[Federal Register Volume 61, Number 139 (Thursday, July 18, 1996)]
[Notices]
[Pages 37513-37515]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-18172]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37421; File No. SR-CBOE-96-02]
Self-Regulatory Organizations; Order Granting Approval to
Proposed Rule Change by the Chicago Board Options Exchange, Inc.,
Relating to the Liability of the Exchange and its Directors, Officers,
Employees, and Agents, Precluding Certain Types of Legal Actions by
Members Against Such Persons, and Requiring Members to Pay the
Exchange's Costs of Litigation Under Specified Circumstances
July 11, 1996.
I. Introduction
On January 18, 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 various Exchange rules
pertaining to the liability of the Exchange, to adopt new Rule 6.7A
prohibiting a member from instituting certain types of legal
proceedings against Exchange officials, and to adopt new Rule 2.24
requiring a member to pay the Exchange's costs of litigation under
specified circumstances.
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\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4.
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Notice of the proposed rule change appeared in the Federal Register
on February 27, 1996.\3\ No comments were received on the proposed rule
change.\4\ This order approves the CBOE's proposal.
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\3\ See Securities Exchange Act Release No. 36863 (February 20,
1996), 61 FR 7285 (February 27, 1996).
\4\ The CBOE submitted a letter regarding the enforceability of
the proposed rules under state law. See letter from Michael L.
Meyer, Schiff Hardin & Waite, to Matthew Morris, Division of Market
Regulation, Commission, dated June 27, 1996.
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II Background and Description
A. Exchange Liability
The principal rule concerning Exchange liability is Rule 6.7(a),
which currently provides that the Exchange shall not be liable to
members, member organizations, or to associated persons for loss,
damages, or claims arising out of the use or enjoyment of the
facilities afforded by the Exchange, whether the loss, damages, or
claims resulted from negligence or other unintentional errors or
omissions, or from a cause not within the control of the Exchange. The
proposed amendment to Rule 6.7(a) clarifies that, except as otherwise
specifically provided in the rules of the Exchange, neither the
Exchange nor its
[[Page 37514]]
directors, officers, committee members, employees, or agents shall be
liable to members or their associated persons except where the
Exchange's liability is attributable to willful misconduct, gross
negligence, bad faith, fraud, or criminal acts.
The proposed amendment to Rule 6.7 also incorporates, without
material change, certain provisions which are currently set forth in
Rules 23.14 and 24.12 to the effect that the Exchange is not liable for
errors, omissions, or delays in collecting or disseminating various
kinds of data, and the Exchange does not warrant such data. According
to the Exchange, the purpose of moving these limitations of liability
and disclaimers of warranty in Rule 6.7 is to place related subjects in
a single rule.
In addition, the CBOE proposes to make non-substantive amendments
to Rules 7.11, 23.14, and 30.75, and to delete Rule 24.12 in order to
eliminate provisions that duplicate what is set forth in Rule 6.7, as
well as to clarify and conform the language of all of the rules
pertaining to the liability of the Exchange.
The CBOE also proposes certain changes to Interpretation and Policy
.03 to Rule 6.7, which currently limits the Exchange's liability with
respect to orders routed through the Exchange's Order Routing System
(``ORS'') once the orders are printed at printers located on the
Exchange floor. These changes clarify the description of the printers
to which orders may be routed, and limits the liability of the Exchange
once an order routed through ORS appears on a public automated routing
(``PAR'') system terminal screen.
B. Legal Proceeding Against Exchange Directors, Officers, Employees, or
Agents
The proposed amendment adds new Rule 6.7A, which prohibits a member
or associated person from instituting a lawsuit or any other legal
proceeding against any director, officer, employee, agent, or other
official of the Exchange or any subsidiary, for actions taken or
omitted to be taken in connection with the official business of the
Exchange or any subsidiary. Rule 6.7A, however, does not apply to
violations of the federal securities laws where a private right of
action exists, to appeals of disciplinary actions, or to other actions
by the Exchange as provided for in the rules of the Exchange. According
to the Exchange, the purpose of disallowing lawsuits or other legal
proceedings against Exchange officials or agents when they are acting
on Exchange business is to eliminate the potential exposure to personal
liability of such persons, which impairs their ability to perform their
duties.
C. Exchange's Cost of Defending Legal Proceedings
The proposed amendment adds new Rule 2.24, which requires a member
or associated person who fails to prevail in a lawsuit or other legal
proceeding instituted by that person against the Exchange or other
specified persons, and related to the business of the Exchange, to pay
all reasonable expenses, including attorneys' fees, incurred by the
CBOE in its defense during such proceeding. This provision is applied
only in the event that the Exchange's expenses exceed $50,000.
According to the Exchange, this rule is intended to discourage
unfounded, vexatious litigation against the CBOE where the Exchange's
costs of defense are significant, without having any undue chilling
effect on legitimate claims or members. The proposed rule would apply
to all types of legal proceedings that might be instituted by members
against the Exchange or any of its directors, officers, committee
members, employees, or agents, except that it expressly would not apply
to disciplinary actions by the Exchange or to appeals therefrom, to
other administrative appeals of Exchange actions, or to any specific
instance where the Board has granted a waiver of this provision.
III. Discussion
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, with the requirements of Section 6(b)(5).\5\ Specifically,
the Commission believes that by limiting the liability of the Exchange
and its directors, officers, employees, and agents, by precluding
certain types of legal actions by members against such persons
individually, and by discouraging frivolous lawsuits against the
Exchange, the costs of the Exchange in responding to claims and
lawsuits will be reduced, thereby permitting the resources of the
Exchange to be better utilized for promoting just and equitable
principles of trade and for protecting investors and the public
interest.
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\5\ 15 U.S.C. Sec. 78f(b)(5) (1988).
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A. Exchange Liability
The Commission believes the rule change limiting the liability of
the Exchange and its directors, officers, committee members, employees,
and agents, to situations attributable to willful misconduct, gross
negligence, bad faith, fraud, criminal acts, or actions otherwise
specifically prohibited in the rules of the Exchange, will adequately
preserve members' right to pursue actions in circumstances where the
Exchange and its officials should be held accountable, or where there
has been a violation of the federal securities laws.
In addition, the Commission believes that the CBOE's proposal to:
(i) Incorporate Rules 23.14 and 24.12 into Rule 6.7; (ii) make non-
substantive amendments to Rules 7.11, 23.14, and 30.75; (iii) delete
Rule 24.12; and (iv) update Interpretation and Policy .03 to Rule 6.7,
will clarify the application of the principal rules governing Exchange
liability.
B. Legal Proceedings Against Exchange Directors, Officers, Employees,
or Agents
The Commission believes that the rule change prohibiting members
from instituting certain types of legal proceedings against Exchange
officials should be approved. Specifically, the rule change prohibits
members and associated persons from instituting lawsuits or any other
legal proceeding against any director, officer, employee, agent, or
other official of the Exchange or any subsidiary of the Exchange, for
actions taken or omitted to be taken by these parties in connection
with official business of the Exchange or any subsidiary. New Rule
6.7A, however, does not impair a members' ability to initiate legal
action based upon violations of the federal securities laws for which a
private right of action exists, appeals of disciplinary actions, or
other actions by the CBOE as provided for in the Exchange's rules. The
Commission believes that new Rule 6.7A is consistent with the Act
because it will help to ensure that the covered persons will be able to
carry out their duties under the Act, and to enforce compliance with
the Act and the rules thereunder, as well as the rules of the Exchange,
without the threat of personal liability.
C. Exchange's Cost of Defending Legal Proceedings
The Commission believes that the rule change requiring members or
associated persons who fail to prevail in a lawsuit or other legal
proceeding instituted by that person against the Exchange or other
specified persons, and related to the business of the Exchange, to pay
all reasonable expenses, including attorneys' fees, incurred by the
CBOE in its defense during such proceedings if
[[Page 37515]]
such expenses exceed $50,000, is consistent with Section 6(b)(4) of the
Act.\6\ Section 6(b)(4) requires that the rules of the exchange provide
for the equitable allocation of reasonable dues, fees, and other
charges among its members.
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\6\ 15 U.S.C. Sec. 78f(b)(4) (1988).
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The Commission believes that because the funds to pay the legal
expenses incurred by the Exchange in defending legal suits are
generated, in part, by membership fees, the rule change reflects a
reasonable business decision by the membership to shift the financial
burden of litigation to the responsible member under certain
circumstances. Moreover, as the Exchange's legal expenses must be
reasonable and must accrue to at least $50,000 before a member would be
obligated to compensate the Exchange, the Commission believes that the
rule change should not provide an undue disincentive to litigation, in
so far as it will permit the discovery needed to assess the merits of
the members' cases.
The Commission also notes that new Rule 2.24 specifically excludes
disciplinary actions brought by the Exchange, other administrative
appeals of Exchange actions, as well as any other specific instance
where the Board grants a waiver of this rule. The Commission believes
that this provision will ensure that members will be able to freely
pursue their right to appeal any action brought by the Exchange for
violations of its rules.\7\
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\7\ The Commission notes that if the minimum amount in the fee
provision were substantially lower it might have a more difficult
time concluding that the provision was consistent with Section
6(b)(4). This is because such a lower threshold amount could be
found to represent an inequitable allocation of fees to the
disadvantage of certain members.
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IV. Conclusion
For the foregoing reasons, the Commission finds that the CBOE's
proposal to limit the liability of the Exchange and its directors,
officers, employees, and agents, to preclude certain types of legal
actions by members against such persons individually, and to require
members to pay the Exchange's costs of litigation under specified
circumstances is consistent with the requirements of the Act and the
rules and regulations thereunder.
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\8\ that the proposed rule change (SR-CBOE-96-02) 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\
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\9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-18172 Filed 7-17-96; 8:45 am]
BILLING CODE 8010-01-M
