[Federal Register Volume 84, Number 85 (Thursday, May 2, 2019)]
[Notices]
[Pages 18878-18892]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-08912]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85727; File No. SR-CBOE-2019-025]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
Chapter 17 of the Cboe Options Rules

April 26, 2019.
    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 April 17, 2019, Cboe Exchange, Inc. (``Cboe Options'' or the 
``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 
Exchange filed the proposal as a ``non-controversial'' proposed rule 
change pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 
19b-4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to amend Chapter 17 of the Cboe Options Rules. The text of the proposed 
rule change is provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (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

[[Page 18879]]

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 update processes and related rules 
concerning investigative and disciplinary matters involving Exchange 
Trading Permit Holders (``TPHs'') \5\ and persons associated with 
Trading Permit Holders (``associated persons'').\6\ Specifically, the 
Exchange is updating its rules and processes related to (1) complaints 
and investigations; (2) expedited proceedings; (3) the issuance of 
charges (and answers thereto); (4) hearings (including decisions made 
pursuant to a hearing and the review of decisions); (5) summary 
proceedings; (6) settlements; (7) judgment and sanctions; (8) service 
of notice; (9) reporting to the Central Registration Depository; and 
(10) imposition of fines for minor rule violations. The Exchange is 
making these updates in an effort to adopt new roles for the Exchange's 
Business Conduct Committee (``BCC'') \7\ and Chief Regulatory Officer 
(``CRO'') \8\ and to increase efficiency and fairness in the Exchange's 
disciplinary process. The Exchange proposes updates to Chapter 17 to 
reflect the new roles of the CRO and the Hearing Panel in the 
disciplinary process, which are consistent with that of the Exchange's 
affiliate exchanges: Cboe BZX Exchange, Inc. (``Cboe BZX''); \9\ Cboe 
BYX Exchange, Inc. (``Cboe BYX''); \10\ Cboe EDGX Exchange, Inc. 
(``Cboe EDGX''); \11\ and Cboe EDGA Exchange, Inc. (``Cboe EDGA'') \12\ 
(collectively, and hereinafter, referred to as the ``Affiliated 
Exchanges'').\13\ The Exchange also proposes additional changes to 
reflect certain other language and provisions of the Affiliated 
Exchanges, particularly regarding ex parte communications \14\ and 
impartiality of Hearing Panel members.\15\ In addition, the Exchange is 
making technical and conforming updates to its minor rule violation 
rules.\16\ The updates reflecting the rules of the Affiliated Exchanges 
contain some nuance. The most notable difference that will remain at 
this time between Exchange rules and the rules of the Affiliated 
Exchanges is that BCC members will be selected by the Chairperson of 
the BCC to comprise Hearing Panels, whereas the Chief Executive Officer 
(``CEO'') appoints members of the Hearing Panels on the Affiliated 
Exchanges. Moreover, the Exchange proposes timing and tolling of 
certain periods in connection with various stages of the proceedings 
under Chapter 17 that are different from the timing in the Affiliated 
Exchanges' corresponding rules. The Exchange also proposes updates to 
certain aspects of the review process intended to streamline the 
overall disciplinary process. Finally, the Exchange is updating certain 
rules to correct minor errors or update obsolete/outdated language as 
needed.
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    \5\ Pursuant to the Tenth Amended and Restated Bylaws of the 
Exchange ``Trading Permit Holder'' means any individual, 
corporation, partnership, limited liability company or other entity 
authorized by the Rules that holds a Trading Permit. If a Trading 
Permit Holder is an individual, the Trading Permit Holder may also 
be referred to as an ``individual Trading Permit Holder.'' If a 
Trading Permit Holder is not an individual, the Trading Permit 
Holder may also be referred to as a ``TPH organization.'' A Trading 
Permit Holder is a ``member'' solely for purposes of the Securities 
and Exchange Act of 1934 (the ``Act''); however, one's status as a 
Trading Permit Holder does not confer on that Person any ownership 
interest in the Exchange.
     Pursuant to Cboe Options Rule 1.1(hhh), the term ``Trading 
Permit'' means a license issued by the Exchange that grants the 
holder or the holder's nominee the right to access one or more of 
the facilities of the Exchange for the purpose of effecting 
transactions in securities traded on the Exchange without the 
services of another person acting as broker, and otherwise to access 
the facilities of the Exchange for purposes of trading or reporting 
transactions or transmitting orders or quotations in securities 
traded on the Exchange, or to engage in other activities that, under 
the Rules, may only be engaged in by Trading Permit Holders, 
provided that the holder or the holder's nominee, as applicable, 
satisfies any applicable qualification requirements to exercise 
those rights.
    \6\ Pursuant to Cboe Options Rule 1.1(qq), the ``associated 
person'' or ``person associated with a Trading Permit Holder'' means 
any partner, officer, director, or branch manager of a Trading 
Permit Holder (or any person occupying a similar status or 
performing similar functions), any person directly or indirectly 
controlling, controlled by, or under common control with a Trading 
Permit Holder, or any employee of a Trading Permit Holder.
    \7\ The BCC has decision-making authority concerning possible 
violations within the disciplinary jurisdiction of the Exchange. The 
BCC is comprised of one or more TPHs or associated persons, one or 
more public representatives, and may also include other individuals 
affiliated with the securities, futures or derivatives industry, all 
as appointed by the Exchange's Nominating and Governance Committee 
with the approval of the Exchange's Board of Directors.
    \8\ The CRO has general supervisory authority over the 
Exchange's regulatory operations, including the responsibility for 
overseeing its surveillance, examination, and enforcement functions 
and for administering any regulatory services agreements with 
another self-regulatory organization to which the Exchange is a 
party.
    \9\ See Rules of Cboe BZX Exchange, Inc., specifically Rules 
8.2, 8.3, 8.4, 8.6, 8.7, and 8.8.
    \10\ See Rules of Cboe BYX Exchange, Inc., specifically Rules 
8.2, 8.3, 8.4, 8.6, 8.7, and 8.8.
    \11\ See Rules of Cboe EDGA Exchange, Inc., specifically Rules 
8.2, 8.3, 8.4, 8.6, 8.7, and 8.8.
    \12\ See Rules of Cboe EDGX Exchange, Inc., specifically Rules 
8.2, 8.3, 8.4, 8.6, 8.7, and 8.8.
    \13\ The rules under Chapter 8 of each of the Affiliated 
Exchanges are the same in number, form and substance. Therefore, the 
Exchange refers singularly to the corresponding rule of the 
``Affiliated Exchanges'' throughout this proposed rule filing.
    \14\ See the Affiliated Exchanges' Rule 8.16.
    \15\ See the Affiliated Exchanges' Rule 8.6.
    \16\ See the Affiliated Exchanges' Rule 8.15.
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Current Exchange Rules and Adjudicatory Process
    The Exchange rules currently divided responsibility for the 
adjudication of its rules into two categories: (1) Rules for which the 
BCC and BCC Hearing Panels are responsible for adjudicating formal 
disciplinary proceedings; and (2) rules under which fines may be 
assessed in lieu of formal disciplinary action. With respect to 
violations that are adjudicated by the BCC and Hearing Panels, Rule 
17.4(b) requires the BCC to direct Regulatory staff (``Staff'') \17\ to 
prepare a statement of charges whenever it appears that there is 
probable cause for finding a violation within the disciplinary 
jurisdiction of the Exchange has occurred and formal disciplinary 
action is warranted. Alternatively, in lieu of conducting a formal 
disciplinary proceeding, Rule 17.50 (Imposition of Fines for Minor Rule 
Violations) provides for disposition of specific violations through 
assessment of fines.\18\
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    \17\ See Cboe Options Rule 17.2 Interpretation and Policy .05. 
References to ``Regulatory staff'' mean the Exchange's employees in 
the Regulatory Division, and, as applicable, may also mean employees 
of the Financial Industry Regulatory Authority, Inc. (``FINRA'') who 
are performing regulatory services to the Exchange in accordance 
with the regulatory services agreement entered into between the 
Exchange and FINRA.
    \18\ None of the fines assessed in lieu of formal disciplinary 
action exceed $5000. Under Rule 17.50(f), the Exchange may refer 
matters covered under Rule 17.50 for formal disciplinary action 
whenever it determines that any violation is intentional, egregious 
or otherwise not minor in nature.
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Current Rule 17.2 Complaint and Investigation
    Staff investigates and examines possible violations within the 
disciplinary jurisdiction of the Exchange (``violations'') whenever 
Staff determines in its sole discretion that there is reasonable basis 
for it to do so.\19\ TPHs and associated persons are required to 
cooperate with Staff inquiries and to furnish information

[[Page 18880]]

requested in connection with investigations and examinations.\20\
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    \19\ See Cboe Options Rule 17.2(a).
    \20\ See Cboe Options Rule 17.2(b).
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    Staff have [sic] the sole discretion to determine whether to 
request the BCC authorize the issuance of a statement of charges.\21\ 
When Staff finds that a violation has occurred and formal regulatory 
action is warranted, Staff submits a written report (``report'') of the 
investigation to the BCC.\22\ When Staff finds that a violation has 
occurred but non-formal disciplinary action is warranted (e.g. 
cautionary letters) Staff may, in its sole discretion, impose non-
formal disciplinary action without submitting a report to the BCC.\23\ 
If Staff finds that there are not reasonable grounds to determine a 
violation has been committed Staff may, in its sole discretion, close 
the investigation without submitting a report to the BCC.\24\
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    \21\ See Cboe Options Rule 17.2(c).
    \22\ Id.
    \23\ Id.
    \24\ Id.
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    Prior to submitting a report to the BCC, Staff must notify the 
subject of the report (``Subject'') of the nature of the alleged 
violations.\25\ Unless the BCC decides expeditious action is required, 
the Subject has 15 days to submit a written statement to the BCC 
concerning why no disciplinary action should be taken.\26\ The Subject 
may request access to documents in the investigative file, furnished by 
the Subject or the Subject's agents, to assist the Subject in preparing 
such a written statement.\27\ The Subject may also submit a videotaped 
response in lieu of a written statement, the length and format of which 
is decided by the Exchange.\28\
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    \25\ See Cboe Options Rule 17.2(d).
    \26\ Id.
    \27\ Id.
    \28\ See Cboe Options Interpretation and Policy .02 to Rule 
17.2.
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Current Rule 17.3 Expedited Proceeding
    When the Subject receives notice of the report, the Subject may 
seek to dispose of the matter through a letter of consent.\29\ The 
Subject submits notice to Staff electing to proceed in an expedited 
manner.\30\ The Subject and Staff may then negotiate a letter of 
consent outlining stipulations and findings regarding the violation(s) 
and the sanctions therefore.\31\ Disposing of the matter via letter of 
consent occurs only if the Subject and Staff agree on the terms and it 
is signed by the Subject.\32\ At any time, the Subject or Staff may 
terminate the negotiations.\33\ Following termination of the 
negotiations, the Subject has 15 days to submit a written statement to 
the BCC, pursuant to Rule 17.2, concerning why no disciplinary action 
should be taken.\34\ The BCC may accept or reject the letter of 
consent.\35\ If the BCC accepts the letter, it may adopt the letter as 
its decision.\36\ If the BCC rejects the letter, the matter proceeds as 
if the letter had not been submitted. The BCC's decision to accept or 
reject the letter is final.\37\
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    \29\ See Cboe Options Rule 17.3.
    \30\ Id.
    \31\ Id.
    \32\ Id.
    \33\ Id.
    \34\ Id.
    \35\ Id.
    \36\ Id.
    \37\ Id.
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Current Rule 17.4 Charges
    When it appears to the BCC from the Staff's report pursuant to Rule 
17.2(c) that no probable cause exists for finding a violation occurred 
or if the BCC otherwise determines that no further action is warranted, 
the BCC issues a written statement setting out its reasons for that 
finding.\38\ When the BCC determines probable cause exists for finding 
a violation occurred and further proceedings are warranted, the BCC 
directs Staff to prepare a statement of charges against the Subject 
(thereafter a ``Respondent'') specifying the acts for which the 
Respondent is charged and setting forth the specific violations.\39\ A 
Respondent may request access to the investigative file within 60 
calendar days of receiving notice of a statement of charges.\40\ The 
Staff, however, may protect the identity of a Complainant in providing 
such documents. Additionally, ex parte communications are prohibited 
between a TPH or person associated with a TPH and members of the BCC or 
Board (and vice versa) concerning the merits of any matter pending 
under Chapter 17.\41\
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    \38\ See Cboe Options Rule 17.4(a).
    \39\ See Cboe Options Rule 17.4(b).
    \40\ See Cboe Options Rule 17.4(c).
    \41\ See Cboe Options Rule 17.4(d) and Interpretations and 
Policies .01-.03 to Rule 17.4.
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Current Rule 17.5 Answer
    The Respondent has 15 days after service of the statement of 
charges to file a written answer to the statement of charges 
(``Answer'').\42\ The Answer specifically admits or denies any 
allegation contained in the statement of charges and may be accompanied 
by supporting documentation.\43\
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    \42\ See Cboe Options Rule 17.5.
    \43\ Id.
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Current Rule 17.6 Hearing
    Subject to Rule 17.7 regarding summary proceedings (described 
below), hearings on charges are held before one or more members of the 
BCC.\44\ The person or persons conducting the hearing exercise [sic] 
the authority of the BCC and are [sic] referred to as the ``Panel.'' 
\45\ The Exchange and the Respondent are parties to the hearing.\46\ 
Where a TPH organization (as opposed to a TPH who is an individual or 
an associated person) is a party, it is represented by one of its TPHs 
(including nominees).\47\ The parties are given at least 15 days' 
notice of the time and place of the hearing.\48\ Not less than five 
days in advance of the hearing date, the parties must furnish copies of 
all documentary evidence they wish to present at the hearing and a list 
of witnesses they intend to present at the hearing.\49\ If the time and 
nature of the proceedings permit, the parties meet in a pre-hearing 
conference in order to clarify and simplify issues, and otherwise 
expedite the proceeding, At the pre-hearing conference, the parties 
must attempt to reach agreement respecting authenticity of documents, 
facts not in dispute, and any other items in order to expedite the 
hearing. At the request of any party, the Panel or Panel Chairperson 
hears and decides the pre-hearing issues not resolved among the 
parties. Generally, interlocutory Board review of any decision made by 
the Panel prior to hearing completion is prohibited, and permitted only 
if the Panel agrees to such review after determining that the issue is 
a controlling issue of rule or policy and that immediate Board review 
would materially advance the ultimate resolution of the case. The Panel 
has the authority to regulate the conduct of the hearing and shall 
determine all questions concerning the admissibility of evidence.\50\ 
Persons who are not parties to the hearing may intervene as a party, 
provided that person can demonstrate an interest in the subject of the 
hearing to the satisfaction of the Panel.\51\
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    \44\ See Cboe Options Rule 17.6(a).
    \45\ Id.
    \46\ Id.
    \47\ Id.
    \48\ See Cboe Options Rule 17.6(b).
    \49\ Id.
    \50\ See Cboe Options Rule 17.6(c).
    \51\ See Cboe Options Interpretation and Policy .01 to Rule 
17.6.
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Current Rule 17.7 Summary Proceedings
    Notwithstanding Rule 17.6 regarding hearings (described above), the 
BCC may make a determination without a hearing and impose a penalty as 
to violations which the Respondent has admitted or failed to Answer or 
which otherwise do not appear to be in

[[Page 18881]]

dispute.\52\ The Respondent is served with notice of summary 
determination, after which the Respondent may notify the BCC that they 
[sic] would like a hearing on one or more of the charges.\53\ A 
Respondent's failure to notify the BCC that they [sic] desire a hearing 
constitutes an admission of the violations and an acceptance of the 
penalty.\54\
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    \52\ See Cboe Options Rule 17.7.
    \53\ Id.
    \54\ Id.
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Current Rule 17.8 Offers of Settlement
    The Respondent may submit an offer of settlement (``offer'') to the 
BCC up to 120 days following service of the statement of charges.\55\ 
If the BCC accepts the offer, it issues a decision consistent with the 
terms of the offer.\56\ If the BCC rejects the offer, it notifies the 
Respondent and the matter proceeds as if the offer had not been 
made.\57\ The Respondent may submit a written statement in support of 
an offer.\58\ In addition, the Respondent is notified if Staff will not 
recommend acceptance of an offer, and the Respondent may then appear 
before the BCC to make an oral statement in support of the offer.\59\ 
If the BCC rejects an offer that the Staff supports the Respondent may 
also appear before the BCC to make an oral statement concerning why the 
BCC should consider changing its decision.\60\
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    \55\ See Cboe Options Rule 17.8(a).
    \56\ Id.
    \57\ Id.
    \58\ See Cboe Options Rule 17.8(b).
    \59\ Id.
    \60\ Id.
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    Subject to certain conditions, the Respondent is limited to two 
offers in connection with a statement of charges.\61\ The BCC, in its 
discretion, may permit the Respondent to submit an additional offer 
during the applicable time period, provided the stipulation of facts 
and sanction contained in the offer are consistent with what is deemed 
acceptable by the BCC.\62\
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    \61\ See Cboe Options Interpretation and Policy .01(a) to Rule 
17.8.
    \62\ See Cboe Options Interpretation and Policy .01(c) to Rule 
17.8.
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    Further, there are certain situations where the 120-day period 
during which the Respondent may submit an offer may be reduced and/or 
extended. If the Respondent elects to proceed in an expedited manner 
pursuant to Rule 17.3 and is unable to reach a consent agreement with 
Staff, then any period in excess of 30 days from when the Respondent 
elected to proceed in an expedited manner to the end of consent 
negotiations (by either Staff or the Respondent's declaration) is 
deducted from the 120-day period.\63\ If the Respondent requests access 
to the investigative file pursuant to Rule 17.4, the 120-day period is 
tolled during the number of days in excess of 30 days that it takes 
Staff to provide access to the investigative file.\64\
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    \63\ See Cboe Options Interpretation and Policy .01(b) to Rule 
17.8.
    \64\ See Cboe Options Interpretation and Policy .01(d) to Rule 
17.8.
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    Finally, at the end of the 120-day period, or after the BCC rejects 
the Respondent's second offer a hearing is scheduled and the hearing 
proceeds in accordance with the provisions of Rule 17.6.\65\
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    \65\ See Cboe Options Interpretation and Policy .02 to Rule 
17.8.
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Current Rule 17.9 Decision
    Following a hearing, the Panel issues a decision (the ``decision'') 
determining whether the Respondent has committed a violation.\66\ The 
decision must also include sanctions in cases where sanctions have been 
imposed. In instances in which the Panel is not composed of at least a 
majority of the BCC, a majority of the BCC automatically reviews the 
decision. The majority may affirm, reverse, or modify the decision or 
remand the matter for additional findings or supplemental 
proceedings.\67\
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    \66\ See Cboe Options Rule 17.9.
    \67\ Id.
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Current Rule 17.10 Review
    The Respondent and/or the Regulatory Division has 15 days after 
service of the decision to petition for review of the decision by 
filing a copy of the petition with the Secretary of the Exchange and 
with all other parties.\68\ Parties other than the petitioner may 
submit written responses to the petition.\69\ The Board or a committee 
of the Board, whose decisions must be ratified by the Board, conducts 
the review.\70\ The Board may affirm, reverse or modify a decision of 
the BCC and the decision of the Board is final.\71\ In addition, the 
Board may review a decision on its own motion.\72\ Finally, the 
Exchange's Regulatory Oversight and Compliance Committee may apply to 
the Board to have the BCC's decision not to initiate charges that were 
recommended by Staff, reviewed by the Board.\73\
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    \68\ See Cboe Options Rule 17.10(a)(1).
    \69\ See Cboe Options Rule 17.10(a)(2).
    \70\ See Cboe Options Rule 17.10(b).
    \71\ Id.
    \72\ See Cboe Options Rule 17.10(c).
    \73\ See Cboe Options Rule 17.10(d).
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Current Rule 17.11 Judgment and Sanction
    The BCC, in part, appropriately disciplines TPHs and associated 
persons for violations by expulsion, suspension, limitation of 
activities, fine, censure, suspension of Trading Permits, or any other 
fitting sanction.\74\ Under this Rule, the BCC considers several 
factors when determining sanctions including, but not limited to, 
deterrence, remediation, precedent and the appropriateness of 
disgorgement and/or restitution.\75\
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    \74\ See Cboe Options Rule 17.11(a).
    \75\ See Cboe Options Interpretation and Policy .01 to Rule 
17.11.
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Current Rule 17.12 Service of Notice
    Service of charges, notices and other documents upon the Respondent 
are made personally, by leaving the same at the Respondent's place of 
business or by deposit in the US post office via registered or 
certified mail addressed to the Respondent at the Respondent's address 
as it appears on the books and records of the Exchange.\76\
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    \76\ See Cboe Options Rule 17.12.
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Current Rule 17.14 Reporting the Central Registration Depository
    The Exchange reports the issuance of a statement of charges and 
significant changes to the status of disciplinary proceedings to the 
Central Registration Depository (``CRD'').\77\
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    \77\ See Cboe Options Rule 17.14.
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Current Rule 17.50 Imposition of Fines for Minor Rule Violations
    In lieu of commencing disciplinary proceedings, the Exchange may 
impose fines, not to exceed $5000, on TPHs and associated persons for 
specified Rule violations.\78\ Any person against whom a fine is 
imposed pursuant to Rule 17.50 may contest the fine by filing an 
Answer, pursuant to Rule 17.5, at which point the matter is subject to 
review by the BCC.\79\ The Answer may request a hearing if desired. 
Review and hearing related to violations outlined in Rule 17.50 are 
handled in the same fashion as any other matter for which a statement 
of charges has been issued.\80\ However, subject to certain conditions, 
the BCC may impose certain forum fees for review and hearing if the BCC 
determines that the conduct serving as the basis of the action under 
review is in violation of Exchange Rules.\81\ The Exchange lists the 
rules as to which the Exchange may impose fines within Rule 17.50 
itself and in regulatory circulars

[[Page 18882]]

and notices.\82\ Nothing in Rule 17.50 requires the Exchange to impose 
a fine pursuant to Rule 17.50 with respect to the violation of any rule 
listed.\83\ For a violation that the Exchange determines is minor in 
nature and falls within the scope of the minor rule plan, it may 
proceed under Rule 17.50.\84\ A number of listed rules within Rule 
17.50 indicate that violations above a specified threshold or a 
specified number of repeat violations will result in referral to the 
BCC.\85\
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    \78\ See Cboe Options Rule 17.50(a).
    \79\ See Cboe Options Rule 17.50(c)(1).
    \80\ Id.
    \81\ See Cboe Options Rule 17.50(c)(2).
    \82\ See Cboe Options Rule 17.50(f).
    \83\ Id.
    \84\ Id.
    \85\ See Cboe Options Rule 17.50(g)(2)-(5), (7), (9)-(19).
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Proposed Updates to Exchange Rules
    As mentioned above, the current application of the rules provides 
for the BCC to determine whether to initiate charges in a regulatory 
matter and to determine appropriate sanctions for rule violations. 
Under the proposed change to Rule 17.4, the CRO will replace the BCC 
and accordingly, the CRO will have the authority to initiate charges. 
Under the proposed changes to Rule 17.11, the CRO or a Hearing Panel, 
as applicable, may impose disciplinary sanctions. The Exchange proposes 
corresponding changes elsewhere in Chapter 17 to reflect the CRO's 
authority to initiate charges and impose disciplinary sanctions. These 
changes harmonize the CRO's authority under Chapter 17 with the CRO's 
authority under corresponding Chapter 8 of the Affiliated Exchanges. 
The Exchange believes that this transfer of authority to the CRO 
maintains the independence of the regulatory functions of the Exchange 
as the CRO supervises the regulatory functions of the Exchange, 
separate from that of its business interest, reporting directly to the 
Regulatory Oversight Committee of the Board of Directors (``ROC'').
    The Exchange recommends additional changes, including amendments 
to:
    (1) Increase the amount of time the Subject of a regulatory report 
has to submit a written statement (from 15 days to 25).
    (2) Increase the amount of time a Respondent has to file an Answer 
(from 15 days to 25). This changed is based on the Rules of the New 
York Stock Exchange (``NYSE''),\86\ the Financial Industry Regulatory 
Authority (``FINRA''),\87\ and NASDAQ PHLX, LLC (``PHLX'').\88\
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    \86\ See NYSE Rule 9215.
    \87\ See FINRA Rule 9215.
    \88\ See PHLX Rule 9215.
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    (3) Update Interpretation and Policy .02 to Rule 17.2 by specifying 
standards for videotaped responses.
    (4) Relocate provisions related to ex parte communications 
currently contained in Rule 17.4 (Charges) to Rule 17.15 (Ex Parte 
Communications). This change is consistent with the ex parte provisions 
under the Affiliated Exchanges' Rule 8.16.
    (5) Update Rule 17.6 (Hearing) to:
    a. Specify that hearings on charges shall be held before a Hearing 
Panel comprised of three or five members of the BCC;
    b. Specify impartiality requirements for members of the Hearing 
Panel and procedures for removal of members of the Hearing Panel on the 
grounds of bias or conflict of interest. This is based on the 
Affiliated Exchanges' Rule 8.6(b) as well as FINRA Rule 9233(a);
    c. Increase the amount of time prior to a hearing date the parties 
to a hearing must furnish documentary evidence (from 5 days to 10); and
    d. Specify that the CRO has the authority to direct that a hearing 
be scheduled at any time after the period to submit an answer to 
Charges pursuant to Rule 17.5 has elapsed.
    (6) Update Rule 17.8 (Settlement) to:
    a. Eliminate the 120-day period during which a Respondent may 
submit an offer of settlement (and make corresponding changes 
reflecting the removal of this time period). This removal comports with 
the Affiliated Exchanges' Rule 8.8;
    b. Specify that offers of settlement will be considered by the CRO 
for acceptance or rejection (as opposed to the BCC).This is a 
harmonizing change reflecting that of the Affiliated Exchanges' Rule 
8.8(b);
    c. Specify that the CRO has the discretion to grant a Respondent 
more than two written offers of settlement. This is a harmonizing 
change reflecting that of the Affiliated Exchanges' Rule 8.8(c); and
    d. Specify that a Hearing Panel will grant the parties leave to 
present an offer of settlement to the CRO.
    (7) Remove the requirement that a majority of the BCC automatically 
review decisions of a Hearing Panel. This is a harmonizing change 
reflecting that of the Affiliated Exchanges' Rule 8.9.
    (8) Remove the provision that the Board may review the decision not 
to initiate charges upon application by the Regulatory Oversight and 
Compliance Committee.
    (9) Specify that if service of notice pursuant to Chapter 17 is 
made by registered or certified mail, three days shall be added to the 
prescribed period for response.
    (10) Add Rule 17.15 for ex parte communications.
    (11) Update the rules related to Minor Rule Violations to reflect 
changes elsewhere in Chapter 17 and to remove any required referral to 
the BCC for repeat violations.
    (12) Update certain other outdated language within Chapter 17.
    Detailed descriptions of the changes to specific Rules within 
Chapter 17 are outlined below.
Updates to Rule 17.2 Complaint and Investigation
    The Exchange replaces references to the BCC with references to the 
CRO within Rule 17.2, which conforms to the Affiliated Exchanges' Rule 
8.2. Under updated Rule 17.2(c), Staff will request the CRO to 
authorize the issuance of a statement of charges when Staff finds there 
are reasonable grounds to believe a violation has been committed and 
formal regulatory action is required. Additionally, the proposed change 
requires the Staff to submit a written report to the CRO of each 
investigation instituted as a result of a complaint, along with the 
current requirement that Staff submit reports where Staff finds 
reasonable grounds that a violation has occurred and formal regulatory 
action is warranted. The Exchange notes that under the Affiliated 
Exchange's current rules, Staff are to submit written reports to the 
CRO when an investigation has been initiated as a result of a 
complaint, as well as when an investigation results in a finding that 
there are reasonable grounds to believe that a violation has been 
committed. The Exchange notes that, unlike the Affiliated Exchanges, 
Staff maintains the authority to impose non-formal disciplinary action 
or determine to close an investigation without the submission of a 
report to the CRO.\89\ The Exchange also notes that, as it does today, 
Staff will retain information and/or summaries regarding an action or 
an investigation closed in this manner. Such information and/or 
summaries are [sic] available to the CRO upon request and included in 
regulatory updates to the CRO when necessary.
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    \89\ See Securities Exchange Act Release No. 71371 (January 23, 
2014), 79 FR 4779 (January 29, 2014) (Notice of Filing and Immediate 
Effectiveness of Proposed Rule To Amend CBOE's Rules To Enhance the 
Independence and Integrity of the Regulatory Functions of the 
Exchange) (SR-CBOE-2014-001).
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    Under updated Rule 17.2(d), except when the CRO determines that 
expeditious action is required, the Subject may submit a written 
statement to the CRO concerning why no

[[Page 18883]]

disciplinary action should be taken. In addition, the Exchange proposes 
to extend the time period the Subject has to submit a written statement 
from 15 days, the period currently provided for in the Affiliated 
Exchanges' Rule 8.2(d), from the date of the notice to 25 days. The 
Exchange further proposes to specify that this 25-day period to submit 
a written statement to the CRO will toll while a request for access to 
the investigative file pursuant to Rule 17.2(d) is pending. The 
Exchange also proposes to update Rule 17.2(d) to eliminate any gender-
specific pronouns (i.e. ``he'', ``him'', or ``his).\90\ Finally, the 
Exchange makes corresponding updates to Interpretation and Policy .02 
to Rule 17.2 to reflect the aforementioned changes to Rule 17.2(d) and 
to set forth standards for videotaped responses. Such responses are 
consistent with current Securities and Exchange Commission 
(``Commission'') enforcement guidelines, specifically the requirements 
that videotaped responses are limited to 12 minutes or less.\91\ The 
Exchange additionally proposes that a written transcript accompany a 
videotaped response. The submission of videotaped responses falls 
within the proposed 25-day submission period and, when applicable, 
proposed tolling period.
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    \90\ The Exchange is also updating Rules 17.5, 17.6, 17.7, 17.8, 
17.12, and 17.50 to eliminate gender-specific pronouns. 
Additionally, in instances in which the Exchange harmonizes its rule 
language with that of the Affiliated Exchanges, the Exchange 
eliminates gender-specific pronouns.
    \91\ See Securities and Exchange Commission Division of 
Enforcement, Enforcement Manual (Nov. 28, 2017), available at: 
https://www.sec.gov/divisions/enforce/enforcementmanual.pdf.
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Purpose of Updates to Rule 17.2
    The Exchange believes the CRO is best suited to review reports from 
Staff and responses to alleged violations from Subjects. The CRO has 
general supervisory authority over the Exchange's regulatory 
operations, including the responsibility for overseeing surveillance, 
examination, and enforcement functions and for administering any 
regulatory services agreements with another self-regulatory 
organization to which the Exchange is a party. The Exchange notes that 
the CRO functions to serve the regulatory functions of the Exchange, 
separate from that of its business interest, reporting directly to the 
ROC. Therefore, the Exchange believes that allowing the CRO to 
authorize the issuance of charges maintains the autonomy and 
independence of the Exchange's regulatory functions, as well as helps 
to ensure that decisions regarding the resolution of investigations are 
made without regard to the actual or perceived business interests of 
the Exchange or any of TPHs. As a result, the submission of written 
reports to the CRO will help expedite the disciplinary process while 
still providing TPH and associated persons with a fair and efficient 
process. The Exchange also notes that the added submission of written 
reports where an investigation has been instituted as a result of a 
complaint serves to make the Exchange's complaint process consistent 
with that of the Affiliated Exchanges. The Exchange believes that 
keeping the Staff's authority in place to find reasonable grounds that 
formal regulatory action is or is not warranted and to impose the 
appropriate non-formal or closing actions where warranted without 
providing a formal report to the CRO will continue to support the 
independence and integrity of the regulatory functions of the Exchange, 
as Staff, like the CRO, functions independently from the business 
interests of the Exchange.\92\
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    \92\ See supra note 88 [sic].
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    Additionally, the Exchange believes that due to the increased 
complexity of Exchange trading activity (and the resulting regulatory 
investigations and examinations) that increasing the time period from 
15 days to 25 days is reasonable. The additional time will enhance the 
regulatory process by allowing subjects to prepare more comprehensive 
and effective written statements.\93\ The Exchange notes that the 
Subject's access to ``other materials'' includes any non-privileged 
exculpatory documents that the Exchange may have in the investigative 
file. Finally, tolling that same period while Staff prepares an 
investigative file when requested by the Subject is necessary in the 
interest of fairness. The Exchange notes that Staff is often able to 
provide an investigative file in one week or less and that the Exchange 
makes every effort to provide such files promptly upon request. 
However, to the extent an investigative file is voluminous or otherwise 
complicated to provide, were that period not tolled, the Subject could 
be left with insufficient time to prepare an effective written 
statement following receipt of the investigative file. Though the rules 
of the Affiliated Exchanges do not provide for tolling of this time 
period, the Exchange notes that its current Interpretation and Policy 
.01(d) to Rule 17.8 (discussed below) already allows for tolling to 
extent it takes Staff more than 30 calendar days (in the context of a 
total 120-day time period) to produce documents to a Respondent. 
Therefore, as proposed, tolling is not novel within the Exchange's 
disciplinary process. The Exchange believes that the proposed 25 day 
time period should be completely tolled while Regulatory staff prepares 
an investigative file for review in order to provide sufficient time 
for a Subject to compose a response. The Exchange also notes that this 
will limit the need for the Exchange to provide extensions when the 
Subject requests more time to respond. Finally, the Exchange notes that 
the addition of a time limit of videotaped responses, consistent with 
current Commission enforcement guidelines, \94\ and the accompaniment 
by a written transcript serves the interest of expediency.
---------------------------------------------------------------------------

    \93\ The Exchange notes that under current Rule 17.13 time 
limits imposed under Chapter 17 may be extended. Where the exchange 
is extending certain time limits within this filing, it also does so 
to reduce the number of extension requests processed by Staff and 
thereby enhance the efficiency of the regulatory process.
    \94\ See supra note 91.
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Updates to Rule 17.3 Expedited Proceeding
    The Exchange proposes to replace references to the BCC with 
references to the CRO within Rule 17.3, thus making the CRO's role 
consistent with that of corresponding Rule 8.3 of the Affiliated 
Exchanges. The Exchange also proposes to update certain verbiage as 
needed resulting from those replacements. The Exchange makes 
corresponding updates to reflect changes to the 17.2(d) processes 
referenced in Rule 17.3. Under updated Rule 17.3, if Staff and the 
Subject are able to agree on the terms of a letter of consent, Staff 
will submit the letter to the CRO for consideration. If the CRO accepts 
the letter of consent, the Exchange shall adopt the letter of consent 
as its decision and no further action shall be taken against the 
Subject respecting the matters that are the subject of the letter of 
consent, which is consistent with the practices set forth in the 
Affiliated Exchanges' Rule 8.3. If the CRO rejects the letter of 
consent, the matter shall proceed as though the letter of consent had 
not been submitted. The CRO's decisions regarding letters of consent 
are final. The Exchange also makes non-substantive, clarifying 
additions qualifying the letter as the ``letter of consent'' throughout 
this rule.
Purpose of Updates to Rule 17.3
    The CRO replaces the BCC as the deciding body related to expedited 
proceedings. The Exchange believes the CRO is best suited to review 
letters of consent and determine whether to reject

[[Page 18884]]

or accept such letters. The CRO is better suited to resolve procedural 
matters like expedited proceedings and the approval or disapproval of 
letters of consent because the CRO has greater subject matter and 
procedural expertise based on his role in directly overseeing the 
regulatory programs and processes on a day to day basis. Additionally, 
the Exchange notes that the CRO is required to report periodically to 
the ROC on all regulatory matters and issues, thus, keeping the ROC 
apprised of, and allowing for its review of expedited proceedings. As a 
result, the Exchange believes that this proposed rule change further 
supports and provides for the autonomy and independence of the 
Exchanges' regulatory functions.
Updates to Rule 17.4 Charges
    The Exchange proposes to replace references to the BCC with 
references to the CRO within Rule 17.4(a) and 17.4(b), which conforms 
to the Affiliated Exchanges' references within their corresponding Rule 
8.4. The Exchange also proposes to add clarification that a 
determination not to initiate charges pursuant to Rule 17.4(a) only 
occurs in those cases where a Subject has been provided notice of 
violations pursuant to Rule 17.2(d). Under updated Rule 17.4(a), in 
those cases where notice has been provide pursuant to Rule 17.2(d) and 
when it appears to the CRO from the report of Regulatory staff that no 
probable cause exists for finding that a violation occurred or if the 
CRO otherwise determines that no further action is warranted, the CRO 
shall direct Staff to prepare and issue a statement to the Subject (and 
Complainant if any) outlining the reasons for such finding. The 
proposed language stating that the CRO shall direct Staff to prepare 
and issue the written statement related to such a determination is a 
clarifying addition to Rule 17.4(a) that is intended to add detail 
regarding the process through which such a statement is issued.
    Similarly, under updated Rule 17.4(b), whenever it shall appear to 
the CRO that there is probable cause for finding a violation occurred 
and further proceedings are warranted, the CRO shall direct Staff to 
prepare and issue a statement of charges against the Respondent. The 
proposed addition of the term ``and issue'' clarifies Staff's 
responsibilities under the Rule, serves to mirror the Staff's 
responsibilities for an issuance pursuant to 17.4(a), and modifies the 
Rule to be substantially similar to the Affiliated Exchanges' Rule 
8.4(b).
    The Exchange also modifies the requirement in Rule 17.4(c) that a 
Respondent request access to documents within 60 calendar days after 
receiving service of charges, to 25 days after receiving such notice. 
This change serves to harmonize a Respondent's time to request 
documents with their [sic] time to file a written answer under proposed 
Rule 17.5 (described below), and the tolling of such period while 
access to the investigative file is pending. Lastly, the Exchange 
proposes to relocate Rule 17.4(d) and its Interpretations and Policies 
.01-.03 (along with the amendments proposed, as described below), which 
concern ex parte communications, to proposed additional Rule 17.15. 
This change is in line with the Affiliated Exchanges' Rule 8.16 that 
specifically covers ex parte communications for disciplinary 
procedures.
Purpose of Updates to Rule 17.4
    The Exchange believes the CRO is best suited to determine whether 
to initiate charges after reviewing a Staff report. Allowing the CRO to 
initiate charges (or elect not to initiate charges) will significantly 
expedite the disciplinary process, as well as serve to conform this 
rule to the Affiliated Exchanges' Rule 8.4. Specifically, Staff and 
Subjects will not have to wait until the BCC meets to learn whether a 
regulatory matter will result in charges and the matter can move on to 
answer, hearing, settlement, and/or summary disposition. In the CRO's 
capacity as supervisor of the Exchange's regulatory operations, the CRO 
maintains the subject matter and procedural expertise that is necessary 
to review and consider regulatory issues and the accompanying facts and 
circumstances in consideration of issuing charges. For example, the CRO 
is best suited to determine when a pattern or practice of violative 
conduct exists, where certain conduct might have been willful in nature 
or whether other aggravating (or mitigating) circumstances exist 
(considerations that may be important in considering charges). As 
stated, the Exchange believes that under the current practice of Rule 
17.4(a) and (b), by having the CRO direct Staff to prepare and issue 
subsequent statements after the CRO's review is clarifying and in line 
with such current practices with the BCC. Additionally, the Exchange 
believes that allowing a Respondent 25 days from receiving service of 
charges to request access to documents serves to harmonize this process 
with the proposed time for which a Respondent may file an answer under 
Rule 17.5, and the proposed tolling requirements thereunder.
Updates to Rule 17.5 Answer
    Under updated Rule 17.5, the Exchange extends the time period the 
Respondent has to submit an Answer from 15 days after the service of 
charges, which is currently provided for under the Affiliated 
Exchanges' corresponding Rule 8.5, to 25 days.\95\ The Exchange 
proposes to specify that this 25-day period to submit an Answer will 
toll, like that of proposed 17.2(d), while a request for access to the 
investigative file pursuant to Rule 17.4(c) is pending.
---------------------------------------------------------------------------

    \95\ This change is based on the rules of NYSE, FINRA and PHLX. 
See supra notes 86-88.
---------------------------------------------------------------------------

Purpose of Updates to Rule 17.5
    The Exchange believes that due to the increased complexity of 
Exchange trading activity (and the resulting regulatory investigations 
and examinations) that increasing the time period from 15 to 25 days is 
reasonable. The additional time will allow Respondents to prepare more 
comprehensive and effective Answers. Finally, similar to the proposal 
to toll the time period in the context of a written response to a 
notification of pending allegations from Staff, the Exchange believes 
that tolling the time period for an Answer pursuant to Rule 17.5 while 
Staff prepares investigative file for the Respondent's review is 
necessary in the interest of fairness. For the same reasons described 
above, were that period not tolled, the Respondent could be left with 
insufficient time to prepare an effective Answer following receipt of 
the investigative file and limits the Exchange having to grant an 
extension. The Exchange again notes that Staff can often provide an 
investigative file in one week or less and that the Exchange makes 
every effort to provide such files promptly upon request.
Updates to Rule 17.6 Hearing
    Under updated Rule 17.6(a), the Exchange proposes that hearings on 
the charges be held by a panel of either three or five members of the 
BCC selected by the Chairperson of the BCC. In addition, the Exchange 
updates Rule 17.6(a) to clarify that where a TPH organization is a 
party to the hearing, it shall be represented by one of its nominees, 
who is properly authorized by a TPH organization pursuant to Rule 3.8 
(Nominees).\96\ The Exchange also proposes language within 17.6(a) that 
states BCC Counsel may assist the Hearing Panel in preparing its 
written

[[Page 18885]]

recommendations or judgments, a practice already in place within the 
hearing process.
---------------------------------------------------------------------------

    \96\ See Cboe Options Rule 1.1(pp). The term ``nominee'' means 
an individual who is authorized by a TPH organization, in accordance 
with Rule 3.8, to represent such TPH organization in all matters 
relating to the Exchange.
---------------------------------------------------------------------------

    Importantly, the Exchange proposes to add subparagraphs (a)(1) 
through (a)(3) to Rule 17.6 which requires that Hearing Panel members 
must function impartially and independently of the involved Exchange 
staff members, provides a recusal process for Hearing Panel members, as 
well as a process in which a Respondent may motion for removal of 
Hearing Panel members who may have bias or a conflict of interest. 
Proposed subparagraph (a)(1) provides that Hearing Members are expected 
to function impartially and independently of the staff members who 
prepared and prosecuted the charges. This language is based on language 
in the Affiliated Exchange's Rule 8.6. Proposed subparagraph (a)(1) 
then states that if a Hearing Panel member determines they [sic] have a 
conflict of interest or bias or other circumstances exists where their 
[sic] fairness might be reasonably questioned, then such Hearing Panel 
member should withdraw from the matter and the Chairperson of the BCC 
may then appoint a replacement. This provision is based on FINRA Rule 
9233(a).\97\ Proposed subparagraphs (a)(2) and (a)(3), like that of the 
Affiliated Exchanges, provide for the process in which a Respondent may 
motion for disqualification of a Hearing Panel member on the grounds of 
bias or conflict of interest, along with the procedure for ruling upon 
such motions for disqualification. The Exchange incorporates additional 
language that the Hearing Panel member subject to a Respondent's motion 
for removal is excluded from rulings on such motion. Subparagraphs 
(a)(2) and (a)(3) are consistent with that of the Affiliated Exchanges' 
Rule 8.6(b), and differ only where necessary to conform to the 
Exchange's existing Rule 17.6 text or to account for details or 
descriptions included in the Exchange's rules but not in the applicable 
rules of the Affiliated Exchanges.
---------------------------------------------------------------------------

    \97\ The Exchange notes that its Rule language differs from that 
of FINRA's where necessary to maintain terminology particular to its 
Rules and disciplinary procedures. The Exchange also notes that in 
this subparagraph it incorporates language specifying that members 
of the Hearing Panel are expected to function impartially, which is 
unlike the FINRA rule, but rather mirrors the Affiliated Exchanges' 
rule language.
---------------------------------------------------------------------------

    Under updated prehearing procedures in Rule 17.6(b), parties to a 
hearing must furnish copies of all documentary evidence to be presented 
at the hearing and a list of witnesses ten business days (as opposed to 
five business days under current Rule 17.6(b)) in advance of the 
scheduled hearing date. The Exchange also proposes to modify the notice 
of the time and place of the hearing given to the Parties to 15 
business days from 15 calendar days to conform to the Affiliated 
Exchanges' corresponding rule.
    The Exchange proposed to add Interpretation and Policy .03 to Rule 
17.6 that states, ``Subject to Rule 17.7, the CRO shall have the 
authority to direct that a hearing be scheduled at any time, after the 
period to answer pursuant to Rule 17.5 has elapsed.''
    The Exchange also updates Rule 17.6 throughout to reference the 
panel selected for the Hearing as the ``Hearing Panel'', which comports 
with the terminology in the Affiliated Exchanges' corresponding Rule 
8.6.\98\
---------------------------------------------------------------------------

    \98\ The Exchange also updates references to the Hearing Panel 
within Rules 17.9, 17.10, 17.11 and 17.50.
---------------------------------------------------------------------------

Purpose of Updates to Rule 17.6
    The Exchange believes the updates to Rule 17.6 will expedite and 
provide greater clarity around the Exchange's hearing process. Under 
the updated Rule 17.6, the BCC still serves as the pool from which 
hearing panelists are selected, however, the Hearing Panel is limited 
to either three or five members selected by the BCC Chairperson. This 
update will clarify the selection process and prevent interlocutory 
issues that may arise in having an even number of members on a Hearing 
Panel. Furthermore, limiting the size of the Hearing Panel helps to 
streamline the hearing process while still providing a sufficient 
number of panelists to adjudicate the hearing effectively. The Exchange 
notes that it expects that most Hearing Panels will be comprised of 
three members, but that five members may be necessary at times to hear 
particularly complex matters. Clarifying that where a TPH organization 
is a party to the hearing it shall be represented by one of its 
nominees ensures that an authorized person consistent with existing 
Rule 3.8 represents a TPH organization.
    The Exchange believes that proposed Rule 17.6(a)(1) through (a)(3) 
providing for Hearing Panel member impartiality and recusal and removal 
processes serve in the interest of fairness to the Respondent. Allowing 
a Respondent to move for disqualification of any member of the Hearing 
Panel selected by the BCC Chairperson based upon bias or conflict of 
interest and providing for a ruling process on motions for 
disqualification conforms to the Affiliated Exchanges' Rule 8.6. As 
stated, the Exchange proposes to maintain language necessary to account 
for different text and procedures between the Exchange's rules and 
those of the Affiliated Exchanges. Notably, the proposed language 
incorporates that a motion shall be filed with the BCC Chairperson. 
This is a logistical difference that accounts for the BCC's role in the 
Exchange's process, which is not present within the Affiliated 
Exchanges' processes. Like that of the Affiliated Exchanges, the 
Hearing Panel will hear such motions. The Exchange explicitly adds that 
a Hearing Panel member subject to a Respondent's motion for 
disqualification is excluded from ruling on such motions, a best-
practice currently in place. The Exchange also proposes moving the 
provision stating that counsel may assist the Hearing Panel in 
preparing its written recommendations, currently found within the 
Affiliated Exchange's corresponding impartiality provision, to Rule 
17.6(a). The Exchange believes that this serves to codify a practice 
already in place; specifying that BCC Counsel assists the Hearing Panel 
throughout the hearing, not only during impartiality rulings. The 
Exchange also believes that adding substantially similar language to 
that of FINRA Rule 9233(a), which provides that a Hearing Panel member 
shall recuse themselves [sic] when they determine they have a conflict 
of interest, bias, or other circumstance which might call into question 
their fairness, is an additional safeguard to protect the integrity of 
the hearing process and the interests of the Respondent.
    Requiring that the parties provide documentary evidence and witness 
lists ten business days in advance of a scheduled hearing will give all 
parties more time to review materials that will be presented at 
hearing. This extended time period is necessary given the increased 
complexity of modern trading activity on the Exchange and the resulting 
complexity of disciplinary matters. Additionally, incorporating that 
the parties receive 15 business days' notice (as opposed to the current 
15 days' notice) harmonizes the business day timing requirements 
throughout paragraph (b) and ensures that the parties have ample time 
from the notice of the scheduled hearing to furnish copies of 
documentary evidence.
    Furthermore, vesting authority in the CRO to direct the scheduling 
of hearings is a necessary update given that the Exchange proposes to 
remove the time limit under which Respondents must submit offers of 
settlement under updated Rule 17.8. Under current rules, the end of the 
settlement period functions as the primary trigger for the

[[Page 18886]]

scheduling of a hearing (hearings are scheduled when the settlement 
period ends and the parties have not reached settlement). Under updated 
Rule 17.6, the CRO can direct the scheduling of a hearing when the CRO 
believes the nature of matter at hand requires a hearing, when the 
Respondent has exhausted his offers of settlement, or when the CRO 
believes that good faith settlement negotiations have ended. As stated 
above, the CRO is required to meet regularly with the ROC to report on 
regulatory performance and status of regulatory matters, including 
caseloads and aging. The Exchange thus believes the CRO's requirement 
to report to the ROC will ensure continued timeliness in the processing 
of a regulatory matter. Interpretation and Policy .03 to Rule 17.6 will 
also greatly expedite the hearing process where the prospective parties 
agree a hearing is required.
Updated Rule 17.7 Summary Proceedings
    The Exchange proposes to replace references to the BCC with 
references to the CRO within Rule 17.7. Under updated Rule 17.7, 
analogous with the Affiliated Exchanges' Rule 8.7, the CRO may make a 
determination without a hearing and may impose a penalty as to 
violations which the Respondent has admitted or has failed to answer or 
which otherwise do not appear to be in dispute. Under updated Rule 
17.7, the Respondent may notify the CRO if they desire a hearing on any 
of the charges not previously admitted or upon the penalty, and that 
the Respondent's failure to notify the CRO constitutes an admission of 
the violations and acceptance of the penalty determined by the CRO. The 
Exchange also amends the 10 day period in which the Respondent may 
notify the CRO that the Respondent desires a hearing to 10 business 
days, which is consistent with the Affiliated Exchanges' corresponding 
rule.
Purpose of Updates to Rule 17.7
    The Exchange proposes to replace the BCC with the CRO as the body 
that will make determinations related to summary proceedings, thus 
harmonizing the determining body with that of corresponding Rule 8.7 of 
the Affiliated Exchanges. The Exchange believes the CRO is best suited 
to address uncontested charges against Respondents and impose penalties 
related to those charges. The CRO is better suited to resolve matters 
like summary proceedings because the CRO has greater familiarity with 
Exchange rules and subject matter/procedural expertise. The Exchange 
notes that the principal considerations in determining sanctions 
outlined in Rule 17.11 Interpretation and Policy .01 are not changing 
and accordingly the considerations weighed by the CRO will be the same 
as those currently weighed by the BCC. Additionally, the Exchange notes 
that the Board may on its own initiative order review of a 
determination of summary proceedings pursuant to 17.10(c). The proposed 
change from 10 days to 10 business days from the date of service for a 
Respondent to notify the CRO that the Respondent desires a hearing is 
consistent with the corresponding time period in Rule 8.7 of the 
Affiliated Exchanges.
Updates to Rule 17.8 Offers of Settlement
    The Exchange replaces references to the BCC with references to the 
CRO within Rule 17.8, consistent with the proposed replacements 
throughout Chapter 17. Under updated Rule 17.8(a), the Respondent 
submits an offer of settlement to the CRO and the CRO determines 
whether to accept or reject an offer. The CRO issues a decision 
accepting an offer and imposes sanctions consistent with the offer. 
Under updated Rule 17.8(b), where Staff will not recommend acceptance 
of an offer to the CRO, the Respondent may appear before the CRO to 
make an oral statement concerning why the offer should be accepted. If 
the CRO rejects an offer Staff supports, the Respondent can appear 
before the CRO to make an oral statement concerning why the CRO should 
reconsider acceptance of the offer.
    The Exchange also removes the 120-day period following service of a 
statement of charges during which a Respondent may submit an offer 
under updated Rule 17.8(a) and specifies that offers can be made at any 
time following the date of service of a statement of charges upon the 
Respondent in accordance with 17.12 (Service of Notice). Removal of the 
120-day time period is consistent with current Rule 8.8 of the 
Affiliated Exchanges. The Exchange also specifies within updated 
Interpretation and Policy .01 to Rule 17.8 that the Respondent may 
submit a maximum of two offers to the CRO unless the CRO orders 
otherwise. As a result of these changes, the Exchange proposes to 
remove Interpretations and Policies .01 (b)-(d) and .02 to Rule 17.8 in 
their entirety as they relate specifically to the 120-period and/or the 
number of offers that may be submitted to the BCC.
    The Exchange adds new Interpretation and Policy .02 to Rule 17.8 to 
specify that if an offer is submitted subsequent to a hearing being 
scheduled, the Hearing Panel shall grant the parties leave from the 
hearing so the offer can be presented to the CRO for consideration.
Purpose of Updates to Rule 17.8
    The Exchange believes the CRO is best suited to determine whether 
to accept an offer of settlement from a Respondent, even after the 
hearing procedures have commenced. The Exchange believes the CRO has 
greater familiarity with the Securities Exchange Act of 1934 (the 
``Act'') and Exchange rules, and what constitutes a fair and reasonable 
offer related to violations of such. The Exchange also notes that 
allowing the CRO to determine offers of settlement mirrors the 
Affiliated Exchanges' corresponding rules. Further, allowing the CRO to 
accept or reject offers of settlement will significantly expedite the 
settlement process while ensuring that the independence and integrity 
of the regulatory process is maintained, as the CRO's regulatory 
decision-making responsibilities are entirely separate from those 
responsible for the Exchange's business interests. Specifically, the 
CRO can facilitate more expedient and independent review of offers. A 
Respondent will not have to wait until a regularly scheduled BCC 
meeting to determine whether their [sic] offer has been accepted or 
rejected nor will they have to wait until the BCC meets to make oral 
statements in support of their offers.
    The Exchange also believes that removing the 120-day period during 
which a Respondent may submit an offer and allowing offers to be 
submitted at any time following the date of service of a statement of 
charges upon the Respondent pursuant to Rule 17.12 will improve the 
settlement process and allow matters to be more efficiently resolved 
when all parties agree that a matter can be settled without further 
disciplinary proceedings. The Exchange believes there is no need to 
prevent settlement negotiations during any period where they are 
proceeding in good faith. As mentioned above, this will align the 
Exchange's Rule with that of the Affiliated Exchanges' Rule 8.8, which 
does not prohibit settlement offers at a particular point in time after 
a statement of charges. Further, under updated Rule 17.6, the CRO has 
authority to schedule a hearing in the event settlement negotiations 
have broken down.
    Moreover, the Exchange believes it is appropriate for the CRO to 
exercise discretion to allow a Respondent to submit more than two 
offers of

[[Page 18887]]

settlement. The Exchange notes that a Respondent will be allowed to 
submit at least two offers (assuming that the offers are made in the 
course of good-faith negotiations). This change conforms to the same 
discretion given to the CRO under the Affiliated Exchanges' 
corresponding Rule 8.8. The maximum allowance of two offers remains in 
place, like that of the Affiliated Exchanges' rule, in order to prevent 
abuses, such as delay tactics, of the disciplinary procedures. However, 
the Exchange believes the CRO may consider additional offers of 
settlement if the CRO feels good faith negotiations continue with a 
Respondent and accordingly additional offers are appropriate. 
Additionally, the Exchange notes that the CRO is best suited to accept 
or reject offers of settlement. The CRO's capacity as supervisor of 
investigative matters provides the CRO case-by-case subject matter 
expertise. The Exchange also notes that the CRO may take into account 
the principle considerations under Rule 17.11 in weighing whether or 
not acceptance or rejection of an offer is appropriate. As a result, 
the Exchange believes that the CRO is the most appropriate determining 
body for reviewing settlement offers and that review of offers of 
settlement by the BCC or other determinative body is not necessary (the 
Exchange notes that, unlike the Affiliated Exchanges, its current Rule 
17.10(c) (Review on Motion of the Board) does not provide that the 
Board may review on its own initiative order an offer of settlement). 
Maintaining acceptance and rejection of such offers with the CRO 
provides for consistent practice throughout the proceedings, as well as 
regulatory independence and integrity.
Updates to Rule 17.9 Decision
    The Exchange removes the requirement that decisions of a Hearing 
Panel be subject to automatic review when the Hearing Panel is not 
comprised of a majority of the BCC. The Exchange also adds a cross 
reference to Rule 17.11 (Judgment and Sanction) and incorporates the 
requirement that the contents of a decision where sanctions are imposed 
include language that is substantially similar to the requirements 
under the Act.
Purpose of Updates to Rule 17.9
    Updated Rule 17.9 corresponds to the update in Rule 17.6 limiting 
the size of a hearing panel to either three or five members of the BCC. 
Due to the size limitation in updated Rule 17.6, most Hearing Panels 
following the operative date of this filing would not be comprised of a 
majority of the BCC.\99\ Removing this stage of review will further 
streamline the hearing process by putting the ultimate decision making 
power squarely on the shoulders of the Hearing Panel. The Exchange 
believes this is appropriate as the Hearing Panel members are the 
individuals that participate in the hearing, hear all of the evidence 
firsthand, and are able to consummate a verdict based on that firsthand 
knowledge. The Exchange also notes that removing this review process 
will not unfairly prejudice any party to a hearing as the parties may 
petition for removal of a Hearing Panel member for impartiality under 
proposed Rule 17.8 and for a review of the decision by the Board or a 
Board Committee, whose decision is ratified by the Board, under Rule 
17.10. As such, updated Rule 17.9 eliminates an unnecessary redundancy 
in the Exchange's disciplinary process. Finally, the Exchange believes 
the cross-reference to its existing sanctions rule, Rule 17.11, and the 
additional instruction regarding the contents of a decision where a 
sanction is imposed is appropriate in order to provide clarity 
regarding statements of sanctions within a decision.
---------------------------------------------------------------------------

    \99\ The BCC is typically composed of 10-12 members.
---------------------------------------------------------------------------

Updates to Rule 17.10 Review
    The Exchange proposes to replace references to the BCC with 
references to the Hearing Panel where applicable within Rule 17.10. 
Additionally, the Exchange proposes to make a clarifying change to 
harmonize the language referring to the decision with Rule 17.9 and 
proposes to remove Rule 17.10(d), which currently provides that the ROC 
may apply for the Board to review a decision not to initiate charges.
Purpose of Updates to Rule 17.10
    Updates to reference the Hearing Panel in lieu of the BCC in Rule 
17.10 reflect updates elsewhere in Chapter 17. The Exchange also 
proposes to delete Rule 17.10(d). Specifically the Exchange updates 
17.10(b) to reflect that decisions under review will be decisions of a 
Hearing Panel. Furthermore, a Hearing Panel (and not the full BCC) will 
have heard a matter under review. The Exchange changes the 
qualification of ``any'' decision to ``the'' decision, which is in line 
with language referring to ``the'' decision throughout Rule 17.9. The 
Exchange removes Rule 17.10(d) as there is no longer the need for a 
special provision for review of BCC determinations not to initiate 
charges pursuant to Rule 17.4(a). As stated, the Exchange believes the 
CRO is best suited to determine whether to initiate charges under Rule 
17.4, rather than the BCC, as the CRO directly oversees all regulatory 
activities, including general reports on the status of regulatory 
matters. Unlike the BCC, the CRO reports and responds directly to the 
ROC, keeping the ROC apprised of the status of regulatory matters, 
including reports regarding open investigations and disciplinary 
matters, and decisions regarding such matters. Because there is a 
direct line of reporting between the CRO and the ROC, and the ROC may 
direct the CRO to take certain regulatory actions where they [sic] see 
fit, the Exchange believes that the ROC's application to the Board to 
review the CRO's decision not to initiate charges is not essential to 
the disciplinary process. As a result, the Exchange believes removing 
the ROC's application of review to the Board of such decisions provides 
for a more efficient, streamlined disciplinary process. Furthermore, 
the Exchange believes that this change is in line with maintaining 
enhanced autonomy and independence of the Exchange's regulatory 
functions.
Updates to Rule 17.11 Judgment and Sanction
    Under updated Rule 17.11, the Exchange replaces references to the 
BCC with references to the ``Hearing Panel or the CRO, as applicable''.
Purpose of Updates to Rule 17.11
    Updated Rule 17.11 reflects the new roles of the CRO and Hearing 
Panels. Specifically, the CRO will issue sanctions that result from 
summary proceedings outlined in Rule 17.7. The Hearing Panel will issue 
sanctions that result from decisions outlined in Rule 17.9. As 
mentioned above, the principal considerations for determining sanctions 
outlined in Interpretation and Policy .01 to Rule 17.11 have not 
changed. The Hearing Panel or the CRO, as applicable, weigh [sic] the 
same considerations in determining sanctions under updated Rule 17.11 
as the BCC weighs under current Rule 17.11.\100\ The Exchange notes 
that the CRO would also weigh the principal considerations under 17.11 
in determining whether to accept or reject a letter of consent under 
Rule 17.3 or offer under Rule 17.8. Additionally, the Exchange believes 
that in the CRO's capacity as supervisor of the Exchange's regulatory 
operations, the CRO possesses the subject matter expertise, as well as 
the accompanying

[[Page 18888]]

facts and circumstances, including knowledge of a TPHs' or associated 
persons' disciplinary history, to consider and determine appropriate 
sanctions. The CRO's capacity as supervisor of the Exchange's 
regulatory operations also ensures that regulatory independence is 
provided for during the judgment and sanction process under Rule 17.11.
---------------------------------------------------------------------------

    \100\ The Exchange notes that the Board also weighs these 
considerations when determining sanctions, and that Staff considers 
similar factors in determining whether formal, non-formal, or no 
further regulatory action in warranted.
---------------------------------------------------------------------------

Updates to Rule 17.12 Service of Notice
    Updated Rule 17.12 specifies that service of charges, notices or 
other documents, may continue to be made upon a Respondent by 
registered or certified mail but if this method of service is used, 
that three days shall be added to the prescribed period for response.
Purpose of Updates to Rule 17.12
    The Exchange updates Rule 17.12 to provide clarity in the Rule and 
in the interest of fairness to Respondents. Many of the time periods 
outlined in Chapter 17 begin upon service of notice, charges or other 
documentation (i.e. the proposed 25 days to submit an Answer to charges 
under Rule 17.5 or the 15 days to petition for review of a decision 
under rule 17.10). Updated Rule 17.12 provides three additional days 
when calculating the time for response to the extent service is made by 
registered or certified mail. Updated Rule 17.12 ensures that a 
Respondent is not penalized any time to respond to notices, charges or 
other documentation while such documentation is in transit. The 
Exchange notes that this update is not based on corresponding rules of 
the Affiliated Exchanges, but is rather based on FINRA Rule 9138(c).
Updates to Rule 17.14 Reporting to the Central Registration Depository
    The Exchange removes a reference to the National Association of 
Securities Dealers, Inc. (``NASD'') within Rule 17.14. The Exchange 
also updates references to the BCC with references to the Hearing Panel 
or the CRO where applicable.
Purpose of Updates to Rule 17.14
    On July 30, 2007, The National Association of Security [sic] 
Dealers, Inc., The New York Stock Exchange, LLC (``NYSE'') and NYSE 
Regulation, Inc. consolidated their member firm regulation operations 
into a combined organization FINRA. After the consolidation, FINRA 
became operator of the CRD. Rather than update the reference to FINRA, 
however, the Exchange proposes to simply remove the reference to NASD 
as the CRD system is widely known as such in the industry and the 
description of its operator is no longer necessary.
Proposed Rule 17.15 Ex Parte Communications
    The Exchange proposes to relocate 17.4(d) and its Interpretations 
and Policies .01 through .03, which concern ex parte communications, to 
proposed additional Rule 17.15. This conforms to the Affiliates 
Exchanges' Rule 8.16, which prohibits ex parte communications on the 
merits of a proceeding. The Exchange has made changes to its current ex 
parte rule language to be substantially similar to that of the 
Affiliated Exchanges' ex parte rule. Where possible, the Exchange has 
mirrored its Affiliated Exchanges' Rule 8.16 in substance and form. 
This includes: The addition of Exchange staff among those persons 
prohibited in making ex parte communications; the definition of members 
of the Hearing Panel, BCC, Board or committee of the Board who 
participate in a decision with respect to that proceeding as 
``Adjudicators''; the addition of a procedure for which an Adjudicator 
must place any prohibited ex parte communications into the record; the 
authority for the Board or committee of the Board to take necessary 
action if an ex parte communication arises; and, importantly, the 
application of the prohibition of ex parte communications beginning 
with the initiation of an investigation under Rule 17.2(a) or when a 
person has knowledge that an investigation will be initiated. The 
proposed change to the Exchange's ex parte communication rule is based 
on the Affiliated Exchanges' existing Rule 8.16. The Exchange notes 
that the language of the proposed rule and the Affiliated Exchanges' 
rule may differ to extent necessary to conform to the Exchanges' 
existing ex parte rule text or to account for details or descriptions 
included in the Exchange's rules but not in the applicable rules of the 
Affiliated Exchanges. The Exchange proposes to maintain its provision 
applicable to the definition of ex parte communications, as well as its 
provisions for actions that will not be considered violations of the ex 
parte rules.
Purpose of Proposed Rule 17.15
    Where possible, the Exchange has substantively mirrored its 
proposed Rule 17.15 to the Affiliated Exchange's Rule 8.16. The 
Exchange believes that this proposed change provides consistency in the 
disciplinary procedures across the multiple exchanges. Specifically, 
the Exchange believes that proposed Rule 17.15(d), which comports with 
the Affiliated Exchanges' Rule 8.16(d) and provides that prohibition on 
ex parte communications begins upon the initiation of an investigation, 
serves to protect the interests of fairness for all Subjects and 
Respondents, as well as for the Exchange. The Exchange also believes 
this same purpose is served by expanding the prohibition of ex parte 
communications to Exchange staff during matters pending.
    As stated, the Exchanges' [sic] proposed Rule 17.15 differs from 
the Affiliated Exchanges' Rule 8.16 to the extent necessary to conform 
to the existing ex parte rule text or to account for details or 
descriptions included in the Exchange's rules but not in the Affiliated 
Exchanges rules. For example, the Exchange has kept it existing 
provisions that define ex parte communications and actions that 
constitute non-violations of the rule. While the Affiliated Exchanges 
use the term ``Respondent'', the Exchange uses ``Trading Permit 
Holder'' and ``person associated with a Trading Permit Holder'' because 
such terminology encompasses Respondents as well as Subjects of 
investigations or examinations who would be subject to ex parte 
communication restrictions. The Exchange notes that it has proposed to 
add reference to a member of a Hearing Panel as a party with whom ex 
parte communications are prohibited even though this appears 
duplicative because a Hearing Panel is comprised of members of the BCC. 
The Exchange believes that inclusion of the Hearing Panel and the BCC 
ensures that BCC members who may ultimately serve on a Hearing Panel 
for a matter are subject to the ex parte rules from the initiation of 
an investigation of that matter. Additionally, the Exchange notes that 
it proposes to maintain its provision for the definition of ex parte 
communication (proposed subparagraph (e)) and provisions stating in 
what circumstances a violation of ex parte communications is not deemed 
to have occurred (proposed subparagraphs (f) and (g)). The Exchange 
believes that maintaining these portions of its ex parte rules will 
continue to provide clarity for all parties regarding what constitutes 
an ex parte communication, what circumstances are not deemed a 
violation of the ex parte rules, and what steps a party must take in 
order to avoid violation of such rules.
Updates to Rule 17.50 Imposition of Fines for Minor Rule Violations
    The Exchange proposes to replace references to the BCC with 
references to a Hearing Panel within Rule 17.50. Within the list of 
violations outlined in

[[Page 18889]]

Rule 17.50(g), the Exchange removes references to matters referred to 
the BCC at specified thresholds after a specified number of repeat 
violations (i.e., ``subsequent offenses''). References of referrals to 
the BCC have been removed from Rules 17.50(g)(2)-(5), (7), (9)-(19). 
Given the proposed removal of referrals to the BCC, the Exchange 
accordingly proposes to incorporate ``subsequent'' offenses under the 
fine schedules that that [sic] correspond to the last monetary range 
listed. The Exchange also proposes to change language within Rule 
17.50(c)(2) to reflect findings of a person's rule violations. The 
Exchange amends Interpretation and Policy .01 to Rule 17.50 to 
incorporate the CRO in lieu of the BCC, where applicable. It also 
deletes the term ``together'' from the phrase ``aggregated together'' 
in paragraphs 1 and 2, as this term is superfluous within this context, 
and changes ``than'' to ``that'' in paragraph 1 to correct an existing 
grammatical error. The Exchange also updates the heading to the fine 
schedule under Rule 17.50(g)(7) and (g)(9) to reflect the term 
``violations'', as opposed to ``infractions'', as this is more 
consistent with the terminology used throughout Rule 17.50.
Purpose of Updates to Rule 17.50
    In the interest of increasing efficiency surrounding the Exchange's 
disciplinary process, a Hearing Panel, as opposed to the full BCC, 
reviews contested fines levied under updated Rule 17.50 and determines 
the manner of the review. As stated above, the Exchange believes a 
Hearing Panel is most appropriately situated to review fines due to a 
Hearing Panel's direct and in-depth involvement in the hearing process. 
Further, the changes reflect updates to Rule 17.6 in that when a person 
against whom a fine is imposed pursuant to Rule 17.50(g) requests a 
hearing, a Hearing Panel will hear and decide such matter. The Exchange 
also modifies language to reflect that the Exchange makes findings that 
a person has committed acts in violation of its rules, rather than 
findings of guilt.
    The Exchange believes that removing any of the referenced referrals 
to the BCC outlined in Rule 17.50(g) is consistent with CRO's authority 
to initiate charges under updated Rule 17.4. The Exchange also notes 
that removal of referenced referrals to the BCC comports with the 
Affiliated Exchanges' corresponding rules imposing fines for minor 
violations, including Rule 8.15 and Rule 25.3, which do not reference 
referrals to their Hearing Panels. Specifically, the Exchange believes 
that a Respondent will continue to receive appropriate discipline for 
repetitive or aggregate offenses because, pursuant to Rule 17.50(a) and 
(f), the Exchange has the discretion to impose a fine in lieu of 
commencing a disciplinary proceeding for a violation that is minor in 
nature. These provisions will continue to limit any risk that a repeat 
offender of minor violations continue [sic] to pay fines under Rule 
17.50, and rather, is disciplined via sanctions that are more 
appropriate. Under current Chapter 17 rules, addressing 17.50(g) rule 
violation through formal disciplinary proceedings requires Staff to 
investigate the matter and then, if necessary, refer the matter to the 
BCC with a recommendation to initiate charges. This recommendation 
includes a report indicating why formal disciplinary action is 
necessary (repeat violations, not minor, egregious, etc.). Under 
updated Rule 17.4, however, the CRO directs the initiation of charges 
thus eliminating the need for this referral process. As the CRO 
receives reports from Staff pursuant to Rule 17.2(c), as well as 
general reports regarding the status of regulatory matters, the CRO has 
on-going knowledge of non-formal regulatory actions and minor rule 
violations. The CRO works directly with Staff to address those 
violations covered under Rule 17.50(g). Accordingly, the CRO is in the 
best possible position to determine whether to impose a fine or 
initiate formal disciplinary proceedings.

Transition Process

    The Exchange intends to announce the operative date of the updates 
to Chapter 17 at least 30 days in advance via a regulatory notice. To 
facilitate an orderly transition from the current rules to the new 
rules, the Exchange proposes to apply the current rules to all matters 
where a subject has received notice of a statement of charges pursuant 
to Rule 17.2(d) prior to the operative date. In terms of Rule 17.50, 
any fine that [sic] imposed prior to the operative date that is 
contested will continue under the existing rules. As a consequence of 
this transition process, the Exchange will retain the existing 
processes during the transition period until such time that there are 
no longer any matters proceeding under the current rules.
    To facilitate this transition process, the Exchange will retain a 
transitional Chapter 17 that will contain the Exchange's rules, as they 
are at the time this proposal is filed with the Commission. This 
transitional Chapter 17 will apply only to matters initiated prior to 
the operational date of the changes proposed herein and it will be 
posted to the Exchange's public rules website. When the transition is 
complete and there are no longer any TPHs or associated persons subject 
to current Chapter 17, the Exchange will remove the transitional 
Chapter 17 from its public rules website.
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.\101\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \102\ 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) \103\ requirement that the rules 
of an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \101\ 15 U.S.C. 78f(b).
    \102\ 15 U.S.C. 78f(b)(5).
    \103\ Id.
---------------------------------------------------------------------------

    The Exchange also believes that the proposed rule is consistent 
with Section 6(b)(6) of the Act,\104\ which requires the rules of an 
exchange provide that its members be appropriately disciplined for 
violations of the Act as well as the rules and regulations thereunder, 
or the rules of the Exchange, by expulsion, suspension, limitation of 
activities, functions, and operations, fine, censure, being suspended 
or barred from being associated with a member, or any other fitting 
sanction.
---------------------------------------------------------------------------

    \104\ 15 U.S.C. 78f(b)(6).
---------------------------------------------------------------------------

    In addition, the Exchange believes that the proposed rule change 
furthers the objectives of Section 6(b)(7) of the Act,\105\ in that it 
provides fair procedures for the disciplining of Trading Permit Holders 
and persons associated with Trading Permit Holders, the denial of 
Trading Permit Holder status to any person seeking a Trading Permit 
therein, the barring of any person from becoming associated with a 
Trading Permit Holder thereof, and the prohibition or limitation by the 
Exchange of any person with respect to

[[Page 18890]]

access to services offered by the Exchange or a Trading Permit Holder 
thereof.
---------------------------------------------------------------------------

    \105\ 15 U.S.C. 78f(b)(7).
---------------------------------------------------------------------------

Updates to the Role of the CRO, Hearing Panel and BCC
    Specifically, the Exchange believes that updating and reducing the 
BCC's role in disciplinary matters to reflect that of the Affiliated 
Exchanges' rules is consistent with Sections 6(b)(5) and 6(b)(6) of the 
Act.\106\ The Exchange believes that replacing the BCC with groups and 
processes like those of the Affiliated Exchanges will continue to 
provide TPHs and associated persons with a fair investigative and 
adjudicatory process. As stated, the functions currently handled 
collectively by the BCC will be split between the Exchange's CRO and a 
Hearing Panel, comprised of BCC members and selected by the BCC 
Chairperson, creating greater autonomy between the charging and 
adjudicatory aspects of the regulatory process. The Exchange believes 
that the CRO is best suited to manage certain responsibilities related 
to complaint and investigation, expedited proceedings, charges, summary 
proceedings and judgment and sanctions. The Exchange notes that the CRO 
has general supervisory responsibility over the Exchange's regulatory 
operations, including the responsibility for overseeing its 
surveillance, examination, and enforcement functions and for 
administering any regulatory services agreements with another self-
regulatory organization to which the Exchange is a party. Further, as 
stated above, the CRO regularly meets with the ROC. As such, the Board 
will remain apprised of any regulatory decisions made by the CRO. The 
BCC via a Hearing Panel (selected from BCC members) will continue to 
manage the hearing process, as well as decisions and sanctions arising 
out of the hearing process, independently from the CRO and the 
Exchange's regulatory program. The Exchange also believes the proposed 
changes will collectively enhance the independence and impartiality of 
the overall regulatory process, which serves to protect investors and 
the public interest, protect customers, issuers, brokers, or dealers 
from unfair discrimination, and ensure that TPHs and associated persons 
are appropriately disciplined. First, the Exchange notes that the CRO 
reports directly to the ROC, remaining independent from business-side 
interests of the Exchange. Second, the Exchange notes its incorporation 
of Rule 17.6(a)(1) which, as proposed, requires that Hearing Panel 
members function impartially and allow [sic] for their removal if a 
conflict of interest arises. As a result, the Exchange believes these 
changes enhance the independence and impartiality of the overall 
regulatory process.
---------------------------------------------------------------------------

    \106\ 15 U.S.C. 78f(b)(5) and (6).
---------------------------------------------------------------------------

    As stated above, where a proposed change to the rules regarding the 
BCC's role is based on an existing rule of the Affiliated Exchanges, 
the language of the Exchange's rules may differ from the Affiliated 
Exchanges' rules to the extent necessary to conform with existing 
Exchange rule text or to account for details or descriptions included 
in the Exchange's rules but not in the applicable rules of the 
Affiliated Exchanges. For example, the Exchange proposes to maintain a 
process where the BCC Chairperson selects Hearing Panel members from a 
pool of BCC members, whereas the CEO selects Hearing Panel members on 
the Affiliated Exchanges. The Exchange has thus maintained differences 
in its rules that account for or relate to this process. Where 
possible, the Exchange has substantively mirrored the CRO's role and 
the Hearing Panel's role within Affiliated Exchange rules, because 
consistency across the rules will increase the understanding of the 
Exchange's disciplinary process for TPHs that are also participants on 
the Affiliated Exchanges, as well as result in greater uniformity, less 
burdensome and more efficient regulatory processes, and appropriate, 
non-discriminatory discipline. As such, the proposed rule changes will 
foster cooperation and coordination with persons engaged in 
facilitating transactions in securities and would remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system. The Exchange also believes that the proposed amendments 
will contribute to the protection of investors and the public interest, 
as well as provide appropriate discipline and fair procedures for such 
discipline, by streamlining the disciplinary process through the CRO, 
who is best suited to address regulatory matters without any 
conflicting business interests given the nature of the CRO's position.
Other Updates Based on the Affiliated Exchanges' Rules
    The proposed amendments to update the Exchange as the adopting body 
for letters of consent as its decision under Rule 17.3, the ten 
business days from the receipt of summary determination that a 
Respondent may notify the CRO that the Respondent desires a hearing 
under Rule 17.7, the 15 business days' notice of the time and place of 
a hearing under Rule 17.6, the CRO's discretion to allow for more than 
two offers of settlement under Rule 17.8, and the removal of the 
referral to the hearing body under the fine schedule for minor rule 
violations in Rule 17.50 are substantially identical to the relevant 
language and/or provisions within the corresponding rules of the 
Affiliated Exchanges. The Exchange believes that these updates provide 
consistency between its rules and that of the Affiliated Exchanges, 
aligns certain aspects of the disciplinary processes, which protects 
investors and the public interest by making it easier for participants 
across the Exchange and its Affiliated Exchanges to understand the 
disciplinary processes. Particularly regarding the removal of referrals 
to the BCC under Rule 17.50, the Exchange believes this change is not 
only consistent with the Affiliated Exchanges' minor rule violation 
schedules but maintains fairness and protection of investors. As 
stated, Rule 17.50 states that the Exchange may impose a fine when a 
rule is minor in nature but is never required to do so, regardless of 
the number of offenses by a participant. This discretion, paired with 
the fact that the CRO has in-depth understanding of regulatory issues 
and takes deference to the principle considerations under Rule 17.11 
when determining if fines are the appropriate disciplinary mechanism, 
will serve to ensure that the Exchange provides appropriate discipline 
and fair procedures to do so.
    The Exchange notes that in some instances the rule change does not 
completely mirror its rules with that of the Affiliated Exchanges or 
proposes additional language/provisions to that of the Affiliated 
Exchange's existing rule language/provisions. The Exchange notes that 
although in these instances it has chosen to maintain its existing 
provisions or modify language of the Affiliated Exchanges' rules, it 
still provides for fair disciplinary procedures or the most appropriate 
discipline for violations to continue to protect investors and the 
public interest. For instance, the Exchange incorporates the Affiliated 
Exchange's formal reports regarding complaints into Rule 17.2(c), but 
maintains that Staff submit a written report when it finds that formal 
regulatory action is warranted, as well as the Staff's authority to 
find that non-formal regulatory action is warranted and to impose non-
formal regulatory action, or to close a matter, without submission of a 
report. The Exchange believes that maintaining Staff's discretion in 
this manner continues to

[[Page 18891]]

provide for the autonomy and independence of the Exchanges' regulatory 
functions, which enhances the fairness of its disciplinary procedures 
and appropriate discipline and thereby enhancing protection of 
investors and the public interest.\107\ The Exchange copies the 
description of counsel's role (and refers specifically to BCC Counsel 
as a clarification), not into its impartiality provisions like that of 
the Affiliated Exchanges, but into its general provision for parties to 
a hearing. The Exchange believes this is a clarifying change as the BCC 
Counsel assists the Hearing Panel throughout the hearing process. The 
Exchange also adds language to make explicit that the Hearing Panel 
member who is the subject of the motion is excluded from the ruling on 
such motion, and adds a provision for recusal of a Hearing Panel member 
when they determine that they have a conflict or bias. The Exchange 
believes that such additional language enhances the procedural fairness 
of the current impartiality rules copied from the Affiliated Exchanges, 
thereby protecting investors and the public interest. Additionally, the 
Exchange incorporates the Affiliated Exchange's ex parte rules, while 
maintaining its provisions defining ex parte communications and ``no 
violations'' of the ex parte rules. The Exchange believes these 
provisions will continue to provide better understanding for all 
parties regarding ex parte communications, thereby protecting investors 
and the public interest and ensuring fair disciplinary proceedings 
throughout.
---------------------------------------------------------------------------

    \107\ Additionally, the CRO directly oversees and manages Staff, 
therefore, the CRO will maintain general supervision over this 
process.
---------------------------------------------------------------------------

Additional Proposed Changes
    The Exchange believes that extending the time periods associated 
with submitting a written response to allegations of rule violations, 
submitting an Answer in response to formal charges, and extending the 
time period prior to a hearing parties are required to submit 
documentary evidence is consistent with the protection of investors. 
The proposed time extensions are also consistent in providing fair 
procedures for disciplining TPHs and persons associated with TPHs, as 
well as ensuring that the Exchange administers appropriate discipline. 
The Exchange believes that due to the increased complexity of Exchange 
trading activity and the regulatory investigations and examinations 
surrounding such activity, extending the time period from 15 days to 25 
days for a Subject's response to a notification of alleged violations 
and for a Respondent's answer to charges, as well as extending time for 
parties to furnish evidence prior to a hearing from five to 10 business 
days, serves to protect investors by allowing more time for these 
parties to respond during various phases of the proceedings. The 
additional time will also serve to ensure fair procedures, that the 
Exchange administers appropriate discipline by allowing subjects to 
prepare more comprehensive and effective written statements in their 
defense, and better Subject and/or Respondent cooperation with the 
Exchange. As stated, this changed is based on the Rules of NYSE,\108\ 
FINRA,\109\ and PHLX.\110\
---------------------------------------------------------------------------

    \108\ See supra note 86.
    \109\ See supra note 87.
    \110\ See supra note 88.
---------------------------------------------------------------------------

    Further, the Exchange believes tolling the applicable periods while 
a Subject or a Respondent's request for access to the investigative 
file similarly serves to protect investors and ensure fair disciplinary 
procedures and the administration of appropriate discipline. As with 
the extension of time periods, the Exchange believes tolling those same 
periods while access to relevant information in the investigative file 
is pending will provide TPHs and associated persons with adequate time 
to craft reasoned and complete responses to regulatory inquires. As a 
result, this serves to foster cooperation and coordination with persons 
engaged in regulating securities, protect investors by serving in the 
interest of fairness to Subjects and Respondents, and provide for 
appropriate discipline for violations of the Act and Exchange rules. 
Any delay to the regulatory process caused by extending the applicable 
time periods is mitigated by the increased efficiency resulting from 
the other rule updates and the fact that Staff no longer needs to 
process extensive extension requests under Rule 17.13.
    The Exchange believes that the proposed removal of automatic review 
of a Hearing Panel's decision by the majority of the BCC and of the 
Board's review of a decision not to initiate charges will streamline 
the various stages of the proceedings under Chapter 17, while ensuring 
that the decision as a result of a hearing and the decision not to 
initiate charges is determined by the persons best suited to make such 
decisions. The Exchange believes the Hearing Panel members are best 
suited to make a final hearing decision as those individuals 
participate directly in the hearing, hear all of the evidence 
firsthand, and are able to consummate a verdict based on that firsthand 
knowledge. The Exchange also believes that proposed Rule 17.6(a)(1)-
(a)(3) guarantees impartiality of Hearing Panel members. As a result, 
the decision by the Hearing Panel of either three or five members will 
be the best-informed and most impartial decision, thus eliminating need 
for review by a majority of the BCC while providing adequate procedural 
protections. Likewise, the Exchange believes the CRO is best suited to 
determine whether to initiate charges when recommended by Staff, as the 
CRO directly oversees all regulatory activities and receives periodic 
updates regarding investigative matters. Unlike the current role of the 
BCC, the CRO reports and responds directly to the ROC. The Exchange 
believes that because the CRO provides regular reports as to the status 
of regulatory matters and decisions pertaining to such matters to the 
ROC and, in turn, because the ROC may direct the CRO to take certain 
regulatory action if they deem necessary, the ROC's application to the 
Board for review of the CRO's decision not to initiate charges is not 
essential to the disciplinary process. Rather, the Exchange believes 
that removing the ROC's application for Board review of such decisions 
will provide for a more efficient, streamlined disciplinary process, 
while ensuring a fair process through the CRO and the direct reporting 
line between the CRO and the ROC. As a result, the Exchange believes 
that removing these review processes will not unfairly prejudice any 
party during these proceedings, which will protect investors throughout 
the disciplinary process and allow the Exchange to determine the most 
appropriate sanctions. Removing these processes will eliminate 
unnecessary redundancies in the disciplinary process, which will also 
protect investors and foster cooperation and coordination with persons 
engaged in regulating securities.
    The Exchange also believes that certain changes and updates to its 
disciplinary rules serve specifically in the interest of fairness and 
expediency. For example, the proposed videotaped responses protect 
investors by allowing Subjects to respond more easily to notice of an 
initiated investigation, especially in such a globalized, technology-
centric industry. Similarly, changes such as allowing the Hearing Panel 
the discretion to grant leave to the parties to a hearing in order to 
present an offer of settlement also protects investors and public 
interest, while

[[Page 18892]]

reducing the burden that once a hearing is scheduled the parties may no 
longer present offers of settlement to the CRO.
    The Exchange believes that the proposed change providing that a 
Hearing Panel be comprised of three or five BCC members protects 
investors and ensures procedural fairness because it will safeguard 
against interlocutory decisions and also allow for more (five) Hearing 
Panel members when necessary to hear complex matters. The Exchange also 
believes that the proposed changes to the service of notice provision 
that adds three days when calculating the time for response to the 
extent service is made by registered or certified mail protects 
investors and provides adequate procedural protections by ensuring that 
a Respondent is not penalized in responding to notices, charges or 
other documentation while such documentation is in transit. 
Additionally, the Exchange updates language throughout Chapter 17 and 
makes other clarifying changes. For example, incorporating that the CRO 
direct Staff to prepare and issue statements of charges or decisions 
not to initiate charges [sic]; a practice currently in place between 
the Staff and the BCC. Also, for example, incorporating that a decision 
containing sanctions shall include a statement of the sanctions imposed 
and the reasons therefor will enable better understanding for all 
parties of sanctions and why such sanctions are imposed. Such updates 
and clarifications will serve to reduce confusion and provide a better 
understanding to TPHs, associated persons, and the Exchange staff of 
the regulatory processes.
    Finally, the Exchange believes that its proposed transition plan 
would allow for a more orderly and less burdensome transition for the 
Exchange's TPHs. The proposed application of current rules to all 
matters where a subject has received notice of a statement of charges 
pursuant to Rule 17.2(d) prior to the operative date provides a clear 
demarcation between matters that would proceed under the new rules and 
those that would be completed under the current rules.

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

    The Exchange does not believe that the proposed rule changes will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended. The 
proposed rule changes are not intended to address competitive issues, 
but rather, are concerned with facilitating less burdensome regulatory 
compliance and processes and enhancing the quality of the regulatory 
processes. The Exchange believes the proposed rule changes reduce the 
burdens within the disciplinary process equally on all market 
participants.

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

    Because the foregoing proposed rule change does not:
    A. Significantly affect the protection of investors or the public 
interest;
    B. impose any significant burden on competition; and
    C. become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \111\ and 
Rule 19b-4(f)(6) \112\ thereunder. At any time within 60 days of the 
filing of the proposed rule change, the Commission summarily may 
temporarily suspend such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission will institute proceedings to determine whether the proposed 
rule change should be approved or disapproved.
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    \111\ 15 U.S.C. 78s(b)(3)(A).
    \112\ 17 CFR 240.19b-4(f)(6).
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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-2019-025 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2019-025. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CBOE-2019-025, and should be submitted 
on or before May 23, 2019.
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    \113\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\113\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-08912 Filed 5-1-19; 8:45 am]
 BILLING CODE 8011-01-P