[Federal Register Volume 67, Number 56 (Friday, March 22, 2002)]
[Notices]
[Pages 13382-13383]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-6898]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45571; File No. SR-CBOE-2001-71]


Self-Regulatory Organizations; Order Granting Accelerated 
Approval of Proposed Rule Change and Notice of Filing and Order 
Granting Accelerated Approval of Amendment No. 1 Thereto 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

March 15, 2002.

I. Introduction

    On December 26, 2001, 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 adopt sanctioning guidelines 
and to incorporate in its Minor Rule Violation Plan violations of the 
Exchange's order handling rules.\3\ The proposed rule change was 
published for comment in the Federal Register on February 14, 2002.\4\ 
On March 7, 2002, the Exchange filed Amendment No. 1 to the proposed 
rule change.\5\ No comments were received on the proposed rule change. 
This order granted accelerated approval to the proposed rule change and 
issues notice of filing and approves Amendment No. 1 on an accelerated 
basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Exchange filed this proposed rule change pursuant to the 
provisions of Section IV.B.i of the Commission's September 11, 2000 
Order Instituting Public Administrative Proceedings Pursuant to 
Section 19(h)(1) of the Act, 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. See Securities 
Exchange Act Release No. 43268 (September 11, 2000), Administrative 
Proceeding File No. 3-10282 (the ``Order'').
    \4\ See Securities Exchange Act Release No. 45427 (February 8, 
2002), 67 FR 6958.
    \5\ See letter from Edward Joyce, President and Chief Operating 
Officer, CBOE, to Deborah Lassman Flynn, Assistant Director, 
Division of Market Regulation, Commission, dated March 1, 2002 
(``Amendment No. 1''). In Amendment No. 1, the Exchange clarified 
that the Exchange would aggregate individual violations of options 
order handling rules and treat such violation as a single offense 
only where such aggregation is based on a comprehensive automated 
surveillance program. In addition, the Exchange clarified that a 
sixth and subsequent violation of the options order handling rules 
would be referred to the Business Conduct Committee (``BCC'') and 
not treated under the Exchange's Minor Rule Plan (``MRP'').
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II. Description of the Proposal

    The Exchange proposes to amend CBOE Rule 17.11 (Judgment and 
Sanction) to incorporate certain Principal Considerations in 
Determining Sanctions (``Principal Considerations'') to be applied by 
the Exchange's BCC 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 CBOE Rule 17.50 (Imposition of Fines for 
Minor Rule Violations) to incorporate in its MRP 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 Exchange Rules 6.73 and 
8.85(b). The proposed rule change would provide both a range of fines 
as well as non-monetary sanctions that could be assessed against 
offending members. Fine amounts would differ depending on the number of 
disciplinary actions that have been brought by the Exchange against the 
particular member or member organization.\6\ The proposed guidelines 
would also allow for non-monetary sanctions such as suspension, 
expulsion, or other sanctions in egregious cases. Finally, the proposed 
rule change would also permit any member who is issued a summary fine 
notice to have the opportunity to submit one written offer of 
settlement to the BCC.
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    \6\ 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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III. 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.\7\ 
In particular, the Commission believes that the proposed rule change is 
consistent with section 6(b)(5) of the Act,\8\ 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. The Commission also finds that the proposed rule 
change is consistent with section 6(b)(6) of the Act,\9\ which requires 
that the rules of an exchange provide that its members be appropriately 
disciplined for violations of exchange rules, the Act, and rules and 
regulations thereunder, by expulsion, suspension, limitation of 
activities, functions, and operations, fine, censure, being suspended 
or barred from being associated with a member, or any other fitting 
sanction.
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    \7\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5).
    \9\ 15 U.S.C. 78f(b)(6).
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    Moreover, the Commission notes that the Exchange submitted a 
letter, for which it requested confidential treatment, proposing how 
its regulatory staff would aggregate violations of the order handling 
rules, where such violations are identified through the Exchange's 
automated surveillance

[[Page 13383]]

systems.\10\ The Commission believes that the compliance thresholds 
proposed in this letter provide a reasonable first step and should 
assist the Exchange in disciplining its members for violations of the 
Exchange's order handling rules. The Commission expects, however, that 
as compliance rates improve, the Exchange will adjust the compliance 
thresholds accordingly. Consequently, the Commission's approval of the 
proposed rule change is contingent on the Exchange providing notice to 
the Commission's Office of Compliance Inspections and Examinations of 
any future changes to this letter, and to any other sanctioning 
guidelines not codified in the Exchange's rules.
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    \10\ See supra note 6.
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    At this time, the Commission believes the proposed sanctioning 
guidelines are reasonably designed to effectively enforce compliance 
with the options order handling rules. Nevertheless, the Commission 
expects the Exchange to continue to evaluate the adequacy of the 
proposed sanctioning guidelines to determine whether they do, in fact, 
effectively enforce compliance with the options order handling 
rules.\11\
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    \11\ The Commission's examination staff will also monitor the 
application of these guidelines to determine whether they do, in 
fact, improve member compliance with the options order handling 
rules.
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    Furthermore, the Commission finds good cause for accelerating 
approval of the proposed rule change and Amendment No. 1 thereto prior 
to the thirtieth day after publication in the Federal Register. The 
Commission notes that the proposed rule change was noticed for the full 
comment period and the Commission is accelerating approval of the 
filing on the twenty-ninth day after publication of the proposed rule 
change in the Federal Register. The Commission believes that 
accelerated approval will permit the Exchange to implement, and 
investors to benefit from, the proposed rule change without undue 
delay. Amendment No. 1 clarifies when the Exchange may aggregate 
multiple violations and when subsequent offenses would be referred to 
the Exchange's BCC and not treated under the Exchange's MRP. Amendment 
No. 1 also clarifies that the Exchange may aggregate multiple 
violations into a single offense only where such aggregation is based 
upon a comprehensive automated surveillance program. In addition, the 
Commission notes that it received no comments on the proposed rule 
change. For these reasons, the Commission finds good cause exists, 
consistent with sections 6(b)(5) \12\ and 19(b)(2) of the Act,\13\ to 
approve the proposed rule change and Amendment No. 1 thereto on an 
accelerated basis.
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    \12\ 15 U.S.C. 78f(b)(5).
    \13\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1, including whether Amendment No. 1 
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 CBOE. All 
submissions should refer to file number SR-CBOE-2001-71 and should be 
submitted by April 12, 2002.

V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, 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,\14\ that the proposed rule change (SR-CBOE-2001-71) and Amendment 
No. 1 thereto are approved on an accelerated basis.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-6898 Filed 3-21-02; 8:45 am]
BILLING CODE 8010-01-P