[Federal Register Volume 62, Number 62 (Tuesday, April 1, 1997)]
[Notices]
[Pages 15553-15555]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8230]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38438; File No. SR-CBOE-96-57]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Inc.; Order Granting Approval to Proposed Rule Change and Notice of
Filing and Order Granting Accelerated Approval of Amendment Nos. 1, 2,
and 3 Relating to a Minor Rule Violation Plan Amendment To Create a
Settlement Procedure for Position Limit Fines
March 25, 1997.
I. Introduction
On September 25, 1996, 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 to amend its minor rule violation
procedure to create an offer of settlement process for certain position
limit violations.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change, together with the substance of the
proposal, was published for comment in Securities Exchange Act Release
No. 37787 (October 4, 1996), 61 FR 53472 (October 11, 1996). No
comments were received on the proposed rule change. The CBOE filed
Amendment Nos. 1, 2, and 3 with the Commission on January 21, March 4,
and March 4, 1997, respectively.\3\ This
[[Page 15554]]
order approves the proposal, including Amendment Nos. 1, 2, and 3, on
an accelerated basis.
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\3\ Amendment No. 1 clarifies that the Exchange will report any
Business Conduct Committee (``Committee'') decision accepting a
settlement offer under the proposed settlement procedure for
position limit fines to the Commission on a current basis. Amendment
No. 1 also clarifies the settlement offer time frame and procedure.
Amendment No. 2 changes the language of proposed Interpretation and
Policy .01 of Rule 17.50 to state that members whose offer of
settlement is accepted by the Committee must report the acceptance
of the settlement offer on the members' broker-dealer form under the
Act (``Form BD'') as a decision in a contested Exchange disciplinary
hearing. Amendment No. 2 also makes a technical change to proposed
Interpretation and Policy .01 of Rule 17.50 by lettering paragraphs
as (a) and (b). Amendment No. 3 further changes the language of
proposed Interpretation and Policy .01 of Rule 17.50 to state that
members whose offer of settlement is accepted by the Committee must
report the acceptance of the settlement offer on the uniform
application for securities industry registration or transfer (``Form
U-4''). See letters from Margaret G. Abrams, Senior Attorney, CBOE,
to Sharon Lawson, Senior Special Counsel, Market Regulation,
Commission, dated January 15, 1997 (``Amendment No. 1''), February
12, 1997 (``Amendment No. 2''), and February 26, 1997 (``Amendment
No. 3''), respectively.
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II. Description
Section 19(d)(1) of the Act and Rule 19d-1(c)(1) thereunder require
a self-regulatory organization (``SRO'') to report any ``final''
disciplinary action taken to the Commission on a current basis. Rule
19d-1(c)(2) of the Act, which provides for the filing and approval of a
minor rule violation reporting plan, states that any disciplinary
action taken by an SRO for violation of the SRO's rules that has been
designated a ``minor rule violation'' by the SRO pursuant to a plan
approved by the Commission shall not be considered ``final'' for
purposes of Section 19(d)(1) and Rule 19d-1(c)(1) of the Act if the
sanction imposed consists of a fine that (1) does not exceed $2,500 and
(2) where the sanctioned person has not sought an adjudication,
including a hearing, or otherwise exhausted his administrative remedies
at the SRO with respect to the matter. Under Rule 19d-1(c)(2), these
unadjudicated minor rule violations can be reported on a quarterly
basis rather than on a current basis.\4\
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\4\ Under CBOE's minor rule plan and Rule 17.50(a), the Exchange
can impose fines up to $5,000 for minor rule violations. Fines above
$2,500 must, however, be reported on a current basis.
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CBOE Rule 17.50 sets forth the minor rule violation provisions
adopted by CBOE in accordance with Section 19(d)(1) and Rule 19d-
1(c)(2) of the Act. Under CBOE Rule 17.50(a), ``[a]ny fine imposed
pursuant to this Rule that (i) does not exceed $2,500 and (ii) is not
contested, shall be reported on a periodic, rather than a current,
basis, except as may be otherwise required by Rule 19d-1 under the
Securities Exchange Act of 1934 and by any other regulatory
authority.'' The CBOE currently processes position limit violations as
minor rule violations pursuant to CBOE Rule 17.50 (i.e. summary fines)
and can impose a fine, not exceeding $5,000 for any one trade date, for
such violations. An Exchange member may contest the fine(s) imposed
under Rule 17.50 by following the procedures outlined in Rule 17.50(c),
which include filing a written answer and requesting a hearing, if the
member so desires. At that time the matter becomes subject to review by
the Business Conduct Committee (``Committee'') because it becomes a
disciplinary proceeding subject to Chapter XVII of the CBOE's rules
and, where applicable, the current reporting provisions of Rule 19d-
1(c)(1) of the Act.
Members with significant position limit summary fines do not
presently have access to the settlement resolution process available to
respondents under Exchange Rule 17.8 for regular disciplinary matters
pending before the Committee, including making offers of settlement and
personal appearances. According to the CBOE, some members who proceeded
to a contested fine hearing admitted that the violations occurred, and
used the hearing forum solely to request that the fines be reduced or
removed. Based upon this past experience with contested position limit
summary fine matters, as well as an internal regulatory focus study,
the Exchange is proposing a new procedure so that members with
significant position limit violations meeting certain criteria will
have an opportunity within the minor rule violation procedure to
present one settlement offer before the Committee.
The proposed rule change adds language describing the settlement
offer procedure to Interpretation and Policy .01 under Exchange Rule
17.50. The additional language defines the threshold levels of position
limit summary fines that trigger access to the new settlement
procedure. The original filing stated that the CBOE will treat (a)
position limit violations resulting in any one-day fine in excess of
$2,500, or (b) position limit violations resulting in an aggregate fine
in excess of $10,000 and involving five or more consecutive trade
dates, as appropriate for an offer of settlement opportunity before the
Committee. Under Amendment No. 1, the CBOE adds upper limits to the
threshold levels, so that the settlement procedure can be used for (a)
position limit violations resulting in any one-day fine in excess of
$2,500 but not exceeding $5,000; or (b) position limit violations
resulting in an aggregate fine greater than $10,000 and not more than
$5,000 in any one day. This amendment makes the CBOE's proposed rule
consistent with the limits for commencing an action under CBOE's minor
rule plan; for example, violations which would result in a fine
exceeding $5,000 a day cannot be processed under CBOE's minor rule
plan.\5\
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\5\ See note 4, supra.
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Amendment No. 1 also clarifies several aspects of the settlement
process under the minor rule violation procedure. Members who meet the
threshold position limit fine level have the opportunity to submit one
written offer of settlement in accordance with Rule 17.8(a), except
that the Interpretations and Policies of Rule 17.8 will not apply and
the member must submit the settlement offer within thirty (30) days of
the date of service of the written statement informing them of the
fine(s) imposed. Amendment No. 1 also states that a member may
personally appear before the Committee in order to make an oral
statement in support of the offer. In addition, Amendment No. 1 adds
language to the rule change stating that a decision accepting an offer
of settlement under this process will be reported on a current basis
pursuant to Rule 19d-1 of the Act.\6\ Amendment No. 2 adds additional
language to proposed Interpretation and Policy .01 of Rule 17.50
stating that members whose offer of settlement is accepted by the
Committee shall report the acceptance of the settlement offer on the
member's broker-dealer form under the Act (``Form BD'') as a decision
in a contested Exchange disciplinary proceeding. Amendment No. 3
further amends the language of proposed Interpretation and Policy .01
of Rule 17.50 to state that members whose offer of settlement is
accepted by the Committee shall report the acceptance on the uniform
application for securities industry registration or transfer (``Form U-
4'') as a decision in a contested Exchange disciplinary proceeding.\7\
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\6\ This will be the case irrespective of whether the accepted
settlement offer is below $2,500.
\7\ If the offer of settlement is not accepted, the minor rule
violation process will continue as if the offer was never made; the
member will be able to either contest the violation under Rule
17.50(c) or pay the fine. Phone conversation between Margaret G.
Abrams, Senior Attorney, CBOE, and Heather Seidel, Attorney, Market
Regulation, Commission, on February 25, 1997.
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The CBOE is only proposing to apply the new settlement procedures
to fines imposed under Rule 17.50 for position limit violations at this
time. In this regard, the CBOE noted that it has not experienced
significant accumulations of fines by members for minor rule violations
under Exchange Rule 17.50 other than position limit violations.
[[Page 15555]]
III. Discussion
The proposed rule change is consistent with and furthers the
objectives of Section 6(b)(5) of the Act \8\ in that it is designed to
refine and enhance the Exchange's minor rule violation procedure as
applied to position limit violations, while retaining adequate
enforcement measures for violations of such rules, thereby removing
impediments to a free and open market and protecting investors and the
public interest.\9\
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\8\ 15 U.S.C. 78(f)(b)(5).
\9\ In approving this rule, the Commission notes that it has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
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The Commission finds that by adopting formal procedures for the
settlement of certain position limit summary fines that are separate
from a full disciplinary hearing, the proposed rule change should
increase the efficiency of the Exchange's disciplinary process by
saving the time and expense of both members and Exchange staff in
preparing for hearings, while continuing to ensure that position limit
rules are effectively enforced. Under the CBOE's proposed rule,
violations settled using new procedures, irrespective of whether the
settlement amount is under $2,500, will be subject to immediate, rather
than quarterly, reporting to the Commission.\10\ The Commission
believes this result is appropriate and makes CBOE's new rule
consistent with the CBOE's minor rule reporting plan and Rule 19d-
1(c)(2),\11\ due to the fact that the members are contesting the fine
amounts and have sought an adjudication on the violation which includes
the opportunity to have a hearing.
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\10\ Amendment No. 1 specifically changes the text of CBOE's
proposed rule to state that ``[a] decision by the Business Conduct
Committee accepting an offer of settlement hereunder shall be
reported on a current basis pursuant to Rule 19d-1 under the
Securities Exchange Act of 1934.''
\11\ See discussion earlier regarding the content and operation
of Rules 19d-1(c)(1) and 19d-1(c)(2) of the Act and of CBOE's Rule
17.50.
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For the same reasons, the CBOE has also amended their new rule to
state that the acceptance of settlement offers under this new procedure
must be reported on the Form BD \12\ and Form U-4. Both Form BD and
Form U-4 require broker-dealers to report violations of an SRO's rules,
except for violations designated as ``minor rule violation[s],'' under
a plan approved by the Commission. However, the definition of a ``minor
rule violation'' on Form BD and Form U-4 states that rule violations
may be designated as ``minor'' under a plan if the sanction imposed
consists of a fine of $2,500 or less, and if the sanctioned person does
not contest the fine. The Commission believes that because under the
proposed rule change, the person submitting the settlement offer is
contesting the fine amount, the acceptance of a settlement offer under
the new procedures being adopted herein must be reported on Form BD and
Form U-4 just like any decision in a contested Exchange disciplinary
proceeding, even if the settlement amount does not exceed $2,500.
Amendments Nos. 2 and 3 adequately address this concern by requiring
the acceptance of a settlement offer to be reported on Form BD and Form
U-4 as a contested Exchange disciplinary proceeding.
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\12\ Form BD requires broker-dealers to report violations of
Commission and Exchange rules, as well as certain criminal, civil
and administrative penalties, and this information is then made
available to the public and investors.
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In summary, the Commission believes that the development of the
interim step of a settlement procedure for contesting the fine amount
for position limit minor rule violations should help to make the CBOE's
entire disciplinary process more efficient by avoiding unnecessarily
burdening the formal disciplinary process with such actions, while
still retaining adequate enforcement measures for violations of the
position limit rules contained in the minor rule plan. In addition, the
fact that acceptance of settlement offers under the new settlement
process will be reported currently, rather than on a quarterly basis,
ensures that the Commission receives adequate notice of these contested
fines.
The Commission finds good cause to approve Amendment Nos. 1, 2, and
3 to the proposed rule change prior to the thirtieth day after the date
of publication of notice of filing thereof in the Federal Register.
Specifically, as stated above in greater detail, by requiring current
reporting of the acceptance of settlement offers under the new
settlement procedure for position limit violations, Amendment No. 1
will ensure that the Commission receives adequate notice of contested
fines which have been settled, while still providing a mechanism for
effectively enforcing position limit violations. Similarly, Amendment
Nos. 2 and 3 ensure that the accepted settlement offers will be
reported on Form BD and Form U-4, leading to greater protection of the
investors and the public interest, by clarifying that the acceptance of
a settlement offer is a decision in a contested Exchange disciplinary
proceeding for purposes of the Form BD and Form U-4. Accordingly, the
Commission believes that it is consistent with Section 6(b)(5) of the
Act to approve Amendment Nos. 1, 2, and 3 to the proposal on an
accelerated basis.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment Nos. 1, 2, and 3 to the proposed rule
change. Persons making written submissions should file six copies
thereof with the Secretary, Securities and Exchange Commission, 450
Fifth Street, NW., Washington, DC 20549. Copies of the submission, all
subsequent amendments, all written statements with respect to the
proposed rules change that are filed with the Commission, and all
written communications relating to Amendment Nos. 1, 2, and 3 between
the Commission and any persons, 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 in the Commission's Public
Reference Room. Copies of such filing will also be available at the
principal office of the Exchange. All submissions should refer to File
No. SR-CBOE-96-57 and should be submitted by April 22, 1997.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (SR-CBOE-96-57), including
Amendment Nos. 1, 2, and 3, is approved.
\13\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-8230 Filed 3-31-97; 8:45 am]
BILLING CODE 8010-01-M
