[Federal Register Volume 61, Number 178 (Thursday, September 12, 1996)]
[Notices]
[Pages 48182-48184]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23350]
[[Page 48182]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37651; File No. SR-CBOE-96-24]
Self-Regulatory Organizations; Order Approving a Proposed Rule
Change by the Chicago Board Options Exchange, Inc.; Relating to As of
Add Submissions
September 5, 1996.
On April 15, 1996, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange
Commission (``SEC'' or ``Commission''), pursuant to section 19(b) of
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to terminate its fee program for
members who, for more than a prescribed percentage of transactions,
submit trade information pursuant to CBOE Rule 6.51 (``Reporting
Duties'') after the date on which the trade is executed. (These post-
trade date submissions are commonly referred to as ``as of adds.'') In
conjunction with the foregoing, the Exchange also proposes to revise
the structure of its as of add summary fine program.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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Notice of the proposal was published for comment and appeared in
the Federal Register on May 17, 1996.\3\ No comment letters were
received on the proposal. This order approves the CBOE's proposal.
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\3\ See Securities Exchange Act Release No. 37201 (May 10,
1996), 61 FR 24986 (May 17, 1996).
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I. Description of the Proposal
CBOE Rule 6.51 requires, among other things, that (i) a participant
in each transaction to be designated by the Exchange shall immediately
report the transaction to the Exchange and (ii) each business day, each
clearing member shall file with the Exchange trade information covering
each Exchange transaction made by it or on its behalf during the
business day.
On October 1, 1993, the Exchange instituted an as of add fee
program to collect fees from members who, for more than a prescribed
percentage of transactions, submit trade information pursuant to Rule
6.51 after the date on which the trade is executed. This program is set
forth in CBOE Rule 2.26 and currently functions in the following
manner. Each individual member is assessed a $10.00 fee for each as of
add submitted by the member during a given month that is in excess of
2.4% of the member's trade submissions during that month. Similarly,
each clearing member is assessed a $3.00 fee for each as of add
submitted by the clearing member during a given month that is in excess
of 1.2% of the clearing member's trade submissions during that month.
In addition, the total fees under the program that may be assessed
against a member in a given month are capped at $500 for individual
members and at $1,000 for clearing members.
The reason the Exchange implemented the as of add fee program was
to allocate the costs borne by the Exchange in processing as of add
submissions to those members most responsible for generating those
costs and thereby to encourage the submission of information with
respect to a trade on the date the trade is executed by creating an
economic incentive to submit the information on that day. The Exchange
represents that during the first year of the program, the percentage of
as of add submissions declined by 10% even though the Exchange
experienced a 37% increase in trading volume. Based on past experience,
the Exchange estimates that had the program not been in effect during
that time period, the percentage of as of add submissions would have
doubled. Since November, 1994, however, the percentage of as of add
submissions has remained relatively constant. Therefore, although the
program has clearly been effective in reducing the percentage of as of
add submissions, it no longer appears to be causing a reduction in the
rate of those submissions.
Accordingly, the Exchange is proposing to terminate the as of add
fee program and to seek further reductions in the percentage of as of
add submissions by revising the structure of the Exchange's as of add
summary fine program.\4\
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\4\ The Exchange now believes that the costs to the Exchange of
administering a program that imposes small fees or fines on
occasional late-reporting members is not justified. Instead, the
focus of the new program is on a small number of chronic late
reporters who appear to be willing to accept fines as a cost of
doing business. The proposed program would permit the Exchange to
bring these chronic violators of trade reporting requirements before
the CBOE's Business Conduct Committee much sooner than would be
permitted under the existing program. This could result in formal
charges being brought against such violators, which could lead to
very severe sanctions such as major fines and suspensions of
membership. See Letter from Michael L. Meyer, Esq., Schiff, Hardin &
Waite, to Ivette Lopez, Assistant Director, Office of Market
Supervision, Division of Market Regulation, Commission, dated August
6, 1996 (``Clarification Letter'').
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The Exchange institute its as of add summary fine program on
February 1, 1995. The program is a part of the Exchange's minor rule
violation plan (``Minor Rule Plan'') and is set forth in CBOE Rule
17.50(g)(7). Under the program, any individual member whose monthly
percentage of as of add submissions exceeds 7.2% for two consecutive
months or any clearing member whose monthly percentage of as of add
submissions exceeds 3.6% for two consecutive months is subject to a
fine of $250 for the first offense, $500 for the second offense, and
$1,000 for each subsequent offense occurring during any 12-month
period.
The Exchange is proposing to revise the structure of the as of add
summary fine program in four primary respects in order to encourage
further change in as of add behavior, and to the extent the Exchange
collects fines under the program, to help the Exchange defray the
additional costs it incurs in processing as of add submissions.
First, the Exchange is proposing to replace the current as of add
summary fine schedule for individual members. The proposed fine
schedule would be stricter in two respects: (i) Action against an
individual member under the fine schedule would be triggered when the
member exceeds the maximum allowable as of add submission percentage in
a given month instead of when the member exceeds that percentage in two
consecutive months as is the case under the current fine schedule and
(ii) the maximum allowable as of add submission percentage for
individual members under the fine schedule would be reduced from its
current level of 7.2% to 5%. Specifically, the current fine schedule
for individual members would be replaced with the following fine
schedule. Any individual member whose percentage of as of add
submissions in any month exceeds 5% would receive a letter of
information for the first offense, a letter of caution for the second
offense, a $500 fine for the third offense, a $1,000 fine for the
fourth offense, and would be referred to the Exchange's Business
Conduct Committee for each subsequent offense occurring during any 12
month period.\5\
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\5\ In some respects the proposed fine schedule is less strict.
Under the proposed fine schedule, a member would not receive any
monetary sanction for the first two offenses, as compared to the
existing schedule where a member is fined $250 and $500 for the
first and second offenses, respectively. Moreover, because the
Exchange is proposing to eliminate the as of add fee program, the
monetary disincentive for as of adds will be reduced for all
individual members except those relatively small number of chronic
late reporters whom the Exchange has chosen to target. This is
consistent with the Exchange's stated purpose of focusing on the
chronic late reporters who appear to be willing to accept fines as a
cost of doing business. See Clarification Letter, supra note 4.
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In addition, as is currently the case, the Exchange would retain
the discretion to initiate a formal disciplinary proceeding against an
[[Page 48183]]
individual member pursuant to Chapter XVII of the Exchange's rules in
the event the Exchange determines that any violations of Rule 6.51 are
not minor in nature.
Second, the current as of add summary fine schedule for clearing
members would be deleted and going forward as of add summary fines
would only be assessed against individual members. The Exchange
believes that such a fine structure is appropriate because individual
members have primary control over the timing of trade submissions, and
in the Exchange's experience, most as of adds are caused by delays and
errors of individual members. Moreover, the Exchange believes that
clearing members generally have a greater economic incentive than
individual members to reduce as of adds because clearing members incur
personnel and systems costs due to the extra work necessary to process
as of adds whereas individual members do not incur such costs.
Therefore, the Exchange believes that the most effective manner in
which to achieve a reduction in the percentage of as of adds is to
direct the as of add summary fine program toward individual members. Of
course, notwithstanding the foregoing, the Exchange would still have
the ability to initiate a formal disciplinary proceeding against a
clearing member for violations of Rule 6.51.
Third, the Exchange is proposing to implement a verification
procedure under Rule 17.50 pursuant to which any member who receives an
as of add summary fine would be able to request verification of that
fine by the Exchange. Under this procedure, the Exchange would attempt
to serve any member who incurs an as of add summary fine with a
disciplinary notice on or before the 10th day of the month immediately
following the month in which the fine is incurred. The member would
then have until the 25th day of the month in which the disciplinary
notice is served to request verification. After the Exchange's
verification process is completed, it would notify the member in
writing of the Exchange's determination, and if the member so desired,
the member could appeal the fine within 30 days after the date of such
notice in accordance with the appeal procedures under Rule 17.50(d). In
addition, any member who incurs an as of add summary fine and does not
request verification would be able to appeal the fine under Rule
17.50(d) within 30 days after the Exchange's service of the
disciplinary notice informing the member of the fine. The above-
described verification procedures would function in the same general
manner as the verification procedures that are currently in place under
Rule 17.50 for fines imposed for failure to submit accurate trade
information and for failure to submit trade information to the price
reporter, and these procedures would serve to replace the current as of
add verification procedures under Rule 2.26(c) which would be
eliminated under the proposed rule change along with the remainder of
Rule 2.26.
Finally, the current procedures set forth in Rule 2.26(d) which
permit the Exchange to suspend the as of add fee program would also be
eliminated along with the remainder of Rule 2.26, and instead, would be
restated in Rule 17.50 and made applicable to the as of add summary
fine program. As is currently the case with respect to the as of add
fee program, these procedures would permit the Exchange's Clearing
Procedures Committee, with the approval of the President of the
Exchange, or his designee, to suspend the as of add summary fine
program for periods no greater than seven calendar days, plus
extensions, when unusual circumstances affect the ability of a
significant number of members to submit trade information on a timely
basis.
The Exchange proposes to implement the proposed rule change within
45 days after its approval by the Commission. The purpose of this time
interval is to give the Exchange the opportunity to inform members of
the approval of the proposed rule change in the Exchange's Regulatory
Bulletin before the rule change is put into effect. The Exchange will
publish the effective date of the rule change in the Exchange's
Regulatory Bulletin and will notify the Commission of the effective
date by letter.
II. 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).\6\ Specifically, the
Commission believes that the proposed rule change may serve to further
reduce the total number of monthly as of add submissions by providing a
clear sanction in those circumstances in which disciplining is clearly
appropriate. As a result, the Commission believes that the proposal
should benefit all Exchange members, and ultimately investors, by
reducing the Exchange's processing costs, making the CBOE more
efficient in terms of the time involved in trade processing, and
reducing the risk exposure to investors and Exchange member firms.
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\6\ 15 U.S.C. 78f(b)(5).
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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. In this regard, the Commission finds that the CBOE's
proposal also is consistent with Section 6(b)(6) \7\ of the Act in that
it provides for the appropriate disciplining of the CBOE's members for
violation of Exchange rules. Indeed, the Commission previously urged
the CBOE to incorporate the as of add fee program into the Minor Rule
Plan contained in Rule 17.50.\8\ The Commission continues to believe
that fining and instituting disciplinary proceedings against members to
encourage compliance with exchange rules is generally preferable to
assessing fees.\9\
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\7\ 15 U.S.C. 78f(b)(6).
\8\ While the CBOE did not completely incorporate the as of add
fee program into Rule 17.50, it did create the current summary fine
program for the most egregious violations of Rule 6.51. See
Securities Exchange Act Release No. 35297 (January 30, 1995), 60 FR
7091 (February 6, 1995).
\9\ See Securities Exchange Act Release No. 35190 (January 3,
1995), 60 FR 3008 (January 12, 1995). Fines levied pursuant to the
Minor Rule Plan provide for an appropriate response to minor
violations of Exchange rules, while preserving the due process
rights of the party accused through specified, required procedures.
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The Commission finds that the proposed schedule of penalties
pursuant to CBOE Rule 17.50(g)(7) is consistent with the Act.\10\
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\10\ The Commission notes that under certain circumstances the
new schedule of penalties pursuant to the Minor Rule Plan may be too
lenient in that referral to the Business Conduct Committee takes a
minimum of five months. However, the Commission's concerns in this
regard are alleviated by the fact that at any time the Exchange has
the discretion to initiate a formal disciplinary proceeding against
a member pursuant to Chapter XVII of the CBOE's rules in the event
the Exchange determines that any violations of Rule 6.51 are not
minor in nature. Moreover, the Exchange has represented to the
Commission that the new schedule of penalties was the subject of
extensive consideration by the Exchange's Clearing Procedures and
Financial Planning Committees as well as its Floor Directors
Committee. See Clarification letter, supra note 4.
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Further, the Commission does not believe that the fact that the new
fine schedule will apply to individual members and not clearing members
raises significant regulatory concerns. First, the Exchange represents
that most as of adds are the result of late submissions by individual
members, not clearing firms. Second, in its present form as previously
approved by the Commission, both the as of add fee program and the
summary fine program distinguish between clearing members and
individual members. Accordingly,
[[Page 48184]]
the Commission believes that the difference in treatment between
clearing members and individual members is reasonable and consistent
with the Act.
Additionally, the Commission believes that including a verification
procedure under Rule 17.50, pursuant to which any member who receives
an as of add summary fine would be able to request verification of that
fine by the Exchange, provides adequate due process rights to the fined
member and is consistent with the Act. The Commission notes that even
if the accused fails to request verification, the member may appeal the
fine under Rule 17.50(d) within 30 days after the Exchange's service of
the disciplinary notice informing the member of the fine.
Moreover, the Commission believes that the procedures currently set
forth in Rule 2.26(d), which permit the Exchange to suspend the as of
add fee program, are just as appropriate for inclusion in the as of add
summary fine program. The Commission believes that when unusual
circumstances exist that affect the ability of a significant number of
members to submit trade information to the Exchange in a timely manner
it may not be appropriate to assess fines against such members. These
procedures will permit the CBOE's Clearing Procedures Committee, with
the approval of the President of the Exchange, or his designee, to
suspend the as of add summary fine program for periods no greater than
seven calendar days, plus extensions, when unusual circumstances so
warrant. The Commission notes, however, that it expects the CBOE to use
its power to waive as of add fines only in highly unusual
circumstances.
Finally, the Commission believes that the Exchange will be
providing adequate notice of the rule change to its members by
publication in the Exchange's Regulatory Bulletin 45 days in advance of
the effective date of the change. The Commission believes this is
particularly important with rule changes such as this which affect
members' susceptibility to disciplinary sanctions.
Accordingly, the Commission finds that the CBOE's proposal is
appropriate and consistent with the Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\11\ that the proposed rule change (SR-CBOE-96-24) is approved.
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\11\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-23350 Filed 9-11-96; 8:45 am]
BILLING CODE 8010-01-M
