[Federal Register Volume 59, Number 232 (Monday, December 5, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29788]
[[Page Unknown]]
[Federal Register: December 5, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35014; File No. SR-CBOE-94-46]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Inc., Relating to
Amendments to the Minor Rule Violation Fine Plan
November 28, 1994.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on November
21, 1994, the Chicago Board Options Exchange, Inc. (``CBOE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
CBOE Rule 17.50, ``Imposition of Fines for Minor Rule Violations,''
authorizes the Exchange to impose a fine of up to $5,000 for minor
violations of certain CBOE rules in lieu of commencing a disciplinary
proceeding. The CBOE proposes to amend CBOE Rule 17.50 to extend the
``lookback period'' for determining certain sanctions, clarify appeal
procedures, and limit the number of times a member may request
verification of certain fines. Specifically, the Exchange proposes to
amend CBOE Rule 17.50 to: (1) extend from nine to 18 months the
``lookback period'' for failure to submit accurate trade information
pursuant to CBOE Rule 6.51, ``Reporting Duties;'' and (2) create an 18-
month ``lookback period'' for failure to submit trade information to
the price reporter pursuant to CBOE Rule 6.51.
The CBOE also proposes to amend CBOE Rule 17.50(g)(6) to provide
that the maximum fine authorized under the Exchange's trading and
decorum policies may be imposed for a first or second offense if
warranted under the circumstances in the view of the Floor Officials
Committee. In addition, the CBOE proposes to amend Interpretation and
Policy .03 to Exchange Rule 17.50 to impose a cap on the number of
transactions during a particular month for which a member fined more
than twice in a 18-month period for failure to submit accurate trade
information or failure to submit trade information to the price
reporter may request verification of the fine. Under the amended
interpretation, a member fined more than twice in an 18-month period
may request verification of the greater of 50 transactions during a
month or 10% of the number of transactions deemed not to be in
compliance with CBOE Rule 6.51.
Moreover, the CBOE proposes to amend CBOE Rule 17.50 to (1) clarify
the appeal procedures for fines imposed for trading conduct and decorum
violations; (2) allow waiver of the forum fee for appeals of fines
imposed pursuant to CBOE Rule 17.50 if a fine is reduced on appeal; and
(3) make the procedures applicable to requests by the Exchange's Board
of Directors (``Board'') for review by the Board of determinations
rendered under CBOE Rule 17.50 consistent with the procedures
applicable to similar Board requests for review under CBOE Rule 19.5,
``Review.'' Finally, the proposal makes certain nonsubstantive
editorial changes to clarify CBOE Rule 17.50.
The text of the proposal is available at the Office of the
Secretary, CBOE, and at the Commission.
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 self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
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
CBOE Rule 17.50 authorizes the Exchange to impose a fine, not to
exceed $5,000, for minor violations of certain CBOE rules in lieu of
commencing a disciplinary proceeding. The purpose of the proposal is to
revise CBOE Rule 17.50 to (1) extend from nine to 18 months the
``lookback period'' for failure to submit accurate trade information;
(2) establish an 18-month ``lookback period'' for failure to submit
trade information to the price reporter; (3) impose a cap on the number
of transactions during a particular month for which a member fined more
than twice in an 18-month period for failure to submit accurate trade
information or failure to submit trade information to the price
reporter may request verification; (4) clarify the appeal procedures
for fines imposed for trading conduct and decorum violations; (5) allow
waiver of the forum fee for appeals of fines imposed pursuant to CBOE
Rule 17.50 if a fine is reduced on appeal; and (6) make the procedures
applicable to requests by the Exchange's Board for review by the Board
of determinations rendered under CBOE Rule 17.50 consistent with the
procedures applicable to similar Board requests for review under CBOE
Rule 19.5. In addition, the proposal makes certain editorial changes to
clarify CBOE Rule 17.50 without affecting its substance.
Currently, CBOE Rule 17.50(g)(4) provides for a nine month
``lookback period'' for failure to submit accurate trade information.
Specifically, the sanction schedule applicable with respect to such
violations is graduated so that the sanctions imposed start to increase
with the third violation committed during a nine month period and
continue to increase with each subsequent violation committed during
such nine month period. Under the proposal, the sanction schedule for
failure to submit accurate trade information will retain its current
structure except that the current nine month ``lookback period'' will
be replaced with an eighteen month ``lookback period.''
Similarly, the Exchange proposes to amend CBOE Rule 17.50(g)(5),
which currently contains no ``lookback period'' for failure to submit
trade information to the price reporter, to also provide for an
eighteen month ``lookback period.'' As amended, the structure of the
``lookback period'' for failure to submit trade information to the
price reporter will be the same as the amended ``lookback period'' for
failure to submit accurate trade information.
The Exchange believes that the proposed increased ``lookback
periods'' will help to sanction recidivists more effectively by
increasing the sanctions for repeat violators. In addition, the
Division of Market Regulation (``Division'') of the Commission
recommended to the Exchange in connection with the Division's 1993
inspection of the Exchange's surveillance, investigative, and
enforcement programs that the ``lookback periods'' under CBOE Rule
17.50 be increased,\1\ and the proposed ``lookback period'' increases
are in accordance with the Exchange's response to the Division
concerning the implementation of this recommendation.\2\
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\1\See Letter from Brandon Becker, Director, Division,
Commission, to Charles Henry, President, CBOE, dated October 20,
1993.
\2\See Letter from Charles Henry, President, CBOE, to Brandon
Becker, Director, Division, Commission, dated January 14, 1994.
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The CBOE also proposed to amend Interpretation and Policy .03 to
CBOE Rule 17.50 to limit the number of transactions during a particular
month for which a member fined more than twice during an 18-month
period under CBOE Rule 17.50(g)(4) or (g)(5) may request verification
of the fine. Currently, there is no limitation on the number of
transactions for which a member may request verification under
Interpretation and Policy .03. Under the proposal, if during an 18-
month period a member receives three or more fines pursuant to CBOE
Rules 17.50(g)(4) or 17.50(g)(5), a limitation would be imposed on the
member's ability to request verification of the fines. Specifically, in
requesting verification of such fines, the maximum number of
transactions during a particular month with respect to which a member
could request verification would be limited to the greater of (1) 50
transactions or (2) 10% of the number of transactions deemed not to be
in compliance with CBOE Rule 17.50(g)(4) or 17.50(g)(5). The proposed
cap would apply separately to fines imposed under CBOE Rules
17.50(g)(4) and 17.50(g)(5).
The CBOE states that in most instances a request for verification
involves the review by the Exchange of the hard copies of a member's
trading tickets in order to determine whether keypunch errors have
occurred in the inputting of the data contained on the tickets. The
majority of the requests involve the review of between 30 and 150
transactions, and the number of transactions with respect to which
review has been requested by a member has ranged in scope from as
little as three transactions to as many as 700 transactions. Since the
end of the third quarter of 1993, contemporaneous with an increase in
trading volume on the Exchange, the number of fines imposed pursuant to
CBOE Rules 17.50(g)(4) and (g)(5) has risen, resulting in a higher
number of requests for verification. Consequently, the Exchange has had
to devote an increasing amount of staff time and resources to handling
these requests.
The Exchange believes that the proposed cap is necessary to reduce
the amount of staff time and resources which are currently devoted to
processing verification requests and to alleviate the current
administrative burden associated with responding to these requests. In
addition, the Exchange believes that the proposed cap strikes an
appropriate balance between not overburdening the Exchange's
surveillance staff with the processing of verification requests and
leaving in place a meaningful and reasonable opportunity for CBOE
members to request verification. Specifically, the Exchange believes
that the proposed cap is reasonable based on its analysis that the cap
will affect a small percentage of the members requesting verification
while at the same time materially reducing the total number of
transactions that will need to be reviewed by the Exchange's
surveillance staff.
The CBOE also proposes several amendments to revise the procedures
applicable to the appeal and review of fines imposed under CBOE Rule
17.50. First, the Exchange notes that all fines imposed under CBOE Rule
17.50 are appealable to the CBOE's BCC, except for fines imposed for
trading conduct and decorum violations not exceeding $2,500, which are
appealable to the Exchange's Appeals Committee and are governed by CBOE
Chapter 19, ``Hearings and Review.'' The CBOE proposes to amend
Exchange Rule 17.50 to clarify the procedures applicable to appeals
from fines imposed for trading conduct and decorum violations by adding
paragraph (d)(1), which notes that, among other things, a person fined
for such violations may contest the Exchange's determination by filing
a written application with the Secretary of the Exchange pursuant to
CBOE 19.2, ``Submission of Application to Exchange,'' and stating that
a hearing, if requested, will be conducted in accordance with the
provisions of CBOE Rules 19.3, ``Procedure Following Applications for
Hearing,'' and 19.4, ``Hearing.'' Under paragraph (d)(2), the Appeals
Committee may waive the forum fee if the Appeals Committee finds that
the person charged is guilty of one or more of the rule violations
alleged and the sole disciplinary sanction imposed by the Appeals
Committee is a fine which is less than the total fine initially imposed
by the Exchange.
In addition, after a hearing or review in which the BCC determines
that a person is guilty of a rule violation, CBOE Rule 17.50(c)
currently requires the BCC to impose a forum fee of $100 against the
person if the determination was reached without a hearing, or $300 if a
hearing was conducted. The CBOE proposes to amend the rule to provide
the BCC with the discretion to waive the forum fee if the BCC finds
that the person charged is guilty of one or more of the rule violations
alleged and the sole disciplinary sanction imposed by the BCC is a fine
which is less than the total fine initially imposed by the Exchange.
The CBOE believes that this amendment will lead to a more equitable
resolution of certain appeals under CBOE Rule 17.50 in situations where
the BCC believes that a waiver of the forum fee is warranted, for
example, when a fine is reduced on appeal.
The CBOE also proposes to amend CBOE Rule 17.50 to make the
procedures applicable to requests by the Board for review by the Board
of determinations of the BCC and Appeals Committee under CBOE Rule
17.50 consistent with the procedures applicable to requests by the
Board for Board review of other decisions of those committees as
provided in CBOE Rules 17.10(c) and 19.5(a).
Finally, the CBOE proposes a nonsubstantive change to clarify CBOE
Rule 17.50(g)(1), ``Violation of position limit rules,'' by deleting a
potentially confusing reference to CBOE Rule 24.4, ``Position Limits
for Broad-Based Index Options.'' Currently, CBOE Rule 17.50(g)(1),
which applies to violations of all of the Exchange's position limit
rules, only specifically references CBOE Rules 4.11, ``Position
Limits,'' and 24.4(a), and does not specifically reference the other
CBOE rules which determine compliance with CBOE Rule 4.11, the
Exchange's general rule governing position limits.\3\ Although the CBOE
states that this is not technically incorrect--because all position
limit violations, no matter what type of option they relate to, are
violations of CBOE Rule 4.11--the current references are potentially
confusing. Therefore, to eliminate potential confusion, the CBOE
proposes to delete the reference to CBOE Rule 24.4(a), so that CBOE
Rule 17.50(g)(1), as amended, will refer only to CBOE Rule 4.11.
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\3\Other CBOE position limit rules which establish ways to
determine compliance with CBOE Rule 4.11 with respect to particular
types of options include CBOE Rule 24.A, ``Position Limits for
Industry Options,'' CBOE Rule A.7, ``Position Limits';' (Flexible
Exchange Options), CBOE Rule 21.3, ``Position Limits'' (Treasury
Bonds and Notes), and CBOE Rule 23.3, ``Position Limits'' (interest
rate options).
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The CBOE believes that the proposed rule change is consistent with
Section 6(b) of the Act, in general, and furthers the objectives of
Sections 6(b)(1) and 6(b)(7), in particular, in that it enhances the
effectiveness and fairness of the Exchange's disciplinary procedures.
(B) Self-Regulatory Organization's Statement on Burden on Competition
The CBOE does not believe that the proposed rule change will impose
any inappropriate burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received from Members, Participants or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days after the publication of this notice in the Federal
Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reason for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(a) By order approve such proposed rule change, or
(b) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying at the
Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. Copies of such filing will also be available for
inspection and copying at the principal office of the above-mentioned
self-regulatory organization. All submissions should refer to the file
number in the caption above and should be submitted by December 27,
1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\4\
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\4\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-29788 Filed 12-2-94; 8:45 am]
BILLING CODE 8010-01-M
