[Federal Register Volume 61, Number 151 (Monday, August 5, 1996)]
[Notices]
[Pages 40685-40689]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19761]
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[[Page 40686]]
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37487; File No. SR-CBOE-96-14]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Inc.; Order Approving a Proposed Rule Change and Notice of Filing and
Order Granting Accelerated Approval of Amendment Nos. 1, 2, and 3 to
the Proposed Rule Change Relating to the Telephone Policy for the S&P
100 (``OEX'') Options Post
July 26, 1996.
I. Introduction
On March 12, 1996, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4
thereunder,\2\ a proposal to amend its policy governing the use of
member-owned or Exchange-owned telephones located at the trading post
where options on the Standard & Poor's 100 Stock Index (``OEX'') are
traded. The proposed rule change was published for comment and appeared
in the Federal Register on April 8, 1996.\3\ No comments were received
regarding the proposal. The Exchange filed Amendment Nos. 1,\4\ 2,\5\
and 3\6\ to its proposal on June 10, 1996, July 10, and July 23, 1996,
respectively. This order approves the proposal.
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\1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 36331 (March 29, 1996),
61 FR 15540.
\4\ Amendment No. 1 effects several changes to the CBOE's
proposal. First, the Exchange represents that it will conduct floor
broker audits in connection with the proposed relaxation of the
restrictions on the use of the telephones at the OEX option trading
post. Second, the Exchange submitted a form of Application and
Agreement to be used by Exchange members in applying to use or
install a telephone or a telephone line at the OEX post or to be
assigned a personal identification number (``PIN'') access code to
make outgoing calls. Third, the Exchange has made certain clarifying
revisions to the Regulatory Circular that it intends to issue
following Commission approval of its proposal. Letter from Timothy
Thompson, CBOE, to Michael Walinskas, Division of Market Regulation
(``Division''), Commission, dated June 7, 1996 (``Amendment No.
1'').
\5\ Amendment No. 2 effects several technical clarifying changes
to the Exchange's proposed Application and Agreement and Regulatory
Circular. Amendment No. 2 also notes that the proposed telephone
policy is not intended to restrict the Exchange from maintaining a
general telephone line or lines at the OEX post on which Exchange
staff may make outgoing calls and receive incoming calls. Letter
from Timothy Thomson, CBOE, to Michael Walinskas, Division,
Commission, dated July 3, 1996 (``Amendment No. 2'').
\6\ Amendment No. 3 effects two changes to the Exchange's
proposal. First, a sentence is added to the preamble to the proposed
Application and Agreement to make it clear that incoming calls from
locations outside of the CBOE building may be received at the OEX
post only on telephones or telephone lines dedicated to the
exclusive use of approved floor brokers, and may not be received on
Exchange-provided general use telephone lines at the post. Although
this restriction already was set forth in the proposed Regulatory
Circular, it was not stated explicitly in the proposed Application
and Agreement. Second, language is added to paragraphs L and M of
the proposed Application and Agreement to indicate that for purposes
of those paragraphs ``Member'' means floor brokers, their employees,
or such other associated persons as are authorized to receive calls
or qualified to receive orders. Letter from Timothy Thompson, CBOE,
to Sharon Lawson, Division, Commission, dated July 23, 1996
(``Amendment No. 3'').
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II. Description of the Proposal
The purpose of the proposed rule change is to amend the Exchange's
Regulatory Circular governing the use of telephones at the OEX trading
post in two respects: first, by relaxing the restriction against floor
brokers taking orders over the post telephones; and second, to
accommodate the receipt of such orders, by relaxing the prohibition on
the use of post telephones to permit floor brokers to receive incoming
calls.\7\ In addition, Exchange members seeking to use or install a
telephone or telephone line or to be assigned a PIN access code will be
required to submit an Application and Agreement form that sets forth
the policies enunciated in the proposed Regulatory Circular, requires a
member to furnish all the information pertaining to his or her intended
use of an OEX post telephone, and shows whether a member has received
all of the necessary approvals attendant to the intended telephone
usage.\8\ Finally, as discussed below, the Exchange is proposing
certain amendments to its Rule 6.70.
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\7\ The Regulatory Circular setting forth the current OEX
telephone policy initially was filed by the Exchange as SR-CBOE-95-
15 (noticed in Securities Exchange Act Release No. 35725 (May 17,
1995)) on May 12, 1995, under paragraph (e)(6) of Rule 19b-4 under
the Exchange Act and accordingly became effective upon the date of
filing and operative 30 days thereafter. The Exchange re-filed the
policy for full Commission review in SR-CBOE-95-49. That second
filing was approved by the Commission on December 1, 1995
(Securities Exchange Act Release No. 36546, 60 FR 63552).
\8\ Amendment No. 1, supra note 4.
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The first proposed change to the Exchange's OEX telephone policy
relaxes the prohibition against floor brokers taking orders over the
post telephones. The telephone lines may not be used to receive orders
except for those telephone lines dedicated to a particular floor broker
who has been approved for such use by the Exchange. Floor brokers who
meet the requirements to engage in a public customer business,
including the requirement that they be registered representatives
associated with a member organization which is qualified to do a public
customer business under Chapter IX of the Exchange's rules, and who are
approved by the Exchange to receive such telephone orders, would be
permitted to take the orders of public customers.\9\ Floor brokers who
are not qualified to do a public customer business still would be
permitted to take the orders of registered broker-dealers, after
receiving Exchange approval to take such telephone orders.\10\ The
second proposed change to the current policy relaxes the prohibition
against receiving incoming calls to accommodate the receipt of orders
by floor brokers.
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\9\ In addition to the SEC net capital, recordkeeping, and
financial reporting requirements applicable to member organizations,
a member or associated person transacting business with the public
must satisfy other requirements, including receiving approval from
the Membership Committee, participating in certain education
programs, and passing a test concerning the handling of customer
accounts.
\10\ Floor brokers who intend to receive orders only from other
Exchange members or other registered broker-dealers for their own
accounts need not qualify to do a public customer business under
Chapter IX, but still must apply for approval to take orders over a
floor telephone.
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Under the revised policy, incoming calls from locations outside of
the CBOE building may be received at the OEX post only on telephone
lines dedicated to the exclusive use of properly approved floor
brokers, and may not be received on Exchange-provided general use
telephone lines at the post. For this purpose, a call that emanates
from a location outside the building and is patched or conference-
linked from a member's booth or other location to a post telephone is
considered to be a call from outside the building. Any floor broker who
wishes to use a telephone or telephone line to receive incoming calls
from outside the CBOE building or to receive orders from any source
must obtain prior approval from the Exchange's Department of Compliance
and from the OEX Floor Procedure Committee. Additionally, any floor
broker who wishes to take orders directly from public customers over a
telephone lie at the OEX post must be approved by the Membership
Committee to conduct a public customer business in accordance with the
rules of the Exchange.\11\
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\11\ For these purposes, ``public customer'' means any person or
entity other than members, member organizations, or U.S. registered
broker dealers.
In its filing, the Exchange states that it is reviewing this
policy and expects to decide soon whether or not market-makers at
the OEX post also should be permitted to receive incoming calls.
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To accommodate these changes, the Exchange has proposed some
language changes to the existing Regulatory Circular. First, the
Regulatory Circular
[[Page 40687]]
will be amended to make clear that only floor brokers may receive
incoming calls from locations outside the CBOE building at the OEX post
on approved telephones or telephone lines dedicated to the exclusive
use of the floor broker. Second, those floor brokers who have been
approved to receive incoming calls will be able to receive incoming
calls even if those calls are not for the purpose of transmitting an
order to the floor broker. Finally, the Regulatory Circular also will
remind members that the Exchange will charge a $5 monthly fee for the
use of the telephones for those members that use a PIN access code.
This fee was noted and approved in the earlier Commission releases
regarding the OEX telephone policy.\12\
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\12\ See Securities Exchange Act Release Nos. 35725, and 36546,
supra note 6.
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The form of Application and Agreement that will be required of
members who wish to install or use telephones at the OEX post has been
drafted to reflect the amended telephone policy. First, only duly
qualified and approved floor brokers will have access to dedicated
telephones or telephone lines that are capable of directly receiving
calls that originate from off the premises of the Exchange. Second,
only those floor brokers who are qualified and approved to conduct a
public customer business will be permitted directly to receive public
customer orders over telephones at the OEX post, whether such orders
are received in calls originating from off or on the floor. Third,
members at the OEX post may apply to be assigned a PIN access code that
will allow them to use Exchange provided telephone lines at the OEX
post, but these lines may be used for outgoing calls only and may not
be used to receive orders. Finally, all members in the OEX post are
permitted to receive calls from and to place calls to another telephone
in the CBOE building on the Exchange's internal system.\13\
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\13\ Paragraph C of the Application and Agreement states that
the Exchange will retain the discretion to allow a floor broker to
have only a dedicated telephone line on an Exchange-owned telephone
(instead of his or her own dedicated telephone) due to space
considerations in the OEX post.
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Reflecting these policies, the form of Application and Agreement
requires applicants to furnish in a single form all of the information
pertaining to their intended use of post telephones that the Exchange
will need to monitor telephone usage and enforce applicable
restrictions. The form also shows whether a floor broker has received
all of the several separate approvals that are needed for the
installation of a dedicated telephone or line at the OEX post. The form
of agreement also serves to remind members of their obligations in
respect of the use of OEX post telephones, including some contractual
provisions that are not present in the proposed Regulatory Circular.
These include paragraphs G and H of the agreement, which deal with
liability issues pertaining to telephone usage. Specifically, paragraph
G states that the Exchange shall not be liable to members or their
customers for losses resulting from the installation, operation,
relocation, use of, or inability to use telephones or telephone lines
at the OEX post. Paragraph H requires the member to indemnify the
Exchange against any liabilities arising out of OEX post telephone or
lines.\14\ Finally, the Application and Agreement defines the terms
``incoming calls from outside the CBOE building,'' ``dedicated
telephone or dedicated telephone line,'' and ``general use telephone
lines'' to the extent these terms are relevant to understanding OEX
telephone policy.\15\
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\14\ Amendment No. 1, supra note 4.
\15\ Amendment Nos. 1 and 2, supra notes 4 and 5, respectively.
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To accommodate the receipt of orders, the Exchange proposes to
amend Rule 6.70, Floor Broker Defined, to state that a floor broker may
receive orders from registered broker-dealers without satisfying the
additional requirements necessary to take orders from public customers.
Currently, Rule 6.70 states that a floor broker only may receive orders
from: (1) members, or (2) public customers, if, in the case of public
customer orders, that floor broker is either the nominee of, or has
registered his individual membership for, a member organization
approved to transact business with the public in accordance with Rule
9.3. Orders from non-member registered broker-dealers do not fit into
either of these categories; they are not considered public customer
orders and are not orders of members. Accordingly, the change will
eliminate any ambiguity and make it clear that floor brokers may accept
orders from non-member broker-dealers without receiving Exchange
approval pursuant to Rule 9.1.
The CBOE also proposes to amend Rule 6.70 to state explicitly the
CBOE Rule 9.3 requirement that a floor broker seeking to transact
business with the public must complete successfully an examination
demonstrating adequate knowledge of the securities business. Currently,
a floor broker must complete successfully the Series 7 examination to
transact business with the public.
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, the requirements of Section 6(b)(5) of the Act,\16\ in that
it is designed to promote just and equitable principles of trade,
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, prevent fraudulent and
manipulative acts and practices, and, in general, to protect investors
and the public interest; and is not designed to permit unfair
discrimination between customers, insurers, brokers, or dealers.
Specifically, the Commission believes that the proposed change to the
CBOE's telephone policy at the OEX post should help to facilitate
efficient access to OEX options in a fair manner. Providing procedures
whereby floor brokers in the OEX trading crowd can readily communicate
with the off-floor offices of member firms as well as with other
locations off of the Exchange's trading floor, including non-member
customers, will allow them to obtain and transmit information and
instructions more efficiently which may result in benefits to investors
by improving execution of orders. At the same time, the changes, as the
CBOE notes, will tend to eliminate the existing disparity between
members whose booths currently are adjacent to the OEX post and those
that have booths further away from the post. For similar reasons, as
discussed below, the Commission finds that the CBOE's proposed
Application and Agreement is consistent with the Act. The Application
and Agreement is designed to make clear the duties and obligations of
members respecting the installation and use of telephones on the
Exchange, and to make sure that all necessary approvals are received
prior to such installation and use. Accordingly, this should help
ensure compliance with Exchange rules by members consistent with
Section 6 of the Act.
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\16\ 15 U.S.C. Sec. 78f(b)(5) (1988).
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In File No. SR-CBOE-95-49, the Exchange stated its concern
regarding the ability of floor brokers to receive orders over
telephones by stating that it was concerned about ``how to provide
customers with access to the trading floor on a fair and
nondiscriminatory basis, how to assure that persons on the floor are
qualified to receive orders directly from customers, and how to
[[Page 40688]]
surveil order-taking activity conducted over floor telephones.'' The
Commission believes that the proposal should not deleteriously affect
customer access, given that calls now come into member firm booths,
some of which are located just outside of the OEX post. In its filing,
the Exchange notes that allowing calls to come directly to the post
eliminates the existing disparity between those members whose booths
are adjacent to the post and those whose booths are farther away. In
its filing, the Exchange states its belief that it will be a business
decision of the individual floor brokers and their member firms to
decide whether to use telephones at the OEX post, and to determine
which customers will have access to those telephones. This is similar
to the current situation where firms decide which customers may call
them at the booth telephones. In addition, the policy will continue to
require that only those quotations that have been publicly disseminated
pursuant to Rule 6.43 may be provided to customers over post
telephones. Therefore, the Commission agrees with the Exchange that
this policy change should not represent a material departure from the
current state of customer access.
Further, the Commission believes that the CBOE's floor broker
examination program and proposed Application and Agreement and
Regulatory Circular adequately address concerns relating to the need to
ensure compliance with rules designed to assure the qualifications of
members who accept orders directly from public customers, and how to
provide adequate surveillance over this activity. The Exchange's floor
broker examination program has been expanded to include a review of
whether a floor broker is qualified to conduct non-member customer
business, and all members registered to conduct non-member customer
business are examined by their designated options examining authority
each year.\17\ Moreover, members that meet internally established
criteria will be identified for a floor broker examination. The
Exchange also will rely on floor officials and other members in the OEX
trading crowd to surveil activity of floor brokers to ensure adequate
compliance with the OEX telephone policy. Finally, the application and
Agreement that members must submit to use or install a telephone or a
telephone line, or to be assigned a PIN access code to make outgoing
calls, as well as the Regulatory Circular, clearly state the
obligations and responsibilities of members vis a vis non-member
customers and the use of telephones, which should aid in compliance. In
particular, the terms of the Application and Agreement should help to
ensure that the Exchange's telephone policy is understood by members,
as are the members' general obligations to adhere to the applicable
laws, rules, policies, and procedures of the Application and Agreement,
Exchange, and Commission. In addition, the Application and Agreement
should ensure that all necessary approvals are received by members
prior to their installation and use of telephones.\18\
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\17\ Amendment No. 1, supra note 4.
\18\ For example, the Application and Agreement requires
verification that a floor broker desiring to accept orders directly
from public customers at an OEX post telephone has been approved by
CBOE's Membership Committee to conduct a public customer business.
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In summary, because the Commission believes that the CBOE's
proposal to modify its policy regarding telephones at the OEX options
post may result in benefits to investors by allowing improved access to
the market while not impairing or diminishing the ability of the
Exchange to conduct surveillance for improper trading activity, the
Commission finds that the proposed rule change is consistent with the
requirements of the Act. The Commission recognizes that the revised OEX
telephone policy only will permit incoming calls at the OEX post from
locations outside of the CBOE building on telephones or telephone lines
dedicated to the exclusive use of approved floor brokers. Accordingly,
other market participants, such as OEX market makers, may not receive
incoming calls at the OEX post. The Commission believes that this
restriction is within the discretion of the Exchange and does not raise
regulatory issues. While this is not meant to imply that the Exchange
is prohibited in the future from requesting such access for other
participants in the OEX trading crowd, appropriate safeguards to
address possible misuse of non-public information, adequate
surveillance, and compliance with Exchange Rules and the Act would have
to be addressed.
Finally, the Commission notes that except for the changes described
above, the substance of the revised Regulatory Circular previously has
been approved by the Commission. For the same reasons discussed in the
Commission's previous approval order, we find those provisions, which
include provisions permitting outgoing calls at the post, as well as
those which prohibit the use of portable telephones or headsets,
consistent with the Act.
As to the remaining proposed amendments, the Commission believes
that the Exchange's proposal to amend its Rule 6.70, Floor Broker
Defined, to state that a floor broker may receive orders from broker-
dealers who are not CBOE members without having to meet the additional
requirements necessary to take orders from public customers is
consistent with the Act. The Commission notes that the proposed
amendment to CBOE Rule 6.70 merely serves to treat registered broker-
dealers equally, whether CBOE members or not. The Commission also notes
that this provision is consistent with the definition of ``public
customer of a member organization'' found in CBOE Rule 6.74,
``Crossing'' Orders.19 The Commission also believes that the
Exchange's proposal to revise its Rule 6.70 to note that among the
requirements a floor broker must meet to register pursuant CBOE Rule
9.1 is the successful completion of an examination demonstrating an
adequate knowledge of the securities business is consistent with the
Act in that it serves to reinforce an existing provision of the CBOE's
Rules relating to transacting business with the public.20
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\19 \CBOE Rule 6.74, Interpretation and Policy .01, defines
``public customer of a member organization'' to mean ``a customer
that is neither a member nor a broker/dealer.''
\20 \CBOE Chapter IX, Doing Business with the Public.
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The Commission finds good cause for approving Amendment Nos. 1, 2,
and 3 to the proposed rule change prior to the thirtieth day after the
date of publication of notice thereof in the Federal Register. The
Commission believes that Amendment No. 1 clarifies the Exchange's
proposal and serves to strengthen it. The Application and Agreement
makes clear the duties and obligations of members with respect to the
installation and use of telephones on the Exchange, and should ensure
that members receive appropriate approvals prior to such installation
and use. With respect to the expansion of the Exchange's floor broker
examination program, the Commission believes that it is designed to
ensure that only members registered and qualified to conduct non-member
customer business indeed do so. Amendment No. 1 also serves to make
certain non-substantive changes to the Exchange's proposal. The
Commission believes that Amendment Nos. 2 and 3 clarify the existing
terms of the CBOE's proposal, rather than make any substantive changes.
Based on the foregoing, the Commission believes it is consistent with
Section 6(b)(5) of the Act to approve Amendment Nos. 1, 2, and 3 to the
Exchange's proposal on an accelerated basis.
[[Page 40689]]
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, 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 copying in the Commission's Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 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-96-14 and should be submitted by August 26, 1996.
V. Conclusion
For the reasons discussed above, the Commission finds that the
amended proposal is consistent with the Act, and, in particular,
Section 6 of the Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,21 that the proposed rule change (File No. SR-CBOE-96-14), as
amended, is approved.
\21 \15 U.S.C. Sec. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.22
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\22 \17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-19761 Filed 8-2-96; 8:45 am]
BILLING CODE 8010-01-M
