[Federal Register Volume 69, Number 15 (Friday, January 23, 2004)]
[Notices]
[Pages 3402-3404]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-1462]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49078; File No. SR-CBOE-2003-58]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to Its 
Summary Fine Schedule for Position Limit Violations

January 14, 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 December 10, 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.
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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 CBOE proposes to amend its summary fine schedule for position 
limit violations. The text of the proposed rule change is below. 
Additions are italicized; deletions are in brackets.
* * * * *

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) Violation of position limit rules. (Rule 4.11)
    (a) For violations occurring in the accounts of non-member 
customers (i.e., customers that are not Exchange members):

Number of Cumulative Violations In Any   Fine Amount (imposed on
 Twelve (12) Month Rolling Period*.       Exchange member firm).
First Offense [1-6]....................  Letter of Caution[, up to 5% in
                                          excess of the applicable
                                          limit; above that level, $1
                                          per contract].
Second Offense [7-12]..................  $500 [1 per contract over
                                          limit].
Third Offense [13+]....................  $1,000 [5 per contract over
                                          limit].
Fourth and Each Subsequent Offense.....  $2,500.
 

    (b) For violations occurring in all other accounts:

Number of Cumulative Violations In Any   Fine Amount.
 Twelve (12) Month Rolling Period*.
First Offense [1-3*]...................  Letter of Caution[, up to 5% in
                                          excess of the applicable
                                          limit; above that level, $1
                                          per contract].
Second Offense [4-6]...................  $1,000 [1 per contract over
                                          limit].
Third Offense [7-9]....................  $2,500 [2.50 per contract over
                                          limit].
Fourth and Each Subsequent Offense       $5,000 [5 per contract over
 [10+].                                   limit].
 
*A violation [in this category] that consists of (i) a 1 trade date
  overage, (ii) a consecutive string of trade date overage violations
  where the position does not change or where a steady reduction in the
  overage occurs, or (iii) a consecutive string of trade date overage
  violations resulting from other mitigating circumstances, may be
  deemed to constitute one offense, provided that the violations are
  inadvertent. [or a 2 consecutive trade date overage will be counted as
  a single violation. At staff's discretion, an informal Staff Interview
  may be conducted rather than a Letter of Caution issued for the 3rd
  violation.]
[Fines imposed for violations of Rule 4.11 shall be in the minimum
  amount of $100.]

    (2)-(10) No change.
* * * * *
    Interpretations and Policies:
    .01 [(a) Violations of the position limit rule that continue over 
consecutive business days will be subject to a separate fine, pursuant 
to subsection (g)(1) of this Rule and except as provided in the 
footnote to (g)(1)(b) for member accounts, for each day during which 
the violation occurs and is continuing.] For purposes of subsection 
(g)(1)(a), all accounts of non-member broker-dealers will be treated as 
customer accounts. In calculating fine

[[Page 3403]]

thresholds under subsection (g)(1)(a) for each Exchange member, all 
violations occurring in any twelve-month rolling period in all of that 
member's non-member customer accounts are to be added together.
    (b) [A member whose position limit summary fine(s) meets one of the 
levels below shall have the opportunity to submit one written offer of 
settlement in accordance with the provisions of Rule 17.8(a)--
Submission of Offer, provided, however, that the Interpretations and 
Policies to Rule 17.8 shall not apply to an offer made hereunder and 
the member must submit the offer within 30 days of the date of service 
of the written statement informing the member of the fine(s) imposed. 
The member may also appear once before the Business Conduct Committee 
to make an oral statement in support of the offer. A member may make 
one offer:
    (1) when the fine calculated pursuant to subsection (g)(1) of this 
Rule would be greater than $2,500 per day and not more than $5,000 per 
day; or
    (2) when position limit violations continue over 5 or more 
consecutive trade dates and the fine calculated pursuant to subsection 
(g)(1) would be greater than $10,000 in the aggregate and not more than 
$5,000 on any day.]
    Any member who is issued a summary fine notice for the same conduct 
covered in sub-paragraph (g)(5) that meets one of the levels below 
shall have the opportunity to submit one written offer of settlement to 
the Business Conduct Committee in accordance with the provisions of 
Rule 17.8(a)--Submission of Offer, provided, however, that the 
Interpretation and Policies to Rule 17.8 shall not apply to an offer 
made hereunder and the member must 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 may also appear once before the Business 
Conduct Committee to make an oral statement in support of the offer. In 
considering an offer of settlement, the Business Conduct Committee 
shall consider the Principal Considerations in Determining Sanctions as 
set forth in Interpretation and Policy .01 of Rule 17.11. A member may 
make one offer:
    (1) When the summary fine amount would be 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 would be 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.
    A decision of the Business Conduct Committee accepting an offer of 
settlement hereunder shall be reported on a current basis pursuant to 
Rule 19d-1 under the Securities Exchange Act of 1934. The member shall 
report a decision accepting an offer of settlement on the member's 
broker-dealer and Form U-4 (uniform application for securities industry 
registration or transfer) forms as a decision in a contested Exchange 
disciplinary proceeding.
    .02-.04 No change.
* * * * *

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's disciplinary rules authorize the imposition of fines 
for minor rule violations, which are set forth in CBOE Rule 17.50. With 
respect to option position limit violations, current CBOE Rule 
17.50(g)(1) sets forth a graduated fine schedule that increases the 
dollar amount of the fine as the number of cumulative violations 
increase. The dollar amount of the fines range from $1.00 to $5.00 per 
contract for every contract exceeding the applicable position limit. 
Pursuant to CBOE Rule 17.50(a),\3\ a violation where the fine amount 
exceeds $5,000 is not a minor rule violation under CBOE Rule 17.50 and 
is subject to the disciplinary procedures under CBOE Rule 17.2 et seq.
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    \3\ CBOE Rule 17.50(a) provides in relevant part: ``In lieu of 
commencing a disciplinary proceeding pursuant to Exchange Rule 17.2 
et seq., the Exchange may, subject to the requirements set forth 
herein, impose a fine, not to exceed $5,000, on any member or person 
associated with or employed by a member with respect to any rule 
violation listed in section (g) of this Rule. * * *''
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    Based on its experience with processing position limit violations, 
the Exchange has found that most position limit violations are 
technical in nature. Accordingly, the Exchange believes that they 
should be processed under a summary fine schedule. For example, the 
Exchange often encounters situations that involve inadvertent 
calculation errors or computer systems problems, which result in 
sizable position limit overages and a consecutive string of single 
trade date violations. The violations are often sizeable and occur over 
a string of days because the member is unaware of the problem that 
caused the violation. In these situations, once the Exchange has 
identified the overage and notified the member, the member has taken 
appropriate action to bring the position into compliance and, if the 
overage was based on a computer systems problem, implemented 
appropriate procedures to prevent a recurrence.
    Notwithstanding the unintentional nature of the violations, the 
Exchange's current rules provide for the imposition of fines for 
position limit violations in accordance with the fine schedule set 
forth in CBOE Rule 17.50(g). For violations occurring in the accounts 
of non-member customers, CBOE Rule 17.50(g)(1)(a) deems one violation 
to equal a single date overage. For violations occurring in all other 
accounts, CBOE Rule 17.50(g)(1)(b) deems one violation to equal either 
a one trade date overage or a two consecutive trade date overage. 
Therefore, a single position limit overage that continues over a string 
of consecutive days will significantly increase the probability that 
the fine will exceed the $5,000 threshold set forth in CBOE Rule 
17.50(a) as a result of reaching the next level in the graduated fine 
schedule. In these situations, the Exchange rules require the Exchange 
to remove the violation from the summary fine process of CBOE Rule 
17.50(g) and place it under the disciplinary process set forth in CBOE 
Rule 17.2 et seq.
    The Exchange believes that removal of these types of violations 
from the summary fine process is incongruous with what it believes is 
the unintentional nature of the majority of the position limit 
violations that the Exchange comes across. To realign CBOE Rule 
17.50(g) with the current landscape, the Exchange proposes to establish 
a fixed dollar fine amount per each offense, with the maximum fine 
amount equaling $2,500 for violations occurring in the accounts of non-
member customers and $5,000 for violations occurring in all other 
accounts. The cap on the fine amount would permit the Exchange to 
process

[[Page 3404]]

the majority of position limit violations under the summary fine 
process without having to subject the violation to the disciplinary 
procedures as provided in CBOE Rule 17.2 et seq. In addition to 
restructuring the fine amounts, the proposed rule change provides in 
the footnote to CBOE Rules 17.50(g)(1)(a) and (b) that (i) a one-trade 
date overage, (ii) a consecutive string of trade date overage 
violations where the position does not change or where a steady 
reduction in the overage occurs,\4\ or (iii) a consecutive string of 
trade violations resulting from other mitigating circumstances, may be 
deemed to constitute one offense, provided that the violations are 
inadvertent. Proposed subsection (ii) addresses the majority of 
violations that the Exchange comes across and proposed subsection (iii) 
addresses the infrequent, inadvertent violations that may not fall 
within proposed subsections (i) and (ii). Contemporaneous with the 
imposition of the fine, the Exchange's regulatory staff will work with 
the subject member to correct the problem that caused the position 
limit violation. The Exchange notes that American Stock Exchange LLC 
Rule 590(g) imposes a similar fine schedule for a violation of its 
position limit rule.
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    \4\ The Exchange notes that proposed subsection (ii) of the 
footnote to Rules 17.50(g)(1)(a) and (b) is designed to replace the 
first sentence of Interpretation .01 to Rule 17.50, which is being 
deleted in the proposed rule change. The first sentence of 
Interpretation .01 to Rule 17.50 currently serves to mitigate the 
substantial fines that would result from sizeable overages and/or 
consecutive day overages. As provided in the proposed footnote to 
Rules 17.50(g)(1)(a) and (b), the Exchange will now deem such 
inadvertent consecutive day overages and/or sizeable overages as one 
offense, with a corresponding set fine. To the extent a position 
limit overage is not covered in proposed subsections (i) and (ii) of 
the footnote to Rules 17.50(g)(1)(a) and (b), such as if the 
position limit overage increases over a period of consecutive days, 
the Exchange would apply proposed subsection (iii) of the footnote 
to Rules 17.50(g)(1)(a) and (b) to the extent the increased option 
position is inadvertent.
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    CBOE Rule 17.50(f) retains the Exchange's authority to remove the 
position limit overage violation from the summary fine process of CBOE 
Rule 17.50(g). Under CBOE Rule 17.50(f), the Exchange ``may, whenever 
it determines that any violation is intentional, egregious, or 
otherwise not minor in nature, proceed under the Exchange's formal 
disciplinary rules as set forth in Exchange Rule 17.2 et seq., rather 
than under Exchange Rule 17.50.'' Therefore, the Exchange may remove 
the violation from the summary fine process whenever it determines that 
the violation is intentional, egregious or otherwise not minor in 
nature.
    The Exchange also proposes to delete the first paragraph of 
subsection (b) of Interpretation .01 to CBOE Rule 17.50 because the 
Exchange believes that offers of settlement are inappropriate under the 
proposed fine schedule. Subsection (b) currently serves to mitigate 
hefty fines caused by unintentional overages such as those that occur 
in the examples provided above. Since the proposed rule change replaces 
the graduated fine schedule with the set fine schedule, each offense is 
capped at a dollar amount and does not need to be mitigated by an offer 
of settlement.
2. Statutory Basis
    The Exchange believes the proposed rule change will enable the 
Exchange to deal more efficiently with the majority of position limit 
violations and to provide the Exchange with a more equitable method of 
dealing with inadvertent position limit overages, which is consistent 
with section 6(b) of the Act \5\ in general and furthers the objectives 
of section 6(b)(5) of the Act \6\ in particular in that it should 
promote just and equitable principles of trade, serve to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and protect investors and the public 
interest.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
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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 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-2003-58. 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-2003-58 and should be 
submitted by February 13, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-1462 Filed 1-22-04; 8:45 am]
BILLING CODE 8010-01-P