[Federal Register Volume 66, Number 49 (Tuesday, March 13, 2001)]
[Notices]
[Pages 14611-14613]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-6191]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44043; File No. SR-CBOE-00-61]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. to Change the 
Capitalization Transfer Fee Applicable to Designated Primary Market 
Makers

March 6, 2001

I. Introduction

    On November 22, 2000, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act''), \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change regarding application of the fee 
for changes in ownership of Designated Primary Market Makers 
(``DPMs''). On December 4, 2000, the Exchange submitted Amendment No. 1 
to the proposed rule change.\3\ On December 13, 2000, the Exchange 
submitted Amendment No. 2 to the proposed rule change.\4\ On January 
10, 2001, the Exchange submitted Amendment No. 3 to the proposed rule 
change.\5\ The proposed rule change, as amended, was published in the 
Federal Register on January 22, 2001.\6\ The Commission received 21 
comment letters on the proposed rule change. Nineteen were submitted by 
DPMs, one by members of the CBOE Modified Trading System (``MTS'') 
Committee for the years 2000 and 2001, and one was submitted by a CBOE 
member.\7\ This order approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Steve Youhn, Attorney, CBOE, to Deborah 
Flynn, Senior Special Counsel, Division of Market Regulation 
(``Division''), SEC, dated December 1, 2000.
    \4\ See letter from Steve Youhn, Attorney, CBOE, to Deborah 
Flynn, Senior Special Counsel, Division, SEC, dated December 8, 
2000.
    \5\ See letter from Steve Youhn, Attorney, CBOE, to Deborah 
Flynn, Senior Counsel, Division, SEC, dated December 28, 2000.
    \6\ See Securities Exchange Act Release No. 43839 (January 12, 
2001), 66 FR 6715 (``Notice'').
    \7\ See letters to Jonathan G. Katz, Secretary, SEC, from 
Lawrence J. Blum, dated November 24, 2000; William O'Keefe, et al, 
members of the 2000 and 2001 MTS Committees, dated February 7, 2001; 
Daniel F. O'Neill and Peter J. Gancer, Managing Members, Midway 
Securities, LLC, dated February 9, 2001; Marc Brown, Brown Trading 
Group, dated February 8, 2001; Lee E. Tenzer, Chairman, Lee E. 
Tenzer Trading Company, dated February 9, 2001; Daniel Koutris, et 
al, Managing Members, KFT DPM, LLC, dated February 9, 2001; John 
Henkel, Managing Member, Midwest Partners, LLC, dated February 8, 
2001; Michael G. Vitek, President, Botta Capital Management, LLC, 
dated February 12, 2001; Mark Wolicki, et al, RTB Derivatives, LLC, 
dated February 5, 2001; Bradley Griffith, Managing Member, 
Specialists DPM, LLC, dated February 8, 2001; Boris Furman, Managing 
Member, Furman Trading, LLC, dated February 9, 2001; David Barclay, 
General Counsel, LaRocque Trading Group, LLC, dated February 9, 
2001; Ethan Schwartz, Managing Member, Schwartz Trading Group LLC, 
dated February 9, 2001; Keith Hoglund, et al, General Partners, 
Rathunas Trading, L.L.C., dated February 8, 2001; Joseph Feldman, 
Manager, Bridgeport DPM, LLC, received February 15, 2001; J. 
Monville Henige, President, O'Connor Specialists, LLC, on behalf of 
the members of O'Connor Specialists, LLC; Rathunas LLC, StoneHedge, 
Securities, LLC, TradeNet, LLC, Option Funding Group, LP, Prime 
Markets, LLC, Callahan DPM, LLC, Hiland Capital, LLC and O'Connor 
and Company, LLC, dated February 8, 2001. Copies of the comment 
letters are available in the Commission's Public Reference Room.
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II. Description of the Proposed Rule Change

    In 1999, CBOE instituted a floor-wide DPM system and awarded the 
appointment of options classes to DPMs at no cost in exchange for a 
long-term commitment to the Exchange and a fee on subsequent changes of 
ownership (``transfer fee''). The transfer fee, contained in 
Interpretation and Policy .02 to CBOE Rule 8.89, is imposed on DPMs 
that undergo changes in their

[[Page 14612]]

capitalizations during a determined five-year period.\8\
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    \8\ See Securities Exchange Act Release No. 43186 (August 21, 
2000), 65 FR 51880 (August 25, 2000) (order approving current 
transfer fee).
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    Currently, the transfer fee is assessed on those DPMs that have 
been allocated one or more options classes that have traded on the CBOE 
prior to June 29, 1999, so long as the allocation of the pre-June 29, 
1999 options class was effected subsequent to June 29, 1999. The 
Exchange currently defines a change in capitalization broadly to 
include any sale, transfer, or assignment of any ownership interest in 
the DPM or any change in the DPM's capital structure, voting authority, 
or distribution of profits or losses.
    The Exchange has proposed to modify the transfer fee to permit a 
DPM to add new capital, to make small changes in ownership or profit 
sharing, to replace a capital partner, or to merge with other DPMs 
(where all pre-existing partners continue their participation in the 
new DPM), without triggering the transfer fee. A transfer fee would, 
however, continue to be assessed in cases where a principal of a DPM 
exists or significantly reduces its participation in its DPM operation.
    Accordingly, CBOE proposes to modify Interpretation .02 to its Rule 
8.89 to allow the MTS Committee to analyze each proposed transaction to 
determine the transfer fee should be applied. To that end, a non-
exhaustive list of factors to be considered in making the determination 
would be added to the Interpretation. The Exchange also proposes to 
change the existing formula contained in Interpretation .02(c) to CBOE 
Rule 8.89 for determining the amount of the transfer fee. The Exchange 
also proposes to amend section (f) of Rule 8.89 to allow the Exchange's 
Board of Directors, whether by appeal or on its own initiative, to 
review the application and amounts of transfer fees.
    Finally, CBOE has proposed to make the effective date of this 
proposal retroactive to October 20, 2000, in order to avoid assessing 
the original transfer fee on the sole transaction that occurred since 
its inception.

III. Summary of Comments

    The majority of the letters received by the Commission supported 
the proposed rule change.\9\ All of the favorable or supporting 
commenters asserted that the proposed rule change would permit the 
Exchange greater flexibility in administering the fee, would allow DPMs 
to structure their businesses and bolster their capital without 
incurring fees, and would preserve the original purposes the fee was 
meant to serve. One commenter argued that the SEC should deny the 
Exchange's classification of the filing as effective upon filing.\10\
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    \9\ See note 7 supra.
    \10\ See Blum letter, note 7 supra. The commenter's concern was 
addressed by the Exchange in Amendment No. 1, which re-classified 
the filing as submitted pursuant to Section 19(b)(2) of the Act, 
rather than Section 19(b)(3)(A) of the Act.
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IV. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\11\ In particular, the Commission believes that the proposal 
is consistent with section 6(b)(5) of the Act,\12\ which requires, 
among other things, that the rules of an exchange be designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market, and to protect 
investors and the public interest.
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    \11\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78(c)(f).
    \12\ 15 U.S.C. 78f(b)(5).
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    Pursuant to the proposed changes, the transfer fee would no longer 
be imposed automatically for all transfers of interest in a DPM. 
Rather, each transfer of interest would be reviewed by the MTS 
Committee, which would determine whether the transfer fee should be 
imposed. The MTS Committee is composed of the Vice-Chairman of the 
Exchange, the Chairman of the Market Performance Committee, and nine 
members. By rule, the elected members must include specific numbers of 
DPMs, floor brokers and market makers.\13\ The members of the MTS 
Committee are subject to the requirements of CBOE's recusal 
standards.\14\ The MTS Committee would evaluate the transfer in light 
of the non-exhaustive list of factors proposed to be added to 
Interpretation .02 to CBOE Rule 8.89. The Commission believes that the 
MTS Committee's recusal standards and membership structure should 
protect the integrity and fairness of its decisions.
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    \13\ See CBOE Rule 8.82.
    \14\ See CBOE Regulatory Circular RG 96-81 (September 12, 1996).
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    The Commission believes that these proposed changes should permit 
the Exchange more flexibility in the administration of the fee, while 
preserving its original purposes.\15\ The Commission believes that the 
procedure for review by the MTS Committee should help to ensure the fee 
is applied only on those occasions necessary to preserve the interests 
originally identified by the Exchange, such as those instances where 
one or more principals in the DPM exit or significantly reduce their 
participation in the DPM operation, and not where DPMs only seek 
changes to their capital structure in their efforts to remain 
competitive. The factors enumerated in the Interpretation should 
provide appropriate guidance to the MTS Committee for this purpose.
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    \15\ According to the Exchange, the rule has three primary 
purposes: (1) to provide an incentive for DPMs to sufficiently 
capitalize their operations; (2) to recognize that DPMs receive 
allocations of options classes without paying any consideration, 
thus the fee is intended to discourage DPMs from profiting from 
their allocations by transferring interests in their operations; and 
(3) to assure the DPM has a long-term commitment to the Exchange.
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    The addition of procedures for review by the Board of Directors of 
the Exchange is also appropriate. Under the proposal, the Board of 
Directors could review the MTS Committee's decision as to whether to 
impose the fee, and the amount assessed. An aggrieved party, as 
described in Chapter XIX of the Exchange's rules, may request a review 
by the Board of Directors, or the Board on its own initiative may 
decide to review the MTS Committee's decision. The Commission finds 
that these changes are appropriate because they provide additional 
safeguards to ensure that the decisions of the MTS Committee are fair, 
equitable, and in accordance with the purposes of the transfer fee.
    The Commission further finds that CBOE's proposed changes to the 
formula for assessing the amount of the fee are reasonable. These 
changes would, in general, serve to simplify the calculation of the 
fee, and reduce the amounts of any fees imposed. By setting forth a 
formula in its rules, the Exchange should be able to ensure that the 
transfer fee is calculated consistently and applied to all DPMs that 
are subject to the transfer fee in a reasonable manner. Therefore, the 
Commission believes that these changes to the formula are consistent 
with Section 6(b)(4) of the Act.\16\ The Commission further notes that 
keeping the formula in the text of Interpretation .02 to Rule 8.89 
should permit any DPM contemplating a change in its capital structure 
to ascertain what costs may be incurred, which the Commission believes 
is appropriate.
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    \16\ 15 U.S.C. 78f(b)(4).

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[[Page 14613]]

    The Exchange's proposal to make the new transfer fee effective as 
of October 20, 2000 is reasonable. According to the Exchange, if the 
proposal is not effective retroactively, only one change in 
capitalization would be subject to the current transfer fee. The 
Commission agrees that this result would be inequitable, and therefore 
believes that it is appropriate to make the new transfer fee effective 
as of October 20, 2000. In addition, this proposed change should 
promote uniformity of treatment for all evaluations of transfers of 
interest in DPMs.
    The Commission believes that the rule, as amended, should preserve 
the original purposes of the transfer fee. Thus, the amended rule 
should still serve the CBOE's interest in securing long-term 
commitments to the Exchange, and thereby ensure the orderly and 
effective operation of the market. Further, the fee should still 
provide incentives of DPMs to maintain sufficient capital to operate as 
a DPM, thereby ensuring greater liquidity and investor protection. 
Finally, the amended transfer fee should serve to compensate the 
Exchange for the fee allocation of a business that was established by a 
person or entities other than the DPM when the DPM sells its interest 
to other parties.

V. Conclusion

    For the foregoing reasons, the Commission finds that CBOE's 
proposal to change the capitalization transfer fee applicable to DPMs 
is consistent with the requirements of the Act and rules and 
regulations thereunder.
    It is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-CBOE-00-61), as amended, is 
approved.
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    \17\ 15 U.S.C. 78s(b)(2).


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(2).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-6191 Filed 3-12-01; 8:45 am]
BILLING CODE 8010-01-M