[Federal Register Volume 69, Number 8 (Tuesday, January 13, 2004)]
[Notices]
[Pages 2028-2030]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-616]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49028; File No. SR-CBOE-2003-54]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to 
Misrepresentations and Omissions in Communications to the Exchange and 
the Options Clearing Corporation

January 6, 2004.
    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 November 12, 2003, 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 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to amend CBOE Rule 4.6 (False Statements) and 
adopt new CBOE Rule 4.22 to distinguish willfully made or material 
misrepresentations or omissions from other misrepresentations or 
omissions. The Exchange also proposes to amend CBOE Rule 17.50 to 
provide a new summary fine schedule for violations of proposed CBOE 
Rule 4.22. The text of the proposed rule change is below. Additions are 
italicized; deletions are in brackets.
* * * * *

CHAPTER IV

Business Conduct

* * * * *
[False Statements] Misrepresentations or Omissions
    RULE 4.6 No member, person associated with a member or applicant 
for membership shall make any willful or material misrepresentation, 
including a misstatement or false statement[s], or omission [or 
misrepresentations] in any application, report or other communication 
to the Exchange, [and no member shall make any false statement or 
misrepresentation] or to the Clearing Corporation with respect to the 
reporting or clearance of any Exchange transaction, or willfully or 
materially adjust any position at the Clearing Corporation in any class 
of options traded on the Exchange except for the purpose of correcting 
a bona fide error in recording or of transferring the position to 
another account.
    Interpretations and Policies:
    .01 No member, person associated with a member or applicant for 
membership shall be considered to be in violation of CBOE Rule 4.6 due 
to misrepresentations or omissions resulting from causes, such as 
systems malfunctions, which are outside the control of the member, 
associated person or applicant and could not be avoided by the exercise 
of due care.
* * * * *

Communications to the Exchange or the Clearing Corporation

    RULE 4.22 No member, person associated with a member or applicant 
for membership shall make any misrepresentation or omission in any 
application, report or other communication to the Exchange, or to the 
Clearing Corporation with respect to the reporting or clearance of any 
Exchange transaction, or adjust any position at the Clearing 
Corporation in any class of options traded on the Exchange except for 
the purpose of correcting a bona fide error in recording or of 
transferring the position to another account. Violations of this Rule 
may be

[[Page 2029]]

subject to summary fine under Exchange Rule 17.50(g)(11).
    Interpretations and Policies:
    .01 The Exchange will distinguish misrepresentations and omissions 
from willful or material misrepresentations and omissions. Willful or 
material misrepresentations and omissions may be considered a violation 
of Exchange Rule 4.6.
* * * * *

CHAPTER XVII--Discipline

* * * * *
RULE 17.50. Imposition of Fines for Minor Rule Violations
    (a)-(b) Unchanged.
    (c)(1) Any person against whom a fine is imposed pursuant to 
subsection (g)(1), (g)(2), (g)(3), (g)(4), (g)(5), (g)(8), (g)(9), [or] 
(g)(10) or (g)(11) of this Rule and any person against whom a fine 
exceeding $2,500 is imposed pursuant to subsection (g)(6) of this Rule 
may contest the Exchange's determination by filing with the Office of 
the Secretary of the Exchange, on or before the date specified pursuant 
to subsection (b)(iv) of this Rule, a written answer as provided in 
Exchange Rule 17.5, at which point the matter shall become subject to 
review by the Business Conduct Committee. The filing must include a 
request for a hearing, if a hearing is desired. Hearings will be 
conducted in accordance with the provisions of Exchange Rule 17.6. If a 
hearing is not requested, the review will be based on written 
submissions and will be conducted in a manner to be determined by the 
Business Conduct Committee.
    (2)-(4) Unchanged.
    (d)-(f) Unchanged.
    (g)
    (1)-(10) Unchanged.
    (11) Communications to the Exchange or the Clearing Corporation 
(Rule 4.22) A fine shall be imposed upon a member, person associated 
with a member or applicant for membership, as applicable, who violates 
Rule 4.22. Such fines shall be imposed on the basis of the following 
schedule:

 
 Number of offenses in any rolling twelve-
               month period                          Fine amount
 
1st Offense...............................  $500
2nd Offense...............................  1,000
3rd Offense...............................  2,500
Subsequent Offenses.......................  Referral to Business Conduct
                                             Committee
 

    Interpretations and Policies:
    .01-.04 Unchanged.
* * * * *

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 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 Exchange is proposing to amend CBOE Rule 4.6 (False 
Statements), which prohibits members and applicants for membership from 
making any false statement or misrepresentation to the Exchange or the 
Options Clearing Corporation (``OCC''), or from adjusting any position 
at OCC except to correct a bona fide error or transfer a position to 
another account. The purpose of the proposed rule change is to: (i) 
Distinguish willful or material misrepresentations (including 
misstatements and false statements) and omissions from other 
misrepresentations and omissions; and (ii) provide that non-willful and 
non-material misrepresentations, omissions and improper option position 
adjustments may be dealt with under the Exchange's minor rule violation 
fine plan rather than with formal disciplinary action.
    CBOE Rule 4.6 addresses three categories of prohibited conduct: 
false statements, misrepresentations, and improper position 
adjustments. The grouping of these three categories under a single 
heading ``False Statements'' has resulted in comments by members that a 
member could be charged by the Exchange with violating CBOE Rule 4.6 
for conduct that does not rise to the level of a false statement, such 
as a minor misstatement or omission, and that such charge would 
unfairly characterize their conduct due to the fact that the rule is 
titled ``False Statements.'' According to members, if such charges were 
brought by the Exchange against a member and the charges or the 
settlement of the Exchange investigation are publicly disclosed, an 
appearance may be created that a respondent was found to have made 
false statements, when in fact the conduct was less egregious.
    Current CBOE Rule 4.6 applies to any false statement or 
misrepresentation made by a member, person associated with a member or 
applicant for membership in a communication to the Exchange or OCC, 
regardless of whether the false statement or misrepresentation was made 
knowingly or was of a material fact. Current CBOE Rule 4.6 does not 
distinguish between willfully made or material false statements and 
misrepresentations and other less serious types of misstatements and 
misrepresentations. Member firms have commented to the Exchange that if 
a member firm employee is charged with violating CBOE Rule 4.6 for a 
minor misstatement, he may lose employment because of the apparent 
seriousness of being charged with making a ``False Statement'' even 
though the actual violative conduct and penalty imposed by the Exchange 
may be less severe.
    The Exchange proposes to limit the scope of CBOE Rule 4.6 to 
willfully made or material misrepresentations (which includes 
misstatements and false statements) and omissions by members, 
associated persons of members, or applicants for membership in 
communications to the Exchange or OCC. Misrepresentations and omissions 
of a less serious nature (those that are neither willfully made nor of 
a material fact) are distinguished from the foregoing in that they are 
proposed to be prohibited by new CBOE Rule 4.22. Improper option 
position adjustments are proposed to be covered by both rules to give 
the Exchange the flexibility to charge a violation of CBOE Rule 4.6 in 
those situations involving a serious offense. CBOE Rule 4.6 is proposed 
to be renamed ``Misrepresentations or Omissions.'' The Exchange 
believes that the proposed rule changes will clarify for members how 
the Exchange applies these rules.
    By amending CBOE Rule 4.6 and adding new CBOE Rule 4.22, the 
Exchange also intends to provide a clearer, more concise statement of 
the disciplinary penalties that apply to misrepresentations and 
omissions to the Exchange or the OCC. Willful or material 
misrepresentations or omissions in communications to the Exchange or 
OCC and willful or material improper position adjustments would be 
charged under revised CBOE Rule 4.6. CBOE Rule 4.6 would continue to be 
applied in those instances involving a serious offense that carries 
substantial penalties for violation such as large fines and suspension 
or expulsion from membership.

[[Page 2030]]

    Misrepresentations or omissions in communications to the Exchange 
or OCC and improper position adjustments that are neither willfully 
made nor of a material nature could be charged under new CBOE Rule 
4.22. Offenses charged under proposed CBOE Rule 4.22 will allow the 
Exchange to fashion more appropriate disciplinary measures. A violation 
of proposed CBOE Rule 4.22 may be deemed minor in nature and therefore 
subject to summary fine. CBOE Rule 17.50 (Minor Rule Violation Fine 
Plan) is proposed to be amended to add a new fine schedule applicable 
to violations of proposed CBOE Rule 4.22. However, nothing in proposed 
CBOE Rule 4.22 shall prevent the Exchange, whenever it determines that 
any violation of that Rule is intentional, egregious, or otherwise not 
minor in nature, from proceeding under the Exchange's formal 
disciplinary rules.
    The proposed rule changes are similar to existing rules at other 
exchanges that distinguish between willfully made false or misleading 
statements or omissions of material fact and other types of statements 
or omissions.\3\
---------------------------------------------------------------------------

    \3\ See e.g., New York Stock Exchange, Inc. Rules 476 and 476A.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule change will advance 
the objectives of Section 6(b)(6) of the Act \4\ in that it will 
provide that Exchange members and persons associated with members shall 
be appropriately disciplined in those instances when a rule violation 
is minor in nature, but warrants a sanction more serious than a warning 
or cautionary letter. The Exchange believes that the proposed rule 
change provides a fair procedure for disciplining members and persons 
associated with members in accordance with the requirements of Sections 
6(b)(7)\5\ and 6(d)(1)\6\ of the Act. Finally, the Exchange believes 
that the proposed rule change is consistent with and furthers the 
objectives of Section 6(b)(5) of the Act \7\ in that it is designed to 
prevent fraudulent and manipulative acts or practices, promote just and 
equitable principles of trade, foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, and to protect investors and the public interest.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78f(b)(6).
    \5\ 15 U.S.C. 78f(b)(7).
    \6\ 15 U.S.C. 78f(d)(1).
    \7\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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 that is 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. 
Comments may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-CBOE-2003-54. This file number should be included on the 
subject line if e-mail is used. To help the Commission process and 
review your comments more efficiently, comments should be sent in 
hardcopy or by e-mail but not by both methods. 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-2003-54 and should be 
submitted by February 3, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
---------------------------------------------------------------------------

    \8\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-616 Filed 1-12-04; 8:45 am]
BILLING CODE 8010-01-P