[Federal Register Volume 62, Number 37 (Tuesday, February 25, 1997)]
[Notices]
[Pages 8472-8474]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-4529]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38290; File No. SR-CBOE-96-73]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Inc. Relating to
Membership Committee Jurisdiction Over Continuing Membership
February 14, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given
that on November 26, 1996, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``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 self-
regulatory organization.\3\ 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\ On February 12, 1997, the Exchange filed an amendment to the
rule proposal. See Letter from Arthur Reinstein, Senior Attorney,
CBOE, to Janice Mitnick, Attorney, Division of Market Regulation,
Commission, dated February 12, 1997 (``Amendment No. 1''). Amendment
No. 1 provides that failure to file an application notifying the
Exchange of a statutory disqualification would be a factor to be
considered by the CBOE's Membership Committee in making
determinations with respect to the person's membership or
association pursuant to CBOE Rule 3.4(e), instead of constituting a
waiver of the individual's right of appeal. Further, Amendment No. 1
describes the procedures to be followed by the Exchange's Membership
Committee in reviewing an application submitted pursuant to proposed
Rule 3.4(f). Finally, Amendment No. 1 describes the composition of
the CBOE's Business Conduct Committee (``BCC'') and CBOE's
Membership Committee.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend CBOE Rule 3.4 to: (i) grant the
Membership Committee, instead of the BCC, the power to decide whether
to limit or condition the right of a person to continue as a member, or
as a person associated with a member, when such person fails to meet
any of the qualification requirements for membership or association
after the membership or association has been approved, fails to meet
any condition placed by the Membership Committee on such membership or
association, violates an agreement with the Exchange, or becomes
subject to a statutory disqualification under the Act; and (ii) require
a member or person associated with a member who is subject to a
statutory disqualification to submit an application to the Membership
Committee in order to continue as a member or as a person associated
with a member.
The text of the proposed rule change 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
1. Purpose
The purpose of the proposed rule change is to grant to the CBOE's
Membership Committee certain authority over persons who fail to meet
conditions to their remaining as members or persons associated with
members, or who become subject to a statutory disqualification after
becoming a member or person associated with a member. Presently this
authority rests with the Exchange's BCC. The proposed rule change also
requires a member or person associated with a member who is subject to
a statutory disqualification and who wants to continue as a member or
in association with a member to submit an application to that effect to
the CBOE's Membership Committee.
CBOE Rule 3.4 (a) through (c) sets forth the reasons the CBOE's
Membership Committee may deny or condition membership or a person's
association with a member. However, the jurisdiction of the CBOE's
Membership Committee currently applies only to applicants for
membership or association with a member, not to existing members or
associated persons. CBOE Rule 3.4(e) currently authorizes the
Exchange's BCC to take action against an existing member under Chapter
XVII, ``Discipline,'' of the CBOE's rules when any of these reasons for
denying or conditioning membership (or association with a member) comes
into existence. Under this authority, the Exchange's BCC may suspend or
bar from membership an existing member for the same reasons a person
applying for membership could be denied membership or be granted only
conditional membership. For example, if an existing member becomes
subject to a statutory disqualification under Sections 3(a)(39) and
15(b) under the Act, the CBOE's BCC may take action, pursuant to CBOE
Rule 3.4(e), to discontinue that member's membership. In addition,
Section 2.2 under the CBOE's Constitution, ``Eligibility for
Membership; Good Standing,'' provides that the good standing of a CBOE
member may be suspended, terminated or otherwise withdrawn, as provided
in the CBOE's Rules, if any of the conditions for approval cease to be
maintained or the member violates any of its agreements with the
Exchange or any of the provisions of the Constitution. Again, the
CBOE's BCC currently would take action under Section 2.2 of the
Exchange's Constitution against existing members or associated persons.
The CBOE believes it is more appropriate for the Exchange's
Membership Committee to deal with membership related issues (whether
those issues concern an applicant for membership or an already existing
CBOE member), and for the Exchange's BCC to limit its activities to
disciplinary matters involving allegations of specific rule violations.
The Exchange believes that its Membership Committee is more familiar
with the considerations that properly bear on decisions to deny or
condition membership, and is best able to evaluate cases involving
whether to continue or condition the membership of an existing member
by referring to the standards it applies when evaluating applicants for
membership. The Exchange's BCC may not be privy to membership
applications that were denied by the CBOE's Membership Committee and
the reasons for such denial. Furthermore, the CBOE's BCC may not be
familiar with the factors considered by the Exchange's Membership
Committee when acting on membership applications, or the types of
conditions that may be imposed on applicants. In short, the Exchange
believes that the present bifurcation of membership issues between the
two committees could result in the CBOE's
[[Page 8473]]
BCC treating existing members who now fail to meet conditions of
membership inconsistently with the way the CBOE's Membership Committee
treats applicants for CBOE membership who are also subject to these
same conditions.
The CBOE believes the same committee should make determinations
about a person's fitness for CBOE membership whether that person is
applying for CBOE membership or is an existing member whose ability to
continue in membership is at issue. The proposed rule change would
accomplish this. The CBOE states that, under the proposed rule change,
the CBOE's Membership Committee may determine whether to limit or
condition the right of a person to continue as a member or as a person
associated with a member for the same reasons that the Exchange's BCC
may presently take such action.
Pursuant to the proposed rule change, the CBOE's BCC will retain
its powers to take action against existing members or associated
persons under Section 2.2 of the Exchange's Constitution if the member
or associated person violates any provision of the Exchange's
Constitution or Rules. However, pursuant to the proposed rule change,
the CBOE's BCC will no longer have the ability to take action pursuant
to CBOE Rule 3.4(e) for the circumstances set forth in CBOE Rule
3.4(c).\4\ Practically, the Exchange believes that this change will
have little effect because the CBOE's BCC does not typically rely on
CBOE Rule 3.4(e) to take action for the circumstances set forth in CBOE
Rule 3.4(c). Instead, the practice of the CBOE's BCC is to take
disciplinary action for specific rule violations. Most of the
circumstances set forth in CBOE Rule 3.4(c) are covered by CBOE Rules
16.1, ``Imposition of suspension,'' or 4.2, ``Adherence to Law.''
Following the Exchange's present practice, the CBOE's BCC will continue
to take disciplinary action based on CBOE Rule 4.2 and the Chairman of
the Board or Chairman of the Executive Committee will continue to take
action based on CBOE Rule 16.1.
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\4\ Under CBOE Rule 3.4(c), the CBOE's Membership Committee may
deny or condition membership or prevent or condition a person from
becoming an associated person if the applicant has a negative net
worth or other financial difficulties, is unable to satisfactorily
demonstrate a capacity to adhere to all applicable CBOE, Commission,
Options Clearing Corporation, and Federal Reserve Board policies and
rules, would bring the CBOE into disrepute, or for such other cause
as the CBOE's Membership Committee may reasonably decide.
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The proposed rule change will also clarify that CBOE Rule 3.4(e)
applies to persons associated with members as well as members. The
other subsections of CBOE Rule 3.4 refer to persons associated with
members and it appears to be an oversight that subsection (e) does not
refer to such persons. The Exchange has always interpreted Rule 3.4(e)
to apply to associated persons.
Presently, under Chapter XIX, ``Hearings and Review,'' of the
CBOE's rules, if a person's application for membership is denied, that
person may apply for a hearing before a panel of the Appeals Committee
to review the Membership Committee's denial. The panel's decision may
then be reviewed by the CBOE's Board of Directors pursuant to CBOE Rule
19.5, ``Review.'' The proposed amendment will grant this same right of
review to an existing member or person associated with a member and
will reference this right in new paragraph (g) to CBOE Rule 3.4. New
paragraph (g) to CBOE Rule 3.4 also provides that no determination of
the Membership Committee to discontinue or condition a person's
membership or association with a member pursuant to CBOE Rule 3.4(e)
shall take effect until the review procedures under Chapter XIX have
been exhausted or the time for review has expired.
The proposed rule change will also add a paragraph (f) to CBOE Rule
3.4 requiring a member or person associated with a member who becomes
subject to a statutory disqualification to submit an application to the
Exchange's Membership Committee within 30 days of becoming subject to a
statutory disqualification if the member or person associated with a
member wants to continue in their membership or association with a
member.\5\ Paragraph (b) of Rule 19h-1 under the Act requires a self-
regulatory organization to file a preliminary notice with the
Commission promptly after it receives an application for admission to,
or continuance in, membership or association with a member,
notwithstanding a statutory disqualification. In order to permit the
Exchange to file the required preliminary notice in respect of existing
members and associated persons, proposed paragraph (f) of CBOE Rule 3.4
requires the statutorily disqualified member or associated person to
sumit a formal application to the Exchange requesting permission to
continue in membership or association. The application would include
the permission to continue in membership or association. The
application would include the information the Exchange needs from the
member or associated person in order to complete the Rule 19h-1
preliminary notice. The application would also inform the Exchange that
it needs to devote the resources necessary to make a decision regarding
whether to continue the membership or association of this statutorily
disqualified person or entity.
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\5\ See Amendment No. 1 supra note 3. Procedures to be followed
by the CBOE's Membership Committee in considering an application
filed pursuant to CBOE Rule 3.4(f) to continue as a member or
associated person after becoming subject to a statutory
disqualification will be the same procedures that are followed
currently by the CBOE's Membership Committee when it reviews an
application from a person subject to a statutory disqualification
who is applying for exchange membership or association with an
Exchange member. These procedures are generally set forth in
Exchange Regulatory Circular RG95-93.
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Pursuant to proposed paragraph (f) of CBOE Rule 3.4, absent
extenuating circumstances, if the member or associated person who is
subject to a statutory disqualification fails to file an application
with the CBOE's Membership Committee seeking to continue in Exchange
membership or association, the Exchange will consider such failure as a
factor to be considered by the Membership Committee in making
determinations with respect to the person's membership or association
pursuant to Rule 3.4(e).\6\
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\6\ See Amendment No. 1, supra note 3.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with and furthers the objectives of Section 6(b) (6) and (7) of the
Act, in that it is designed to protect investors and the public
interest by providing appropriate standards of qualification for
membership and association with members, and procedures intended to
assure the consistent application of these standards.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes that the proposed rule change will not impose
any 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 of the date of 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
[[Page 8474]]
publishes its reasons for so finding or (ii) as to which the self-
regulatory organization consents, the Commission will:
(A) by order 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 coping at the
Commission's Public Reference Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
Exchange. All submissions should refer to File No. SR-CBOE-96-73 and
should be submitted by March 18, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\7\
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\7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-4529 Filed 2-24-97; 8:45 am]
BILLING CODE 8010-01-M
