[Federal Register Volume 65, Number 250 (Thursday, December 28, 2000)]
[Notices]
[Pages 82413-82418]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-33118]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43756; File No. SR-CBOE-98-46]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Approving and Notice of Filing and Order Granting 
Accelerated Approval of Amendment Nos. 1, 2, 3, 4, 5, 6, and 7 to the 
Proposed Rule Change Relating to the Evaluation of Trading Crowd 
Performance

December 20, 2000.

I. Introduction

    On October 23, 1998, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 196-4 
thereunder,\2\ a proposed rule change to amend CBOE Rule 8.60, 
Evaluation of Trading Crowd Performance, to provide limited remedial 
actions for Designated Primary Market Makers (``DPMs''), market makers, 
and other members and trading crowds (collectively referred to as 
``Market Participants'') who have failed to satisfy their market 
responsibilities. The proposed rule change was published for comment in 
the Federal Register on December 10,

[[Page 82414]]

1998.\3\ By letter dated March 12, 1999, the Exchange filed Amendment 
No. 1 to the proposal.\4\ On April 12, 1999, CBOE filed Amendment No. 2 
to the proposal.\5\ On June 17, 1999, CBOE filed Amendment No. 3 to the 
proposal.\6\ On October 23, 2000, CBOE filed Amendment No. 4 to the 
proposal.\7\ On November 13, 2000, the Commission received a faxed copy 
of CBOE's Amendment No. 5 to the proposal.\8\ On December 4, 2000, CBOE 
filed Amendment No. 6 to the proposal.\9\ On December 19, 2000, the 
CBOE filed Amendment No. 7 to the proposal.\10\ The Commission received 
one comment regarding the proposal.\11\ The Commission is approving the 
proposed rule change, as amended, and publishing this notice to solicit 
comments on Amendment Nos. 1, 2, 3, 4, 5, 6, and 7. The Commission is 
also approving Amendment Nos. 1, 2, 3, 4, 5, 6, and 7 on an accelerated 
basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 40737 (December 2, 
1998), 63 FR 68321.
    \4\ See letter from Debora E. Barnes, Senior Attorney, Legal 
Department, Office of Enforcement, CBOE, to Marc McKayle, Attorney, 
Division of Market Regulation (``Division''), Commission, dated 
March 12, 1999 (``Amendment No. 1''). In Amendment No. 1, CBOE 
responded to a comment letter. The substance of CBOE's response to 
the comment letter is discussed in greater detail below.
    \5\ See letter from Andrew D. Spiwak, Managing Director, Legal 
Department, Office of Enforcement, CBOE, to Marc McKayle, Attorney, 
Division, Commission, dated April 8, 1999 (``Amendment No. 2''). In 
Amendment No. 2, CBOE clarified that there is no automatic stay of 
an action during the appeal of a remedial sanction, but that a 
Market Participant could request a stay of action during an appeal. 
CBOE also indicated that the primary difference between the 
sanctions that presently exist under the Rule and the limited 
remedial actions introduced by this proposal is the severity of the 
sanctions. The Exchange also clarified that pursuant to CBOE Rule 
19.1, Interpretations and Policies .01, a Market Participant would 
be considered aggrieved in an economic sense if sanctioned under the 
proposed revisions to CBOE Rule 8.60, and thus entitled to appeal 
any action taken by a Market Performance Committee under the rule. 
The Exchange also noted that, pursuant to CBOE Rule 19.5, any 
decision of the Appeals Committee is subject to review by the 
Exchange's Board of Directors. The Exchange also explained that 
limited remedial actions taken under the proposal by the appropriate 
Market Performance Committee would not constitute a disciplinary 
action, and thus Exchange reporting requirements under Rule 19d-1(e) 
of the Act, 17 CFR 240.19d-1(e), would not be triggered. Finally, 
the Exchange assured the Commission that the three Market 
Performance Committees have exclusive, non-overlapping jurisdiction, 
and thus Market Participants would not face duplicative sanctions 
stemming from one course of conduct.
    \6\ See letter from Andrew D. Spiwak, Managing Director, Legal 
Department, Office of Enforcement, CBOE, to Marc McKayle, Attorney, 
Division, Commission, dated June 16, 1999 9``Amendment No. 3''). In 
Amendment No. 3, CBOE amended the Rule to restrict a member's 
ability to participate in the Rapid Opening System (``ROS'') as a 
limited remedial sanction. CBOE also deleted language from the rule 
text that would have given the appropriate Market Performance 
Committee discretion to ``take any other limited remedial action.'' 
CBOE also indicated that any additional comparable limited remedial 
sanctions would be added to the rule by a proposed rule change filed 
with the Commission pursuant to section 19(b)(3)(A) of the Act, 15 
U.S.C. 78s(b)(3)(A).
    \7\ See letter from Andrew D. Spiwak, Managing Director, Legal 
Department, Office of Enforcement, CBOE, to Elizabeth King, 
Associate Director, Division, Commission, dated October 17, 2000 
(``Amendment No. 4''). In Amendment No. 4, CBOE reorganized the text 
of the rule language and consolidated all remedial actions and 
hearing procedures into paragraphs (c) and (d), respectively, of 
proposed CBOE Rule 8.60. In addition, CBOE added language to specify 
that the rule pertained to DPMs, market makers, and other members 
(individually or collectively as trading crowds) and not solely 
market markers. The CBOE also amended the rule to refer to the 
``market responsibilities'' of market participants instead of 
``performance standards.'' The Exchange also revised the rule text 
to indicate that the appropriate Market Performance Committee can 
find that a Market Participant has failed to satisfy its market 
responsibilities if the Market Participant is ranked one or more 
standard deviations from the mean score of all trading crowds in a 
periodic examination. Finally, Amendment No. 4 amends CBOE Rule 
8.60(f) to specify that, for Committee action taken under proposed 
CBOE Rule 8.60(c)(1) through (4), Market Participants may directly 
appeal the action to the Board of Directors as under the current 
Rule, and amends CBOE Rule 8.60(g) to specify that Committee actions 
taken under proposed CBOE Rule 8.60(c)(5) through (11) may be 
appealed in accordance with Chapter XIX of the Exchange Rules.
    \8\ See letter from Andrew D. Spiwak, Managing Director, Legal 
Department, Office of Enforcement, OBOE, to Nancy Sanow, Assistant 
Director, Division, Commission, dated November 13, 2000 (``Amendment 
No. 5''). Amendment No. 5 was replaced in its entirely by Amendment 
No. 6.
    \9\ See letter from Andrew D. Spiwak, Managing Director, Legal 
Department, Office of Enforcement, CBOE, to Nancy Sanow, Assistant 
Director, Division, Commission, dated November 27, 2000 (``Amendment 
No. 6''). In Amendment No. 6, in addition to technical changes, CBOE 
Rule 8.60(d) was amended to clarify that the Committee may take any 
action listed in CBOE Rule 8.60(c) after a formal hearing, and may 
take any action listed in CBOE Rule 8.60(c)(5) through (11) after an 
informal hearing. In addition, a conforming change was made in CBOE 
Rule 8.60(f) to clarify that a Market Participant may appeal any 
Committee action taken after a formal hearing directly to the Board 
of Directors. This provision supersedes the change in Amendment No. 
4 to CBOE Rule 8.60(f) that specified that Market Participants may 
appeal Committee action taken under CBOE Rule 8.60(c)(1) through (4) 
directly to the Board of Directors.
    \10\ See letter from Andrew D. Spiwak, Managing Director, Legal 
Department, Office of Enforcement, CBOE, to Nancy Sanow, Assistant 
Director, Division, Commission, dated December 12, 2000 (``Amendment 
No. 7''). In Amendment No. 7, proposed CBOE Rule 8.60(g) was amended 
to clarify that Committee actions taken after an informal meeting in 
accordance with CBOE Rule 8.60(c)(5) through (11) may be appealed in 
accordance with Chapter XIX of the Exchange Rules. The amended rule 
language clarifies the provision set forth in Amendment No. 4.
    \11\ See letter from James Gelbort to Robert L.D. Colby, Deputy 
Director, Division, Commission, dated December 28, 1998 (``Gelbort 
Letter'').
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II. Description of the Proposal

    The Exchange proposes to modify CBOE Rule 8.60 to clarify and 
improve the market performance evaluation of Market Participants on the 
Exchange. The proposed rule change should provide the appropriate 
Market Performance Committee (``Committee'')\12\ greater procedural 
flexibility in addressing the performance of Market Participants, while 
clarifying the due process safeguards that apply to the exercise of the 
Committee's authority.
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    \12\ The appropriate Committee refers to the Market Performance 
Committee, the Index Market Performance Committee or the Modified 
Trading System Appointments Committee.
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    The purpose of CBOE Rule 8.60 is to provide the appropriate 
Committee with a means to work with Market Participants to improve 
market quality and competition. The market performance evaluation 
process is designed to assist the appropriate Committee in working with 
Market Participants to improve their market performance. Currently, 
under CBOE Rule 8.60, the Committee must hold a formal hearing to 
impose serious sanctions such as: (1) Suspension, termination, or 
restriction of registration of a market maker; (2) suspension, 
termination or restriction of an appointment to one or more option 
classes; (3) restriction of appointments to additional option classes; 
(4) relocation of option classes; and (5) prohibiting a member from 
trading at a particular trading station. However, under the current 
Rule, the appropriate Committee does not have explicit authority to 
take limited remedial actions. Under the proposed rule change, the 
Committee would be able to take certain limited remedial actions after 
an informal meeting with Market Participants who have been identified 
through the evaluation process.
    The proposal would amend CBOE Rule 8.60(a) to indicate that the 
Committee in evaluating whether a Market Participant is satisfactorily 
meeting its market responsibilities may consider: (1) Quality of 
markets; (2) extent of competition in the crowd; (3) due diligence in 
representing orders as agent; (4) adherence to ethical standards; (5) 
carrying out administrative responsibilities; and (6) such other 
matters as the Exchange may deem relevant.\13\ Under the proposal, in 
addition to the survey, the Committee may also consider any other 
relevant information including, but not limited to, statistical 
measures of performance and such other factors and data as the 
Committee may determine to be pertinent to the evaluation of Market

[[Page 82415]]

Participants. CBOE Rule 8.60(a) is also being amended to clarify that 
the Rule pertains to DPMs (both market-making and agency 
responsibilities), market makers, and other members (individually or 
collectively as trading crowds).
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    \13\ The factors that may be considered under current CBOE Rule 
8.60(a) are: (1) Quality of markets; (2) competition among market-
makers; (3) observance of ethical standards; and (4) administrative 
factors.
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    Under the proposal, CBOE Rule 8.60(b) would be amended to indicate 
that the Committee may find that a Market Participant has failed to 
satisfy its market responsibilities, if the evaluation of the Market 
Participant results in a ranking that is one or more standard 
deviations from the mean score of all Market Participants within the 
Committee's jurisdiction, or if such a finding may reasonably be 
supported by any other relevant information known to the Committee. 
Currently, under CBOE Rule 8.60(b), the Committee must presume a 
failure to meet minimum performance standards exists for all members of 
a trading crowd, if the trading crowd is ranked in the bottom 10% of 
trading crowds in the aggregate results of the Crowd Evaluation 
Questionnaire.
    Under the proposal, the rule language in current CBOE Rule 8.60(a) 
listing the sanctions for a market-maker's failure to meet minimum 
performance standards would be moved to paragraph (c) of the proposed 
rule. In addition to the more serious sanctions that are currently 
listed in the Rule, the proposal would amend CBOE Rule 8.60(c), to 
clarify that the Committee has the authority to take limited remedial 
actions if a Market Participant fails to satisfy its market 
responsibilities. Thus, under the proposed CBOE Rule 8.60(c) the 
Committee may take one or more of the following actions, if it finds 
that a Market Participant has failed to satisfy its market 
responsibilities:
    (1) Suspension, termination, or restriction of registration of a 
Market Participant (which may also include the termination of a DPM 
appointment);
    (2) Suspension, termination or restriction of an appointment to one 
or more option classes or other securities;
    (3) Relocation or reallocation of option classes or other 
securities to other trading crowds;
    (4) Prohibiting a Market Participant from trading at a particular 
trading station;
    (5) Requiring the Market Participant to submit a business plan to 
the Committee detailing those steps that the Market Participant intends 
to take to improve its performance;
    (6) Requiring that one or more Market Participants in a crowd 
execute 100% of their opening transactions in that crowd in person;
    (7) Restricting the ability of Market Participants to participate 
in the Exchange's Retail Automatic Execution System (``RAES'');
    (8) Restricting the eligibility of a crowd to be allocated new 
option classes or other securities;
    (9) Requiring that one or more Market Participants attend a meeting 
or series of meetings as the Committee shall require for the purpose of 
education or improving their performance as Market Participants;
    (10) Requiring that all bookable orders be booked if not executed 
immediately upon presentation in the crowd; and
    (11) Restricting the ability of Market Participants to participate 
in ROS.
    The Exchange has indicated that it may in the future add comparable 
limited remedial sanctions to the Rule by filing a proposed rule change 
with the Commission pursuant to 19(b)(3)(A) of the Act.\14\ CBOE Rule 
8.60(c) is also being amended to delete language pertaining to the 
distribution of a crowd evaluation questionnaire on a six-month 
periodic basis. Under the proposal, the Exchange will conduct market 
performance evaluations twice a year as it deems necessary, but 
generally on a six-month periodic basis.\15\
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ Telephone conversation between with Andrew D. Spiwak, 
Managing Director, Legal Department, Office of Enforcement, CBOE, to 
Marc McKayle, Special Counsel, Division, Commission, on November 1, 
2000.
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    The proposed rule change would amend CBOE Rule 8.60(d) to include 
the Rule's formal hearing and informal meeting procedures. Under the 
proposal, before taking any remedial action, the Committee would be 
required to give written notice to the Market Participant to indicate 
that the Committee is considering taking action and the basis for the 
action, and that the Market Participant is entitled to an opportunity 
to appear before the Committee (or a panel thereof). If the Committee 
contemplates taking any of the actions listed in proposed CBOE Rule 
8.60(c)(1) through (4), a formal hearing with a verbatim record would 
be required, although the Committee would have the authority to take 
any action listed in CBOE Rule 8.60(c) after a formal hearing. If the 
Committee contemplates taking any of the actions listed in proposed 
CBOE Rule 8.60(c)(5) through (11) that will not be imposed for a period 
longer than one year, an informal meeting without the requirement of a 
verbatim record would be permitted. In addition, under proposed CBOE 
Rule 8.60(d), a Market Participant receiving written notice of 
potential Committee action would be required to appear at the formal 
hearing or informal meeting, as applicable, and could also submit a 
written statement to the Committee in addition to an appearance. At 
such a hearing or meeting, the formal rules of evidence would not apply 
and the Committee would decide all questions of procedure and 
admissibility of evidence. If after the hearing or meeting the 
Committee determined that the Market Participant failed to satisfy its 
market responsibilities, the Committee would give written notice to all 
affected Market Participants reflecting the sanction ordered, the 
length of the sanction, and the basis for the Committee's findings and 
conclusions.
    The proposed rule change would also amend CBOE Rule 8.60(e) to 
provide the Committee with the authority to impose any sanction under 
CBOE Rule 8.60(c) if the Market Participant failed to appear before or 
meet with the Committee pursuant to proposed CBOE Rule 8.60(d) and did 
not have a reasonable justification or excuse. CBOE Rule 8.60(e) would 
also be amended to indicate that a Market Participant's unexcused 
absence before the Committee could result in a referral to the Business 
Conduct Committee.
    The proposal also amends CBOE Rules 8.60(f) and (g) to specify the 
process for taking appeals from a Committee action. Under proposed CBOE 
Rule 8.60(f), consistent with the current Rule, Committee actions taken 
after a formal hearing may be appealed directly to the Board of 
Directors. Proposed CBOE Rule 8.60(g) specifies any action taken by the 
Committee after an informal meeting in accordance with CBOE Rule 
8.60(c)(5) through (11) may be appealed pursuant to Chapter XIX of the 
Exchange Rules. CBOE believes that Chapter XIX appeals would be 
procedurally duplicative for Committee actions taken after a formal 
hearing where a verbatim record is kept.\16\
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    \16\ Telephone conversation between with Andrew D. Spiwak, 
Managing Director, Legal Department, Office of Enforcement, CBOE, to 
Marc McKayle, Special Counsel, Division, Commission on November 1, 
2000.
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    Finally, the proposal amends Interpretation and Policy .01 under 
CBOE Rule 8.60 to provide the Committee discretion in defining whether 
a market maker is a member of a trading crowd.

III. Comments

    The Commission received one comment letter on the proposal.\17\ The 
commenter inquired: (1) Whether the proposed restriction of RAES 
participation as a limited remedial

[[Page 82416]]

sanction would supercede the remedial actions in CBOE Rule 8.16; \18\ 
(2) whether appealing parties must be aggrieved in an economic sense 
when appealing pursuant to Chapter XIX of the Exchange Rules; and (3) 
whether inequitable results would occur because of overlapping 
jurisdications of the Market Performance Committees.\19\ In Amendment 
No. 1, the Exchange stated that the proposed limited remedial sanction 
restricting RAES participation would not supersede remedial actions 
under CBOE Rule 8.16. The Exchange explained that CBOE Rule 8.16 and 
CBOE Rule 8.60, as proposed, are not facially inconsistent with each 
other and may co-exist within the CBOE regulatory framework because 
action may be taken under one rule without implicating the other. The 
Exchange also explained its view that, despite the separate and 
distinct jurisdictions of the three Market Performance Committees, a 
Market Participant could not be sanctioned by more than one Committee 
for a single course of conduct. The Exchange also clarified that if a 
Market Participant received a limited remedial sanction under the 
proposal, it would be considered to have been aggrieved in an economic 
sense, and thus the sanction would be appealable pursuant to Chapter 
XIX of the Exchange Rules.\20\
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    \17\ See Gelbort Letter, supra note 11.
    \18\ CBOE Rule 8.16 pertains to RAES eligibility in option 
classes other than the Dow Jones Industrial Index (``DJX'').
    \19\ Two other issues raised by the commenter were rendered moot 
by subsequent amendments.
    \20\ As originally filed, the proposal allowed any Committee 
action to be appealed under Chapter XIX of CBOE Rules. Under 
Amendment No. 6, Chapter XIX procedures would be available when the 
Committee imposed a limited remedial sanction after an informal 
meeting, while sanctions imposed after a formal hearing may be 
directly appealed to the Board of Directors.
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IV. Discussion

    The Commission finds that the proposed rule change is consistent 
with the Act \21\ and, in particular, with section 6(b) of the Act.\22\ 
Specifically, the Commission believes that the proposal is consistent 
with the sections 6(b)(5), (b)(6), and (b)(7) of the Act.\23\ Section 
6(b)(5) of the Act \24\ requires that rules of an exchange be designed 
to promote just and equitable principles of trade, perfect the 
mechanism of a free and open market, prevent fraudulent and 
manipulative acts, and, in general, protect investors and the public 
interest. Section 6(b)(6) of the Act \25\ requires an exchange to 
provide rules to appropriately discipline its members for violation of 
the provisions of the Act, the rules or regulations thereunder, or the 
rules of the exchange, by expulsion, suspension, limitation of 
activities, functions, and operations, fine, censure, being suspended 
or barred from being associated with a member, or any other fitting 
sanction. Section 6(b)(7) of the Act \26\ requires the rules of an 
exchange generally to provide a fair procedure for the disciplining of 
members.
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    \21\ In approving this rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \22\ 15 U.S.C. 78f(b).
    \23\ 15 U.S.C. 78f(b)(5), (b)(6), and (b)(7).
    \24\ 15 U.S.C. 78f(b)(5).
    \25\ 15 U.S.C. 78f(b)(6).
    \26\ 15 U.S.C. 78f(b)(7).
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    The Commission finds that proposed CBOE Rule 8.60(a) is consistent 
with Section 6(b)(5) \27\ because it is designed to help the Exchange 
maintain market quality and integrity by providing the appropriate 
Market Performance Committee with a means to identify Market 
Participants that fail to satisfy their market responsibilities. The 
proposed rule change amends CBOE Rule 8.60(a) to enumerate, and add, 
factors that the Committee may consider in evaluating whether a Market 
Participant satisfactorily meets its market responsibilities. The 
proposed rule change also amends CBOE Rule 8.60(a) to specify that the 
Rule pertains to DPMs, market makers, and other members (individually 
or collectively as trading crowds). The Commission believes that the 
ability of the Committee to evaluate the market performance of Market 
Participants should be enhanced by the addition of new factors and 
clarification of existing factors to be contained in the survey of 
members that is a part of the market performance evaluation. The 
proposal should also provide the Committee and Market Participants with 
appropriate guidance on how the Exchange evaluates the market 
performance of its members. The Commission notes that CBOE Rule 8.60(a) 
is also being amended to enable the Committee to consider any other 
relevant information that the Committee determines is pertinent to the 
evaluation of Market Participants. In such instances, where non-
enumerated factors have been included in a Market Participant's 
evaluation, the Exchange has represented that the factors beyond those 
explicitly mentioned in the Rule's text would be detailed in the 
written notice of a Market Participant's potential failure to satisfy 
its market responsibilities, as required by CBOE Rule 8.60(d).\28\ 
Further, the Commission notes that in order to provide appropriate 
guidance in the future, the Exchange should inform Market Participants 
of any additional factors determined to be pertinent in evaluating 
whether a Market Participant has satisfied its market responsibilities.
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    \27\ 15 U.S.C. 78f(b)(5).
    \28\Telephone conversation between with Andrew D. Spiwak, 
Managing Director, Legal Department, Office of Enforcement, CBOE, to 
Marc McKayle, Special Counsel, Division, Commission on November 1, 
2000.
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    The Commission finds that proposed CBOE Rule 8.60(b) is consistent 
with the Act,\29\ including section 6(b)(6),\30\ because the Rule is 
part of the scheme that provides the Exchange with a means to 
appropriately discipline its members. The proposed rule change would 
amend CBOE rule 8.60(b) to indicate that the Committee may determine 
that a Market Participant has failed to satisfy its market 
responsibilities if the Market Participant evaluation results in a 
ranking that is one or more standard deviations from the mean score of 
all Market participants within the Committee's jurisdiction, or if such 
a finding may reasonably be supported by any other relevant information 
known to the Committee. The Commission believes that it is reasonable 
for the Committee to find that a Market Participant has failed to 
satisfy its market responsibilities if the Market Participant 
evaluation results in a ranking that is one or more standard deviations 
below the mean score of all Market Participants within the Committee's 
jurisdiction. Moreover, this evaluation should provide an objective 
measure as to whether Market Participants have failed to satisfy their 
market responsibilities.
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    \29\ 15 U.S.C. 78s(b)(3)(A).
    \30\ 15 U.S.C. 78f(b)(6).
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    The Exchange has represented that each Committee has exclusive 
jurisdiction over discrete market performance issues, and that such 
specialization provides the separate Committees added competence to 
review certain market performance matters. The Commission believes that 
the structure of the Exchange's market performance evaluation should 
permit the appropriate Committee to properly evaluate whether 
satisfactory market performance has been achieved by Market 
Participants based on the factors set forth in revised CBOE Rule 
8.60(a). As indicated above, the Commission considers it essential that 
a Market Price Participant be fully cognizant of the factors that may 
bear upon the Committee's evaluation, particularly if that evaluation 
could result in remedial action by the Committee. Thus, the Commission 
expects that the Exchange

[[Page 82417]]

will fully apprise Market Participants of any other relevant 
information known to the Committee that influences a Committee finding 
that a Market Participant has failed to meet his market responsibility.
    The Commission also finds that proposed CBOE Rule 8.60(c) is 
consistent with the Act, particularly Section 6(b)(6).\31\ CBOE Rule 
8.60(c) will be amended to include the more serious sanctions found in 
current CBOE Rule 8.60(a), and to clarify that the Committee also has 
the authority to take limited remedial actions if a Market Participant 
fails to satisfy its market responsibilities. The Commission believes 
that the proposed rule change should enhance the flexibility of the 
Exchange's market performance evaluation. Presently, the Exchange does 
not have an express mechanism to address market performance matters 
that may warrant remedial action, but are not serious enough to warrant 
suspension, termination, or restriction of a market-maker's 
registration under the current Rule. The proposed rule change should 
permit the CBOE to implement appropriate, limited remedial sanctions 
that will permit the Committee to take corrective measures to enhance 
the performance of Market Participants before more serious sanctions, 
such as suspension or termination, are warranted. The Commission 
believes that the proposal should improve the manner in which the 
Exchange assesses and responds to the quality of market performance by 
the Market Participant, which in turn should help the Exchange provide 
a more competitive, efficient and fair market. Specifically, the 
Commission finds that CBOE Rule 8.60(c) is consistent with Section 
6(b)(6) of the Act \32\ because it provides the Exchange with a means 
to appropriately discipline its members for violating the rules of the 
exchange by imposing sanctions such as suspension, limitation of 
activities, functions, and operations, or other fitting sanctions.
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    \31\ 15 U.S.C. 78f(b)(6).
    \32\ 15 U.S.C. 78f(b)(6).
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    The Commission finds that proposed CBOE Rule 8.60(d) is consistent 
with section 6(b)(7) of the Act.\33\ Under the proposal, CBOE Rule 
8.60(d) will be amended to include all of the Rule's formal hearing and 
informal meeting procedures. The Commission believes that the 
amendments to CBOE Rule 8.60(d) should clarify the due process 
safeguards associated with the Committee's evaluation of a Market 
Participant's market performance. Further, the Commission believes that 
amended CBOE Rule 8.60(d) should provide Market Participants with 
adequate procedural safeguards under the Rule. For instance, before any 
action is taken, the Committee would be required to give written notice 
to the Market Participant to indicate that the Committee is considering 
taking action and the basis for the action, and that the Market 
Participant is entitled to an opportunity to appear before the 
Committee (or a panel thereof). The Commission believes that Market 
Participants are provided with reasonable due process safeguards and 
that CBOE Rule 8.60(d), as amended, should provide a fair procedure for 
disciplining members, and thus is consistent with Section 6(b)(7) of 
the Act.\34\
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    \33\ 15 U.S.C. 78f(b)(7).
    \34\ 15 U.S.C. 78f(b)(7).
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    The Commission also finds that proposed CBOE Rule 8.60(e) is 
consistent with Section 6(b)(6) of the Act.\35\ The proposed rule 
change amends CBOE Rule 8.60(e) to authorize the Committee to impose 
any sanction listed under CBOE Rule 8.60(c) if a Market Participant 
fails to appear before the Committee, without reasonable justification 
or excuse, as required by proposed CBOE Rule 8.60(d). CBOE Rule 8.60(e) 
would also be amended to indicate that a Market Participant's unexcused 
absence before the Committee could result in a referral to the Business 
Conduct Committee. The Commission believes that CBOE Rule 8.60(e) 
provides appropriate discipline for violation of the provisions found 
in amended CBOE Rule 8.60(d), and thus is consistent with section 
6(b)(6) of the Act.\36\
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    \35\ 15 U.S.C. 78f(b)(6).
    \36\ 15 U.S.C. 78f(b)(6).
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    The Commission finds that proposed CBOE Rules 8.60(f) and (g) are 
consistent with Section 6(b)(7) of the Act.\37\ The proposal amends 
CBOE Rule 8.60(f) to specify that Market Participants may appeal 
Committee action taken after a formal hearing directly to the Board of 
Directors. The proposal also amends CBOE Rule 8.60(g) to specify that 
after an informal meeting, a Market Participant may appeal a Committee 
action imposed under CBOE Rule 8.60(c)(5) through (11) to an Appeals 
Committee in accordance with Chapter XIX of the Exchange Rules. The 
Commission believes that direct appeals to the Board of Directors for 
Committee action taken after a formal hearing with a verbatim record 
should provide Market Participants with adequate procedural 
protections. The Commission also believes that CBOE Rule 8.60(g), which 
allows Market Participants to appeal in accordance with Chapter XIX of 
the Exchange Rules any Committee action pursuant to CBOE Rule 8.6(c)(5) 
through 11 after an informal meeting, should provide adequate 
procedural safeguards. The Commission therefore finds that CBOE Rules 
8.60(f) and (g) are consistent with Section 6(b)(7) of the Act because 
they provide fair procedures for the disciplining of Exchange 
members.\38\
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    \37\ 15 U.S.C. 78f(b)(7).
    \38\ 15 U.S.C. 78f(b)(7).
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V. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    For the reasons discussed below, the Commission finds good cause 
for approving Amendment Nos. 1 through 7 to the proposed rule change 
prior to the thirtieth day after the date of publication of notice 
thereof in the Federal Register.
    In Amendment No. 1, as outlined above, CBOE responded to various 
issues raised by a commenter. In Amendment No. 2, CBOE explained and 
clarified the procedural impact of the proposal. Specifically, 
Amendment Nos. 1 and 2 were of a technical, non-substantive nature, and 
did not significantly alter the original proposal, which was subject to 
a full notice and comment period. Thus, the Commission finds that 
granting accelerated approval to Amendment Nos. 1 and 2 is appropriate 
and consistent with section 19(b)(2) of the Act.\39\
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    \39\ 15 U.S.C. 78s(b)(2).
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    In Amendment No. 3, CBOE amended Rule 8.60 to restrict a member's 
ability to participate in the ROS as a limited remedial sanction. CBOE 
also deleted language from the Rule's text that would have given the 
appropriate Market Performance Committee discretion to ``take any other 
limited remedial action.'' CBOE also indicated that any additional 
comparable limited remedial sanctions would be added to the Rule by a 
proposed rule change filed with the Commission pursuant to section 
19(b)(3)(A) of the Act.\40\ The changes in proposed Amendment No. 3 
should help to ensure that Market Participants are fully notified to 
the types of limited remedial sanctions that may be imposed under Rule 
8.60. Amendment No. 3 also set forth how additional limited remedial 
sanctions may be added to Rule 8.60 in future. The Commission finds 
that Amendment No. 3 strengthens and clarifies Rule 8.60 from a 
procedural perspective. Thus, the Commission finds that granting

[[Page 82418]]

accelerated approval to Amendment No. 3 is appropriate and consistent 
with section 19(b)(2) of the Act.\41\
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    \40\ 15 U.S.C. 78s(b)(3)(A).
    \41\ 15 U.S.C. 78s(b)(2).
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    In Amendment No. 4, CBOE reorganized the text of Rule 8.60 and 
consolidated all remedial actions and hearing procedures into 
paragraphs (c) and (d), respectively, of the Rule, as amended. In 
addition, CBOE added language to specify that Rule 8.60 pertained to 
DPMs, market makers, and other members (individually or collectively as 
trading crowds) and not just market makers. The CBOE also amended the 
Rule to refer to the ``market responsibilities'' of market participants 
instead of ``performance standards.'' The Exchange also revised the 
Rule's text to indicate that the appropriate Market Performance 
Committee can find a Market Participant has failed to satisfy its 
market responsibilities if the Market Participant is ranked one or more 
standard deviations from the mean score of all trading crowds in a 
periodic examination. The Commission finds that the proposed changes in 
Amendment No. 4 serve to clarify the intent and application of the 
proposal. Thus, the Commission finds that granting accelerated approval 
to Amendment No. 4 is appropriate and consistent with Section 19(b)(2) 
of the Act.\42\
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    \42\ 15 U.S.C. 78s(b)(2).
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    In Amendment No. 6,\43\ in addition to technical changes, CBOE Rule 
8.60(d) was amended to clarify that the Committee may take any action 
listed in CBOE Rule 8.60(c) after a formal hearing, and may take any of 
the actions listed in CBOE Rule 8.60(c)(5) through (11) after an 
informal meeting. In addition, a conforming change was made in CBOE 
Rule 8.60(f) to clarify that a Market Participant may appeal any 
Committee action taken after a formal hearing directly to the Board of 
Directors.\44\ The Commission finds that the proposed changes in 
Amendment No. 6 serve to clarify the intent and application of the 
proposal. Thus, the Commission finds that granting accelerated approval 
to Amendment No. 6 is appropriate and consistent with Section 19(b)(2) 
of the Act.\45\
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    \43\ Amendment No. 5 was replaced in its entirety by Amendment 
No. 6.
    \44\ This provision supersedes the change in Amendment No. 4 to 
CBOE Rule 8.60(f) that specified that Market Participants may appeal 
Committee action taken under CBOE Rule 8.60(c)(1) through (4) 
directly to the Board of Directors.
    \45\ 15 U.S.C. 78s(b)(2).
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    In Amendment No. 7, proposed CBOE Rule 8.60(g) was amended to 
clarify that Committee actions taken after an informal meeting in 
accordance with CBOE Rule 8.60(c)(5) through (11) may be appealed in 
accordance with Chapter XIX of the Exchange Rules. The Commission finds 
that the proposed change in Amendment No. 7 serves to clarify the 
intent and application of the proposal. Thus, the Commission finds that 
the granting accelerated approval to Amendment No. 7 is appropriate and 
consistent with section 19(b)(2) of the Act.\46\
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    \46\ 15 U.S.C. 78s(b)(2).
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VI. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment Nos. 1, 2, 3, 4, 5, 6, and 7, including 
whether the proposed amendments are 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 CBOE. All 
submissions should refer to File No. SR-CBOE-98-46 and should be 
submitted by January 21, 2001.

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\47\ that the proposed rule change, as amended, (SR-CBOE-98-46) is 
approved.
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    \47\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\48\
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    \48\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-33118 Filed 12-27-00; 8:45 am]
BILLING CODE 8010-01-M