[Federal Register Volume 66, Number 117 (Monday, June 18, 2001)]
[Notices]
[Pages 32853-32854]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-15220]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44408; File No. SR-CBOE-2001-14]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. To Amend Its Rules 
Regarding Jurisdiction Over Former Members and Associated Persons for 
Failure To Honor an Exchange Arbitration Award

June 11, 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 March 27, 2001, 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 CBOE. 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 amend its rules regarding jurisdiction over 
former members and associated persons for failure to honor an Exchange 
arbitration award.
    The text of the proposed rule change is available at the Office of 
the Secretary, CBOE and at the Commission.

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 CBOE 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 CBOE 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 Exchange proposed to amend its rules to provide that the 
failure to honor a CBOE arbitration award by a former Exchange member 
or associated person would subject such former member or associated 
person to the disciplinary jurisdiction of the Exchange regardless of 
the date of termination of membership.
    Chapter 18 of the Exchange's rules governs the CBOE's arbitration 
process. CBOE Rule 18.37 provides that any member or person associated 
with a member who fails to honor an Exchange arbitration award shall be 
subject to CBOE disciplinary proceedings. Furthermore, CBOE Rule 18.1, 
Interpretation and Policy .02 states that it may be deemed conduct 
inconsistent with just and equitable principles of trade to fail to 
honor a CBOE arbitration award. Conduct inconsistent with just and 
equitable principles of trade is a violation of Exchange Rule 4.1, and 
is thus subject to CBOE disciplinary proceedings.
    Chapter 17 of the Exchange's rules governs the CBOE disciplinary 
process. Generally, the Exchange maintains disciplinary jurisdiction 
over its members, and persons associated with its members, with respect 
to instances where members or associated persons are alleged to have 
violated or aided and abetted a violation of any provision of the Act, 
the rules and regulations promulgated thereunder, or any constitutional 
provisions, by-laws or rules of the Exchange or any interpretation 
thereof or resolution of the Board of the Exchange regulating the 
conduct of business on the Exchange.
    Thus, a member or person associated with a member who fails to 
honor an Exchange arbitration award has violated CBOE Rule 18.37 and 
CBOE Rule 4.1 and is subject to disciplinary proceedings under Chapter 
17. Currently, however, such failure to honor a CBOE arbitration award 
by a former member, or former person associated with a member, may not 
always be subject to the Exchange's disciplinary jurisdiction.
    CBOE Rule 17.1(b) provides that members (or associated persons) 
shall continue to be subject to the disciplinary jurisdiction of the 
Exchange following such member's (associated person's) termination of 
membership (association with a member) with respect to matters that 
occurred prior to such termination, provided that written notice of the 
commencement of an inquiry into such matters is given by the Exchange 
to such former member (person) within one year of the Exchange's 
receipt of notice of such termination. This provision allows for 
certain anomalies in the context of failure to pay arbitration awards. 
For example, the following scenario is possible: A customer is involved 
in a trading dispute with a CBOE member. Months later, the CBOE member 
terminates its membership on the Exchange. Weeks after the membership 
termination, the customer files an arbitration claim with the CBOE 
Arbitration Department against the former member.\3\ One and one-half 
years after the membership termination, the customer prevails in the 
arbitration proceeding, and a monetary award is

[[Page 32854]]

imposed against the former member. Nevertheless, the former member 
subsequently fails to honor the arbitration award. Because more than 
one year has lapsed since the former member's termination of membership 
and the Exchange did not provide written notice of the commencement of 
an inquiry into the failure to pay the award, the Exchange could not 
assert disciplinary jurisdiction over the former member. The Exchange 
believes this is problematic given the fact that the dispute concerned 
Exchange-related business, and that the award was pursuant to an 
Exchange arbitration proceeding.
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    \3\ CBOE Rule 18.1, Interpretation and Policy .01 provides, 
among other things, that former members and associated persons are 
subject to Exchange arbitration proceedings with respect to any 
dispute claim or controversy arising out of the Exchange business of 
such former member or associated person that took place while such 
member or associated person was still a member or associated person.
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    While the Exchange notes that the customer in the above example 
would be able to seek enforcement of the award in the court system, the 
inability of the Exchange to even potentially take disciplinary 
measures undermines the credibility of the CBOE arbitration forum. 
Therefore, the proposed rule change would essentially eliminate the 
notice requirement in Rule 17.1(b) solely with respect to instances 
where the Exchange seeks to take disciplinary measures with respect to 
a former member or person associated with a member for failure to honor 
an arbitration award pursuant to Chapter 18.
2. Statutory Basis
    The Exchange believes that the proposed rule change will strengthen 
the Exchange's arbitration process and allow the Exchange to take 
action for non-compliance with its arbitration rules. Accordingly, the 
Exchange believes 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, and, in particular, with 
the requirements of sections 6(b)(1),\4\ 6(b)(6),\5\ 6(d)(1) \6\ and 
19(d) of the Act.\7\
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    \4\ 15 U.S.C. 78f(b)(1).
    \5\ 15 U.S.C. 78f(b)(6).
    \6\ 15 U.S.C. 78f(d)(1).
    \7\ 15 U.S.C. 78s(d).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange represents that the proposed rule change will impose 
no burden on competition.

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

    No written comments were solicited or received with respect to 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 self-regulatory organization consents, the Commission will:
    A. by order approve the 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 
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 at the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Exchange.
    All submissions should refer to File No. SR-CBOE-2001-14 and should 
be submitted by July 9, 2001.

    For the Commission, by the Division of Market Regulations, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-15220 Filed 6-15-01; 8:45 am]
BILLING CODE 8010-01-M