[Federal Register Volume 66, Number 12 (Thursday, January 18, 2001)]
[Notices]
[Pages 4874-4877]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-1407]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43827; File No. SR-CBOE-00-60]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. To Change Its 
Membership Application Posting Process and Clarify Its Membership Rules

January 9, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 22, 2000, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposes to change its membership application posting 
process and to make some clarifying revisions to its membership rules.
    Below is the text of the proposed rule change. Proposed new 
language is italicized and proposed deletions are in brackets.

Chicago Board Options Exchange, Incorporated--Rules

* * * * *
Chapter III--Membership
* * * * *

Application Procedures and Approval or Disapproval

Rule 3.9.
    (a)-(d) Unchanged.
    (e) Within a reasonable time following receipt of an application 
for membership from an applicant that has not been a member within 6 
months prior to the date of receipt of the application by the 
Membership Department[, an application to change membership capacity 
statutes set forth in Rule 3.2(b) or 3.3(b),] or an application to 
change Clearing Members, the name of the applicant and the application 
request shall be published in the Exchange Bulletin and posted on the 
Exchange Bulletin Board. The Membership Committee shall determine for 
each type of the foregoing applications the required time period that 
the above information must be posted on the Exchange Bulletin Board, 
provided that in no event shall any such required posting period be 
less than 10 days. Notwithstanding the foregoing, the required posting 
period for a member's application to change Clearing Members shall be 
waived if the Clearing Member(s) that will no longer be guaranteeing 
the member's Exchange transactions consent to such waiver in a form and 
manner prescribed by the Exchange. The Membership Committee may also 
determine to implement a posting period requirement for other types of 
applications submitted pursuant to paragraph (a) of this Rule. The 
Membership Committee may shorten or waive a required posting period for 
an applicant if the Membership Committee determines that doing so is 
warranted due to extenuating circumstances.
    (f) The Membership Department shall investigate each applicant 
applying to be a member organization, each associated person required 
to be approved by the Membership Committee pursuant to Rule 3.6(b), and 
each applicant applying to be an individual member (with the exception 
of any associated person applicant that is a current member, any 
[individual] member applicant that [who] was a [an individual] member 
within 6 months prior to the date of receipt of that applicant's 
membership application by the Membership Department, and any member or 
associated person applicant that was investigated by the Membership 
Department within 6 months prior to the date of receipt of that 
applicant's application by the Membership Department). The Membership 
Department may [also] investigate any applicant that is not required to 
be investigated pursuant to this paragraph (f) and any other person or 
organization that submits an application pursuant to paragraph (a) of 
this Rule.
    (g) Unchanged.
    (h) The Membership Committee may approve an application submitted 
pursuant to paragraph (a) of this Rule only if any applicable posting 
period requirement pursuant to paragraph (e) of this Rule has been 
satisfied, any investigation pursuant to paragraph (f) of this Rule has 
been completed, and any applicable orientation and exam requirements 
pursuant to paragraph (g) of this Rule have been satisfied.
* * * Interpretations and Policies:
    .01-.02  Unchanged.
* * * * *

Purchase of Membership

Rule 3.13.
    (a)-(b) Unchanged.
    (c) Payment. Not later than the second business day following the 
acceptance of a bid pursuant to paragraph (a) of this Rule or the 
matching of a bid and offer pursuant to paragraph (b) of this Rule, the 
purchaser shall deliver to the Membership Department a certified or 
cashier's check in the amount of the purchase price made payable to the 
Exchange [covering the purchase price of the membership] or complete a 
wire transfer in the amount of the purchase price to an Exchange 
account designated the Exchange.

Sale and Transfer of Membership

Rule 3.14.
    (a)-(b) Unchanged.
    (c) Transfer by Owner. The owner of a transferable membership may 
transfer the membership without adhering to the provisions contained in 
Rule 3.13(b) and paragraph (a) of this Rule so long as one of the 
following qualifying circumstances is applicable to and descriptive of 
the desired transfer and the transferee is approved to be an owner or 
lessor:
    (i) The owner of a transferable membership (whether or not the 
membership is registered for a member organization) requests the 
transfer of the membership to the member's spouse, brother, sister, 
parent, child, grandparent, or grandchild;
    (ii) The owner of a transferable membership requests the transfer 
of the membership to an organization which has succeeded, through 
statutory merger, exchange of stock, or acquisition of assets to the 
business of the transferor;
    (iii) The owner of a transferable membership requests the transfer 
of the

[[Page 4875]]

membership to an organization in which the transferor will maintain an 
interest at least equal in value to the current market price of the 
membership; or
    (iv) The owner of a transferable membership requests the transfer 
of such membership to an individual or organization which is a partner 
or shareholder with a 50% or greater interest in [of] the transferor as 
part or all of a [liquidation] distribution of the transferor.
    (d)(i)-(d)(vii) Unchanged.
    (viii) The grant of an Authorization to Sell a membership shall 
include the grant of a security interest (A) in any proceeds from the 
sale of the membership that the grantee of the Authorization to Sell is 
entitled to receive pursuant to Rule 3.15(v)[,] and (B) in the 
membership to the extent necessary to establish the priority of the 
preceding security interest in such proceeds. A [a] properly executed 
Authorization to Sell form that has been filed with the Membership 
Department shall constitute a security agreement which grants the 
foregoing security interest to the grantee of the Authorization to 
Sell. The grantee of an Authorization to Sell may act to perfect the 
foregoing security interest under applicable law, which may include the 
filing of one or more UCC-1 Financing Statements. However, failure by a 
grantee of an Authorization to Sell to perfect the foregoing security 
interest under applicable law shall not affect the rights of the 
grantee under the Rules. In the event of a cancellation of an 
Authorization to Sell pursuant to paragraph (d)(iv) of this Rule, the 
grantee of the Authorization to Sell shall promptly file a Termination 
Statement with every filing authority where UCC-1 Financing Statement 
were filed with respect to the Authorization to Sell. The grantee of an 
Authorization to Sell shall promptly file with the Membership 
Department a file-stamped copy of any UCC filings made with respect to 
the Authorization to Sell.
* * * * *

Member Death Benefit

Rule 3.24
    (a) Unchanged.
    (b) The following individuals shall be eligible for the Member 
Death Benefit:
    (i) any individual who is an active member at the time of his or 
her death; and
    (ii) any individual who (i) was an active member within 90 days 
prior to the date of his or her death and (ii) was an active member 
during at least 274 out of 365 days preceding the date of his or her 
last termination from active member status.
    (c) For the purposes of this Rule, the term ``active member'' shall 
mean any individual member [natural person] who is a nominee of a 
member organization, a Chicago Board of Trade exerciser, a lessee of an 
Exchange membership, or an owner of an Exchange membership that is not 
being leased to a lessee.
    (d)-(e) Unchanged.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this proposed rule change is to change the 
Exchange's membership application posting process and to make some 
clarifying revisions to the Exchange's membership rules.
    CBOE Rule 3.9(e) requires that a posting be included in the 
Exchange Bulletin and on the Exchange Bulletin Board with respect to 
any application for membership, any application from a current member 
to change membership capacity statuses, and any application to change 
Clearing Members (unless the posting is waived under certain specified 
circumstances in accordance with the provisions of the Rule). CBOE Rule 
3.9(e) also provides that the posting period on the Exchange Bulletin 
Board be no less than ten days, and that the Exchange's Membership 
Committee shall determine the required posting period for each of these 
types of applications in conformity with this minimum time period. The 
posting period for each of these application categories is fourteen 
days. The posting is required to set forth the name of the applicant 
and the application request, and its purpose is to provide members with 
an opportunity to submit information concerning an applicant that may 
bear on the applicant's qualifications and fitness for membership under 
the Exchange's rules. Under CBOE Rule 3.9(h), an application may not be 
approved, among other things, until any applicable posting requirement 
has been satisfied.
    There are two related factors that have caused the Exchange to 
propose changing its membership application posting process. First, the 
Exchange receives no submissions from members in response to the 
postings for the vast majority of applicants that are posted to the 
membership on the Exchange's Bulletin Board as part of the posting 
process. Second, the Exchange has a less extensive and shorter 
application process for current members that are applying to change 
membership capacity statutes and for member applicants that have been a 
member within the prior six months. In most cases, the Exchange is able 
to process these applications well before the expiration of the posting 
period. According, the vast majority of these applicants are required 
to wait for a period of time following the completion of the processing 
of their applications for their new membership capacities to become 
effective. This results in inefficiency in the conduct of business on 
the Exchange as well as inconvenience to these applicants.
    As a result, the Exchange is proposing to change its membership 
application posting process in a manner that seeks to eliminate this 
inefficiency and inconvenience while at the same time preserving the 
ability of members to submit information concerning the qualifications 
and fitness for membership of applicants. Specifically, the Exchange is 
proposing to amend CBOE Rule 3.9(e) to eliminate the requirement that 
there be a posting period for current members that are applying to 
change membership capacity statuses and for member applicants that have 
been a member within the prior six months. Additionally, the Exchange 
intends to notify its membership via circular that the Membership 
Department will accept submissions concerning any current or former 
member at any time (in contrast to the current limited formal 
submission period during the posting period) and that these submissions 
will be retained in the member's membership file.\3\ Subsequently, if a 
current or former member submits any membership

[[Page 4876]]

application and there is a submission for that current or former member 
in the membership file at the time of submission of the application, 
the submission concerning that current or former member will be 
reviewed and considered in the same manner that occurs under the 
posting process.
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    \3\ The CBOE indicated that the circular will be detailed and 
widely disseminated. The circular will be attached to the back of 
the CBOE rule book and made readily available to the public. 
Telephone conversation between Arthur Reinstein, Associate General 
Counsel, CBOE, and Sapna C. Patel, Attorney, Division of Market 
Regulation, Commission (Jan. 5, 2001).
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    The Exchange is proposing to retain the posting period requirement 
for new membership applicants (i.e., those membership applicants that 
have never been a member or that have not been a member within the 
prior six months). The posting period generally does not result in a 
delay in processing these applications because they are subject to a 
more extensive and longer application process that takes in excess of 
fourteen days (during which there is adequate time to complete a 
fourteen day posting). In addition, the Exchange is proposing to retain 
the posting period for an application to change Clearing Members (which 
in the vast majority of cases is waived pursuant to the current 
provision of CBOE Rule 3.9(e), which provides for the waiver of this 
posting period if the Clearing Member(s) that will no longer be 
guaranteeing the member's Exchange transactions consents to such a 
waiver).
    The Exchange is also proposing to make the following clarifying 
changes to its membership rules:
    First, the Exchange is proposing to revise CBOE Rule 3.9(f) to 
clarify those categories of membership applicants for which the 
Exchange does not conduct a background investigation due to the fact 
that the applicant is a current member, the applicant was recently a 
member, or the Exchange recently conducted a background investigation 
concerning the applicant. Specifically, CBOE is proposing to revise 
Rule 3.9(f) to clarify that the Membership Department is not required 
under CBOE Rule 3.9(f) to investigate the following categories of 
applicants: (i) Any associated person applicant that is a current 
member, (ii) any member applicant that was a member within six months 
prior to the date of receipt of that applicant's membership application 
by the Membership Department, and (iii) any member or associated person 
applicant that was investigated by the Membership Department within six 
months prior to the date of receipt of that applicant's application by 
the Membership Department. In addition, CBOE is proposing to revise 
Rule 3.9(f) to clarify that the Membership Department retains the 
discretion to investigate any applicant that is not required to be 
investigated under CBOE Rule 3.9(f) if the Membership Department 
determines that a background investigation is warranted under the 
circumstances.
    Second, CBOE is proposing to revise Rule 3.13(c) to clarify that 
the Exchange will accept payment for the purchase of a membership by a 
certified or cashier's check or via a wire transfer.
    Third, the Exchange is proposing to clarify the provisions of CBOE 
Rule 3.14(c)(iv). CBOE Rule 3.14(c)(iv) sets forth one of the four 
circumstances pursuant to which a membership may be transferred without 
going through the normal auction process for the purchase and sale of 
Exchange memberships. Specifically, CBOE Rule 3.14(c)(iv) provides that 
the owner of a transferable membership may request the transfer of the 
membership to an individual or organization which is a partner or 
shareholder of the transferor as part or all of a distribution of the 
transferor. Under CBOE Rule 3.3.01, the transferee could also be a 
limited liability company member if the transferor were a limited 
liability company. CBOE is proposing to clarify Rule 3.14(c)(iv) in two 
respects. First, CBOE is proposing to revise Rule 3.14(c)(iv) to 
clarify that the transferee must have at least a fifty percent interest 
in the transferor. Without this provision, a person could avoid the 
normal membership auction process by becoming a nominal partner or 
shareholder in a member organization and then having the member 
organization transfer the membership to that partner or shareholder. 
Second, CBOE is proposing to revise Rule 3.14(c)(iv) to delete the word 
``liquidation'' due to the fact that it results in confusion as to what 
constitutes a liquidation distribution and what constitutes a non-
liquidation distribution (given that an entity can have partial 
liquidation in which it does not distribute all of its assets and 
continues in operation following the partial liquidation). Because the 
Exchange has interpreted Rule 3.14(c)(iv) to permit membership 
transfers in connection with partial liquidation distributions, and 
because the Exchange believes there is no meaningful distinction in 
this context between a partial liquidation distribution and a regular 
distribution, the Exchange is proposing to delete the word 
``liquidation'' to make it easier for members to understand CBOE Rule 
3.14(c)(iv).
    Fourth, the Exchange is proposing to clarify the nature of the 
security interest received by the grantee of an Authorization to Sell 
under CBOE Rule 3.14(d)(viii). CBOE Rule 3.14(d) provides an owner of a 
transferable membership the ability to voluntarily grant to another 
member an Authorization to Sell the membership. The grantee of an 
Authorization to Sell is vested with all of the authority provided for 
under the Exchange's Constitution and Rules relating to the sale of the 
membership. The grantee of an Authorization to Sell also has the right 
on the sale of the membership to submit claims against the grantor 
pursuant to CBOE Rule 3.15(b), to be satisfied out of the proceeds of 
the sale of the membership, that are related to the grantor's Exchange 
business activities. CBOE Rule 3.14(d)(viii) provides that the grant of 
an Authorization to Sell a membership includes the grant of a security 
interest in any proceeds from the sale of the membership that the 
grantee of the Authorization to Sell is entitled to receive under CBOE 
Rule 3.15(b). The exchange is proposing to revise CBOE Rule 
3.14(d)(viii) to clarify that the grant of an Authorization to Sell 
also includes the grant of a security interest in the membership itself 
to the extent necessary to establish the priority of the security 
interest in the membership sale proceeds the grantee is entitled to 
receive under CBOE Rule 3.15(b). The Exchange has interpreted CBOE Rule 
3.14(d)(viii) to provide for such a security interest in the membership 
itself and believes that the grant of such a security interest is 
fairly and reasonably implied from the existing language of CBOE Rule 
3.14(d)(viii). The Exchange is simply proposing to revise CBOE Rule 
3.14(d)(viii) to make the language of CBOE Rule 3.14(d)(viii) more 
explicit in this regard.
    Finally, the Exchange is proposing to revise CBOE Rule 3.24, the 
Exchange's Member Death Benefit Rule, to make clear that the term 
``active member'' under that Rule only includes individual members and 
is not intended to include associated persons who are not individual 
members pursuant to the Exchange's Rules. Specifically, the definition 
of the term ``active member'' in CBOE Rule 3.24(c) would be revised to 
replace the words ``natural person'' in that definition with the words 
``individual member.'' The remainder of the definition of ``active 
member'' in CBOE Rule 3.24(c) would not be revised. Thus, as revised, 
the definition of ``active member'' contained in CBOE Rule 3.24(c) 
would state that the term ``active member'' shall mean any individual 
member who is a nominee of a member organization, a Chicago Board of 
Trade exerciser, a lessee of an Exchange membership, or an owner of an 
Exchange membership that is not being leased to a lessee. CBOE Rule 
3.24(b) provides that the following

[[Page 4877]]

individuals are eligible for the member Death Benefit: (i) Any 
individual who is an active member at the time of his or her death; and 
(ii) any individual who (a) was an active member within ninety days 
prior to the date of his or her death, and (b) was an active member 
during at least 274 out of the 365 days preceding the date of his or 
her termination from active member status.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \4\ in general, and in particular, with Section 
6(b)(5) of the Act,\5\ in that it is designed to remove impediments to 
and perfect the mechanism of a free and open market and to protect 
investors and the public interest. The proposed rule change seeks to 
revise the Exchange's membership application posting process in a 
manner that will reduce inefficiency in the conduct of business on the 
Exchange and inconvenience to membership applicants while preserving 
the ability of members to submit information concerning the 
qualifications and fitness for membership of membership applicants. The 
proposed rule change will also clarify certain provisions of the 
Exchange's membership rules making it easier for members to understand 
those rules.
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    \4\ 15 U.S.C. 78f(b).
    \5\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change 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 
statement 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-00-60 and should 
be submitted by February 8, 2001.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-1407 Filed 1-17-01; 8:45 am]
BILLING CODE 8010-01-M