membership Committee to conduct a hearing concerning the 
matter.
    (iii) The hearing panel will hold a hearing concerning the matter 
14 or more days following the receipt of the application or the 
initiation of the proceeding, and both the subject of the proceeding 
and Exchange staff will be afforded an opportunity to present relevant 
information, arguments, and witnesses during the hearing.
    (iv) Following the hearing, the hearing panel will present its 
recommended decision to the Membership Committee, which may ratify or 
amend the decision.
    (v) The Exchange's Executive Committee may determine within 7 days 
after the issuance of the Membership Committee's decision to order 
review of the decision. If the Executive Committee does not order 
review of the decision, the Membership Committee's decision will become 
the final decision of the Exchange.
    (vi) If the Executive Committee orders review of the Membership 
Committee's decision, the review will be conducted by the Executive 
Committee or a panel thereof composed of at least 3 members of the 
Executive Committee, whose decision must be ratified by the Executive 
Committee, and the Executive Committee's decision will be the final 
decision of the Exchange.
    The Executive Committee is composed of the Exchange's Chairman, 
Vice Chairman, and President, and at least 4 other Exchange directors 
and is generally authorized under Section 7.2 of the Exchange's 
Constitution to exercise all the powers and authority of the Board of 
Directors in the management of the business and affairs of the 
Exchange. The Exchange is proposing to utilize the Executive Committee 
as the review body under proposed CBOE Rule 3.18 instead of the Board 
of Directors because the Executive Committee is generally able to 
convene more quickly than the Board because of its smaller size.
    In the event that the Exchange were to determine to permit a member 
or associated person who is subject to a statutory disqualification to 
remain in membership or association, the Exchange would also submit a 
notice to the Commission to the extent required by Rule 19h-1 under the 
Act.\9\
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    \9\ 17 CFR 240.19h-1.
---------------------------------------------------------------------------

    Additionally, in order to help to ensure that the Exchange receives 
notice if a member or associated person becomes subject to a statutory 
disqualification, proposed CBOE Rule 3.18.02 provides that if an 
associated person of a member is or becomes subject to a statutory 
disqualification, the member is required to immediately provide written 
notice to the Membership Department of the name of the associated 
person, the person's capacity with the member, and the nature of the 
statutory disqualification.

Rule 3.19--Termination from Membership

    Proposed CBOE Rule 3.19 clarifies that the membership status of a 
member automatically terminates if the member does not possess a 
membership through ownership, lease, or registration of a membership to 
the member and that the membership of a member organization 
automatically terminates if the member organization has no nominee or 
person who has registered his or her membership for the member 
organization. Proposed CBOE Rule 3.19 also restates the provision of 
current CBOE Rule 3.17 which permits the Exchange, if extenuating 
circumstances are present, to allow a member to retain the member's 
membership status following an event that triggers the termination of 
that status in order to permit the member to re-obtain a membership 
status.

Rule 3.20--Dissolution and Liquidation of Member Organizations

    Proposed CBOE Rule 3.20 restates the provisions currently set forth 
in current CBOE Rule 3.18 regarding dissolution and liquidation of 
member organizations and amends those provisions by requiring a member 
organization (i) to provide notice of the adoption of a plan of 
liquidation or dissolution to both the Department of Financial and 
Sales Practice Compliance and the Membership

[[Page 63095]]

Department and (ii) to provide notice to these Departments of any 
actual liquidation or dissolution.

Rule 3.21--Obligations of Terminating Members

    Proposed CBOE Rule 3.21 restates requirements applicable to 
terminating members which are currently set forth in current CBOE Rule 
3.19. In addition, in connection with the modification of the current 
membership claims which includes the elimination the Exchange's ability 
to submit claims against the proceeds of a membership sale under that 
process, the Exchange is proposing to delete the provision of current 
CBOE Rule 3.19 which permits the Exchange to withhold the distribution 
of the proceeds of a sale of a membership if the seller is not current 
in the payment of Exchange fees or the submission of various filings.

Current Rules 3.20-3.22A--Government Securities Options Permits

    All of the provisions contained in current CBOE Rules 3.20, 3.21, 
3.22, and 3.22A relating to government securities options permits are 
proposed to be deleted due to the fact that all of these permits have 
expired. Similarly, CBOE Rule 1.1(hh), which sets forth the definition 
of a government securities options permit holder, and CBOE Rule 
6.20.03, which relates to government securities options permit holders, 
are also proposed to be deleted.

Rule 3.25--Transfer of Individual Membership in Trust

    CBOE Rule 3.25 is proposed to be amended to clarify that (i) the 
only type of trust into which a membership owner may transfer a 
membership is a living trust; (ii) a member desiring to transfer a 
membership in trust is required to submit an application to the 
Membership Department which must be approved by the Exchange; (iii) a 
Trust Member is required to submit to the Membership Department any 
amendments to the trust agreement and to notify the Membership 
Department of any changes in the information set forth in the 
application to transfer the membership in trust, any changes in 
successor trustee, any release of the membership out of trust, and any 
termination of the trust; and (iv) the Exchange shall deem a membership 
held in trust to have reverted to the Trust Member to be held directly 
and not in trust in the event the membership is released from the 
trust, the trust terminates, or the trust agreement is amended so that 
it no longer complies with the requirements of CBOE Rule 3.25.

Rule 3.27--Options Trading Permits

    In connection with the modification of the current claims process 
that is applicable to memberships, the Exchange is also proposing to 
amend CBOE Rule 3.27 to make the same modifications to the corollary 
claims process that is applicable to Options Trading Permits.

Rule 3.28--Extension of Time Limits

    Proposed CBOE Rule 3.28 clarifies that any time limit imposed on an 
applicant, member, or other person under Chapter III of the Exchange's 
rules may be extended by the Membership Committee in the event the 
Membership Committee determines that such an extension is warranted due 
to extenuating circumstances. This proposed provision is similar to 
CBOE Rule 17.13 which authorizes the Exchange to extend time limits 
provided for under Chapter XVII of the Exchange's rules.

Rule 3.29--Delegation of Authority

    Proposed CBOE Rule 3.29 clarifies that all of the authority granted 
to the Exchange under Chapter III of the Exchange's rules may be 
exercised by the Membership Committee and/or the Membership Department 
and that the Membership Committee may delegate to the Membership 
Department any of the authority that is granted to the Membership 
Committee under the Exchange's rules. Since there are so many different 
types of membership-related applications and approvals provided for 
under Chapter III, the Membership Committee may wish to delegate to the 
Membership Department the authority to act on certain routine types of 
applications and approvals so that the Committee can focus its 
attention on the more significant types of membership-related 
applications and approvals. Proposed CBOE Rule 3.29 makes clear that 
this type of delegation may occur.

Rule 6.76A--Automated Billing Process for Market-Maker Brokerage Bills

    In order to streamline the processing and payment of bills for 
brokerage services that are provided to Market-Makers by Floor Brokers 
and order service firms (``OSFs'') and because Floor Brokers and OSFs 
will no longer have the ability to submit claims for outstanding 
brokerage bills as part of the membership claims process, the Exchange 
is proposing to implement an automated billing process for these bills 
which is proposed to be set forth in proposed CBOE Rule 6.76A. Below 
are the substantive components of this proposed automated billing 
process. Some additional procedural aspects of this proposed automated 
billing process are also described in the proposed Rule.
    (i) Each Floor Broker and OSF will be required to submit a written 
bill by the sixth day of the month to each Market-Maker customer of the 
Floor Broker or OSF for brokerage fees incurred by the Market-Maker 
during the prior month.
    (ii) Submission of a written bill to a Market-Maker for these 
purposes shall be deemed to include hand-delivery of the bill to the 
Market-Maker, hand delivery of the bill to a representative of the 
Market-Maker, or delivery of the bill to the Market-Maker's Clearing 
Member with a written notation that the bill is for the Market-Maker.
    (iii) A Market-Maker who receives a brokerage bill from a Floor 
Broker or OSF in accordance with this billing process will have until 
the tenth day of the month to inform the Floor Broker or OSF if the 
Market-Maker disputes any portion of the bill.
    (iv) A Floor Broker or OSF that has submitted a bill to a Market-
Maker by the sixth day of the month will notify the Exchange's 
Accounting Department by the twelfth day of the month of the amount to 
bill each Market-Maker customer of the Floor Broker or OSF for 
brokerage fees incurred by the Market-Maker during the prior month.
    (v) The Exchange will take direction solely from the Floor Broker 
or OSF with respect to the amount to bill a Market-Maker pursuant to 
this billing process.
    (vi) If for any reason a Market-Maker disputes the amount a Floor 
Broker or OSF has instructed the Exchange to bill the Market-Maker 
pursuant to this billing process, the Market-Maker may pursue a claim 
against the Floor Broker or OSF in arbitration under Chapter XVIII of 
the Rules or through other means permitted by that Chapter. In 
addition, in the event a Floor Broker of OSF improperly instructs the 
Exchange to bill a Market-Maker for brokerage fees which the Floor 
Broker or OSF is not entitled to receive, the Exchange may discipline 
the Floor Broker or OSF pursuant to Chapter XVII of the Exchange's 
rules for violating CBOE Rule 4.6 by submitting false statements to the 
Exchange.
    (vii) The Accounting Department will prepare a monthly Market-Maker 
floor brokerage billing list for each Clearing Member that clears 
Market-Maker transactions and provide this list to each such Clearing 
Member by the twenty-first day of the month.
    (viii) A Clearing Member may instruct the Accounting Department not 
to draft the Clearing Member pursuant to this billing process for that 
portion of the

[[Page 63096]]

brokerage fees billed to a Market-Maker which would cause the Market-
Maker to have a negative balance in the Market-Maker's account at the 
Clearing Member.
    (ix) On the twenty-fifth day of the month, the Exchange will draft 
from each Clearing Member's account at the Clearing Corporation the 
total amount billed pursuant to this billing process to Market-Makers 
that clear through that Clearing Member.
    (x) The Exchange will then promptly distribute the amounts drafted 
to the applicable Floor Brokers and OSFs.
    (xi) In the event a Clearing Member instructs the Accounting 
Department not to draft a portion of the brokerage fees billed to a 
Market-Maker, the Exchange will distribute on a pro rata basis to the 
Floor Brokers and OSFs that submitted instructions to bill the Market-
Maker, the portion of the brokerage fees which were drafted from the 
Clearing Member for that Market-Maker.
    (xii) In the event a Clearing Member instructs the Accounting 
Department not to draft a portion of the brokerage fees billed to a 
Market-Maker and the Market-Maker later has a positive balance in the 
Market-Maker's account at the Clearing Member, the Clearing Member will 
be required to deduct from the account the amount of the brokerage fees 
that the Clearing Member previously instructed the Accounting 
Department not to draft and to distribute these funds to the Floor 
Brokers and OSFs who previously did not receive full payment.
    (xiii) If a Floor Broker or OSF fails to satisfy the submission 
deadlines provided for under this billing process for the billing of 
brokerage fees incurred by a Market-Maker during the prior month, the 
Floor Broker or OSF may not bill the Market-Maker for these brokerage 
fees pursuant to this billing process. However, the Floor Broker or OSF 
will still be permitted to bill the Market-Maker for these brokerage 
fees in the regular, non-automated fashion.
    (xiv) In the event that any of the deadlines under this billing 
process fall on a non-business day, the deadline will advance to the 
next business day.
    In order to contribute toward defraying the Exchange's cost of 
administering this automated billing process, the Exchange also 
proposes to assess, in a form and manner prescribed by the Exchange, 
(i) a $0.50 fee to each Floor Broker and OSF for each bill of $5.00 or 
more from the Floor Broker or OSF that is assessed to a Market-Maker 
under this billing process and (ii) a $0.50 fee to each Market-Maker 
for each bill of $5.00 or more from a Floor Broker or OSF that is 
assessed to the Market-Maker under this billing process.

Rules 6.72, 6.78, and 8.5--Clearing Member Guarantees

    CBOE Rules 6.72, 6.78, and 8.5 relate to guarantees provided by 
Clearing Members. CBOE Rule 6.72 is proposed to be amended to clarify 
that a Floor Broker may only have one Letter of Authorization guarantee 
from a Clearing Member in effect at a time. CBOE Rules 6.72, 6.78, and 
8.5 are each proposed to be amended to clarify that if a Clearing 
Member revokes a guarantee provided under one of those Rules, the 
Exchange will only post notice of the revocation if requested to do so 
by the Clearing Member. The Exchange does not believe that it is 
necessary to require that all of these revocations be posted because 
most are routine and result because a member is terminating from 
membership or is changing the Clearing Member that guarantees the 
member's Exchange transactions. In addition, CBOE Rule 8.5 is proposed 
to be amended to clarify that a Market-Maker may have in effect more 
than one Letter of Guarantee from a Clearing Member and that each such 
Letter of Guarantee shall provide that the issuing Clearing Member 
accepts financial responsibility for Exchange transactions made by the 
guaranteed Market-Maker when executing transactions through the issuing 
Clearing Member.
    Also, in order to ensure that Clearing Members receive notice of 
proceedings involving disputed trades, CBOE Rule 18.2 is proposed to be 
amended to provide that in any arbitration concerning the alleged 
failure to honor a trade, each party to the arbitration shall promptly 
provide copies of all documents filed or received in the arbitration by 
that party to the Clearing Member(s) that guaranteed that party's 
Exchange transactions when the alleged trade took place.

Rule 8.9--Securities Accounts and Orders of Market-Makers

    Proposed CBOE Rule 8.9.01 clarifies that each participant in a 
joint account shall be jointly and severally liable for any losses 
which may be incurred by the joint account, except that in the case 
where a participant in a joint account is a nominee of a member 
organization, or is an individual who has registered his or her 
membership for a member organization, and the participant is not acting 
as an independent Market-Maker pursuant to CBOE Rule 3.8(f), the member 
organization and not the participant shall be so liable. This 
clarification is intended to make applicable to joint accounts the 
general provision proposed to be included in proposed CBOE Rule 3.8(d) 
which clarifies that a nominee shall not, solely by virtue of being a 
nominee of a member organization, have any personal liability to the 
Exchange or to any other member for Exchange transactions and other 
securities transactions made by the nominee on behalf of the member 
organization.

Rule 18.2--Procedures in Member Controversies

    In order to ensure that Clearing Members receive notice of 
proceedings involving disputed trades, CBOE Rule 18.2 is proposed to be 
amended to provide that in any arbitration concerning the alleged 
failure to honor a trade, each party to the arbitration shall promptly 
provide copies of all documents filed or received in the arbitration by 
that party to the Clearing Member(s) that guaranteed that party's 
Exchange transactions when the alleged trade took place.

Membership Fee Circular

    The Exchange is proposing to amend its Membership Fee Circular to 
only include in the Circular information regarding membership fees and 
to delete from the Circular two introductory paragraphs regarding 
certain rule requirements related to membership since these 
requirements are now proposed to be more fully set forth in the 
membership rules themselves. The Exchange is also proposing to amend 
the description in the Membership Fee Circular of the fee that is 
payable by an applicant who is subject to a statutory disqualification 
to reflect that the rule provisions governing this situation are now 
proposed to be set forth in proposed CBOE Rule 3.18.

Special Members

    The Exchange proposes to delete all references to special members 
contained in the Exchange's rules since all special memberships on the 
Exchange have expired. These proposed deletions are from CBOE Rules 
3.12, 3.14, 3.16, 6.5, and 9.1.

Nonsubstantive Rule Changes

    The Exchange is also proposing to make certain nonsubstantive 
wording changes to several CBOE membership rules, including CBOE Rules 
3.23, 3.24, 3.27, 6.77, and 10.11.

Conforming Rule Changes

    Additionally, the Exchange proposes to make conforming changes to 
other CBOE rules (including CBOE Rules 24A.15, 26.11, 26.13, and 30.74, 
and the NYSE Options Program Permit Lease

[[Page 63097]]

Pool Procedures \10\) to make them consistent with the proposed rule 
changes described above.
---------------------------------------------------------------------------

    \10\ See Amendment No. 2, supra note 4.
---------------------------------------------------------------------------

Effectiveness of Rule Change

    This proposed rule change will become effective 30 days from the 
date of its approval by the Commission. The purpose of this 30 day time 
period is to provide the Exchange with an opportunity to notify the 
Exchange's membership of the effectiveness of this rule change and to 
provide those members who desire to grant or receive Authorizations to 
Sell with an opportunity to do so before the amended rule provisions 
take effect.
2. Statutory Basis
    The proposed rule change will codify in the Exchange's membership 
rules various procedures that have been implemented over time pursuant 
to the Exchange's current membership rules, will clarify, restate, and 
reorganize certain of the Exchange's membership rules to make it easier 
for the Exchange's membership to reference and understand those 
provisions, and will incorporate into the Exchange's membership rules 
various proposed improvements and enhancements to those rules. 
Accordingly, the Exchange believes that the proposed rule change is 
consistent with and furthers the objectives of Section 6(b)(5) of the 
Act \11\ in that it is designed to promote just and equitable 
principles of trade, to prevent fraudulent and manipulative acts and 
practices, and to protect investors and the public interest.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    The Exchange does not believe that the proposed rule change will 
impose any 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 solicited or received with respect to the 
proposed rule change.

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

    Within 35 days of the date of 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, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW, Washington, 
DC 20549-0609. 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 in 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-99-15 and should be submitted by December 9, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-29777 Filed 11-17-99; 8:45 am]
BILLING CODE 8010-01-P