[Federal Register Volume 67, Number 242 (Tuesday, December 17, 2002)]
[Notices]
[Pages 77295-77297]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-31653]



[[Page 77295]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46981; File No. SR-CBOE-2001-59]


Self-Regulatory Organizations; Order Granting Approval to the 
Proposed Rule Change and Amendment No. 1 Thereto and Notice of Filing 
and Order Granting Accelerated Approval to Amendment Nos. 2 and 3 to 
the Proposed Rule Change by the Chicago Board Options Exchange, Inc. 
Amending CBOE Disciplinary Rules 17.4, 17.9 and 17.10

December 11, 2002.

I. Introduction

    On December 6, 2001, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``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 provisions of its 
disciplinary rules. On December 17, 2001, the Exchange filed Amendment 
No. 1 to the proposed rule change.\3\ The proposed rule change and 
Amendment No. 1 were published for comment in the Federal Register on 
January 3, 2002.\4\ The Commission received no comments on the proposal 
and Amendment No. 1. On May 13, 2002, the Exchange filed Amendment No. 
2 to the proposed rule change.\5\ On October 9, 2002, the Exchange 
filed Amendment No. 3 to the proposed rule change.\6\ The Commission is 
approving the proposed rule change and Amendment No. 1, and is 
publishing notice of, and granting accelerated approval to, Amendment 
Nos. 2 and 3 to the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Christopher R. Hill, Attorney II, Office of 
Enforcement, Legal Division, CBOE, to Sapna C. Patel, Attorney, 
Division of Market Regulation (``Division''), Commission, dated 
December 13, 2001 (``Amendment No. 1'').
    \4\ Securities Exchange Act Release No. 45191 (December 26, 
2001), 67 FR 378.
    \5\ See letter from Nancy Nielsen, Director of Arbitration and 
Assistant Secretary, CBOE, to Nancy Sanow, Assistant Director, 
Division, Commission, dated May 10, 2002 (``Amendment No. 2''). In 
Amendment No. 2, the CBOE deleted proposed CBOE Rule 17.15, which 
would have governed ex parte communications with any member of the 
CBOE Board of Directors (``Board''), and amended CBOE Rule 17.4 to 
incorporate the Board into the prohibition against ex parte 
communications with the Exchange's Business Conduct Committee 
(``BCC''). In addition, Amendment No. 2 proposes to add 
Interpretations .02 and .03 to CBOE Rule 17.4.
    \6\ See letter from Christopher R. Hill, Attorney II, Office of 
Enforcement, Legal Division, CBOE, to Nancy Sanow, Assistant 
Director, Division, Commission, dated October 8, 2002 (``Amendment 
No. 3''). In Amendment No. 3, the CBOE proposed to clarify in 
Interpretation .03 that a person refusing an ex parte communication 
must notify Exchange regulatory staff about such ex parte 
communication and how he or she responded to it, and that the 
Exchange regulatory staff must memorialize such information of the 
attempted communication in the regulatory record of the 
investigation or disciplinary proceeding. In addition, the CBOE 
provided the following examples of what it would consider ``solely 
procedural matters'' for purposes of proposed Interpretation .02: 
``the time, place, or manner of events in the disciplinary process, 
or the procedural requirements set forth in the Exchange's rules as 
they apply to the disciplinary proceedings.''
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    Below is the text of the proposed rule change, as amended. Proposed 
new language is italicized, and proposed deletions are in brackets.
* * * * *
Chicago Board Options Exchange, Incorporated Rules
Chapter XVII--Discipline
Rule 17.4. Charges
    (a) No Change.
    (b) No Change.
    (c) No Change.
    (d) No member or person associated with a member shall make or 
knowingly cause to be made an ex parte communication with any member of 
the Business Conduct Committee or Board concerning the merits of any 
matter pending under Chapter XVII of the Rules. No member of the 
Business Conduct Committee or Board shall make or knowingly cause to be 
made an ex parte communication with any member or any person associated 
with a member concerning the merits of any matter pending under Chapter 
XVII of the Rules.
* * * * *
* * * Interpretations and Policies
    .01 No Change.
    .02 No violation of Rule 17.4(d) shall be deemed to occur if the ex 
parte communication deals solely with procedural matters rather than 
the merits of the investigation or proceeding.
    .03 No person shall be deemed to violate Rule 17.4(d) if the person 
refuses an attempted communication concerning the merits of an 
investigation or proceeding as soon as it becomes apparent that the 
communication concerns the merits. In order for this Interpretation .03 
to apply, the person refusing the attempted communication must promptly 
notify Exchange regulatory staff about the attempted communication and 
how the person responded to it. Exchange regulatory staff shall 
memorialize this information in the regulatory record of the 
investigation or disciplinary hearing. 
* * * * *
Rule 17.9. Decision
    Following a hearing conducted pursuant to Rule 17.6 of this 
Chapter, the Panel shall issue a decision in writing, based solely on 
the record, determining whether the Respondent has committed a 
violation and imposing the sanction, if any, therefor. Where the Panel 
is not composed of at least a majority of the members of the Business 
Conduct Committee, its determination shall be automatically reviewed by 
a majority of the Committee, which may affirm, reverse or modify in 
whole or in part or may remand the matter for additional findings or 
supplemental proceedings. Such modification may include an increase or 
decrease of the sanction. The decision shall include a statement of 
findings and conclusions, with the reasons therefor, upon all material 
issues presented on the record. Where a sanction is imposed, the 
decision shall include a statement specifying the acts or practices in 
which the Respondent has been found to have engaged and setting forth 
the specific provisions of the Securities Exchange Act of 1934, as 
amended, rules and regulations promulgated thereunder, constitutional 
provisions, by-laws, rules, interpretations or resolutions of the 
Exchange of which the acts are deemed to be in violation. The 
Respondent and the Office of Enforcement shall be promptly sent a copy 
of the decision. After Board review pursuant to Rule 17.10, or the time 
for such review has expired, the decision will be considered final, and 
the Exchange shall publish a summary of the decision in the Exchange 
Bulletin.
* * * * *
Rule 17.10. Review
    (a)
    (1) Petition. Both t[T]he Respondent and the Office of Enforcement 
shall have 15 days after service of notice of any [a] decision made 
pursuant to Rule 17.9 of this Chapter to petition for review of the 
decision by filing a copy of the petition with the Secretary of the 
Exchange (``Secretary'') and with all other parties to the hearing [the 
Exchange's Office of Enforcement]. Such petition shall be in writing 
and shall specify the findings and conclusions to which exceptions are 
taken together with reasons for such exceptions. Any objections to a 
decision not specified by written exception shall be considered to have 
been abandoned.

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    (2) Written Submissions. Within 15 days after a [Respondent's] 
petition for review has been filed with the Secretary of the Exchange 
pursuant to paragraph (a)(1) of this Rule, the other parties to the 
hearing [Exchange staff] may each submit to the Secretary a written 
response to the petition. A copy of the response must be served upon 
the petitioner [Respondent]. The petitioner [A Respondent] has 15 days 
from the service of the response to file a reply with the Secretary and 
the other parties to the hearing [Office of Enforcement].
    (b) Conduct of Review. The review shall be conducted by the Board 
or a committee of the Board composed of at least three Directors whose 
decision must be ratified by the Board. Any Director who participated 
in a matter before the Business Conduct or other Committee may not 
participate in any review of that matter by the Board. Unless the Board 
shall decide to open the record for the introduction of evidence or to 
hear argument, such review shall be based solely upon the record and 
the written exceptions filed by the parties. New issues may be raised 
by the Board; the parties to the hearing [Respondents] shall be given 
notice of and an opportunity to address any such new issues. The Board 
may affirm, reverse or modify, in whole or in part, the decision of the 
Business Conduct Committee. Such modification may include an increase 
or decrease of the sanction. The decision of the Board shall be in 
writing, shall be promptly served on the Respondent and the Office of 
Enforcement, and shall be final.
    (c) Review on Motion of Board. The Board may on its own initiative 
order review of a decision made pursuant to Rule 17.7 or 17.9 of this 
Chapter within 30 days after notice of the decision has been served on 
the Respondent and the Office of Enforcement. Such review shall be 
conducted in accordance with the procedure set forth in paragraph (b) 
of this Rule.
    (d) No change.
* * * * *

II. Description of the Proposal

A. Ex Parte Communications with Exchange Board Members Prohibited

    Exchange Rule 17.4(d) prohibits members or persons associated with 
members from making or causing ex parte communications with any member 
of the BBC concerning the merits of any matter pending under the 
disciplinary rules of the Exchange. This prohibition is to eliminate 
the potential that such communications might somehow influence the 
outcome of an investigation or enforcement matter. The proposed rule 
change would amend Exchange Rule 17.4(d) to also forbid ex parte 
communications with members of the Board. The Exchange represents that 
such communications are already prohibited by some of the other self-
regulatory organizations (``SROs'').\7\
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    \7\ See American Stock Exchange LLC Exchange Disciplinary 
Proceedings Rule 11(a); National Association of Securities Dealers, 
Inc. (``NASD'') Rule 9143(a); and Pacific Exchange, Inc. Rule 
10.3(a).
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    The proposed rule change would also add two new Interpretations to 
clarify the application of the amended Exchange Rule 17.4(d). Proposed 
Interpretation .02 addresses the current language of Exchange Rule 
17.4(d), which permits ex parte communications that do not ``concern 
the merits.'' Proposed Interpretation .02 distinguishes permissible ex 
parte communications from those ``concerning the merits'' by specifying 
that the only permissible ex parte communications are those that deal 
``solely'' with procedural matters. The Exchange considers examples of 
``solely procedural matters'' to include the following: ``the time, 
place, or manner of events in the disciplinary process, or the 
procedural requirements set forth in the Exchange's rules as they apply 
to the disciplinary proceedings.'' \8\
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    \8\ See Amendment No. 3, supra note 6. The Exchange represents 
that by ``manner of events in a disciplinary process,'' it means the 
sequence of events in the disciplinary process. Telephone 
conversation between Christopher R. Hill, Attorney II, Office of 
Enforcement, Legal Division, CBOE, and Kathy A. England, Assistant 
Director, and Sapna C. Patel, Attorney, Division, Commission, on 
December 5, 2002.
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    Proposed Interpretation .03 is intended to provide workable 
guidelines for Board and BCC members, particularly those who work on 
the Exchange trading floor. In such positions, these Board and BCC 
members are subject to the possibility that a member or associated 
person involved in an investigation or disciplinary proceeding may 
approach them and launch into a conversation or other communication 
concerning the merits of their disciplinary case before the Board or 
BCC member can stop them. The Exchange believes it would be unfair in 
such circumstances to subject the Board or BCC member to disciplinary 
action for violation of Exchange Rule 17.4(d) if the violation of the 
Rule is caused by the unpredictable and uncontrollable actions of a 
third party. At the same time, the Exchange believes that Board or BCC 
members in such circumstances remain responsible for adhering to 
Exchange Rule 17.4(d) and encouraging members and associated persons to 
do likewise. To balance these concerns, proposed Interpretation .03 
clarifies that, in such circumstances, Board or BCC members will not be 
deemed to have violated Exchange Rule 17.4(d) so long as they ``refuse 
the communication'' (e.g., stop the conversation, stop reading the e-
mail or letter, etc.) as soon as it becomes apparent that the 
communication concerns the merits of the case. In addition, the 
Exchange proposes to require that a person refusing an ex parte 
communication notify Exchange regulatory staff about such ex parte 
communication and how he or she responded to it, and also requires that 
the Exchange regulatory staff memorialize such information of the 
attempted communication in the regulatory record of the investigation 
or disciplinary proceeding.\9\ The Exchange represents that copies of 
the attempted communication will be given to all of the parties 
involved in the proceeding.\10\
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    \9\ See Amendment No. 3, supra note 6.
    \10\ Telephone conversation between Christopher R. Hill, 
Attorney II, Office of Enforcement, Legal Division, CBOE, and Kathy 
A. England, Assistant Director, and Sapna C. Patel, Attorney, 
Division, Commission, on December 5, 2002.
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B. Exchange Office of Enforcement's Right To Appeal

    Exchange Rule 17.10(a) permits a respondent in a disciplinary 
matter to appeal a decision of the BCC to the Board, but does not grant 
the Exchange's Office of Enforcement (``OOE'') a similar right of 
appeal. The proposed rule change would permit the Exchange's OOE to 
appeal factual findings that the OOE thinks may have been in error, as 
well as to appeal disciplinary sanctions that the OOE deems 
insufficient. The Exchange represents that such appeals are already 
authorized at other SROs.\11\ Therefore, the Exchange proposes to amend 
Exchange Rules 17.9 and 17.10 to give the OOE and the Respondent 
equivalent rights in the appellate process.
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    \11\ See New York Stock Exchange, Inc. Rule 476(f); NASD Rule 
9311; and Securities Exchange Act Release No. 43554 (November 14, 
2001), 65 FR 69975 (November 21, 2001) (File No. SR-Amex-00-22).
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III. Discussion

    The Commission has carefully reviewed the proposed rule change, as 
amended, and finds that it is consistent with the Act and the rules and 
regulations promulgated thereunder applicable to a national securities 
exchange and, in particular, with the requirements of section 6(b) of 
the Act.\12\ Specifically, the Commission

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finds that the proposed rule change, as amended, is consistent with 
section 6(b)(5) of the Act \13\ in that it is designed to promote just 
and equitable principles of trade, to remove impediments and to perfect 
the mechanism of a free and open market and a national market system, 
and in general, to protect investors and the public interest. In 
addition, the Commission finds that the proposed rule change, as 
amended, is consistent with sections 6(b)(1) and 6(b)(7) of the Act 
\14\ in that it requires compliance by the Exchange members and persons 
associated with its members with the Act, the rules and regulations 
thereunder, and Exchange rules; and provides a fair procedure for the 
disciplining of Exchange members.
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    \12\ 15 U.S.C. 78f(b). In approving this proposal, the 
Commission has considered the proposed rule's impact on efficiency, 
competition and capital formation. 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ 15 U.S.C. 78f(b)(1); and 15 U.S.C. 78f(b)(7).
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    The Commission believes that the proposed rule change, as amended, 
should limit ex parte communications in the disciplinary process, 
thereby providing a safeguard against influence over the outcome of a 
disciplinary proceeding and eliminating the appearance of unfairness. 
The Commission notes that the Exchange currently prohibits ex parte 
communications between persons involved in disciplinary proceedings and 
the Exchange's BCC. Extending the prohibition to Board members is 
consistent with practices on other SROs.\15\
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    \15\ See, e.g., supra note 7.
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    The Commission believes that proposed Interpretations .02 and .03 
to the proposed rule change should provide objective criteria and 
guidance regarding the application of the proposed rule change, as 
amended. The Commission notes that proposed Interpretation .02 excludes 
from the prohibition against ex parte communications any ex parte 
communications dealing solely with procedural matters. The Commission 
further notes that the Exchange has provided examples of what it 
considers ``solely procedural matters.'' The Commission believes that 
proposed Interpretation .03 strikes the right balance permitting 
persons who refuse an attempted ex parte communication to avoid 
violating the rule, provided that they report such attempted 
communication and their responses to such communications to Exchange 
regulatory staff. The proposed Interpretation would also require 
Exchange regulatory staff to keep a record of the attempted ex parte 
communication in the regulatory record of the investigation or 
disciplinary proceeding. In addition, the Commission notes that the 
Exchange has represented that it will give copies of the attempted ex 
parte communication to all of the parties involved in the 
proceeding.\16\
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    \16\ Telephone conversation between Christopher R. Hill, 
Attorney II, Office of Enforcement, Legal Division, CBOE, and Kathy 
A. England, Assistant Director, and Sapna C. Patel, Attorney, 
Division, Commission, on December 5, 2002.
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    Furthermore, the Commission believes that allowing the Exchange's 
OOE to appeal a decision of the BCC to the Board regarding factual 
findings that the OOE believes may have been in error or disciplinary 
sanctions that it finds insufficient, is consistent with practices on 
other SROs.\17\
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    \17\ See, e.g., supra note 11.
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    In addition, the Commission finds good cause for approving 
Amendment Nos. 2 and 3 to the proposed rule change prior to the 
thirtieth day after the date of publication of notice of filing thereof 
in the Federal Register. Amendment No. 2 deletes proposed CBOE Rule 
17.15 and amends CBOE Rule 17.4 to incorporate the Board into the 
prohibition against ex parte communications with the BCC. The 
Commission believes this change is not substantively different from the 
proposal, as published. In addition, it makes sense for the Board to be 
subject to the same limitations that the BCC is subject to. As 
discussed more fully above, Amendment No. 3 provides clarity to 
proposed rule change by requiring persons to report attempted 
communications, and by requiring Exchange regulatory staff to 
memorialize the communications. In addition, Amendment No. 3 provides 
examples of what the Exchange would consider ``solely procedural 
matters'' for purposes of proposed Interpretation .02. The Commission, 
therefore, finds good cause to approve Amendment Nos. 2 and 3 to the 
proposed rule change on an accelerated basis.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment Nos. 2 and 3, including whether the 
Amendment Nos. 2 and 3 to the proposed rule change are 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-2001-59 and should be 
submitted by January 7, 2003.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-CBOE-2001-59) and Amendment 
No. 1 are hereby approved, and that Amendment Nos. 2 and 3 to the 
proposed rule change are approved on an accelerated basis.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-31653 Filed 12-16-02; 8:45 am]
BILLING CODE 8010-01-P