[Federal Register Volume 67, Number 198 (Friday, October 11, 2002)]
[Notices]
[Pages 63480-63484]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-26019]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46600; File No. SR-CBOE-2002-39]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change and Amendment Nos. 1 and 2 Thereto by the Chicago Board 
Options Exchange, Inc. To Make Certain Changes Pertaining to the 
Enforcement of Trading Conduct and Decorum Policies

October 4, 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 July 15, 2002, 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. On August 
30, 2002, CBOE submitted Amendment No. 1 to the proposed rule 
change.\3\ On September 17, 2002, CBOE submitted Amendment No. 2 to the 
proposed rule change.\4\ The Commission is 2 publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Form 19b-4 received on August 30, 2002 (``Amendment No. 
1''). Amendment No. 1 replaced the original filing in its entirety. 
In Amendment No. 1, the Exchange clarified that not all Class A 
offenses qualified the offender for summary exclusion, explained why 
three types of offenses previously set forth as ``Violations of 
Trading Conduct and Decorum Policies'' had been omitted from the 
proposed list of such violations, clarified that the ``rolling look 
back'' period used to determine the appropriate fine for Firm Quote 
violations will be 24 months, and cross-referenced the appeal 
procedure for the imposition of fines for minor rule violations.
    \4\ See letter from Christopher R. Hill, Attorney II, Legal 
Division, CBOE, to Nancy Sanow, Division of Market Regulation 
(``Division''), Commission, dated September 16, 2002 (``Amendment 
No. 2''). In Amendment No. 2, the Exchange underlined the entire 
subsection of Exhibit B to Amendment No. 2 labeled ``Class A 
Offenses'' to reflect that it is new text, and added the offense 
``Trading in the Aisle'' to the subsection of Exhibit B to Amendment 
No. 2 labeled ``Class B Offenses.''
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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 CBOE Rule 6.20(c) (Admission to and 
Conduct on the Trading Floor--Fines Imposed by Floor Officials) to 
authorize two Floor Officials, in consultation with a designated senior 
executive officer of the Exchange, to summarily exclude a member or 
person associated with a member from the Exchange premises for not 
longer than the remainder of the trading day for any violation of the 
Exchange's trading conduct and decorum policies that is classified as a 
Class A offense, except for those Class A offenses specified by 
Exchange Regulatory Circulars as not qualifying the offender for 
summary exclusion. The Exchange also proposes to amend CBOE Rule 
17.50(g)(6) (Imposition of Fines for Minor Rules Violations--Violations 
of Trading Conduct and Decorum Policies) to reflect the incorporation 
into the fine policies of specified higher fine levels for 
``subsequent'' offenses. Finally, the Exchange proposes to issue a new 
Regulatory Circular setting forth the fines that may be imposed under 
CBOE Rule 17.50 for violations of CBOE Rule 6.20. The proposed 
Regulatory Circular also sets forth those violations that may qualify 
the offender for summary expulsion. Below is the text of the proposed 
rule change. Proposed new language is italicized; deletions are in 
brackets.
* * * * *

CHAPTER VI--Doing Business on the Exchange Floor

Section B: Member Activities on the Floor

* * * * *
Admission to and Conduct on the Trading Floor; Member Education
RULE 6.20.
    (a) No Change.
    (b) No Change.
    (c) Fines Imposed by Floor Officials. The Exchange shall 
periodically issue fine schedules setting forth which violations of the 
Exchange's trading conduct and decorum policies are subject to fines 
pursuant to CBOE Rule 17.50 and the specific dollar amounts of such 
fines. Floor Officials may (i) fine members and persons employed by or 
associated with members pursuant to CBOE Rule 17.50 for trading conduct 
and decorum violations which are subject to fine under such fine 
schedule, (ii) direct members and persons employed by or associated 
with members to act or cease to act in a manner to ensure compliance 
with Exchange Rules and accepted and established standards of trading 
conduct and decorum and/or (iii) refer violations of the foregoing to 
the Business Conduct Committee for disciplinary action pursuant to 
Chapter XVII of the Rules. In addition, two Floor Officials in 
consultation with a designated senior executive officer of the 
Exchange, may summarily exclude a member or person

[[Page 63481]]

associated with a member from the Exchange premises for not longer than 
the remainder of the trading day for any violation of the Exchange's 
trading conduct and decorum policies that is classified as a Class A 
offense, except for those Class A offenses specified by Exchange 
Regulatory Circulars as not qualifying the offender for summary 
exclusion. Any action taken by Floor Officials under this paragraph (c) 
shall not preclude additional disciplinary action by the Business 
Conduct Committee under Chapter XVII of the Rules. Any application or 
interpretation of Rules, and any decision to impose a fine under this 
paragraph (c), shall be agreed upon by at least two Floor Officials. 
Floor Officials shall file with the Exchange a written report of any 
action taken pursuant to authority specifically granted them by the 
Rules and of any interpretation of the Rules.
    (d) No Change.
    (e) No Change.
    * * * Interpretations and Policies:
    .01-.09 No Change.
    .10 Where a member or person associated with a member is summarily 
excluded from the trading floor pursuant to Rule 6.20(c), that member 
or associated person shall have the right to request reinstatement from 
Floor Officials after a sufficient ``cooling-off'' period has elapsed. 
If, in the judgment of two Floor Officials, the member or associated 
person no longer poses an immediate threat to the safety of persons or 
property, the member or associated person shall be permitted to return 
to the trading floor.
* * * * *

CHAPTER XVII--Discipline

RULE 17.50. Imposition of Fines for Minor Rule Violations
    (a)-(f) No Change.
    (g) The following is a list of the rule violations subject to, and 
the applicable fines that may be imposed by the Exchange pursuant to, 
this Rule:
    (1) No Change.
    (2) No Change.
    (3) No Change.
    (4) No Change.
    (5) No change.
    (6) Violations of Trading Conduct and Decorum Policies. (Rule 6.20)
    The Exchange's trading conduct and decorum policies shall be 
distributed to the membership periodically and shall set forth the 
specific dollar amounts that may be imposed as a fine hereunder with 
respect to any violations of those policies. If warranted under the 
circumstances in the view of two floor officials, the fine authorized 
under those policies for a second, [or]third or subsequent offense may 
be imposed for a first offense and the fine authorized for a third or 
subsequent offense may be imposed for a second offense.
* * * * *
(The following Regulatory Circular will supersede and replace RG98-123)

02- Violations of Trading Conduct and Decorum Policies
Date: , 2002
To: Exchange Members and Associated Persons of Member Organizations
From: Floor Officials Committee

    The purpose of this circular is to advise members and their 
personnel of the provisions of Exchange Rule 17.50, Imposition of Fines 
for Minor Rule Violations, as they relate to violations of the 
Exchange's trading conduct and decorum policies under Exchange Rule 
6.20, Admission to and Conduct on the Trading Floor.
    (1) The Rule. Rule 17.50(g)(6) provides for the imposition of fines 
for violations of the Exchange's trading conduct and decorum policies 
under Rule 6.20. The following schedule identifies certain conduct 
deemed to violate those policies and lists the applicable fines that 
may be imposed for such violations by the Exchange under Rule 
17.50(g)(6). Please be advised that Rule 17.50(g)(6) enables the 
Exchange, if warranted under the circumstances, to impose for a first 
offense the fine authorized for a second, third or subsequent offense; 
to impose for a second offense the fine authorized for a third or 
subsequent offense; and to impose for a third offense the fine 
authorized for a subsequent offense.
    (2) Two Floor Officials may impose a summary fine in a rolling 
twelve month period (except for firm quote violations, which will be 
assessed using a 24-month look back period) not to exceed $5,000 for 
violative conduct classified as a Class A offense within the following 
ranges:

----------------------------------------------------------------------------------------------------------------
             1st Offense                      2nd Offense                3rd Offense         Subsequent Offenses
----------------------------------------------------------------------------------------------------------------
$500 to $1,500.......................  $1,000 to $3,000.........  $2,000 to $5,000.........     $3,500 to $5,000
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    (3) Two Floor Officials may impose a summary fine in a rolling 
twelve month period not to exceed $2500.00 for violative conduct 
classified as a Class B offense within the following ranges:

------------------------------------------------------------------------
         1st Offense                2nd Offense      Subsequent Offenses
------------------------------------------------------------------------
$100 to $500.................  $500 to $1,000......     $1,000 to $2,500
------------------------------------------------------------------------

TRADING CONDUCT AND DECORUM VIOLATIONS

Class A Offenses:

    [sbull] Physical Violence (Shoving, Fighting)
    [sbull] Unbusinesslike Conduct
    [sbull] Harassment (as set forth in Exchange Rule 4.19)
    [sbull] Failure to Abide by a Floor Official Determination
    [sbull] Property Damage (plus repair or replacement costs)
    [sbull] Enabling/Assisting Suspended Member or Associated Person to 
Gain Improper Access to Floor
    [sbull] Failure to Supervise a Visitor
    [sbull] Failure to Attend Exchange Mandated Educational Training 
[Dagger]
    [sbull] Effecting or Attempting to Effect a Transaction with No 
Public Outcry [Dagger]
    [sbull] Violation of Rule 8.51 (Firm Quote) \5\ [Dagger]

    \5\ In any Rolling Twenty-Four Month ``Look-Back'' Period.
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    [Dagger] Does not qualify the offender for summary exclusion 
pursuant to Exchange Rule 6.20(c).

Class B Offenses:
    [sbull] Abusive Language
    [sbull] Abusing Exchange Property (no damage)
    [sbull] Dress Code Violation
    [sbull] Failure to Display I.D.
    [sbull] Food or Drink on Floor
    [sbull] Gaining or Enabling Improper Access to Floor

[[Page 63482]]

    [sbull] Improper Use of Runners' Aisle
    [sbull] Smoking in Unauthorized Areas
    [sbull] Running
    [sbull] Impermissible Use of Member Phones
    [sbull] Visitor Badge Returned Late or Not Returned
    [sbull] Failure of Market-Maker to Respond to Request for Market by 
Order Book Official or to Bid or Offer within Ranges Specified by Rule 
8.7(b)
    [sbull] DPM Failure to Activate or Deactivate RAES
    (2) Floor Officials. Fines under Rule 17.50(g)(6) may be imposed 
upon the determination of two Floor Officials that the person fined has 
committed any of the 4 trading conduct and decorum violations 
enumerated in the fine schedule above. Any application or 
interpretation of the Rules relating to conduct on Exchange premises 
shall be agreed upon by at least two Floor Officials. Floor Officials 
shall file with the Exchange a written report of any action taken 
pursuant to authority specifically granted them by the Rules and of any 
interpretation of the Rules.
    (3) Persons Subject to Fine. The Exchange may impose the preceding 
fines against either or both of the following: (a) the individual 
responsible for the subject violation and/or (b) if such individual is 
employed by or associated with a member, the member and/or any 
supervisory personnel of the member that failed to adequately supervise 
such individual to ensure compliance with Exchange rules. Any member or 
supervisory person who is fined more than one (1) time in any twelve 
month period for failure to supervise shall be subject to the fines 
specified above for second offenses, third offenses and subsequent 
offenses, regardless of the number of offenses committed by the 
individual subject to fine for the underlying violation.
    (4) Right to Contest Fines. Any person against whom a fine is 
imposed pursuant to Rule 17.50(g)(6) may contest that fine. 
Specifically, fines imposed under Rule 17.50(g)(6) that do not exceed 
$2,500 may be contested before the Appeals Committee in accordance with 
the provisions of Rule 17.50(d), and fines imposed under Rule 
17.50(g)(6) that exceed $2,500 may be contested before the Business 
Conduct Committee in accordance with the provisions of Rule 17.50(c). 
Persons wishing to contest such fines must comply with the deadlines 
and all other requirements set forth in Rule 17.50(d) or Rule 17.50(c), 
as applicable. Please be advised that if a fine imposed under Rule 
17.50(g)(6) is contested and the reviewing body finds that the person 
fined committed the rule violation(s) alleged, the reviewing body may 
impose any one or more of the disciplinary sanctions authorized by the 
Exchange's Constitution and Rules, including but not limited to a 
higher fine than the fine imposed pursuant to Rule 17.50(g)(6). In 
addition, if a person contests a fine imposed under Rule 17.50(g)(6) 
and the fine is upheld by the reviewing body, the reviewing body will 
impose a forum fee against the person in the amount of $100 if the 
reviewing body's determination was reached without a hearing, or in the 
amount of $300 if a hearing was conducted.
    (5) Additional Floor Official Action. In addition to, or instead 
of, issuing a fine pursuant to Rule 17.50(g)(6), Rule 6.20(c) provides 
that Floor Officials may direct members and their associated persons to 
act or cease to act in a manner to ensure compliance with Exchange 
Rules and accepted and established standards of trading conduct and 
decorum and/or refer violations of the foregoing to the Business 
Conduct Committee for disciplinary action pursuant to Chapter XVII of 
the Rules. Furthermore, any action taken by Floor Officials under Rules 
17.50(g)(6) and 6.20(c) does not preclude additional disciplinary 
action by the Business Conduct Committee under Chapter XVII. In 
addition, as set forth in Rule 6.20(c), two Floor Officials in 
consultation with a designated senior executive officer of the 
Exchange, may summarily exclude a member or person associated with a 
member from the Exchange premises for not longer than the remainder of 
the trading day for any violation of the Exchange's trading conduct and 
decorum policies that is classified as a Class A offense.
    Any questions in connection with this circular should be directed 
to Andrew Spiwak of the Legal Division at (312) 786-7483 or to Rod Ely 
of the Trading Floor Liaison Group at (312) 786-7794.

(RG98-123, Revised)

* * * * *

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

Temporary Exclusion

    The Exchange proposes to amend CBOE Rule 6.20(c) (Admission to and 
Conduct on the Trading Floor--Fines Imposed by Floor Officials) to 
authorize two Floor Officials, in consultation with a designated senior 
executive officer of the Exchange, to summarily exclude a member or 
person associated with a member from the Exchange premises for not 
longer than the remainder of the trading day for any violation of the 
Exchange's trading conduct and decorum policies that is classified as a 
Class A offense, except for those Class A offenses specified by 
Exchange Regulatory Circulars as not qualifying the offender for 
summary exclusion.
    Class A offenses are the most serious offenses against trading 
conduct and decorum policies, including but not limited to violations 
such as physical violence (e.g., shoving or fighting), unbusinesslike 
conduct,\6\ harassment, failure to abide by a floor official 
determination, or property damage. Most Class A offenses affect the 
safety or security of personnel and/or property on the Exchange in ways 
that may be ameliorated by temporarily excluding the offender from 
Exchange premises. The Exchange also proposes that members be summarily 
excluded from Exchange premises for enabling or assisting a suspended 
member or associated person to gain improper access to the floor, and 
failing to supervise a visitor. As specified in the proposed Regulatory 
Circular, the Exchange currently proposes to distinguish three Class A 
offenses as not qualifying the offender for summary exclusion. These 
are (1) Failure to Attend Exchange Mandated Educational Training; (2) 
Effecting or Attempting to Effect a Transaction with No Public Outcry; 
and (3) Violation of CBOE Rule 8.51 (Firm Quote). These offenses are so 
categorized because unlike the other Class A offenses, they do not 
raise significant issues of safety or security at the Exchange.
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    \6\ In general, ``unbusinesslike conduct'' is conduct, other 
than harassment, that disrupts trading. Telephone call between 
Christopher R. Hill, Attorney II, Legal Division, CBOE, and Jennifer 
Lewis, Attorney, Division, Commission, on September 30, 2002.
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    The Exchange believes that it is important for Floor Officials, in 
consultation with a designated senior Exchange executive, to have the

[[Page 63483]]

authority to temporarily exclude certain such violators from the 
Exchange premises, in order to be able to defuse volatile situations, 
safeguard trading floor personnel and facilities, and minimize 
disruptions to the maintenance of fair and orderly markets. The 
proposed rule will enable an excluded 5 member or associated person to 
request reinstatement to the Trading Floor from Floor Officials after a 
sufficient ``cooling off period'' has elapsed.
    The Exchange represents that this part of its proposal is closely 
patterned on Article XII, Rule 3(c) of the Rules of the Chicago Stock 
Exchange.

Penalties for Violations of Trading Conduct and Decorum Policies

    The Exchange also proposes to amend CBOE Rule 17.50(g)(6) 
(Imposition of Fines for Minor Rules Violations--Violations of Trading 
Conduct and Decorum Policies) to reflect the incorporation into the 
fine policies of specified higher fine levels for ``subsequent'' 
offenses. For example, the amended provision would enable the 
imposition of the fine authorized for a Class A ``subsequent'' offense 
to be imposed for a first, second or third Class A offense, if such is 
deemed warranted under the circumstances in the view of two floor 
officials.\7\ The Exchange believes this update will help Exchange 
officials safeguard people, property, and fair and orderly markets at 
the Exchange by enabling them to impose fine levels for violations of 
Trading and Decorum Policies that are most appropriate to the 
circumstances of particular offenses.
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    \7\ The amended provision would also enable the imposition of 
the fine authorized for a Class B ``subsequent'' offense to be 
imposed for a first or second Class B offense, if such is deemed 
warranted under the circumstances in the view of two floor 
officials.
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Regulatory Circular

    The Exchange proposes to issue a new Regulatory Circular to update 
and replace Regulatory Circular RG 98-123, and classify trading conduct 
and decorum offenses as either Class A or Class B offenses. The 
Exchange believes the schedule of offenses is consistent with the 
recently revised Minor Rule Violation Plan.\8\
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    \8\ See Securities Exchange Act Release No. 45571 (March 15, 
2002), 67 FR 13382 (March 22, 2002).
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    The Exchange notes that it has added the violation ``DPM Failure to 
Activate or Deactivate RAES'' to the new proposed regulatory circular 
in order to encourage DPM's to comply with their obligations under 
Exchange Rule 6.8 (RAES Operations).\9\
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    \9\ Telephone call between Christopher R. Hill, Attorney II, 
Legal Division, CBOE, and Jennifer Lewis, Attorney, Division, 
Commission, on October 3, 2002.
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    The Exchange notes the following reasons why three types of 
offenses previously set forth as ``Violations of Trading Conduct and 
Decorum Policies'' in RG-98-123 are omitted from the list of such 
violations in the new proposed regulatory circular. First, ``Disruptive 
Announcements of Stock Prints'' are no longer a focus of regulatory 
concern due to technological advances that have changed and improved 
the dissemination of such information. Second, ``Failure to Abide by 
Floor Official Request for Information,'' has been omitted because it 
is now deemed to be included within the broader offense entitled 
``Failure to Abide by Floor Official Determination.'' Finally, ``Book 
Priority Violations'' are no longer included in the list of Trading 
Conduct and Decorum violations because under a recent Exchange rule 
change approved by the SEC, (Securities Exchange Act Release No. 34-
45571, 67 FR 13382 (March 15, 2002), approving SR-CBOE-2001-71), such 
violations are now addressed separately in CBOE Rule 17.50(g)(5).
    The Exchange also proposes that as set forth in the first footnote 
of the proposed regulatory circular, the ``rolling look back'' period 
used to determine the appropriate fine for Firm Quote violations will 
be 24 months.\10\
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    \10\ See note 5 supra.
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    Finally, the Exchange notes that the appeal procedure for the 
imposition of fines for minor rule violations as set forth in CBOE Rule 
17.50(d)(1) is described in paragraph (4) in the proposed draft 
regulatory circular.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\11\ in general, and furthers the 
objectives of Sections 6(b)(5) \12\ and 6(b)(7) \13\ of the Act, in 
particular, because the proposed rule change will refine and enhance 
the Exchange's Minor Rule Violation Plan to make it more efficient and 
effective. The Exchange believes the proposed rule change is designed 
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.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ 15 U.S.C. 78f(b)(7).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE does not believe that the proposed rule change will impose 
a burden on competition that is not necessary or appropriate in 
furtherance of 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 CBOE 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, as amended, 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 CBOE.
    All submissions should refer to File No. SR-CBOE-2002-39 and should 
be submitted by November 1, 2002.


[[Page 63484]]


    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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-26019 Filed 10-10-02; 8:45 am]
BILLING CODE 8010-01-P