[Federal Register Volume 66, Number 72 (Friday, April 13, 2001)]
[Notices]
[Pages 19262-19263]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-9168]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44152; File No. SR-CBOE-00-13]


Self Regulatory Organizations; Order Approving Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Amending Procedures 
and Requirements for Trading in Joint Accounts in Equity and Index 
Options

April 5, 2001.

I. Introduction

    On April 3, 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 to amend the procedures and 
requirements for trading in joint accounts in equity and index options. 
On January 8, 2001, the CBOE filed Amendment No. 1 with the 
Commission.\3\ The proposed rule change was published for comment in 
the Federal Register on February 27, 2001.\4\ No comments were received 
on the proposal.\5\ 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\ Letter from Timothy Thompson, Assistant General Counsel, 
Legal Department, CBOE, to Deborah Flynn, Senior Special Counsel, 
Division of Market Regulation (``Division''), Commission, dated 
October 23, 2000 (``Amendment No. 1''). In response to comments from 
Commission staff, the Exchange submitted Amendment No. 1, which: (1) 
represents that staff at the American Stock Exchange LLC, 
International Securities Exchange LLC, Pacific Exchange, Inc., and 
Philadelphia Stock Exchange, Inc. have informed the CBOE that their 
respective regulatory policies do not include any specific rule or 
regulatory circular that prohibits trading between joint accounts 
with common participants or that addresses ``wash sale'' 
transactions (i.e., a transaction in a registered security that 
involves no change in beneficial ownership, for the purpose of 
creating a false or misleading appearance of active trading); (2) 
represents that the proposed rule change makes the CBOE's rules and 
regulatory policies regarding transactions between related accounts 
or entities consistent with those in place at the other options 
exchanges; and (3) provides three letters that were submitted by 
CBOE members to the Exchange in support of the rule filing.
    \4\ Securities Exchange Act Release No. 43984 (February 20, 
2001), 66 FR 12574 (February 27, 2001).
    \5\ Although the Commission received no comments on the 
proposal, three letters were sent to the CBOE and forwarded to the 
Commission. See letters from Patricia Levy, General Counsel, and 
Steven O'Malley, Compliance & Regulatory Officer, Hull Trading 
Company, LLC, to Mary Bender, Senior Vice President, Division of 
Regulatory Services, CBOE, dated August 13, 1999; Michael J. 
Carusillo, Chief Executive Officer, and Barbara McHugh, President, 
Fulcrum Investment Group, LLC, to Pat Cerny, CBOE, dated July 17, 
1998; and William J. Shimanek, Kessler, Asher Clearing, to Pat 
Cerny, CBOE, dated April 24, 1996. See also Amendment No. 1, supra 
note 3.
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II. Description of the Proposal

    The CBOE proposes to amend Interpretation .06 to Exchange Rule 8.9 
and Exchange Regulatory Circulars RG 98-94 and RG 98-95, which set 
forth Exchange procedures and requirements for trading in joint 
accounts in equity and index options, to allow certain transactions 
between joint accounts that have common participants.
    In early 1980s, the CBOE adopted a regulatory interpretation that 
prohibited trading between related accounts with greater than 10% 
common ownership. The Exchange later amended Interpretation .06 to 
Exchange Rule 8.9 (Securities Accounts and Orders of Market-Makers) to 
extend this trading prohibition to market maker joint accounts that 
have common participants.\6\ Interpretation .06 to Exchange Rule 8.9 
and Exchange Regulatory Circulars \7\ state that ``no joint account 
participant shall cause a transaction to be executed for the joint 
account with another member acting on behalf of another joint account 
if the member knows, or in the exercise of reasonable care under the 
circumstances, the member has reason to know that the two joint 
accounts have one or more common participants.'' \8\
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    \6\ See Securities Exchange Act Release No. 38286 (February 13, 
1997), 62 FR 8287 (February 24, 1997) (SR-CBOE-96-70).
    \7\ The Regulatory Circular governing joint account trading in 
certain index options was approved in Securities Exchange Act 
Release No. 31174 (September 10, 1992), 57 FR 42789 (September 16, 
1992). The Regulatory Circular governing joint account trading in 
equity options was approved in Securities Exchange Act Release No. 
36977 (March 15, 1996), 61 FR 11911 (March 22, 1996).
    \8\ CBOE Rule 8.9, Interpretation .06.

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[[Page 19263]]

    The Exchange now proposes to alter its long-standing regulatory 
interpretation so that certain transactions effected between joint 
accounts with common participants would be permitted, provided that 
such transactions are effected within Exchange rules. The proposal 
would enable common participants to trade between related joint 
accounts that are used as financing vehicles without violating Exchange 
Rule 8.9. The following activity would be permitted: (1) Trading 
between different market makers or other broker/dealer accounts that 
are financed by the same member where there is no common control over 
the trading activity in those accounts; and (2) trading between 
independently operated subsidiaries (i.e., separate broker/dealers) of 
the same parent or holding company.\9\
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    \9\ The Exchange represented that it will issue a regulatory 
circular informing members of permitted and prohibited trading 
activity among joint accounts.
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    The Exchange, however, would continue to prohibit the following 
activity: (1) Market makers trading with their joint account, even 
though their percentage of ownership is less than 100% (for instance, 
market maker ABC finances market maker XYZ via a joint account and ABC 
is a participant in the joint account. Ownership is 50% and XYZ makes 
his own trading decisions. ABC is still prohibited from trading 
directly with the joint account of which he is a member); (2) nominees 
of the same entity trading with each other on behalf of the entity; (3) 
firm traders employed by the same broker/dealer on different trading 
desks trading together, regardless of whether they are separate profit 
centers; and (4) spouses trading together.

III. Discussion

    The Commission finds that the proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\10\ Specifically, the 
Commission believes that the proposal is consistent with Section 6(b) 
of the Act,\11\ in general, and furthers the objectives of Section 
6(b)(5),\12\ in particular, in that it is designed 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. The 
Commission notes that the proposal responds to concerns of CBOE's 
membership that its current interpretation of a wash sale does not 
promote a level playing field for its members vis-a-vis other 
exchanges' members. The Commission also notes that while the proposal 
would permit certain transactions between joint accounts with common 
participants, such transactions would be required to be effected within 
Commission and Exchange rules. Under the proposal, transactions between 
related joint accounts that are conducted for an improper purpose, such 
as trades executed to create a false and misleading appearance of 
activity, would continue to violate Exchange Rule 4.1 (Just and 
Equitable Principles of Trade). The Commission expects that the CBOE's 
Department of Market Regulation will continue to monitor vigorously 
trading between accounts with common beneficial ownership for trading 
abuses.
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    \10\ In approving this rule, the Commission has considered the 
proposed rule change's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-CBOE-00-13) is approved, as 
amended.
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    \13\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-9168 Filed 4-12-01; 8:45 am]
BILLING CODE 8010-01-M