[Federal Register Volume 78, Number 218 (Tuesday, November 12, 2013)]
[Notices]
[Pages 67424-67426]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-26934]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70806; File No. SR-CBOE-2013-100]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change Relating to 
CBSX Trading Permit Holder Eligibility

November 5, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on October 23, 2013, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``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 Exchange proposes to adopt a CBOE Stock Exchange, LLC 
(``CBSX'') rule regarding eligibility for CBSX Trading Permit Holders. 
The text of the proposed rule change to [sic] is also available on the 
Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

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 Exchange 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
    CBSX is a stock execution facility of CBOE. Therefore, CBOE, as a 
self-regulatory organization, conducts surveillance of trading on CBSX, 
and surveils and examines the securities-related operations of its 
Trading Permit Holders for compliance with CBSX Rules and the federal 
securities laws, rules and regulations. The Exchange proposes to add 
CBSX Rule 50.4A.\3\ Proposed CBSX Rule 50.4A provides that a CBSX 
Trading Permit Holder may become or remain a CBSX Trading Permit Holder 
only if it is a member of a national securities association.\4\ All 
CBSX Trading Permit Holders that are effective as of the approval date 
of this filing shall have six months from the date of approval of this 
rule filing to become a member of a national securities association. 
The proposed rule also provides that CBSX will terminate, upon written 
notice, the Trading Permit Holder status of any CBSX Trading Permit 
Holder that fails to meet this requirement.\5\
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    \3\ The proposed Rule also furthers compliance with Undertaking 
O of the June 11, 2013 Order Instituting Administrative and a Cease-
and-Desist Proceedings (``Order'') involving CBOE and its affiliate 
exchange, C2 Options Exchange, Incorporated (``C2''). Undertaking O 
requires CBOE to enhance its regulation of CBSX-only Trading Permit 
Holders, i.e., Trading Permit Holders that are not CBOE Trading 
Permit Holders or members of another national securities exchange or 
a national securities association (``CBSX-Only Trading Permit 
Holders''). The proposed rule change is only one component of the 
Exchange's effort to enhance its regulation of all CBSX Trading 
Permit Holders, including CBSX-Only Trading Permit Holders, and to 
satisfy Undertaking O. Although there will technically no longer be 
any CBSX-Only Trading Permit Holders if the proposed rule change is 
approved, the Exchange still believes the proposed rule change will 
enhance the general regulatory oversight of CBSX Trading Permit 
Holders, including those former CBSX-Only Trading Permit Holders, as 
further described in this filing.
    \4\ Currently, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') is the only registered national securities association.
    \5\ The Exchange notes that the termination of the Trading 
Permit Holder status of a CBSX Trading Permit Holder, that is also a 
CBOE Trading Permit Holder, in accordance with proposed Rule 50.4A, 
will not affect that CBSX Trading Permit Holder's status as a CBOE 
Trading Permit Holder.
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    CBSX Trading Permit Holders may submit orders to other trading 
venues as customers through executing broker-dealers, which are 
ultimately executed on those other trading venues (``away-trading 
activity''). Because away-trading activity does not occur on CBSX's 
market, CBOE does not have access to all necessary order and trade 
information for this trading activity, as it does for trading activity 
done directly on CBSX, from which it can directly conduct systematic 
surveillance reviews.\6\ As such, the Exchange believes that the 
proposed CBSX Trading Permit Holder eligibility requirement will 
enhance the general regulatory oversight of CBSX Trading Permit Holders 
and their away trading activity.
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    \6\ The Exchange notes that as a member of the Intermarket 
Surveillance Group (``ISG''), the Exchange receives an equity audit 
trail of all equity market orders and trade information for away-
trading activity. However, the equity audit trail the Exchange 
receives does not provide the granular level of detail to denote 
when a CBSX Trading Permit Holder is executing a trade as a customer 
through another broker dealer on an away market. Without such 
granular information, the Exchange is limited in the reviews it can 
conduct of this away activity.
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    More specifically, FINRA rules currently require each FINRA member 
to submit order data for its trading activity on all trading venues 
(including its away-trading activity) to FINRA on a regular basis.\7\ 
Through this audit trail, FINRA has the necessary information

[[Page 67425]]

related to each member's away-trading activity to review for and detect 
possible violations of the federal securities laws, rules and 
regulations, including those related to anti-fraud and anti-
manipulation. The proposed requirement that all CBSX Trading Permit 
Holders be members of a national securities association (i.e., FINRA) 
to remain or become a CBSX Trading Permit Holder ensures that CBSX 
Trading Permit Holders are submitting their order data for their 
trading activity on all trading venues (including away-trading) on a 
regular basis to FINRA, thus allowing FINRA to detect possible 
violations of federal securities laws, rules, and regulations, 
including those related to anti-fraud and anti-manipulation. Moreover, 
if FINRA detects potential violative activity, it has the authority to 
take appropriate regulatory and disciplinary action against the CBSX 
Trading Permit Holder as one of its regulators, or otherwise refer such 
matter to CBOE for further review and consideration of disciplinary 
action. The Exchange notes that certain other exchanges require their 
members to be members of another national securities exchange or a 
national securities association.\8\ The Exchange believes that 
requiring CBSX Trading Permit Holders to be a member of FINRA but not 
providing the option of becoming a member of another national 
securities exchange is appropriate to ensure that the CBSX Trading 
Permit Holders' away-trading activity is subject to appropriate 
regulatory review. As is the case with CBSX, other national securities 
exchanges may not have direct access to the order and transaction 
information related to the away-trading activity of its members and 
therefore would not be in a position to review the activity for 
potential violations of federal securities laws, rules and 
regulations.\9\ Additionally, the Exchange notes that requiring CBSX 
Trading Permit Holders to be a member of FINRA is similar to former 
NYSE Rule 2(b), which provided that membership in FINRA was a condition 
precedent to becoming a member organization of NYSE.\10\
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    \7\ See, e.g., FINRA Rules 7440 and 7450.
    \8\ See, e.g., BATS Exchange, Inc. Rule 2.3, BATS Y-Exchange, 
Inc. Rule 2.3, EDGA Exchange, Inc. Rule 2.3(a), EDGX Exchange, Inc. 
Rule 2.3(a), NASDAQ Stock Market LLC Rule 1002(e), and New York 
Stock Exchange LLC Rule 2.
    \9\ The Exchange notes that it will be in a position to have an 
audit trail of this ``away activity'' from which it will be able to 
conduct direct systematic surveillance reviews once the National 
Market System consolidated audit trail (``CAT'') is finalized and 
implemented.
    \10\ See Securities Exchange Act Release No. 56654 (October 12, 
2007) 72 FR 59129 (October 18, 2007) (Order Approving Proposed Rule 
Change Relating to NYSE Rule 2) (SR-NYSE-2007-67). NYSE subsequently 
amended Rule 2(b) in 2009 to make its rule similar to BATS Rule 2.3, 
in order ``to make its membership more broadly available to other 
registered brokers or dealers who are not FINRA members but who are 
members of another registered securities exchange and do not 
transact business with public customers or conduct business on the 
Floor of the [NYSE].'' See Securities Exchange Act Release No. 60318 
(July 16, 2009) 74 FR 36797 (July 24, 2009) (SR-NYSE-2009-63).
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    Finally, proposed Rule 50.4A provides that the Trading Permit 
Holder Status of a current CBSX Trading Permit Holder will be 
terminated upon written notice if it fails to meet the eligibility 
requirement set forth in the proposed rule (i.e., to become a member of 
a national securities association). The Exchange recognizes that 
certain CBSX Trading Permit Holders may need a reasonable amount of 
time to become members [sic] FINRA. Accordingly, the Exchange proposes 
to require CBSX Trading Permit Holders to become a member of FINRA 
within six months of the date of approval of this rule change.\11\ The 
Exchange will announce the date by which CBSX Trading Permit Holders 
must comply with this new requirement (the ``Compliance Date'') in a 
Regulatory Circular to be published no later than seven (7) days 
following the approval of this filing.\12\ Notwithstanding the 
foregoing, if the Exchange determines that there are extenuating 
circumstances which result in a CBSX Trading Permit Holder not being 
able to comply by the Compliance Date, the Exchange may permit a CBSX 
Trading Permit Holder to retain its Trading Permit Holder status beyond 
the Compliance Date for such period of time as the Exchange deems 
reasonably necessary to enable the CBSX Trading Permit Holder to become 
a member of FINRA.\13\ In the event the firm fails to meet this 
eligibility requirement by the Compliance Date, the Exchange will issue 
written notice to the CBSX Trading Permit [sic] that its Trading Permit 
Holder status will terminate in thirty (30) days in accordance with 
proposed Rule 50.4A and Rule 3.5, unless the CBSX Trading Permit Holder 
was granted an extension based upon extenuating circumstances or the 
CBSX Trading Permit Holder files a timely appeal in accordance with the 
provisions of Chapter XIX. The Exchange notes there is similar 
authority to terminate a CBSX Trading Permit Holder under Rules 3.5 and 
3.19 with respect to current eligibility requirements of CBSX Trading 
Permit Holders. The Exchange believes this proposed provision (which 
would require termination upon failure to satisfy the proposed 
eligibility requirement) is appropriate to ensure that all trading 
activity of CBSX Trading Permit Holders will be subject to appropriate 
oversight and regulation.
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    \11\ Currently, there are 42 CBSX Trading Permit Holders that 
would be affected by this eligibility requirement (i.e., are not 
already members of FINRA).
    \12\ The Exchange will also issue periodic written reminders to 
all CBSX Trading Permit Holders affected by this requirement that 
the CBSX Trading Permit Holder must become a FINRA member by the 
Compliance Date.
    \13\ The Exchange notes that the ability to extend certain time 
limits where extenuating circumstances exist is consistent with and 
similar to other Exchange rules. See e.g., CBOE Rule 3.19 and CBOE 
Rule 3.30.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\14\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \15\ requirements that the rules 
of an exchange be designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
Additionally, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \16\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ Id.
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    In particular, the Exchange believes that the proposed rule change 
will improve its oversight of all CBSX Trading Permit Holders by 
enhancing the ability to detect, regardless of trade venue, potential 
violations of CBSX rules and federal securities laws, rules and 
regulations, including anti-fraud and anti-market manipulation rules, 
which will help to prevent fraudulent and manipulative acts and 
practices and promote just and equitable principles of trade. 
Additionally, the proposed rule change will enhance CBOE's regulation 
of CBSX-Only Trading Permit Holders in particular as required by 
Undertaking O of the Order, which is consistent with the Section 
6(b)(5) requirements. More specifically, as described above, all CBSX 
Trading Permit Holders,

[[Page 67426]]

including CBSX-Only Trading Permit Holders, would be required to submit 
their order data for their trading activity on all trading venues 
(including away-trading) on a regular basis to FINRA, thus allowing 
FINRA to detect possible violations of federal securities laws, rules, 
and regulations, including those related to anti-fraud and anti-
manipulation. If FINRA detects potential violative activity, it may 
refer such matter to CBOE for further review and consideration of 
disciplinary action.
    The Exchange also believes that the proposed rule change is 
designed to not permit unfair discrimination among market participants 
as the proposed rule change will apply to all CBSX Trading Permit 
Holders. While the proposed rule change may impose an additional burden 
on CBSX Trading Permit Holders, the Exchange believes this is 
outweighed by the Exchange's need to enhance its regulation of the CBSX 
market and the overall trading activity of CBSX Trading Permit Holders, 
which enhanced regulation will ultimately protect investors and the 
public interest. The Exchange believes that any additional burden 
imposed on CBSX Trading Permit Holders that would not currently satisfy 
the proposed eligibility requirement is justified because their away-
trading activity may currently be subject to less regulation than that 
of the CBSX Trading Permit Holders that would currently satisfy the 
proposed eligibility requirement. The proposed rule change will 
ultimately subject the trading activity of all CBSX Trading Permit 
Holders to a similar level of regulatory oversight.

B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE 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. The Exchange does not believe 
that the proposed rule change will impose an unnecessary burden on 
intramarket competition because it would apply equally to all CBSX 
Trading Permit Holders. Additionally, the proposed rule change is not 
designed to address any competitive issues. Rather, the proposed rule 
change is intended to enhance its regulation of all CBSX Trading Permit 
Holders, including CBSX-Only Trading Permit Holders, and is one part of 
the Exchange's overall effort to comply with Undertaking O of the 
Order. The Exchange believes the proposed rule change will enhance the 
oversight of CBSX Trading Permit Holders' overall trading activity and 
the ability of the Exchange and other self-regulatory organizations to 
detect violations of federal securities laws, rules and regulations, 
including anti-fraud rules. While the proposed rule change may impose 
an additional burden on CBSX Trading Permit Holders, the Exchange 
believes this burden is similar to a burden imposed by several other 
exchanges on their members \17\ and is outweighed by the Exchange's 
need to enhance its regulation of the CBSX market and the trading 
activity of CBSX-Only Trading Permit Holders, which enhanced regulation 
will ultimately benefit all market participants. See the discussion 
above for additional information regarding the potential burden imposed 
by the proposed rule change on CBSX Trading Permit Holders.
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    \17\ See supra note 6 [sic].
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate 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 or disapprove 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. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CBOE-2013-100 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2013-100. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-2013-100 and should be 
submitted on or before December 3, 2013.
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    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-26934 Filed 11-8-13; 8:45 am]
BILLING CODE 8011-01-P