[Federal Register Volume 67, Number 31 (Thursday, February 14, 2002)]
[Notices]
[Pages 6958-6959]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-3631]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45427; File No. SR-CBOE-2001-71]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. to Incorporate 
Certain Principal Considerations in Determining Sanctions and to 
Incorporate in the Exchange's Minor Rule Violation Plan Violations of 
the Exchange's Order Handling Rules

February 8, 2002.
    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 December 26, 2001, the Chicago Board of 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 Exchange proposes to amend Exchange Rule 17.11 (Judgment and 
Sanction) to adopt sanctioning guidelines that the Exchange believes 
will promote consistency and uniformity in determining appropriate 
remedial sanctions through the resolution of disciplinary matters 
through offers of settlement or after formal disciplinary hearings. In 
addition, the Exchange proposes to amend Exchange Rule 17.50 
(Imposition of Fines for Minor Rule Violations) to incorporate in its 
Minor Rule Violation Plan violations of the Exchange's order handling 
rules. The text of the proposed rule change is available at the CBOE's 
Office of the Secretary 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 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 the proposed rule change is to amend CBOE Rule 17.11 
(Judgment and Sanction) to incorporate certain Principal Considerations 
in Determining Sanctions (``Principal Considerations'') to promote 
consistency and uniformity in determining appropriate remedial 
sanctions through the resolution of disciplinary matters through offers 
of settlement or after formal disciplinary hearings. In addition, the 
proposed rule change would amend CBOE Rule 17.50 (Imposition of Fines 
for Minor Rule Violations) to incorporate in its Minor Rule Violation 
Plan violations of the Exchange's order handling rules, including 
violations of firm quote requirements pursuant to Exchange Rule 8.51; 
failure to promptly book and display limit orders that would improve 
the disseminated quote pursuant to Exchange Rules 7.7 and 8.85(b); 
failure to honor the priority of marketable customer orders maintained 
in the Customer Limit Order Book pursuant to Exchange Rule 6.45; and 
failure to use due diligence in order execution pursuant to Rules 6.73 
and 8.85(b).
    The Exchange filed this proposed rule change in accordance with 
Section IV.B.i of the Commission's September 11, 2000 Order Instituting 
Administrative Proceedings Pursuant to Section 19(h)(1) of the 
Securities Exchange Act of 1934 (``Order''),\3\ which required the 
Exchange to adopt rules establishing, or modifying existing, 
sanctioning guidelines such that they are reasonably designed to 
effectively enforce compliance with options order handling rules. The 
Exchange believes that the Principal Considerations, as set forth in 
proposed Exchange Rule 17.11, codify the historical considerations the 
Exchange's Business Conduct Committee (``BCC'') has applied in 
determining appropriate sanctions.
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    \3\ See Securities Exchange Act Release No. 43268 (September 11, 
2000), Administrative Proceeding File No. 3-10282.
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    With respect to violations of the Exchange's order handling rules, 
the Exchange proposes that these violations covered under the plan 
should be included in a rolling twenty-four month ``look-back'' period. 
With respect to the failure to submit trade information on time and 
failure to submit trade information to the price reporter pursuant to 
Exchange Rule 6.51, the Exchange does not propose to amend the current 
``look-back'' period or fine schedule as set forth in Exchange Rule 
17.50(g)(4) at this time.\4\ With respect to fines imposed upon Market-
Makers or Floor Brokers for the conduct resulting in violations of the 
order handling rules as set forth in Exchange Rule 17.50(g)(5), the 
following fine schedule would be applied:
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    \4\ For violations of any of the Exchange's order handling 
rules, the BCC would consider the party's entire disciplinary 
history for purposes of determining whether violations should 
consitute a first, second or subsequent disciplinary action as set 
forth in CBOE's Internal BCC Sanction Guidelines. See letter from 
Pat Sexton, Assistant General Counsel, CBOE, to Deborah Lassman 
Flynn, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated February 8, 2002.

------------------------------------------------------------------------
   Number of offenses in any rolling
        twenty-four-month period                   Fine amount
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1st Offense............................  $500 to $1,500.
2nd Offense............................  $1,000 to $3,000.
3rd Offense............................  $2,000 to $5,000.
Subsequent Offenses....................  $3,500 to $5,000 or Referral to
                                          Business Conduct Committee.\5\
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    \5\ The Exchange has agreed to submit an amendment to clarify 
that after a maximum of 6 offenses, subsequent offenses would be 
referred to the BCC. See telephone conversation between Mary L. 
Bender, Senior Vice President and Chief Regulatory Officer, CBOE, 
and Deborah Flynn, Assistant Director, Division, Commission, on 
February 6, 2002.
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    The Exchange intends to use an automated surveillance program in 
the detection of order handling violations and a rolling twenty-four 
month look-back period in the determination of recidivist conduct.\6\ 
As a result, the

[[Page 6959]]

Exchange believes it is appropriate, at times, to aggregate individual 
violations of particular rules and treat such violations as a single 
offense.\7\ The Exchange believes that aggregation would enable its 
staff to analyze large amounts of regulatory data and craft appropriate 
remedies, including minor fines, without being held to rigid schedules 
or being required to bring formal disciplinary action based on a 
minimal number of surveillance breaks. Similarly, the Exchange would, 
if no exceptional circumstances are present, impose a fine based upon a 
determination that there exists a pattern or practice of violative 
conduct. The Exchange would also be permitted to aggregate similar 
violations if the conduct was unintentional, incurred no injury to 
public investors, or the violations resulted from a single systemic 
problem or cause that has been corrected.
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    \6\ The Exchange has agreed to submit an amendment to proposed 
Rule 17.50(a) to clarify this point. See telephone conversation 
between Mary L. Bender, Senior Vice President and Chief Regulatory 
Officer, CBOE, and Deborah Flynn, Assistant Director, Division, 
Commission, on February 6, 2002.
    \7\ The Exchange submitted to the Commission a letter, for which 
it requested confidential treatment, proposing how its regulatory 
staff would aggregate violations of the order handling rules, where 
the violations are identified through the Exchange's automated 
surveillance system. See letter from Mary L. Bender, Senior Vice 
President and Chief Regulatory Officer, CBOE, to John McCarthy, 
Associate Director, Office of Compliance, Inspections and 
Examinations, Commission, dated December 21, 2001.
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    According to the Exchange, the proposed change to Exchange Rule 
17.50 would allow any member who is issued a summary fine notice for 
conduct covered in paragraph (g)(5) of its rule, and also meets one of 
the levels described below, to have the opportunity to submit one 
written offer of settlement to the BCC in accordance with the 
provisions of Exchange Rule 17.8(a) (Submission of Offer), provided, 
however, that the Interpretations and Polices to Rule 17.8 would not 
apply to an offer made under Exchange Rule 17.50 and the member would 
be required to submit the offer within 30 days of the date of service 
of the written notice informing the member of the fine(s) imposed. The 
member would also be permitted to appear once before the BCC to make an 
oral statement in support of the offer. According to the Exchange, this 
is consistent with the current application of the rule as set forth in 
Exchange Rule 17.50 and Interpretation and Policy .01(b) under the 
Exchange's Minor Rule Violation Plan. Under the proposal, a member 
would be permitted to make one offer of settlement:
    (1) When the summary fine amount is greater than $2,500 but not 
more than $5,000 for a single offense, regardless of whether the single 
offense is the result of one violation or multiple violations 
aggregated together; or
    (2) When the total fine for multiple offenses is greater than 
$10,000 in the aggregate and not more than $5,000 for any single 
offense, again regardless of whether any single offense is the result 
of one violation or multiple violations aggregated together.
    The Exchange notes that to the extent that other Exchange rules or 
effective Regulatory Circulars include different schedules for summary 
fines related to the same types of conduct addressed herein, this rule 
change is intended to supersede all other existing provisions. Should 
the Commission approve this filing, the Exchange will file proposed 
rule changes effective upon filing to correct any discrepancies in the 
provisions of other Exchange rules or Regulatory Circulars.
(2) Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act,\8\ in general, and furthers the 
objectives of sections 6(b)(5) \9\ and 6(b)(7),\10\ in particular, in 
that it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, and processing information with respect to 
transactions in securities, to protect investors and the public 
interest, and enhances the effectiveness and fairness of the Exchange's 
disciplinary procedures. Lastly, the Exchange believes that the 
proposed rule change will refine and enhance the Exchange's Minor Rule 
Violation Plan to make it more efficient and effective.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 15 U.S.C. 78f(b)(7).
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B. Self-Regulatory Organization's Statement on Burden on 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

    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 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 
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 
Exchange. All submissions should refer to File No. SR-CBOE-2001-71 and 
should be submitted by March 7, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-3631 Filed 2-13-02; 8:45 am]
BILLING CODE 8010-01-U