[Federal Register Volume 65, Number 146 (Friday, July 28, 2000)]
[Notices]
[Pages 46524-46541]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-19055]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43056; File No. SR-CBOE-99-15]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 3 to the Proposed Rule Change by the Chicago Board 
Options Exchange, Inc. Relating to Membership Rules

July 19, 2000.

I. Introduction

    On April 12, 1999, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'' or ``Exchange Act''),\1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to revise the 
CBOE's membership rules. The CBOE amended its proposal on July 15, 
1999, November 3, 1999, and April 26, 2000.\3\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Arthur B. Reinstein, Assistant General 
Counsel, CBOE, to Kenneth Rosen, Attorney, Division of Market 
Regulation (``Division''), Commission, dated July 14, 1999 
(``Amendment No. 1''); letter from Arthur B. Reinstein, Assistant 
General Counsel, CBOE, to Yvonne Fraticelli, Division, Commission, 
dated November 3, 1999 (``Amendment No. 2''); and letter from Arthur 
R. Reinstein, Assistant General Counsel, CBOE, to Yvonne Fraticelli, 
Division, Commission, dated April 25, 2000 (``Amendment No. 3''). 
Amendment No. 1 made numerous technical changes to the proposed rule 
language and corresponding changes in the Purpose section of the 
CBOE's filing. Amendment No. 2 made minor technical corrections to 
the text of the proposed rule and made a conforming change by 
deleting Section 8(h) from the Exchange's Option Trading Lease Pool 
Procedures. Amendment No. 3 revised the requirements proposed in 
CBOE Rule 3.4 for foreign member organizations.
---------------------------------------------------------------------------

    Notice of the proposed rule change and Amendment Nos. 1 and 2 were 
published for comment in the Federal Register on November 18, 1999.\4\ 
The Commission received no comment letters regarding the proposal. This 
order approves the proposal, as amended. In addition, the Commission is 
publishing notice to solicit comments on, and is simultaneously 
approving, on an accelerated basis, Amendment No. 3 to the proposal.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 42111 (November 5, 
1999), 64 FR 63065.
---------------------------------------------------------------------------

II. Description of the Proposal

    As described below, the CBOE proposes to make extensive changes to 
revise and update its membership rules.

A. Definitions

    The CBOE proposes to amend the definition of ``lessor'' in CBOE 
Rule 1.1(ff) 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, 
``Exchange Approval.'' Specifically, CBOE proposes to delete the second 
sentence of CBOE Rule 1.1(ff) because the CBOE believes that the 
sentence could be ready to imply that a lessor member organization is 
not permitted to transact business with the public.
    The CBOE proposes to amend the definition of ``nominee'' in CBOE 
Rule 1.1(pp) to: (1) Clarify that under the CBOE's rules, as amended, 
not all nominees are required to have an authorized floor function,\5\ 
and (2) eliminate a provision in the current definition indicating that 
all nominees shall be deemed to be Exchange members because CBOE Rule 
3.8(b), as amended, states 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.
---------------------------------------------------------------------------

    \5\ Under 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 nominees of lessor member organizations 
are not required to have an authorized floor function.
---------------------------------------------------------------------------

B. CBOE Rules 3.1, 3.2, and 3.3

    The CBOE proposes to revise CBOE Rule 3.1, ``Public Securities 
Business,'' to clarify that the members referred to in subparagraphs 
(b)(1)(i) and (b)(1)(ii) are member organizations. CBOE Rule 
3.1(b)(1)(i) refers to member organizations approved to transact 
business with the public in accordance with CBOE Rule 9.1, and CBOE 
Rule 3.1(b)(ii) refers to member organizations approved to clear 
Exchange transactions.
    In addition, the CBOE proposes to delete CBOE Rule 3.1(b)(2), which 
requires compliance with Section 11(a) of the Act \6\ for the following 
reasons: (1) CBOE Rule 4.2, ``Adherence to Law,'' currently requires 
compliance with the Act; and (2) CBOE Rule 3.1(b) is intended to set 
forth permissible membership capacities for the purpose of satisfying 
the requirement under Section 2.2 of Article II of the CBOE 
Constitution and CBOE Rule 3.1(a) that every member have as the 
principal purpose of its membership the conduct of a public securities 
business.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78k(a).
---------------------------------------------------------------------------

    The CBOE also proposes to amend CBOE Rule 3.1 to refer separately 
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.
    CBOE Rule 3.2, ``Qualifications and Membership Statuses of 
Individual Members,'' as amended, clarifies certain requirements for 
individual members and lists individual membership statuses. 
Specifically, CBOE Rule 3.2(a) indicates that the current requirement 
that an individual member must be 21 years of age applies to every 
individual member and not solely to individual members who own 
memberships. CBOE Rule 3.2(b) and CBOE Rule 3.2, Interpretation and 
Policy .01, list all of the individual membership statuses under the 
Exchange's rules, including those that are approved by the CBOE's 
Membership Committee (``Membership Committee'') and those that are 
approved by Exchange bodies other than the Membership Committee.\7\ 
CBOE Rule 3.2(c) states that every individual member who is a lessee, a 
Chicago Board of Trade (``CBOT'') exerciser, or an owner (who is not a 
lessor) must have an authorized floor function. CBOE Rule 3.2(c) also 
codifies the definition of an authorized floor function by indicating 
that an individual 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.
---------------------------------------------------------------------------

    \7\ CBOE Rule 3.2(b) states that the individual membership 
statuses approved by the Membership Committee include: (i) owner; 
(ii) lessor; (iii) lessee; (iv) Chicago Board of Trade (``CBOT'') 
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; (ix) floor broker; (x) 
member eligible to trade securities pursuant to Chapter XXX of the 
CBOE's rules; and (xi) trust member. Proposed CBOE Rule 3.2(b) also 
notes that the individual permit statuses that are approved by the 
Membership Committee are IPC Permit exerciser and Options Trading 
Permit holder. Proposed Interpretation and Policy .01 lists the 
following individual membership statuses that are approved by CBOE 
bodies other than the Membership Committee: (i) Designated Primary 
Market Maker (``DPM'') designee; (ii) FLEX appointed market maker 
for FLEX index options; (iii) FLEX qualified market maker for FLEX 
equity options; (iv) lead market maker in OEX or DJX options; and 
(v) supplemental market maker in OEX or DJX options. CBOE Rule 3.3, 
Interpretation and Policy .02 states that member organization 
membership statuses that are approved by CBOE bodies other than the 
Membership Committee include Designated Primary Market Makers.

---------------------------------------------------------------------------

[[Page 46525]]

    CBOE Rule 3.3, ``Qualifications and Membership Statuses of Member 
Organizations,'' as amended, is similar in structure to CBOE Rule 3.2 
and sets forth all of the membership statuses of member organizations 
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.\ 8\ CBOE Rule 3.3(c) sets forth 
the longstanding Exchange policy that a member organization that is a 
clearing member or an order service firm must possess at least one 
membership for which the organization is not a lessor. CBOE Rule 3.3(d) 
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.
---------------------------------------------------------------------------

    \8\ CBOE Rule 3.3(b) states that the member organization 
membership statuses approved by the Membership Committee for member 
organizations 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; (vi) clearing member; and (vii) order 
service firm. CBOE Rule 3.3, Interpretation and Policy .02, 
indicates that the membership organization status approved by a body 
other than the Membership Committee includes is that of designated 
primary market maker. Proposed CBOE Rule 3.3(b) notes that member 
organization permit statuses approved by the Membership Committee 
are IPC permit exerciser and option trading permit holder. IPC 
permits were issued to persons who were member of the Bolsa Mexicana 
de Valores as of January 1, 1996. See CBOE Rule 3.26, ``IPC 
Permits.''
---------------------------------------------------------------------------

    CBOE Rule 3.3, Interpretation and Policy .01, indicates that the 
members of a limited liability company will be deemed its principal 
shareholders, and its members with management responsibility and its 
managers will be deemed executive officers.

C. CBOE Rule 3.4

    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 increasingly global nature of 
the securities markets, the Exchange has decided to amend its rules to 
permit foreign entities to become members of the Exchange, provided 
that the foreign entities satisfy the requirements set forth in new 
CBOE Rule 3.4, ``Qualifications of Foreign Member Organizations,'' that 
are designed to eliminate potential hindrances to regulating foreign 
members. On April 26, 2000, the CBOE filed Amendment No. 3 to the 
proposal, which provides additional requirements for foreign member 
organizations.\9\ CBOE Rule 3.4, as amended, requires an organization 
not organized under the laws of the United States to:
---------------------------------------------------------------------------

    \9\ Amendment No. 3 provides that: (1) a foreign member 
organization must be organized under the laws of a country which has 
an information sharing agreement, memorandum of understanding, or 
treaty in effect that provides the Commission with access to 
information concerning securities trading activity in that country; 
(2) clarifies that foreign member organizations must maintain in 
English at a location in the U.S. any books and records a U.S. 
broker-dealer is required to maintain at a location in the U.S.; (3) 
requires foreign member organizations to agree to permit inspections 
of their foreign securities operations by the Commission or the 
CBOE; (4) requires that foreign member organizations be exempted 
from applicable blocking statutes in their domiciliary jurisdiction; 
and (5) requires that customers of the organization that utilize the 
organization to execute orders on the CBOE to waive any applicable 
secrecy laws and be exempted from any applicable blocking statutes 
in the domiciliary jurisdiction of the organization. See Amendment 
No. 3, supra note 3.
---------------------------------------------------------------------------

     Be organized under the laws of a country with respect to 
which an information sharing agreement, memorandum of understanding, or 
treaty is in effect that provides the Commission with access to 
securities trading activity in that country;
     Disclose to the CBOE all persons associated with the 
organization and all tiers of ownership, until the ultimate beneficial 
owners of the organization are disclosed;
     Maintain in english at a location in the U.S. the books 
and records of the organization relating to the organization's business 
on the CBOE, including trading records, and any other books and records 
that a broker or dealer registered under Section 15 of the Act would be 
required to maintain;
     Maintain its financial records in accordance with U.S. 
accounting standards;
     Agree to permit inspections by the CBOE and by the 
Commission of the foreign operations of the organization related to its 
securities business;
     Waive applicable secrecy laws and be exempted from any 
applicable blocking statutes in its domiciliary jurisdiction;
     Provide the CBOE with an opinion of legal counsel of the 
domiciliary jurisdiction of the organization certifying that there are 
no applicable secrecy laws or blocking statutes or that the 
organization has effectively waived any applicable secrecy laws or is 
exempted from applicable blocking statutes in that jurisdiction;
     Require any customer of the organization that utilizes the 
organization to execute orders on the CBOE to have waived any 
applicable secrecy laws and be exempted from any applicable blocking 
statutes in the domiciliary jurisdiction of the organization;
     Agree to submit to the jurisdiction of the federal courts 
of the U.S. and the courts of Illinois and to irrevocably waive any 
objection the organization may have based on venue or forum non 
conveniens;
     Own its CBOE membership;
     Register as a broker or dealer pursuant to Section 15 of 
the Act; \10\ and
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78o.
---------------------------------------------------------------------------

     Meet the other qualification requirements for membership 
under the CBOE's Constitution and rules.\11\
---------------------------------------------------------------------------

    \11\ See Amendment No. 3 supra note 3.
---------------------------------------------------------------------------

D. CBOE Rule 3.5

    New CBOE Rule 3.5, ``Denial of and Conditions to Membership and 
Association,'' a revised version of current CBOE Rule 3.4, clarifies 
the criteria for denial or conditioning membership or association with 
a member that are applicable only to broker-dealer applicants and 
revises one of the current grounds for denial or conditioning approval 
of a broker-dealer applicant. Specifically, CBOE Rule 3.5(a) states 
that the Membership Committee shall deny membership where an applicant 
has failed a required membership test. CBOE Rule 3.5(c)(i) provides 
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 CBOE believes that the proposed standard is appropriate in 
light of the financial resources typically not required to operate as 
an Exchange member.
    Revised CBOE Rule 3.5(c)(i) also reflects the Exchange's intention 
to refrain from using an applicant's failure to pay debts that have 
been discharged in bankruptcy as a ground for denial or conditioning 
approval of an applicant. However, the CBOE notes that this provision 
is not intended to limit the CBOE's consideration of fraud or other 
violations of just and equitable principles of trade in connection with 
a bankruptcy proceeding in determining whether to deny or condition 
approval of the applicant.
    CBOE Rule 3.5(e) states that any decision by the Membership 
Committee to deny or condition approval of an applicant must be 
consistent with both the provision of CBOE Rule 3.5 and the provisions 
of the Act.

[[Page 46526]]

E. CBOE Rule 3.6

    CBOE Rule 3.6, ``Persons Associated with Member Organization,'' a 
revised version of current CBOE Rule 3.5, clarifies that the associated 
persons of a member organization that must be disclosed to the Exchange 
and approved by the Membership Committee include those associated 
persons that must 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 if the 
organization was broker-dealer. CBOE Rule 3.6 also states that 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 the association.

F. CBOE Rule 3.7

    Many of the provision of CBOE Rule 3.7, ``Certain Documents 
Required of Member, Applicants, and Associated Persons,'' restate with 
greater specifically the current requirements set forth in CBOE Rule 
3.6 regarding documents that a member organization or applicant must 
file with the CBOE. For example, CBOE Rule 3.7(a) requires a member 
organization or applicant that is a corporation to file with the 
Membership Department a copy of the organization's articles or 
certificate of incorporation, by-laws, and amendments to those 
documents. CBOE Rule 3.7 establishes comparable requirements for member 
organizations or applicants that are partnerships and limited liability 
companies. In addition, CBOE Rule 3,7 requires member organizations and 
applicants to file with the Membership Department documents relating to 
the registration, governance, capital structure, or ownership of the 
organization that the CBOE requests and documents the CBOE, requests 
that are reasonable related to the member's businesses on the CBOE.
    CBOE Rule 3.7 also requires members, member applicants, and their 
covered employees to comply with the provisions of Section 17(f) of the 
Act \12\ and Exchange Act Rule 17f-2 \13\ regarding fingerprinting. In 
addition, CBOE 3.7 requires members and member applicants that are 
registered broker-dealers to comply with the requirement under Section 
15 of the Act that broker-dealers complete and keep current Form BD. 
Members and member applicants that are not registered broker-dealers 
must file and keep current a list of associated persons that have been 
or are applying to be approved by the Membership Committee. CBOE Rule 
3.7, Interpretation and Policy .01, states that a limited liability 
company must file with the Membership Department a copy of the limited 
liability company's registration certificate, operating agreement and 
any amendments to those documents.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78q(f).
    \13\ 17 CFR 240.17f-2.
---------------------------------------------------------------------------

G. CBOE Rule 3.8

    Currently, CBOE Rule 3.8, ``Nominees,'' requires every member 
organization that owns leases a membership to authorize an individual 
nominee to represent the organization with respect to the membership in 
all matters relating to the CBOE. The CBOE proposes to amend CBOE Rule 
3.8, which will be retitled as ``Nominees and Members Who Register 
Their Memberships for Member Organizations,'' to restate and provide 
additional details regarding the requirements applicable nominees and 
members who register their memberships for member organizations.\14\ 
CBOE Rule 3.8(a) requires each member organization that is not acting 
as a lessor and each member organization that a lessee of a membership 
to designate an individual nominee to represent the member organization 
with respect to CBOE matters, and to designate a different nominee for 
each membership the member organization owns a leases. The nominee, who 
must be approved for membership, must have an authorized floor 
function, except for the nominee for a member organization that is 
approved solely to transact business with the public. Each nominee will 
be deemed to be an individual member.
---------------------------------------------------------------------------

    \14\ Under CBOE Rule 3.8(c), each individual member who owns a 
membership and each CBOT exerciser may apply to register his or her 
membership for a member organization. Upon approval of the 
application, an individual who has registered his or her membership 
for a member organization shall represent the organization in all 
matters relating to the CBOE in the same manner that a nominee 
represents a member organization. An individual who registers his or 
her membership for a member organization must have an authorized 
floor function.
---------------------------------------------------------------------------

    CBOE Rule 3.8(b) formalizes and clarifies the CBOE's rules 
regarding nominees of lessor member organizations. 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. The nominee must satisfy all of the qualification requirements 
for membership other than the requirements that are not applicable to 
lessors or that are applicable solely to members who will have an 
authorized floor function. The nominee of a lessor 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.
    CBOE Rule 3.8(c) sets forth the current requirements that are 
applicable to an individual member who owns a membership or a CBOT 
exerciser that applies to register his or her membership for a member 
organizations. An individual who registers his or her membership for a 
member organization will represent the organization in all matters 
relating to the CBOE in the same manner that a nominee a member 
organization.
    CBOE Rule 3.8(d) states that a member organization represented by a 
nominee or an individual who has registered his or her membership for 
the organization must agree to be responsible for all obligations 
arising out of that person's representation of the member organization 
in all matters relating to the CBOE and to guarantee payment of all 
monetary disciplinary sanctions assessed against that person with 
respect to activity that take place while the person is a nominee of 
the organization or has registered his or her membership for the 
organization.
    CBOE Rule 3.8(d) also clarifies that a nominee shall not, solely by 
virtue of being a nominee of a member organization, have any person 
liability to the Exchange or to any other member for Exchange 
transactions and other securities transactions made by the nominee on 
behalf to the member organization. CBOE Rule 3.8, Interpretation and 
Policy .01, makes clear that nothing in CBOE Rule 3.8(d) is intended to 
define or limit: (1) 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; (2) 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 (3) 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.

[[Page 46527]]

    CBOE Rule 3.8(e) provides that each nominee of a member 
organization and each individual who has registered his or her 
membership for a member organization must be materially involved in the 
daily operation of the Exchange business activities of the member 
organization. According to the CBOE, this provision in 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 proposes to prohibit such arrangements because they would 
dilute the value of the membership rights of other Exchange members and 
allow a person who is not materially involved in an organization's 
Exchange business activities to be designated to represent the member 
organization in all matters relating to the Exchange.
    CBOE Rule 3.8(g) specifies rules and requirements applicable to 
inactive nominees of member organizations.

H. CBOE Rule 3.9

    The CBOE proposes to amend CBOE Rule 3.9, ``Application Procedures 
and Approval or Disapproval,'' to restate and revise the CBOE's 
membership application procedures. Proposed CBOE Rule 3.9(a) states 
that the following individuals or organizations must submit an 
application to the Membership Department: (1) Any individual or 
organization desiring to become a CBOE member; (2) any applicant or 
member desiring to act in one or more of the membership statuses set 
forth in CBOE, Rules 3.2(b) or 3.3(b); (3) any associated person that 
must be approved by the Membership Committee pursuant to CBOE Rule 
3.6(b); and (4) any member desiring to change the clearing member that 
guarantees the member's CBOE transactions.
    The CBOE proposes to add CBOE Rule 3.9(d), which will require each 
applicant to promptly update the applicant's application materials if 
any information provided in the materials becomes inaccurate or 
incomplete after the date when the application is submitted to the 
Membership Department and prior to approval of the application. This 
requirement is currently set forth in the application materials.
    CBOE Rule 3.9(e) clarifies the current procedure allowing the 
Membership Committee to utilize a posting period for any type of 
membership application.\15\ CBOE Rule 3.9(f) states that the CBOE's 
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 CBOE Rule 3.6(b), and each 
applicant applying to be an individual member, except for an individual 
member applicant who was an individual member within six months prior 
to the Membership Department's receipt of the applicant's 
application.\16\ The CBOE states that 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 six months 
because the person was recently an Exchange member.\17\
---------------------------------------------------------------------------

    \15\ CBOE Rule 3.9(b) currently states that the name of an 
applicant for membership shall be published in the Exchange Bulletin 
and posted on the Exchange Bulletin Board following the receipt of 
the application. CBOE Rule 3.9(e) states that for an application for 
membership, an application to change membership capacity statuses 
set forth in CBOE 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 required posting period will be no 
less than 10 days, although the Membership Committee may shorten or 
waive the posting period. In addition, 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 CBOE transactions consents to a waiver.
    \16\ CBOE Rule 3.9(c) currently states every individual 
applicant and, in the case of applicant organizations, all persons 
associated with the organization, shall be investigated by the 
Membership Department before the Membership Committee approves an 
application.
    \17\ The CBOE generally conducts a less extensive review of the 
applications of individual member applicants who have been members 
within the previous six months, but will conduct a more extensive 
review if warranted. Telephone conversation between Arthur B. 
Reinstein, Assistant General Counsel, CBOE, and Yvonne Fraticelli, 
Special Counsel, Division, Commission, on June 9, 2000 (``June 9 
Conversation'').
---------------------------------------------------------------------------

    CBOE Rule 3.9(g) sets forth requirements applicable to persons 
required to have an authorized floor function, including the 
requirement that a person score 75% or better on the Floor Member 
Qualification Exam to pass the exam. The CBOE notes that these 
requirements were approved previously by the Commission but are not 
currently set forth in CBOE Rule 3.9.\18\
---------------------------------------------------------------------------

    \18\ See Securities Exchange Act Release No. 32943 (September 
22, 1993), 58 FR 50984 (September 29, 1993) (order approving File 
No. SR-CBOE-91-38) (``Membership Qualification Exam Order'') 
(regarding procedural provisions related to the Exchange's 
requirement that individual membership applicants applying for an 
authorized floor function must pass the Exchange's Floor Member 
Qualification Exam).
---------------------------------------------------------------------------

    CBOE Rule 3.9(h) allows the Membership Committee to approve an 
application only if the applicable posting period requirement has been 
satisfied, any investigation has been completed, and any applicable 
orientation and exam requirements have been satisfied. CBOE Rule 3.9(i) 
requires each applicant and each person associated with the applicant 
to submit any additional information requested by the CBOE and notes 
that such persons may be required to appear before the Membership 
Committee for an in-person interview or interviews.
    CBOE Rule 3.9, Interpretation and Policy .01, requires a member to 
apply to the Membership Department to change the clearing member that 
guarantees the member's Exchange transactions. With its application, 
the member must include a financial statement setting forth the 
member's assets and liabilities. The Membership Department will provide 
a copy of the 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. The 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 of any 
outstanding liabilities that bear upon the member's qualification for 
membership and to provide the new clearing firm with information 
regarding the member's financial standing so that the clearing member 
will have the information available to manage the risk associated with 
the member's trading activities.
    CBOE Rule 3.9, Interpretation and Policy .02 clarifies that a 
member organization seeking to change its name must 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.

I. CBOE Rule 3.10

    The CBOE proposes to amend CBOE Rule 3.10, which will be retitled 
as ``Effectiveness of Membership or Approved Person Status,'' to 
provide that each applicant for membership, for one of the membership 
statuses set forth in CBOE Rule 3.2(b) or 3.3(b), or for

[[Page 46528]]

approved associated person status under CBOE Rule 3.6(b), must become 
effective in the status within 90 days of the applicant's approval for 
the status, except that an applicant to become a lessor may become 
effective in that status within six months of the date of the 
applicant's approval for that status. The CBOE is adopting the six-
month requirement for lessors because a lessor generally must purchase 
a membership to become an effective lessor and it is often difficult 
for a lessor to purchase a membership within 90 days.

J. CBOE Rule 3.11

    The CBOE proposes to amend CBOE Rule 3.11, which will be retitled 
as ``Notice of Effectiveness of Membership or Approved Associated 
Person Status,'' to reflect the Exchange's current procedures for 
notifying the CBOE membership of the effectiveness of any membership, 
membership status, or associated person status by publishing notice of 
the effectiveness in the Exchange Bulletin. The CBOE is deleting from 
CBOE Rule 3.11 the current requirements that such notices be mailed to 
all members and posted on the Exchange Bulletin Board because the 
notices are included in the Exchange Bulletin (which is forwarded to 
all members) and because the notices relate to statuses that have 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.

K. CBOE Rule 3.12

    The CBOE proposes to amend CBOE Rule 3.12, which will be retitled 
``Membership Rights and Restrictions on Their Transfer,'' to indicate 
that certain rights may be granted to the grantee of an Authorization 
to Sell, as discussed more fully below, pursuant to new CBOE Rules 
3.14(b) and 3.15(b). CBOE Rule 3.12(b)(ii) incorporates a provision 
currently contained in CBOE Rule 3.15(g) regarding restrictions on the 
transfer of membership rights.

L. CBOE Rule 3.13

    The CBOE proposes to amend CBOE Rule 3.13, ``Purchase of 
Membership,'' to clarify that: (1) Newly issued memberships may be 
purchased pursuant to procedures established by the CBOE; (2) only 
those approved to be an owner or a lessor may purchase a membership; 
(3) any bid to purchase a membership shall be canceled at such time 
that the bidder is no longer approved to be an owner or lessor; and (4) 
the purchaser of a membership must pay for the membership within two 
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.

M. CBOE Rule 3.14

    The CBOE proposes several amendments to CBOE Rule 3.14, ``Sale and 
Transfer of Membership.'' Specifically, the CBOE proposes to indicate 
in CBOE Rule 3.14(a) that the lowest offer for a CBOE membership will 
be published in the Exchange Bulletin as well as on the Exchange 
Bulletin Board. The CBOE proposes to amend CBOE Rule 3.14(b), ``Sale by 
Exchange,'' to apply its provisions to members who are lessees as well 
as owner of transferable memberships.
    The CBOE proposes to amend CBOE Rule 3.14(c) to require that an 
owner transferring a membership to an organization pursuant to CBOE 
Rule 3.14(c)(iii) must maintain an interest in the organization at 
least equal in value to the current market price of the membership, 
rather than an interest equal to the lower of the current market price 
or cost of the membership, as the rule currently provides. The CBOE 
notes that because the market price of a membership has increased 
significantly over the years, an ownership interest in an organization 
that equals the original cost of the membership may not longer reflect 
a material ownership interest in the organization. The CBOE also 
proposes to make a conforming change to CBOE Rule 3.14(c) to eliminate 
a deposit required under the current membership claims process, which 
the CBOE is revising as part of this proposed rule change.
    The CBOE notes that Interpretation and Policy .01 to CBOE Rule 
3.15, ``Proceeds from the Sale of Membership,'' currently allows the 
Exchange to 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 for the purpose of purchasing a 
membership, has authorized the lending or guaranteeing member to sell 
that membership. The CBOE proposes to adopt new CBOE Rule 3.14(d), 
``Authorizations to Sell,'' to replace this provision and expand 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.
    CBOE Rule 3.14(d) states that a membership owner will not be 
permitted to grant an Authorization to Sell a particular membership to 
more than one member. 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, although the grantee must notify the 
membership owner in writing at least three business days prior to 
exercising the grantee's right to sell the membership. An Authorization 
to Sell will be irrevocable and may only be canceled if the grantee of 
the Authorization to Sell consents to its cancellation. A membership 
owner that grants an Authorization to Sell will have no authority to 
direct the sale or transfer of the membership.
    The Exchange will take direction solely from the grantee of an 
Authorization to Sell a membership with respect to matters relating to 
the sale of the membership. A membership owner and the grantee of an 
Authorization to Sell may enter into a written agreement, which must be 
filed with the Membership Department, setting 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 Chapter XVIII. The grantee of 
an Authorization to Sell that exercises its right to sell the 
membership may not be the purchaser of the membership unless the 
membership owner consents. The Membership Department will provide a 
member's clearing member(s) with a copy of any Authorization to Sell 
granted by the member, a cancellation of the Authorization to Sell, or 
a contract concerning the exercise of authority under the Authorization 
to Sell.
    The grant of an Authorization to Sell will include the grant of a 
security interest in any proceeds from the sale of the membership that 
the grantee is authorized to receive under CBOE Rule 3.15(b), as 
discussed below. 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.

[[Page 46529]]

N. CBOE Rule 3.15

    Current CBOE Rule 3.15 and certain provisions of CBOE rules 3.14, 
``Sale and Transfer of Membership,'' and Rule 3.16, ``Special 
Provisions Regarding Memberships,'' provide a claims process whenever a 
membership is sold or transferred without a sale, at the beginning of a 
membership lease, and at the end of a membership lease. At these times, 
the Exchange, the Options Clearing Corporation (``OCC''), and CBOE 
members may submit claims against the owner of the membership that is 
being sold, transferred, or leased. At the end of a membership lease, 
the Exchange, the OCC, and CBOE members also may submit claims against 
the lessee of the membership.
    In the case of a sale, claims that the Board of Directors 
determines are valid are satisfied from 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 obtain a letter of guarantee from a clearing member to satisfy the 
payment of any valid claims.\19\
---------------------------------------------------------------------------

    \19\ See CBOE Rule 3.16(b)(ii).
---------------------------------------------------------------------------

    The Exchange proposes to modify the membership claims process so 
that the only permissible claimant under the process will be the 
grantee of an Authorization to Sell. Under the revised procedures, the 
claims process will occur only upon the sale of a membership and 
lessors will no longer be liable under the claims process for the debts 
and liabilities of their lessees. The Exchange believes that it is not 
equitable for a lessor to be liable under the membership claims process 
for the debts and liabilities of a lessee, particularly when, as is 
usually the case, the lessor had no involvement in incurring a lessee's 
debts and liabilities and no means to monitor the lessee's activities. 
The Exchange also believes that the proposed modifications to the 
membership claims process, when coupled with the ability to grant an 
Authorization to Sell a membership, will produce greater demand for 
ownership of Exchange memberships. In addition, the CBOE believes that 
the proposed 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. 
At the same time, the CBOE notes that members will continue to have the 
right to pursue claims against other members through the arbitration 
process.
    Accordingly, the CBOE proposes to amend CBOE Rule 3.15 to establish 
a modified claims process following the sale of a membership. 
Specifically, CBOE Rule 3.15 provides that, following the sale of a 
membership for which an Authorization to Sell has been granted, the 
grantee will have two 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. The claims must be related to the 
CBOE business activities of the member whose membership was sold.\20\ 
The member whose membership was sold will have five business days from 
the date of the sale to either acknowledge or contest the claims. The 
Exchange will remit to the grantee the portion of the sale proceeds 
applicable to the claims acknowledged by the member whose membership 
was sold, escrow the portion of the sale proceeds applicable to any 
claims contested by the member whose membership was sold, and remit to 
the member whose membership was sold any remaining portion of the sale 
proceeds.
---------------------------------------------------------------------------

    \20\ For purposes of CBOE Rule 3.15, claims related to CBOE 
business activities include claims associated with CBOE 
transactions, securities or futures transactions other than on the 
CBOE that are related to CBOE transactions or positions resulting 
from CBOE transactions, loans or guarantees of loans for the purpose 
of purchasing a CBOE membership, and services provided in connection 
with the foregoing. The CBOE will determine whether a claim is 
related to Exchange business activities. See CBOE Rule 3.15(b)(ii).
---------------------------------------------------------------------------

    Any portion of the sale proceeds applicable to contested claims 
that have been escrowed will 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. However, the Exchange may 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 will remit the 
escrowed proceeds to the grantee and the member whose membership was 
sold in accordance with the resolution of the claims.

O. CBOE Rule 3.16

    The CBOE proposes to amend CBOE Rule 3.16, which will be retitled 
``Special Provisions Regarding Chicago Board of Trade Exerciser 
Memberships,'' to clarify that a nontransferable CBOT exerciser 
membership acquired pursuant to Paragraph (b) of Article Fifth of the 
Exchange's Certificate of Incorporation will terminate upon receipt by 
the Membership Department of written notice from the CBOT exerciser 
member that he or she is surrendering the membership or at such time 
when the CBOT exerciser member is no longer entitled to membership on 
the Exchange in accordance with Paragraph (b) of Article Fifth. In 
addition, the CBOE proposes to delete the provisions regarding leased 
memberships currently contained in CBOE Rule 3.16(b) and restate them 
in an amended form in new CBOE Rule 3.17, ``Leased Memberships.'' \21\
---------------------------------------------------------------------------

    \21\ Current CBOE Rule 3.17, ``Death, Retirement, Withdrawal and 
Resignation,'' will be revised and will appear in new CBOE Rule 
3.19, ``Termination from Membership.''
---------------------------------------------------------------------------

P. CBOE Rule 3.17

    CBOE Rule 3.17 restates many of the provisions regarding leased 
memberships that currently are contained in CBOE Rule 3.16(b) and also 
incorporates several substantive changes to those provisions. CBOE Rule 
3.17(a) states that the owner of a transferable membership in good 
standing may lease the membership provided that the lessee is approved 
for membership, the lease is made pursuant to a written lease 
agreement, and the lease is preapproved by the CBOE. CBOE Rule 3.17(a) 
also clarifies that the Exchange will 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 and the elimination of a lessor's liability under the 
process for claims against a lessee, the Exchange proposes to include a 
provision in CBOE rule 3.17(b) stating that a lessor of a membership 
will have no liability for claims against a lessee of the membership 
solely by virtue of being a lessor of the membership. 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. Similarly, the 
Exchange proposes to eliminate the current provision of CBOE Rule 
3.16(b) stating that any division of rights and responsibilities 
between the lessor and lessee will not affect the lessor's obligation 
to pay all amounts due to the CBOE.

[[Page 46530]]

    CBOE Rule 3.17(c) states that the Exchange may specify that 
particular provisions be included in membership lease agreements in 
addition to those specifically designated in CBOE rule 3.17(c).
    CBOE Rule 3.17(d) requires a lessee to promptly file the lease 
agreement and any amendments to the lease agreement with the Membership 
Department and to promptly notify the Membership Department of any 
termination of the lease before the termination becomes effective. The 
CBOE proposes to place these obligations on lessees because lessees are 
present at the Exchange to conduct their activities.
    CBOE Rule 3.17(e) provides that if a lessor sells or transfers a 
membership while it is being leased, the purchaser or transferee of the 
membership must lease the membership to the lessee pursuant to the 
terms of the lessee's existing lease agreement 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 owner for the 
required time period pursuant to the terms of the lessee's existing 
lease agreement.
    CBOE Rule 3.17(e) states that a lessor will violate CBOE Rule 
3.17(e) if the lessor circumvents 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 proposed CBOE Rule 3.17(e). If the Exchange determines 
that a lessor has improperly terminated a membership lease to avoid the 
applicability of CBOE Rule 3.17(e), the Exchange may impose the 
requirements of CBOE Rule 3.17(e) upon the purchaser or transferee of 
the membership and/or take disciplinary action against the lessor.
    CBOE Rule 3.17(f) states that a lessor that sells or transfers a 
membership while it is being leased must remit to the purchaser or 
transferee any amounts paid to the lessor 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. The lessor must 
remit these amounts to the purchaser or transferee no later than the 
date the membership is transferred. By the transfer date the lessor 
also must remit to the lessee any remaining amounts the lessee has paid 
to the lessor under the lease agreement for any portion of the lease 
period beyond the foregoing 20 business day period.

Q. CBOE Rule 3.18

    The CBOE proposes to adopt new CBOE Rule 3.18, ``Members and 
Associated Persons Who Are or Become Subject to a Statutory 
Disqualification,'' to modify its procedures for determining whether, 
or under what conditions, to permit the continued membership or 
association of a member or associated person who is or becomes subject 
to a statutory disqualification.\22\
---------------------------------------------------------------------------

    \22\ Current CBOE Rule 3.18, ``Dissolution and Liquidation of 
Member Organizations,'' will be amended and renumbered as CBOE Rule 
3.20.
---------------------------------------------------------------------------

    Currently, CBOE Rule 3.4 authorizes the Membership Committee to 
determine whether to permit a member or associated person who is or 
becomes subject to a statutory disqualification to continue in 
membership or association with a member or to condition such 
continuance in membership or association. Under the CBOE's current 
rules, 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 Exchange's Appeals 
Committee and to appeal the Appeals Committee's decision to the Board 
of Directors. These appeal rights must be exhausted before the 
membership Committee's decision can take effect. Therefore, the CBOE 
notes that it is possible for a member or associated person to become 
subject to a statutory disqualification, such as a serious felony 
conviction, and continue to act as a member or associated person for an 
extended period of time while the appeal proceedings are pending.
    Accordingly, the Exchange proposes to adopt more expedited 
procedures. The CBOE believes that its revised procedures will 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.
    Under the modified procedures in CBOE Rule 3.18, a member or 
associated person who is or becomes subject to a statutory 
disqualification and wants to continue in Exchange membership or 
association with a member must submit an application to the Membership 
Department within 10 days of becoming subject to the statutory 
disqualification.\23\ Following receipt of the application, or in the 
event the Exchange becomes aware that a member or associated person is 
subject to statutory disqualification and has failed to submit an 
application to continue in membership or association within the 
required time period, 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. The hearing panel will hold a hearing 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. Any person who is the 
subject of a proceeding under CBOE Rule 3.18 is entitled to be 
accompanied, represented, and advised by counsel at all stages of the 
proceeding.
---------------------------------------------------------------------------

    \23\ In addition, CBOE Rule 3.18, Interpretation and Policy .02, 
requires a member to provide immediate written notice to the 
Membership Department of the name of any associated person who is or 
becomes subject to a statutory disqualification, the person's 
capacity with the member, and the nature of the statutory 
disqualification.
---------------------------------------------------------------------------

    Following the hearing, the hearing panel will present its 
recommended decision in writing to the Membership Committee, which may 
ratify or amend the decision. The Membership Committee will render its 
decision in writing and promptly provide its decision to the subject of 
the hearing and the Executive Committee, which may determine within 
seven days after the issuance of the Membership Committee's decision to 
order a 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.
    If the Executive Committee orders review of the Membership 
Committee's decision, the Executive Committee or a panel comprised of 
at least three members of the Executive Committee will conduct the 
review. The Executive Committee must ratify the panel's decision. The 
Executive Committee's decision, which must be in writing, will be the 
final decision of the Exchange.
    The CBOE notes that the CBOE's Executive Committee is composed of 
the Exchange's Chairman, Vice Chairman, President, and at least four 
other Exchange directors. According to the CBOE, the Executive 
Committee generally is authorized under Section 7.2 of Article VII of 
the Exchange's Constitution to exercise all the powers and authority of 
the CBOE's Board of Directors in the management of the business and 
affairs of the Exchange. The Exchange proposes to utilize the Executive 
Committee as the review body under CBOE Rule 3.18, instead of the Board 
of Directors, because the Executive Committee is generally able to

[[Page 46531]]

convene more quickly than the Board of Directors because of its smaller 
size.
    If the Exchange decided 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.\24\
---------------------------------------------------------------------------

    \24\ 17 CFR 240.19h-1.
---------------------------------------------------------------------------

    CBOE rule 3.18, Interpretation and Policy .01, allows the CBOE to 
waive the provisions of proposed CBOE Rule 3.18 when a proceeding is 
pending before another self-regulatory organization to determine 
whether to permit an associated person or a member to continue in 
association or membership. In addition, CBOE Rule 3.18, Interpretation 
and Policy .01 states that if the CBOE waives the provisions of CBOE 
Rule 3.18, the Department of Financial and Sales Practice Compliance 
will determine whether the CBOE will concur in any Exchange Act Rule 
19h-1 filing made by another self-regulatory organization.

R. CBOE Rule 3.19

    CBOE Rule 3.19, ``Termination from Membership,'' which replaces 
current CBOE Rule 3.17, clarifies that the membership status of a 
member terminates automatically if the member does not possess a 
membership through ownership, lease, or registration of a membership to 
the member. In addition, CBOE Rule 3.19 states that the membership of a 
member organization terminates automatically if the member organization 
has no nominee or person who has registered his or her membership for 
the member organization.

S. CBOE Rule 3.20

    CBOE Rule 3.20, ``Dissolution and Liquidation of Member 
Organizations,'' restates the provisions currently set forth in current 
CBOE Rule 3.18 and amends those provisions by requiring a member 
organization to provide written notice of the adoption of a plan of 
liquidation or dissolution, and any actual liquidation or dissolution, 
to both the Department of Financial and Sales Practice Compliance and 
the Membership Department.

T. CBOE Rule 3.21

    CBOE Rule 3.21, ``Obligations of Terminating Members,'' restates 
requirements applicable to terminating members which are currently set 
forth in current CBOE Rule 3.19. In addition, in connection with the 
elimination of the Exchange's ability to submit claims against the 
proceeds of a membership sale, the Exchange proposes to delete the 
provision of current CBOE Rule 3.19 which permits the Exchange to 
withhold the distribution of the proceeds of the sale of a membership 
if the seller is not current in the payment of Exchange fees or the 
submission of various filing.

U. CBOE Rule 1.1(hh), 3.20, 3.21, 3.22, 3.22A, and 6.20

    The CBOE proposes to delete current CBOE Rules 3.20, 3.21, 3.22, 
3.22A, and 6.20, Interpretation and Policy .03, which relate to 
government securities options permits, because all the government 
securities options permits have expired. Similarly, the CBOE proposes 
to delete CBOE Rule 1.1.(hh), which defines a government securities 
options permit holder.

V. CBOE Rule 3.25

    The CBOE proposes to amend CBOE Rule 3.25, ``Transfer of Individual 
Membership in Trust,'' to clarify that: (1) A member who owns a 
membership may transfer the membership only into a living trust: (2) a 
member who wishes to transfer a membership into trust must submit an 
application to the Membership Department, which must be approved by the 
Exchange; (3) a member who has transferred a membership in trust 
(``Trust Member'') must submit to the Membership Department any 
amendments to the trust agreement and notify the Membership Department 
of any changes in the information set forth in the application to 
transfer the membership in trust, any changes in the successor trustee, 
any release of the membership out of trust, and any termination of the 
trust; and (4) the Exchange will deem a membership held in trust to 
have reverted to the Trust Member to be held directly and not in trust 
if 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. CBOE Rule 3.25(c) also notes that a 
member may grant an Authorization to Sell with respect to a membership 
held in trust.

W. CBOE Rule 3.27

    In connection with the modification of the current claims process 
that applies to memberships, the Exchange proposes to amend CBOE Rule 
3.27 to make the same modifications to the corollary claims process 
that is applicable to Options Trading Permits. The CBOE proposes to 
make a corresponding conforming change to Regulatory Bulletin 00-37, 
``Option Trading Permit lease Pool Procedures,'' by deleting paragraph 
8.h, which states that a lease of an Options Trading Permit will not 
become effective until a letter of guarantee equal to the last sale 
price of an Options Trading Permit has been deposited with the 
Membership Department. \25\
---------------------------------------------------------------------------

    \25\ See Amendment No. 2, supra note 3.
---------------------------------------------------------------------------

X. CBOE Rule 3.28

    The CBOE proposes to adopt CBOE Rule 3.28, ``Extension of Time 
Limits,'' to clarify that the Membership Committee may extend any time 
limit imposed on an applicant, member, or other person under Chapter 
III of the Exchange's rules if the Membership Committee determines that 
such an extension is warranted due to extenuating circumstances. This 
proposed provision is similar to CBOE Rule 17.13 ``Extension of Time 
Limits,'' which authorizes the Exchange to extend time limits provided 
for under Chapte XVII of the Exchange's rules.

Y. CBOE Rule 3.29

    The CBOE states that because there are many 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 to allow the Membership Committee to focus its attention on 
more significant types of membership-related applications and 
approvals. Accordingly, new CBOE Rule 3.29, ``Delegation of 
Authority,'' 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.

Z. CBOE Rule 6.76A

    The CBOE proposes to adopt CBOE Rule 6.76A, ``Automated Billing 
Process for Market Maker Brokerage Bills,'' to streamline the 
processing and payment of bills for brokerage services that floor 
brokers and order service firms provide to market makers. The CBOE also 
proposes to implement the automated billing process because floor 
brokers and order service firms will no longer have the ability to 
submit claims for outstanding brokerage bills as part of the membership 
claims process. The automated billing process operates as follows:

[[Page 46532]]

     Each floor broker and order service firm must submit a 
written bill by the sixth day of the month to each market maker 
customer of the floor broker or order service firm for brokerage fees 
the market maker incurred during the prior month.
     A market maker will have until the tenth day of the month 
to inform the floor broker or order service firm if the market maker 
disputes any portion of the bill.
     A floor broker or order service firm 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 order 
service firm for brokerage fees incurred during the prior month.
     The CBOE will take direction solely from the floor broker 
or order service firm with respect to the amount to bill a market maker 
pursuant to the automated billing process. If the market maker disputes 
the amount a floor broker or order service firm has instructed the CBOE 
to bill, the market maker may pursue a claim against the floor broker 
or order service firm in arbitration under Chapter XVIII of the CBOE's 
rules or through other means provided by Chapter XVIII. In addition, if 
a floor broker or order service firm improperly instructs the Exchange 
to bill a market maker for brokerage fees which the floor broker or 
order service firm is not entitled to receive, the Exchange may 
discipline the floor broker or order service firm pursuant to Chapter 
XVII of the Exchange's rules for violating CBOE Rule 4.6, ``False 
Statements,'' by submitting false statements to the Exchange.
     By the twenty-first day of the month, the Accounting 
Department will provide a monthly market maker floor brokerage billing 
list to each clearing member that clears market maker transactions. The 
list will set forth the amounts floor brokers and order service firms 
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.
     A clearing member may instruct the Accounting Department 
not to draft the clearing member pursuant to the automated billing 
process for that portion of the brokerage fees billed to a market maker 
that would cause the market maker to have a negative balance in the 
market maker's account at the clearing member.
     On the twenty-fifth day of the month, the Exchange will 
draft from each clearing member's account at the OCC the total amount 
billed pursuant to the automated billing process to market makers that 
clear through that clearing member. The Exchange will then promptly 
distribute the amounts drafted to the applicable floor brokers and 
order service firms. Each clearing member will be authorized to deduct 
from a market maker's account at the clearing member the amounts the 
CBOE has drafted from the clearing member's account at the OCC for 
brokerage fees billed to the market maker.
     If 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 brokerage fees which were drafted from the 
clearing member for that market maker on a pro rata basis to the floor 
brokers and order service firms that submitted instructions to bill the 
market maker.
     If 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 must deduct from 
the account the amount of the brokerage fees that the clearing member 
previously instructed the Accounting Department not to draft and 
distribute the funds to the floor brokers and order service firms who 
previously did not receive full payment.
     If a floor broker or order service firm fails to satisfy 
the submission deadlines provided for under the automated billing 
process, the floor broker or order service firm may not bill the market 
maker for brokerage fees pursuant to the automated billing process. 
However, the floor broker or order service firm may bill the market 
maker for brokerage fees in the regular, non-automated fashion.
    To contribute to defraying the Exchange's cost of administering the 
automated billing process, the Exchange proposes to assess, in a form 
and manner prescribed by the Exchange: (1) A $0.50 fee to each floor 
broker and order service firm for each bill of $5.00 or more from the 
floor broker or order service firm that is assessed to a market maker 
under this billing process; and (2) a $0.50 fee to each market maker 
for each bill of $5.00 or more from a floor broker or order service 
firm that is assessed to the market maker under this billing process.

AA. CBOE Rules 6.72, 6.78 and 8.5

    The CBOE proposes to amend CBOE Rules 6.72, ``Letters of 
Authorization,'' 6.78, ``Letters of Guarantee Required of Order Service 
Firms,'' and 8.5, ``Letter of Guarantee,'' to provide that the CBOE 
will post notice of a clearing member's revocation of its guarantee 
only at the clearing member's request. The Exchange does not believe 
that it is necessary to require the posting of all revocations because 
most are routine and arise because a member is terminating from 
membership or is changing the clearing member that guarantees the 
member's Exchange transactions.
    In addition, revised CBOE Rule 6.72 states that: (1) A revocation 
will not relieve a clearing member of responsibility for transactions 
guaranteed prior to the effective date of the revocation; and (2) a 
floor broker may only have one letter of authorization guarantee from a 
clearing member in effect at a time.
    The CBOE proposes to amend CBOE Rule 8.5 to clarify that a market 
maker that clears transactions through more than one clearing member 
must have a letter of guarantee issued by each clearing member to cover 
the CBOE transactions executed by the market maker through the clearing 
member. The CBOE also proposes to add Interpretation and Policy .04 to 
CBOE Rule 8.5, which states that the CBOE will 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 with regard to transactions 
subject to the rules of any other clearing corporation.

BB. CBOE Rule 8.9

    The CBOE proposes to add Interpretation and Policy .08 to CBOE Rule 
8.9, ``Securities Accounts and Orders of Market Makers.'' 
Interpretation and Policy .08 clarifies that each participant in a 
joint account will be jointly and severally liable for any losses 
incurred by the joint account. However, Interpretation and Policy .08 
also states that for a joint account participant that is the nominee of 
a member organization, or an individual who has registered his or her 
membership for a member organization, and who is not acting as an 
independent market maker pursuant to CBOE Rule 3.8(f), the member 
organization and not the participant will be liable for losses incurred 
by the joint account. The clarification is intended to make applicable 
to joint accounts the general provisions in CBOE Rule 3.8(d), which 
clarify that neither a nominee nor an individual who has registered his 
or her membership for a member organization shall, solely by virtue of 
being a nominee of a member organization or

[[Page 46533]]

having registered 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 
nominee or individual on behalf of the member organization.

CC. CBOE Rules 9.3, 10.11, and 15.1

    The CBOE proposes to amend CBOE Rule 9.3, ``Registration and 
Termination of Representatives,'' to clarify the associated persons who 
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 continue to require other applicants to 
complete Form U-4 during the application process solely as an 
information gathering tool. In addition, the CBOE proposes to add new 
Interpretation and Policy .01 to CBOE Rule 9.3, which will clarify that 
the application form referred to in CBOE Rule 9.3(a) is the Form U-4, 
and that any person required to file Form U-4 must promptly file any 
required amendments to Form U-4.
    The CBOE proposes to amend CBOE Rule 10.11, ``Contracts of 
Suspended Parties,'' to refer to the claims resolution procedures in 
CBOE Rule 3.15.
    The CBOE proposes to amend Interpretation and Policy .01 to CBOE 
Rule 15.1, ``Maintenance, Retention and Furnishing of Books, records 
and Other Information,'' to revise references to specific CBOE rules 
regarding the maintenance of books and records and the furnishing of 
information to the CBOE. The new references reflect the proposed 
changes to the CBOE's membership rules.

DD. CBOE Rule 18.2

    To ensure that clearing members receive notice of proceedings 
involving disputed trades, the CBOE proposes to add Interpretation and 
Policy .01 to CBOE Rule 18.2, ``Procedures in Member Controversies,'' 
which will require each party to an arbitration concerning the alleged 
failure to honor a trade to 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.

EE. CBOE Rules 6.72, 24A.15, 26.11, 26.13, and 30.74

    The CBOE proposes to make conforming changes to CBOE Rules 6.72, 
24A.15, ``Letter of Guarantee or Authorization,'' 26.11, ``Market 
Makers,'' 26.13, ``Floor Broker Financial Requirements,'' and 30.74, 
``Clearing of System Transactions,'' that delete references to the 
current membership claims process.

FF. Membership Fee Circular

    The Exchange is proposing to amend its Membership Fee Circular 
(``Circular'') to delete two introductory paragraphs regarding certain 
rule requirements related to membership that will be set forth more 
fully in the membership rules themselves. The revised Circular will 
contain only information regarding membership fees.
    The Exchange proposes to amend the description in the Membership 
Fee Circular of the fee payable by an applicant who is subject to a 
statutory disqualification to reflect that the rule provisions that 
govern such applicants are set forth in new CBOE Rule 3.18. The CBOE 
also proposes to clarify the fees relating to partnership agreement 
amendments by indicating that a fee is payable each time a member 
organization's bylaws, partnership agreement, or operating agreement is 
amended. In addition, the revised Circular will state that a CBOT 
exerciser, as well as other members, must pay the fingerprint 
processing fee.

GG. Special Members

    The CBOE proposes to delete references to special members from CBOE 
Rules 3.12, 3.14, 3.16, 6.5, and 9.1 because all special memberships on 
the CBOE have expired.\26\

HH. Effectiveness of the Proposed Rule Change
---------------------------------------------------------------------------

    \26\ See CBOE Constitution, Article II, Section 2.1(d).
---------------------------------------------------------------------------

    The CBOE proposes to provide that the rule change will become 
effective 30 days from the date of its approval by the Commission. The 
CBOE believes that the 30-day period will provide the Exchange with an 
opportunity to notify the Exchange's membership of the effectiveness of 
the rule change and provide members who wish to grant or receive 
Authorization to Sell with an opportunity to do so before the amended 
rule provisions take effect.

III. Discussion

    For the reasons discussed below, the Commission finds that the 
proposed rule change is consistent with the Act and the rules and 
regulations under the Act applicable to a national securities exchange. 
In particular, the Commission finds that the proposed rule change is 
consistent with the requirements of Section 6(b)(5) of the Act.\27\ 
Section 6(b)(5) requires, among other things, that the rules of an 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest. In addition, as described more fully below, the 
Commission finds that various provisions of the proposal are consistent 
with the requirements of Sections 6(b)(1), 6(b)(4), and 6(c)(3) of the 
Act, and with Rules 15c3-1 and 19h-1 under the Act.\28\
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78f(b)(5).
    \28\ 15 U.S.C. 78f(b)(1), 78f(b)(4), 78f(c)(3), 17 CFR 240.15c3-
1, and 17 CFR 240.19h-1. In approving this rule, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

A. Definitions

    The Commission finds that the proposed amendments to CBOE Rule 1.1 
will update and clarify CBOE Rule 1.1 and ensure consistency with other 
CBOE rules. Specifically, the Commission believes that the revised 
definition of ``lessor'' make clear that a lessor may conduct a public 
securities business, provided that the organization is approved to do 
so pursuant to CBOE Rule 9.1. Similarly, the revised the definition of 
``nominee'' makes clear that all nominees need not have an authorized 
floor function, making the definition of ``nominee'' consistent with 
new CBOE Rules 3.8(a)(iii) and 3.8(b)(iii). In addition, the revised 
definition of ``nominee'' eliminates the provision in the current 
definition stating that a nominee will be deemed to be an Exchange 
member, thereby making the definition of ``nominee'' consistent with 
new CBOE Rule 3.8(b)(v), which states that the nominee of a member 
organization acting as a lessor will be deemed to be an associated 
person of the organization and not an individual member.

B. CBOE Rules 3.1, 3.2, and 3.3

    The Commission finds that the proposed changes to CBOE Rules 3.1, 
3.2, and 3.3 will clarify the rules and help to ensure consistency in 
the CBOE's rules. Specifically, the Commission believes that amending 
CBOE Rules 3.1(b)(1)(i) and (b)(1)(ii) to refer to member 
organizations, rather

[[Page 46534]]

than members, will add clarity and consistency to the CBOE's rules 
because only member organizations may perform the functions referred to 
in subparagraphs (b)(1)(i) and (b)(1)(ii).
    The Commission believes that amendments to CBOE Rule 3.1(a)(3) and 
(4) that refer separately 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 make clear that both a nominee and 
an individual who has registered his or her membership for a member 
organization are CBOE members.
    The Commission believes that the deletion of current CBOE Rule 
3.1(b)(2), which requires compliance with Section 11(a) of the Act, 
will clarify CBOE Rule 3.1 by limiting its scope to the principal 
purpose of an Exchange membership, i.e., the conduct of a public 
securities business, and the membership capacities that satisfy that 
requirement. At the same time, the Commission notes that the CBOE's 
rules and policies will continue to require compliance with Section 
11(a) of the Act. In this regard, the Commission notes that CBOE Rule 
4.2 prohibits CBOE members from engaging in conduct that violates the 
Act and other rules insofar as they relate to the reporting or 
clearance of any CBOE transactions,\29\ and CBOE Rule 4.1, ``Just and 
Equitable Principles of Trade,'' prohibits members and associated 
persons from engaging in acts or practices inconsistent with just and 
equitable principles of trade. In addition, CBOE Regulatory Circular 
RG94-11 explains the requirements of Section 11(a) of the Act to CBOE 
members.
---------------------------------------------------------------------------

    \29\ CBOE Rule 4.2 states that ``[n]o member shall engage in 
conduct in violation of the Securities Exchange Act of 1934, as 
amended, rules or regulations thereunder, the Constitution or the 
Rules of the Exchange, or the Rules of the Clearing Corporation 
insofar as they relate to the reporting or clearance of any Exchange 
transactions, or any written interpretation thereof. Every member 
shall so supervise persons associated with the member as to assure 
compliance therewith.''
---------------------------------------------------------------------------

    The Commission believes that the proposal to amend CBOE Rule 3.2 to 
clarify that every individual member must be 21 years of age will help 
to ensure that only qualified persons will be eligible to become CBOE 
members. The Commission believes that the proposal to list in CBOE Rule 
3.2 all of the individual membership statuses will help to inform 
individual members of the available individual membership statuses 
provided under the CBOE's rules. In addition, the Commission believes 
that CBOE Rule 3.2(c), which specifies the individual members who must 
have an authorized floor function, will help to notify individual 
members of the requirement applicable to them. The Commission believes 
that it is reasonable for the CBOE to further clarify this requirement 
by indicating that an individual member will be deemed to have an 
authorized floor function if the member is approved to act as a market 
maker and/or floor broker.
    The Commission believes that the proposal to amend CBOE Rule 3.3 to 
set forth all of the member organization membership statuses will help 
to inform member organizations of the available member organization 
membership statuses provided under the CBOE's rules. The Commission 
also believes that the CBOE's proposal to codify in CBOE Rule 3.3(c) 
its long-standing policy that a clearing member or order service firm 
must possess at least one membership for which the organization is not 
a lessor will help to ensure that clearing members and order service 
firms are aware of the requirement. In addition, the Commission 
believes that the proposal to provide in CBOE Rule 3.3(d) that a member 
that wishes to become a different type of business entity must reapply 
for membership in the name of the new entity will help the CBOE to 
ensure that the new entity continues to satisfy the CBOE's membership 
requirements.
    The Commission believes that the CBOE's proposal to amend CBOE Rule 
3.3, Interpretation and Policy .01, to state that the limited liability 
company's members will be deemed principal shareholders and its members 
with management responsibility and its managers will be deemed 
executive officers will clarify the treatment of limited liability 
companies under the CBOE's rules.

C. CBOE Rule 3.4

    New CBOE Rule 3.4 sets forth the membership requirements for 
entities that are not organized under the laws of one of the states of 
the United States. The Commission believes that the requirement under 
CBOE Rule 3.4 that a foreign organization register as a broker or 
dealer pursuant to Section 15 of the Act will help to protect investors 
and the public interest by ensuring that foreign CBOE members are 
subject to the same regulatory requirements a U.S. broker-dealers. The 
Commission also believes that the requirement that foreign members 
disclose all associated persons and all parents of the organization, 
including the ultimate individual beneficial owners of organization, 
will facilitate the CBOE's review of membership applications submitted 
by foreign organizations and help the CBOE to ensure that foreign 
applicants for membership satisfy all of the CBOE's requirements for 
membership.
    The Commission also believes that it is reasonable for the CBOE to 
clarify that, in addition to satisfying the requirements of CBOE Rule 
3.4, a foreign organization must satisfy the other membership 
qualification requirements under the CBOE's rules and Constitution, as 
well any additional requirements that the CBOE reasonably deems 
appropriate. The Commission believes that these provisions will clarify 
that a foreign organization, like a U.S. applicant for membership, must 
satisfy all of the CBOE's membership qualification requirements and 
provide the CBOE with flexibility to impose additional requirements 
that the CBOE reasonably believes are necessary with respect to foreign 
members.
    In addition, the Commission believes that CBOE Rule 3.4 will 
facilitate the CBOE's examinations of foreign members, thereby helping 
the CBOE to enforce compliance by its foreign members with the CBOE's 
rules and the federal securities law, consistent with Section 6(b)(1) 
of the Act. The Commission also believes that CBOE Rule 3.4 will 
facilitate any CBOE or Commission investigation of a foreign member. In 
this regard, the Commission notes that CBOE Rule 3.4 requires a foreign 
CBOE member to maintain in English, at a location in the U.S., all of 
the books and records of the organization relating to its CBOE 
activities; to permit inspections by the CBOE and the Commission of the 
foreign operations of the organization related to its securities 
business; and to be located in a country in which an information 
sharing agreement, Memorandum of Understanding, or treaty enables the 
Commission to obtain information about securities trading in that 
country. In addition, CBOE Rule 3.4 requires that both a foreign member 
and any of its customers that utilize the organization to execute 
orders on the CBOE waive any applicable secrecy laws or obtain 
exemptions from blocking statutes.
    The Commission believes that it is reasonable for the CBOE to 
require a foreign member to keep its financial records in accordance 
with U.S. accounting standards because all brokers or dealers 
registered under Section 15 of the Act must maintain their financial 
records in accordance with U.S. Generally Accepted Accounting 
Principles (``GAAP''). In this regard, the Commission notes that a 
broker-dealer's net capital is computed under Rule 15c3-1 under the 
Act, in

[[Page 46535]]

accordance with U.S. GAAP. Accordingly, requiring a foreign member to 
maintain its financial records in accordance with U.S. GAAP will help 
the CBOE to monitor the financial status of foreign members and ensure 
their compliance with Rule 15c3-1 under the Act, and with Section 
6(c)(3)(A) of the Act, which section provides, in part, that a national 
securities exchange may deny membership to, or condition the membership 
of, a registered broker or dealer if the broker or dealer does not meet 
the standards of financial responsibility prescribed by the rules of 
the exchange.
    The Commission believes that the requirements under CBOE Rule 3.4 
that a foreign member appoint a process agent in Illinois and agree to 
submit to the jurisdiction of the federal courts and the courts of 
Illinois will help a U.S. person involved in a dispute with a foreign 
CBOE member to pursue any available legal or equitable remedies against 
the member.
    The Commission believes that it is reasonable for the CBOE to 
require a foreign member to own its CBOE membership. In addition, the 
Commission believes that it is reasonable for the CBOE to provide 
consistency with CBOE Rule 3.3, Interpretation and Policy .01 by 
providing in CBOE Rule 3.4, Interpretation and Policy .01 that the CBOE 
will deem a foreign member organized as a limited liability company to 
be a corporation for purposes of eligibility for membership.

D. CBOE Rule 3.5

    The Commission finds that the proposed changes in CBOE Rule 3.5 
will clarify the CBOE's membership requirements by indicating the 
criteria for denial or conditioning membership or association are 
applicable only to broker-dealer applicants. In addition, the 
Commission believes that the proposed net worth requirements will 
strengthen the CBOE's membership requirements and help the CBOE to deny 
or condition membership to individuals and organizations that have not 
demonstrated the ability to assume the economic responsibilities 
attendant to CBOE membership. In addition, the Commission believes that 
it is reasonable for the CBOE to indicate that it will not use an 
applicant's failure to pay debts that have been discharged in 
bankruptcy as a ground for denial or conditioning approval of the 
application, while reserving the right to consider fraudulent activity 
or other violations of just and equitable principles of trade in 
connection with a bankruptcy proceeding in determining whether to deny 
or condition approval of an applicant. The Commission also believes 
that it is reasonable for the CBOE to state in CBOE Rule 3.5 that any 
Membership Committee decision to deny or condition membership must be 
consistent with the provisions of CBOE Rule 3.5 and the Act.

E. CBOE Rule 3.6

    The Commission believes that CBOE Rule 3.6 will clearly identify 
the associated persons that must be disclosed to the CBOE and approved 
by the Membership Committee and help to ensure that the Membership 
Committee has an opportunity to review the qualifications of those 
associated persons. CBOE Rule 3.6 also makes clear that 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 
the association.

F. CBOE Rule 3.7

    The Commission believes that the proposed changes in CBOE Rule 3.7 
identify with greater specificity the documents that member 
organizations and member organization applicants must file with the 
CBOE, as well as the additional documents that member organizations and 
member organization applicants must file with the CBOE upon request. 
Accordingly, the Commission believes the proposed changes will more 
clearly notify member organizations and applicants of the documents 
they must file with the CBOE.
    The Commission believes that the requirement that member 
organizations and applicants file, upon request, documents reasonably 
related to the member's business or proposed business on the CBOE and 
documents relating to the registration, governance, capital structure 
or ownership of the organization, will facilitate the CBOE's review of 
membership applications and help the CBOE to examine and verify the 
qualifications of an applicant for membership, consistent with Section 
6(c)(3) of the Act. The requirements also should help the CBOE to 
enforce compliance by its members and associated persons with the Act, 
and the rules and regulations thereunder, and the rules of the CBOE, 
consistent with Section 6(b)(1) of the Act.
    The Commission also believes that it is reasonable for the CBOE to 
add provisions in CBOE Rule 3.7 notifying members and applicants of 
their obligation to comply with Section 17(f) under the Act and 
Exchange Act Rule 17f-2. Similarly, the Commission believes that it is 
reasonable for the CBOE to notify members and member applicants that 
are registered brokers or dealers of their obligation to file and keep 
current Form BD and to require members and member applicants that are 
not registered broker-dealers to file with the CBOE and keep current a 
list of associated persons that must be approved by the Membership 
Committee pursuant to CBOE Rule 3.6(b).
    The Commission believes that CBOE Rule 3.7, Interpretation .01, 
which specifies the documents that a limited liability company must 
file with the Membership Department, will clarify the CBOE's 
requirement with respect to limited liability companies and notify 
limited liability companies of the documents they must file with the 
Membership Department.

G. CBOE Rule 3.8

    The Commission believes that the proposed changes to CBOE Rule 3.8 
will clarify the CBOE's rules regarding nominees and individual members 
who register memberships for member organizations. By specifying 
requirements both for member organizations that are not lessors of 
memberships and for member organizations that are leasing memberships, 
the proposal helps to ensure that the CBOE will know which individual 
of a member organization will represent the organization in matters 
before the CBOE. In addition, by clarifying the procedures applicable 
to nominees and individual members who register memberships for member 
organization, the proposed changes should better inform CBOE member 
organizations and prospective member organizations of the requirements 
for obtaining these statuses, as well as the rights and obligations of 
nominees and individual members who register memberships for member 
organizations.
    The Commission notes that the proposal provides that the nominee of 
a member organization that is not acting as a lessor, other than a 
member approved solely to transact business with the public, and an 
individual that registers a membership for a member organization, must 
have an authorized floor function. In addition, the proposal states 
that a nominee or individual who registers a membership for a member 
organization must be materially involved in the daily operation of the 
CBOE business activities of the member organization for which the 
person is a nominee or has registered his or her membership. The 
Commission believes that these requirements will help to

[[Page 46536]]

ensure that qualified persons represent member organizations in matters 
relating to the CBOE. In addition, the Commission believes that the 
requirements are consistent with Sections 6(c)(3)(A) and (B) of the 
Act, which provide that a national securities exchange may prescribe 
standards of training, experience, and competence for members or 
persons associated with its members.
    The Commission believes that it is reasonable for the CBOE to 
clarify in CBOE Rule 3.8(d) that neither a nominee nor an individual 
member who has registered a membership for a member organization will 
have any personal liability, solely by virtue of being a nominee or an 
individual member who has registered a membership for a member 
organization, to the CBOE or to other members for transactions made by 
the nominee or individual member on behalf of the member organization. 
Similarly, the Commission believes that it is reasonable for the CBOE 
to clarify in CBOE Rule 3.8, Interpretation and Policy .01, that CBOE 
Rule 3.8(d) is not intended to limit any obligations between a nominee 
or individual member who has registered a membership for a member 
organization and the member organization, any responsibility that a 
nominee or individual member who has registered a membership for a 
member organization may have for obligations of the member organization 
by virtue of a contractual obligation or ownership relationship, or the 
CBOE's ability to sanction or take other remedial measures against a 
nominee or an individual member who has registered a membership for a 
member organization. The Commission believes that these changes will 
help to clarify the rights and obligations of members and nominees.
    The Commission also believes that it is reasonable for the CBOE to 
provide that: (1) A member organization may designate one or more 
inactive nominees; (2) an inactive nominee of a member organization 
must become an effective nominee of the member organization, with 
authorized floor functions, within 90 days of approval for membership; 
and (3) an individual may be an inactive nominee of only one member 
organization. The Commission believes that these provisions will help 
to clarify the CBOE's policies, ensure that member organizations have 
an appropriate number of inactive nominees, and ensure that only 
qualified persons will be eligible to serve as nominees.

H. CBOE Rule 3.9

    The Commission believes the proposed changes to CBOE Rule 3.9 will 
clarify the CBOE's application procedures and requirements by codifying 
several existing CBOE policies, thereby helping to notify members and 
applicants for membership of the CBOE's application procedures and 
requirements and helping to ensure compliance with those rules. In this 
regard, the Commission notes that the proposal codifies in CBOE Rule 
3.9 requirements related to the CBOE's Floor Member Qualification Exam, 
which the Commission has approved previously,\30\ as well as the 
requirement currently set forth in the CBOE's application materials 
(the Form U-4) that an applicant promptly update its application if any 
of the information contained in the application becomes inaccurate or 
incomplete after the date the applicant submits the materials to the 
CBOE and prior to approval of the application. The Commission believes 
that it is reasonable for the CBOE to codify these existing 
requirements in CBOE Rule 3.9.
---------------------------------------------------------------------------

    \30\ See Membership Qualification Exam Order, supra note 18.
---------------------------------------------------------------------------

    CBOE Rule 3.9(e) clarifies the CBOE's use of posting periods for 
membership applications, applications to change a membership capacity 
status, and applications to change clearing members. CBOE Rule 3.9(e) 
also allows the Membership Committee to implement a posting requirement 
for other types of applications and to shorten or waive a required 
posting period. The Commission believes that it is reasonable for the 
CBOE to codify its posting requirements to notify members and 
membership applicants of the requirements. The Commission believes that 
the posting periods should provide CBOE members with an opportunity to 
provide the CBOE with comments and information relevant to an 
application, including comments relating to an applicant's fitness for 
membership. In addition, the Commission believes that providing the 
Membership Committee with the flexibility to implement a posting period 
for other types of applications and to reduce or waive a posting period 
will help the Membership Committee to utilize the posting requirements 
effectively.
    CBOE Rule 3.9(f) makes clear that the Membership Department 
typically does not investigate an individual member applicant who was 
an individual member within the prior six months, since the person 
recently had been a CBOE member. CBOE Rule 3.9(f) also indicates that 
the Membership Department will investigate associated persons that the 
Membership Committee must approve pursuant to CBOE Rule 3.6(b), rather 
than all persons associated with an organization, as required currently 
under CBOE Rule 3.9(c)(1). In addition, CBOE Rule 3.9(f) states that 
the Membership Department may investigate any other person or 
organization that submits an application pursuant to CBOE Rule 3.9(a).
    The Commission believes that CBOE Rule 3.9(f), as amended, will 
ensure that the Membership Department conducts necessary investigations 
of applicants for membership and of associated persons that the 
Membership Committee must approve pursuant to CBOE Rule 3.6(a), thereby 
helping to ensure that only qualified individuals and organizations 
become CBOE members or approved associated persons. The Commission 
believes that the provision in CBOE Rule 3.9(f) indicating that the 
Membership Department may conduct a less extensive review of an 
individual member applicant who was an individual member within the 
previous six months will provide the Membership Department with 
flexibility in reviewing the applications of individuals whom the 
Membership Department has investigated recently. The Commission notes, 
in addition, that the CBOE will conduct a more extensive review of an 
individual member applicant who was a member within the previous six 
months if such a review is warranted.\31\ The Commission believes that 
the provision in CBOE Rule 3.9(f) allowing the Membership Department to 
investigate any other person or organization that submits an 
application pursuant to CBOE Rule 3.9(a) clarifies the Membership 
Department's authority and ensures that the Membership Department will 
have the flexibility to conduct necessary investigations.
---------------------------------------------------------------------------

    \31\ See June 9 Conversation, supra note 17.
---------------------------------------------------------------------------

    The Commission believes that the requirements in CBOE Rule 3.9 
applicable to a member seeking to change the clearing member that 
guarantees the member's CBOE transactions will help to ensure the 
financial integrity of CBOE members. Specifically, CBOE Rule 3.9 
requires a member seeking to change clearing members to submit an 
application to the Membership Department, along with a financial 
statement setting forth the applicant's assets and liabilities. In 
addition, the application to change clearing members must be posted, 
unless the clearing member(s) that will not longer guarantee the 
applicant's CBOE transactions waives the posting

[[Page 46537]]

requirement. The Commission believes that the posting requirement will 
allow the clearing member(s) that will no longer clear the applicant's 
CBOE transactions, and other members, to notify the Membership 
Department of outstanding liabilities that may be relevant to the 
applicant's qualifications for membership. In addition, the information 
regarding the applicant's financial standing should help the new 
clearing member to manage the risk associated with the applicant's 
trading activities.
    The Commission believes that CBOE Rule 3.9, Interpretation and 
Policy .02, which allows the Membership Committee to disapprove the 
name change application or membership application of an organization 
with a name that is confusingly similar to the name of an existing 
member organization will help to avoid confusion and help the CBOE to 
maintain a fair and orderly market.

I. CBOE Rule 3.10

    The Commission finds that the provisions in CBOE Rule 3.10 
requiring an applicant for membership, for certain membership statuses, 
and for approved associated person status to become effective in the 
status within 90 days will clarify the CBOE's rules and notify members 
of the CBOE's requirements. In addition, the Commission believes that 
it is reasonable for the CBOE to provide a lessor with six months to 
become effective in the status to allow lessors sufficient time to 
purchase a membership.

J. CBOE Rule 3.11

    The Commission believes that the proposal to amend CBOE Rule 3.11 
to reflect the CBOE's current procedures for notifying the CBOE 
membership of the effectiveness of any membership, membership status, 
or associated person status will help to inform members of the CBOE's 
current practice for providing such notifications. The Commission 
believes that it is reasonable for the CBOE to eliminate the 
requirement in CBOE Rule 3.11 that the CBOE mail notices to members 
because the Exchange Bulletin now is forwarded to all members and will 
accomplish the same purpose as mailing notices to members. In addition, 
the Commission believes that it is reasonable for the CBOE to eliminate 
the requirement that notices of approved statuses be posted on the 
CBOE's bulletin board because the notices relate to statuses that have 
been approved, rather than to pending applications on which members may 
wish to submit comments.

K. CBOE Rule 3.12

    The Commission finds that the provisions of CBOE Rule 3.12 that 
restate current provisions of the CBOE's rules do not raise new 
regulatory issues. The Commission believes that the new reference in 
CBOE Rule 3.12 to an Authorization to Sell will help to ensure clarity 
and consistency in the CBOE's rules.

L. CBOE Rule 3.13

    The Commission believes that the proposed amendments to CBOE Rule 
3.13 will help to notify members of the CBOE's requirements and 
procedures for the purchase of memberships, thereby facilitating 
compliance with the CBOE's rules. In addition, the Commission finds 
that the provisions limiting the purchase of memberships to those 
approved by the Membership Committee to be an owner or lessor will help 
to ensure that only qualified individuals and organizations purchase 
CBOE memberships. The Commission finds that the provision requiring 
payment for a membership within two business days will clarify the 
CBOE's rule and help to facilitate the orderly transfer of CBOE 
memberships.

M. CBOE Rule 3.14

    The Commission believes that amending CBOE Rule 3.14(a) to provide 
that the lowest offer to sell a membership will be published in the 
Exchange Bulletin may better inform members of sale offers and 
facilitate the sale of memberships.
    The Commission believes that it is reasonable for the CBOE to amend 
CBOE Rule 3.14(b) to apply its provisions to lessees as well as members 
as a means to clarify the CBOE's authority to sell a membership if the 
lessee satisfies one of the conditions listed in CBOE Rule 3.14(b).
    The Commission believes that amending CBOE Rule 3.14(c)(iii) to 
require a transferor to maintain an interest at least equal in value to 
the current market price of the membership will help to ensure that a 
transferor maintains a substantial ownership interest in the 
organization to which the transferor transfers his or her membership. 
The Commission believes that the proposed change will help to preserve 
the original intent of this provision in light of the increase in 
prices for CBOE memberships.
    The Commission believes that it is reasonable for the CBOE to adopt 
the Authorization to Sell procedures specified in CBOE Rule 3.14(d). As 
the CBOE notes, CBOE Rule 3.14(d) expands upon the current provisions 
of CBOE Rule 3.15, Interpretation and Policy .01, which allow the CBOE 
to 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.
    The Commission believes that CBOE Rule 3.14(d) expands upon and 
strengthens the CBOE's current rule by clarifying the rights and 
obligations of both a grantee and a membership owner that grants an 
Authorization to Sell. For example, CBOE Rule 3.14(d) states that a 
membership owner and a grantee may enter into a written contract 
setting forth the circumstances under which the grantee may exercise 
its authority to sell the membership. In addition, CBOE Rule 3.14(d) 
provides that any breaches of the written contract may be redressed 
through arbitration under Chapter XVIII of the CBOE's rules or other 
means permitted under Chapter XVIII. CBOE Rule 3.14(d) also clarifies, 
among other things, that a membership owner may grant only one 
Authorization to Sell a particular membership; that a grantee shall 
have all authority relating to the sale of a membership; and that a 
grantee shall have a security interest, which the grantee may act to 
perfect, in any proceeds from the sale of the membership that the 
grantee is entitled to receive pursuant to CBOE Rule 3.15(b). The 
Commission believes that the Authorization to Sell provisions should 
function with the revised claims process established in CBOE Rule 3.15, 
as discussed below, to provide an orderly and efficient procedure for 
resolving claims among CBOE members.

N. CBOE Rule 3.15

    The Commission believes that the revised membership claims process 
will promote just and equitable principles of trade and remove 
impediments to and perfect the mechanism of a free and open market by 
enhancing the CBOE's procedures for resolving claims between members. 
The Commission believes that the revised membership claims process is a 
reasonable effort by the CBOE to reduce the administrative burdens 
associated with its current claims process and to provide members with 
a fair and efficient means for resolving claims between the grantee of 
an Authorization to Sell and the membership owner who granted the 
Authorization to Sell.
    CBOE Rule 3.15 revises the membership claims process by providing 
that the only possible claimant under the membership claims

[[Page 46538]]

process will be the grantee of an Authorization to Sell. Specifically, 
CBOE Rule 3.15 provides, among other things, that the grantee must 
submit in writing within two business days any claims related to the 
CBOE business activities of a member whose membership was sold.\32\ The 
member whose membership was sold has five business days from the date 
of the sale to acknowledge or contest the claims. Contested claims will 
be resolved through arbitration under Chapter XVIII of the CBOE's rules 
or through other means permitted by Chapter XVIII.
    Although the CBOE, the OCC, and other CBOE members will not be able 
to pursue claims against a member that has granted an Authorization to 
Sell under the revised claims process, they will continue to have the 
ability to pursue claims against the member who has granted an 
Authorization to Sell through arbitration under Chapter XVIII of the 
CBOE's rules or through other means permitted under Chapter XVIII. 
Accordingly, the Commission believes that the revised membership claims 
process, together with the CBOE's arbitration facilities, will provide 
fair procedures for the resolution of disputes involving CBOE members, 
the CBOE, or the OCC when an Authorization to Sell has been granted.

O. CBOE Rule 3.16

    The Commission believes that the proposed changes to CBOE Rule 3.16 
will help to notify members of the circumstances under which a CBOT 
exerciser membership terminates. In addition, the proposed changes will 
clarify the CBOE's rules by moving provisions relating to leased 
memberships from CBOE Rule 3.16 to CBOE Rule 3.17.

P. CBOE Rule 3.17

    The Commission believes that new CBOE Rule 3.17 will clarify the 
requirements, rights, and obligations applicable to leased memberships. 
For example, CBOE Rule 3.17 makes clear that the CBOE must pre-approve 
a lease; that the CBOE will bear no liability to a lessor or lessee in 
connection with its review and approval of a lease agreement; and that 
the CBOE may specify additional provisions that must be included in a 
membership lease, in addition to those designated in CBOE Rule 3.17. 
CBOE Rule 3.17 also clarifies that a lessee must file a lease and any 
amendments to the lease with the Membership Department and notify the 
Membership Department of any termination of the lease before the 
termination becomes effective.
    Consistent with the revised membership claims process, CBOE Rule 
3.17 indicates that a lessor will have no liability for claims against 
a lessee solely by virtue of being a lessor of the membership. However, 
CBOE Rule 3.17 also states 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 the membership. 
Similarly, to provide consistency with the revised membership claims 
process, the Exchange is eliminating the current provision of CBOE Rule 
3.16(b) which states that any division of rights and responsibilities 
between the lessor and lessee will not affect the lessor's obligation 
to pay all amounts due to the CBOE.
---------------------------------------------------------------------------

    \32\ As noted above, CBOE Rule 3.15 defines claims related to 
CBOE business activities to include, among other things, claims 
associated with CBOE transactions and loans or loan guarantees for 
the purpose of purchasing a CBOE membership. The Exchange will 
determine whether a claim is related to CBOE business activities.
---------------------------------------------------------------------------

    CBOE Rules 3.17(e) and 3.17(f) contain provisions that apply when a 
lessor sells or transfers a membership that is being leased. 
Specifically, CBOE Rule 3.17(e) requires a purchaser or transferee of a 
membership that is being leased to lease the membership to the lessee 
pursuant to the terms of the existing lease agreement for a period of 
20 business days following the date of the transfer to the purchaser or 
transferee. The Commission believes that the 20-day period will provide 
a lessee with time to obtain the lease of another membership, thereby 
helping to ensure that a lessee will be able to continue its business 
uninterrupted if the membership it is leasing is sold or transferred 
during the term of the lease. By allowing a lessee to continue in 
business without interruption, the proposal will protect lessees and 
contribute to the maintenance of a fair and orderly market on the CBOE.
    CBOE Rule 3.17(f) clarifies the application of CBOE Rule 3.17(e) by 
specifying the allocation of amounts paid under a lease agreement when 
the membership being leased is sold or transferred. The Commission 
believes that CBOE Rules 3.17(e) and 3.17(f) will notify members of the 
rights and obligations of a lessor, lessee, and transferee when a 
leased membership is sold or transferred.

Q. CBOE Rule 3.18

    As described more fully above, the CBOE proposes to revise its 
procedures for determining whether to permit a member or associated 
person who becomes subject to a statutory disqualification to continue 
in membership or association and, if so, whether to condition such 
continuance in membership or association. The procedures adopted in new 
CBOE Rule 3.18 are similar to the procedures set forth in National 
Association of Securities Dealers (``NASD'') Rules 9520 through 9526, 
which the Commission approved previously.\33\ The Commission finds that 
new CBOE Rule 3.18 is consistent with Section 6(b)(5) in that it is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system and, in general, to protect investors and the public 
interest.
---------------------------------------------------------------------------

    \33\ See Securities Exchange Act Release No. 40853 (December 28, 
1998), 64 FR 555 (January 5, 1999) (order approving File No. SR-
NASD-98-57).
---------------------------------------------------------------------------

    Specifically, the Commission believes that CBOE Rule 3.18 should 
enhance investor protection by enabling more rapid identification of 
statutorily disqualified individuals. In this regard, the Commission 
notes, for example, that CBOE Rule 3.18 requires a member or associated 
person that becomes subject to a statutory disqualification to submit 
an application seeking to continue in membership or association to the 
Membership Department within 10 days of becoming subject to a statutory 
disqualification, rather than within 30 days of becoming subject to a 
statutory disqualification, as provided under current Policy .02 sets 
forth a member's obligation to notify the Membership Department of the 
name of an associated person who is or becomes subject to a statutory 
disqualification, the person's capacity with the member, and the nature 
of the statutory disqualification.
    CBOE Rule 3.18 further expedites the CBOE's current procedures by 
requiring a panel of the Membership Committee to hold a hearing within 
14 days following the receipt of an application to continue in 
membership or association, or the initiation of a proceeding by the 
CBOE if a member or associated person subject to a statutory 
disqualification fails to submit the required application to continue 
in membership or association. Following the hearing, the panel will 
present its recommended decision to the Membership Committee, which may 
ratify or amend the decision. The Membership Committee will present its 
decision to the Executive Committee, which may determine within seven 
days to review the Membership Committee's

[[Page 46539]]

decision. If the Executive Committee does not order a review of the 
Membership Committee's decision, the Membership Committee's decision 
will become the final decision of the CBOE. If the Executive Committee 
orders a review of the Membership Committee's decision, the Executive 
Committee or a panel of the Executive Committee, whose decision must be 
ratified by the Executive Committee, will conduct the review. The 
Executive Committee's decision, which must be in writing, will become 
the final decision of the CBOE.
    The Commission believes that CBOE Rule 3.18 will streamline the 
CBOE's procedures and allow the CBOE to proceed more expeditiously to 
discontinue or condition the membership or association of a member or 
associated person who is or becomes subject to a statutory 
disqualification. The CBOE's revised procedures should protect 
investors and the public interest by helping to ensure that CBOE 
members and associated persons are qualified and eligible for 
membership.
    The Commission believes that it is reasonable for the CBOE to 
provide in CBOE Rule 3.18, Interpretation and Policy .01, that the CBOE 
may waive the provisions of CBOE Rule 3.18 when a proceeding is pending 
before another self-regulatory organization to determine whether to 
permit an associated person to continue in membership with the member 
notwithstanding a statutory disqualification, and to provide that, if 
the CBOE waives the provisions of CBOE Rule 3.18, the Department of 
Financial and Sales Practice Compliance will determine whether the CBOE 
will concur in any filing made under Rule 19h-1 of the Act by another 
self-regulatory organization. The Commission finds that this provision 
is consistent with Rule 19h-1 under the Act.

R. CBOE Rule 3.19

    The Commission finds that new CBOE Rule 3.19, a revised version of 
current CBOE Rule 3.17, will clarify that a member's membership status 
will terminate automatically when the member does not possess a 
membership and when a member organization has no nominee or member who 
has registered a membership for the member organization. The Commission 
believes that new CBOE Rule 3.19 will help to notify members of the 
CBOE's rules regarding the termination of membership status and provide 
consistency with the CBOE's requirement that a member organization 
select a nominee or member who has registered a membership for the 
member organization to represent the organization in all matters 
relating to the CBOE.

S. CBOE Rule 3.20

    The Commission believes that the new requirements in CBOE Rule 3.20 
that a member organization provide written notice to the Membership 
Department and the Department of Financial and Sales Practice 
Compliance of the adoption of a plan of liquidation or dissolution, and 
any actual liquidation or dissolution, will protect investors and the 
public interest by helping the CBOE to monitor the status and financial 
condition of its members.

T. CBOE Rule 3.21

    The Commission believes that the deletion from CBOE Rule 3.21 of 
provisions allowing the CBOE to withhold the distribution of the 
proceeds of a sale of a membership if the seller is not current in the 
payment of CBOE fees or the submission of various fillings will ensure 
that CBOE Rule 3.21 is consistent with the CBOE's revised claims 
process.

U. CBOE Rules 1.1(hh), 3.20, 3.21, 3.22, 3.22A, and 6.20

    The Commission believes that it is reasonable for the CBOE to 
delete CBOE Rules 1.1(hh), 3.20, 3.21, 3.22, 3.22A, and 6.20, 
Interpretation and Policy .03, which relate to government securities 
options permits, because all of the government securities options 
permits have expired. Accordingly, the Commission believes that 
eliminating these rules will clarify the CBOE's rules.

V. CBOE Rule 3.25

    The Commission believes that the proposed changes to CBOE Rule 3.25 
will clarify the CBOE's rules regarding a membership held in trust, 
thereby facilitating compliance with the CBOE's rules and requirements 
for memberships held in trust. Among other things, CBOE Rule 3.25, as 
amended, clarifies that a member transferring a membership into a trust 
must transfer the membership into a living trust. In addition, CBOE 
Rule 3.25 clarifies that the CBOE will deem the membership to have 
reverted to the Trust Member if the membership is released from the 
trust, the trust terminates, or the trust agreement no longer complies 
with the requirements of CBOE Rule 3.25. The requirement that a Trust 
Member submit to the Membership Department amendments to the trust 
agreement, any release of the membership out of trust, and any 
termination of the trust will help the CBOE monitor the status of a 
membership held in trust and determine whether a trust continues to 
satisfy the requirements of CBOE Rule 3.25.

W. CBOE Rule 3.27

    The Commission believes that it is reasonable for the CBOE to amend 
CBOE Rule 3.27 and Regulatory Bulletin 00-37 to provide consistency 
with the revised membership claims process.

X. CBOE Rule 3.28

    The Commission believes that new CBOE Rule 3.28 will provide 
necessary flexibility in the administration of the rules in Chapter III 
of the CBOE's rules by allowing the Membership Committee and/or the 
Membership Department to extend any time limit imposed under Chapter 
III of the CBOE's rules, relating to membership. The Commission notes 
that new CBOE Rule 3.28 is similar to current CBOE Rule 17.13, which 
allows the CBOE to extend time limits for the submission of materials 
required under Chapter XVII of the CBOE's rules.

Y. CBOE Rule 3.29

    The Commission believes that new CBOE Rule 3.29 will facilitate the 
orderly administration of the CBOE's rules by clarifying that the 
Membership Committee and/or the Membership Department may exercise all 
of the authority granted to the CBOE under Chapter III of the CBOE's 
rules. In addition, CBOE Rule 3.29 will clarify the Membership 
Committee's ability to delegate authority to the Membership Department, 
thereby helping to ensure that the Membership Committee will be able to 
focus its attention on more significant membership applications and 
approvals.

Z. CBOE Rule 6.76A

    The Commission believes that the automated billing process 
established in CBOE Rule 6.76A will streamline the processing and 
payment of bills for brokerage services performed by floor brokers and 
order service firms. The Commission believes that new CBOE Rule 6.76A 
will establish an efficient and effective automated billing process 
that will facilitate the prompt payment of amounts market makers owe to 
floor brokers and order service firms while providing market makers 
with an opportunity to review and dispute bills submitted by floor 
brokers and order service firms. In this regard, CBOE Rule 6.76A states 
that a market maker that disputes a bill may pursue a claim against the 
floor broker or order service firm in arbitration under Chapter XVIII 
of the CBOE's rules or through other means permitted by Chapter XVIII. 
In addition, the Commission notes that the

[[Page 46540]]

CBOE may discipline a floor broker or order service firm for violating 
CBOE Rule 4.6 by submitting a false statement to the CBOE if the floor 
broker or order service firm improperly instructs the CBOE to bill a 
market maker for brokerage fees which the floor broker or order service 
firm is not entitled to receive.
    The Commission believes that CBOE Rule 6.76A provides a detailed 
description of the automated billing system that will notify members of 
the procedures and obligations associated with the new billing system, 
including monthly deadlines for submitting bills and instructions under 
the new procedures. In addition, CBOE Rule 6.76A(a)(vii) provides that 
a clearing member may instruct the CBOE's accounting department not to 
draft the clearing member for brokerage fees that would cause the 
market maker to have a negative balance in the market maker's account 
at the clearing member, thereby clarifying that a clearing member will 
not serve as a guarantor for a market maker's brokerage service bills. 
CBOE Rule 6.76A also establishes procedures for making deductions from 
a market maker's account if a clearing member instructs the accounting 
department not to draft the clearing member pursuant to CBOE Rule 
6.76A(a)(vii) and the account subsequently has a positive balance.
    The Commission notes that the automated billing system established 
in CBOE Rule 6.76A is similar to the Integrated Billing System 
established in CBOE Rule 3.23 for CBOE invoices, which the Commission 
has approved.\34\
---------------------------------------------------------------------------

    \34\ See Securities Exchange Act Release No. 20962 (May 15, 
1984), 49 FR 21586 (May 22, 1984) (order approving File No. SR-CBOE-
84-10).
---------------------------------------------------------------------------

    The Commission believes that the fees that the CBOE proposes to 
assess to help to defray the CBOE's cost of administering the automated 
billing process provides for the equitable allocation of reasonable 
dues, fees, and other charges among members, consistent with Section 
6(b)(4) of the Act.

AA. CBOE Rules 6.72, 6.78 and 8.5

    The Commission believes that it is reasonable for the CBOE to amend 
CBOE Rules 6.72, 6.78, and 8.5 to provide that the CBOE will post 
notice of a clearing member's revocation of its letter of authorization 
only at the request of the clearing member because, according to the 
CBOE, most revocations are routine and arise because a member is 
terminating from membership or is changing the clearing member that 
guarantees the member's Exchange transactions.
    The amendments to CBOE Rule 6.72 also clarify the rules applicable 
to letters of authorization by stating that: (1) A revocation will not 
relieve a clearing member of responsibility for transactions guaranteed 
prior to the effective date of the revocation; and (2) a floor broker 
may have only one letter of authorization guarantee from a clearing 
member in effect at a time. The Commission believes that these 
amendments will help to notify members of the rules applicable to floor 
brokers' letters of authorization.
    In addition, the Commission believes that it is reasonable for the 
CBOE to amend CBOE Rule 8.5 to clarify that a market maker that clears 
transactions through more than one clearing member must have a letter 
of guarantee issued by each clearing member to cover the CBOE 
transactions executed by the market maker through the clearing member. 
The Commission believes that this amendment to CBOE Rule 8.5 will 
protect investors and the public interest by helping to ensure the 
financial integrity of market makers.
    The Commission also believes that it is reasonable for the CBOE to 
amend CBOE Rule 8.5, Interpretation and Policy .04, to provide that the 
CBOE will 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 the market 
maker in respect of transactions subject to the rules of any other 
clearing corporation. The Commission believes that the proposed change 
will help to inform a clearing corporation of the financial status of a 
market maker for whom the clearing corporation has approved a letter of 
guarantee.

BB. CBOE Rule 8.9

    The Commission believes that new Interpretation and Policy .08 to 
CBOE Rule 8.9 will clarify the obligations of members by stating that 
each participant in a joint account will be jointly and severally 
liable for any losses incurred by the joint account. In addition, 
Interpretation and Policy .08 will provide consistency with CBOE Rule 
3.8(d) by indicating that when a joint account participant that is the 
nominee of a member organization, or 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, rather than the participant, will be liable 
for losses incurred by the joint account.

CC. CBOE Rules 9.3, 10.11, and 15.1

    The Commission believes that new Interpretation and Policy .01 to 
CBOE Rule 9.3 will clarify an existing CBOE requirement by stating that 
the application that associated persons who are representatives must 
file with the CBOE is the Form U-4. Similarly, Interpretation and 
Policy .01 will set forth the existing requirement that a person 
required to file Form U-4 also must file any required amendments to 
Form U-4. The Commission believes that the proposed changes will help 
to notify associated persons of their obligations with respect to Form 
U-4.
    The Commission believes that the proposed amendment to CBOE Rule 
10.11 will provide clarity and consistency in the CBOE's rules by 
referring to the claims resolution procedures established in CBOE Rule 
3.15. Similarly, the proposed amendments to Interpretation and Policy 
.01 to CBOE Rule 15.1 will revise references to specific CBOE rules to 
reflect the changes to the CBOE's membership rules.

DD. CBOE Rule 18.2

    The Commission believes that CBOE Rule 18.2, Interpretation and 
Policy .01, which will ensure that clearing members receive notice of 
proceedings involving disputed trades, is reasonable because it will 
help to keep clearing members apprised of proceedings involving members 
whose trades the clearing member has guaranteed.

EE. CBOE Rules 6.72, 24A.15, 26.11, 26.13, and 30.74

    The Commission believes that the conforming changes to CBOE Rules 
6.72, 24A.15, 26.11, 26.13, and 30.74, will provide clarity and 
consistency in the CBOE's rules by deleting references to the current 
membership claims process.

FF. Membership Fee Circular

    The Commission believes that the amendments to the Circular will 
clarify the Circular by limiting the Circular solely to information 
regarding membership fees while moving the deleted portions of the 
Circular to the CBOE's rules. The Commission believes that the revised 
fees set forth in the Circular provide for the equitable allocation of 
reasonable dues, fees, and other charges among members, consistent with 
Section 6(b)(4) of the Act.

GG. Special Members

    The Commission believes that the deletion of references to special 
members in CBOE Rules 3.12, 3.14,

[[Page 46541]]

3.16, 6.5, and 9.1 will clarify the CBOE's rules because all special 
memberships on the CBOE have expired.\35\
---------------------------------------------------------------------------

    \35\ See note 22, supra.
---------------------------------------------------------------------------

HH. Effectiveness of the Proposed Rule Change

    The Commission believes that it is reasonable for the proposed rule 
change to become effective 30 days from the date of its approval by the 
Commission. The Commission believes that the 30-day period will provide 
the CBOE with an opportunity to notify the Exchange's membership of the 
effectiveness of the rule change.
    The Commission finds good cause for approving Amendment No. 3 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Amendment No. 3 strengthens the CBOE's proposal by providing additional 
requirements for foreign organizations seeking to become CBOE members. 
Accordingly, the Commission believes that granting accelerated approval 
of Amendment No. 3 is appropriate and consistent with Sections 6(b)(5) 
and 19(b)(2) of the Act.\36\
---------------------------------------------------------------------------

    \36\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 3, including whether Amendment No. 3 
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 Amex. All 
submissions should refer to File No. SR-CBOE-99-15 and should be 
submitted by August 18, 2000.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\37\ that the proposed rule change (SR-CBOE-99-15), as amended, is 
approved.
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\38\
---------------------------------------------------------------------------

    \38\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jonathan G. Katz,
Secretary.
[FR Doc. 00-19055 Filed 7-27-00; 8:45 am]
BILLING CODE 8010-01-M