[Federal Register Volume 60, Number 32 (Thursday, February 16, 1995)]
[Notices]
[Pages 9067-9069]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-3844]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35350; File No. SR-CBOE-94-35]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the Chicago Board Options Exchange, Inc., Relating to
Expedited Proceedings and Offers of Settlement
February 9, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ the Chicago Board Options
Exchange, Inc. (``CBOE'' or ``Exchange'') submitted to the Securities
and Exchange Commission (``SEC'' or ``Commission'') a proposal to amend
CBOE Rules 17.3, ``Expedited Proceeding,'' and 17.8, ``Offers of
Settlement,'' to (1) specify that the subject of an Exchange
investigation must notify the CBOE staff in writing within 15 days of
the date of notification under CBOE Rule 17.2(d), ``Notice, Statement
and Access,'' that he elects to proceed in an expedited manner pursuant
to CBOE Rule 17.3; (2) reduce the time period during which settlement
offers may be submitted by a subject in an Exchange disciplinary matter
who seeks to resolve the matter through expedited proceedings pursuant
to CBOE Rule 17.3; and (3) allow either the subject or the Exchange
staff to end the negotiations for a letter of consent at any point
during the negotiations.\3\
\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1994).
\3\CBOE Rule 17.2(c), ``Report,'' requires the CBOE staff to
submit a written report of an investigation to the Exchange's
Business Conduct Committee (``BCC'') in every case where an
investigation results in a finding that there are reasonable grounds
to believe that a violation of the Act or the CBOE's rules has been
committed. CBOE Rule 17.2(d) requires the CBOE staff to notify the
subject of the report of the general nature of the allegations and
of the specific provisions of the Act or of the CBOE's rules that
appear to have been violated, and the subject has 15 days from the
date of the notification to submit a written statement to the BCC
concerning why no disciplinary action should be taken. Under CBOE
Rule 17.3, the subject of a report written pursuant to CBOE Rule
17.2 may seek to dispose of the matter through a letter of consent
prior to the issue of a statement of charges. [[Page 9068]]
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The proposal was published for comment in the Federal Register in
Securities Exchange Act Release No. 34987 (November 18, 1994), 59 FR
60858 (November 28, 1994). No comments were received on the proposed
rule change.
CBOE Rule 17.3 establishes an expedited process under which the
subject of an Exchange investigation may seek to resolve a disciplinary
matter through a letter of consent with the Exchange prior to the
issuance of a statement of charges against the subject.\4\ Under CBOE
Rule 17.3, a letter of consent must contain a description of the facts,
violation, and sanction, and must be agreed upon by the Exchange staff,
the subject of the investigation, and the BCC. If the Exchange staff
and the subject are unable to agree upon a letter of consent or if they
agree upon a letter of consent and the letter is rejected by the BCC,
the matter proceeds as if no letter of consent had been submitted to
the BCC (i.e., the BCC may decide to authorize the issuance of a
statement of charges against the subject; the subject is then entitled
to submit settlement offers to the BCC pursuant to CBOE Rule 17.8
during the 120-day settlement period).
\4\Under CBOE Rule 17.4(b), ``Initiation of Charges,'' when it
appears to the BCC from the report of the exchange staff that there
is probable cause for finding a violation within the disciplinary
jurisdiction of the Exchange and that further proceedings are
warranted, the BCC directs the Exchange staff to prepare a statement
of charges against the person or organization alleged to have
committed a violation (the ``respondent'') specifying the acts in
which the Respondent is charged to have engaged and setting forth
the specific provisions of the Act, as amended, and the rules and
regulations promulgated thereunder, constitutional provisions, by-
laws, rules, interpretations or resolutions of which such acts are
in violation. Under CBOE Rule 17.8, at any time during the 120-day
period following the date of service of a statement of charges, a
respondent may submit a written offer of settlement to the BCC. The
offer of settlement must contain a proposed stipulation of facts and
consent to a specified sanction.
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The CBOE proposes to amend CBOE Rule 17.3 to (1) require that any
subject who desires to resolve a disciplinary matter through the
expedited proceedings using a letter of consent to submit a written
notice of this fact to the Exchange staff within 15 days from the date
of service of a notification letter; and (2) permit either the Exchange
staff or the subject of an investigation to declare an end to the
negotiations regarding a letter of consent at any point in the
negotiations by providing written notice to the other party.\5\
Thereafter, the subject will have 15 days to submit a notification
response pursuant to CBOE Rule 17.2(d) and the Exchange staff will then
be permitted to bring the matter to the BCC. The CBOE states that these
new procedures will establish a start and end date for expedited
proceedings so that the number of days a subject spends in the
expedited process can be calculated and deducted accordingly from the
120-day settlement period, as proposed under CBOE Rule 17.8.
\5\The CBOE states that it will terminate the negotiations for a
letter of consent if, among other things, it appears to the Exchange
that the subject is not negotiating in good faith. Telephone
conversation between Arthur Reinstein, Attorney, CBOE, and Yvonne
Fraticelli, Staff Attorney, Options Branch, Division of Market
Regulation, Commission, on February 8, 1995.
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The proposed amendments to CBOE Rule 17.8, Interpretation and
Policy .01 would reduce the time period during which settlement offers
may be submitted to the BCC by a subject who seeks to resolve a
disciplinary matter through expedited proceedings, is unable to reach
an agreement with Exchange staff, and consumes over 30 days in the
expedited proceedings. Specifically, under the proposal, the number of
days in excess of 30 days that a subject spends in the expedited
proceeding will be deducted from the 120-day settlement period
applicable to the subject under CBOE Rule 17.8. Regardless of the
amount of time spent in unsuccessful negotiations, the respondent will
have no less than 14 days to submit a settlement offer to the BCC
pursuant to CBOE Rule 17.8(a).
The mechanism for limiting settlement periods will apply only to a
subject who attempts to resolve a disciplinary matter through expedited
proceedings and is unable to reach an agreement with CBOE staff upon a
letter of consent; it will not apply to a subject who attempts to
resolve a disciplinary matter through expedited proceedings and who
reaches an agreement with CBOE staff upon a letter of consent but finds
that the agreed-upon letter of consent is not accepted by the BCC. In
addition, under the proposal, the number of days between the time that
the expedited process is deemed to end and the time that a subject is
served with a statement of charges will not be deducted from the 120-
day settlement period applicable to the subject.
Finally, the CBOE proposes to make certain editorial changes to
clarify CBOE Rules 17.3 and 17.8 without affecting their substance.
The CBOE believes that the proposal will enhance the efficiency and
effectiveness of the Exchange's disciplinary process. Specifically, the
Exchange believes that the proposed changes will minimize opportunities
for delay and thereby help to preserve evidence and the memories of
witnesses.
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, the requirements of Section 6(b)(5)\6\ that the rules of an
exchange be designed to prevent fraudulent and manipulative acts and
practices and to protect investors and the public interest. In
addition, the Commission finds that the Exchange's proposal is
consistent with the requirement of Section 6(b)(1) of the Act that an
exchange have the capacity to enforce compliance by its members with
the Act and the rules and regulations thereunder and the rules of the
exchange. The Commission also believes that the proposal is consistent
with Section 6(b)(7) of the Act because it provides a fair procedure
for disciplining members.
\6\15 U.S.C. 78f(b)(5) (1988).
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The Commission believes that the proposal strikes a reasonable
balance between the Exchange's need to provide prompt, effective and
meaningful discipline for violations of Exchange rules and the federal
securities laws and the need to ensure fair procedures for the subjects
of Exchange investigations to contest CBOE disciplinary proceedings. By
streamlining the expedited proceedings established in CBOE Rule 17.3
and limiting the time allowed for the submission of settlement offers
under CBOE Rule 17.8, the Commission believes that the proposal should
minimize opportunities for delay, thereby helping to preserve evidence
and the availability of witnesses. This, in turn, should enhance the
quality, consistency, and fairness of the Exchange's disciplinary
proceedings and enable the CBOE to better enforce compliance by its
members with the Exchange's rules and the federal securities laws.
The CBOE states that the Exchange's current rules allow the subject
of an Exchange investigation who unsuccessfully attempts to resolve a
disciplinary matter through expedited proceedings to take advantage of
the entire 120-day settlement period provided under CBOE Rule 17.8, so
that a respondent may utilize the expedited process to circumvent the
120-day settlement period and delay the resolution of a case.
Accordingly, the [[Page 9069]] Exchange proposes to amend CBOE Rule
17.8, Interpretation and Policy .01 to deduct from the 120-day
settlement period the number of days over 30 days which a subject
spends in the expedited process unsuccessfully attempting to reach an
agreement with the Exchange staff.
The Commission believes that the proposed amendments to CBOE Rule
17.8 should allow the Exchange's disciplinary proceedings to progress
promptly without compromising members' rights to ``fair procedures'' in
CBOE disciplinary proceedings. Specifically, by deducting from the 120-
day settlement period the number of days over 30 spent in unsuccessful
negotiations under the expedited process, the proposal will prevent the
subject of an Exchange investigation from using the expedited process
to delay the resolution of a case while continuing to ensure that the
subject has adequate time to resolve the matter through a letter of
consent or settlement. In this context, the proposal will deduct only
the portion of days above 30 spent in unsuccessful negotiations under
the expedited process from the 120-day settlement period, thereby
limiting the total amount of time a subject may spend in attempts to
resolve a case through either a letter of consent under CBOE Rule 17.3
or a settlement offer under CBOE Rule 17.8.
The Commission also believes that it is reasonable to allow the
CBOE staff, as well as the subject, to terminate negotiations for a
letter of consent at any time during the negotiations. As noted
above,\7\ the CBOE has stated that it will terminate the letter of
consent negotiations if, among other things, it appears to the Exchange
that a subject is not negotiating in good faith. The Commission
believes that this provision will help to ensure that disciplinary
matters are resolved quickly by preventing subjects who do not
negotiate in good faith from using the letter of consent negotiations
to delay the resolution of the matter.
\7\See note 5, supra.
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At the same time, the Commission believes that the proposal should
preserve the rights of respondents to submit settlement offers under
CBOE Rule 17.8. By providing that respondents will have no less than 14
days following the date of service of the statement of charges to
submit offers of settlement to the BCC, regardless of the amount of
time spent in the expedited process, the proposal should provide
respondents with sufficient time to submit settlement offers under CBOE
Rule 17.8. Thus, the Commission believes that the proposed amendments
to CBOE Rule 17.8 will help to safeguard the procedural rights of
members while preserving the Exchange's ability to administer its
disciplinary proceedings in a timely and efficient manner.
The Commission also believes that the proposed amendments to CBOE
Rule 17.3 are consistent with the Act. Specifically, the Commission
believes that the proposed amendments will streamline the Exchange's
expedited proceedings by providing that a subject of an Exchange
investigation who wishes to dispose of a matter through a letter of
consent must notify the Exchange staff of his intent within 15 days of
the receipt of notice under CBOE Rule 17.2(d). In addition, the
proposal clarifies the requirements for expedited proceedings by
specifying that the subject and the Exchange staff must agree upon the
terms of a letter of consent and the letter must be signed by the
subject. The proposal also allows either party to deliver a written
notice declaring an end to the negotiations, thereby limiting the
amount of time that may be spent in unsuccessful negotiations.
In summary, the Commission believes that the proposed amendments to
CBOE Rules 17.3 and 17.8 should allow cases to be resolved more quickly
and efficiently, while continuing to ensure adequate due process for
subjects of disciplinary matters, consistent with Section 6(b)(7) of
the Act. Accordingly, the changes should permit Exchange resources to
be allocated more effectively in pursuing violations of the Exchange's
rules and the federal securities laws and help to ensure that
appropriate and fair discipline is imposed for violations. This should
further the Exchange's mandate to protect investors and the public
interest.
Finally, the Commission believes that it is reasonable for the
Exchange to clarify its rules by making editorial changes to CBOE Rules
17.3 and 17.8 which do not affect the substance of those rules.
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\8\that the proposed rule change (SR-CBOE-94-35) is approved.
\8\15 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\9\
\9\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-3844 Filed 2-15-95; 8:45 am]
BILLING CODE 8010-01-M
