[Federal Register Volume 63, Number 212 (Tuesday, November 3, 1998)]
[Notices]
[Pages 59348-59350]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-29341]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40607; File No. SR-CBOE-98-22]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Inc.; Order Approving Proposed Rule Change Relating to Floor Official
Fining Authority
October 27, 1998.
I. Introduction
On May 28, 1998, the Chicago Board Options Exchange, Inc. (``CBOE''
or ``Exchange'') submitted to the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change consolidating most floor official fining authority
governed by Exchange Rule 17.50, Imposition of Fines for Minor Rule
Violations (``Summary Fine Rule''), under one regulatory circular. The
CBOE filed Amendment No. 1 to its proposal with the Commission on July
8, 1998,\3\ Amendment No. 2 on August 27, 1998,\4\ and Amendment No. 3
on September 9, 1998.\5\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from Debora E. Barnes, Senior Attorney, CBOE, to
Gail Marshall-Smith, Special Counsel, Division of Market Regulation
(``Division''), Commission, dated July 7, 1998 (``Amendment No.
1'').
\4\ See Letter from Debora E. Barnes, Senior Attorney, CBOE, to
Terri L. Evans, Attorney, Division, Commission, dated August 26,
1998 (``Amendment No. 2'').
\5\ See Letter from Debora E. Barnes, Senior Attorney, CBOE, to
Terri L. Evans, Attorney, Division, Commission, dated September 8,
1998 (``Amendment No. 3'').
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On September 21, 1998, the proposed rule change and amendments were
published for comment in the Federal Register.\6\ No comments were
received on the proposal. This order approves the proposal.
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\6\ Exchange Act Release No. 40440 (Sept. 14, 1998) 63 FR 50265.
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II. Description of the Proposal
The Exchange proposes to modify Exchange Rule 6.20, Admission to
and Conduct on the Trading Floor, and certain other Exchange Rules to
consolidate most floor official fining authority governed by Exchange
Rule 17.50, Imposition of Fines for Minor Rule Violations (``Summary
Fine Rule''), under one regulatory circular.\7\ The CBOE also proposes
to modify its
[[Page 59349]]
regulatory circular pertaining to the administration and enforcement of
paragraph (g)(6) of the Summary Fine Rule, as it relates to minor rule
violations applicable to trading conduct and decorum policies
(``Trading Conduct and Decorum Circular'').
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\7\ The Exchange has issued separate circulars setting forth
fine schedules for violations of Rule 8.51 with respect to OEX and
DJX options. These circulars were approved by the Commission in SR-
CBOE 96-31 and SR-CBOE 97-45.
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The purpose of the CBOE's summary fine plan is to provide a
mechanism whereby certain minor violations of Exchange Rules can be
resolved fairly, effectively and expeditiously. Because the minor rule
violations subject to summary fines are easily ascertainable by floor
officials, they are suitable for summary fine treatment. The proposed
changes are meant to clarify the categories of behavior subject to
summary fines and clarify the authority of floor officials to summarily
fine under the Summary Fine Rule.
Currently, Rule 6.20 provides that admission to the Exchange's
trading floor is limited to members, employees of the Exchange, clerks
employed by members and registered with the Exchange, and such other
persons as may be provided by resolution of the Board. The Exchange is
proposing to amend Rule 6.20 to clarify that Exchange visitors and
service personnel, including but not limited to, electricians, building
maintenance engineers, and computer repair support staff, are
authorized admission to the trading floor pursuant to and in accordance
with Exchange policy concerning admission to the trading floor.\8\ In
addition, the amendment to Rule 6.20 grants the President, rather than
the Board, the authority to allow other people admission to the floor,
because admission to the floor is primarily an administrative issue and
the President is generally able to act more expeditiously than the
Board, which generally must convene a meeting to take action.
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\8\ See Amendment No. 1, supra note 3.
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The summary fines for Rule 6.20 violations are set forth in the
Trading Conduct and Decorum Circular. Currently, if a member is fined
for a Rule 6.20 violation more than once in a calendar year, that
individual is subject to increased summary fines for a second or
subsequent offense of that kind in the same calendar year. The Exchange
proposes to amend the Trading Conduct and Decorum Circular to provide
that summary fines for second or subsequent offenses will be assessed
on a twelve-month rolling period, rather than on a calendar year basis.
This Circular also is being amended to allow for the fining of any
supervisory personnel of an associated person of a member who fails to
adequately supervise an associated person. The Circular and Rule 17.50
also are being amended to clarify that the Exchange, if warranted under
the circumstances, may impose a fine for a first offense equal to the
fine authorized for a second or third offense and to impose for a
second offense the fine authorized for a third offense. This provision
permits the Exchange to impose greater fines for more serious behavior.
Currently, floor officials only have the ability to impose a fine
authorized for a third offense for a first or second offense. This has
restricted the ability of floor officials to fine a manner
corresponding to the circumstances.\9\
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\9\ Telephone conversation between Arthur Reinstein, Associate
General Counsel, CBOE, Debora Barnes, Senior Attorney, CBOE, and
Terri Evans, Attorney, Division, Commission, on September 1, 1998.
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The Exchange also is amending the Trading Conduct and Decorum
Circular to add the following summary fine categories: Enabling a
barred or suspended member to gain improper access to the floor, with
fines of $500 for a first violation, $1,000 for a second violation, and
$2,000 for a third violation; Enabling or assisting a member or
associated person to gain improper access to the floor, with fines of
$100 for a first violation, $250 for a second violation, and $500 for a
third violation; Gaining improper access to the floor, with fines of
$100 for a first violation, $250 for a second violation, and $500 for a
third violation; Impermissible use of member phones, with fines of $50
for a first violation, $150 for a second violation, and $300 for a
third violation; Visitor badge returned late, with a warning for the
first violation, a $25 fine for a second violation, and a $50 fine for
a third violation; and Failure to supervise a visitor, with fines of
$50 for a first violation, $100 for second violation, and $250 for a
third violation.
Additionally, the Exchange is amending the Trading Conduct and
Decorum Circular to specify fine amounts for the following conduct:
Effecting or attempting to effect transactions with no public outcry,
with fines of $500 for a first violation, $1,000 for a second
violation, and $2,000 for a third violation; Failure of a market-maker
to respond to a request for the market by order book official, with
fines of $500 for a first violation, $1,000 for a second violation, and
$2,000 for a third violation; Failure to bid or offer within ranges
specified by Rule 8.7(b), with fines of $500 for a first violation,
$1,000 for a second violation, and $2,000 for a third violation;
Failure to abide by floor official determination or floor official
request for information, with fines of $1,000 for a first violation,
$2,500 for a second violation, and $5,000 for a third violation; and
Violation of Rule 8.51 in an option class other than OEX or DJX, with
fines of any amount up to $5,000 for first, second and third
violations. Floor officials currently have fining authority for this
conduct under Rule 6.20.04, but specific fine amounts for the conduct
are not set forth in the Trading Conduct and Decorum Circular.
Including this conduct in the Circular will clarify that floor official
fines for this conduct are imposed under the Summary Fine Rule.
The Exchange also is proposing to change some of the summary fine
amounts in the Trading Conduct and Decorum Circular. The current fine
for property damage is $500 for the first violation, $750 for the
second violation and $1,000 for the third violation. The Exchange is
proposing to increase the latter two fines to $1,000 for a second
violation and $2,000 for a third violation.
The Exchange also is proposing to amend Rule 6.20(c) to clarify
that the Exchange has the authority to direct members and persons
employed by or associated with members to act or cease to act in a
manner to ensure compliance with Exchange Rules.\10\
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\10\ Telephone conversation between Arthur Reinstein, Associate
General Counsel, CBOE, Debora Barnes, Senior Attorney, CBOE, and
Terri Evans, Attorney, Division, Commission, on September 1, 1998.
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In addition, because the Exchange is consolidating all summary fine
procedures under the Summary Fine Rule, the Exchange is proposing to
amend Rule 6.20(c) by deleting the reference to Chapter XIX and its
appeal procedures, because the appeal procedures for summary fines are
set forth in the Summary Fine Rule. The proposed rule change also
amends Rule 6.61, Interpretation and Policy .05(d) by deleting the last
two sentences that relate to the authority of the Exchange to establish
a fine schedule and refer violations to the Business Conduct Committee.
The Exchange is deleting this language because it is attempting to
consolidate summary fine authority under Exchange Rule 17.50. In
addition, a member's failure to observe the procedures referenced in
Interpretation and Policy .05 is subject to the disciplinary authority
of the Business Conduct Committee under Chapter XVII of the Exchange's
Rules, therefore making the cross-reference in Interpretation and
Policy .05 unnecessary.\11\ The Exchange also is proposing to clarify
that non-member
[[Page 59350]]
joint venture participants have the right to appeal fines under the
Summary Fine Rule.
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\11\ See Amendment No. 1, supra note 3.
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The Exchange also proposes to amend Exchange Rule 6.51,
Interpretation and Policy .01, by amending the final paragraph to
delete the reference to the Floor Procedure Committee. This change is
being proposed to conform the Exchange's Rule language with the
Exchange's current practice. The Floor Procedure Committee is no longer
involved in fining floor members who violate Rule 6.51(a) or (b);
instead members are fined pursuant to the Summary Fine Rule.\12\
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\12\ Telephone conversation between Arthur Reinstein, Associate
General Counsel, CBOE, Debora Barnes, Senior Attorney, CBOE, and
Terri Evans, Attorney, Division, Commission, on September 1, 1998.
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The Exchange is proposing that Rule 8.51 (``Firm Quote Rule'') be
revised as well, to provide that floor officials may fine members of
trading crowds under the Summary Fine Rule for violations of the Firm
Quote Rule.\13\ This change is being proposed to consolidate all of the
minor rule violation authority of floor officials under the Summary
Fine Rule, rather than having the Firm Quote Rule refer to Rule 6.20,
which then refers back to the Summary Fine Rule. This proposed rule
change also makes certain changes to clarify and incorporate Rule 6.20,
the Summary Fine Rule, and the Trading Conduct and Decorum Circular
into other Exchange Rules.\14\
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\13\ The Exchange has issued separate circulars setting forth
fine schedules for violations of Rule 8.51 with respect to OEX and
DJX options. These circulars were approved by the Commission in SR-
CBOE 96-31 and SR-CBOE-97-45.
\14\ For example, in Amendment No. 1, the Exchange notes that it
has deleted the reference to member organizations in certain of the
rules proposed to be amended by the rule filing that also refer to
members, because Section 1.1 of the Exchange Constitution defines
the term ``member'' to include either an individual member or a
member organization.
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III. Discussion
After careful review the Commission finds that the proposed rule
change, as amended, is consistent with the Act and the rules and
regulation thereunder applicable to a national securities exchange.\15\
Specifically, the Commission believes that the proposal is consistent
with the requirements of Sections 6(b)(5), 6(b)(6) and 6(b)(7) of the
Act,\16\ because the proposed rule change is designed to promote just
and equitable principles of trade and protect investors and the public
interest, discipline members who fail to comply with the Exchange's
Rules, and provide for fair disciplinary procedures.
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\15\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition and
capital formation. 15 U.S.C. 78c(f).
\16\ 15 U.S.C. 78f(b)(5)-(b)(7).
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In the proposed rule change, the Exchange proposes, in part, to:
(1) clarify that the Floor Procedure Committee is no longer involved in
fining floor members for violating CBOE Rule 6.51(a) or (b); (2)
consolidate summary fine authority under the Summary Fine Rule; and (3)
clarify and incorporate Rule 6.20, the Summary Fine Rule and Trading
Conduct and Decorum Circular into other Exchange Rules. The Commission
believes that the proposed rule change clarifies the Exchange's
disciplinary procedures and conforms the Exchange's Rules with current
practice. The Commission believes that the proposed rule change is
consistent with Section 6(b)(5) of the Act,\17\ because the
clarification and enhancement of the Exchange's summary fine plan
promotes just and equitable principles of trade.
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\17\ 15 U.S.C. 78f(b)(5).
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The Exchange also proposes to: (1) create a twelve-month look back
period for assessing fines for second or subsequent offenses; (2) levy
a fine for a first offense equal to the fine authorized for a second or
third offense and impose a fine authorized for a third offense for a
first or second offense based on the seriousness of the offense; (3)
fine supervisory personnel who fail to adequately supervise associated
persons; (4) add categories of behavior subject to summary fines as
well as increase current fines; and (5) clarify that floor officials
have the authority to direct members and persons employed by or
associated with members to act or cease to act to achieve compliance
with Exchange Rules. The Commission believes that these amendments to
the Exchange's Rules and Trading Conduct and Decorum Circular are
consistent with Section 6(b)(6) of the Act,\18\ because the proposed
changes provide for prompt, effective and appropriate discipline under
the Exchange's Summary Fine Rule. Further, the proposed rule change
encourages greater supervision of persons associated with members and
compliance with the Exchange's Rules. The Commission notes that
allowing the Exchange to create a twelve-month lookback period is
consistent with the existing framework of graduated fines and may
increase the Exchange's ability to deter repeat offenders. Further, the
Commission believes that allowing the imposition of greater fines for
first or second offenses should deter serious misconduct.
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\18\ 15 U.S.C. 78f(b)(6).
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The Commission believes that the amendments to CBOE Rule 6.20,
clarifying the appeals procedure for non-member joint venture
participants and the appeals process under the Summary Fine Rule, are
consistent with Section 6(b)(7) of the Act,\19\ because the amendments
help to ensure that the Exchange provides fair procedures for
disciplining members, including joint venture participants that are
treated as members of the Exchange for purposes of Exchange Rules 6.7
and 6.20. The Commission believes that the right to appeal sanctions
helps to safeguard the procedural rights of sanctioned persons while
preserving the Exchange's ability to adjudicate minor rule violations
in a timely and efficient manner.
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\19\ 16 U.S.C. 78f(b)(7).
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The Commission also believes that the Exchange's amendment to
Exchange Rule 6.20 is appropriate in light of the practical need to
allow service personnel on the trading floor. Further, the Commission
believes that the President is the appropriate officer of the Exchange
to grant the admission of other people onto the trading floor.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\20\ that the proposed rule change (SR-CBOE-98-22) is approved.
\20\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-29341 Filed 11-2-98; 8:45 am]
BILLING CODE 8010-01-M
