[Federal Register Volume 60, Number 24 (Monday, February 6, 1995)]
[Notices]
[Pages 7091-7092]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-2750]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35297; File No. SR-CBOE-94-50]
Self-Regulatory Organizations; Order Granting Accelerated
Approval to a Proposed Rule Change by the Chicago Board Options
Exchange, Inc. Relating to As-of-Add Submissions
January 30, 1995.
On December 1, 1994, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4
thereunder,\2\ filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change relating to the fees assessed
by the Exchange against members pursuant to Exchange Rule 2.26 for
submitting trade information under Exchange Rule 6.51\3\ after the
trade date (each an ``as-of-add''). Notice of the proposal and the
Commission's order granting partial accelerated approval of the
proposal appeared in the Federal Register on January 12, 1995.\4\ No
comment letters were received on the proposed rule change. This order
approves the remaining portion of the CBOE proposal.
\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1992).
\3\Among other things, Rule 6.51 requires that each transaction
be immediately reported to the Exchange in a form and manner
prescribed by the Exchange. See Rule 6.51(a).
\4\See Securities Exchange Act Release No. 35190 (January 3,
1995), 60 FR 3008 (January 12, 1995) (``Exchange Act Release No.
35190'').
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The purpose of the proposed rule change was to amend the as-of-add
fee pilot program in three ways and to have the pilot program, as
amended, made permanent. The Commission has already approved those
portions of the proposal: (1) Permanently approving the as-of-add fee
pilot program; (2) placing a ceiling on the monthly as-of-add fee that
can be assessed against individual and clearing members pursuant to
CBOE Rule 2.26; and (3) amending Rule 2.26 to authorize the Exchange to
suspend rule 2.26 (and thereby waive the as-of-add fees that would
otherwise be due) in exigent circumstances.\5\
\5\Id.
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The only portion of the proposal which has not yet been approved by
the Commission is a proposed amendment to CBOE Rule 17.50(g) to include
a fine schedule for substantial and repeated submissions by members of
as-of-adds (``Minor Rule Plan Amendment''). Specifically, any member
who exceeds the as-of-add rate considered nominal under Rule 2.26 by
three times or more for two consecutive months\6\ would be subject to a
fine of $250 for the first offense, $500 for the second offense, and
$1,000 for each offense thereafter occurring during any 12-month
period.\7\ The fines imposed pursuant to Rule 17.50(g) would be in
addition to any fees due under Rule 2.26 and would serve to penalize
those members who submit the greatest number of excessive as-of-add
trades. Furthermore, in any circumstance in which a member's use of as-
of-adds suggests that it may be appropriate to impose more severe
disciplinary sanctions than would be provided for under Rule 17.50(g),
the member would be subject to investigation and discipline in
accordance with Chapter XVIII of CBOE's rules.\8\
\6\The nominal as-of-add rate is currently 2.4% of an individual
member's monthly trades and 1.2% of a clearing member's monthly
trades. Accordingly, fines under this proposal would currently be
triggered for an individual member whenever that member's as-of-add
submissions equal or exceed 7.2% of total trade submissions in each
of two consecutive months, while fines to clearing firms would be
triggered whenever a clearing member's as-of-add submissions equal
or exceed 3.6% of total trade submissions for each of two
consecutive months.
\7\These fines would be assessed on a rolling basis. For
example, an individual member who is cited for a first offense for a
minor rule violation for exceeding the nominal allowable number of
as-of-adds by three or more times during each of December and
January would be fined for a second offense if that member again
exceeds the allowable number of as-of-adds by three or more times
during February. See Exchange Act Release No. 35190, supra note 4.
\8\The CBOE has issued a Regulatory Circular to members
describing the portions of the proposal previously approved and the
Minor Rule Plan Amendment. The Commission notes, however, that this
Regulatory Circular stated that the Minor Rule Plan Amendment would
apply retroactively as of January 1, 1995. See CBOE Regulatory
Circular RG94-85, dated December 28, 1994. Because the Commission
generally does not approve the retroactive application of rule
changes, particularly with regard to the assessment of fees and
fines, immediately following approval of the Minor Rule Plan
Amendment, the Exchange will issue another Regulatory Circular
notifying members of the approval and the revised implementation
date for Minor Rule Plan Amendment, which is tentatively scheduled
for February 1, 1995. This Regulatory Circular will also emphasize
that serious instances or extended periods of as-of-add submissions
will be subject to investigation and possible disciplinary action
notwithstanding Rule 17.50(g).
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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).\9\ Specifically, the
Commission finds that incorporating a fine schedule into Rule 17.50(g)
for substantial and repeated submissions of as-of-adds fees addresses
the suggestions previously noted by the [[Page 7092]] Commission
concerning the assessment of as-of-add fees\10\ and may serve to
further reduce the total number of as-of-adds by providing a clear
sanction in those circumstances in which discipline is clearly
appropriate. As a result, the Commission believes that the proposal
should benefit all Exchange members, and ultimately investors, by
increasing the efficiency with which Exchange transactions are
processed as well as helping the Exchange to defray the additional
costs it incurs with the processing of as-of-adds.
\9\15 U.S.C. 78f(b)(5) (1988).
\10\See Securities Exchange Act Release No. 34783 (October 3,
1994), 59 FR 51459 (October 11, 1994).
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The Commission believes that an exchange's ability to effectively
enforce compliance by its members and member organizations with
Commission and Exchange rules is central to its self-regulatory
functions. The inclusion of a rule in an exchange's minor rule
violation plan, therefore, should not be interpreted to mean that it is
not an important rule. On the contrary, the Commission recognizes that
the inclusion of minor violations of particular rules under a minor
rule violation plan may make the exchange's disciplinary system more
efficient in prosecuting more egregious and/or repeated violations of
these rules, thereby furthering its mandates to protect investors and
the public interest.
The Commission believes that adding the Minor Rule Plan Amendment
is consistent with Sections 6(b)(5) and 6(b)(6) of the Act in that the
purpose of Rule 17.50 is to provide for a response to a violation of
Exchange rules or policy when a meaningful sanction is needed, but when
initiation of a disciplinary proceeding pursuant to CBOE Rule 17.2 et
seq. is not suitable because such a proceeding would be more costly and
time-consuming than would be warranted given the nature of the
violation. Rule 17.50 provides for an appropriate response to minor
violations of certain Exchange rules, while preserving the due process
rights of the party accused through specified, required procedures.
Furthermore, the Commission finds that violations of the Minor Rule
Plan Amendment are objective and easily verifiable, thereby lending
itself to the use of expedited proceedings. Noncompliance with Rule
17.50(g) may be determined objectively and adjudicated quickly without
the complicated factual and interpretative inquiries associated with
more sophisticated Exchange disciplinary proceedings. If the Exchange
determines that a violation of Rule 17.50(g) is not minor in nature,
the Exchange retains the discretion to initiate full disciplinary
proceedings in accordance with Chapter XVII of CBOE's rules. The
Commission expects the CBOE to bring full disciplinary proceedings in
appropriate cases (e.g., in cases where the violation is egregious or
where there is a history or pattern of repeat violations).
The Commission finds good cause for approving the Minor Rule Plan
amendment prior to the thirtieth day after the date of publication of
notice of filing thereof in the Federal Register in order to provide
the Exchange with adequate time to notify members of the approval of
the Minor Rule Plan Amendment prior to the scheduled implementation
date of February 1, 1955.\11\ Because any fines to be assessed pursuant
to the Minor Rule Plan Amendment will be based on calendar month
submissions of as-of-adds, accelerated approval will allow the Exchange
to begin receiving the benefits of the rule without having to delay
implementation for an additional month. Additionally, because the
Exchange has already distributed a Regulatory Circular to members
stating that the Minor Rule Plan Amendment, once approved, would be
given retroactive effectiveness to January 1, 1995,\12\ members are
already on notice of the proposal and will not, in the Commission's
opinion, be harmed by shifting the implementation date to February 1,
1995. Accordingly, the Commission believes it is consistent with
Sections 6(b)(5) and 19(b)(2) of the Act to approve the remaining
portion of the proposed rule change on an accelerated basis.
\11\See supra note 8.
\12\Id.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (File No. SR-CBOE-94-50) is
approved.
\13\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.\14\
\14\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-2750 Filed 2-3-95; 8:45 am]
BILLING CODE 8010-01-M
